Sun Pharmaceutical Industries Limited (SUNPHARMA) Earnings Call Transcript

Ladies and gentlemen, good day and welcome to the Sun Pharma's Q2 FY '27 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, sir.

Thank you. Good evening, and a warm welcome to our second quarter FY '27 earnings call. I'm Abhishek from the Sun Pharma Investor Relations team. We hope you have received the Q2 financials, the press release and the earnings presentation that was sent out earlier in the day. These are also available on our website. We have with us Mr. Dilip Shanghvi, Chairman; Mr. Kirti P. Ganorkar, Managing Director; Ms. Jayashree Satagopan, CFO; and Mr. Richard Ascroft, CEO, North America. Today, the team will provide an update on the financial performance and business highlights for the pipeline updates and respond to any questions that you may have. We will refer to the consolidated financials during management comments. The call recording and call transcript will also be put on our website shortly. The Organon acquisition is subject to satisfaction of the remaining customary closing conditions and is on track to close by early 2027. Organon has already announced their corresponding quarter results. Since Organon remains a separate public listed company, we will not be taking any questions today regarding Organon's business performance. The discussion today might include certain forward-looking statements, and these must be viewed in conjunction with the risks that our business faces. You are requested to ask 2 questions in the initial round. 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, Ms. Jayashree Satagopan.

Welcome, and thank you all for joining us for the earnings call after the announcement of the financial results for the second quarter FY '27. The financials are already with you. Let me take you through the key consolidated financials. During the second quarter of FY '27, sales were at INR 161,000 million, registering a growth of 11.8% vis-a-vis Q2 FY '26. Gross margin was at 80.8% for the quarter, higher than the same period last year, largely on account of a better product mix and favorable currency tailwinds. EBITDA for the quarter was INR 47,439 million, an increase of 4.8% over Q2 last year. EBITDA margins came in at 29.3%. While EBITDA margins are lower year-on-year, please note that Q2 FY '26 had some benefit from lenalidomide sales. Adjusted for lenalidomide, EBITDA growth has outpaced revenue growth. ForEx gain for the quarter was INR 785 million, which is lower than Q2 of last year. Reported net profit after tax for Q2 FY '27 was INR 19,885 million, while adjusted net profit for the quarter was INR 31,620 million. EPS for the quarter was INR 8.3 per share. Exceptional items for the second quarter includes provision towards a litigation settlement and on account of Organon related acquisition costs. Effective tax rate for the quarter was 28.3% versus 24.7% in Q2 FY '26. Balance sheet continues to be strong with a net cash of $3.3 billion at the consolidated level. Now let me take you through the half year performance. For the first half, sales were at INR 312,836 million registering a growth of 11% over the first half last year. Gross margin was 80.6% for the first half. EBITDA for the first half was INR 91,615 million, registering a growth of 3.8% over the first half of last year. EBITDA margin percentage was 29.1%. Adjusted net profit for was INR 62,515 million. The successful subscription of Sun Pharma's debe NCD issue underscore the strength of its credit profile and a broad investor confidence in the company's financial position. I will now hand it over to Kirti, who will share the performance of our Global Innovative Medicines business and India business.

Thank you, Jayashree. I shall first provide you an update on Global Innovative Medicine. In Q2 FY '27, our innovative medicine sales were up 6.9% to reach USD 356 million. The business amounted for 21.1% of Sun sales for the quarter. The performance in innovative medicine continues to be driven by growth across U.S. and ex U.S. market across products, notably Ilumya, ex U.S., CEQUA, Odomzo. We are pleased to note that Ilumya is now approved in the west for the treatment of adults with active psoriatic arthritis. Introducing a health care provider administered IL-23 inhibitor broadens our treatment portfolio and creates new opportunities to strengthen patient support and health care team engagement. We are planning for a soft launch in November with a full launch in the following months. Ilumya continues to do well across international markets. As a highlight, recently, Japanese society for psoriasis research announced that Ilumya be #2 across all biologics in the new patient across 73 main hospital in Japan, making a significant improvement over last year. During the quarter, partnership with Leap Therapeutics strengthen our innovative medicine portfolio and expanded our presence in the rapidly growing PCSK9 market outside U.S. and China. Lerodalcibep adds to a differentiated once-monthly therapy that can help address significant unmet needs in cholesterol management. Now coming to India business, the sales of India formulations were INR 55,523 million for the quarter, recording a growth of 17.3%. India sales accounted for 34.5% of total consolidated sales for the quarter. Sun Pharma is ranked #1 and holds 8.6% market share over INR 2,618 billion Indian pharmaceutical market as per PharmaTrack MAT September '26. Corresponding market share for the previous period was [ 8.3 ]. For the quarter ending September '26, we grew higher than IPM, and we have done well across all major representative therapy areas. Sun Pharma's 51.1% PharmaTrack September '26 growth was driven primarily by strong volume expansions. Sales volume growth was 6.7% for the quarter compares favorably to IPM growth of 1.8%. As per MSRC, March, June '26 report, we continue to be #1 company based on prescription volumes. Sun Pharma is also ranked #1 by prescription with 12 different doctor categories. For Q2 FY '27, the company launched 15 new products in India. Regarding Organon, integration planning for the Organon acquisition continues to progress across functions and work stream in line with plan. Separator approvals have now been secured in majority of the regions with the remaining jurisdiction tracking on schedule. We are now on track to close the transaction as per earlier committed time lines, that is Q4 of FY '27. I will now hand over the call to Rick for update on the U.S. market.

Thank you, Kirti. Let me share performance highlights for our U.S. business. Overall, the U.S. business reported sales of USD 455 million for the quarter, declining by 8.2%. This decline is largely due to lenalidomide erosion. On a quarter-over-quarter basis, the U.S. business has grown by 6.5%. The U.S. accounted for 27% of consolidated sales for the quarter, and we launched 5 generic products in the U.S. during this quarter. This quarter, we saw a slowdown in Ilumya business in the U.S., driven by a mix of factors. This is a key reason behind slower growth in global innovative medicines. We've put actions in place to improve performance and anticipate further growth from these as well as the new psoriatic arthritis indication that Kirti mentioned earlier. The rest of our Innovative Medicines portfolio in the U.S. continues to show strong growth. I also want to provide some recent updates on UNLOXCYT. UNLOXCYT elevation to a category to a preferred recommendation in the NCCN guidelines reinforces its growing clinical relevance and advanced CSCC. Subsequently, we presented long-term follow-up data on UNLOXCYT at a leading scientific conference in Europe. Long-term data showed complete responses in 34% of locally advanced and 17% to 21% of metastatic patients on UNLOXCYT. Additionally, the product profile continues to excel on tolerability with a very low level of high-grade immune-related adverse events. These data reinforce the potential of UNLOXCYT in advanced cutaneous squamous cell farcinoma. During the quarter, Sun Pharma also announced agreements with the U.S. government aimed at prioritizing access to affordable medicine for American patients. According to the White House, 25 other pharma companies have signed similar agreements. As part of the agreement, Sun Pharma will extend most favored nation pricing to state Medicaid programs. This agreement delays Section 232 tariffs on innovative products for over 2 years and exempt Sun Pharma from the Globe and Guard Medical models. I will now hand over the call to Kirti for updates on the rest of our business.

Thank you, Rick. I will provide an update on the performance highlights of our other businesses. Our formulation revenue in emerging markets were USD 350 million, up by 7.6% over Q2 last year. The underlying growth in a constant currency term was 7.4%. Emerging markets accounted for 20.7% of total consolidated revenue for Q2. While branded generics has continued to go innovative medicine has been an important driver for growth in emerging markets with Ilumya doing well across several markets such as Romania and Brazil. Our partner also launched semaglutide generics in Brazil during the quarter. Formulation revenues in Rest of the World for the quarter were USD 241 million higher than Q2 last year. Rest of the World markets accounted for approximately 14.3% of consolidated revenue. I will now hand over call to Mr. Dilip Shanghvi for updates on R&D.

Thank you, Kirti. Let me discuss various R&D initiatives and how we are doing. We continue to invest in building an R&D pipeline for both the global generics and innovative medicine businesses. Consolidated investments towards R&D for Q2 '27 stands at INR 7,784 million or 4.8% of sales. Innovative R&D accounted for 32.4% of our total R&D spend. These numbers are tracking lower than our intended R&D spend, but we expect the second half of the year to catch up some of this R&D spend.

That's the end of our prepared remarks. Operator, if you can request for Q&A lineup.

[Operator Instructions] Your first question comes from the line of Dr. Kunal Dhamesha with Macquarie Capital.

First one on the slowdown in growth for Ilumya in West. Rick, can you highlight what is driving that? And what kind of actions we have taken? And what's the time line in terms of the recovery in the growth?

Yes. I don't want to get into the -- all the details, but we have highlighted a few key things that have led to the slowdown. We put key interventions in place already. And as I mentioned, those interventions, coupled with the launch in cirrhotic arthritis, believe we'll return Ilumya to more typical growth patterns.

Over any time period you would like to see, next couple of quarters, 1 quarter?

Over the next few quarters.

Sure. And just on the storage front, I see that maybe the prescription would be generated by a different specialty of doctors. So that kind of investment that needs to be done in terms of sales force on excess personnel. Is it already there in quarter 2?

It is. It's already built into our existing sales force model. Some of the prescriptions will be generated by dermatologists, but using the existing sales force, we will increase our reach and also begin calling on rheumatologists.

Sure. And do you foresee any one-off kind of launch expense for the psoriatic arthritis indication?

We have expenses, but they've been built into our overall budget. They're not extra.

Sure. And second one, on the guidance for FY '27. I mean since the first half, we have been clocking at around double-digit top line growth. Most of our FY '27 guidance of a single digit. So at this point in time, is there an update that you want to share? And R&D assume that we're going to -- there will be a ramp-up in second half. But just looking at the specialty R&D, it seems like as a percentage of salty revenue, it has declined to like single digits in this quarter. So is this the ongoing run rate or there is a phasing out and then there will be some phasing in of clinical trials? How should we think about it?

So I think you're asking 2 questions. I'll respond to the R&D. So I think the R&D investment is a function of the start and our ability to recruit subjects in the clinical trial. So we expect that to pick up at putting in place a proper infrastructure in place for that. Kirti will respond to the other question.

Yes. Regarding the guidance, I think we'll stick to what else we have given at the beginning of the year.

Your next question comes from the line of Neha Manpuria with Bank of America.

The special for the U.S. I just wanted to understand since it's been over a year since we have launched LD and close to 9 months since we have launched, when should we start seeing meaningful contribution from these 2 launches? And so for the psoriatic arthritis indication, is it fair to assume that the contribution from that should be much faster than, let's say, some of these new launches because we already have Ilumya [indiscernible] in the market, so that should help bring in prescriptions earlier. Would that be a fair assumption?

Maybe let me start with like Leqselvi and UNLOXCYT and then I'll move into Ilumya. I think we feel confident about both of the launches. If we start with UNLOXCYT, we had some very encouraging news, I think, as you've heard me share, we recently had an update to the NCCN guidelines. And really what that means now is UNLOXCYT is a preferred agent and that would really help us continue to accelerate access for patients and guide clinician confidence. So that's quite important. The other thing we shared is that we released long-term data with UNLOXCYT, not only was the efficacy impressive, but the tolerability, which has been one of the key strengths of UNLOXCYT has been durable over time. So we saw a deepening and a durability of response and the tolerability as well. Just to meet with a number of key opinion years at ESMO, and they were very impressed with this new data. So we believe both of those 2 things will be a catalyst for UNLOXCYT, will continue to accelerate growth. Already, we see month-over-month improvements in share. I would say the same for Leqselvi. We also recently announced new data for Leqselvi. Right now that what we hear from physicians is the speed that we've talked about, Leqselvi is playing out in their patients. What's nice about the new data is it also shows that in addition to the speed, we see a durability of the efficacy that we saw in our initial published clinical results. As it relates to psoriatic arthritis, it is a new indication for us. The benefits of the product remain the same. So Ilumya in treating psoriatic arthritis will be the only IL-23 that is physician-administered, making it the perfect choice for patients that require extra care and benefit from HCP administration. And it's also the only HP administered product for psoriatic arthritis that rheumatologists can use to treat patients quarterly. The other HCP administered products are used on a much more frequent basis, making them more inconvenient for patients. We are increasing, as I mentioned, to cover rheumatologists, and those customers are familiar with products like Ilumya. We call them buy and bill products in the United States, and we would expect that they would begin to use the product quickly. As was mentioned earlier, we've already -- we're training actually our sales force today on the updated package insert and we'll be launching over the coming months.

That's very helpful. And second, Dilip sir, the R&D, is it fair to assume that we think the 6% to 7% guidance for the full year for R&D spend when we mentioned the second half setup?

So what I said is that we expect the R&D spend to significantly ramp up in the subsequent quarter. And our expectation is that as that ramps up, we should be able to meet the overall guidance that we've shared with people.

Your next question comes from the line of Damayanti Kerai with HSBC.

My question is regarding the new licensed PCSK9 inhibitor, which you will be launching in outside U.S. and China market. So just wanted to understand two points here. First, you have moved into cardiology now. In the past, obviously, we saw you have been focused on onco-derma and eye care space. So going ahead, whether you will be expanding into more therapies beyond what we have right now in your portfolio? And for the marketing part, what kind of spend we should assume for this particular product? Do you have to build a separate sales and marketing team for this product?

Your question is quite broad. So I would say there are a couple of things, like you know, our emerging market business, which contributes almost 20% to total business. So there are many markets where we have capabilities and field force to promote product to cardiologists. And that is what we will leverage. There are some markets where we don't have capabilities where we need to go on and add those. And that is what we will do in the next couple of months. So regarding expenses, we cannot give exact detail on how much we'll spend on launching PCSK9, but it will be part of our overall guidance and the budget, what we are tracking right now.

Sure. So it will be like across the world launched these 2 markets, you will try to launch in as many markets as possible. Okay.

Ex-U.S. China, and we have approval in Europe, yes.

Okay. Then my second question is on semaglutide where you mentioned your partner has launched in Brazil. So can you update us regarding how you're looking to file this product in other markets, like which will be the key market where you intend to enter in next 1 to 2 years' timeframe?

I think in last call also, we guided to all of you that we don't inform where we have filed and will get approval for semaglutide. But at the same time, now we are present in India. We have approval in South Africa and Brazil and all the markets, we have commercialized the product

The next question comes from the line of Bino Pathiparampil with Elara Capital.

Bit of a repeat, but I was just getting -- trying to get a little more color on the slowdown in Ilumya, something to do with the market getting saturated? Or is it something related to the sales strategy or some sales execution for example, salespeople leaving, et cetera? Is it an action problem? Or is it something to do with the market getting saturated and the strategy of selling?

No. It's really a variety of things. I think there's a bit of market, but frankly, part of it is execution as well. And that's the intervention we have in place. I should just add, though, we continue to see plenty of opportunity for Ilumya. It's quite unique in terms of being able to treat patients that require extra care. And there are a large number of those patients in the United States on Medicare, which is where we do quite well with the product.

The next question comes from the line of Krish Mehta with Enam Holdings.

I just had a question on Ilumya psoriatic arthritis indication. If you could provide some color on the size of opportunity in terms of the market potential as well as what it could add to our current Ilumya franchise as well as specialty franchise, it would be helpful directionally to understand how much this adds to us.

Yes. We don't provide product-specific guidance. What I can share is about 1/3 of patients that have psoriasis also have comorbid psoriatic arthritis.

Your next question comes from the line of Shashank Krishnakumar with Emkay Global.

My first one is again on Ilumya. Just trying to understand if we look beyond Stelara and probably at other biologics, which we might also include in the creation set for Ilumya, those might also see a loss of exclusivity probably sometime over the next 4, 5 years? Now 2 factors. One is our channel dominance in Part B. And then the second is the fact that probably the treatment regimen itself has moved towards IL-23. Now do you see these 2 factors sort of helping us defend our Ilumya franchise in the medium term? Or what is it that you think could change in terms of the market dynamics when you sort of take a 4, 5 years here?

There certainly are changes in the marketplace that we've seen and we'll continue to see. I think you mentioned the most important 2 points, though. The IL-23 class remains the dominant class and the preferred class amongst clinicians in treating psoriasis patients. And Ilumya is quite unique in that it's HCP administered and then it really supports patients that require that extra care. And that is very much a unique attribute to Ilumya that no other product has.

Got it. Just a related question here. So what is the loss of exclusivity for Ilumya itself that we should be factoring in? Should it be 2030? Or would secondary protection sort of extend beyond that?

It's not in the foreseeable future, Shashank.

Okay. Got it. And just one last one, if I could squeeze in. So it seems like this quarter, the U.S. generic business probably on a quarter-on-quarter basis has gone up? Was there any short-term opportunity that we benefited from? Or was it business as usual if you will?

Yes. I -- you may have missed it, but I did share in my opening that we launched 5 new products this quarter, which led to the growth.

Your next question comes from the line of Tushar Manudhane with Motilal Oswal Financial Services.

So firstly around the emerging market [indiscernible] on a constant basis, growth has been mid digit. When do we see the pickup and what will drive this pickup in the business? Maybe if you could share ROW growth and [indiscernible].

I think your voice was breaking to share. You were asking for EM and ROW growth.

Am I audible?

Yes.

Yes.

Yes. Are you referring to the mid-single-digit growth on a constant currency basis in emerging markets and its execute share what's happening there? And what would drive growth going forward?

So as far as EM is concerned, I think there has been a pickup on a quarter-on-quarter basis. This year -- this quarter, we did a constant currency growth of 7.6%, and this was again driven by product launches across several markets. So I think your question would be more directed towards RW where the growth is lower.

Even in EM, this is the kind of sustainable growth to think about? .

No, we don't guide to any particular growth number, but I think if you look at our historical trend in terms of constant currency, which we report every quarter, broadly, this is the range, plus or minus.

Got it. And on ROW side?

We are not guiding to any specific guidance. I think you can refer to...

It's covered in the overall...

Overall revenue growth.