Sun Pharma stock likely to keep shining amid global specialty scale-up

Focus on key markets to help expand branded formulations business, say experts

The stock of Sun Pharmaceutical Industries, the country’s largest drug maker, was up 5.5 per cent on Friday, after it posted better-than-expected results for the June quarter (Q1FY23). Investors were enthused by the prospects on the global specialty front, product launches, and the outperformance in the domestic market. 

Broad-based growth in Q1 and the growth outlook have prompted brokerages to revise their FY23 earnings estimates by mid-single digits. On a high base, Sun Pharma posted 10 per cent YoY consolidated sales growth to Rs 10,644 crore. But, adjusted for Covid products, sales over the year-ago quarter were up 14 per cent.

Reported growth was led by key geographies of the US and emerging markets, which grew in the 11-13 per cent range. The India domestic formulations business was up 2.4 per cent YoY. Like-for-like (adjusted for Covid sales), domestic sales were up 13 per cent.

On the overall guidance, while the company maintained single-digit to low double-digit sales growth in FY23, it expects R&D spends to increase to 7-8 per cent of sales. This, according to Axis Capital, may keep Sun’s margins under check. 

Though the operating profit margin in Q1 slipped by 320 basis points to 24.6 per cent due to higher employee and other expenses, it was offset a bit by lower research and development costs. The margin print was better than what the Street was working with.

Among the drivers of growth in the quarter was the specialty portfolio segment and the Street shall keep an eye on whether the company can sustain the momentum. Sales in the segment were up 29 per cent YoY and 3 per cent sequentially, led by rising sales graph of Ilumya used in the treatment of plaque psoriasis, Cequa (dry eye disease), Odomzo (skin cancer), and Winlevi (acne).

The uptick for the business came despite seasonal weakness of Levulan, a skin overgrowth medication. The company has multiple specialty products in the trial phase and their launch in the global market will add to the specialty portfolio. The segment currently accounts for 13 per cent of overall sales and incremental gains in this will translate into a higher margin for the company. The segment is also helping to overcome the weakness in the generic business in the US.

The generic segment, excluding Taro, posted 13 per cent growth to $263 million on the back of two new launches, market share gains, and better supply-chain management. Growth, going ahead, will be driven by a strong pipeline of 89 abbreviated new drug applications (ANDAs) and 13 NDAs awaiting the approval of the US drug regulator.

Given traction in specialty sales, consistent launch momentum in generics and steady Taro sales, analysts led by Tushar Manudhane of Motilal Oswal Research expect the US market to exhibit an 18 per cent annual growth to $2.1 billion in sales over the FY22-24 period. The US market accounts for 30 per cent of consolidated sales and the trailing 12-month sales stood at just over $1.5 billion. 

What may be a growth dampener are further observations for its facility in Halol in Gujarat. The company received 10 observations for the facility in May this year and is awaiting closure through an establishment inspection report after the remediation measures.

The domestic formulation segment (32 per cent of consolidated sales) growth was led by chronic therapies with outperformance in cardiac, central nervous system and gastrointestinal medications. In addition to 22 product launches in the quarter, the completion of medical representative expansion with a focus on tier-1 and tier-2 markets and productivity improvement shall drive incremental sales gains.

What may dent its revenues is increased competition in anti-diabetic medication Sitagliptin. After patent expiry in July, multiple players are expected to launch similar products and this may put Rs 300-crore brand sales at risk. Brokerages expect the company to post higher single-digit/low double-digit growth in the Indian market and outperform its peers.

At the current price, the stock is trading at 23 times its FY24 earnings estimates. Given growth and margin levers, investors can consider the stock, which has gained about 19 per cent over a month and a half, on dips.