Despite being India’s largest drug maker, Sun Pharmaceutical Industries Ltd trades at a discount to its peers.
The December quarter (Q3) results can shed some light on this. Revenue rose 5% year-on-year. Sales in the US dropped 3%, reflecting a price erosion in the generic drugs business.
This lacklustre performance is made up by the India business, which clocked a healthy 13% growth. Gross profit margin expanded on better product mix. What’s more, the management sees good prospects in the domestic market. As a result, the firm is expanding its field force by 10%, most of whom are expected to join by Q1 of FY21.
This strategy is in line with other drug makers, who are stepping up focus on the domestic market. However, investors are awaiting a pickup in the US business. Here, there are no clear signs of a revival yet. “US generic business continues to be competitive and challenging,” the management told analysts.
To overcome the pricing pressure, Sun Pharma is building specialty products, which are difficult to develop and imitate. Sales from these drugs reached $118 million (up 30% sequentially) last quarter, helped by a seasonal boost to certain products. Even so, analysts complain about the slow ramp-up of the specialty drugs business, which continues to incur high costs.
Close to a quarter (24%) of the R&D (research and development) expenditure of the company was incurred on specialty drugs in Q3. Considering that Ilumya, a specialty drug, hits the clinical-trials phase to get approval for treatment of an additional disease (than what it has already been approved for now) in FY21, R&D spends are projected to increase.
As such, it is difficult to gauge the progress of specialty drugs. Investors see that as a handicap. Sun Pharma maintains that the progress is in line with the industry average.
“Ilumya’s ramp-up has been slow, but we remain positive on both Ilumya and Cequa. Our doctor survey in the US highlighted that Ilumya could achieve peak sales of $300 million. The ramp-up, though, is set to be slow, occurring over the next 12 months,” Jefferies India Pvt. Ltd said in a recent note.
Commensurate ramp-up remains crucial for investor sentiment. The Sun Pharma stock currently trades at 19.5 times estimated earnings for FY21, based on Bloomberg data.
