Citi research report on Sun Pharama: High Growth to Continue

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High Growth to Continue
 Business Snapshot – Sun Pharma is one of the fastest-growing companies in
India's pharma market. It has followed a strategy of being the first to enter
niche, high-growth segments (both organic and through acquisitions). It has
a presence in the CNS, pain management, ophthalmology, cardiovascular
and respiratory segments. It is also a leading company in the US generics
space and is now trying to expand in the emerging markets. With the
acquisition of Taro, Sun has consolidated its presence in the US generics
market.


 Latest Quarterly Performance – Residual sales of generic Eloxatin at Caraco
drove topline (+15%) but EBIDTA margins declined 420 bps off the high
base (generic Protonix led) in 2QFY10. PAT grew c9% YoY, aided by lower
tax rate & depreciation - quite impressive, given the high base. Formulations
sales in India (+27% adjusted for low 2QFY10 base: channel filling in
4QFY09) & US (+25% on a high base: generic Protonix sales) continued to
impress. Growth emerging markets was surprisingly subdued at c5% YoY but
is expected to recover over the full year.

 Key Catalysts / Issues – a) Key launches in the US market – Taxotere
(docetaxel) and Gemzar (gemcitabine) & newsflows on P-IV / niche
opportunities; b) Progress on efforts to resolve the FDA issues at the Caraco
& Cranbury sites; c) Taro’s financials – expected to be reported in end Dec
10; d) Integration of Taro & synergies from the process; e) Efforts to expand
presence in the emerging markets; f) Any news flow related to the litigation
over the ‘at risk’ launch of Protonix & potential damages.

 Completion of Taro Acquisition adds Scale & Reach – We see this as a clear
positive, as Taro complements Sun’s basket and reach in the US. Taro (sales
of cUS$300m+, 100+ products and pending filings) is expected to give Sun
a leg up in the US, without having to wait for approvals to ramp up. Its
complementary product basket (strong in derma & topical products; some
proprietary technologies) and customer reach (chain stores, retail chains)
also augur well and should allow Sun to gain traction for its own biz. It also
expands Sun’s global reach via access (albeit small) to Canada, Israel and
UK. While the unreliability of reported numbers makes it difficult to arrive at
a firm value, we remain conservative in our assumptions but expect the deal to be
materially accretive.

 Valuations – Sun has traditionally traded at a premium to its Indian pharma
peers & we see this continuing going forward. Its strong Indian franchise,
niche US biz, acquisition of Taro & improving visibility on its patent
challenge pipeline should drive steady long-term growth & help maintain
above industry average return on capital – thus sustaining premium
valuations. With more clarity on resolution at Caraco & closure of Taro, there
appears no major risk to valuations. The stock trades at c21xFY12E core biz
EPS & we see room for some upside – synergies with Taro & utilization of
idle cash would be key catalysts.