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Domestic Formulation / US (ex-Taro) on steady footing

Enhanced portfolio / Newer markets to drive specialty sales

* Sun Pharma (SUNP) delivered yet another robust quarterly performance, with the beat on margins led by Domestic Formulation (DF) / Emerging Markets (EM) and sustained momentum in global specialty sales.

* We raise our earnings estimate by 7%/3% for FY22E/FY23E, factoring in a) a continued ramp-up in the Ilumya-led Specialty portfolio, b) faster growth in non-COVID, Chronic therapy sales in DF, c) superior traction in Emerging Markets, and d) deferred R&D spending on specialty clinical trials. We continue to value SUNP at 25x 12M forward earnings to arrive at Target Price of INR970.

* We remain positive on SUNP’s a) increasing portfolio offerings in the Specialty segment, b) market share gains in the Branded Generics segment, and c) a healthy and steady pace of launches in US Generics (ex-Taro). Maintain Buy.

DF, EMs drive performance for the quarter, while API proves a drag

* Adjusted for milestone payments amounting to USD10m on two specialty products, SUNP’s 2QFY22 sales were up 12% YoY to INR95b (our est.: INR92.7b).

* DF sales grew 26% YoY to INR32b (33% of sales), EM sales were up 16% YoY to USD243m (19% of sales), and US sales grew 8% YoY to USD351m (28% of sales). ROW sales were up 5% YoY to USD188m (15% of sales). API sales declined 15% YoY to INR4.4b.

* The gross margin for the quarter was down 120bps YoY to 73.4%. However, it improved 80bp QoQ on a) a lower sales contribution from COVID products in DF and b) better growth in Emerging Markets.

* The EBITDA margin expanded 80bps YoY to 27% (our est.: 25.2%), led by lower employee/R&D expenses (-120bps/-150bp YoY as a % of sales), partially offset by higher other expenses (+60bp YoY as % of sales).

* EBITDA was up 16% YoY to INR25.6b (our est.: INR23.3b).

* PAT grew at a higher rate of 25% YoY to INR21b (our est.: INR17.8b).

* 1HFY22 sales/EBITDA/PAT grew 17%/27%/31% to INR192b/INR53b/INR40b.

Highlights from management commentary

* Specialty revenue came in at USD157m, including USD10m in milestone payments for two products. Ilumya/Cequa grew 70%/100% YoY on a 12M basis.

* The marginal decline in Levulan YoY was attributable to temporary supply disruption.

* Doctors’ visits are still lower v/s pre-COVID levels.

* SUNP launched Winlevi in the US. The initial focus would be on detailing Winlevi to the doctors. DTC-related spending, if at all, would happen only six months after the launch.

* The R&D decline YoY was due to the spillover of some R&D expenses to the coming quarters. Cost of R&D is a function of the ability to enroll new patients and commence operations at new clinical sites. Patient recruitments for trials are slow due to COVID and would gain momentum as the situation improves.

Valuation and view

* We raise our earnings estimate by 7%/3% for FY22E/FY23E, factoring in a) a continued ramp-up in specialty sales in the US, including the newly launched Winlevi, b) the strong revival of non-COVID sales in the DF segment, c) increasing product offerings / gains in critical mass in Emerging Markets sales, and d) the postponement of R&D expenses.

* Accordingly, we raise our Target Price to INR970 on a 25x 12M forward earnings basis.

* We remain positive on SUNP on a) a burgeoning global Specialty portfolio / Branded Generics across geographies and b) a robust ANDA pipeline to sustain the US Generics business despite severe price erosion. We maintain our Buy rating.

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