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Sun Pharmaceuticals rating – Buy: One-offs hit bottomline in Q4FY22

Traction in specialty sales was maintained; FY23/24e EPS down 3.3/3.5%; ‘Buy’ retained with revised target price of Rs 1,040

Sun has largely optimised marketing costs for Ilumya and Cequa.

Sun reported net loss of Rs 22.8 bn in Q4, mainly on one-offs of Rs 39.4 bn (Rs 37.2 bn of provisions related to settlement of antitrust litigation for valganciclovir, valsartan and esomeprazole, Rs 1.6 bn of provisions for settlement with various purchaser groups and Rs 563.5 m for restructuring of certain businesses). It also booked a one-off tax gain of Rs 764.2 m and FX gain of Rs 1.6 bn. Adjusting for one-offs and FX, PAT was Rs 14.2 bn (~19% below HSBCe). EBITDA margins at 23.1% fell 109bps y-o-y and 346bps q-o-q on input cost pressure and normalisation of expenses.

Traction continues for specialty sales: Global sales for the specialty products portfolio of $185 m grew ~33% y-o-y (+1% q-o-q) on strong traction in key brands Ilumya, Cequa, and Odomzo. Specialty sales in FY22 grew 42% to $673 m (13% of total revenues vs 7% in FY18). Global sales for Ilumya (incl. milestones and royalties) reached $315 m (+81% y-o-y). Winlevi (novel acne drug launched in Nov 2021) is seeing good traction and around 9K prescribing doctors (out of 15K) have prescribed it. We expect sales traction to continue for key brands on improving patient footfall (elective procedures are not yet back to pre-COVID-19 levels), better commercial execution and increasing market size.

Sun has largely optimised marketing costs for Ilumya and Cequa. For Winlevi, we expect spend to scale up for improving brand visibility. Sun is also continuing R&D spend to progress in four specialty R&D assets (20% of total R&D spend in Q4). It is conducting Phase 3 studies for Ilumya in psoriatic arthritis and calibrating strategies to expedite trial completion (COVID-19 and geopolitical conflict delayed patient recruitment at some sites).

A scientist works in a lab owned by Sun Pharmaceuticals Industries Ltd in Mumbai, India, on Tuesday, May 22, 2007. Sun Pharmaceutical Industries Ltd., India’s biggest drugmaker, agreed to buy Taro Pharmaceutical Industries Ltd., an unprofitable producer of generic medicines, giving it factories and distribution assets in the U.S. Photographer: Abhijit Bhatlekar/Bloomberg News

Retain Buy rating: We remain positive on Sun’s efforts in the specialty products portfolio, which we believe will likely achieve Ebitda breakeven over the next 2-3 years, resulting in significant operating leverage. We assume specialty sales to be key driver of US sales, with sales CAGR of 17.2% for FY22-25e, while we assume base generic and Taro sales stabilising at current levels.

Sun plans to expand India sales headcount by 10% in FY23e to improve market coverage and de-clutter some marketing divisions. We assume its India segment sustaining above-market growth on new launches and better reach. The outlook remains largely steady for other segments (RoW, emerging markets, API, etc.) barring any short-term fluctuations. Post Q4, we adjust our estimates per current visibility leading to 3.3%/3.5% cuts in EPS for FY23/24e. Our TP is Rs 1,040 (from Rs 1,075).

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