Stock corner: Sun Pharma trading at 20% discount, retain buy – Jefferies

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October 16, 2019 2:18 AM

Sun is trading at 16x FY21 PE, a 20% discount to peers. Risk reward in our view is favorable.

Sun pharma, sun pharma net profit, sun pharma shares, sun pharma stocks, sun pharma revenue, sun pharma listing, sun pharma buy sharesSun is trading at 16x FY21 PE, a 20% discount to peers.

Sun announced the launch of its dry eye treatment drug Cequa. We expect it to have $70m peak sales in two years. While Restasis genericization is a risk, we believe Cequa, given its better efficacy and faster onset, could gain 10-15% market share at better pricing vs generic Restasis. We remain positive on Sun’s specialty business outlook where our doc survey indicates $300 m Ilumya peak sales. With valuations at 16x FY21 PE (20% discount to peers) we retain ‘Buy’. There are currently three approved medications for DED – Restasis, Xiidra and Cequa.

Restasis has c10% market share with annual sales of $1 bn. Restasis though could soon get genericized with multiple players awaiting approval. However, genericization of Restasis would drive increased TRx, in our view, as cost is a key hindrance for usage of prescription treatments. Novartis earlier in the year acquired Xiidra for $3.4 bn upfront and potential milestones of $1.9 bn. Xiidra in CY18 had sales of $0.4 bn. This highlights the potential market opportunity in DED.

The higher concentration allows for faster onset: per label 84 days for Cequa vs 180 days for Restasis and better efficacy. This, in our view, gives Cequa headroom even in a post generic Restasis market. We believe that Cequa could be priced at a premium to generic Restasis and achieve mid-teen market share over the medium term, led by better efficacy, faster onset time and lower side effects. We believe that Cequa can gain 15% market share at a 50% price premium, implying $ 70-80 m sales.

Our doctor survey in the US highlighted that Ilumya can achieve peak sales of $300 m. The ramp-up though is going to be slow and happen over next 12m. Ilumya’s ramp-up cannot be compared with Skyrizi, in our view, as Skyrizi is expected to have sales of $250 m in CY19 which is our expectation for Ilumya in FY23. Skyrizi peak sales are expected to be $2-3 bn.

Sun is trading at 16x FY21 PE, a 20% discount to peers. Risk reward in our view is favorable. We expect base business to see steady recovery in FY20/21. We expect specialty business to turn EBITDA positive in FY22 from $150 m EBITDA loss currently. Retain ‘Buy’.

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