Sun Pharmaceutical's US specialty ramp-up still slow, say experts

With competitive intensity in the US market continuing, Sun Pharmaceutical Industries is relying on its specialty portfolio to deliver growth in that geography. 

Analysts, however, feel that the specialty ramp-up is still a long way for the firm with direct -to-consumer campaigns dragging down profitability, delay in launches of its dry-eyes opthalmic products, among others. 

In the June quarter, the company shared the revenue from the specialty business in the US for the first time ($94 million) and its share in the overall research and development (R&D) expenditure. The company said that specialty R&D accounted for 15 per cent of its R&D expenditure in Q1 (it was about 5 per cent of sales). Overall R&D numbers are expected to go up in the coming quarters, however. The firm has guided to overall R&D spend at 8-9 per cent of sales (versus 6.7 per cent in FY19) in FY20, with higher spend related to additional indication trials (Psoriatic arthritis) for its specialty drug Ilumya.

Sun's focus on specialty comes at a time when its US revenues are under pressure owing to competitive intensity. US revenues (36-37 per cent of the total) declined by 4 per cent sequentially in the June quarter in constant currency to $424 million, noted Edelweiss. It continued to see contribution from a significant supply opportunity worth $70-80 million which began in Q4FY19. “Ex-Taro, sales remained flat at $ 263 mn,” the brokerage noted. 

Source: YES Securities

Sun's founder and managing director Dilip Shanghvi noted in the first quarter earnings call, "Given the competitive intensity in the US generics market, we are consistently focusing on improving our efficiencies and cost structure to ensure reasonable returns for our generic business." 

Sun Pharma has built a portfolio of nine products in the specialty business by investing around $1 bn. It launched three of these in FY19 — Yonsa (prostate cancer), Ilumya (psoriasis) and Xelpros (Glaucoma). It had launched Odomzo (for skin cancer) in 2017-18. 

Abhay Gandhi, chief executive officer for North America for Sun Pharma said during the earnings call that Ilumya is gradually ramping up and patient numbers and doctors prescribing Ilumya are steadily increasing. "We continue to invest in promoting Ilumya, including the direct-to-consumer promotion campaigns," he added. So far around 1,200 doctors have prescribed Ilumya, which is around 40 per cent doctors prescribing biologics for psoriasis. 

Gandhi added, "Our efforts of increasing prescriptions for Odomzo have started showing some initial results, with a small improvement in our market share. We hope that the improvement will continue in the coming quarters." The market share in Odomzo has increased to around 12.2 per cent (versus around 10.5 per cent in 4QFY19). 

While it is seeing more oncologists prescribing the product, Sun Pharma is also working on redefining the derma doctor base to improve prescriptions.

Analysts, however, feel that the specialty ramp up is slower than expected. "A breakeven in this (specialty) will take long as the company has already lined up more investments. Near-term challenges in specialty eclipse the medium-term outlook as the ramp up has been slow even as competition is intensifying," Edelweiss said. 

Moreover, the launch of its dry eye disease opthalmic drug has now been postponed to Q3 FY20 due to challenges related to manufacturing and supply chain. Brokerages see that the upcoming Cequa launch could mean higher promotional efforts. JP Morgan's Neha Manpuria said, "The upcoming launch of Cequa could mean higher promotional efforts to ramp up the brand. Further, investment in its growth pipeline will mean that specialty related costs are unlikely to plateau in the next few years."

JP Morgan thus estimates that Sun's Ebitda margins could remain under pressure despite the operating leverage from the ramp-up of its recent or upcoming launches. "We assume flattish Ebitda margins for FY20 (around 21 per cent)," Manpuria noted. While Sun Pharma is perhaps the best positioned among its Indian peers to transition into a specialty pharma player, analysts see medium term headwinds related to the potential regulatory investigation, investment in specialty and muted earnings.

“Sun Pharma is increasingly reliant on specialty portfolio to deliver growth in the US as base business commentary remains lackluster at best. In the specialty basket, key products such as Ilumya are tasked with expanding market share in what is a difficult and crowded market. Management expects to launch Cequa in Q3FY20 though associated costs are fully reflected in Q1 expenses; moreover, it believes Cequa to be an attractive opportunity even if Restatis (a similar drug in the market) is genericised,” Yes Securities said.