Product Specific Price Erosion in US Markets – Sun Pharma

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the red at 17,560 (-1.2%). Among the sectoral indices IT (-2.1%), REALTY (-1.7%), and FINANCIAL SERVICES (-1.4%) were top losers, and AUTO (+0.4%) and CONSUMER DURABLES (+0.1%) were sectoral gainers. HEROMOTOCO (+2.3%), BAJAJ-AUTO (+2.1%) and DIVISLAB (+0.9%) were the top gainers. HDFC (-3.5%), ONGC (-3.0%), and SBILIFE (-2.9%) were among the top losers.

Excerpts from an interview of Mr. CS Muralidharan, CFO of Sun Pharma, with CNBC-TV18 dated 02^nd February 2022:

• The government’s focus on healthcare initiatives and push for modernisation in the Union Budget 2022 bodes well for the industry, the incentive for manufacturers is something to look for considering the medium-term horizon.
• US Specialty Revenues for 9MFY2022 exceeded full-year FY2021 Revenues, the growth in revenues was fuelled by contribution from all the products. Winlevi was recently launched in the US in November 2022 is showing good traction.
• The company is on a very good footing now because they have been focusing on increasing their prescription of core products which has helped the company record good growth in the global specialty business.
• The company is now increasing its geographical presence across the globe as a part of the strategy to leverage its pipeline across global markets, it recently launched its Derma-Specialty products Illumya and Cequa in Canada which is seeing good traction.
• Price Erosion in the US has been a product-specific issue for the company as compared to its other peers which have seen pricing erosion across the board. The company has seen pricing erosion in the ex-Taro generic business but it has managed to control the same by leveraging new launches and efficient supply chain management.
• Global uncertainty around COVID-19, especially the caseload in the US has impacted the company’s ability to give guidance over the medium term. The company has plans to continue its growth momentum by focusing on specialty revenues and Indian business and the rest of the world emerging markets.
• EBITDA margins are seeing some pressures due to rising costs. However, the company has reiterated that margins will say stable due to increased operational efficiencies and cost-saving measures.
• Despite strong competitive pressures, the company has consistently managed to improve its market share in the domestic business and outperform the industry growth by a large margin.

Asset Multiplier comments:

• US Generic Business has been seeing competitive pricing pressures for all pharma manufacturers. Sun Pharma has effectively managed to mitigate pricing pressures due to prudent policies.
• Domestic India and the Rest of the World Emerging Market Business has seen good traction in the past few quarters, Sun Pharma can leverage its presence to unlock the next stage of the growth cycle in these markets.

Consensus Estimate: (Source: Market screener website)

• The closing price of Sun Pharma was ₹ 885/- as of 03-February-2022.  It traded at 28x/25x/22x the consensus Earnings per share estimate of ₹ 32/35/40/- for FY22E/FY23E/FY24E respectively.
• The consensus average target price is ₹ 972/- which implies a PE multiple of 24x on FY24E EPS of ₹ 40/-.

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