Sun Pharma: Sustained focus on innovation

24 Aug 2023 , 10:54 AM

Recommendation: Buy; Target Price: Rs 1340

 

FY23 was a robust year for Sun Pharma, with the Global Specialty business growing strongly at 29% led by Ilumya, Winlevi and Cequa. Sun’s FY23 annual report highlights its sustained focus on innovation to further increase the revenue share of the fast growing Global Specialty business, by scaling up existing products through additional indications (Psoriatic Arthritis) and geographic expansion into new markets (China). While Sun is banking on potential approval of Deuruxo to further strengthen its Specialty derma portfolio, analysts of IIFL Capital Services note that Deuruxo has faced multiple setbacks in recent times including the loss of patent litigation on the COM patent and Deuruxo’s launch could get delayed to mid-2027. Nonetheless, analysts of IIFL Capital Services expect Sun’s Specialty sales to grow 14% Cagr, which along with 10% Cagr in India/EM/RoW business, should drive 13% base biz EPS Cagr over FY23-26. Sun remains analysts of IIFL Capital Services top pick in large-cap pharma. Their TP of Rs1,340 implies 19% upside. 

Forecast 14% Cagr in Specialty sales over FY23-26: 

Specialty growth in FY23 was led by Ilumya, Winlevi and Cequa, as Ilumya/Cequa’s US prescription volumes grew 41/57% while Winlevi’s volumes were up ~2x in FY23 (base effect). Although Ilumya’s P-3 trials for PsA indication have been delayed over the past 2 years, Sun has taken efforts to improve study enrolment this year. Analysts of IIFL Capital Services expect Ilumya’s revenue to grow at 10% Cagr from USD477mn in FY23 to USD630mn in FY26, driven by the potential approval for PsA and entry into new markets like China. 

Focus on productivity improvement in India biz: 

With two rounds of field-force expansion undertaken over the past 3 years, Sun’s India sales rep strength has increased 30% over FY20-23, which has enabled it to accelerate new product launch momentum & drive 7-8% volume Cagr over the past 2 years. With the expansion of the rep team now largely over, analysts of IIFL Capital Services expect Sun’s India PCMP to grow at 8-10% Cagr from current levels of Rs8.9lakhs pm. SPLL, the subsidiary accounting for 70% of Sun’s India business, has consistently maintained Ebitda margins above 50%. 

Concert-acquisition added Rs50bn of intangibles/goodwill to Sun’s BS in FY23, which impacted return ratios by 100-130bps in FY23. Excl. Concert, RoE/RoIC (post-tax) improved to 17.5/21%. While higher WCap and capex impacted FCF in FY23, analysts of IIFL Capital Services expect FCF generation to improve to USD900-1,200mn pa over FY24-26, driven by robust double-digit growth in Specialty/India business and cashflows from the Revlimid opportunity.