Sun Pharmaceutical beats profit forecasts but shares fall as costs weigh on margins

India's largest drugmaker navigates tension between specialty drug growth and rising research expenditure

Sun Pharmaceutical Industries (SUNPHARMA) reported quarterly profit ahead of analyst expectations on Friday, driven by strong demand for its higher-margin specialty medicines, but rising costs eroded profitability and pushed shares lower.

The Mumbai-based company's consolidated net profit rose 26.2 per cent to 27.14bn rupees ($283mn) in the quarter to March, narrowly beating the 27.12bn rupee consensus estimate compiled by LSEG. Shares initially fell as much as 3.1 per cent following the results before closing 2.5 per cent lower on the day.

The earnings, while technically a beat, were overshadowed by a sharp deterioration in margins. Total expenses climbed 16 per cent to 115.19bn rupees, driven in large part by heavier research and development spending, compressing the company's core operating margin to 27.1 per cent from 28.7 per cent a year earlier. Shrikant Akolkar, a pharmaceuticals analyst at Nuvama Institutional Equities, described the cost pressure and margin performance as "disappointing".

Sun Pharma's strategic push into specialty therapies — spanning dermatology, oncology and obesity treatments — continued to underpin the group's relative outperformance. Revenue from the specialty segment rose 20 per cent to $354mn, representing close to a quarter of total sales. That momentum helped the company pull ahead of domestic rivals Dr Reddy's Laboratories (RDY) and Cipla (CIPLA), both of which missed consensus estimates for the March quarter.

Growth was uneven across geographies. India, Sun Pharma's largest market, delivered specialty revenue growth of 14.8 per cent, while US specialty sales fell 1.1 per cent — a modest decline that will nonetheless draw scrutiny given the strategic importance of that market to the group's long-term ambitions.

The results arrive weeks after Sun Pharma unveiled its most significant transaction to date: an all-cash offer of $11.75bn for US-based Organon & Co (OGN), a deal that would rank as the largest overseas acquisition ever by an Indian pharmaceutical company. Investors will be watching closely to see how the company manages integration costs alongside the research spending that is already pressing on margins.