Sun Pharmaceutical: 2 key reasons why HSBC expects 16% upside despite regulatory challenges

Stock Market Today-  Sun Pharmaceutical Industries share price has decline 4-5% in last two trading sessions on regulatory concerns. The US drug regulator (USFDA) post conducting an inspection at Sun Pharma's Dadra facility from December 4,2023 till December 15, 2024 have now determined the inspection classification status of this facility as Official Action Indicated (OAI).

OAI status means that the USFDA (United States Food and Drug Administration) found notable deviations from its prescribed Good manufacturing practices or GMP quality norms and USFDA may withhold approval of new products from Dadra until Sun Pharma resolves the issues. 

Sun Pharma in its release on Friday said that it will work with the regulator to achieve fully compliant status.

The Sun Pharma's ordeal with the US drug regulator continues as its Halol Manufacturing facility in Gujarat is already under USFDA scanner facing import alert. Its Mohali unit also swaits USFDA clearance.

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Limited earnings impact of Dadra units OAI status

Analysts at HSBC Securities and Capital Markets (India) Private Limited nevertheless for now feel that there should be limited earnings impact due to Dadra OAI as it contributes  less than 2% of Sun’s consolidated revenue, it adds to the regulatory overhang.  In the near term, Sun Pharma mainly is seeing benefits accrue to its US generics sales from the sale of generic of Revlimid, the multiple Myeloma drug , Nevertheless excluding Revlimid, HSBC expects near-term US generics sales to remain range-bound at $120-130 million a quarter on the lack of notable new launches.

Specialty portfolio remains a key growth drivers

Sun Pharma has been focusing on developing and growing its specialty portfolio for past few years and is ramping up sales contributions regularly. 

Analysts at HSBC also remain positive on the growth outlook for Sun's specialty brands (mainly dermatology drugs Ilumya, Winlevi and Cequa opthalmic drops) and foresee  Healthy outlook for specialty

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portfolio, The global specialty sales  as per HSBC estimates are likely to contribute about 19% of Sun Pharma's total revenue by FY26 . These contributions are significantly higher compared to 16% in FY23 .

The contributions specialty to Sun's US sales  is to rise to phenomenal 51% of US sales compared to c]43% in FY23, which means CAGR (compounded annual growth rate of 14% for FY24-26 estimated) -  

Specialty sales momentum and the consistent rise of Indian formulations should more than offset the challenges in the US generic sales, said analysts.

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