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Bolder and bigger bets ahead?

Sun’s annual operating cash flows of USD 1bn+ and potential access to Taro’s rich cash reserves (if the offer sails through) creates room for bolder and bigger bets (such as Concert), in our view. The key focus area is derma and eye-care in the US. We expect Sun’s specialty sales to sustain double-digit growth momentum given Ilumya’s upward trajectory and Deuruxolitinib launch likely next fiscal. Regulatory headwinds dented US generic sales and overall margins, which were partly mitigated by gRevlimid and favourable US dynamics. The Street seems to be underappreciating Sun’s potential in generics – it has a robust pipeline and resolution of site issues could be a key positive trigger. Sun’s India field force expansion and new launches/initiatives will continue to drive IPM outperformance. Given the robust specialty outlook, domestic leadership, strong cash position and risk-appetite for large M&As, we retain SUNP as our ‘top pick’ in the sector and reiterate BUY.

? Global specialty growth to sustain momentum: Deuruxolitinib approval is a key near-term trigger. We expect it to rapidly scale up in the newly evolving Alopecia Areata market. The IL-23 shift in PsO and PsA is becoming increasingly visible as global peers also signal a positive commentary – this reaffirms our long-term growth thesis for Ilumya. The biosimilars of Humira, Stelara, etc. may not impact Ilumya’s growth significantly. Levulan’s 2H skew and Bromsite’s Cigna formulary win could be immediate revenue drivers. Ilumetri’s addition to China’s National Reimbursement Drug List w.e.f. 1 st Jan’24 (outlicensed to CMS in Jun’19) could incrementally yield milestone/ royalty benefits. We expect global specialty sales to deliver double-digit CAGR over FY23-26 and believe that it has achieved breakeven. Nidlegy, which recently completed Ph III studies in Europe, demonstrated positive data for skin cancer (not fully factored in to Street estimates).

? gRevlimid partly mitigates regulatory woes: SUNP’s specialty growth and gRevlimid contribution w.e.f. 4Q has mitigated the impact of Halol/ Mohali. Any resolution of site issues is a key positive. The Street seems to be underappreciating Sun’s generic pipeline and execution capabilities.

? India dominance continues: Sun’s domestic leadership is unassailable - the company continues to guide for IPM-beating growth. The company continues to invest in field force expansion and new products/ initiatives, despite being a high EBITDAM and high cash flow generating business segment. In the last few quarters, its growth was sluggish partly due to lower anti-diabetic growth. A large part of the anti-diabetic growth was impacted by Istamet (sitagliptin patent expiry), which is now in the base.

? Bold M&As cannot be ruled out: Sun’s balance sheet strength is remarkable – it has net cash of USD 1.9bn (USD 660mn ex-Taro). Potential access to Taro’s rich cash reserves (post minority buyout) will increase the risk appetite for more bolt-on acquisitions/deals. In addition to existing cash reserves, USD 1bn+ annual operating cash inflows create headroom for big-ticket M&A, in our view. These investments are likely to be in specialty assets in derma and eye-care segments in the US.

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