Add Sun Pharma Ltd for the Target Rs 2,100 by Emkay Global Financial Services Ltd
Sun’s 1QFY27 EBITDA was in line with our and street estimates, albeit aided by meaningfully lower R&D spend. Gross margin was resilient on the back of sustained domestic outperformance. However, expectations of a qoq uptick in US sales did not materialize. The impact of the persistent weakness in Sun’s US generic portfolio is real – US sales are now expected to remain at ~$1.9bn for a third consecutive year despite an estimated 18% CAGR in US specialty sales over FY25-27E. While gRevlimid as well as the core US generic business would have meaningfully eroded by FY27 and the business will enter FY28 on a much lower base, AbbVie’s accelerated entry into Alopecia Areata (EU approval received last week, potential USFDA approval by Feb-27) remains a key risk to Leqselvi’s ramp-up. We cut our earnings estimates for Sun by ~5% owing to lower US sales + margin assumptions as well as a higher tax rate guidance (second consecutive year of a negative surprise on the ETR front; basis revised FY27E earnings, Sun is expected to post ~5% earnings CAGR over FY25-27E). Organon’s own topline print for 2QCY26 (+7% qoq) was marginally positive, with the company’s disclosures also pointing to the potential for higher medium-term cost synergies. Consequently, we revise our SoTP-based TP upward by 5% to Rs2,100. We expect upside to be capped in the near term, with the quarter’s performance indicating that there is only so much heavy lifting that Sun’s stellar domestic franchise can do (the franchise’s sales share will fall to less than 1/5th post-Organon integration); retain ADD.
US sales meaningfully below expectations; domestic outperformance continues
Global specialty sales were up ~13% yoy to $351mn, below our expectations, with the qoq decline being attributed to adverse seasonality in Levulan (also expected in 2Q). US sales (10% decline in cc terms) were meaningfully below our estimate on account of lower specialty as well as generic sales. Domestic formulations growth (16% yoy vs our estimate of 13%) was above our expectations (5.4% volume growth).
KTAs from the earnings call
1) Adjusted for gRevlimid contribution in the base quarter, 1QFY27 EBITDA margin was higher yoy.
2) Leqselvi crossed 1,000 prescribers in Jun-26 and continues to expand payor access, with the majority of covered patients now available.
3) Unloxcyt is receiving positive prescriber feedback for efficacy + safety, and continues to see mom growth as more cancer centers add it to their formularies.
4) EM growth was driven by branded generics + specialty (particularly Ilumya across markets, including Romania, Brazil).
5) Sun has launched Semaglutide in South Africa, and shortly plans a partnered launch in Brazil; Sun manufactures the API + formulation in-house, and has partnered for the device. 6) R&D spend was lower due to the gap between the discontinuation of prior trials and initiation of studies for new indications (guidance retained at 6-7% of sales for FY27).
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