Sun Pharmaceutical Industries Limited (SUNPHARMA) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Sun Pharma's Q4 FY '25 Financial Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Dr. Abhishek Sharma, Vice President and Head of Investor Relations and Strategic Projects. Thank you, and over to you, Dr. Sharma.

Thanks. Thank you. Good evening, and a warm welcome to our fourth quarter FY '25 earnings call. I am Abhishek from the Sun Pharma Investor Relations team. We hope you have received the Q4 financials and the press release that was sent out earlier in the day. These are also available on our website. We have with us Mr. Dilip Shanghvi, Chairman and Managing Director; Mr. C.S. Muralidharan, CFO; Mr. Abhay Gandhi, CEO, North America; and Mr. Kirti Ganorkar, CEO, India Business. Today, the team will provide an update on the financial performance and business highlights for the quarter, pipeline updates and respond to any questions that you may have. We will refer to the consolidated financials for management comments. The call recording and call transcript will also be put up on our website shortly. The discussion today might include certain forward-looking statements and these must be viewed in conjunction with the risks that our business faces. [Operator Instructions] I also request all of you to kindly send in your questions that may remain unanswered today. I will now hand over the call to our CFO, Mr. C.S. Muralidharan.

Welcome and thank you for joining us for this earnings call after the announcement of financial results for the fourth quarter FY '25. Our full year and Q4 financials are already with you. The full year FY '25 sales were at INR 520,412 million, a growth of 9% over last year. Material cost stands at 20.7% of sales, lower than last year on account of better product mix, including higher share of sales from Specialty business. Staff cost stands at 19.2% of sales, flat year-on-year. Other expenses are at 32.2% of sales, flat versus FY '24. ForEx gain for the year was INR 1,855 million compared to a gain of INR 361 million last year. EBITDA for the year was INR 152,717 million, a growth of 17.3% with a resulting EBITDA margin of 29%. Adjusted net profit for the year was INR 119,844 million, up 19%. Reported net profit for the year was INR 109,290 million compared to INR 95,764 million for FY '24. Let us now discuss the Q4 FY '25 performance. Q4 FY '25 sales were at INR 128,156 million, a growth of 8.5% over Q4 FY '24. Material costs for the quarter were 20.6% of sales. Staff cost came in at 19.4% of sales. Other expenses were lower year-on-year as a percentage of sales and higher on Q-on-Q due to higher sales and distribution expenses across geographies. ForEx gain for the quarter was INR 2,912 million compared to a loss of INR 564 million in Q4 FY '24. EBITDA, including other operating revenues was at INR 37,161 million, higher by 22.4% over Q4 last year. EBITDA margin for the quarter was 28.7% compared to 25.3% in Q4 FY '24 and 29.3% in Q3 FY '25. We had a few exceptional items in Q4 FY '25 amounting to INR 3,617 million. A major portion comes from an impairment of our investment in Lyndra Therapeutics, INR 2,597 million. Adjusted net profit excluding the exceptional items for Q4 FY '25 was INR 28,890 million, representing a growth of 4.8% over Q4 FY '24. Reported net profit for Q4 FY '25 stands at INR 21,499 million. The effective tax rate for Q4 FY '25 was 19.8% compared to 5.1% in Q4 FY '24. Tax rate for the full year is 16.6% versus 12.4% in FY '24. Going forward, we expect the tax rate to continue to go up on a full year basis, mainly on account of exhaustion of tax losses. Reported EPS for the quarter was INR 9 per share. As of 31st March 2025, net cash was $3.1 billion at the consolidated level. The Board has proposed a final dividend of INR 5.50 per share for the year FY '25. This is in addition to the interim dividend of INR 10.50 per share, taking the total dividend for FY '25 to INR 16 per share compared to INR 13.50 per share for FY '24. Over to Kirti Ganorkar, who will share the performance of our India business.

Thank you, Murali. I shall take you through the performance of our India business. Our India formulation sales for the full year FY '25 were INR 169,230 million, recording 13.7% growth over previous year. For Q4, the sales of formulation in India were INR 42,130 million, recording a growth of 13.6% over Q4 last year. India formulation sales accounted for 32.9% of total consolidated sales for the quarter. Sun Pharma is ranked #1 and holds 8.3% market share in over INR 2,259 billion Indian pharmaceutical market as per AIOCD AWACS MAT March '25 report. Corresponding market share for the previous period was 8%. For the quarter ending March '25, we grew higher than IPM, and we have done well across all major represented therapy areas, primarily led by volume growth and new product introductions. As per SMSRC MAT November-February '25 report, we continue to be #1 brand company based on the prescription volumes. Sun Pharma is also ranked #1 by prescription with 13 different doctor categories. For quarter FY '25, the company launched 10 new products in India. There are new products planned for future launch in diabetes and weight management space. During this month, Sun Pharma launched a corporate branding campaign. This is for the first time that we have launched a corporate branding initiative at this scale. The campaign underscores Sun Pharma's roles in the lives of patients, caregivers, doctors, pharmacists and communities, reaffirming its leadership in India. Now I will hand over call to Abhay.

Thank you, Kirti. I will update on the performance highlights of our U.S. business. Our overall U.S. business grew by 3.6% to $1,921 million for the full year FY '25. The growth is driven by Specialty with all our growth products contributing like Ilumya, Cequa, Winlevi and Odomzo, but offset by a decline in generics for the full year. In Q4, our overall sales in the U.S. were $464 million, lower by 2.5% over Q4 of last year, with growth in Specialty offset by a decline in generics. The generic business declined due to additional competition in certain products. The U.S. accounted for over 31.4% of consolidated sales for the quarter. In Q4, we launched 2 generic products in the U.S. I will now hand over the call to Mr. Shanghvi.

Thank you, Abhay. I will now provide an update on the performance highlights of our other businesses as well as give you an update on our R&D initiatives. Our branded formulation revenues in emerging markets were $1.114 billion for the full year, up 7% year-on-year. For Q4, sales in emerging markets was $261 million, up 6.3% over Q4 last year. The underlying growth in constant currency terms was 11.5% year-on-year for Q4. Emerging markets accounted for 17.6% of total consolidated revenue for Q4 amongst the larger markets in local currency terms, Romania, Russia and Brazil have done well. Formulation revenues in rest of the world were USD 847 million, up 4.5% over last year. For Q4, rest of the world sales were $200 million, up 2% over Q4 last year. Rest of the world markets account for approximately 13.5% of consolidated revenue. In FY '25, our Global Specialty sales were up 17.1% to reach $1,216 million. In Q4 financial year '25, our Global Specialty sales were up 8.6% to reach $295 million. Global Ilumya sales for the year were up 17% to $681 million. This figure does not include end market sales of our partners. We continue to invest in building an R&D pipeline for both the Global Generics and the Specialty businesses. Consolidated investments towards R&D for Q4 FY '25 stands at INR 8,116 million or 6.4% of sales. The Specialty R&D accounted for 36% of our total R&D spend for the quarter. Moving on an update on Global Specialty. There are a few changes in our clinical pipeline. We are now seeking a partner for future development and commercialization of MM-II in certain geographies. This change is due to the strategic reassessment of our pipeline. We continue to believe in the potential of the product. The other change is that we are now planning a trial of GL0034 in type 2 diabetes as its first indication. Sun Pharma has agreed to acquire Checkpoint Therapeutics, a company specializing in immunotherapy and targeted oncology. We are awaiting approval of that transaction and subsequent closing. Checkpoint has recently received approval from U.S. FDA for Unloxcyt for metastatic or locally advanced cutaneous squamous cell carcinoma, and we look forward to leveraging our presence to accelerate patients' access to Unloxcyt. And lastly, on the guidance of FY '26, we expect mid to high single digit consolidated top line growth for FY '26. For the current year, we are looking to invest approximately USD 100 million additionally on commercialization of new Specialty product. This investment will enable us to significantly strengthen our Specialty business for the future. We now expect our FY '26 R&D spend to be 6% to 8% of sales for the next year.

Operator, that's the end of our readout. We can go to Q&A, please.

[Operator Instructions] First question is from the line of Kunal Dhamesha from Macquarie Group.

First question on the Global Specialty sales growth for the quarter. This is after many quarters, we have seen a single-digit top line growth in this business. And I think the quarter 4 base from last year was also a little lower because of the issues at United Healthcare, but -- so is there any one-off why we are seeing this kind of lower growth in this quarter? Because sometimes branded companies do see some rebate adjustment, et cetera, which could lead to this kind of growth. So any color there would be helpful.

So Abhay, you will respond?

Sure. So I can only speak for the U.S., Kunal. But Jan and Feb typically are lighter months in the U.S. because of change in the way the insurance resets happens. But otherwise, when I look at the prescription trends and the inventory trends that are there in the market, and I am comfortable that our key brands will continue to grow. And clearly no one-offs.

Okay. But any particular product [Technical Difficulty].

Kunal, sorry to interrupt you, we are losing your audio. Can you please come in a better reception area, please?

Yes. Can you hear me now?

Yes, I can hear you.

Yes. Sorry for that. Yes, so any particular product that you want to call out? Or is it a broad base you said it's more like a seasonality, Jan, Feb, which would have paid off?

No, it’s not really a seasonality, Kunal. It's more to go with insurance resets. No particular product that I can call out.

Okay, sure. And second one on the $100 million additional spend that we are expecting this year to spend. The whole idea of getting more dermatology products was to kind of reduce -- gain more synergies of our front-end infra, which is already in the place, right? So, yes -- so I'm just a little bit confused as to why do we need such a big amount even if we launch 2 products in dermatology and derma-onco, which is something that we have already been doing for quite some time.

So there are specific products...

No, I think it's a question of looking at how other companies, even very large companies have a significant launch cost for new products. So once you study, I think this actually is a conservative number.

Okay. And sir, this is launch cost. So in the future, it should basically moderate, right? That's the way we should look at it?

Which is what I said is that we don't actually look at this as a cost. We look at this as an investment, and we expect this to further help us strengthen our Specialty business.

Next question is from the line of Damayanti Kerai from HSBC.

My question is on Leqselvi. So now like what are the plans for launch of this product in the U.S.? If you can give us some time line there?

So I think in the quarter 2, we will be launching this product in the U.S.

Second quarter of this fiscal?

Yes.

Okay. Okay. And my second question is on your generic business in the U.S., where you mentioned there was some price pressure, et cetera. So 2 things. Had it worsened compared to recent quarter in the base portfolio? And also, if you can comment in the fourth quarter, was Revlimid a significant contributor?

So I'll start with your latter question. I mean Revlimid sales in the Q4 was similar to Q3, and that was not very significant. On pricing, I think we have consistently said that it's a product-specific thing and nothing which I can speak to on a generalized basis. So product-specific, we continue to see pressure on pricing.

Okay. Okay. It's product-to-product and nothing we should read as part of the change in industry, which might have happened on the pricing part?

No, there is not much which has changed as far as overall industry dynamics is concerned. Basically, it remains the same, that is what we have seen in the past.

Next question is from the line of Neha Manpuria from Bank of America.

Abhay, first question on the Checkpoint asset. What should we think about from a time line perspective for the launch of the product? Will we first -- obviously, the deal needs to be completed. So will that be a launch probably in the later part of the year?

So I think we have to wait for the launch to -- I mean, for the acquisition to go through all the clearances. And before that, it won't be fair to give an answer on when we will launch. So I think we'll have to wait for the processes to get over before I'm able to answer that question. Maybe on the next call, I will be able to.

Fair enough. That's clear. My second question is on the India business. We saw a fantastic growth this year, given what the industry has been doing. Kirti, sir, when we think about next year, do we need to invest more in MR? Should the growth momentum that we have seen this year continue? Any color that we can provide on how we are thinking about the India business and the investments there?

No, no, what -- I have been telling for the last couple of calls is we want to grow higher than the market. And that's the effort we are continuously putting quarter-after-quarter. So this year, our growth is at least 3%, 4% higher than the market, and the growth is coming from volume and new product. So I strongly believe we have a good base and then the momentum should continue, but we can't predict what this growth will be in coming years. It's very difficult.

And any MR expansion plans, sir, for the growth?

No, it's like a strategic lever what we said whenever we had done expansion, it has helped us to grow. Depending on the opportunity which may come, we will decide on the expansions.

Next question is from the line of Anubhav Agarwal from UBS Group.

One, just trying to understand this $100 million additional spend. So it will be multiple areas that we will be spending on. But just checking, is there a dominant part that you guys will be spending on? Just -- so what I'm trying to ask is, you guys not been doing TV ads right now. Would you start doing TV ads for the new one? Or how much of this, let's say, roughly, is going in expanding the infrastructure on the ground? Let's say more sales force versus more promotion. So what will be a rough split of salesforce expense versus the promotions expense out of this $100 million?

These products that we are talking about are niche areas Anubhav. So they do not lend themselves to TV advertising clearly. So the promotion will be more with the HCPs as well as the patient advocacy groups. Later on as we evolve, we will keep evaluating what works best for the product.

And Abhay, the spend will be largely more tilted towards the promotion rather than adding more people on the ground?

It will be a combination. There will be certain expenses related to optimizing the field force, looking at the target audience that we need to cover, and also looking at competitive dynamics and how the competitors are structured. Large part will, of course, be the variable promo spend.

Understood. And just last clarity on this and then I'll move to second question. This is largely for the new products, right? For the existing business, that's...

Sorry, sorry, I missed you. Can you repeat?

The question is this $100 million spend is largely for the new products that you'll be launching -- the 2 products that you'll be launching. The existing Specialty business is on business as usual?

That's correct. This is only for the new launches.

Okay. That's helpful. Second question is for Dilip bhai. I'm just trying to understand one thing that current manufacturing for the branded product is out, Sun doesn't manufacture directly, most of them, and gets them contract manufactured. So let's say, the tariffs, no one knows what number will come out for tariffs. But just trying to understand that how much just as a process, how much time does it take if you need to shift manufacturing from outside U.S. to U.S. from one contract manufacturer to the other contract manufacturer? So the question one is on time. Secondly, what's the harm in Sun Pharma already starting the process now, given what the U.S. wants to do it, et cetera. So in terms of doing it later versus doing it now as a backup mechanism, just your thoughts on that.

No, I think it's a good suggestion. You have to keep one thing in perspective that Ilumya is a biological and transferring a biological product and giving the kind of quantities that we require is not something that is easy to identify a CDMO who can do that in the U.S. So, we are looking at it because it's not a question of where we do feel finish. We will have to manufacture the full product in the U.S., starting with the active substance.

Sorry, one part of the question was that if you were to do it, how much time does it take if you want to transfer the full product?

No, I think both cost and time. I think my view is that it will take at least 2.5, 3 years before the new source is approved by the agency, and it cost a lot of money.

Next question is from the line of Shashank Krishnakumar from Emkay Global.

So my first question was on Ilumya. I think our partner in Europe has commercialized 200 mg version there. Just wanted to understand the thought process and if we have plans to also sort of commercialize it in the U.S. market.

Abhay, you want to respond?

I think on the Europe part, you can, sir. In U.S., we are evaluating for the filing and then subsequently launching the product, but it will take some time.

Got it. Sir, and secondly, on MM-II, I think we have passed Phase II and I think we also have a fast track designation here. Just wanted to understand why we are looking to sort of enter into a partnership to commercialize this? Is it largely because it doesn't fall within a broader onco-derma framework? Or why this change in the commercialization strategy?

No, I think you've said is right is that it doesn't kind of fit immediately into -- I mean, focus in the U.S. because I think we're further strengthening our presence in the dermatology. We continue to look at opportunities in ophthalmology, so...

Next question is from the line of Vivek Agrawal from Citigroup.

Sir, question is related to Leqselvi. The launch seems to have been delayed by, I think...

Vivek, sorry to interrupt you. Your audio is not clear.

Yes. Sorry, the question is related to Leqselvi. The launch seems to have been delayed by 3, 4 quarters because of the litigations, et cetera. So does anything change from this delay, let's say, your expectations from this competitive dynamics? Or are your expectations on the product are more or less same, let's say, you would have launched the product last year?

We still believe we have a competitive product. However, since the launch is delayed by, as you said, 3 quarters, I think the time to our expected peak will move a little, but I think the intent of the team will be to try and make up for that lost time by increasing the focus on the product and the investment on the product to try and mitigate it to the extent that we can.

The second question is related to the recent acquisition, Unloxcyt. So if I was looking at some of the competitive products, right, Unloxcyt has a bit longer infusion, it is around 60 minutes, so I don't have other indications, et cetera, while -- if you look at some of the other competing products like Libtayo well entrenched with the market, longer clinical history, wider indication. So just trying to understand why the prescribers would shift to the new therapy Unloxcyt, if you can help us understand.

I mean, 2 ways of looking at the whole thing, while you right that your competitors will have multiple indications and we will end up with only one indication. And that also means that we will be able to give our attention and time to one single indication and try and be the best we can in the arena that we compete in. So it helps us focus also better. So you can look at it either way. We look at it, of course, clearly, but it helps us focus better. Also don't forget in the same indication or rather with the same customer group, we have 2 other products that we go to. So we have familiarity with the customer groups. Some, of course, will be new to us. But we understand the space and that also helps.

Understood. Sir, just a related question here. Is it -- although you didn't launch the product yet, but is it pricing going to be one of the key differentiator because there is what I think the Checkpoint also indicated earlier that the product can be priced much lower compared to some of the other products that are in the market and can help a better market share? That’s it.

How do you expect me to answer pricing question when I haven't even decided the time of launch exactly? And the transaction itself is not yet completed.

Next question is from the line of Bino from Elara Capital.

First question on Leqselvi. The patent litigation, as I understand, is ongoing. So to that extent, if we launch in coming second quarter, it would be sort of at risk of any damages if at all we lose the patent litigation. Am I right in thinking so?

Yes, that's true.

Okay. And second, this $100 million additional spends that you would do, how should we look at it? You will have a normal selling SG&A expense on which you will have a normal increase which happens every year. On top of that, there will be an additional $100 million. Is that the way we can model it?

That's correct. That's correct. I think we don't want only look at the normal expenses. We want to understand that there are significant launch-related costs for these products and it needs to be factored. We don't want to negatively surprise investors afterwards.

And finally, there is a tax rate which has gone up significantly compared to last few years at 19% this year consolidated level. Is that the new range we should look at for tax? Or is there some reason why it is high this year?

So we have indicated in earlier communications also that the tax rates continue to inch or go up, mainly due to this year, we have also said that utilization of the past losses we exhausted. That's one of the primary reasons for the increase in tax rate.

Okay. So practically this is roughly the range that we should expect going forward.

No, Bino -- Bino, just one second.

Yes.

So what I said is that it will inch up, I said, compared to the last year, if you see our full year was 16.6% and this year is 19.8%. That's because of the of tax losses. It could inch up from the current level.

Next question is from the line of Girish from OrbiMed.

Abhay, just going back to Checkpoint actually. I know the transition is yet to close, but what's the key difference between the competition, particularly Libtayo for this asset?

I think broadly our understanding is that in the class, it has possibly the safest side effect profile.

Okay. So Dilip bhai, if I just actually ask a bit of generic question here, given this is PD-L1, others are PD-1. Is there a difference for clinicians materially? I don't know if it has been observed in a clinical setting or in other cancers. Does that give a material edge to your asset?

We believe it does.

Okay. Okay. That's helpful. Second question was on the psoriasis market. I mean, I know Ilumya is going strong. But FY '27, '28, given there will be full steam Humira, full steam Stelara biosimilar, what's your thought on, let's say, 3 years down the line for this asset?

It's an evolving situation. So we keep evaluating. And yes, I mean, my expression, which you can't see is similar to Dilip bhai but whatever modeling we have done so far, I mean, there will be an impact, but we think it will be a small impact and the product can continue to be a growth driver in the existing therapy as well as with the new indication that we will get.

And would biosimilars, let's say, impact differently in medical channel and versus commercial, directly?

So it's a narrower competitive field. So to that extent, it helps. Now how much is something that we need to continuously evaluate because there is only so much that you can estimate with a great degree of certainty.

Right. Abhay, do you have any number like how much biosimilar penetration should there be, let's say, 3 years down the line from both these products?

I mean I can't have a number which I can share with you.

Next question is from the line of Tushar Manudhane from Motilal Oswal.

Sir, just with respect to, firstly, on the R&D spend guidance of 6% to 8%. So does this factor the R&D spend, additional or higher R&D spend on the existing projects? Or are we building new projects for the R&D spend basically? That's my first question.

Everything. It does not include transactions that we have not done. If there is a transaction that we do in future during the year, then that can change the guidance. But this includes whatever that we have in the pipeline.

Got it. And sir, secondly, with the growth in, let's say, branded markets of India Emerging Markets and the Specialty and at the same time, spending on the Specialty product. So how to think about the EBITDA growth compared to revenue growth for FY '26?

I mean, generally, we don't give margin guidance. That is why because we felt that analysts would not have clarity about increased cost of launching the product, we give a specific number, which helps the model, but we don't give margin guidance.

Next question is from the line of Anubhav Agarwal from UBS Group.

Just trying to understand the impact of new MFN laws on Sun Pharma here. So please help me understand if this is an important metric to look at. So if -- on the Medicare side, if they -- would they look at price difference between Ilumya in the U.S. and Ilumetri in Europe and then try to compare the 2 and ask you guys to, let's say, match those prices, one? That's the first part of the question. Second, is there a material difference between the price of Ilumya and Ilumetri?

No, I think we have to wait for greater clarity on finally how this -- because as I read it, it is kind of currently at a voluntary level. So we have no idea as to how it plays out. So we have to wait for greater clarity before we respond. To the question of the price difference between the U.S. and Europe, I think all the branded products will have significant difference in the prices between U.S. as well as Europe. I mean this is not only our product, all the products. Only thing we have to keep in perspective is that it and for any reason, I don't understand, but stock prices of big pharma companies have not changed.

Just one technical clarity on this. Like Sun is selling Ilumya in the U.S., but Sun technically is not selling in Europe, so does it...

Sir, there are many, many issues that we can go into. So, till the time we have clarity on finally how the law -- so this is just a what you call guidance document without specific how it will be implemented and on what condition, what provision. Because if you see the IRA when they wanted to implement, they gave a significant amount of time and very great level of clarity as to how, what, what is negotiation and how it will be done. So that level of clarity doesn't exist here.

Okay. Dilip bhai. Second question is on R&D. So I'm talking not on the Specialty, but on the generic R&D here, on the non-specialty side. The absolute amount for Sun Pharma is similar in last 4 years, somewhere about $230 million. Based on the focus of the company on the Specialty side, how would you think about this absolute amount that the company is spending on the generic side? Would this absolute amount remain flattish? Go down from here because the focus on generic is reducing as well the opportunities in the market are reducing?

I mean generally, I have said that there would be increase in the Specialty R&D. However, since we spend money as a percentage of our turnover, I am not expecting the absolute money spent on R&D for generics to go down.

Okay. Can I ask one more question and just join the queue.

Yes. Okay.