5 Reasons for Sun Pharma’s under-performance as compared to Pharma sector

4 min read
Nifty Pharma index has doubled from its lows in March 2020. But, the story is different for India’s largest pharma company - Sun Pharmaceutical Industries. Sun Pharma has under-performed its peers such as Dr. Reddy’s Laboratories, Cipla, Aurobindo Pharma as well as the Nifty Pharma index. Why the company’s performance is subdued vs its peers?

Why is Sun Pharma’s stock performance not up-to the mark with Pharma sector?

Introduction

Sun Pharma has failed to replicate the rally exhibited by the NIFTY Pharma Index and has under-performed its peers like Dr. Reddy’s Laboratories, Cipla, Aurobindo Pharma, etc. Let us find out the reasons for this under-performance in this blog.

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5 Reasons for Sun Pharma stock’s under-performance

Recent stock price movement

Sun Pharma price movement

Muted Earnings growth over the years (FY16-FY20)

  • The company’s net profit has sharply declined by -17.2% from Rs. 4546 Crore in FY16 to Rs. 3765 Crore FY20. Likewise, their US Sales have also contracted by -22% from Rs. 13,517 Crore to Rs. 10,543 Crore.
  • These figures indicate that the company has been in dire straits for quite some time and this is just the tip of the ice berg. Let’s dive deeper.
Sun Pharma Muted Earnings growth

1. High Investment in Specialty Drugs Franchise

  • Sun Pharma has invested a whooping $2 Billion in their speciality drugs business, which is way more than any of their peers.
  • Specialty drugs are classified as high-cost, high complexity and/or high touch. They are often biologics—’drugs derived from living cells’ that are injectable or infused. They aid to cure chronic diseases like cancer, alzheimer’s, etc.
  • In 2019, the US’s national health expenditure reached $3.65 trillion, which is 17.8% of their GDP, according to the latest healthcare in the USA facts and reports. US is the largest healthcare market and covet exceedingly large amounts of speciality drugs.
  • Sun Pharma is the 5th Biggest player globally in the speciality drugs segment. They possess a solid speciality drugs portfolio with 9 renowned commercialized products in the US market.
  • Sun Pharma’s total specialty drugs sales worldwide in FY20 was $429 Million, accounting for around 9% of company’s consolidated revenue.
  • Despite the rosy picture being painted, the company still requires gigantic investments to continue building their Specialty Drugs Franchise. It entails establishing a strong network and lofty market expenditures on the company’s end.
  • Investors are skeptical and what worries them is the lower visibility of return in the Specialty Drugs business. Uncertainties over a meaningful rise in revenue in the coming years is also a key concern.

2. Price Erosion in the USA

  • Sun Pharma is facing intense rivalry from other generic medicine producers in the US market. Competitive pricing of these medicines has resulted in erosion of margins of various specialty drugs and impairing the company’s performance.
  • The above state of affairs are common to all Indian pharma players operating in specialty drugs segment.
  • A generic medicine is one that contains the same chemical substance as a drug that was originally protected by chemical patents. Generic drugs are allowed for sale after the patents on the original drugs expire.

3. Integration of Ranbaxy

  • Sun Pharmaceuticals is known for acquiring strapped companies that are about to go bust and then adroitly turn them around into successful subsidiaries.
  • On 7 April 2014, India-based Sun Pharmaceutical acquires the entire 63.4% share of Ranbaxy from Daiichi Sankyo in a $4 billion all-share deal.
  • However, it has been a travesty for Sun Pharma. There have been many complications & issues, numerous overlapping brands and they are unable to sort out an integration even after 6 years post acquisition.
  • This acquisition has become a roadblock, preventing Sun Pharma from making any progress, while deteriorating their overall performance.

4. Persistent Quality Compliance Issues at Halol Plant

  • Sun Pharma’s Manufacturing facility at Halol, Gujarat (contributing 10% of the revenue) has been under Warning Letter from USFDA from 2015 to 2018.
  • This Halol manufacturing facility has once again received 8 observations by USFDA on Quality-compliance in March 2020. Thus, putting on hold product approvals from this Halol plant.

5. Corporate Governance Issues in Sun Pharma

  • Corporate governance issues such as Insider Trading, Whistle Blower Complaint regarding CEO, Stock-rigging Case, etc continue to loom Sun Pharmaceuticals.
  • They are also frequently alleged of implementing forceful acquisitions and engaging in arm-twisting entities to meet their objectives. 
  • While the company has often attempted to assuage these concerns, the company needs to rethink its corporate governance structures.

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