Investors flock to Sun Pharma on strong Q1, lack of negative surprises – Mint


In the past week, shares of Dr Reddy’s Laboratories Ltd fell more than 13%, while those of Sun Pharmaceutical Industries Ltd rose by over 10%.

For the former, its June-quarter earnings came with the fine print that it had received a subpoena from the US Securities and Exchange Commission. Sun Pharma’s investors, in contrast, breathed a sigh of relief when they found nothing untoward in the financial statements or the fine print. Instead, the company reported a stellar performance for the June quarter (Q1FY22).

In the quarter, the US markets were weak for Dr Reddy’s, but Sun Pharma said its sales in the US grew about 35% over Q1FY21 to $380 million. Also, revenue grew 3% sequentially, beating expectations. Analysts at Motilal Oswal Financial Services Ltd estimated US sales of $350 million for Q1.

The company’s US subsidiary Taro reported sales of $147 million, increasing 25% from a year earlier. Notably, Taro’s adjusted net profit grew 42% to $41 million. Taro has seen its dermatology range under continuous pricing pressure for a long time. Hence, the rebound in growth and earnings is encouraging. Analysts say Taro’s recovery from here bodes well for Sun Pharma’s US earnings outlook.

Healthy boost

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Healthy boost

Sun Pharma has been focusing on its speciality portfolio to beat the pricing pressure in the US market and drive growth. The Q1 performance gives confidence on this front, too, as its speciality portfolio sales have been rising. The company said that speciality products as Illumya, Cequa and Absorica LD supported growth in the segment.

Domestic formulations, which contribute a third to consolidated sales, boosted the company’s Q1 show significantly. The sales of branded formulations in India for Q1 grew by a robust 39% year-on-year (y-o-y) to 3,308 crore. While Sun Pharma benefited from the low base of last year, its India sales growth was ahead of expectations. The company’s chronic portfolio was already seeing good growth, and now the rebound in acute portfolio sales is driving the company’s performance.

Even the emerging markets (EM) and the Rest of the World markets recorded decent growth of 25% and 35%, respectively. The two contributed about 17% and 14%, respectively, to the total consolidated sales for the quarter.

The upshot: the company’s consolidated sales rose 29% y-o-y, and Ebitda (earnings before interest, tax, depreciation and amortization) jumped 59% because of margin improvement. Adjusted net profit for the quarter improved as much as 73% y-o-y to 1,979 crore. This was also a significant improvement over the previous quarter’s profit of 1,460 crore.

Surya Patra at Phillip Capital Institutional Equity Research in a note said that going ahead, visible recovery in the US (particularly Taro) and the domestic business is expected to drive margin expansion and result in earnings upgrades. While some firms such as Dr Reddy’s have spoken of pricing pressure in the US, Sun Pharma’s speciality products focus is likely to support growth going ahead. Improving traction in prescription flows in the US, with rising patient visits to clinics, will keep supporting sales growth, analysts say.

The company recently announced an in-licensing and supply agreement for Winlevi in the US and Canada for topical treatment of acne. Analysts at JP Morgan Asia Pacific Equity Research estimate Winlevi risk-adjusted peak sales of $250-300 million to further improve Sun Pharma’s earnings visibility. The product will also help address concerns on rising competition in Absorica, another acne treatment product.

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