Specialty drugs essential for re-rating of Sun Pharma stock, say analysts

Analysts say, Tuesday's launch of ophthalmic specialty product Cequa can achieve peak sales of $100-125 million per annum

Sun Pharma continues to expand its specialty product pipeline in the US to drive growth, even as the generics business continues to feel pricing pressure. The firm on Tuesday launched its ophthalmic specialty product Cequa, used for treating dry eyes.

The market size for the product is about $1.6 billion per annum, split currently between two players. Cequa, given its better effectiveness and faster onset of action, could gain 10-15 per cent market share and better pricing, compared to generic variants of its existing brand, said analysts.

Cequa, if priced well, has the potential to generate $100-125 million peak sales annually, said analysts at CLSA. Sun Pharma’s product is a superior brand, offering advantages such as increased bioavailability, improved ocular tissue penetration, superior tolerability, and higher concentration, said analysts.

The company will need to focus on execution, convince ophthalmologists, and price it accordingly. With all specialty products now launched in the US, ramping up is key and strong execution on this front could drive re-rating of the stock, said the CLSA analysts. Their target price of Rs 540 indicates potential upside of 36 per cent for the stock, currently trading at Rs 396.

The company now has three ophthalmic products in the US. It has also launched many dermatology products and is focusing on its dermatology and ophthalmology portfolios in the US.

The ramp-up of dermatology treatment drug Ilumya is also being looked at closely. Analysts at Jefferies said that while Ilumya’s ramp-up has been slow, they remain positive on both Ilumya and Cequa, and the doctor survey conducted in the US highlighted that Ilumya could achieve peak sales of $300 million (annually). The scale-up, though, is going to be slow and will take place over the next 12 months, they estimate.

While Sun is concentrating on the US, it also plans to commercialise products such as Cequa in Europe, Japan, and other emerging markets. Analysts said that the company signed an exclusive agreement in June with CMS for product commercialisation in Greater China, for 15 years.

In the near term, all eyes will be on the September results. Its performance in the US may see a decline on a sequential basis, given the non-recurrence of a one-time supply opportunity, which had driven growth over the past few quarters. Therefore, while overall revenues may grow slightly more than 15 per cent year-on-year, it may decline by 4 per cent sequentially, according to analysts at Emkay Global.

They also expect Sun’s operating and net profits to decline 20 per cent or more sequentially, but grow around 12 per cent over the year-ago period. Besides, the overhang related to the Securities and Exchange Board of India (Sebi)-related forensic audit may also continue.

Krishnanath Munde, analyst at Reliance Securities, said that though Sun had already addressed some corporate governance issues raised by investors, the Sebi-related issues remained an event-specific risk in the near term. However, in light of increasing visibility in India and other geographies, Munde maintains his positive recommendation with a target price of Rs 500.