Sun Pharmaceutical Industries Ltd - Equity99

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largest generic dermatology product companies in the US -with opera�ons across Canada and Israel. In 2012, SPIL announced acquisi�ons of two US companies: Dusa Pharmaceu�cals, a dermatology device company and generic pharmaceu�cal company, and URL Pharma. In 2013, the company announced a R&D joint venture for ophthalmology with a research company, Intrexon. On 6 April 2014, SPIL announced the acquisi�on of 100% stake in Ranbaxy Laboratories, in an all-value transac�on valued at US$4bn. A�er this acquisi�on, SPIL became the largest pharmaceu�cal company in India, the largest Indian pharmaceu�cal company in the US, and the fi�h-largest generic company worldwide.

Sun Pharmaceutical Industries Ltd

Fundamental Research Report

BUY

Date : 08-06-2020

Company Background:

Sun Pharmaceu�cal Industries Limited (SPIL) is an Indian mul�na�onal pharmaceu�cal company headquartered in Mumbai, Maharashtra. It was established by Mr. Dilip Shanghvi in Vapi, Gujarat, to treat five psychiatry ailments. The company manufactures and sells pharmaceu-�cal formula�ons and ac�ve pharmaceu�cal ingredients (APIs) primar-ily in India and the US.The company offers formula�ons in various therapeu�c areas such as cardiology, psychiatry, neurology, gastroen-terology and diabetology. It also provides APIs such as warfarin, carbamazepine, etodolac, and clorazepate, as well as an�-cancer drugs, steroids, pep�des, sex hormones, and controlled substances. Over 72% of SPIL’s sales are from markets outside India, primarily in the US. The US is the single largest market, accoun�ng for about 50% turnover. Overall, formula�ons or finished dosage forms account for 93% of the turnover. Manufacturing is spread across 26 loca�ons, including plants in the US, Canada, Brazil, Mexico and Israel. In the US, the company markets a large basket of generic drugs, with a strong pipeline awai�ng approval from the USFDA.In 1998,SPIL acquired a number of respiratory brands from Natco Pharma. Other notable acquisi�ons include Milmet Labs and Gujarat Lyka Organics (1999), Pradeep Drug Company (2000), Phlox Pharma (2004), a formula�ons plant in Bryan, Ohio, and ICN, Hungary, from Valeant Pharma and Able Labs (2005), respec�vely, and Cha�em Chemicals (2008). In 2010, the company acquired a large stake in Taro Pharmaceu�cals - among the

CMP

Target (Upside)

NSE Symbol

BSE Code

Market Cap

52 WEEK High /

Low

Stock PE

Dividend Yield

Recommenda�on

Book Value

Face Value

ROCE

ROE

Sales Growth (3Yrs)

: Rs.494.25

: 15% - 20%

: SUNPHARMA

: 524715

: Rs.118,587 Cr.

: Rs.511.00 /

Rs.312.00

: Rs.29.74

: 0.61%

: BUY

: Rs.188.65

: Rs.1.00

: 11.19%

: 9.19%

: 0.67%

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Shareholding Pa�ern:

INVESTMENT RATIONALE

Ilumya has more than a fair chance to beat expecta�ons: We forecast peak sales of US$500mn to US$1,000mn for Ilumya in the US. Ilumya ramp-up is expected to be slower than other marketed biologics, primarily as SPIL is a new entrant and will take some �me for it to garner acceptance by physicians.

Biologic market con�nues to expand:There is s�ll a significant unmet need Psoriasis market has the poten�al to grow mul�-fold from the current level driven by more frequent usage of biologics. With new biologics gaining approval, there is a gradual increase in the number of pa�ents being treated with biologics every year. Currently, around 0.15mn pa�ents are treated with a biologic and in the US there are 0.7mn pa�ents who have severe pso-riasis (BSA > 10%). At an annual cost of US$36,000, the poten�al market for biologics can expand up to US$25bn. Biologics remain under-penetrated as topical and oral systemic agents remain the preferred choice of insurers and physicians. However, insurers and physicians are gradually adap�ng to the change as physician/pa�ent expecta�on on the treatment outcome is ge�ng upwardly revised with treatment outcome from new age biologics being significantly be�er than under the old systemic/topical agents that are widely used.

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Par�culars

Promoter & promoter group

Mutual funds

ICICI Pruden�al AMC

Foreign por�olio investors

Governement of Singapore

Financial ins�tu�ons/banks

Insurance Companies

LIC

Non-Ins�tu�ons

Others

No. of shares (mn)

1,304.8

232.3

81.8

356.9

15.3

20.8

166.2

142.1

0

314

% held

54.4

9.7

3.4

14.9

1.38

0.9

6.93

5.93

0

13.17

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Most drugs have a good chance to gain a fair market share as pa�ents need to switch:Psoriasis, unfortunately, is a chronic disease and pa�ents have to keep switching from one drug to another. The length of �me a pa�ent con�nues with a drug is known as drug survival. Most commonly prescribed biologic medica�ons used in the treatment of psoriasis are associated with very low drug survival based on a systema�c review of literature. The median overall drug survival for Ustekinumab, Adalimumab, Infliximab and Etanercept was 38.0, 36.5, 26.6 and 24.7 months, respec�vely. The mean annual drug survival rate for TNF inhibitors was 70%, 57%, 51%, 45% and 41% at 1, 2, 3, 4 and 5 years, respec�vely.

Efficacy is be�er/comparable to most widely used drugs for psoriasis:Based on a cross-trial comparison, efficacy of Tildrakizumb is be�er/comparable to the most widely used drugs for psoriasis - Humira, Otezla and Stelara - whose market share put together add up to around 70% of psoriasis market. This should allow Tildrakizumab a fair share of the pie. While SPIL may not have com-parable marke�ng strength as its compe�tors, it will only restrict the company’s peak poten�al and lead to some delay in ramp-up.

Biologics are used very late in the life cycle of psoriasis pa�ents:A study of pa�ent registry indicated that the median �me un�l ini�a�on of conven�onal systemic therapy was 11.0 years and the median �me un�l ini�a�on of biologic therapy was 18.9 years for all pa�ents treated from 2005 to 2015. Most pa�ents received three different conven�onal an�psoria�c systemic therapies. There is a minor trend which signals that the �me for ini�a�on of biologic therapy is ge�ng shorter as the second-half of the �me period studied showed that pa�ents were treated with only two conven�onal systemic agents before ini�a�on of a biologic therapy, while in the first-half (2005-10), pa�ents were treated with three systemic agents before ini�a�ng a biologic.

Ini�a�on of a biologic therapy significantly reduces day-care admissions:Ini�a�on of biologics treatment is associated with a significant decrease in (day care) admissions. The rate of day-care admissions stood at 17.7 per 100 follow-up years, two years before biologic ini�a�on versus 8.6 per 100 follow-up years in the first two years a�er the start of a biologic treatment.



SPIL’s base business in the US:SPIL is currently the sixth-largest generic company in the US and has a por�olio comprising 441 and 49 approved ANDAs and NDAs, respec�vely. 123 ANDAs and 6 NDAs are pending approval. Exis�ng mar-keted ANDA por�olio of SPIL in the US is more or less commodi�sed with a median compe��ve intensity of eight players per ANDA. SPIL has just 3 ANDAs where it is the only player in the market (which are all age-old ANDAs) and around 28 ANDAs where there are two or less compe�tors.

Domes�c business:SPIL dominates the market with leadership posi�on SPIL is the largest player in India with 8.2% market share. It is the market leader in chronic segment. It has top 30 brands figuring in the country’s top 300 brands. It also has the largest product offerings supported by a strong 9,200+ sales force covering more than 400,000 doctors. SPIL has a best-in-class sales field force with Rs8.2mn sales per medical repre-senta�ve or MR versus the industry average of Rs5.2mn per MR. 31% of SPIL’s revenues comes from the domes�c business and the company expects this business to grow faster than the industry. The Indian pharmaceu�cal industry is expected to post a CAGR of 9%-12% in 2018-22 to reach a size of US$26bn-US$30bn. Branded generic drugs account for nearly 80% of Indian pharmaceu�cal market in terms of sales.


Compe��ve intensity

0

1

2

3

4

>5

Median compe��ve intensity

# of por�olio drugs

3

9

16

14

11

128

8


Market share of SPIL in domes�c market:

Market share of SPIL in domes�c market:SPIL is present in 100 markets across the world. Brazil, Mexico, Russia, South Africa are some of these markets. The company has manufacturing facili�es in seven countries. It has 2,300+ sales force spread across all the markets. The company, in 2016, acquired Biosinetz to enhance its presence in Russia and it has given access to the local manufacturing facility. Pharmaceu�cal spending in emerging markets stood at around US$269.6bn in 2017. It is es�mated to post a 6%-9% CAGR over 2018-22 to touch US$345bnUS$375bn in 2022. The Russian pharmaceu�cal market is expected to grow 10%, while overall markets are supposed to grow 6%-7%. China is the largest emerging pharmaceu�cal market and is pegged for 5%-8% growth.

VALUATION

The headwinds in the US for SPIL’s generic business are easing and the specialty business is posi�oned for a ramp-up post recent approval for specialty assets – Ilumya for psoriasis and Cequa for dry eye disease.

We an�cipate a turnaround in its US business going forward as an outcome of its strategy to invest in building a specialty por�olio so as to gain immunity from steep price erosion and be able to scale up from the current level.

At CMP of 494.25, stock is trading at 30x trailing EPS which is a significant discount to historical mul�ples. We recommend a strong BUY to investors for Sun Pharma given its supremacy and market leadership across the globe, and future growth prospects.



FINANCIALS

Annual Financials

Ra�os

Quarterly Financials

Financial YearSales +Expenses +Opera�ng ProfitProfit before taxNet Profit

Mar-1527,39219,706

7,6866,4034,539

Mar-1628,48720,425

8,0626,5714,546

Mar-1731,57821,48910,089

9,0486,964

Mar-1826,48920,885

5,6053,4792,096

Mar-1929,06622,710

6,3563,8102,665

Mar-2032,83825,848

6,9905,0103,765

ROCEROEP/EP/BEV/EBITDANet debt/EquityDebtor days

FY15A-5%

-10%

NM0.362

FY16A-3%-6%

5.4NM0.388

FY17A0%

-1%

5.6NM0.3

110

FY18A5%5%

5.3NM0.3

162

FY19A8%8%

NM5.2

NM0.3

182

RevenueEBITDAMarginPBTPAT

4Q1970,44374,455105.7%11,483

-288

4Q2080,78082,872102.6%11,528

831

YoY15%11%

(311)0%

NM

3Q2080,38782,747102.9%18,983

3,276

QoQ0%0%

(35)-39%-75%



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