Sun Pharmaceuticals Rating: Buy- Market trends augur well for Ilumya sales in US

Sun reported strong pick-up in specialty products sales in Q3FY21 mainly on impressive Ilumya (anti-IL brand) sales. It surpassed FY20 sales of $94 m for Ilumya in 9MFY21 on improved commercial execution as well as continuous market expansion for anti-IL (interleukin) inhibitor drugs. Overall anti-IL drug sales in the US at

$11.5 bn grew ~31.5% y-o-y in 2020 (after 38% y-o-y growth each in 2018 and 2019) with robust sales reported by key brands – Novartis’s Cosentyx, Eli Lilly’s Taltz, JNJ’s Stelara and Tremfya, and AbbVie’s Skyrizi. After COVID-19 disruptions in H1, most of the brands saw strong recovery in H2CY20, which in our view implies strong demand and growing market size for anti-IL drugs.

No incremental hurdles for Ilumya on rise in competition, in our view: We believe there are a few concerns on Ilumya on (i) rise in competition with potential entry of UCB’s bimekizumab, and Eli Lilly’s mirikizumab in near- to medium-term; and (ii) ongoing high spend on R&D and marketing. While competition and ongoing costs for specialty drugs are inevitable, we do not see incremental hurdles for Ilumya as: (i) anti-IL market is growing and it has always been a competitive space where Sun is competing against stronger competitors (e.g. Novartis, AbbVie); (ii) newer drugs are weighing themselves against established brands (e.g. Cosentyx), so any potential market shift may happen there rather than disrupting relatively small brands like Ilumya, in our view; (iii) Sun has largely optimised marketing costs for Ilumya and clinical trial costs for an additional indication is well within its budgeted R&D.

Remain Buy on operating leverage benefits: We remain positive on the long-term outlook for Sun’s efforts in specialty products, where it should eventually achieve operating leverage benefits with pick-up in prescriptions and sales. We expect US specialty sales to reach $625 m in FY23e (37% of total US sales) from ~$340-345 m in FY20 (~24% of US sales). We assume Ilumya sales in the US to reach $225 m by FY23 (from ~$80-85 m in FY20), implying a sales CAGR of 23%.

Valuation: We value Sun’s base business by discounting the one-year forward fair value, which is based on 24x (Gordon growth-based PE, unchanged) our December 2022e EPS estimate of Rs 29.37. We add a NPV of `50 per share (unchanged) for Ilumya and Cequa to the base business value to arrive at our fair value TP of Rs 700.