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Specialty/DF drive earnings

Leqselvi faces injunction hurdle

* Sun Pharma (SUNP) delivered better-than-expected 1QFY25 earnings, led by an improved segmental mix and lower RM costs. Lower-than-expected R&D spending led to margin improvement in 1Q. The performance was affected partly by a muted show in ROW sales.

* We raise our earnings estimates by 2% each in FY25/FY26, factoring in a) superior execution in domestic formulation (DF) segment, b) reduced R&D spending, and c) a higher tax rate. We value SUNP at 31x 12M forward earnings to arrive at a TP of INR1,980.

*  We remain positive on SUNP on the back of a) a rising contribution from specialty products through commercial traction, b) progress on development pipeline, and c) outperformance vs. the industry in branded generics. Maintain BUY.

Product mix benefit, lower R&D spending drive margin

* Sales grew 6.3% YoY to INR125b (est. INR132b). DF sales grew 16.4% YoY to INR41.4b (33% of sales). US sales were flat YoY at INR38.9b (USD466m, down 1% in CC terms; 31% of sales). EM sales grew 10% YoY to INR23.7b (19% of sales). ROW sales declined 1% YoY to INR15.8b (13% of sales).

* Gross margin expanded 200bp YoY to 78.6% for the quarter.

* EBITDA margin expanded 130bp to 28.2% (est. 24.8%) as better GM was offset by higher other expenses (up 160bp as % of sales). Employee expenses were down 80bp as % of sales.

*  Accordingly, EBITDA grew 11.2% YoY to INR35.3b ( est. INR32.7).

*  After adjusting the forex loss of INR505m, adj. PAT grew 26.1% YoY to INR28.8b (est. INR26.5b) for the quarter.

Highlights from the management commentary

* A motion seeking a preliminary injunction has been filed in a US court to prevent the launch of Leqselvi (Deuruxolotinib). SUNP intends to rigorously oppose the motion and action.

* Except Levulan, all specialty products posted growth for the quarter.

* Nidlegy is filed with EMA (EU) for treatment of locally advanced, fully resectable melanoma in the neoadjuvant setting.

* For GL0034, SUNP has completed phase-I clinical trials and would start phase-II in 2HCY24.

* SCD-044 topline data readout would be 1HCY25 compared to 2HCY24.

* R&D spending would step up in subsequent quarters, with products progressing in clinical development.

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