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Home >Markets >Mark To Market >Sun Pharma’s investor fortunes hinge on ramp-up in specialty products business

The Sun Pharmaceuticals stock has slipped about 5% against the Nifty Pharma index’s gains of about 6% in the past two months.

One reason for the stock’s underperformance is the slow growth of its speciality products sales. With heavy investments required in specialty products, the sales dip of 38% sequentially in Q1 had an impact on the company’s performance. However, the Street is pinning its hopes on a concerted effort by the company to drive its earnings.

The sales of specialty products of Sun Pharma have increased following the coronavirus outbreak. The company’s revenue from Illumya has recovered from its lows, according to analysts. The product launch in Japan could also add a lever for revenue expansion and margins.

“The operating leverage from the ramp-up in the specialty business can drive meaningful margin expansion," said analysts at JPMorgan India in a client note.

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However, the increase in specialty products entails higher investments in research and development (R&D). As such, Sun’s R&D expenses is expected to increase in the coming quarters. This is also vastly different from the generic medicines business. The specialty products business requires a risk appetite, added analysts.

“While R&D expenses (6% of sales in FY20) remain low, the management expects an increase (guidance of 7-8% of sales) in the medium-term to develop new specialty products and add to additional indications for existing products," said analysts at Dolat Capital.

Further, trials of some of its products were impacted because of the pandemic and as such the company faces some hurdles in new product development. Nevertheless, the margin profile could improve on higher specialty sales.

“The sustainability of Sun Pharma’s US earnings is getting better (Taro accounted for 40% of Ebitda at peak). Improving margins on the back of specialty sales should increase confidence in earnings," said the JPMorgan report. Ebitda is earnings before interest, taxes, depreciation, and amortization.

The US regulatory overhang has been another drag. The company’s Halol facility is under official action indicated status, which could hamper progress in new drug launches in the US. The US pricing environment continues to remain challenging for generics, said analysts.

Meanwhile, domestic growth is likely to pick up this quarter with clinics and hospitals re-opening gradually. Even so, the stock’s consensus price-earnings multiple of about 22 times FY22 earnings according to Bloomberg is not quite inexpensive. Besides, any increase in research expenses could impact margins in the near term, while the increase in specialty products could take time because of the disruption caused by covid-19.


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