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Sun Pharma’s investor fortunes hinge on speciality product ramp-up

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Sun Pharmaceuticals stock has lagged the Nifty Pharma index over the past two months, slipping about 6% against the index’s gains of about 5% during this period.

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

Sales of some speciality products have increased post the pandemic as Sun Pharma has several speciality products under its belt. Sun’s revenue from Illumya has recovered from its lows recently due to covid-19, said analysts. Further, the product launch in Japan could add another lever of revenue expansion, and margins.“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 speciality sales should increase confidence in earnings," said the JP Morgan report.

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

Meanwhile, domestic growth is likely to pick up this quarter with clinics and hospitals re-opening gradually.

Even so, the stock’s price-earnings multiple of about 22 times FY22 earnings is not quite inexpensive. Besides, any increase in research expenses could impact margins in the near term, while the ramp-up in speciality products could still take some time due to covid-19 disruption.

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