Sun Pharmaceutical Industries: More special than others - Buy

The company’s growth prospects are strong, driven by a pipeline of specialty launches

After going through a tough phase over the last three years, Indian pharma companies seem to set for a turnaround in the coming quarters, thanks to subsiding regulatory woes and healthy revenue growth in key markets.

Despite rising competition and supplier consolidation and the resultant pricing pressure affecting exports to the US, large pharma players are likely to benefit from the significant R&D spend in creating a niche specialty pipeline and more approvals in the US, which were stalled so far owing to regulatory tangles.

One of the largest players in the space, Sun Pharmaceuticals, seems set for a rebound from the decline seen over 2015-2017. The revival in earnings is evident, as the company has posted a good set of numbers in the first quarter of 2018-19, with 16 per cent and 87 per cent Y-o-Y growth in its consolidated revenue and net profit respectively. The company has registered a 12 per cent growth Y-o-Y in the US in the first quarter, despite the challenges in the US generics space and decline in the Taro business (its US subsidiary). Strong traction in the India formulation business also contributed to overall growth.

 

 

 

Going ahead, the company is expected to generate better numbers, with a steady stream of launches, after its key facility, Halol, received clearance from the US Food and Drug Administration (USFDA).

Over the long run, the company’s growth prospects remain strong, driven largely by progress in the specialty pipeline in the US, strong presence in the domestic business and traction in emerging markets.

The stock is up 16 per cent, post the announcement of its first quarter results. However, investors with a two to three-year time horizon can still consider buying the stock.

At the current price of ₹640, the stock trades at about 27 times its estimated 2019-20 earnings, compared with its three-year historical average of 41 times. The premium valuation of Sun pharma is justified, given its earnings growth expectations and improvement in the outlook for the specialty business, as this can provide a leg-up to long-term revenue and earnings prospects.

Diversified business model

Sun is the largest pharmaceutical company in India and the fifth largest specialty generic firm in the world. The company has 41 manufacturing sites across the world.

In the US market, the company has built its business mostly with acquisitions and generic focus. It owns the largest product basket among Indian players, with as many as 561 (ANDA) generic drug and 42 (NDA) new drug filings.

 

In Indian formulations, it holds the No 1 rank in 13 doctor categories, including the niche therapy areas of psychiatry, gastroenterology, neurology, cardiology, nephrology, orthopaedics and ophthalmology.

Specialty pipeline, key driver

Indian pharma companies with presence in US generics are now focusing on building complex and specialty generics pipelines on the expectation of sustainable profitability compared to the competitive simple generics products.

Sun pharma builds its specialty pipeline, supported by its strong R&D capabilities. Specialty drugs are high margin and limited competition products. Though they require superior R&D spend, business development strategy and higher risk appetite, Sun is ahead of Indian peers in executing the specialty strategy.

The company has built a specialty pipeline focused on dermatology, ophthalmology and oncology. The series of specialty launches by the company in the US in the coming quarters includes Illumya, Cequa, Kapspargo Sprinkle, INFUGEM, Xelpros and Elepsia. The company has launched Yonsa in the first quarter of 2018-19. Though the higher spend on specialty products would impact margins in the near term, such launches are expected to improve the sustainable revenue trajectory of the company over the medium to long term.

Traction in US base business

Sun’s US business contributes 33 per cent of overall revenue, backed by acquisitions, including Caraco, Taro, Dusa, URL and product launches. The company’s base business witnessed erosion in the last two years due to pricing pressure in key drugs, regulatory overdrive, poor performance from its US subsidiary, Taro Pharma, and absence of meaningful launches.

However, in future, the pricing pressure in the base business is expected to be offset by new launches. Sun’s US product portfolio remains robust with 422 ANDAs approved and 139 pending for final approvals.

With the clearance of the Halol facility, the management expects gradual improvement and new product approvals from the US.

Strong domestic business

Sun’s India business grew at a compounded annualised rate of 22 per cent in the last five years, thanks to its leading position in the high-growth chronic therapeutic area and strong presence in the acute segment. It contributes about 30 per cent of the total revenue (as on Q1FY19) to the company and holds a market share of 8.5 per cent in the domestic pharma market.

The company has a strong field force of more than 9,200 representatives, covering over six lakh doctors. The key therapeutic areas are generating higher revenue, including cardiology, neuro-psychiatry, gastroenterology, anti-infectives and diabetology.

The company continues to invest in R&D (7-8 per cent of the total revenue) for enhancing its pipeline.

Financials

The company clocked revenue of about ₹26,490 crore and profit of about ₹3,112 crore in 2017-18. Operating profit margin stood at 22 per cent in FY18.

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