Sun Pharma Q1FY23 revenue/Ebitda /PAT was 2/4/13% above our estimates. The topline beat was driven by a 29% y-o-y sales increase in specialty segment. Ebitda was boosted by lower R&D while PAT benefited from lower taxes. Management indicated Winlevi ramp-up will continue in the coming quarters. We estimate Sitagliptin impact to be limited on FY23 Ebitda. Our FY23/24 EPS increases by 1%/3%. Maintain Buy with PT of Rs 1,089.
Sun Pharma beats expectations on lower R&D and taxes: Sun Pharma’s Q1FY23 revenue was 2% above our estimates, Ebitda was 4% above and PAT was 13% above. Revenue beat came on strong US and EM performance, Ebitda was helped by lower R&D costs while PAT was further boosted by lower taxes. During the quarter, Sun Pharma’s profitability was adversely affected by Alchemee integration, which is operationally loss-making, in our view. R&D as % of revenue was at just 4.3% and is likely to pick up gradually during the coming quarters.
Specialty delivers despite seasonality: Specialty sales were up 29% y-o-y and 3% q-o-q on the back of sales growth in Ilumya, Cequa, Odomzo and Winlevi. The company clarified that the recent stagnation in Winlevi’s prescriptions is due to seasonality and summer months are weakest for Derma products. The product is prescribed by ~10,000 doctors in the US and will continue to ramp up in future quarters.
Sitagliptin setback to have limited impact on financials: In India, Sitagliptin was among the top-5 molecules for Sun Pharma. Retail sales of the Sitagliptin SKUs were worth Rs 3.2 bn (past twelve months). However, they were royalty products and were likely to be a low-margin business. We estimate that sales from the products were at ~ Rs 2.2 bn and Ebitda contribution was of Rs 0.65 bn, which is 0.6% of its FY22 Ebitda. The product went off-patent in July-22. Several new players have launched Sitagliptin products post the patent expiry, leading to pricing pressure.
India sales force expansion largely completed: Last quarter, Sun Pharma announced India sales force expansion by 10%. This is almost complete and most of the costs were reflected in Q1; thus no major rise is expected in staff costs going forward.
Maintain Buy: We like Sun Pharma’s non-reliance on US generic drugs and traction in its specialty drugs segment. We increase our FY24 margins as we factor in new India sales force productivity from FY24. We value Sun Pharma at 28.4x FY24 EPS with PT of Rs 1,089.