Sun Pharmaceutical's vital signs: A strong dose of valuation multiples

The specialty segment and domestic business act as the lifeblood, coursing through the largest pharma company in the country, fuelling both revenue and margins

Bolstered by an impressive performance in the global specialty business and outstanding results in the Indian market, Sun Pharmaceutical Industries, the largest pharmaceutical (pharma) company in the country, showcased a strong performance in the July–September quarter (second quarter, or Q2) of 2023–24 (FY24). This robust performance resulted in an 11 per cent growth in revenue on a consolidated basis and an expansion of gross margins by 180 basis points.

Following the Q2FY24 results, while most brokerages have maintained their earnings estimates, some have upgraded the stock, attributing it a higher valuation multiple.

Research analysts Vishal Manchanda and Vivek Mane from Systematix Institutional Equities have revised their rating from ‘hold’ to ‘buy’ and increased the valuation multiple from 25x to 27x.

They stated, “This reflects the strength of base earnings, the potential for meaningful margin expansion, the option value of its complex generic pipeline, and inorganic growth, which is currently not factored into our forecasts.”

JM Financial also believes that the stock deserves a higher valuation multiple, raising it to 26x from 25x and reaffirming that the market leader is their top pick in the sector. Analyst Jainil Shah of the brokerage notes that the company’s domestic leadership, strong balance sheet, and long-term specialty growth visibility reinforce their positive stance.

With the company’s growth and profitability gains, the Street’s focus will be on the progress of the specialty and domestic formulations segments. Sun Pharma’s global specialty business exhibited a 19 per cent year-on-year growth and a 3.4 per cent sequential increase to $240 million. The expansion in the global specialty business was led by Ilumya (for moderate-to-severe plaque psoriasis), Cequa (cyclosporine eye drops), and Winlevi (topical treatment of acne vulgaris).

The performance of the US business fell short of expectations, registering an 8.3 per cent sequential decline. This decline was attributed to lower sales of the generic version of the cancer drug Revlimid (used for multiple myeloma). With seasonal demand for specialty products, sales in this segment are expected to improve in the second half of FY24.

Analysts Rahul Jeewani and Naman Bagrecha of IIFL Research suggest that the anticipated seasonal uptick in specialty dermatology products in the second half could help increase global specialty sales to $255/$263 million in the third and fourth quarters of FY24.

The company highlighted that the US Food and Drug Administration has accepted a new drug application for deuruxolitinib, a drug used to treat moderate-to-severe alopecia areata, an autoimmune disorder. Brokerages believe that this product, which may be launched by the end of 2024–25 (FY25), represents a significant opportunity and may be more effective than its competitors.

JM Financial anticipates that it will be a substantial growth driver for Sun Pharma, with the potential to generate $400–500 million in revenue within four to five years of its launch.

Sun Pharma has mitigated risks and outperformed peers due to its stable structural growth engines across various markets.

Prabhudas Lilladher Research notes that over the past few years, Sun Pharma’s dependency on US generics has decreased, and the company’s growth now hinges on specialty, the rest of the world, and domestic pharma businesses, all of which have strong growth prospects. Additionally, the acquisition of Concert Pharmaceuticals, along with the progress of other pipelines, provides visibility into Sun Pharma’s specialty pipeline beyond FY25. The brokerage has a ‘buy’ rating on the stock.

Growth in the domestic formulation business was primarily driven by volume growth, with the remainder attributed to price hikes and new product launches. The company launched eight products in the quarter, including the medication Tyvalzi to treat strokes.

Motilal Oswal Research expects the company to achieve 10 per cent annual growth in the domestic market, reaching ~16,500 crore over the period from 2022-23 (FY23) through FY25. Furthermore, they estimate that the rest of the world and emerging markets will experience an annual growth of 12 per cent (in constant currency terms) from FY23 to FY25, reaching $2.2 billion.

The growth in these markets will be fuelled by increasing demand for existing products, an expanding reach, and a focus on specialised products.

The company is well-positioned to strengthen its specialty franchise through the addition of new products, expanding its reach, and executing sales of existing products effectively. The brokerage holds a ‘buy’ rating on the stock.