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Buy Sun Pharmaceutical Industries Ltd For Target Rs.960

Reaping the fruits of enhanced efforts in Specialty

Superior execution/addition of MRs to improve outlook in the India business

* After having toughed out for more than three years in the US, its flagship product Ilumya is continuously ramping-up sales, with Cequa also showing good traction. This is slightly offset by generic competition in Absorica and difficulty in shifting prescriptions to Absorica LD.

* Ilumya has been able to carve out a niche for itself in the fiercely competitive Psoriasis segment. Ilumya, being a medical benefit product, does not directly compete with most drugs which fall into the Pharmacy benefits segment. Its new mechanism of action, fewer dosage, and low sideeffects also bode well for better uptake.

* While Ilumya and Winlevi contribution can drive growth in Specialty sales over the medium term, SUNP has four products under clinical trials. The risk to Cequa sales persist, with scope for genericization of peer product Restasis.

* US Generics, excluding Taro, have stabilized and are currently faring better than the industry, which is seeing high single-digit price erosion. SUNP has been able to counter the price erosion in the base business with new product launches and better supply chain management. Taro’s US sales have also stabilized QoQ, with a decrease in the intensity of price erosion in Dermatology products.

* SUNP has an unparalleled reach in Domestic Formulations (DF), with an industry-leading connect with doctors and field force strength and productivity.

* While FY15-20 sales CAGR in DF has been muted and inferior to the industry at 7.7%, SUNP has upped its effort with better performance (14.3% YoY) over the past one year. It has also outperformed relative to industry in a number of therapies in FY21 as compared to that in FY15-20.

* The addition of MRs is expected to further boost the outlook for DF over the next 2-3 years. While peers are refraining from expansion, SUNP has boosted its field force to increase its reach beyond the metros and Tier I cities. Thus, we expect new introduction/better traction in the base portfolio and increased reach to drive 13% sales CAGR in DF over FY21-23E.

* We remain positive on SUNP due to: a) investments in the global Specialty portfolio improving overall profitability, b) a robust pipeline of NDAs/ANDAs, and c) revival in the Branded Generics segment in DF, and d) incremental contribution from an expanded field force. We expect 16% earnings CAGR over FY21-23E, led by a 15%/13% revenue growth in the US/DF. We value SUNP on a 25x 12-months forward earnings basis to arrive at our TP of INR960. We maintain our Buy rating.

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