12/3/2020 Sun Pharma: Why Sun missed the pharma rally: the answer is hidden in a bet many failed — speciality drugs - The Economic Times

https://economictimes.indiatimes.com/prime/pharma-and-healthcare/why-sun-missed-the-pharma-rally-the-answer-is-hidden-in-a-bet-many-failed-spe… 1/11

Dilip Shanghvi, founder and managing director, Sun Pharmaceuticals

Synopsis

Sun Pharma is the only Indian company to have made some inroads into speciality drugs. What worriesinvestors is high investments and uncertainties over ramp up in revenue. The stock can still see upside becauseof its current valuations, strong India business, and any positive surprises in US generic business. But it is crucial

that its speciality bet pays off.

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�hy Sun missed the pharmarally: the answer is hidden in abet many failed — specialitydrugs

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12/3/2020 Sun Pharma: Why Sun missed the pharma rally: the answer is hidden in a bet many failed — speciality drugs - The Economic Times

https://economictimes.indiatimes.com/prime/pharma-and-healthcare/why-sun-missed-the-pharma-rally-the-answer-is-hidden-in-a-bet-many-failed-spe… 2/11

Call it a blessing in disguise for the Indianpharmaceutical industry. The stocks of pharmacompanies have been on a tear since the beginning ofthe Covid-19 crisis. The Nifty Pharma index hasdoubled from its lows in March 2020.

But the narrative is di�erent for Sun PharmaceuticalIndustries, India’s largest pharma company. Thecompany has underperformed its peers such as Dr.Reddy’s Laboratories, Cipla, and Aurobindo Pharma aswell as the Nifty Pharma index.

So, what is weighing on the Sun Pharma stock?

For the last �ve years, trouble has been surroundingSun Pharma from all sides. The list is long:

Persistent quality-compliance issues at its keymanufacturing facility at Halol, Gujarat

Price erosion in the US

Integration of Ranbaxy

Corporate-governance lapses in India

Generic drugs price-�xing issue in the US

And the need for higher investments to build thespeciality drugs franchise.

While pricing pressures in the US impacted all genericpharma companies, other issues were speci�c to SunPharma. The earnings growth of the company has been

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12/3/2020 Sun Pharma: Why Sun missed the pharma rally: the answer is hidden in a bet many failed — speciality drugs - The Economic Times

https://economictimes.indiatimes.com/prime/pharma-and-healthcare/why-sun-missed-the-pharma-rally-the-answer-is-hidden-in-a-bet-many-failed-spe… 3/11

muted and investors’ optimism faded over the last fewyears. Net pro�t of the company declined fromINR4,546 crore in FY16 to INR3,765 crore in FY20.

Currently, one major factor that is an overhang on thecompany is uncertainties around its speciality drugsbusiness.

So far in the calendar year 2020, return on Sun

Pharma’s shares has been -36%, compared with 61%

returns given by Dr. Reddy’s and 18% by Cipla.

The bet on speciality drugs A few years ago, many leading pharma companies triedto get into the speciality drugs business. The idea wasto move up the pharma value chain. But it is a di�icultbusiness that requires signi�cant investments andcarries higher risks. Hence most companies, includingDr. Reddy’s, Cipla, and Glenmark Pharmaceuticals,have re-evaluated their strategies for speciality drugs.We have already told you about it here.

Sun Pharma started investing in its speciality businessaround 2013-14 and made several acquisitions tocreate its current portfolio. According to someestimates, the company has invested around USD2billion in the speciality drugs business so far.

Sun Pharma is the only Indian company to have madesome inroads into speciality drugs with a portfolio ofnine products commercialised in the US market. Itsproduct basket comprises Ilumya, Cequa, Absorica,LevulanKerastick, Odomzo, Yonsa, Bromsite, Xelpros,and Infugem.

BY

Isha Trivedi

8 MINS READ

Dec 3, 2020, 05:54 AM IST

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12/3/2020 Sun Pharma: Why Sun missed the pharma rally: the answer is hidden in a bet many failed — speciality drugs - The Economic Times

https://economictimes.indiatimes.com/prime/pharma-and-healthcare/why-sun-missed-the-pharma-rally-the-answer-is-hidden-in-a-bet-many-failed-spe… 4/11

Its key products are Ilumya, used to treat moderate-to-severe plaque psoriasis; Absorica, used to treat severenodular acne; and Cequa, used to treat dry eyes.

The company remains committed to scaling up thespeciality business, but what worries investors isconsistent high investments in this franchise anduncertainties over a meaningful ramp up in revenue.

“The ramp up in Ilumya has been slower thanexpected in the US since its launch in 2018. Thecompetition in this category of drugs is high with bigplayers such as Johnson and Johnson, Novartis, Eli Lilyhaving strong muscle and hence gaining market sharecan be di�icult for Sun Pharma,” says a fund manageron condition of anonymity.

Analyst estimates of peak sales for Ilumya range fromUSD300 million to USD400 million over the next two-three years. However, the company is conductingclinical trials for additional indications of the drug,which, if successful, may improve revenue potential inthe longer run.

In FY20, Ilumya had global sales of USD94 million.The company’s total speciality drugs sales worldwidelast �scal were USD429 million, accounting for 9% ofits consolidated revenue.

Abhay Gandhi, head of North America business at SunPharma said during the FY20 earnings call that thecompany has made signi�cant investment on Ilumya,not only on the marketing side, but also on doingdi�erent clinical trials to improve the label of theproduct.

“The investment is de�nitely heavy on this product.Currently, if we look at the sales versus expenses, theproduct is not pro�table, but we feel that with theramping up of the business, we should be able toabsorb these costs and hopefully churn pro�ts goingahead,” Gandhi had said.

Although sales of speciality drugs were impacted inthe early part of the current year due to the pandemic,they have been recovering in recent months. However,

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12/3/2020 Sun Pharma: Why Sun missed the pharma rally: the answer is hidden in a bet many failed — speciality drugs - The Economic Times

https://economictimes.indiatimes.com/prime/pharma-and-healthcare/why-sun-missed-the-pharma-rally-the-answer-is-hidden-in-a-bet-many-failed-spe… 5/11

"The speciality business hasbeen an overhang on thecompany’s stock but the marketis not fully valuing its Indiabusiness potential."— A fund manager

Absorica, a major revenue earner for the company, isexpected to face generic competition this month,which could a�ect margins and overall performance ofthe speciality business.

Accordingto a note bybrokerage�rm

PhillipCapital, “Sun Pharma’s e�orts to de-risk itsleading brand Absorica (scheduled to go generic inDecember 2020) by converting patients to its lower-dose version was largely hampered by the Coviddisruption, as they saw lower-than-expected 20%conversion by end of Q2FY21. But we believe thatpotential generic impact ahead and gradualconversion to Absorica LD is largely built in the price.”

Meanwhile, Cequa sales have recovered to pre-Covid-19 levels, and the company expects further tractiongoing forward due to its direct-to-consumer marketinge�orts. However, this drug may also face competitionin the near future, which could hamper growth.

Other issues The company’s generics-drugs business in the US hasbeen subdued due to price erosion, which has beenparticularly high in the dermatology space.

Consolidation in the distribution channel and risingcompetition have increased pricing pressure andreturns on capital employed have reduced. SunPharma’s total US sales have declined from INR13,517crore in FY16 to INR10,543 crore in FY20.

To add to the woes, its Halol manufacturing facility,which was under a warning letter from the US Foodand Drug Administration (US FDA) from 2015 to 2018,has again received eight observations relating todeviations from good manufacturing practices from

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12/3/2020 Sun Pharma: Why Sun missed the pharma rally: the answer is hidden in a bet many failed — speciality drugs - The Economic Times

https://economictimes.indiatimes.com/prime/pharma-and-healthcare/why-sun-missed-the-pharma-rally-the-answer-is-hidden-in-a-bet-many-failed-spe… 6/11

the US regulator. It has been classi�ed as “o�icialaction indicated” in March this year, which means theUS regulator will put on hold product approvals fromthis plant.

The company has 92 abbreviated new drugapplications (ANDAs) pending with the USFDA, butapproval timelines are uncertain for a signi�cantnumber of products �led from the Halol unit.

Sun Pharma says it expects two-three generic drugapprovals in the US every quarter, which makes it 8-12products in a year. This is far less than 30 generic drugapprovals expected for Dr. Reddy’s in the current year.

An analyst says there is no visibility on any big-ticketproduct approval from the company’s generic pipelineand even after Halol issues get resolved, it is unlikelythat the generics business in the US can move theneedle.

All is not lost The biggest strength for Sun Pharma is its INR10,000crore India business, which is expected to see steadygrowth and margins. It is the largest player in thedomestic market, and has recently increased its �eldforce to penetrate further.

Another fund manager says, “The speciality businesshas been an overhang on the company’s stock but themarket is not fully valuing its India business potential.At the current valuation, it is cheaper and can seeupside because of its strong India business and anypositive surprises in generic and speciality business inthe US.”

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12/3/2020 Sun Pharma: Why Sun missed the pharma rally: the answer is hidden in a bet many failed — speciality drugs - The Economic Times

https://economictimes.indiatimes.com/prime/pharma-and-healthcare/why-sun-missed-the-pharma-rally-the-answer-is-hidden-in-a-bet-many-failed-spe… 7/11

The Indian branded generics business has highoperating margins of 30-35% and the company expectsrevenue growth to be in line or higher than industryaverage.

With challenges in the US business mounting, SunPharma had in the last two to three years shifted itsfocus to India and other emerging markets. The USmarket contributed over 50% to its revenue in FY16,but accounted for 33% in FY20. Meanwhile, the shareof the India business in its total revenue increasedfrom 25% in FY16 to 30% in FY20.

Although uncertainties around speciality drugsremain, the downside risks from here on seem limitedand hence most analysts have a buy recommendationon the company’s stock.

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12/3/2020 Sun Pharma: Why Sun missed the pharma rally: the answer is hidden in a bet many failed — speciality drugs - The Economic Times

https://economictimes.indiatimes.com/prime/pharma-and-healthcare/why-sun-missed-the-pharma-rally-the-answer-is-hidden-in-a-bet-many-failed-spe… 8/11

Some analysts believe that the investments made overthe last few years on the speciality front will now startto fructify as revenue from these drugs picks up.

“In our view, the operating leverage from the ramp upin the speciality business can drive meaningful marginexpansion, even after building in a continued increasein R&D. Sun Pharma’s valuation, at a 13x EV/Ebitda,does not factor in the ~14% FY21E-23E Ebitda CAGR(assuming a 26% R&D increase) and visibility forspeciality-business-driven growth,” brokerage �rm JPMorgan said in a report.

However, the company will have to continuously lookat adding more products to its speciality basketthrough acquisitions or in-licensing to gain scale inthis business. This means by the time one or twoproducts become pro�table, the company will beinvesting again in new product additions, which maykeep a check on pro�tability.

“Sun Pharma has taken a 10-to-20-years call to becomea strong speciality generic global company, and inorder to get there, it will have to go through the phasesof volatility in its pro�ts because it will have to keepin-licensing new assets for the speciality business. Thestrategy makes sense in the long term but theinvestment horizon of investors needs to match thehorizon of the promoters,” says Aditya Khemka, fundmanager at InCred AMC.

The company has the past record of turning aroundbusinesses and a strong balance sheet to pursueorganic as well as inorganic growth opportunities.Now it is critical for Sun Pharma to win the specialitydrugs game.

(Data support by Rochelle Britto)

(Graphics by Mohammad Arshad)

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