Morgan Stanley rates Sun Pharmaceutical Industries ‘Equal-Weight’

By: | Published: January 10, 2017 6:09 AM

Sun announced that its NCE drug Seciera has met phase 3 primary and secondary endpoints (in a study of 744 dry eye patients).

Sun continues to bolster its specialty pipeline—Tildrakizumab (Merck), Odomzo (Novartis), MM-II (Moebius), Seciera (Ocular), Elepsia/Xelpros (SPARC), BromSite/DexaSite (Insite), Absorica (Ranbaxy), and Dusa drug products. Sun continues to bolster its specialty pipeline—Tildrakizumab (Merck), Odomzo (Novartis), MM-II (Moebius), Seciera (Ocular), Elepsia/Xelpros (SPARC), BromSite/DexaSite (Insite), Absorica (Ranbaxy), and Dusa drug products.

Sun announced that its NCE drug Seciera has met phase 3 primary and secondary endpoints (in a study of 744 dry eye patients). Seciera is a patented, novel, clear, preservative-free, aqueous solution. Seciera is being developed by Ocular Technologies, a company recently acquired by Sun. It agreed to pay $40 million upfront, plus contingent development milestones and sales milestones as well as tiered royalties on sales of Seciera. Sun aims to commercialise this product in global markets including the US, Europe, and Japan, as well as several emerging markets.

Clinical differentiation: The company has not yet disclosed the Phase III trials data (plus, it was not a head-to-head trial versus Restasis). Therefore, it is difficult to assess the medical benefits versus available drug options. However, according to Sun, Seciera is differentiated by early demonstration of efficacy (12 weeks) versus other approved dry eye drugs in the same class. We note that Xiidra has a faster onset of action (roughly 2 weeks, according to Shire). After 12 weeks of treatment, Seciera showed statistically significant improvement in the primary endpoint, Schirmer’s score (a measurement of tear production) (p<0.0001). Adverse events reported in the trial were mild to moderate in nature and similar to those of other approved drugs in the category. Sun will continue to analyse the data and present findings at upcoming medical conferences.

Roadmap ahead: Sun plans to discuss the Phase III data with the FDA to assess if more clinical work is required for this product. To note, historically, a few drug candidates have been discontinued in the regulatory pathway because data were insufficient to convince the FDA. Assuming all goes well for Sun, the company could file an NDA for Seciera in FY18 and launch the product in FY19. Sales ramp-up could take 2-3 years. In addition, based on clinical trials.gov, it is conducting more clinical studies. Completion is expected in June 2017. According to management, the global dry eye market is estimated to reach $5 bn by 2020.

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Our View: Sun continues to bolster its specialty pipeline—Tildrakizumab (Merck), Odomzo (Novartis), MM-II (Moebius), Seciera (Ocular), Elepsia/Xelpros (SPARC), BromSite/DexaSite (Insite), Absorica (Ranbaxy), and Dusa drug products. We remain EW on Sun in view of a slow earnings ramp-up (as gGleevec erodes and competitive intensity rises for the Taro portfolio), distant and modest upside from upcoming specialty portfolio, and full valuation.

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Valuation methodology: Our price target of R762 is our base case scenario value, derived by applying a target multiple of 20x (~5%-10% discount to the large-cap industry average P/E) to our September 2018 EPS estimate of R38.1. This is in view of higher single-product profit concentration and slower base business sales growth progression due to US approval delays. We cite the following reasons to support our 20x target multiple: (i) FDA issuance of a warning letter at the Halol plant, leading to delay in new product approval. There could also be collateral damage in terms of brand equity with various stakeholders including customers in the US. (ii) Delay in the evolution of specialty business, especially the two lead candidates from SPARC (Elepsia XL and Xelpros) which are filed from Halol. (iii) Loss of some opportunities in the US due to now delayed ANDA approvals. (iv) Higher single-product dependence for near-term earnings growth.

The aforementioned we cite versus (i) Solid base business, especially its domestic market leadership in chronic ailment therapies. This is being replicated in other emerging markets.

(ii) Longer-term mid-teens US growth outlook driven by its portfolio of ~160 ANDAs pending FDA approval. (iii) New growth levers—SPARC, specialty products, Ranbaxy synergies, MK-3222. (iv) Sizable and growing net cash on the balance sheet, which could unlock value via inorganic means. (v) Deepening leadership team (Israel Makov, Kal Sundaram), which underlines Sun’s aspirations to continue to grow globally and profitably.

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