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Double-digit growth with expanding margins

SUNP reported stellar performance with highest global specialty revenue of USD 191 mn driven by Ilumya, Cequa, Odomzo and Winlevi in a seasonally weak quarter. Revenue/ EBITDA/ Adj. PAT of INR 107618 mn/ 28844 mn/ 20609 mn were +11%/+2%/+4% YoY and were +7%/+11%/+12% vs. our estimates. Overall sales growth was in healthy double digits i.e. 14% (ex-Covid). EBITDA margins increased c. 200 bps QoQ to 26.8% (+110 bps beat) amid inflationary pressures plaguing the industry, Alchemee consolidation and sales force expansion. The lower R&D spend (21% innovative) driven by trial delays will be covered in the coming quarters. The US generics business (ex-Taro) reported 24% YoY growth led by increasing market share in existing products and new launches. The US and EM businesses continued momentum despite a high Covid base. Domestic business grew 2% YoY (+13% YoY ex-Covid; +6% beat) led by healthy growth in Top 16-25 brands. API surprised positively with 16% growth (+37% beat). SUNP beats street expectations as support from domestic/specialty segments improve earnings trajectory making earnings upgrade imminent. We maintain BUY on SUNP, our top pick, at 25x 1Y forward earnings to derive a Jun’23 Price Target of INR 1130.

- Specialty business unstoppable: Global specialty sales for the quarter were the highest at USD 191 mn (+29% YoY; +3% QoQ) in a seasonally weak quarter led by Ilumya, Cequa, Odomzo and Winlevi. Management indicated that psoriatic arthritis trials have been delayed primarily due to on-going conflict in Russia-Ukraine. We believe Ilumya (PsO) alone could add c. USD 200 mn to FY23 topline. Winlevi grew 22% QoQ despite being a seasonally weak quarter for derma products. 10,000+ doctors have prescribed Winlevi at least once. The management believes there is no negative impact on Cequa (all segments combined) from competition. However, seasonality impacted Levulan the most while the clinics are yet to operate at pre-Covid levels

- All-round performance: Domestic business continues to gain market share (8.5% MS per AOICD AWACS MAT Jun’22) as it reported a 2% YoY increase (+13% ex-Covid) to INR 33.9 bn (+6% beat) driven by new launches and normalization of chronic treatments post pandemic. The company launched 22 new products during the quarter. The US business grew 16% YoY (24% ex-Taro). This was the first full quarter of Alchemee impact (Taro sales USD 157 mn increased +6% YoY/+9% QoQ). SUNP received 3 US FDA approvals and has filings of 89 ANDAs (28 tentative approvals) and 13 NDAs. SUNP launched 2 new products ex-Taro (including Pentasa in May’22). Emerging market sales were INR 18.9 bn (+18% YoY; 14% beat) growing +16% YoY on a constant currency basis whereas ROW sales increased 7% YoY to INR 14.6 bn (4% beat). API revenues reported surprise growth of 16% YoY (37% beat) at INR 5.9 bn. The company had a net cash balance of USD 2 bn at a consolidated level and USD 860 mn (ex-Taro) as on 30 Jun’22.

- Management guidance for FY23: The management guides to a high single digit to low double digit top-line growth for FY23 as all business segments are poised to grow. The management stated that the global specialty portfolio shall continue to ramp up. Then Pharmaceutical Industries 29 July 2022 JM Financial Institutional Securities Limited Page 2 management cautions against cost escalations but remains confident of price hikes offsetting the same. The R&D guidance for the year is 7-8% as clinical trials for R&D assets ramps up. As guided by management, SUNP has expanded its field force by 10% (almost 90% achieved) to enhance domestic coverage and reflected in the P&L

* Key financials:

Revenue/EBITDA/Adj. PAT of INR 107618 mn/ 28844 mn/ 20609 mn were +11%/+2%/+4% YoY and were +7%/+11%/+12% vs. our estimates. Gross Margins improved c.30 bps YoY to 73.1% (c.-30 bps miss; flat QoQ). EBITDA stood at 26.8% (+110 bps beat; JMFe: 25.7%). Forex gain for the quarter stood at INR 1456 mn vs. INR 798 mn in 1QFY22. R&D expenses stood at INR 4608 mn of which global specialty constituted 21%. The company repaid USD 254 mn debt during 9MFY22.

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