US FDA nod to Teva for key specialty product to weigh on Sun Pharma

Strong US portfolio, margin gains and India business growth to support stock

The approval to Teva Pharmaceuticals (Teva) by the US Food and Drug Administration (USFDA) for the launch of the generic version of Absorica in the US market is a negative for Sun Pharmaceutical Industries (Sun Pharma). At annual revenues in the $100-120 million range, the drug — used in treating severe acne and certain types of skin cancers — is the largest specialty product in Sun Pharma’s US portfolio. 

The launch of the product and the market share that Teva could take in the coming weeks could weigh on the stock, say analysts. The patent of the product is slated to expire in September this year. Teva had a settlement which would have allowed it to launch in December 2020, although the same was delayed due to absence of approval by the USFDA. 

While the delay allowed Sun Pharma to shift prescriptions to a newer version — Absorica LD — analysts believe the company was not able to take full advantage of it. So far it has been able to shift about 24 per cent of the Absorica prescriptions to the new formulation. In addition to the late launch of the new version, analysts highlight that the pandemic-related impact in the US market had led to a sharp drop in sales of the drug last year. 

Even though the developments are a negative, the stock ended flat, outperforming the benchmarks. While the eventual launch by Teva was known and factored into the price, analysts believe there are multiple triggers, including other products in the specialty portfolio, higher margins, and the growth prospects, in the India business supporting the stock. 

Analysts at Haitong Securities expect the revenues from Sun’s specialty product portfolio to cross the $500-million mark by 2022-23 and account for 40 per cent of US sales. The growth of these products, which now account for 14 per cent of US sales, are expected to be led by Ilumya (for plaque psoriasis) and Cequa (dry eye disease). Both Illumya and Cequa have been gaining traction in recent weeks and improving their market share. 

The bigger impact of a higher proportion of these products will be on profitability as volume traction and flat marketing spends should take the margins from single digits to the high teens. In the Indian business, led by the chronic therapies (neurologic, cardiac) and its top 10 brands, the company has been outperforming the overall pharmaceutical market in recent months.

Although the regulatory overhang related to Halol and the competitive intensity for Taro Pharmaceutical Industries are negatives, the stock is trading at a 30 per cent discount to its 10-year historical valuations. Investors with a long-term view can consider the stock on dips.