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Launched g-Revlimid in 4QFY23; specialty sales strengthen further

* Sun Pharmaceutical and Industries (SUNP) delivered operational miss for 4QFY23 performance (on ex-milestone income basis), led by higher-thanexpected operational cost. There was a sharp uptick in gross margin, (YoY/QoQ) due to increased share of higher margin products. However, this benefit was offset to some extent due to increased promotional spent in the branded segment.

* We reduce our earnings estimate by 4% each for FY24/FY25 to factor in a) elevated sales/distribution cost, and b) higher R&D spent related to specialty products. We continue to value SUNP at 25x 12M forward earnings to arrive at a price target of INR1,160.

* SUNP remains in good stead to scale up business related to specialty portfolio. It is also making efforts to introduce new products and develop existing products for alternate indications. While higher R&D spent may affect near-term margins, it would strengthen SUNP’s positioning in innovative products offerings on successful clinical outcome. Niche launches such as like that of g-Revlimid would enable better sales/profitability prospects in the US generics segment. Sustained strong brand franchise/enhanced marketing efforts would also drive better-than-industry growth in the branded generics segment. We reiterate our BUY rating on the stock.

Higher opex outweighed product mix benefit for the quarter

* There was a one-time milestone receipt of USD6.8m for 4QFY23. Adjusting for the same, SUNP’s 4QFY23 sales were up 13.7% YoY to INR107b (v/s our est: INR112b). US sales were up 10.5% YoY to USD430m (33% of sales). DF sales were up 8.7% YoY to INR33.6b (32% of sales). EM sales were up 7.5% YoY to USD221m (17% of sales). RoW sales were up 7.4% YoY to USD191m (15% of sales). Specialty sales grew 28% YoY to USD237m.

* Gross margin (GM) expanded 600bp YoY to 78.9%, on better product mix.

* EBITDA margin expanded 150bp YoY to 24.1% (our estimate: 25.8%), led by better GMs. However, some of this benefit was offset by higher expenses (other expense/staff cost up 370bp YoY/40bp YoY as % of sales). R&D cost was also up 50bp YoY as % of sales.

* EBITDA was up 21% YoY to INR25.6b (our est: INR29b).

* Adjusted PAT grew at a higher rate of 33.6% YoY to INR21b (our est: INR21b), due to higher ‘other income’.

* In FY23, the Revenue/EBITDA/PAT were up by 12.4%/11%/14% to reach INR431b/110b/86b.

Highlights from the management commentary

* SUNP guided for high single-digit YoY growth in revenue for FY24.

* SUNP provided guidance that their R&D expenditure for FY24 is expected to be 7-8% of sales. This planned increase in spending would primarily focus on developing additional indications for Deuruxotinib and Illumya, as well as conducting additional study on GLP-1

* SUNP is conducting a study on a letter received from USFDA on Deuruxotinib. They are evaluating the filing for both the 8mg and 12mg strengths of the medication.

* The cost base for specialty business has not changed much in FY23 v/s FY22.

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