Specialty drug boost for Sun Pharma

Valuations, however, already factor in some of the positives

The Sun Pharmaceutical stock gained nearly seven per cent on Wednesday, after it announced the acceptance by the US Food and Drug Administration (FDA) for a new drug application (OTX-101) to treat dry eye disease. The Street expectation is that final approval for launch will be faster than current estimates of end-2018 or early 2019. Any launch ahead of the earlier estimates will not only give it a head start in a category with limited competition but help it fend off generic competition for a competing product, Allergan's Restasis.

Analysts believe Sun's product is better than Allergan's. However, new generic competition for Restasis, which had branded annual sales of $1.8 billion, could impact the latter's prospects. Both Restasis and Sun's product have the same Active Pharmaceutical Ingredient but different strengths/formulation.

Analysts at Morgan Stanley had said if generic players enter the market by the end of 2018, it will coincide with Sun's launch, thereby hurting the economics. And, resulting in lower market share and potentially lower pricing power for Sun. While the company will gradually scale up its presence in the US, the peak sales potential over five years for the product, according to estimates by Credit Suisse, is $250 million.

When launched, the dry eye solution would be the second key branded opthalmic product for Sun after Bromsite, launched a year ago and used in treating ocular pain and inflammation in the eye after cataract surgery. The success of OTX-101 is key, as this showcases Sun’s speciality product pipeline. The product came into Sun’s portfolio after it acquired Auven Therapeutics’ subsidiary, Ocular Technologies, for $40 million. Sun will also make milestone payments and royalties on product launch and sales.

Apart from this, the Street will look at the progress of psoriasis drug Tildra, expected to be launched in FY19 (peak drug sales estimated by IIFL at $250 million), osteoarthritis drug MM-II and skin cancer drug Odomzo.

While progress on the specialty pipeline is a positive, the re-rating trigger for the company continues to be FDA approval for its Halol facility. Analysts say this is key, as a majority of the filings for important drugs (excluding Taro) are from this site. The company is awaiting re-inspection by FDA of Halol.

While pricing pressure continues to be acute in the US market, impacting both Sun's and Taro's portfolios, what is supporting overall sales is the strong doubledigit growth in the Indian market, led by the chronic ailment portfolio. India sales account for about 30 per cent of Sun's revenue.

At the current price, the stock is trading at an expensive 30 times its FY19 estimates and factors in some of the positives.