Buy Sun Pharma Ltd for the Target Rs.2,000 By Emkay Global Financial Services Ltd
Strong margin performance continues; all markets in fine fettle
Sun’s 2QFY26 EBITDA was ahead of the street and our estimates (by ~12%), on the back of a marginally higher gross margin and lower R&D spend. The reported EBITDA margin was again at a multi-quarter high; excluding forex gain, EBITDA was marginally ahead of expectations. The topline surprise was primarily driven by a strong beat in EM + the RoW (no one-offs, per the management), with US and domestic sales being broadly in line. We believe that 2Q performance should put to rest concerns about sustainability of Sun’s double-digit domestic growth, given the scale of its domestic business (9th consecutive quarter of double-digit growth). While we admit that the lower R&D spend (which, in line with our earlier expectations, will be at the lower-end of the guidance for FY26) and forex gain have helped Sun well exceed the street’s margin expectations over the last 2 quarters, Sun equally deserves credit for gross margin defense at elevated levels (which, as we have been arguing in the past, is a structural driver, given that branded share in the overall mix will continue to increase). Pessimism around specialty ramp-up should get addressed as the base specialty business continues to scale up across markets (US and excl US); Leqselvi further widens access (refer to our note), Unloxcyt is launched in 2HFY26, and Ilumya receives an approval for Psoriatic Arthritis (2HFY27). Sun’s specialty portfolio will also benefit from favorable seasonality in 2HFY26. We broadly maintain our earnings estimates, and retain BUY with an unchanged TP of Rs2,000.
US and domestic sales broadly in line; EM and RoW sales ahead of estimates
Global specialty sales were up 16% YoY to USD333mn, in line with our estimate. US sales (base business as well as gRevlimid sales) were in line with expectations, with gRevlimid sales remaining flat QoQ. Domestic formulations growth (at 11% YoY vs our estimate of 9% YoY) was marginally ahead of our expectations. EM sales delivered a meaningful beat, with growth being driven by key markets including South Africa and Brazil. The RoW’s outperformance was aided by growth in the generic as well as specialty portfolio.
KTAs from the earnings call
1) Ilumya has now been commercialized in 35 markets, with the product being launched in some of these markets over the last one year. 2) US specialty sales exceeded generic sales for the first time in 2Q. 3) New generic entrants in Restasis will not have an impact on Cequa’s growth trajectory. 4) Leqselvi has already started seeing paid prescriptions in the commercial channel. 5) Odomzo has more than 50% share within Hedgehog inhibitors, among dermatologists in the US and Europe. 6) Salesforce for Unloxcyt is in place; costs linked to specialty salesforce, marketing, and patient support programs will continue in FY27. Sun is in the process of compiling the dossier for Unloxcyt in Europe. 7) R&D spend will be at the lower-end of the 6-8% guidance for FY26. Specialty R&D accounted for ~38% of the total R&D spend in 2Q. 8) Sun Pharma will launch Semaglutide in the first wave in India, post the innovator’s loss of exclusivity.
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