4better safety, compared to other drugs on the market. APIs

APIs

APIs, which stand for the active pharmaceutical ingredient, are compounds in any drugs that produce the intended effects. In simple terms, APIs are like raw materials for drugs.

Sun Pharma has its presence in APIs too. APIs contribute to about 6% of revenue for the company. It provides cost competitiveness and a reliable supply chain. This reduces the dependence on third-party for APIs. Sun Pharma currently develops around 20-30 APIs annually and has 14 API manufacturing units across many countries. As of FY21, Sun Pharma also supplies APIs for about 300 products to other large generic manufacturers. This is after meeting the in-house requirements.

Globally pharma companies are looking for alternate supply sources, specifically for APIs, since the outbreak of Covid (in China) disrupted the APIs supplies. Sun Pharma’s API manufacturing has the potential and the market to grow.

What does the future hold?

While globally pharma stocks had a bull run, particularly since the onset of Covid, they faced multiple challenges. These include postponement of surgeries and critical treatments and supply related bottlenecks for APIs. Since most of these issues have been resolved in the industry including Sun Pharma, its prospects appear good in the coming years.

A few points to support the argument for the company:

Strengthening specialty products pipeline:

There is an increasing demand for chronic conditions and ailments. The emergence of such diseases is more frequent in recent years due to changes in our lifestyle. This is where specialty segment comes into play. And Sun Pharma has multiple products lined up under this segment.

Expansion in APIs: There is an emerging R&D trend in APIs to explore complex APIs used in the novel formulation and niche therapeutic areas. This bodes well for Sun Pharma as its R&D is one of the competitors in the industry.
Sun Pharma has a better brand coverage compared to other companies in the industry. It is among the top brands prescribed by doctors.
The string of acquisitions made by the companies appears to be benefiting the companies. And according to analysts, this provides long-term growth visibility, particularly in specialty segment.
Sun Pharma spend about 6.5% of its revenue on R&D and it could aid in its growth in the coming years. For instance, R&D efforts in innovative therapies are picking interest globally, like gene and cell therapy is another area.

Investors: Take note

While Sun Pharma’s prospects appear bright, and most of the challenges, in the past two years, for the pharma industry have been ironed out, there are a few pointers that investors should keep in mind.

Patent expiries:

In the next 5-7 years, patent expiries are estimated to be about $166 billion. While it could be offset by spending on generics and biosimilar, it is still an area of concern for many pharma companies, including Sun Pharma. This is something that investors should note. However, considering the pipeline of products with the company, the impact could be less. According to the company’s statement, it continues to evaluate in-licensing opportunities for the latest generation patented products.

In general, US generics markets have two key challenges – tight competition, and pricing pressures. This impacts Sun Pharma as well. While the company can navigate these challenges, there could be an impact in the short term, in case of an issue. For instance, in the year FY18-19, the company had lost exclusivity for a drug in the US, thereby weakening its financials.
While the financial performance is likely to be positive in the coming quarters, the valuation of Sun Pharma appears expensive. It trades at 106 times while its peer Divi’s Lab is trading at 45 times.

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