1 Sun Pharmaceutical Industries Ltd Event Update 23 rd March, 2018
Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 India Equity Institutional Research II Event Update II 23 rd March, 2018 2 CMP INR 508 Target INR 633 Potential Upside 25% Market Cap (INR Mn) 1,210,938 Recommendation BUY Sector Pharma USFDA approval of ILUMYA (tildrakizumab) for the treatment of moderate-to-severe plaque psoriasis Sunpharma has received USFDA approval for tildrakizumab which was originally developed by US based company Merck and later in 2014, Sunpharma acquired the worldwide rights from Merck for USD 80 mn. Sunpharma is entitled to pay to Merck undisclosed payments associated with regulatory (including product approval) and sales milestones as well as tiered royalties ranging from mid-single digit through teen percentage rates on sales. This was a remarkable achievement for SUN and a first step towards development of its innovative pipeline Following are the key highlights: o Psoriasis is an autoimmune disorder which has a market size of USD 6 bn in the US and is growing in single digit. There are various treatment options available in the market and but none of them offers a cure. Sunpharma s molecule will be ninth biologic to be approved on US markets. o For US region Sunpharma is entitled to pay to Merck undisclosed payments associated with regulatory (including product approval) and sales milestones as well as tiered royalties ranging from mid-single digit through teen percentage rates on sales. o For European region Sunpharma had entered into entered into a licensing agreement with Almirall for development and commercialisation of the drug. Almirall will pay Sun Pharma an initial upfront payment of US $50 million and Sun Pharma will be eligible to receive development and regulatory milestone payments along with sales milestone payments and royalties. o o We expect the peak sales of Tildrakizumab to be around USD 300 mn in 2022 and we assume the market share for Tildra to be 9%. As the psoriasis market is already crowded we believe that the company has to sell the drugs at a lower price than its competitors in order to gain a fair market share. The clinical studies of Tildra vs is asfollows: Efficacy Primary Endpoint at Week 12 in Tildrakizumab (ILUMYA) resurface 1 Study resurface 2 Study (NCT01722331) (NCT01729754) ILUMYA ILUMYA 100 mg 100 mg n=309 n=154 n=307 n=156 PGA of "clear" (0) or "minimal" (1) 179 (58%) 11 (7%) 168 (55%) 7 (4%) PASI 75 197 (64%) 9 (6%) 188 (61%) 9 (6%) PASI 90 35% 3% 39% 1% PASI 100 14% 1% 12% 0% Efficacy Primary Endpoint at Week 12 in Secukinumab () IGA of "clear" or utmost clear (N=245) n (%) (N=327) n (%) 300 mg 150 mg (N=245) (N=248) (N=245) (N=248) 160 (65%) 6 (2%) 174 (71%) 6 (2%) PASI 75 response 200 (82%) 11 (4%) 125 (51%) 11 (4%) PASI 90 (52 Weeks) 76.20% 60.60% - - PASI 100 45.90% 35.80% - - The Psoriasis Area and Severity Index (PASI) is a validated measure used frequently in clinical trials for psoriasis treatments to determine the severity of psoriasis. In the above study, PASI 75 score represents a 75% improvement from baseline in PASI score and is considered to be a clinically meaningful endpoint. For Tildra the PASI 75 score is 64% as compared to the placebo (benchmark studies) which is at 6%. But when we compare these studies from the competitor, then have a better efficcacy results. The PASI score of in PASI 75 is 65% vs 64% in tildrakizumab. But at higher scores of PASI 90 stands at superior level of 76% vs 35% in tildrakizumab. Overall, we believe that the Tildrakizumab has a mediocre level efficacy than its competitor which will make a tough and competitive environment for the drug. MARKET DATA Shares outs (Mn) 2399 EquityCap (INR Mn) 2399 Mkt Cap (INR Mn) 1210938 52 Wk H/L (INR) 710/433 Volume Avg (3m K) 7634.4 Face Value (INR) 1 Bloomberg Code SUNP IN SENSEX 33136 NIFTY 10155 130 100 70 40 Sunpharma Industries Sensex SHARE HOLDING PATTERN (%) Particulars Dec 17 Sep 17 Jun 17 Promoters 54.38 54.38 54.38 FIIs 17.2 18.17 19.74 DIIs 14.91 13.88 12.86 Others 13.51 13.57 13.02 Total 100 100 100
Competitive landscape for Tildrakizumab 3 Brand Name API Company Class of drug Therapy class Sales 2016 (USD mn) Approval Date secukinumab Novartis interleukin (IL)-17A mab 1,100 Jan-15 Enbrel etarnacept Amgen anti-tnf Immune Suppressant 8,875 Nov-98 Stelara Ustekinumab J&J interleukin 12 mab 3,232 Sep-09 Humira adalimumab Abbvie anti-tnf mab 16,100 Dec-02 Taltz ixekizumab Eli Lilly interleukin (IL)-17A mab 61 Mar-16 Market share of drugs in 2017 Source: Abbvie investor presentation, Market model of Tildrakizumab Total Population 2019 2020 2021 2022 2023 US Psoriasis patients (000) 7,500 7,500 7,500 7,665 7,834 (%) Increase 0.0% 2.2% 2.2% Moderate-to-severe (%) 20% 20% 20% 20% 20% Eligible Pts (000) 1,500 1,500 1,500 1,533 1,567 US Penetration (%) 3% 5% 8% 9% 10% Patients on Tildra (000) 45 75 120 138 157 Average cost of therapy in USD 21,000 21,315 21,635 21,959 22,398 (%) Price increase 1.50% 1.50% 1.50% 2% Total US sales (USD mn) 95 160 260 303 351 Royalties to Merck in USD mn 5% 5 8 13 15 18 Total sales in USD mn 90 152 247 288 333 Total US sales in INR mn 5,683 9,613 15,612 18,219 21,103 EU Psoriasis patients (000) 14,000 14,000 14,308 14,623 (%) Increase 0.0% 2.2% 2.2% Moderate-to-severe (%) 20% 20% 20% 20% Eligible Pts (000) 2,800 2,800 2,862 2,925 US Penetration (%) 5% 7% 9% 11% Patients on Tildra (000) 140 196 258 322 Average cost of therapy in USD 21,000 21,315 21,635 21,959 (%) Price increase 1.50% 1.50% 1.50% Total EU sales (USD mn) 294 418 557 706 Total EU sales in INR mn 18,610 26,445 35,270 44,717 Royalties to Sunpharma (INR mn) 5% 931 1,322 1,764 2,236 (Assumption) Total sales for Sunpharma 10,544 16,934 19,983 23,339
Valuation: We believe that Sunpharma will start commercializing the drug post Q4 FY18 in the US markets. Due to competitive market and challenges the drug will take 2-3 years of time to reach its peak sales. We project sales of USD 95 mn in FY19 with a market share of 3%. Although the drug has lower efficacy but due to huge market size and growing patients population in psoriasis market Tildrakizumab will be able to achieve a peak sales of USD 300-350 mn in 2023. This development is priced in the near term valuations. However, over the long term we believe this to be one of the key triggers in our investment thesis. We have a BUY rating on the stock with a target price of INR 633. 4
KEY FINANCIALS Exhibit 2: Income Statement Net Sales 2,75,183 2,78,881 3,02,643 2,59,816 2,80,049 Other Operating Income 1,469 5,990 13,142 2,598 2,800 Operating Expenses 1,94,281 2,03,287 2,14,892 2,05,255 2,09,477 EBITDA 82,371 81,584 1,00,893 57,160 73,373 Depreciation 11,947 10,375 12,648 13,960 15,885 Other Income 4,508 6,583 6,232 6,792 6,929 EBIT 74,932 77,791 94,477 49,992 64,417 Interest Paid 5,790 5,232 3,998 4,203 4,893 Pre-Tax Profit 69,142 72,559 90,479 45,789 59,524 Non-Recurring Items -2,381-6,852 0-9,505 0 Pre-Tax Profit 71,523 79,410 90,479 36,284 59,524 Tax (current + deferred) 9,147 9,138 12,116 6,531 9,702 Net Profit 62,376 70,273 78,364 29,753 49,822 Minority Interests -9,363-11,126-8,819-8,827-8,836 Share of associates -126 15 99 15 20 Net Income 52,888 59,161 69,644 20,940 41,005 Source: Company, 5 Exhibit 3 : Balance Sheet Equity Share Capital 2,071 2,407 2,399 2,399 2,399 Reserves & Surplus 2,54,309 3,27,418 3,63,997 3,89,027 4,30,939 Total Shareholders Fund 2,56,381 3,29,825 3,66,397 3,91,426 4,33,338 Minority Interest 28,512 40,853 37,909 37,909 37,909 Non- current liabilties Long Term Borrowings 27,682 32,906 31,769 33,051 34,414 Deferred Tax Liabilities 985 1,028 3,148 3,148 3,148 Other LT Liabilties & Provisions 27,187 21,055 13,418 14,655 16,014 Current Liabilities Short-term Borrowings 62,279 52,061 66,549 67,031 67,519 Trade Payables 31,538 35,829 43,954 44,133 44,041 Other Current Liabilities & Provisions 55,715 41,746 50,959 51,548 52,143 Total Liabilities 4,90,279 5,55,302 6,14,102 6,42,901 6,88,526 Non- current Assets Fixed Assets 1,10,202 1,24,130 1,49,403 1,90,815 2,09,930 Non-Current Investments 5,989 11,161 9,610 9,706 9,803 Goodwill 37,010 56,347 55,362 55,362 55,362 Other Non-Current Assets 45,860 64,252 70,190 70,464 70,742 Current assets Current Investments 21,174 7,138 2,309 2,424 2,545 Trade Receivables 53,123 67,757 72,026 65,488 69,053 Inventories 56,680 64,225 68,328 68,406 67,672 Cash & Bank Balances 1,09,980 80,751 86,628 78,053 99,191 Short Term Loans & Advances 21,933 10,716 10,191 10,395 10,603 Other Current Assets 28,329 68,826 90,055 91,789 93,624 Total Assets 4,90,279 5,55,303 6,14,102 6,42,901 6,88,526 Source: Company,
Exhibit 4: Cash flow statement 6 PBT 64,029 65,707 90,479 36,284 59,524 Depreciation 11,947 10,375 12,648 13,960 15,885 Change in Working Capital 1,796 2,468-4,092 6,254-3,291 Other items -21615-11691 -28212-2328 -4810 Cash flow from operations 56,158 66,859 70,823 54,169 67,308 Proceeds from sale of fixed assets -23,419-34,035-36,929 0 0 Payments for purchase of property, plant and equipment 501 706 1025-55371 -35000 Other Investing Activities -5740-10387 -6312-212 -218 Cash flow from investing -28,657-43,716-42,216-55,583-35,218 Proceeds from borrowings 79,184 82,945 53,640 1,765 1,850 Repayment of borrowings -96,645-90,765-45,268 0 0 Finance costs (includes borrowing costs capitalised) -3504-3014 -3338-4203 -4893 Dividend paid -3,105-7,217-2,399-4,723-7,909 Others 12,204-835 -25,488 204 0 Cash flow from financing -11,865-18,885-22,854-6,958-10,952 Net increase in cash and cash equivalents 15,635 4,258 5,753-8,371 21,138 Opening Cash Balance 43,587 72,856 80,317 86,424 78,053 Effect of exchange differences on restatement of foreign currency cash and cash equivalents 1,208 4,225 355 0 0 Pursuant to the Scheme of Amalgamation 12,426 0 0 0 0 Closing Cash Balance 72,856 81,338 86,424 78,053 99,191 Source: Company, Exhibit 5: Ratio Analysis EPS 26.50 23.51 32.66 12.40 20.77 CEPS 21.92 18.89 29.03 8.73 17.09 BVPS 123.71 137.05 152.71 163.14 180.61 DPS 3.49 1.00 3.50 1.86 3.11 Valuation (x) P/E 41.5 51.1 15.3 46.8 27.9 P/BV 8.9 8.8 3.3 3.6 3.2 EV/EBITDA 28.36 35.45 12.01 24.73 19.00 Return ratio (%) EBIDTA Margin 28.9% 29.3% 33.3% 22.0% 26.2% PAT Margin 19.9% 20.3% 25.9% 11.5% 17.8% RoE 24.9% 19.3% 22.5% 7.9% 12.1% RoCE 19.9% 16.7% 19.5% 9.0% 11.0% Leverage Ratios (x) Long Term D/E 0.35 0.26 0.27 0.26 0.24 Net Debt/Equity -0.08 0.01 0.03 0.06 0.01 Debt/EBITDA 1.13 1.04 0.97 1.75 1.39 Interest Coverage 12 14 22 10 12 Current ratio 1.9 2.3 2.0 1.9 2.1 Growth Ratios (%) Income growth 72% 1% 9% -14% 8% EBITDA growth 10.7% 2.4% 23.7% -43.3% 28.4% PAT growth 39% 3% 39% -62% 67% Turnover Ratios Asset Turnover (x) 1.88 2.11 2.11 1.52 1.47 Inventory Days 307 370 307 310 315 Debtors Days 70 89 87 92 90 Source: Company,
7. Date CMP (INR) TP (INR) Recommendation 22-Mar-18 508 633 BUY 15-Feb-18 572 633 ACCUMULATE 15-Nov-17 513 613 BUY 14-Aug-17 450 550 BUY 15-Feb-17 623 930 BUY 11-Nov-16 667 940 BUY 16-Aug-16 797 940 BUY 01-Jun-16 755 885 BUY 15-Feb-16 847 971 BUY 12-Aug-15 843 910 ACCUMULATE 21-Jul-15 805 910 ACCUMULATE 8-Jul-15 879 991 ACCUMULATE 30-May-15 966 991 HOLD 9-April-15 1152 1200 HOLD 16-Feb-15 939 991 ACCUMULATE Rating Legend Our Rating Upside Buy More than 15% Accumulate 5% - 15% Hold 0 5% Reduce -5% 0 Sell Less than -5% CERTIFICATION: We, Vaibhav Chowdhry (B.Com, MBA), research analyst and Dhara Patwa (BBA,MBA), research associate, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. 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