Sun Pharmaceutical Industries (SUNP IN) - Q4FY23 Result Update - Specialty & gRevlimid drives the Q4 momentum

We reduce our FY24/FY25 earnings estimates by 4%/2%. Sun Pharma (SUNP) Q4FY23 EBIDTA was 4% above our estimate, aided by gRevlimid and higher specialty sales. Overall specialty sales, GMs continue to remain healthy while other expenses remain elevated on back of higher SG&A and R&D spends. Over last few years SUNP dependency on US generics has reduced and company’s growth is more functional on specialty, RoW and domestic pharma business that has strong growth visibility. Furthermore, acquisition of Concert Pharma provides visibility to SUNP’s specialty pipeline beyond FY25. We maintain ‘BUY’ rating at TP of Rs.1140 (Rs1175 earlier) based on 25x FY25E earnings. SUNP remains our top pick in large cap space.

• Strong revenue growth of 16% YoY: Revenue grew 16% YoY at Rs109.3bn vs our estimate of Rs106.6bn. The beat was aided by higher gRevlimid and specialty sales. Domestic formulation growth was 9%. Ex COVID growth was 10% for Q4FY23. US sales came in $430mn ($422mn in Q3FY23). There was one-time milestone income to tune of $6.8mn booked in specialty sales. Ex Taro, US sales came in at $327mn ($324mn in Q3) vs our est of $310mn. We believe that the company has booked +$35mn sales from gRevlimd in US. EM and ROW growth was strong at 18%YoY. API sales were down by 7% YoY. Specialty sales were up 6% QoQ (adj for milestone income) to $237mn.

• EBITDA beat aided by higher gRevlimid sales: EBIDTA adj for milestone came in at Rs28bn; up 30% YoY; 4% above our estimate. Adjusted GMs came in higher at 79%, up 450bps QoQ aided by high margin gRevlimid sales. R&D cost came in higher at Rs6.6bn, 6% of sales, flat QoQ. Ex R&D other expenses came in higher; up 10% QoQ. Adjusted OPM for milestone came in at 25.5%, down 50bps QoQ. Other operating income came in higher at Rs2.1bn which included PLI benefits. There was an exceptional loss of Rs2bn related to impairment charges, concert pharma acquisition.

• Key concall takeaways: (1) Strong ramp-up in global specialty business driven by Ilumya, Cequa and Winlevi. Changes in Copay program for Winlevi have aided realization. Expect Rx to pick up from Q2/Q3FY24. Specialty R&D was 32% of total R&D spends (2) Revlimid contributed significantly during the qtr. The impact of import alert of Halol unit was off-set by new launches and market share gains in Q4. Launched four generics products in US on ex-Taro basis (3) Expect to file Deuruxolitinib in H1FY24 and remain confident about efficacy of 8mg doses (4) Domestic formulation business grew by 10.2% YoY for FY23 ex-Covid, witnessed good growth across therapies in chronic and sub-chronic segment in Q4. Addition of 1000 MRs and increased productivity should aid India sales. Expect to grow in line or above IPM market (5) Other expenses increased given higher selling and distribution cost on further normalization, higher R&D cost and consolidation of Alchemee business with Taro (6) R&D investments are likely to increase and guided for 7-8% of sales in FY24. Mgmt indicated that US generic continues to remain price competitive and not see any price stabilization.