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Outlook promising on COVID drug launches

Sun Pharma is India’s top drug maker and world’s fifth largest specialty generic pharmaceutical company. The company develops, manufactures, and markets branded and generic formulations and active pharmaceutical ingredients (APIs) in India and globally.

* Q4FY21 revenue increased by 4.4% YoY, with growth led by India Formulations (+12.9% YoY) and ROW Formulations (+6.3%).

* EBITDA margin expanded 580bps to 24.4% and EBITDA rose 36.8% YoY to Rs. 2,059cr, driven by favorable product mix and efficiencies, along with low advertising and discretionary expenses. Adj. PAT was up 96.6% YoY. R&D remained stable at Rs. 557cr (~6.6% of sales).

* Outlook remains positive with new launches (COVID drugs like Remdisivir, Itolizumab and Favipiravir) and Licensing agreements signed for Molnupiravir from Merck and Baricitinib from Eli Lilly. Biosimilars, API and Emerging markets are the long-term growth catalysts for the company. We reiterate our BUY rating with revised TP of Rs. 783 based on 26x FY23E adj. EPS.

Topline fueled by specialty products

Q4FY21 revenue increased 4.4% YoY to Rs. 8,431cr, with India formulations rising to Rs. 2,671cr (+12.9% YoY). Emerging markets (+3.5% YoY) and ROW formulations (+6.3% YoY) also performed reasonably well. Meanwhile, US Formulations declined marginally (-0.7% YoY to Rs. 2,695cr) primarily due to poor performance by Taro (- 15.3% YoY to Rs. 1,480cr). External sales for API business slumped to Rs. 436cr (-9.9% YoY). However, overall outlook for API segment remains strong due to its vertical integration benefits. Global specialty business revenue rose to Rs. 14cr due to 51% YoY jump in Ilumya sales for FY2021. Market share for the quarter improved to 8.3% (vs. 8.0% in Q3FY21). However, patent expiry of Absorica will bring down market share due to competition from generics.

Margins improve on cost efficiencies

Gross margin improved ~190bps YoY to 73.4%, while EBITDA margin boosted to 24.4% (+580bps YoY). As % of sales, purchases cost, employee benefits and other expenses contributed +247bps, +55bps and +352bps YoY, respectively. These benefits were partially offset by (-574bps YoY) in costs of materials consumed as % of sales. Resultantly, EBITDA and Adj. PAT jumped to Rs. 2,059cr (+36.8% YoY) and Rs. 1,578cr (+96.6% YoY), respectively.

Key concall highlights

* R&D spend was stable at Rs. 557cr (6.6% as percentage of sales).

* During the quarter, company filed 8 ANADAs and received approval for 5. Current Pipeline includes 55 approved NDAs and 9 NDAs awaiting US FDA approval.

* In-line with company’s plans for being debt-free (excl. Taro) by FY22, USD 580mn of debt has been repaid, with outstanding net debt (excl. Taro) of USD 179mn.

Valuation

Outlook remains positive with new product launches (COVID drugs like Remdisivir, Itolizumab and Favipiravir). Additionally, licensing agreements for Molnupiravir from Merck and Baricitinib from Eli Lilly have also been signed. Biosimilars, API business and Emerging markets should act as long-term growth catalysts. Hence, we continue to be positive on the stock and reiterate our BUY rating with revised TP of Rs. 783 based on 26x FY23E adj. EPS.

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