Sun Pharmaceutical Industries Limited (SUNPHARMA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Sun Pharma's Q2 FY '26 Earnings Conference Call. [Operator Instructions]. 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 '26 earnings call. I'm Abhishek from the Sun Pharma Investor Relations team. We hope you have received the Q2 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; Mr. Kirti Ganorkar, Managing Director; Mr. Aalok Shanghvi, Chief Operating Officer; 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 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 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. 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 for joining us for this earnings call after the announcement of our financial results for the second quarter FY '26. Our Q2 financials are already with you. Let me take you through the consolidated financials of the second quarter. Q2 FY '26 sales were at INR 144,052 million, record a growth of 8.6% vis-a-vis the second quarter of FY '25. Gross margin was at 79.3% for this quarter. EBITDA for the quarter was INR 45,271 million, registering an increase of 14.9% over Q2 last year. EBITDA margin percentage for the quarter was at 31.3% against 29.6% for Q2 FY '25 and 31.1% during the first quarter of FY '26. Net profit after tax for Q2 FY '26 was INR 31,180 million, which is up by 2.6% over the reported net profit of Q2 last year. EPS for the quarter was INR 13 per share. Effective tax rate for the quarter was 24.7% vis-a-vis 15.8% in Q2 FY '25. During the first quarter of FY '26, the ETR was at 24.3%. ForEx gain during the quarter was INR 4,305 million compared to a gain of INR 1,281 million during the same period last year. Balance sheet continues to be strong with a net cash of $2.9 billion at a consolidated level. This is after our investment in the business acquisition of Checkpoint and settling the GxMDL case. Now let me take you through the half yearly performance. For the first half, sales were at INR 2,81,913 million, registering a growth of 9.3% over the first half last year. Gross margin was at 79.4% for the first half. EBITDA for the first half was INR 88,287 million, registering a growth of 17% over the first half of last year. EBITDA margin percentage was at 31.2%. Adjusted net profit for H1 was INR 61,141 million, up by 4.1% over the adjusted net profit of H1 during the last year. I will now hand over this call to Kirti, who will share the performance of our Global Innovative Medicines and India business.

Thank you, Jayashree. In Q2, FY '26, our Global Innovative Medicines sales were up by 16.4% to reach USD 313 million (sic) [ USD 333 million ]. U.S. sales of Innovative Medicine has surpassed generics for the first time during the quarter. Our ex-U.S. Innovative Medicine business also continues to deliver strong growth. Our largest brand, Ilumya is now commercialized in all the major markets and is available across 35 markets. Coming to India business for Q2, the sales of formulation in India were INR 47,348 million, recording a growth of 11% over Q2 last year. India's 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 2,350 billion Indian pharmaceutical market as per Pharmarack MAT September 2025. Corresponding market share for the previous period was 8%. For the quarter ending September '25, we grew higher than IPM. And we have done well across all major represented therapy areas. We're happy to note that on MAT basis, the sales growth has been led by volumes and new product launches versus the IPM growth, which is predominantly price led. As per SMSRC, March-June 2025 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 Q2 FY '26, the company launched 9 new products in India. I will now hand over call to Rick for the updates on the U.S. business.

Thank you, Kirti. I will update on the performance highlights of our U.S. business. Our overall U.S. business declined by 4.1% to $496 million for the quarter. Growth in Innovative Medicines was led by Ilumya, Cequa, and Odomzo. Innovative Medicines growth was offset by lower sales in our generics business due to additional competition for certain products and lower sales of lenalidomide. U.S. accounted for 30% of consolidated sales for the quarter. For the second quarter, we launched 3 new generic products in the U.S. We also launched LEQSELVI this quarter, and we've been pleased with our initial access and the response from health care providers and patients that they've had to the product. We anticipate access will continue to improve as well as overall uptake of the product. I will now hand over the call to Aalok, who will cover Emerging Markets and Rest of World.

Thank you, Rick. I will provide an update on the performance highlights of our other businesses. Our formulation revenues in Emerging Markets were $325 million, up by 10.9% over Q2 last year. The underlying growth in constant currency terms was 8%. In Emerging Markets, we have seen broad-based growth both in the Generic and Innovative Medicines business, aided by favorable currency movement. Emerging Markets accounted for 19.7% of total consolidated revenue for the second quarter. Amongst the larger markets in local currency terms, South Africa and Brazil have done well. Formulation revenues in Rest of the World were $234 million up 17.7% over last quarter -- over the Q2 last year, we have seen growth both in the Generics and Innovative Medicines business in Rest of the World and Rest of the World markets account for approximately 14.2% of consolidated revenue. I will now hand over to Mr. Shanghvi.

Thank you, Aalok. Let me take you through our R&D initiatives. We continue to invest in building an R&D pipeline of our Innovative Medicines business. Consolidated investments towards R&D for Q2 FY '26 stands at INR 7,827 million or 5.4% of sales. Innovative R&D accounted for 38% of our total R&D spend, and stands at approximately 10% of Global Innovative Medicine sales for the quarter. Regarding updates on Innovative Medicines, we are awaiting FDA decision on UNLOXCYT updated labeling. And we remain on track to launch UNLOXCYT in the U.S. in the second half of FY '26. We are also planning to file ILUMYA, psoriatic arthritis, sBLA during second half of FY '26.

Operator, we can open for Q&A now.

[Operator Instructions] First question is from Saion Mukherjee from Nomura. The next question is from Kunal Dhamesha from Macquarie.

The first one on the intangible assets, which seem to have moved sharply from the March '25 level, almost around USD 950 million plus. So I can see the $300 million intangibles which have moved from under development to other intangible head, but if you could provide a broader moving pieces here?

Thank you, Kunal, for your question. The increase in the intangible assets is also due to the Checkpoint intangible that is got added during the quarter. And we also had a milestone payment for Odomzo.

So Checkpoint would be close to $400 million plus, right?

Yes, it is about $471 million.

So then rest of the $500 million, what is driving that?

So we had Leqselvi related apart from Checkpoint, which is another larger piece, as you would know.

So Kunal, Leqselvi moved from intangibles under development into intangibles.

Okay. So that's another $300 million, and there should be Odomzo?

No, then the rest are several small items. It's largely Checkpoint and Leqselvi.

Secondly, on the incremental specialty spend that we had suggested that we would be spending around $100 million in this year related to the launches of Leqselvi and Unloxcyt. So is it fair to assume that some of that has started in Q2? And should we see the run rate to be more similar in the quarter 3, quarter 4? Or should we expect some acceleration deceleration? Any color would be helpful.

Yes. I'm happy to address that. So we did see a slight increase in Q2, and we would expect to see further increases in Q3, Q4 particularly as we launch Unloxcyt.

And lastly, on the Generics piece. The generic Revlimid seems to have kind of gone down even on a sequential basis? Is it a fair assumption? And would it be now a meaningful contributor in this quarter?

In the quarter that follows?

In quarter 2 versus quarter 1, the movement of lenalidomide?

Yes. Okay. So on lenalidomide, we have said that Y-o-Y, there is a drop. Q-o-Q, the number is flat.

Next question is from Neha Manpuria from Bank of America.

With 2 questions on the specialty business. On Leqselvi, when should we start seeing contribution -- revenue contribution from [indiscernible] improving payer coverage and payer access that you talked about? Would more meaningful revenue contribution from this be evident, let's say, in the later part of this fiscal? Or more so would you say in fiscal '27? What would be your assumption there?

We're already starting to see paid prescriptions through commercial channels, and we would expect that to continue to grow throughout the year.

And on Ilumya, is it fair to assume that the prescription growth that we are seeing, I know as a category biologics in psoriasis is growing. But even as we wait for psoriatic arthritis approval to come through, we can continue to see the momentum in prescription growth over the next few years?

For -- was the question related to Ilumya for psoriasis?

Yes, that's right.

We do expect to see continued growth. As you shared, the IL-23 market continues to grow as does the overall psoriasis market. We continue to release new data on Ilumya and sharpen our sales and marketing tactics, so we would expect to see continued growth.

And the last one I have is on R&D spend. If you look at R&D, we are obviously tracking below the guidance that we had revised down last quarter. How should we think about R&D spend for the full year? Do we expect to pick up going into second half? Or would it remain at the current 5.5% level that you see?

So Neha, I think we should come in the lower end of the guidance overall, that's what is our assessment today.

Lower end of the 6% to 8% guidance that you mentioned, right sir?

Right.

[Operator Instructions] The next question is from Vishal Manchanda from Systematix.

I have a question on the balance sheet. If I look at the other current assets, it's almost doubled since March 2026 -- sorry, March '25 from INR 2,500 crores to almost INR 5,000 crores. Could you clarify on this? What led to this?

Yes. This is mainly on account of the GxMDL settlement, which has gone into an escrow account.

Sorry, which settlement?

Last quarter, we had a settlement on the GxMDL case, and that amount has been deposited in an escrow account.

And second one on cosibelimab. I wanted to understand whether it has been filed for European markets. And whether our competitors, Keytruda and Libtayo, do they have a European approval already?

Yes, we are in the process of compiling the dossier for Europe. Once it's filed, we will share the update with investors.

And just one final one on Odomzo. If you could share what would be Odomzo share in the basal cell carcinoma market between -- so among the BRAF inhibitors?

It's not a BRAF inhibitor. It's a Hedgehog inhibitor.

Sorry, Hedgehog inhibitor.

So I think it all depends on different geographies. Rick can update on the U.S. market share. But in Europe, I think, is in excess of 60% market share.

Yes. And it depends on the customer. In dermatologists, we have over a 50% share in the United States.

And in the overall market, including the oncologist?

The oncologists are slightly less. I don't have the exact figure for the overall market at this time.

And would dermatologists be the primary prescriber here?

It's both.

Next question is from Harith Ahamed from Avendus Spark.

On semaglutide, where we have a filing in Canada as per Health Canada disclosures. Based on your previous experience with filings in that market, what are the time lines that we can look at for approval of this product? And on semaglutide again, in India, where the market formation is expected in March '26. So we plan to have a product ready with an approval by the market formation time?

So India, I will ask Kirti.

Yes, India, I think what we have told you in our last call also, India will be ready for the launch in the first wave when the LOE happens on the patent expires.

For Canada, I don't believe we share that information.

One is that. And second, I think it's still not very clear.

Right? How Canada has been shared.

And in the ROW segment, we've seen a very strong growth this quarter, constant currency terms around 17% to 18%. And in the last quarter, we had alluded to some onetime sales. So has that continued into the second quarter?

so before we answer the drivers for this one, there is no one-off in this quarter sales. For ROW, basically, the growth has been led by both Generics as well as Innovative Medicines. But there is no one-off.

A couple of months back, there was an announcement by the U.S. President on 100% tariffs on patent drug imports into the U.S. Well, there's no final policy that's been released yet, but is this a risk for our IM products given that we are manufacturing these products outside the U.S. And at the same time, we are manufacturing these in geographies where U.S. already has a trade deal and these trade deals cover pharma as well. So how should we look at this particular risk?

Look as you say, there's a lot of uncertainty at this point. I mean, we don't have any additional tariffs that we're paying today. The original announcement has been put on pause, and we're still awaiting the outcome of the Section 232 investigation.

[Operator Instructions] The next question is from Bharat from Equirus.

Just wanted to understand, there is some investment into subsidiaries, which is showing up in the cash flows amounting to almost like INR 3,400 crores. Can you explain what is it all about?

This is mainly Checkpoint acquisition...

Because this amounts to almost like INR 390 million, whereas we have paid almost like 4 -- more than 5 -- around INR 500 million for Checkpoint. So just was trying to understand that there was a big difference.

No, the Checkpoint consideration is not INR 500 million, Bharat, it's less. It's what we disclosed was INR 355 plus.

Next question is from Shyam Srinivasan from Goldman Sachs.

Just the first one again on the consolidated cash flow statement. Just the net cash generated Y-o-Y has declined despite similar profits. So just -- I can see it is working capital. But if you could explain why our lower cash generated, please?

Yes. There is some amount of increase in the working capital, which we believe will get normalized in this quarter. As I was also mentioning in the initial commentary, there has been a settlement that has happened towards GxMDL plus our brand acquisitions that have happened, which is the reason why the cash flow overall has come down compared to the last -- from 1st April '25.

So by the end of the fiscal, we expect this to be -- the generation to be in line at least with the growth in PBT. Let's assume.

Yes. I think the cash generation to clarify has been good. Working capital changes happened during the quarter, and this has happened during this quarter. Other than that, there have been 2 other items. One is the business acquisition. The other one is a settlement. So they should get normalized.

And just on the opening comments now, I think called out that the U.S. business formulation, we have now innovative higher than Generics. So obviously, you don't call it out, but of the $500 million U.S. formulation, so I assume $250 million, $260 million is now innovative. That's a 70%, 80% of global innovative business, right? So just maybe the question is the other way around. What is the prognosis now for the Generic business? Do you foresee that this kind of decline continues? Does it still be -- make sense for us to be -- it's still significant, but just your thoughts on how we should look at the U.S. generic business going forward?

Our strategy is to grow both our Innovative Medicines business as well as our Generics business.

Last question, just again, just in light of the tariffs and U.S. based on localized manufacturing in the U.S., what are your thoughts? Is there any move for us to move supply chains back into the U.S.? I know policy is still uncertain. But just your thoughts, you have enough cash. What about looking at U.S. manufacturing assets?

Yes. We already have a manufacturing footprint in the U.S. We are kind of constantly assessing that manufacturing footprint. And we are open to considering moves to the U.S. in due time.