Sun Pharmaceutical Industries (Sun Pharma) announced USFDA approval for its specialty product ILUMYA (tildrakizumab-asmn) for the treatment of adults with moderate-to-severe plaque psoriasis who are candidates for systemic therapy or phototherapy. This is one of the largest opportunities from specialty product pipeline for Sun Pharma and is the first biologic approval for Sun Pharma. Sun Pharma had acquired this molecule from Merck in 2014 for $80 mn and Merck will receive milestone payments plus royalties on sales from Sun Pharma. We view this as a positive development for the company and we expect peak revenue potential of $350 mn for Sun Pharma by FY23. The market has become competitive with three similar products already available; hence, pricing strategy by Sun Pharma would be important. We expect FY18 performance to remain muted for Sun Pharma. However, we believe strong earnings growth to follow from FY19 considering (i) ramp-up in revenue from branded/specialty business in India and US, (ii) potential for inorganic growth based on strong balance sheet and (iii) expected resolution of USFDA issues at Halol in near term. The stock has corrected more than 10% in last one month, which have made valuations attractive. We upgrade the stock to Buy from Add and maintain our target price of Rs 615/share (22xFY22e).
ILUMYA approval to strengthen speciality portfolio
We believe the approval for ILUMYA would strengthen specialty portfolio and would be one of the largest products for Sun Pharma. The company has Absorica, Bromsite and Odmozo as commercialised specialty products and approval for Seciera is expected in near term. ILUMYA is indicated for treatment of adults with moderate-to-severe plaque psoriasis who are candidates for systemic therapy or phototherapy. We expect Sun Pharma to launch this product in 3-6 months and total specialty portfolio to contribute over 20% of US revenue by FY20.
We expect this product to generate over $100 mn sales in FY20 and peak revenue could reach $350 mn by FY23. The psoriasis market size has been estimated at ~$7.5 bn. More importantly, this would help in improving Ebitda margin as the company had already been spending on building marketing set-up with field force for specialty products which has been impacting the profitability and the product would be under patent without competition. The United States’ specialty business has been making losses due to expenses pertaining to R&D, marketing franchise, build-up of field force etc and we expect this business to breakeven in FY20.
Valuations and risks
The stock currently trades at 24.5x FY19e and 18.1x FY20e earnings and EV/Ebitda multiple of 15.1x FY19e and 11.3x FY20e. The stock has corrected over 10% in last one month. We expect ILUMYA approval would help re-rate valuations to some extent and clearance of USFDA warning letter at Halol plant would be another positive trigger in near term for valuations. The stock has traded at an average P/E of 33.2x 1-year forward earnings over the past five years and below mean over the past one year. We expect FY18 performance to remain muted for Sun Pharma. However, we believe earnings growth to follow from FY19 considering (i) ramp-up in revenue from branded/specialty business in India and US, (ii) potential to buy inorganic growth based on strong balance sheet, (iii) expected resolution of USFDA issues at Halol by FY18 end and (iv) continued margin recovery. Key downside risks: Higher than expected pricing pressure in US, regulatory hurdles and delay in resolution of Halol facility beyond H1FY19.