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Sun Pharma reported 4Q earnings ahead of JMFe after adjusting for exceptional item of INR 1.7bn. The topline benefited from strong global specialty sales of USD 244mn (incl. USD 6.8mn milestone). The gross margin in 4Q reflects lower API sales and benefits of product mix tilted towards specialty and gRevlimid. The management expects the current gross margin of ~79% to normalize in coming quarters. 4Q reflects full impact of Halol IA and IT security breach issues cushioned by gRevlimid (USD 33-37mn) launch thereby improving exTaro US generic business. gRevlimid will continue to support the US generic business in FY24/FY25. Domestic (ex-covid 10.2%) and ROW sales continue to grow in healthy double digits for FY23 and we expect the same to sustain. Domestic business is expected to further benefit from new MR additions. The management guided for high single digit revenue growth in FY24. We believe robust specialty performance, gRevlimid launch and strong domestic/EM/ROW performance will sustain double digit growth in FY24 accompanied by higher R&D costs (7-8% of sales). We remain optimistic on specialty outlook as we await Deuruxolitinib filing and Ilumya PsA trials update meanwhile we look forward to higher profitability support from the specialty segment. At CMP of INR 970, SUNP trades at 23x/20x FY24/FY25 earnings. Maintain BUY.

* Specialty growth sustains strong momentum: Global specialty business (ex- royalty payments) grew 28% YoY to USD 237mn (3% beat) driven by Ilumya, Cequa, Winlevi and Levulan. Additionally, SUNP also received USD 6.8mn in royalty payments. Ilumya sales grew a whopping 51%YoY to USD 477mn in FY23. The company is contemplating Deuruxolitinib filing as agency has halted 12mg trials. We continue to believe that Deuruxolitinib is a meaningful opportunity in the Alopecia Areata space and is more effective than peers. We expect this launch by end of FY25. Ilumya PsA trials are progressing (readout in FY24) and studies are expected to be completed in FY25. SUNP expects R&D expenses to inch up to 7-8% in FY24 as it continues to invest in both generics and specialty. Winlevi will continue to drive growth on account of higher coverage and co-pay changes.

* FY24 revenues to grow in high single digit: SUNP conservatively guided for a high singledigit growth in FY24. US business ex-Taro grew 32%YoY to INR 27.5bn (4% beat). SUNP launched 4 generic products this quarter (ex-Taro). However, there was a decline in base due to Halol Import Alert. This was offset by gRevlimid launch whose contribution was meaningful this quarter. We expect gRevlimid contribution to be in the range of USD 33- 37mn adjusted for this and ex-Taro EBITDA margins were ~25% and ~27% respectively. Mohali supplies are expected to resume batch by batch. SUNP also launched SEZABY for neonatal seizures in 4Q which is gradually ramping up. Taro’s derma portfolio has seen multiple new entrants and high erosion which has been dragging growth. We expect near-term pressures in the US due to Halol IA to be offset by gRevlimid. EM grew 18%YoY (11% miss) to INR 18.2bn while RoW grew 17%YoY to INR15.7bn (11% miss and accounts for 14.7% of total sales for the quarter. API business declined 7%YoY at INR 3.9bn (24% miss) impacted by the IT security breach issue. India revenues grew 9%YoY (ex-covid 10% YoY) to INR 33.6bn (in-line) with the chronic and sub-chronic therapies performing well. During the quarter the company launched 24 products. We expect the company to grow in-line or ahead of the IPM as field force addition delivers.

* To acquire balance shares in Taro: Sun Pharma announced the acquisitions of all the remaining shares of Taro Pharmaceuticals Industries, Israel at USD 38/share (premium of 31.2% over May 25 closing). The total consideration for balance 8.1mn shares would be c. USD 307mn. Proposed Transaction Structure: The proposal contemplates an all cash transaction to acquire all remaining stake in Taro. The company envisages the proposed transaction to be consummated in the form of a reverse triangular merger under Israeli law. Sun will incorporate a wholly owned subsidiary (SPV) and enter into a merger with Taro thereby becoming a WOS of Sun and to be de-listed from NYSE. Sun Pharma hopes to complete the proposed transaction in an expedited manner. Financial implications: At present, Taro is already being consolidated by Sun Pharma. As per FY22 Annual Report, Taro group has INR 28.3bn accumulated NCI on Sun’s books. Taro group NCI allocation during FY22 was INR 845mn which hereon will not be allocated thereby improving earnings to that extent (not meaningful overall). As on FY23, Taro had a robust cash balance of USD 1.3bn.

* Key financials: Sun’s Revenue/EBITDA/Adj. PAT of INR 109bn/ 28bn/ 21.6bn grew +16%/+20%/+30% YoY and were -4%/-1%/+4% vs. our estimates and were in-line/ - 6%/ +8% vs. consensus estimates. Gross Margin improved ~ 630bps YoY to c. 79.4% (JMFe: 73.9%), primarily due to change in product mix (launch of gRevlimid) and contribution of higher specialty sales albeit expected to normalise going forward. EBITDA margin improved 90bps YoY to 25.6% (JMFe: 24.8%). Adj. EBITDA margin (ex-Revlimid) was in-line with our expectations. Ex-Taro margins were lower at 28% (vs. 29.6%QoQ) and ex-Revlimid ex-Taro margins were ~27%. Forex loss for the quarter stood at INR 272mn vs. INR 161mn (gain) 4Q22. R&D expenses stood at INR 6.7bn of which global specialty constituted 32%. Management guides for a higher R&D expense of 7-8% for FY24, as the clinical studies for Illumya, additional studies for GLP-1 and Concert products will add to the costs. Other expenses increased due to (1) higher selling and distribution expenses; and (2) Alchemee consolidation. Reported was impacted by INR 1.7bn exceptional item pertaining to impairment and Concert acquisition costs. Net cash ex-Taro was USD 196mn.

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