By Suhani AdilabadkarSun Pharmaceutical Industries (Sun Pharma) lagged behind its peers throughout FY21, in the absence of a strong Covid-19 drug portfolio, muted US business growth and subsidiary Taro’s consistent underperformance. But FY22 started on a stellar note, and Sun Pharma reported its highest ever quarterly revenues in the June 2021 quarter. Robust revenue growth was driven by a recovery in both domestic and US formulation business in Q1FY22. Traction in the specialty portfolio and Taro Pharma’s positive revenue YoY growth enthused the street. After the company announced its results, Sun Pharma’s stock price jumped 10%.
Quick Takes
Sun Pharma repaid debt of about $185 million in Q1FY22 and $765 million over the last five quarters
The management expects its global specialty portfolio to start earning it operating profits in the next two years
The management guided research & development (R&D) expenditure to be around 7-8% of turnover in FY22
Sun Pharma’s generic drugs pipeline for the US market includes 86 abbreviated new drug applications (ANDAs) and 13 new drug applications (NDAs) awaiting the US FDA approval
US FDA clearance for its Halol facility is still pending which has impacted the flow of new generic product launches in the US
All-round performance in Q1FY22
Sun Pharma reported consolidated revenues of Rs 9,719 crore in Q1FY22 compared to Rs 7,585 crore, a year ago. Robust revenue growth of 28% YoY was driven by double-digit growth in formulations business (94% of revenue mix) across all geographies. Sun Pharma’s formulation business rose 31% YoY to Rs 9,082 crore aided by India business (up 39% YoY), US formulation business (up 31% YoY), emerging markets (up 22% YoY) and rest of world formulations (up 31% YoY) in June 2021 quarter. The only revenue segment that witnessed decline was active pharmaceutical ingredients (APIs) (down 7% YoY). Sequential revenue growth for Sun Pharma was 14% in the June 2021 quarter.
Operating margins expanded 470 basis points (bps) YoY supported by lower cost of material and stagnant employee-related costs. Cost of material as a percentage of sales declined to 16% in Q1FY22 compared to 20% a year ago due to product mix and other efficiency initiatives.
Higher revenues and strong operational performance led to strong sequential net profit growth of 57% in the June 2021 quarter. Net profit came in at Rs 1,404 crore in Q1FY22 compared to a net loss of Rs 1,656 crore a year ago. Sun Pharma’s net loss in Q1FY21 was due to an exceptional item of Rs 3,633 crore on account of subsidiary Taro’s settlement with the US Department of Justice for multi-jurisdiction antitrust matters. Research & development (R&D) expenditure stood at Rs 593 crore at 6% of sales in June 2021 quarter.
Sun Pharma outperforms peers as India business revenue growth at 24-quarter high
Sun Pharma’s India business revenues came in at Rs 3,308 crore, a rise of 39% YoY in June 2021 quarter. Growth rate was much lower than Dr Reddy’s Labs (DRL) 69% YoY, Cipla’s 68% YoY followed by Cadila Healthcare’s 47% YoY domestic revenue increase driven by strong Covid-19 drug portfolio and low base of Q1FY22 last year. Speaking on Q1FY22 numbers, Kirti Ganorkar, CEO India Business at Sun Pharma, said that domestic growth was supported by a combination of core business, low base of last year and Covid-19 related products. Covid drugs accounted for about 8-10% of India sales in Q1FY22.
Sun Pharma is on softer footing in terms of Covid-19 portfolio compared to DRL, Cipla and Cadila Healthcare. But stock prices of all these companies fell after their respective Q1FY22 results were announced. Sun Pharma’s stock on the other hand surged 10% post its June 2021 quarter results.
India business accounts for about 20-35% of total revenues of these top pharma companies. Rest of the revenue mix is diversified across the US, Europe and emerging markets (Latin America, Africa and Asia). While its peers reported robust growth mainly on the home front, Sun Pharma delivered stellar performance with above 20% YoY revenue growth across all geographies in Q1FY22. This comes after a lacklustre FY21.
Emerging market revenues (Rs 1,605 crore) constituted 18% of total formulation business in Q1FY22 and reported 22% YoY growth. In dollar terms YoY quarterly revenue growth is the highest over the past 17 quarters. Emerging market business is spread across Africa, Americas, Asia and Eastern & Central Europe. Emerging markets are characterised by volatile currencies and high dependence on crude price movement. Strong recovery in 2021 from Covid-19 pandemic has stabilized revenues for most pharma companies in emerging markets.
Sun Pharma entered emerging markets in 2011, and the company has slowly and steadily achieved critical mass across key geographies such as Russia, Romania, South Africa, Brazil and Mexico by introducing new products specifically targeted for emerging markets, launching complex generics and augmenting its market specific branded product portfolio. The company presently has 100 drug master files filed across various geographies in emerging markets.
Rest of the world (ROW) revenues accounted for about 15% of total formulation revenues and reported at Rs 1,368 crore, grew 31% YoY. In dollar terms, ROW YoY revenue growth was at a 8-quarter high in Q1FY22. The ROW region includes countries from Western Europe, Canada, Australia and New Zealand. ROW growth is mainly driven by ageing population and high incidence of chronic ailments. Sun Pharma’s ROW business includes differentiated offerings for hospitals, injectables and generics for the retail market. To bolster its global specialty growth, the company is launching its specialty products in ROW countries such as Japan, Australia and New Zealand.
In the India business, the company reported 39% YoY growth in June 2021 quarter, at a 24-quarter high. Sun Pharma launched more than 100 new products and expanded its field force by 10% over the past five quarters in the domestic market. Market leader Sun Pharma with 8% market share in the Indian pharmaceutical market is one of the strongest players in the chronic therapy segment. The chronic segment reported healthy growth, acute segment stabilized and sub-chronic segment did exceptionally well for Sun Pharma in Q1FY22. But what enthused investors the most was the US business recovery driven by Taro’s double digit revenue growth after 10 quarters and strong earnings visibility of Sun Pharma’s global speciality portfolio.
Specialty segment drives growth, Taro recovers
US business revenues rose by 31% YoY to Rs 2,800 crore in Q1FY22. In dollar terms, revenues at $ 380 million grew 35% YoY, a 32-quarter high. US business comprises generics which includes Taro and specialty segment. The management said US generic business (excluding Taro) continues to be competitive and delivered strong YoY revenue growth driven by new launches and better supply chain management. After going through severe price erosion post FY20, Taro Pharma (mainly dermatology) reported strong double-digit revenue growth after 10 quarters. Taro revenues rose 25% YoY to $ 147 million in the June 2021 quarter.
Abhay Gandhi, CEO of the North America Business at Sun Pharma said, “While all our businesses in the US have grown, the main driver of growth was the specialty business.” The management said specialty revenues were mainly driven by Ilumya (plaque psoriasis), Cequa (dry eye disease), Levulan (actinic keratosis) and Absorica LD (severe nodular acne). Specialty revenues nearly doubled YoY to $148 million in Q1FY22. On sequential basis also growth was healthy at 6.5% despite Teva’s Absorica generic launch in April 2021.
The company till date has commercialized 12 specialty products. Sun Pharma diversified into specialty products to counter high pricing pressure and vendor consolidation in its core US generic business. Specialty medicines are the latest generation products treating chronic, complex, and rare diseases. The company recently expanded its specialty business to Japan and Australia by launching Ilumya.
Sun Pharma is also conducting multiple clinical trials for four key molecules to augment its specialty product portfolio. SCD-044 is undergoing Phase-2 trials for atopic dermatitis and moderate to severe plaque psoriasis. MM-II is undergoing Phase 2 trials for the treatment of knee pain for patients with symptomatic knee osteoarthritis. GLP-1R agonist is in Phase-1 trials for diabetes and Ilumya is undergoing Phase-3 trials for psoriatic arthritis as second indication. Specialty R&D accounted for about 26% of Sun Pharma’s total R&D spend in the June 2021 quarter.
Sun Pharma also recently signed an exclusive in-licensing deal with Cassiopea SpA to commercialize Winlevi in the US and Canada. Winlevi, a new class of topical medication in dermatology complements Sun Pharma’s existing anti-acne segment led by Absorica. While Absorica is present in the niche severe nodular acne segment, Winlevi’s appeal is more broad-based and is expected to increase Sun Pharma’s anti-acne addressable market in the near future. The company is planning to launch Winlevi in Q3FY22.
Specialty business revenues in the June 2021 quarter accounted for roughly 40% of total US revenues. The management guided that its specialty segment will be EBITDA positive in the next two years. With the revival of its India business, specialty segment’s strong earnings visibility and Taro also moving into the recovery fold, all growth levers are now moving in sync for Sun Pharma.