Street concerns ease as Sun Pharma's specialty segment delivers in Q2

Upsides in the stock will depend on sustaining specialty and India sales growth

Pharma stocks have been the biggest gainers in six months, but the notable underperformer in that list is the country’s largest drug maker Sun Pharma. Compared to 27 per cent returns for the peer index, the BSE Healthcare in that period, Sun managed just a third of that number.

The muted returns was largely a function of the underwhelming results in the domestic as well as the US market over the last couple of quarters. In addition to the recovery in the US specialty portfolio, the street will watch out for the resolution of regulatory issues at the Halol plant as well as sales growth in India. 

On specialty drug sales, the September quarter performance will ease some concerns. The sequential rebound in US and domestic sales meant that its contribution matched those in the year ago quarter. The street’s confidence about the prospects on this front is reflected in the stock gains of 4 per cent  on Wednesday.

The US geography, which accounts for 30 per cent to overall sales, reported a 19 per cent growth on a sequential basis to $335 million (Rs 2,492 crore) and matched the year ago numbers. Growth could have been better if there was higher contribution from its US subsidiary Taro. Sales of the unit, which accounts for 40 per cent of Sun’s US revenues, was down 19.2 per cent and its growth is dependent on new product launches and the resolution of outstanding issues at Halol.

Sun’s specialty business recovered in Q2 with key products such as psoriasis treatment formulation Ilumya, ophthalmology drug Cequa, oncology drugs Yonsa and Odomzo achieved revenue run rate of pre-Covid levels, say analysts. In addition to the 5 per cent price hikes in Illumya, its launch in Japan and positive response has helped in the sales of the drug. Analysts at Nomura Research estimate specialty global revenues to have increased by $30million sequentially to $108 million in Q2. 

India revenues too rebounded by 6 per cent sequentially to Rs 2,531 crore (up by a per cent on year-on-year basis). The growth in the chronic segment (high single digit), recovery in sub-chronic therapies led to the recovery, say analysts at HDFC Securities though acute segment sales are yet to gain traction. Sun launched 22 new products in the domestic market during the quarter, and as the patient footfalls at clinics improve, analysts expect better prescription flow, driving both India and global specialty product sales.

With support provided by the rest of the world and emerging market sales (up 10 per cent and 4.5 per cent respectively) and 9 per cent growth in active pharma ingredients, margins too saw an expansion. Adjusted profit growth of 43 per cent year-on-year thereby helped beat the 6.1 per cent growth in revenues. In addition to ramp up of key categories such as specialty, lower costs helped at the operating profit level despite higher research spends, say analysts. 

Analysts remain positive on growth prospects after the Q2 performance and specialty segment coming back on the growth track. HSBC expects the uptrend to continue for the segment given Sun’s investments and strengthening of this portfolio. Though overall specialty sales are still lower than the run rate of $126 million seen in the March’20 quarter, analysts expect improving patient footfalls and Sun’s marketing efforts to yield benefits. Sun is to commence DTC (direct-to-consumer) marketing for Cequa starting this month mainly in non-TV platforms. As such efforts yield benefits, scale up in specialty sales should help it in absorbing marketing and R&D costs ahead. 

Not surprising that Nomura has maintained its price target of Rs  623, while HSBC raised target price to 620 and FY21 earning estimates by 17 per cent. 

However even as most brokerages remain positive on its prospects, the second wave of covid-19 cases and rise in competition could play spoilsport. Entry of competing generics is imminent for Cequa and acne drug, Absorica, say analysts though Sun remains confident about reasonable market uptake for its brands given product features.