Sun Pharma’s specialty and domestic formulations growth offsets US generics pressure

Investment View and Key Thesis

Motilal Oswal Financial Services Limited has retained its Buy recommendation on Sun Pharma with a target price of Rs 2,310. The broker views specialty and branded formulations as the principal growth drivers, while recognising continued pressure from US generics.

Sun Pharma delivered in-line revenue and EBITDA in Q1 FY27, while adjusted PAT was 11% above the broker’s estimate, supported by higher other income. Motilal Oswal expects the company to expand its innovative-medicines portfolio through partnerships, launches, enhanced marketing, a wider prescriber base and improved prescription rates. Domestic formulation growth is also expected to remain healthy, aided by brand-building initiatives and the addition of medical representatives.

Q1 FY27 Financial Performance

Reported Q1 FY27 sales increased 10.1% year-on-year to Rs 151.8 billion, marginally below Motilal Oswal’s estimate of Rs 152.8 billion. Gross margin expanded by 90 basis points year-on-year to 80.5%. EBITDA increased 4% year-on-year to Rs 41.8 billion, exceeding the broker’s estimate of Rs 40.0 billion. However, EBITDA margin declined by 155 basis points to 27.5%, as employee costs and other expenses increased by 90 basis points and 160 basis points of sales, respectively.

Adjusted PAT increased 3.1% year-on-year to Rs 30.9 billion, compared with the broker’s estimate of Rs 29.8 billion. The tax rate was 29%. The quarter included an exceptional item of Rs 821 million, comprising Rs 1.7 billion of Organon acquisition due-diligence, legal and filing fees, Rs 370 million of employee-compensation restructuring costs, and Rs 1.2 billion of net foreign-exchange gains.

Segment Performance

Domestic Formulations

Domestic formulations were the strongest reported segment, with sales growing 16% year-on-year to Rs 54.7 billion and accounting for 36% of total sales. Management attributed the performance to new prescriptions, brand-building across therapy areas and the addition of medical representatives. Sun Pharma delivered 5.4% volume growth, compared with about 2% growth for the Indian Pharmaceutical Market.

Growth was broad based across cardiovascular, central nervous system, gastro and ortho therapies. The company launched five products in Q1 FY27. Management said it saw no slowdown in its own business despite high industry channel inventory for generic semaglutide.

Emerging Markets, Rest of World and the US

US sales were affected by lower generic Revlimid contribution and increased competition in selected base products.

Innovative Medicines and Specialty Growth

Global innovative-medicines sales, excluding milestones, grew 13% year-on-year to US$351 million and represented 22% of Q1 FY27 sales. Ilumya drove performance, supported by Cequa and Odomzo.

Motilal Oswal considers LEQSELVI and Unloxcyt to be incremental growth levers, although it expects their scaling to be gradual because both products are at an early launch stage. Management cited encouraging physician feedback on LEQSELVI’s speed of response and efficacy. Unloxcyt is gaining traction based on its durable efficacy and safety.

Innovative medicines accounted for about 30% of R&D spending, with the balance directed towards generics and India-related development. The broker forecasts specialty sales to grow at a 13% CAGR to US$1.7 billion over FY26–28.

Management Outlook and Pipeline Milestones

Management reiterated its high-single-digit revenue-growth guidance for FY27. Organon shareholders have approved the proposed acquisition, and management expects completion by Q4 FY27.

Sun Pharma has approvals for generic semaglutide injection for Type-2 diabetes in South Africa and Brazil. The company has commercialised the product in South Africa and expects to launch it in Brazil through a partner shortly.

Key pipeline milestones include:

• An October 2026 US FDA PDUFA date for Ilumya in psoriatic arthritis.
• Phase 3 initiation for Fibromun in soft-tissue sarcoma.
• GL0034 Type-2 diabetes topline data expected in the second half of CY27.

Earnings Estimates and Valuation

Motilal Oswal has maintained its FY27 and FY28 earnings estimates and forecasts an 11% earnings CAGR over FY26–28. Its forecasts imply the following growth over the period:

The broker values Sun Pharma at 38 times 12-month forward earnings, resulting in a target price of Rs 2,310.

Key Risks

• Price erosion and competitive intensity in US generics.
• Gradual adoption of recently launched innovative medicines.