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In a different league for the US brand market

* Consistent marketing efforts as well as increased reach for Illumya are driving its performance in the Specialty business. It is also adding products to tide over generic competition in Absorica.

* Increased MR strength in the DF space and enhanced marketing efforts bodes well for superior growth in the Branded Generics segment.

* Taro sales declined by 15% YoY in FY21. However, steady sales for the past three quarters implies limited impact on the overall profitability of SUNP.

Marketing efforts in the Specialty business, stable Taro sales, and new launches to drive US sales growth

* After the adverse impact of the COVID-19 outbreak on the Specialty business at the start of FY21, product sales bounced back strongly to USD148m in 1QFY22 from USD78m in 1QFY21. The ongoing marketing effort for Illumya would drive incremental prescription/higher off take from existing patients and lead to higher operating leverage, driving overall profitability.

* The generic launch of another product (Absorica) in the Specialty portfolio may put some pressure on overall growth prospect over the near term for SUNP. This could be offset to some extent by the in-licensed Dermatology product Winlevi, albeit at a lower margin. SUNP can leverage its existing marketing infrastructure for Winlevi as well.

* In addition to superior execution of the existing portfolio, SUNP intends to develop Illumya for additional indication (Psoriatic Arthritis). A drop in the number of COVID-19 cases would increase the pace of recruiting patients for clinical trials.

* In the Generics segment, SUNP has 86 ANDAs pending approval. Considering: a) new launches in Generics, b) stabilizing Taro sales, and c) better traction in the Specialty portfolio, we expect 15% CAGR in US sales to USD1.8b over FY21- 23E.

DF: Core therapies recover; COVID-related products aid growth to an extent

* SUNP has recorded a 10.5% growth in the DF segment on a MAT basis in Jul’21, with a slight underperformance to IPM over the last six months, due to delayed launches of COVID-19 products v/s its peers. With a decline in COVID-19 cases in India from Jun’21, SUNP saw 17% YoY growth in Jul’21 v/s 13% for IPM.

* Based on strong brand recall, market leading presence in the Chronic category, loss of exclusivity opportunities in DF in FY22, and the expanded field force reaching optimum productivity, SUNP is well-placed to outperform the industry over the next 2-3 years. We expect 13% CAGR in India sales to INR132b over FY21-23E.

Valuation and view

* 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.

* We value SUNP at a P/E multiple of 25x to arrive at our TP of INR920. We reiterate our BUY rating.

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