Despite near-term challenges, brokerages remain positive on Sun Pharma

The stock of the country’s largest pharmaceutical company, Sun Pharmaceutical Industries (Sun Pharma), has shed about 15 per cent from its highs over the last three months. Weak US sales trajectory, the uptick in research and development expenses, USFDA-related issues and pricing pressure in the US generics have weighed on the stock prices. Despite the near-term challenges, most brokerages are positive on the long-term prospects 

 

The recent trigger for the stock is the acquisition of US-based Checkpoint Therapeutics. The immunotherapy and targeted oncology company has been acquired for $355 million and a potential $61 million in milestone-based payments. The upfront payment is at a premium of 66 per cent to Checkpoint’s closing price on March 7.

 

The acquisition strengthens the company’s dermatology specialty portfolio globally. The US company has a USFDA approved product Unloxyct used in the treatment of metastatic skin cancer in adults and has an addressable market size of $1 billion in the US market.

 

Despite the premium paid for the deal, Elara Securities believes that the acquisition is value-accretive. “Our analysis shows Unloxcyt could hit peak sales of $200 million annually in the US alone. Given the company already has a dermatology sales force in the US, the incremental fixed cost of selling the product would be low,” Bino Pathiparampil of the brokerage said.  ALSO READ: India-specific de-rating done; markets eyeing earnings revival: Nuvama

 

The brokerage has an accumulate rating on the stock with a target price of Rs 1,871 a share and believes that the key concerns for the stock are US trade tariffs and IP-related risks in the specialty portfolio.

 

Going ahead, the Street will focus on the sales trajectory of the US market given that revenues in that market were down 1 per cent year-on-year (Y-o-Y) in the December quarter while falling 8 per cent on a sequential basis. The sales were pegged back by lower sales of the generic version of cancer drug, Revlimid and pricing pressure in the generics market. Brokerages believe the underperformance of the generic portfolio is on the back of manufacturing issues (warning letters/import alerts) at its facilities and will likely take a few quarters to settle.

 

HSBC’s Damayanti Kerai and Gaurang Sakare, however, remain positive on the growth outlook for Sun’s key specialty brands of Ilumya (psoriasis), Winlevi (acne), and Cequa (dry eyes).

 

While there have been some delays in clinical trials for its pipeline assets, they believe Sun remains focused on investing in R&D for specialty assets. The brokerage has a buy rating on the stock with a target price of Rs 2,000 a share.

 

Kotak Research has an accumulate rating on the stock. Despite factoring in higher R&D expenses, given the increasing clinical stage pipeline, analysts led by Alankar Garude of the brokerage expect Sun Pharma to report a healthy 200 basis points operating profit margin expansion over FY24-27 to 28.8 per cent. This is led by higher profitability in specialty and better domestic productivity.  ALSO READ: What triggered 16% rally in Pasupati Acrylon shares today? Find out here

 

Unlike the US business, the domestic pharma segment has been growing at a steady clip for the company. The company reported a 14 per cent growth in the December quarter with major therapies posting market beating growth. The outperformance vis-a-vis the domestic market growth was led by higher volumes and pricing growth. Brokerages expect the company to maintain its growth trend in the Indian formulations market largely led by volume growth.

 

Nirmal Bang Research remains structurally positive on the business despite increased R&D spend, other expenses, and lower topline growth. It had upgraded the stock from hold to buy last month with a target price of Rs 2,139.