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Sun Pharmaceuticals
It was Eloxatin again
Event
Sun reported 2Q FY11 numbers and held an earnings conference call.
Numbers (sales Rs13.7bn and PAT Rs5.04bn) were ahead of our
expectations, driven by high one-time Eloxatin sales in the US and strong
domestic sales.
While Sun's long-term fundamentals remain intact, we believe the current
stock price post the recent run-up after the Taro court verdict (up 25%) leaves
little valuation buffer. Ratings change to Neutral (from Outperform) with a
revised TP of Rs2,175 (previously Rs2,100).
Impact
Eloxatin spill-over drives Caraco sales upside: Caraco, Sun’s 76%-
owned US subsidiary, reported sales of US$98m in 2Q FY11, up 25% YoY
despite the absence of contribution from Protonix this quarter. This was driven
by Eloxatin sales (our estimate of US$40m) in the last four to five days of 1Q
FY11 that was booked this quarter. Given the stretched timeline, only four to
five products will be in a position to be manufactured at Caraco’s troubled
Michigan facility by end-FY12. The earlier strategy of site transfer pursued by
the company to get Caraco-owned products manufactured at a third-party site
might help to augment sales in the interim.
Home sweet indeed: Domestic formulations contributed 46% to the top line
and grew at a healthy 36% YoY (7% QoQ) to Rs6.4bn. Even after adjusting for
lower sales in 1H FY10 (due to channel stocking in 4Q FY09), domestic sales
grew an impressive 26% in 1H FY11. Chronic therapies contributed ~70% of
the top line, with Sun's market share in India at 3.7% (IMS ORG report).
Management revised guidance for FY11: Sales growth of 35% YoY (vs
20% YoY earlier), primarily on account of Taro consolidation.
Taro consolidation: Sun consolidated Taro sales beginning 21September.
Taro reported US$103m in sales for the quarter ending September, up 10%
YoY, and an operating margin of 23% vs 18% in the quarter ending
September 2009. ANDAs for 363 products have been filed across Sun
Pharma, Caraco and Taro, with 146 pending approvals.
Earnings and target price revision
We adjust FY11E/12E/13E core EPS to Rs72/100/ 116 from Rs68/84/94, driven
primarily by consolidation of Taro and a higher domestic sales assumption. We
value the base business at 22x FY12E EPS and add NPV of exclusivity-driven
products to arrive at our TP of Rs2,175 (previously Rs2,100).
Price catalyst
12-month price target: Rs2,175.00 based on a Sum of Parts methodology.
Catalyst: Launch of Docetaxel generic in US in 2H FY11.
Action and recommendation
SUNP has run up 25% since the beginning of September following the Taro
verdict. The shares now trade at 22x FY12E earnings and seem fairly valued.
While synergies from Taro and a niche US pipeline could provide upside,
prudence demands adding on weakness, in our view. Downgrade to Neutral with
a revised target price of Rs2,175.
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