Sun Pharma Rating ‘Buy’; momentum in specialty sales was sustained

Key points from Q3FY22: (a) Global sales for specialty products portfolio at $183 m grew ~24% y-o-y on strong traction in key brands Ilumya, Cequa, Levulan and Absorica; (b) 9MFY22 specialty sales at $488 m surpassed sales of $473 m in FY21; (c) the recent US launch of the Winlevi brand is seeing a good market response, per SUNP; (d) total US sales of $397 m (+6.1% y-o-y, +10% q-o-q) included specialty sales of ~$154-156 m, in our view (rest are base generics and Taro sales); (e) R&D costs for specialty products were 22% of total R&D spend for Q3. (f) India sales at Rs 31.7 bn grew 15.1% y-o-y (-0.6% q-o-q); (g) gross margins at 73.1% largely remains steady y-o-y and q-o-q with better mix and efficiencies offsetting higher raw materials costs and price erosion in the base US generics; (h) Ebitda margins (excl. forex impact) at 26.5% declined 158bps q-o-q on higher operating costs (margins were steady y-o-y); and (i) other income of Rs 4.3 bn included one-off gains mainly related to a product settlement ($22.5 m).

Specialty sales momentum should continue: While specialty products sales in Q3 had some benefits from seasonality and channel stocking, we expect sales traction to continue on improving patient footfalls (elective procedures are not yet back to pre-COVID-19 levels) and better commercial execution. A pick-up in Winlevi sales should be visible from Q4 onwards. Levulan could see extended seasonality benefits in Q4 too. While brand-specific sales were not disclosed, we believe Ilumya’s annualised sales are now trending at $200-225 m (vs $143 m in FY21).

Sun is utilising the existing sales team for Absorica (which was expanded previously) to promote and market Winlevi, hence it may not incur sizeable costs associated with a new brand launch. For other specialty brands, it has already gained a fair understanding of market dynamics (e.g. better reach to ‘key opinion leaders’ for Ilumya) and associated marketing costs are largely at an optimal level. Sun expects R&D spend to inch up ahead with progress in clinical trials for pipeline specialty assets (e.g. Phase 3 studies for Ilumya in psoriatic arthritis).

Retain Buy rating and TP of Rs 1,030: We remain positive on Sun’s efforts in specialty products portfolio where it continues to see healthy sales growth with improving operating leverage. We assume specialty sales to be the key driver for its US sales, with a sales CAGR of 24.7% for FY21-24e, while we assume base generic and Taro sales to stabilise at current levels. We think the outlook for India sales remains strong in view of the improving productivity of its marketing team. Post Q3, we adjust our estimates per the current outlook and this leads to a 7.3% increase in EPS estimate for FY22 (minor changes for FY23-24e EPS estimates). Our TP is Rs 1,030 (unchanged).