The Speciality business of Sun Pharmaceuticals looks promising and according to a research report by HDFC securities the management expects the speciality business to break even by FY23/24. The key takeaways from the analysts call was that R & D was 7-8 per cent of sales and this figure is expected to rise with the normalisation of business activity. Second, the company aims to launch Winlevi by October-December and Ilumya has an 8 per cent share in the US IL-23 market.

The note also added that despite generic competition in Absorica, the speciality business grew ~6% QoQ to US $ 148mn, led by strong traction in Ilumya, Cequa, Levulan and Absorica LD sales. Key products like Ilumya and Cequa are tracking higher than the pre-COVID level. Given doctors' clinics are not yet fully operational, HDFC Securities see the scope of further ramp-up. Winlevi, the recently added anti-acne product with a new mechanism of action and broad-based use (vs Absorica), will further boost the derma portfolio and speciality business growth.

Sun's Q1 revenue/EBITDA grew by 28%/55% YoY, led by robust growth across markets and restricted spends driving sharp operating leverage and margin expansion to 28.7% (+495bps YoY, +404bps QoQ). Its Speciality business surprised positively despite the generic impact of Absorica (US $ 148mn, +6% QoQ, +90% YoY). The consistent traction seen in the past three quarters gives us comfort in the company's ability to execute its Speciality pipeline and break even by FY23. Further scale-up in the Speciality business will improve profit growth visibility and support rerating, according to the report. Sun's strong balance sheet (net cash) is likely to aid Speciality spends and inorganic initiatives. While the margin may likely revert to 25% in 2HFY22 as costs normalise, it expects double-digit growth in India and the Speciality business to drive 28% earnings CAGR over FY20-23e.

All-round beat: Revenue grew by 28% YoY, driven by strong growth in India (+39% YoY), US (+3% QoQ, specialty led), EMs (+22% YoY) and RoW (+33% YoY). EBITDA margin expanded to 28.7% (+404bps QoQ) as moderation in gross margin (-97bps QoQ, product/region mix) was offset by savings in staff costs (-159bps QoQ) and other expenses (-302bps QoQ) due to restricted spending during the lockdown.

Strong recovery in the base business, COVID drugs boost India: The India business grew by ~39% YoY (vs. ~37% for the IPM), led by a recovery in the core business, a low base, and sales of COVID drugs (~10% of sales). The chronic segment grew at a healthy pace, the acute segment performed in line with the market, whereas the sub-chronic segment did exceptionally well, the note concluded.