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Despite the recent decline in Sun Pharmaceutical Industries' share price due to the USFDA's OAI status for its Dadra Plant, HSBC anticipates a 16% upside. Here are the two main reasons behind their positive outlook.
In recent trading sessions, Sun Pharmaceutical Industries' stock has experienced a 4-5% decline due to regulatory concerns. Following an inspection by the USFDA at Sun Pharma's Dadra facility from December 4, 2023, to December 15, 2024, the regulatory status has been classified as Official Action Indicated (OAI).
The Official Action Indicated (OAI) status signifies that the United States Food and Drug Administration (USFDA) has identified significant deviations from the prescribed Good Manufacturing Practices (GMP) quality norms during its inspection. Consequently, the USFDA may withhold approval of new products from Sun Pharma's Dadra facility until the identified issues are adequately resolved.
In its recent statement, Sun Pharma expressed its commitment to collaborating with the regulator to attain full compliance status. However, the challenges persist for the company, with its Halol Manufacturing facility in Gujarat already under scrutiny from the US Food and Drug Administration (USFDA), facing an import alert. Additionally, its Mohali unit awaits clearance from the USFDA, reflecting ongoing regulatory hurdles for Sun Pharma.
Limited earnings impact of Dadra units OAI status
Despite the regulatory challenges, analysts at HSBC Securities and Capital Markets (India) Private Limited believe that the impact on earnings from the Dadra OAI status should be limited, considering it contributes less than 2% of Sun Pharma's consolidated revenue. However, it does add to the overall regulatory concerns surrounding the company. In the short term, Sun Pharma is benefiting from sales of its generic version of Revlimid, a drug for multiple myeloma. Nonetheless, excluding Revlimid, HSBC expects US generics sales to remain relatively stable at $120-130 million per quarter due to the absence of significant new launches.
Specialty portfolio remains a key growth drivers
Sun Pharma has indeed been prioritizing the development and expansion of its specialty portfolio over the past few years, consistently increasing its sales contributions in this segment.
HSBC analysts maintain a positive outlook on the growth prospects of Sun's specialty brands, particularly focusing on dermatology drugs like Ilumya, Winlevi, and Cequa ophthalmic drops, predicting a healthy trajectory for the specialty segment.
Analysts at HSBC anticipate a robust outlook for Sun Pharma's specialty portfolio, with global specialty sales projected to contribute approximately 19% of the company's total revenue by FY26, a significant increase from 16% in FY23. Moreover, they expect specialty sales to represent a remarkable 51% of Sun's US sales by FY26, up from 43% in FY23, with an estimated compounded annual growth rate (CAGR) of 14% for FY24-26.
Despite challenges in the US generic sales segment, analysts believe that the momentum in specialty sales, combined with the consistent growth of Indian formulations, will more than offset these challenges.
Disclaimer: Absolutely, it's always wise for investors to consult certified experts and conduct thorough research before making any investment decisions.
Source: livemint
