Momentum in specialty sales likely to be sustained; FY21/22e EPS up 5.3/1.3%; Buy retained with TP of Rs 700
Improving patient flows on the broader market recovery and improved execution of marketing and promotional efforts led to a healthy pick-up in specialty sales during Q3.
Sun’s strong Q3 beat on margins and PAT were mainly led by lower operating costs and favourable below Ebitda items (other income, interest and tax). Sales at Rs 87.8 bn (+9.2% yoy, 3.8% q-o-q) were in line with consensus and most segments maintained a recovery trend. Key notable points were: a) specialty product sales continued their upward trajectory with global sales reaching $148 m in Q3 (vs $108 m in Q2); b) key brand, Ilumya, surpassed FY20 sales of $94 m in 9MFY21; and c) US base generic sales (ex-Taro, ex-specialty) saw a strong pick-up on volume gains, operational efficiencies and supply benefits due to some drug shortages.
Specialty sales momentum to continue Improving patient flows on the broader market recovery and improved execution of marketing and promotional efforts led to a healthy pick-up in specialty sales during Q3. We expect specialty sales momentum to continue: a) after US launch of Ilumya in late 2018, Sun has undergone a huge learning curve and we believe it is now better equipped to identify and gain target patients; b) it has now largely optimised marketing spend incl. DTC (direct to consumer) TV ads for Ilumya; c) potential to scale-up Ilumya sales in key new markets e.g. Japan; d) despite imminent entry of competing generics for Absorica and Cequa brands, Sun expects to gain good market share on notable offerings in efficacy, safety and durability of results.
Operating leverage on the way Sun will continue R&D and marketing spend for enhancing its specialty presence in the US and other markets and, while cost breakeven for specialty sales is still some way away, we are enthused by recent sales trends. We expect further spend on the specialty portfolio to remain prudent (e.g. R&D spend for clinical trials for the additional indication for Ilumya will be well within budgeted R&D of 6-6.5% of revenues) and scale-up in sales should eventually result in operating leverage.
Maintain Buy with TP of Rs 700 While we expect other operating costs to normalise to pre-COVID levels (the Q3 beat were largely led by lower costs), we believe India and US (ex-Taro) sales growth will sustain Ebitda margins in the 25-26% range in FY21-23e. We retain our Buy rating on improving specialty sales. We expect US specialty sales to reach c$625 m in FY23e (37% of total US sales) from ~$340-345 m in FY20 (~24% of US sales), implying FY20-23e CAGR of 23%.
Post Q3, we adjust our FY21-23e EPS estimates by 1-5% to reflect the current outlook. We raise NPV/share for specialty products to Rs 50 (from Rs 40) as we assume a better pick-up for Ilumya beyond our explicit period assumptions. Our revised fair value TP is Rs 700 (from Rs 695).