Sun Pharmaceuticals- It was Eloxatin again:: Macquarie

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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.