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Concert deal paves way to add JAK inhibitors to specialty portfolio

JAK inhibitors have potential to treat multiple skin diseases

* Sun Pharma (SUNP) adds Deuroxolitinib, a potential best-in-class JAK inhibitor, to its specialty portfolio through the acquisition of Concert Pharma Inc (CNCE).

* Deuroxolitnib has shown a better Severity of Alopecia Tool (SALT) score compared to peers, providing confidence on the potential of the product post regulatory approval.

* The deal further enhances specialty offerings by SUNP in the dermatology space.

* The development potential of Concert synergizes with marketing capabilities of SUNP, thereby aiding significant value accretion on the combined basis.

* We maintain our estimates given that the products are under development. We remain positive on SUNP, considering its effort to strengthen the specialty franchise, 2) branded generics led growth in India/emerging/ROW market, and 3) its robust ANDA pipeline for the US market. We value SUNP at 25x 12M forward earnings to arrive at a price target of INR1,200. Reiterate BUY

Deal background

* SUNP and CNCE have executed an agreement under which SUNP will acquire shares of CNCE through a tender offer for an upfront payment of USD8 per share of common stock in cash, or USD576m in equity value.

* CNCE stakeholders can receive an additional USD3.5 per share of common stock in cash, subject to Deuruxolitinib achieving certain net sales milestones within a specified period.

* The merger is expected to be completed in 1QCY23.

Deuroxolitinib – potential NDA to be filed with USFDA in 1HCY23

* Deuroxolitinib is an oral inhibitor of Janus kinases JAK1 and JAK2 for the treatment of Alopecia Areata. The USFDA has granted break-through and fast-track designation for Deuroxolitinib.

* CNCE has completed the evaluation of the efficacy and safety of Deuruxolitinib in adult patients with moderate to severe Alopecia Areata in its THRIVE-AA Phase 3 clinical program. About 42%/30% of patients achieved a SALT score ≤20 with Deuruxolitinib 12 mg/8 mg twice a day over 24 weeks of treatment. Thus, the safety profile and potential to treat moderate to severe Alopecia Areata are promising.

*CNCE intends to file NDA in 1HCY23.

* The USFDA has recently approved Eli Lilly’s baricitinib (Olumiant) in Jun’22. Pfizer’s Ritlecitinib application has been accepted by the USFDA and EMA. There are other products like Jakitinib/LH-8/ANB030/SHR0302 under different stages of clinical trial.

CNCE – pioneering use of Deuterium chemistry

* CNCE is using deuterium chemistry to discover and develop new medicines. While Deuroxoitinib is wholly owned by CNCE, it has a product pipeline under a partnership. Specifically, AVP-786 in partnership with Avanir Pharma is expected to complete phase III trials in 3QCY23. CNCE has given the worldwide right to develop and commercialize certain products (CTP354 to Cipla; CTP-499 to Processa Pharma).

* The asset purchase agreement by Vertex gave CNCE one-time receipt of USD160m (CY17) and milestone receipt of USD32m, which provides confidence on development capabilities of CNCE.

Other highlights

* CNCE has cumulatively spent USD176m on Deuruxolitinib from CY15-9MCY22.

* CNCE expects to garner more than USD162m from regulatory milestones (USD37M) and sales milestones (USD125M) and some revenue from royalties with respect to AVP-786.

Valuation and view:

* SUNP has added a potential product to its specialty pipeline through the CNCE acquisition. SUNP is already tracking USD200m per quarter sales from its specialty portfolio.

* In addition to its own portfolio under development, SUNP has used the inorganic route to strengthen its new product offering in the dermatology space.

* Moreover, SUNP continues to outperform in branded generics in India, as well as other emerging/ROW markets.

* We expect a 16% earnings CAGR over FY23-25, led by a 17%/11% sales CAGR in the US/emerging markets and RoW, aided by a 110bp margin expansion.

* We continue to value SUNP at 25x 12M forward earnings to arrive at a TP of INR1,200.

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