Sun Pharma bets on nurturing specialty portfolio outlook; stock rises 3.6%

Sun Pharma has already changed its distribution channels for its Indian business by disbanding sales through Aditya Medisales and bringing them in-house
From its lows earlier this month, Sun Pharmaceutical Industries has gained about 15 per cent. An upgrade rating by foreign brokerage Morgan Stanley has been one of the triggers for the stock. The stock gained about 3.61 per cent on Monday. 

Analysts believe the stock’s risk-reward is favourable now versus earlier when it had to deal with a multitude of issues from increased competition in the US — its key market — repeated regulatory lapses, drug pricing lawsuits, and corporate governance concerns. While valuations remain attractive, the company is expected to report improved performance for the second consecutive quarter. 

This is likely to be driven by stabilising US generic sales, ramp-up in specialty products, cost rationalisation, Halol plant ramp-up, among others. Addressing governance issues has been a key focus area of the company with visible progress, say analysts. 

The company has already changed its distribution channels for its Indian business by disbanding sales through Aditya Medisales and bringing them in-house. As corporate governance issues get addressed, analysts at CLSA had indicated that investor attention will incrementally shift to the company’s specialty pipeline ramp-up and a pick-up in this vertical can drive a rerating.

Looking at a challenging environment on the generics front, the company has been diversifying into specialty products such as Ilumya (dermatology), BromSite, Cequa, Xelpros (all ophthalmic), and Odomzo, Yonsa (both oncology), among others. 

While Ilumya product has gained substantial traction with higher usage by physicians in the US, the incremental gains are expected to be reflected in sales gradually. 

Analysts at Morgan Stanley feel that the potential upside is not priced in for Ilumya that should benefit from a multi-year trend of psoriasis patient conversion to biologics, a relatively low frequency of dosing, and its niche medical benefit positioning. They estimate $30 million and $110 million in revenue for 2019-20 (FY20) and 2020-21 (FY21).

However, the increased marketing costs for specialty products such as Ilumya may entail higher marketing costs in FY20 and hence, more benefits on profitability are expected to flow in FY21.

Further, as the specialty portfolio ramps up, analysts are also awaiting key approvals such as those for generics of dermatology drugs Olux-E and Aczone, which could drive growth. 

Meanwhile, the company’s US performance during the June quarter is likely to be stable after a decent March quarter showing lower competitive intensity and benefits from short-term US generic supplies. 

Sun Pharma is expected to sustain its base business growth with lower price erosion and stable Taro numbers, say analysts at Centrum Broking. 

Sun Pharma’s sales, excluding Taro in the US, are expected to come in higher by 20 per cent year-on-year. This would be a six-quarter high, according to estimates by BOB Capital. 

With recovery in US sales after stabilisation and good domestic growth outlook, it is not surprising that analysts are turning positive on the stock with lower valuations an added advantage. 

Analysts at Morgan Stanley expect a revival of earnings from FY21. They estimate three-year (FY20-22) annual growth rate of 13 per cent in sales and 20 per cent in net profit versus two-year trailing annual decline rates of 4 per cent in sales and 21 per cent in profits. 

With improved prospects for Sun Pharma on the back of better outlook for specialty product portfolio, the prospects for SPARC, the research arm of Sun Pharma responsible for developing specialty products, too, is expected to improve.  The stock that had seen 52-week lows a few days back however, gained close to 20 per cent on Monday.

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