Sun Pharma Shares Jump After Jefferies Upgrades Stock To 'Buy'
Jefferies upgraded Sun Pharma to 'buy' from 'underperform'.
Sun Pharmaceutical Industries Ltd.’s growth is expected to be driven by its specialty portfolio and India business, Jefferies said, as it upgraded the nation’s largest drugmaker to ‘buy’.
That led the shares to jump the most in more than two weeks.
The company has guided for a “low single to double-digit FY23 sales growth, including an above-industry-level growth for India”, the research house said in a June 17 report. “Sun Pharma’s FY23 sales guidance is quite achievable as it no longer relies on its generic portfolio, which has a higher risk of price erosion.”
“The next two years’ growth will be driven by Ilumya (moderate to severe plaque psoriasis), Cequa (dry eyes), and Winlevi (acne), while the dependence on the U.S. generics is among the lowest in our coverage.”
Sun Pharma’s plans to increase its sales force in India by 10% (about 1,100 employees) should drive above-industry-level growth for the company, the report said.
Jefferies also said the “key risk” to its specialty portfolio is behind.
Absorica (for severe cystic acne)—the third-largest product for the company after Ilumya and Levulan (warty overgrowths of skin) during the pre-pandemic period—faced generic competition from April 2022, Jefferies said. Still, Sun Pharma clocked more than 42% growth in specialty in FY22, led by Ilumya sales, overcoming Absorica’s decline.
Other products that supported growth for the company are Cequa, Levulan, and Odomzo (skin cancer). Sun Pharma, the report said, launched Winlevi in November 2021, and it should help to offset the Absorica sales loss in FY23. Ilumya should continue to grow, albeit at a lower rate in the next two years.
“For the next two years, we factor in incremental U.S. sales of $141 million (around Rs 1,100 crore) from the specialty division (growth CAGR 12%), and $90 million (around Rs 700 crore) from the generic portfolio (including U.S. subsidiary Taro Pharma), establishing specialty as the bigger growth driver between the two business lines in the U.S.”
Dilip Shanghvi, managing director at Sun Pharma, in the fourth-quarter earnings concall had said, “We continue to invest in building an R&D pipeline for both the global generics and the specialty businesses.”
Jefferies said the company’s FY23 margin will be below FY22’s that were inflated by lower research and development expenses. For FY23, the company has guided for 7-8% of revenue as R&D costs against 5.8% in FY22 and a 50-basis-point impact from freight cost and raw material expenses. “For FY24, we put the margins at 25.1% (versus 26.1% in FY22) on easing of raw material inflation pressure.”
Sun Pharma, the research house said, is trading at 23.6x versus a five-year historical average of one year forward at 24x and a slight premium to the Nifty Pharma trading at 22.2x FY24E.
“The stock is trading near our ‘underperform price target’, so we’re taking a fresh stance and double upgrading it to ‘buy’," Jefferies said. It values Sun Pharma at 25x FY24 EPS with a price target of Rs 910 apiece against Rs 775 earlier—an implied upside of 14.70%.
Key catalysts
New additions in specialty portfolio can further augment growth (like Winlevi).
Halol facility clearance.
Pickup in approvals in the U.S.
Key risks:
R&D costs as a percentage of revenue significantly higher than 7%.
Raw material price inflation.
Low India pharma industry growth.
On Monday, Sun Pharma shares gained as much as 2.53% intraday. Of the 45 analysts tracking the stock, 42 have a ‘buy’ rating, two recommend a ‘hold’ and one suggests a ‘sell’, according to Bloomberg data. The average of the 12-month target prices implies an upside of 27.7%.