Strong specialty sales and volumes keep it sunny for Sun Pharma

Rerating on the cards; the domestic business is expected to outperform

Growth momentum for its US specialty drug portfolio, acquisitions, and outperformance in the domestic pharma market may sustain the returns trajectory of the country’s largest drugmaker, Sun Pharmaceutical Industries (Sun Pharma). The stock is the second-biggest gainer among the Nifty Pharma constituents with returns of 56 per cent over the past year.

Even as its peers are facing high single-digit price erosion, the impact on Sun Pharma is less, given its focus on a specialty drug portfolio. Quarter-to-date sales and volumes remain strong for most of its key specialty products in the US market. Rahul Jeewani and Punit Pujara of IIFL Securities say: “ Sun’s specialty products continue to show robust traction as volumes for both Ilumya for treating plaque psoriasis and Cequa’s (for dry eyes) have increased by 7 per cent in Q4, as compared to the monthly run-rate in Q3, while Winlevi’s (acne) weekly run-rate has increased by over 30 per cent from end-December 2021 levels.”

There was apprehension in some quarters about the ability of drugs, such as Ilumya, to gain given rising competition from new entrants in the segment. Most brokerages believe the company will continue to post strong growth with estimates pegging the company at improving its Ilumya sales from an expected $200 million in FY22 to $318 million-$370 million over the next two-three years.

 For Cequa, the views are mixed. Nirmal Bang Research indicates that, so far, there has not been any direct volume impact after the launch of the generic version of Restatis (competing brand) on Cequa sales. But IIFL Securities indicated the entry of additional generics players in the Restasis market can lead to greater price erosion in the overall US dry eye market and may impact Cequa’s growth. Considering the potential pricing impact on Cequa sales, analysts at the brokerage believe the drug will deliver modest 14 per cent annual growth, from $65 million in FY22 to $85 million in FY24.

Higher volumes of specialty drugs not only generate operating leverage but also play a key role in improving margins. Alankar Garude and Samitinjoy Basak of Kotak Institutional Equities say: “Sun Phama’s specialty business is yet to break even and as revenues scale up further, we expect overall margins to advance.”

 The share of the branded/specialty drugs in Sun Pharma’s US sales has risen from just over 20 per cent in FY19 to 34 per cent in FY21. This portfolio is expected to end FY22 at 37.5 per cent. Continued execution in specialty provides further re-rerating potential, says Kotak Securities.

Acquisitions are expected to expand the existing portfolio and contribute to incremental growth. The company, last month, announced the acquisition of Swiss-based dermatology major Galderma’s arm Alchemee for $90 million. The deal includes the acquisition of the Proactiv brand and the skin portfolio, which includes a cleanser, toner and repairing treatment.

Given Alchemee had revenues of $166 million in FY21, the deal is valued at 0.5x sales. Dermatological and topical products account for 58 per cent of Taro’s $166 million sales in FY21. The acquisition, according to BOB Capital Markets, will complement Taro’s portfolio as dermatological and topical therapeutic products are its key focus areas in the US and Canada; this can contribute to a lower single-digit earnings uptick over a couple of years.

The domestic business, too, continues to outperform peers. In February, even as the overall pharma market posted flattish performance YoY, Sun Pharma’s sales were up 7 per cent. Sluggish volumes pulled down the performance of the broader pharma market while price hikes and new launches supported it. For Sun, growth was led by cardiac, pain, and respiratory therapies; growth for the three months ended February stood at 12.2 per cent —twice that of the sector. Market share gains, field force expansion, maintaining leadership position in key therapies, and fresh product launches are positive and shall sustain domestic growth momentum for the company.

While the stock has gained quite a bit, BOB Capital Markets values it at an unchanged 18x FY24 enterprise value-to-operating profit multiple. This is at a 30 per cent premium to large-cap peers, such as Cipla and Dr Reddy’s, due to its high-margin specialty presence in the US, Europe, and Japan. Investors can consider it on dips.