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Sun surprised the Street positively, yet again. Excluding milestone income (USD 20mn) Global specialty sales came in at USD 276mn, up USD 36mn QoQ. This was primarily led by Ilumya, Cequa and Levulan. Among geographical segments, US grew ahead of estimates, India was in line and EM/RoW disappointed on account of weaker currency. EBITDA margin of ~28% was partly driven by milestone income and forex gain adjusting for this margin was 26.1%. Reported PAT was INR 25bn, up 17% YoY (6% beat). Notably, gRevlimid contribution was lower this time around. 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 in the specialty segment (such as Concert), in our view. The key focus area remains 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. Also, the Street seems to be underappreciating Sun’s potential in generics – it has a robust pipeline and resolution of site issues could be a positive trigger. In India, Sun’s 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 assume coverage with BUY and increase our multiple to 30x (vs. 28x earlier) to arrive at a Dec’24 TP of INR 1,580.

* Specialty growth sustains strong momentum: Global specialty sales was USD 296mn (including USD 20mn milestone) and grew 24% YoY (ex-milestone) driven by Ilumya, Cequa and Levulan. 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. Ilumetri’s addition to China’s National Reimbursement Drug List w.e.f. 1st Jan’24 (out-licensed to CMS in Jun’19) could incrementally yield milestone/ royalty benefits. Levulan’s 2H skew and Bromsite’s Cigna formulary win could be immediate revenue drivers. 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 into Street estimates).

* US regulatory challenges overshadowed by specialty/ gRevlimid: US business ex-Taro grew 15% YoY to INR 31.6bn (5% beat) with minimal contribution from gRevlimid. SUNP’s specialty growth and gRevlimid contribution w.e.f. 4Q23 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. The company launched three products (ex-Taro) during the quarter

* India growth intact: SUNP maintained its guidance of growing in line or ahead of the IPM (9M growth ~9%) for FY24. India revenue grew 11% YoY to INR 37.8bn (1% beat). SUNP launched 28 new products in India during the quarter. The company believes it can grow in line/ ahead of the IPM and we believe 10-12% growth is achievable over the next few years. EM was broadly flat YoY (12% miss) at INR 23.5bn and was impacted by adverse currency movements while RoW grew 14% YoY to INR 17.8bn (2% beat); however, excluding milestone income, growth was tepid at 3% YoY. API business declined 10% YoY to INR 4.7bn (14% miss).

* 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

* Key financials: Sun’s Revenue/EBITDA/Adj. PAT of INR 123.8bn/ 34.8bn/ 25.9bn grew +10%/+16%/+20% YoY and were in line/ +6%/ +9% vs. our estimates and in line/ +5%/ +7% vs. consensus estimates Gross margin improved 280bps YoY to ~77.9% (JMFe: 76.9%), primarily due to change in product mix, contribution of higher specialty sales and milestone income of USD 20mn. EBITDA margin improved 140bps YoY to 28.1% (JMFe: 26.3%); however, this was partly driven by milestone income and forex gain, adjusted margin was 26.1%. Forex gain for the quarter stood at INR 1.2bn vs. INR 31mn (loss) in 2Q23. R&D expenses stood at INR 8.2bn (6.8% of sales) of which global specialty constituted ~39%

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