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`Specialty` way of driving growth prospects

* In this note, we explored the specialty pipeline of SUNP, examining products under development, the commercialized portfolio, and the competitive dynamics within each segment.

* The overall R&D expenditure is expected to increase by 33% YoY in FY24 and maintain an 18% CAGR over FY24-26 to support clinical development of certain assets. Despite some delays in the clinical trial processes of Ilumya (additional indication), MM-II, and GL0034, the innovative/discovery pipeline continues to be the most promising within the India listed space.

* SUNP has consistently outperformed the industry in the domestic formulation (DF) segment for five years now. The growth is largely driven by better volume off-take. SUNP has been aggressive in new launches as well. However, these efforts have not yet translated into improved growth prospects.

* Despite regulatory issues at its key sites Halol/Mohali/Dadra and ongoing price erosion, SUNP has been able to sustain the sales run-rate of US generics segment on the back of new launches.

* We are factoring 19% earnings CAGR over FY24-26 on the back of 12%/13% sales CAGR in DF/EMs, 18% sales CAGR in specialty portfolio, and 18% CAGR in R&D spent. We value SUNP at 30x 12M forward earnings to arrive at a PT of INR1,870. We remain positive on SUNP on the back of a) building robust brand franchise in developed market and b) superior execution in the DF segment. Maintain BUY.

Specialty drugs – Efforts under way to enhance portfolio

* SUNP is building an interesting specialty pipeline (under development) for addressing patient’s needs in areas of dermatology, ophthalmology, and oncodermatology.

* On the potential pipeline front, SUNP has enrolled ~950 patients for the treatment of psoriatic arthritis treatment using Ilumya in Ph-III clinical trials. However, delays in patient enrollment have extended the study completion date to Jan’26.

* Additionally, SUNP is yet to submit the study protocol for ph-II and ph-III clinical trials of GL0034 and MM-II drug, respectively.

* With filing in Europen markets in 1HCY24 and subsequent launches in other regulated markets, Nidlegy is expected to contribute to the commercial portfolio over the next 15-18M.

* The prescription trend for commercialized portfolios such as ilumya and winlevi has been robust. However, there has been a decline in the prescription trend for Cequa due to genericization of restatis.

* We anticipate specialty portfolio to register 20% CAGR over FY24-26.

Product development to reflect in high R&D expense

* SUNP has the highest R&D spend compared to the peers under our coverage on absolute basis. This is due to efforts taken toward building specialty pipeline by the company.

* Notably, SUNP’s R&D expenditure still averages at 6.3% of sales for 9MFY24, in line with the average of companies under coverage.

* Glenmark has the highest R&D spend as a % of sales, at 10.5%, compared to its peers, attributable to its investments in novel drugs.

* We anticipate that SUNP’s overall R&D expenditure will register an 18% CAGR over FY24-26, on the back of the advancement of products under clinical trials, particularly, Ilumya/MM-II/GL0034.

DF - on track to sustain superior execution

* Over the past five years, SUNP has outperformed IPM. The industry growth has been on a downtrend for the past two years, partly due to high base and partly due to weaker seasonality.

* Notably, SUNP has been able to do better-than-industry on the back of better volume off-take and strong brand franchise.

* SUNP has been aggressive in terms of new launches at an annual average rate of 91 during FY21-23. However, the pace of new launches has been lower at 46 in 9MFY24. The growth contribution from new launches has been moderate at 2% vs. 3% at industry level.

* We expect the DF business to register 12% CAGR over FY24-26, on the back of the launch of specialty drugs, in licensing opportunities, and improving MR productivity.

US generics – ANDA approval witnessed uptick in FY24

* After a decline in approval and filing pace in FY22 and FY23, there has been a revival in the approval and filing pace during 9MFY24.

* Due to regulatory issue at Halol/Mohali/Dadra plant, the new approvals would be adversely impacted. Accordingly, we expect SUNP complex launches to offset price erosion impact on the base portfolio and maintain stable US generics sales over FY24-26.

Reiterate BUY

* We expect 19% earnings CAGR over FY24-26, led by 20%/12%/12% sales CAGR in Specialty/EM-ROW/DF segment. We expect margin expansion by 210bps over FY24-26, on the back of improved operating leverage.

* We value SUNP at 30x 12M forward earnings to arrive at a price target of INR1,870. We reiterate our BUY rating on the stock.

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