Stock corner: Sun Pharma trading at 20% discount, retain buy – Jefferies

Sun announced the launch of its dry eye treatment drug Cequa. We expect it to have $70m peak sales in two years. While Restasis genericization is a risk, we believe Cequa, given its better efficacy and faster onset, could gain 10-15% market share at better pricing vs generic Restasis. We remain positive on Sun’s specialty business outlook where our doc survey indicates $300 m Ilumya peak sales. With valuations at 16x FY21 PE (20% discount to peers) we retain ‘Buy’. There are currently three approved medications for DED – Restasis, Xiidra and Cequa.

Restasis has c10% market share with annual sales of $1 bn. Restasis though could soon get genericized with multiple players awaiting approval. However, genericization of Restasis would drive increased TRx, in our view, as cost is a key hindrance for usage of prescription treatments. Novartis earlier in the year acquired Xiidra for $3.4 bn upfront and potential milestones of $1.9 bn. Xiidra in CY18 had sales of $0.4 bn. This highlights the potential market opportunity in DED.

The higher concentration allows for faster onset: per label 84 days for Cequa vs 180 days for Restasis and better efficacy. This, in our view, gives Cequa headroom even in a post generic Restasis market. We believe that Cequa could be priced at a premium to generic Restasis and achieve mid-teen market share over the medium term, led by better efficacy, faster onset time and lower side effects. We believe that Cequa can gain 15% market share at a 50% price premium, implying $ 70-80 m sales.

Our doctor survey in the US highlighted that Ilumya can achieve peak sales of $300 m. The ramp-up though is going to be slow and happen over next 12m. Ilumya’s ramp-up cannot be compared with Skyrizi, in our view, as Skyrizi is expected to have sales of $250 m in CY19 which is our expectation for Ilumya in FY23. Skyrizi peak sales are expected to be $2-3 bn.

Sun is trading at 16x FY21 PE, a 20% discount to peers. Risk reward in our view is favorable. We expect base business to see steady recovery in FY20/21. We expect specialty business to turn EBITDA positive in FY22 from $150 m EBITDA loss currently. Retain ‘Buy’.