Despite short-term blip, Sun Pharma remains favourite among investors

Around six weeks ago, Sun Pharmaceutical Industries, India’s largest drugmaker, suffered a setback, which led to a selloff in the share. The US District Court of New Jersey granted Incyte’s request for a preliminary injunction against Sun Pharma’s launch of Leqselvi, a drug that treats alopecia.

 

Sun announced it would immediately appeal against the court’s decision, but the injunction prevents Sun from launching Leqselvi, until either the court rules in its favour or the expiry of Incyte’s 335 patent in December 2026.

 

However, analysts are now reviewing the decision and some say that if the base case is assumed to be a launch in 2026, there could still be an NPV (net present value) of Rs 59 per share from the launch. It is assumed that Sun will enter a royalty-based settlement with Incyte in due course.

 

Sun Pharma beat consensus in Q2FY25, driven by strong specialty portfolio demand, g-Revlimid uptake, and reduced R&D expenses. It was adversely impacted by moderating Rest of World (ROW) sales (excluding the US, India and other Emerging Markets) and increased operating costs, partly due to Leqselvi and price cuts in Japan.

 

Sun focuses on sustainable growth through expanding its specialty portfolio, developing a differentiated product mix, and increasing branded generics volume. Lower R&D guidance (from 8-10 per cent of sales to 7-8 per cent of sales in FY25) may be margin-accretive though offset partly by higher selling and distribution expenses.

 

Sun is adding products and improving prescriptions for specialty portfolios, alongside clinical development of differentiated products, and focusing on volume and new introductions in the branded generics market. The R&D spend could actually be on the lower side of guidance or even below, driving a better near-term margin.

 

In Q2FY25, sales grew 10.5 per cent year-on-year (Y-o-Y) to Rs 13,200 crore. Domestic Formulation (DF) sales grew 11 per cent Y-o-Y to Rs 4,270 crore (32 per cent of total sales). US sales grew 22 per cent Y-o-Y to Rs 4,330 crore ($517 million, up 20 per cent in constant currency terms and 33 per cent of sales). Emerging Markets’ sales grew 5 per cent Y-o-Y to Rs 2,450 crore (19 per cent of sales). ROW sales declined 2 per cent Y-o-Y to Rs 1,660 crore (13 per cent of sales).

 

The gross margin expanded 290bp Y-o-Y to 79.7 per cent for the quarter. The Ebitda margin expanded 330bp to 28.5 per cent led by better gross margin and lower employee expense (down 100bp as per cent of sales). Other expenses witnessed considerable increase (up 60bp as per cent of sales). Accordingly, Ebitda grew at 25 per cent Y-o-Y to Rs 3,780 crore for the quarter. After adjusting for forex gain of Rs 130 crore, adjusted PAT grew 22 per cent Y-o-Y to Rs 2,930 crore for the quarter.

 

In H1FY25, the revenue grew 8 per cent to Rs 25,700 crore, while Ebitda grew 18 per cent to Rs 7,300 crore, and PAT grew 24 per cent ( Y-o-Y) to Rs 5,800 crore. The revenue growth may accelerate in H2FY25 and Ebitda will probably be sustained. Sun launched 14 products domestically in Q2FY25.

 

Sun has reduced its guidance for R&D spend to 7-8 per cent (8-10 per cent earlier) due to delays in clinical trials in FY25. R&D expenses for Q2 stood at Rs 790 crore, about 6 per cent of sales. However, the company anticipates this to increase to 8-10 per cent of sales in coming quarters of FY25 as clinical trials recommence. Specialty R&D made up 38 per cent of total R&D spend and is expected to rise, with several assets projected to enter Phase-III clinical trials within the next 1-2 years.

 

The specialty segment appears very promising, supported by a strong pipeline and increasing prescriptions for branded drugs. More margin expansion could be driven by improved operating leverage and reduced R&D costs.

 

According to Bloomberg, 30 of 41 analysts are bullish on Sun Pharma, while the remaining seven have a neutral rating and only 4 are bearish. Their average one-year target price is Rs 2,045.41 for the stock trading at Rs 1,808.95.