CLSA said Indian drug makers' transition to making complex generics should drive significant growth in the sector. Drugs worth $100 billion, especially biologics, are losing patent protection over the next five years in the United States, the broker added.
Sentiment was also boosted after Labour Minister Bandaru Dattatreya said state pension fund could invest more into equities in the next fiscal year starting April by raising the current limit set at 5 per cent of total investable assets.
The Employees' Provident Fund Organisation's chief said overall investment in equities could be as high as Rs 7,000-8,000 crore this year after including other long-term assets.
"Sentiment remains positive as India's macro remains in a sweet spot. Fed rate hike and monsoon are the key triggers to watch going forward," said G Chokkalingam, founder of Equinomics, a Mumbai-based research and fund advisory firm.
The Sensex was up 0.28 per cent and the Nifty rose 0.24 per cent heading towards their highest close since July 23.
Gains were however limited amid profit-taking in other blue-chip stocks and lower global shares after strong US data and comments from a Federal Reserve governor fanned expectations of an interest rate hike in September.
Dr.Reddy's Laboratories gained as much as 3.2 per cent to mark a record high of Rs 4,326.5. CLSA said the company's profit could increase to $1 billion by FY20 as it launches new products.
Cadila Healthcare rose 2 per cent after CLSA upgraded the stock to "outperform" from "underperform", citing differentiated drug pipeline.
Lupin rose 1.9 per cent and Aurobindo Pharma gained 3.4 per cent each on rising prospects of their US businesses.
Among other drug makers, IPCA Laboratories rose 3.4 per cent, Strides Arcolab gained 3.3 per cent while Astrazeneca Pharma India rose 4.3 per cent.
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