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Sun Pharma Offered The First Peek Into Its Specialty Segment

The drugmaker expects the segment to drive its next phase of growth following stiff competition in the market for generics.

Dilip Shanghvi, managing director of Sun Pharmaceutical Industries Ltd., poses for a photograph at the company’s headquarters in Mumbai (Photographer: Kuni Takahashi/Bloomberg)
Dilip Shanghvi, managing director of Sun Pharmaceutical Industries Ltd., poses for a photograph at the company’s headquarters in Mumbai (Photographer: Kuni Takahashi/Bloomberg)

Sun Pharmaceutical Industries Ltd. expects its specialty drugs portfolio to drive its next phase of growth following stiff competition in the market for generics.

The segment generated $94 million in sales in the first quarter, the company said during a conference call after announcing its earnings for the quarter ended June. That was the first time India’s largest drugmaker by market value revealed financials for the segment—involving an investment of nearly $1 billion and five product launches till date.

The company launched two specialty products in 2017-18 and three in the next year.

Spends on research and development, which are low and varying for different products, will rise in the coming quarters, Dilip Shanghvi, managing director of the drugmaker, said during the earnings call. The company had earlier indicated that the segment—which accounts for 15 percent of its total research and development costs—would achieve breakeven through sales by 2020.

That comes as the company faces stiff competition in the U.S.—which contributes 36 percent of its total revenue—led by increased approvals for generics. Sun Pharma is focusing on specialty drugs for treating ailments ranging from dry eye to psoriasis and cancers to reduce its dependence on low-margin copycat versions of drugs.

Disclosures for the specialty segment would be more meaningful when production of key products like Ilumya increase over the next three-four quarters, according to Anubhav Aggarwal, healthcare analyst at Credit Suisse. The specialty portfolio would take time to achieve breakeven as the company has already lined up lot more investments, Deepak Malik, pharma analyst at Edelweiss Securities, wrote in a recent report.

Shares of Sun Pharma have declined over 3 percent so far this year.

Traction By Specialty Drugs

Here’s how Sun Pharma’s specialty drugs have performed in the U.S.

Ilumya

The psoriasis drug is witnessing improved traction in international markets, at both the doctor and patient ends. The drug, according to Shanghvi, is performing in line with expectations. The company plans to increase its marketing and promotional spends in the U.S. to improve visibility.

Although the drug is increasingly figuring in doctor prescriptions in U.S., it’s not translating into revenues yet, according to IMS. In contrast, AbbVie Inc.’s psoriasis treatment drug Skyrizi has gained traction, according to IMS data. Jefferies pegs Ilumya’s peak sales—or the maximum possible sales that it can generate—at $300 million.

Cequa

Launch of the dry-eye treatment drug in the U.S. has been pushed by three months to the third quarter of the current fiscal as the company is in final stages of resolving technical issues. The launch, although delayed, is a significant opportunity globally for the company, according to CLSA.

Sun Pharma said its marketing personnel are firming up supplies and doesn’t expect a potential entry of generics for competing drug Restasis to hurt pricing or sales prospects. However, IDFC identifies an earlier-than-expected entry by copycat versions of Restasis as a potential risk.

Jefferies anticipates peak sales of $70 million for Cequa.

Odomzo

Market share for the specialty drug—which Sun Pharma acquired from Novartis for $175 million in 2016—has risen to 12 percent in the quarter ended June in the U.S. from 10.5 percent in the previous quarter, the company said.

Others

The company has signed licensing agreements with Chinese companies to develop and commercialise Tildrakizumab and Cequa for the Chinese market and has filed application to market Tildrakizumab in Japan. The drugmaker also said one early stage molecule has shown best-in-class therapeutic effect in pre-clinical models, which is likely to enter clinical trials next year.

What Analysts Say

Citi

Progress on the specialty front would be the key to Sun Pharma’s stock performance going forward, said Prashant Nair, pharma analyst at the brokerage.

Emkay Global

The U.S. specialty business still has a long road to profitability, according to Pharma Analyst Praful Bohra. A pick-up in the specialty business is key for any meaningful change in earnings trajectory, he said.

IDFC Securities

With three specialty product launches in FY19, and one more in second quarter of current fiscal, this segment should begin to meaningfully contribute from FY20. This remains the primary monitorable going forward, according to Nitin Agarwal, pharma analyst at the brokerage.

Investec

Pharma Analyst Anshuan Gupta told BloombergQuint via email that he likes “the company’s resolve towards specialty and its readiness to invest if needed to make this initiative a success”. But the path is laden with significant risks and worry that specialty initiative may take much longer to deliver significant returns— and deliver sub-par returns in the near term, he said.

JP Morgan

It’s too early to play for earnings potential from specialty, according to analyst Neha Manpuria. Higher promotional efforts to ramp up drugs will mean specialty related costs are unlikely to plateau in the next few years, she said, adding that margins could remain under pressure despite the operating leverage from the ramp-up of its drugs.

Macquarie

Investments in specialty segment will keep Sun Pharma’s profitability under check over the near to medium term. It’s highly unlikely that the specialty portfolio will breakeven in FY21.