Improved US prospects, domestic outlook to drive Sun Pharma's earnings

The Sun Pharma stock hit its 52-week high earlier this week on strong domestic growth expectations and improved outlook for the US market, following the clearance for its Halol manufacturing plant in Gujarat. The stock is up almost 20 per cent in less than a month after the company posted better-than-expected June-quarter earnings. Analysts at Credit Suisse have upgraded the stock recently as they believe upside from an acne treatment drug could lead to a re-rating.

The key near-term trigger is the company's specialty pipeline. In addition to the recent launch of Yonsa (anti-cancer drug) in the US, Ilumya (psoriasis drug) and Cequa (ophthalmology drug) in the ongoing quarter, the company is awaiting two more approvals by the US Food and Drug Administration (USFDA) that have been filed from Halol. 

With all these specialty drug launches, a substantial portion of the current specialty pipeline will be in the market. Among a few patents pending approvals, which are being looked at with interest, some are for treating acne. Sun is currently selling Absorica for acne treatment, which will go generic in December 2020. The Street was concerned over a hit to profits from this, as Absorica was estimated to contribute about 15 per cent to Sun's 2019-20 profits. 

Nevertheless, analysts at Credit Suisse say Sun should be able to shift the Absorica market segment to a new formulation of the drug, which should lead to a re-rating. 

Meanwhile, among other US drivers is the rising pace of generic product approvals in the US, after resolution and clearance of key export facility in Halol by the USFDA. Rising product launches bode well for growth and will ease the pressure on the base business. What is positive is that pricing pressure in the US has also moderated from 12-13 per cent a couple of quarter ago to 8-9 per cent currently.

Further growth in the domestic market is expected to drive earnings. The overall domestic pharma sector is expected to grow a strong 13 per cent year on year for FY19 on a low base and seasonal uptick from monsoons, say analysts.


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