Sun Pharma's Q2 Review: Brokerages Bet On A Ramp-Up In U.S. Specialty Portfolio
Here's what brokerages have to say about Sun Pharma's Q2 results:
Analysts remained optimistic on Sun Pharmaceutical Industries Ltd., betting on a ramp-up in the nation's largest drugmaker's specialty treatments, from skin to cancer medicines, in the U.S.
The company's formulation sales in the U.S., accounting for 28% of the consolidated sales, fell 4.4% sequentially in the quarter ended September. It includes sales of its American subsidiary Taro Pharmaceuticals Inc.
Managing Director Dilip Shanghvi in an exchange filing said the company remains steadfast in its focus on growing overall business and simultaneously strengthening the global specialty portfolio. “The recent launch of Winlevi (acne) in the U.S. and Ilumya (plaque psoriasis) in Canada is a step forward in this direction.”
The company's overall profit, however, beat estimates on a low base, while revenue and Ebidta declined during the period.
Shares of Sun Pharma fell 1.75% in early trade on Wednesday to Rs 801.1 apiece. Of the 40 analysts tracking the company, 35 maintained a 'buy', two recommend a 'hold' and three suggest a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 11.6%.
Here's what brokerages have to say about Sun Pharma's Q2 results:
Nirmal Bang
Upgrades to 'buy' from 'accumulate' with a target price of Rs 939 apiece, implying an upside of 15.3%.
The second quarter FY22 revenue was in line with estimates. Net profit was ahead of estimates, led by an improvement of 110 basis points in gross margin quarter-on-quarter and lower research and development spend.
The brokerage sees a favourable risk-reward at current market price with a potential upside risk to their estimates due to the Winlevi (acne) ramp-up, which was launched in the U.S. a few days back.
Winlevi has a unique positioning and can potentially alter the specialty portfolio growth trajectory for Sun Pharma over the next two years.
India sales dipped slightly on a quarter-on-quarter basis due to lower sales of Covid-19 products. Excluding the Covid-19 products, sales increased 2% quarter-on-quarter.
As of Sept. 30, Sun Pharma continues to remain net cash positive at the ex-Taro level.
Dolat Research
Recommends 'buy' with a target price of Rs 930 apeice, implying an upside of 14%.
Expects Sun Pharma to remain a relatively safer bet in the near term given that incremental growth in the U.S. to be driven by the ramp-up in specialty portfolio, amid a challenging U.S. generic pricing environment.
Challenges in specialty ramp-up remain overstated with Sun Pharma’s specialty performance remaining strong even as patient footfall is yet to normalise to pre-Covid-19 levels.
Key triggers:
Specialty to become Ebitda positive by FY23E.
Taro seems to have bottomed in terms of operating performance, lower Covid-19 cases likely to revive Taro’s earnings efficiency.
Productivity improvement in India post the field force expansion.
U.S. FDA resolution of Halol (currently under official action indicated).
Key risks:
High R&D (about 8% of sales) and marketing expenses on U.S. specialty to keep margins under check.
Emkay Global
Maintains 'hold' with a target price of Rs 775 apiece, implying a downside of 5%.
The revenue beat was driven by higher revenue in India, emerging markets and the rest of world businesses.
The Ebidta beat was driven by slightly better gross margins and lower-than-expected other and R&D expenses.
Believes the current valuations limit the upside potential in view of near-term headwinds such as:
1. Potential increase in R&D expense.
2. Reversal of Covid-19 and seasonal product sales in India.
3. Increase in sales and marketing costs.
Global specialty sales included a milestone payment related to two specialty products. Excluding that, specialty sales were flat quarter-on-quarter.
QoQ growth in Ilumya (plaque psoriasis) and Cequa (dry eye) was offset by Absorica genericisation and supply issues in Levulan (warty overgrowths of skin).
Active pharmaceutical ingredients' sales saw a decline, mainly due to lower opioid sales.
Management sounded confident in ramping up specialty sales.
However, the FY23/24 specialty breakeven guidance given in Q1 FY22 was withdrawn.
On the cost front, management expects R&D expenses to inch up.
Moreover, other expenses are expected to inch up due to the launch costs related to Winlevi and the return of medical conferences and international travel.
Motilal Oswal
Maintains 'buy' with a target price of Rs 970 apiece, implying an upside of 19%.
Raised estimates factoring in:
1. A continued ramp-up in specialty sales in the U.S., including the newly launched Winlevi.
2. Faster growth in non-Covid-19, chronic therapy sales in domestic formulations.
3. Superior traction and increasing product offerings/gains in critical mass in emerging markets.
4. Deferred R&D spending on specialty clinical trials.
Positive on Sun Pharma's:
1. Increasing portfolio offerings in the specialty segment.
2. Market share gains in the branded generics segment.
3. Healthy and steady pace of launches to sustain U.S. generics (ex-Taro) business despite severe price erosion.