Sun Pharma: Taro provides multiple levers:: JM Financial

Visit http://indiaer.blogspot.com/ for complete details �� ��


Taro provides multiple levers
􀂄 Base profits in-line with expectation: Sun Pharma reported 2Q11 net profit
at `5.0bn including one-off income from recognition of residual sales (c.4
days) of generic Eloxatin during the quarter. Excluding this opportunity,
estimated adjusted net profit at `3.95bn appears slightly higher than JMFe of
`3.6bn. Sun also consolidated Taro Pharma starting Sept 21, 2010 on a prorata
basis. While we estimate c.$8mn impact on sales, the impact on
bottomline is not significant. Adj EBIDTA at `3.6bn is in-line with JMFe. Raw
material as % to sales at 27.7% (JMFe: 23.0%; 2Q10:23.1%) was negatively
impacted by product mix and forex movement. Net sales at `13.7bn, up 27%
YoY, are higher than expectations mainly due US formulations driven by oneoff
oxaliplatin sales and US launches like venlafaxine XR.


􀂄 US formulations lead growth; guidance upgraded to 35%, mainly on Taro:
Domestic formulations grew 36% YoY to `6.4bn, higher than JMFe of `6.1bn.
Adjusted for lower base effect, domestic formulation grew 27%. Management
expects the business to grow at mid-high teens going forward. Sun launched
11 new products in India. It maintained market share at 3.7% (source: ORGIMS)
with five leading therapies continuing to contribute c.70% to sales. In
CNS it grew faster than market, while in others it grew in-line. Caraco
reported $98mn sales against our expectation of $60mn. The difference is
mainly due to residual sales of oxaliplatin and higher sales from generic
Exelon, Wellbutrin, Effexor-XR, Flomax and Optivar. Caraco sales for 2H11 are
expected to be lower given the lack of one-offs, which had a positive impact
on 1H11. Sun filed 2 ANDAS in 2Q11. Cumulative 146 ANDAs await approval,
including 27 from Taro, 33 from Caraco and 86 from Sun. The company has
upgraded sales guidance to 35% (from 18-20%) primarily due to consolidation
of Taro business.

􀂄 We introduce FY13E EPS at `135; maintain BUY: We increase FY11/12E EPS
by 20%/29% as we consolidate Taro and increase US sales. We have assumed
some benefit of Taro synergies in our model. We roll–forward to Dec’11 with
a revised target price of `2,660 and value Sun at 20x Dec’12E EPS. While there
is a risk of Taro sales declining due to competition on some products, we
think Sun has enough levers to manage the transition. Further, PEx will
sustain for some time, as a large part of profit is from brands. Maintain BUY.