Returns from specialty assets likely to ensure 20% CAGR over FY19-22e; upgraded to ‘Outperform’ with TP going up to Rs 595
Sun has already invested >$600 m in seven specialty assets. Our proprietary analysis shows peak sales of these assets should be $ 700 m+, and should swing contribution of Specialty from -15% of profits to +15% by FY22. Increasing contribution of specialty addresses growth concerns in generics (10-12% profit CAGR), and helps Sun revert to 20% profit growth trajectory. Strong FCF (>$500 m) should help acquire more assets and deepen presence in chosen specialties. Monetisation has already started with two drugs in the market, and the lead derma drug MK-3222 should be launched next year. We upgrade Sun to Outperform (from Neutral) and increase target price to Rs 595, from Rs 490.
Price erosion risk at Sun to be lower at mid-single digit while industry faces higher risk: We stay negative on the US generic market, and expect high single-digit price erosion. However, for Sun we lower price erosion to mid-single digit (and increase FY19 EPS by 5%) as (i) Taro’s Ebitda has already halved (from FY16) and product concentration is also lower now, and (ii) Ex-Taro US sale has already seen an erosion of 34% in the last two quarters and 55% of the remaining sale is immune to the price erosion risk.
Halol re-inspection and MK-3222 approval are key catalysts: Halol re-inspection is in Q3FY18 and this could unlock several key filings (Focalin XR, Ganirelix, Lupron, Vagifem, Protonix IV, Invega, Makena). Further, MK-3222 approval is likely in Q4FY18 and is key driver for breakeven of specialty by FY20.
Increase target price to Rs 595 due to (i) higher specialty valuation (NPV: Rs 35/share), (ii) FY19 EPS up by 5%, (iii) separating specialty loss of 15% from core profits. Our EPS for FY19/20 is 10% higher than consensus due to our view of lower erosion on generics and constructive stance on specialty. Key risks: (i) Halol resolution delay, (ii) Dadra Form 483, and (iii) Department of Justice (DOJ) penalty.
Return to a 20% growth trajectory
Monetisation of specialty pipeline has started and should break even by FY20: Sun has already invested $600 m on seven specialty assets in Derma, Ophthal, CNS and Oncology. Two drugs are already in the market, and the lead derma drug, MK-3222, should be launched in Q1FY19. Currently, annual spend on specialty is $150 m which is suppressing base profits by 15%. With the ramp-up of MK-3222 and oncology drug Odomzo, specialty should break even by FY20. MK-3222 is targeted for psoriasis and should achieve peak sales of $300 m. MK-3222 is lower in efficacy than its peers but given that IL biologics market is expanding and with aggressive pricing, MK-3222 could achieve high-single digit market share.
Upgrade to Outperform: The specialty business is currently suppressing core profits by 15% and with the scale-up of the portfolio to $700 m+ sales by FY22, we expect it to contribute +15% of FY22 profits. High growth in specialty also addresses concerns of lower growth in generics (10-12%) and helps boost overall growth to a 20% CAGR (FY19-22). We upgrade Sun to Outperform from Neutral, and value the Specialty pipeline on an NPV of Rs 35/share for a target price of Rs 595/share. Key risks: (i) delay in Halol resolution, (ii) escalation of Form 483 at Dadra facility, (iii) DOJ penalty, and (iv) higher taxes.