Sun Pharma: Retain ‘buy’ on stock, raise TP to Rs 620 from Rs 605

By HSBC Global Research

Strong sequential recovery in sales across businesses in Q2; operating margin beat driven by lower overheads. We expect uptrend to continue for specialty products sales; Sun Pharma continues investing to strengthen its specialty offerings. Retain ‘buy’; raise target price to Rs 620 (from Rs 605); market share gains for major specialty brands will be key stock catalyst.

Operating margins beat in Q2. Sun reported revenues of Rs 85.5billion (+12.8% QoQ, +5.3% YoY; HSBCe Rs85.9 billion) in Q2 with sequential recovery seen for all the business segments from Covid-19 disruptions in Q1. Total US sales at $335m grew 18.8% QoQ (-1.2% YoY) on strong recovery in Taro sales and sales of specialty products. Gross margin (GM) at 74.6% improved 100bps QoQ and 316bps YoY on better mix, and process optimisation. Ebitda margins (excluding forex and other operating income) at 26.2% improved 414bps QoQ on higher GM, and lower overheads (savings on marketing & travel costs). Reported PAT of Rs 18.1billion had one-off tax benefit of Rs2.9 billion. Adjusted PAT would have been Rs15.9 billion (41% QoQ). It repaid $300 million of debt in H1FY21.

Uptrend should continue for specialty sales. Sun reported global sales of $108 million for specialty products in Q2 (vs $78 million in Q1 and $126 million in Q4FY20), showing strong QoQ recovery in sales. Per management, US sales for main specialty brands — Ilumya, Cequa and Odomzo — have recovered back to pre-Covid levels (though Levulan brand is yet to see sales recovery).

With improving patient footfalls at doctors’ clinics, Sun expects continued improvement in sales for key brands. Sun plans to bolster its marketing initiatives for Ilumya by utilising recently released five-year sustained efficacy and safety data for Ilumya in patients with moderate-to-severe psoriasis patients. It will commence DTC (direct-to-consumer) marketing for Cequa starting this month mainly in non-TV platforms. While entry of competing generics is imminent for Cequa and Absorica, it remains confident about reasonable market uptake for its brands on the back of notable offerings in terms of efficacy, safety and durability of results. It will continue to spend towards R&D and marketing for enhancing its specialty presence in the US and other markets (Ilumya is recently launched in Japan). Scale up in specialty sales should help it in absorbing marketing and R&D costs ahead.