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NRI
Sun Pharmaceuticals Industries Ltd>
  • CMP : 1,836.0 Chg : -30.10 (-1.61%)
  • Target : 1,210.0 (16.35%)
  • Target Period : 12-18 Month

01 Feb 2023

Numbers in line despite Taro weakness, below-par India

About The Stock

Sun is the world’s fourth largest generics/specialty pharma company with 43 manufacturing sites at its disposal addressing segments like specialty products, branded generics, complex generics, pure generics and APIs.

  • With a market share of 8.6%, Sun is ranked No. 1 in domestic formulations. It enjoys leadership position in 11 specialties based on prescription
  • Revenue break-up Q3FY23: US formulation~ 31%, Indian branded~31%, Emerging markets~19%, RoW~14%, API & Others~5%
Q3FY23

Revenues were in line with our estimates.

  • Revenues grew 14% YoY to ₹ 11241 crore, driven by market share gain in India, sustained ramp-up of global specialty business and growth in Emerging Markets
  •  EBITDA increased 15.2% YoY to ₹ 3003.6 crore. EBITDA margins increased 30 bps YoY to 26.7%
  • Adjusted PAT was up 5.2% YoY to ₹ 2166 crore
What should Investors do?

Sun Pharma’s share price has grown at a CAGR of 33.55% over the past three years.

  • We maintain BUY as 1) Global specialty portfolio continues to maintain momentum, 2) Growth in India formulations from new launches and field force expansion and 3) Calibrated cost approach including R&D spend
Target Price and Valuation

Valued at ₹ 1210 i.e. 28x P/E on FY25E EPS of ₹ 43.2.

Key Triggers for future price performance
  • Higher contribution from specialty to overall revenues (from 11% in FY21 to ~13% by FY24) & sustained momentum in India branded formulations to improve product mix and margins profile as US generics slow down
  • In the US, Sun has diversified into specialty products like Ilumya, Levulan, BromSite, Cequa, Xelpros, Odomzo, Yonsa, Winlevi, etc, which has led to incremental remunerative contribution offsetting slowdown in US generics
  • Launch momentum in India (32 launches in Q2), pick-up in demand for chronic and sub-chronic segment backed by high PCPM and field expansion by 10% in FY23 to sustain growth
Alternate Stock Idea

Apart from Sun, in our healthcare coverage we also like Cipla.

  • Cipla has a long-drawn strategy of targeting four verticals viz. One-India, South Africa & EMs, US generics & specialty and lung leadership
  • BUY with target price of ₹ 1290

Key Financial Summary

Particulars FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E FY25E 2 Year CAGR (FY23E-FY25E)
Net Sales 32,837.5 33,498.1 38,654.5 4.1 43,867.1 48,814.4 53,694.1 10.6
EBITDA 6,989.8 8,491.4 10,397.7 0.6 11,851.7 13,326.3 14,658.5 11.2
EBITDA Margins (%) 21.3 25.3 26.9 - 27.0 27.3 27.3 -
Adj. Profit 4,025.6 7,210.0 7,667.1 1.9 8,381.3 9,250.5 10,371.8 11.2
Adj. EPS (|) 16.8 30.1 32.0 - 34.9 38.6 43.2 -
PE (x) 66.3 85.9 76.2 - 29.8 27.0 24.1 -
EV to EBITDA (x) 35.3 28.7 22.9 - 19.9 17.2 15.1 -
RoE (%) 8.9 15.5 16.0 - 15.2 14.7 14.4 -
RoCE (%) 10.0 14.2 18.2 - 17.2 18.1 17.8 -
- - - - - - - - -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q3FY23 Results: Better product mix with higher specialty business aid growth

  • Revenues grew 14% YoY to | 11241 crore driven by continued traction of global specialty business with market share gain in India and growth in Emerging Markets. US formulations grew 16% YoY to | 3466 crore as the growth was driven by specialty portfolio amid demand uptick from Ilumya and Winlevi among others. US ex-Taro generics also did well. Global Specialty sales (ex-milestone) came at US$222.5 million. India formulations witnessed YoY growth of 7.1% to | 3392 crore driven by new product launches and increased market share. Emerging markets witnessed YoY growth of 18.2% to | 2116 crore. RoW markets witnessed growth of 15% YoY in to | 1556 crore. APIs witnessed YoY growth of 7.2% to | 570.2 crore. Gross margins increased ~183 bps over the previous year to 75.1%. EBITDA margins expanded 30 bps YoY to 26.7%. Adjusted PAT increased 10.5% YoY to | 2262 crore
  • Sun Pharma’s Q3FY23 operational performance was better than expected I-direct estimates. The company’s performances continued to thrive on remunerative businesses of US (and Global) Specialty and domestic formulations. Overall better product mix with higher specialty business up 21.6% YoY driven by Ilumya and Winlevi aided growth during the quarter. India business continued to grow with branded portfolio, leading to increase in its market share. The managements enhanced focus on its specialist sector is reaffirmed by the most recent acquisition of Concert Pharma. With that its strategic focus on branded formulations for with calibrated R&D allocation should augur well in the near future.

Q3FY23 Earnings Conference Call highlights:

Business performance:

  • Revenue was driven by continued traction of global specialty business with market share gain in India and growth in Emerging Markets
  • Ilumya and Winlevi remained key growth drivers in the US formulations business during the quarter
  • It intends to increase specialty portfolio especially in core therapy areas like dermatology, opthalmology and oncology, which remain the key focus
  • Its formulations business benefited from vertical integration and supply chain continuity provided by the API business
  • Us generic business ex Taro declined due to shortage of shipment from Halol facility
  • Price reduction due to two in-licensed Merck drugs that were about to lose their patent protection as well as a few difficulties in the gastro business had a minor impact on the domestic business in Q3 results

Concert Pharma acquisition:

  • Sun Pharma entered into a definitive agreement to acquire Concert Pharmaceuticals Inc. for an equity consideration of $576 million. As on September 30, 2022, Concert Pharmas cash balance was at ~$150 mn.
  • The recent acquisition added late stage asset Deuroxolitinib for treating Alopecia Areata. The transaction is expected to get completed in Q1CY23.
  • Immediate priority remains to follow concerts plan to submit NDA for the lead asset to USFDA

Launches:

  • For Q3FY23, the company launched 25 new products in the Indian market
  • Launched two generic products in US on ex Taro basis during the quarter
  • In January 2023 it also announced the launch of Sezaby
  • It plans to launch dermatology assets in the US and is targeting newer markets in the coming future

R&D update:

  • R&D for specialty business was at 26% to total R&D cost during the quarter
  • Currently specialty R&D pipeline includes four molecules undergoing clinical trials
  • Its efforts in the R&D space span across both specialty and generic businesses

 

Other highlights:

  • It continues to witness good growth in chronic as well as sub chronic segment
  • The focus remains on increasing API supply for captive consumption for its key products
  • Halol shipment accounted for 3% of US exports before the site received import alert
  • There was an increase in expense due to import alert. This was primarily on account of provision related to inventory
  • Higher distribution expenses, consolidation of higher Alchemee business and R&D caused a spike in costs
  • It continues to invest in building the pipeline for various markets including the US, Emerging Markets, RoW Markets and India

Disclaimer

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