Steady progress in sales of specialty products; the momentum is likely to be sustained; ‘Buy’ retained with TP raised to Rs 815
Reported PAT of Rs 8.9 bn included one-offs of Rs 6.7 bn (Rs 5.8 bn for provisions towards Taro’s ongoing civil anti-trust litigations in the US, and Rs 895.6 m for settlement of citalopram anti-competitive litigation in the EU), exceptional tax of Rs 1.2 bn and relevant minority interest of Rs 1 bn. Adjusting for one-offs, PAT at Rs 13.5 bn declined 24% q-o-q (~17% below HSBCe). Total sales at Rs 84.3 bn declined 4% q-o-q (+4.4% y-o-y) while Ebitda margins at 23.3% (excl. other operating income) declined 262bps q-o-q (but increased 603bps y-o-y on a disrupted base of last year).
Notable points from Q4: (i) Q4 global specialty products sales at $139 m were lower than sales of $148 m in Q3 (Q4 had some impact of insurance plan changes and reversal of channel stocking in the previous quarter); (ii) Global sales for Ilumya (its key specialty brand) were $143 m in FY21 (vs $94 m in FY20); (iii) R&D spend for specialty products were 23% of total R&D costs (per Sun, this will likely increase ahead); (iv) Sun will enter biosimilars space to participate in “third-wave” opportunities (in 2030 and beyond).
It has avoided biosimilars earlier on lack of regulatory clarity and market unfamiliarity. It doesn’t expect any major drag due to R&D and capex outlays for biosimilars; and (v) it evaded guidance for FY22 on the back of pandemic uncertainties.
Specialty sales momentum should continue: In view of increasing COVID-19 vaccination coverage in the US and other key markets, Sun expects upwards trends to continue for its specialty portfolio. Its focus remains on commercial execution through strategic marketing efforts. It has largely optimised marketing costs incl. DTC (direct to consumer) TV Ads for Ilumya and future spend will be commensurate with visible growth opportunities. Potential scale-up of Ilumya in newer markets like Japan are additional growth drivers.
Retain Buy: We remain positive on Sun’s efforts in specialty products where it should eventually achieve operating leverage benefits with pick-up in sales. We expect US specialty sales to reach $639 m in FY23e (39% of US sales) from ~$390 m in FY21.
Post Q4, we adjust our FY22-23e EPS estimates by 1-2% per current outlook. We value Sun’s base business by discounting the one-year forward fair value, which is based on 26x (Gordon growth-based PE, earlier 25x) our March 2023e EPS of Rs 31.59 (earlier Rs 30.86). We add an NPV of Rs 55 (unchanged) for specialty products to the base business value to get our TP of Rs 815 (from Rs 770).