Sun Pharma stock expected to keep market lead as firm recovers in US

Stock trading at the highest discount to ten-year valuation averages, as brokerages favour its US specialty portfolio.

The Sun Pharma stock has been an outperformer since July, gaining 15 per cent against a 3.6 per cent rise in the BSE Healthcare index. Over the past 10 days, the stock has been upgraded by brokerages amid expectations of a recovery in the US specialty segment.

Further, recovery in the domestic chronic segment in August is positive; the company reported 21 per cent growth for chronics’ therapies in August. The stock is also among the few pharma names trading at the biggest discount to 10-year valuation averages.

The main trigger continues to be the growth expectation from its specialty portfolio in the US market. Even as overall sales in the US in FY21 were 4 per cent lower because of Covid-related disruptions and lockdowns, the specialty business grew 11 per cent. Despite increased competition in Absorica, which is used in the treatment of severe acne, its global specialty sales in the June quarter at $148 million were 6.5 per cent higher on a sequential basis. Though patient footfall is yet to return to pre-Covid levels in the US, analysts expect opportunities from the current portfolio to remain good despite rising competition.

Anmol Ganjoo and Shashank Krishnakumar of JM Financial expect continued growth momentum in Ilumya (plaque psoriasis) & Cequa (for dry eyes), with early prescription trends in the second quarter for Ilumya remaining encouraging and Cequa’s prescription volumes in July 2021 being the highest since launch. They also highlight that overall prescription volumes for Absoria have witnessed a marginal increase with the launch of lower-priced authorised generic aiding market expansion. 

What should aid incremental sales in the US, especially in the dermatology portfolio, is the recent in-licensing and supply agreement for acne drug Winlevi. Analysts at JPMorgan believe that the drug will leverage its derma footprint, given the recent generic competition in Absorica providing ample room to add new products to its derma portfolio. Assuming peak penetration of the drug at 25 per cent and monthly cost to ensure broad payer access, risk-adjusted sales from the drug to be launched by the end of the current year is estimated at $250-300 million. 

Brokerages, such as Phillip Capital, expect Sun Pharma to witness healthy profitable growth in the US business, going ahead. They cite guided healthy double-digit growth in the specialty segment, a turnaround of this business by FY23 implying a 300-basis point operating profit margin expansion, and bottoming out of Taro’s operating performance. Excluding Taro, the company was net cash positive at the end of the June quarter and has a target of becoming debt-free by FY22.

The other trigger is growth in the domestic market. In August, the company outperformed the pharma market’s 18 per cent YoY growth on the back of select chronic drugs and anti-infectives. An uptick in chronics’ therapies as the Covid situation stabilises should aid the company as the segment accounts for 58 per cent of domestic sales, the highest in the large-cap space.

From FY21 revenues of just over Rs 10,000 crore, analysts at Motilal Oswal Research expects the company’s domestic formulations business to post 12 per cent average growth over FY21-23, taking the sales to Rs 13,200 crore at the end of the period.

The valuation of the stock at 25x one year forward estimates, too, is moderate and is at a discount to its 10-year average. While regulatory concerns remain and any delay in the monetisation of the specialty pipeline can hurt earnings, the risk-reward is favourable for investors with a three-year time frame.