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Sun Pharmaceuticals (SUNP)
Pharmaceuticals
All the ducks in a row. Sun Pharma’s business outlook, in our view, has undergone a
substantial improvement following favorable outcome on key catalysts. We are upgrading our
earning estimates and target prices following clarity on (1) Taro acquisition and clearing of all
outstanding legal issues, and (2) favorable unfolding of the Taxotere opportunity. We raise our
FY2012E revenue and EPS estimates by 28% and 21%, respectively. We upgrade our
recommendation to an BUY with a revised price target of Rs2,410.
Taro: A new growth driver
After a protracted legal battle, Sun has acquired a controlling stake in Taro. We are positive on the
acquisition given the distressed valuations at which it has been acquired and a niche drug portfolio
which Sun gets access to. Without taking into account the medium-long term synergistic benefits
of an accelerated entry into dermatological segment and an enhanced distribution network in the
US, Taro will add 9.5 bn and 20 bn to Sun’s topline for FY2011E and FY2012E, respectively.
Taxotere: Underlines the quality of the pipeline
Sun has one of the most impressive Oncology filings pipelines in the US market. In the next 12-18
months, we see several niche opportunities for Sun in the US market. We refrain from building
explicitly into estimates the opportunities for which the regulatory/legal pathway is not clear.
However, post the lower US Court ruling invalidating the patent on Taxotere and Hospira
announcing expected FDA label approval anytime, we believe that Sun as well as other generic
filers have a good chance of monetizing this opportunity. We believe that the earliest Sun could
launch the drug is in Q1FY12E, and it could earn revenues of US$53 mn (15% market share,
65% price erosion) and PAT of US$34 mn in FY2012E.
Raise price target to Rs2,410, premium valuations to stay
Sun has consistently commanded a 25-35% premium to the sector average. It still has one of the
best product pipelines given the robust outlook on all business segments and best-in-class
operational metrics, we believe this premium will sustain. We value Sun at (1) 22 X FY2012E core
EPS ex-interest income, (2) cash/share of Rs247, and (3) DCF value of Para IV challenges at Rs4.
Catalysts are (1) resumption of production at Caraco plant and (2) favorable verdict on generic
Eloxatin appeal filed by SUNP, and (3) launch of generic Taxotere by Hospira.
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