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Sun Pharma
Rs482.75 - OUTPERFORM
Sector leader
Niche US opportunities, margin upsides from restructuring at Taro
Pharma and steady domestic business will drive strong earnings growth
in Sun Pharma. We see reasonable upsides to our estimates as niche
launches in the US like Taxotere, Stalevo and Eloxatin pan out over the
next two years. Including those, we see 29% net profit cagr over FY11-
13CL and see premium valuations sustaining. We raise our target price to
Rs532/ share based on 22x FY13CL EPS. O-PF.
US prospects to provide upgrades
Numerous para-IV first to file opportunities in the US market provide strong
upgrades for Sun Pharma in FY12 and FY13 and even beyond. Beginning from
Taxotere, Stalevo and Eloxatin that are more certain launches to Cardizem
CD, Gemzar and Gabitril where timing remains a bit uncertain, Sun Pharma
has a lot going on in the US market. We believe Sun Pharma’s FY12-13 EPS
could see 11-23% upgrades and hence seem quite attractive on reported PE
multiples with a reported EPS cagr of 28.7% over FY11-13CL.
Integration benefits to drive margins
Sun Pharma will realign cost structure of Taro Pharma, an acquisition that got
completed in September 2010. Taro more than doubles Sun Pharma’s revenue
base in the US generics market and adds 26 pending ANDAs and a strong
dermatology franchise. Sun’s management could potentially drive
manufacturing and other operational efficiencies resulting in improvement in
Taro’s profitability from current c.10% net margins.
Steady growth prospects in domestic market
Sun Pharma is by far the leader in lifestyle related therapy areas like
cardiology, neurology, gastro-enterology and metabolic disorders. It has
delivered the fastest growth in domestic market among listed peers with
24.5% cagr over last five years.
Premium valuations to sustain
Strong franchise in domestic market and strengthening position in the US
generics will drive 21% net profit cagr over FY10-13CL despite our
assumption of 450bps increase in tax rate to 11%. Risks to earnings growth
could come from potential damages from ongoing litigation on Protonix, an
increase in tax rate in case of an adverse outcome on dispute with income tax
department and appreciation of rupee. We raise our target price to Rs532/
share based on 22x FY13 earnings plus PV of niche prospects. Maintain O-PF.
Niche opportunities in the US
With 146 ANDAs pending approval (including Caraco and Taro), Sun Pharma
has one of the largest ANDA pipeline among the big cap pharmaceutical
names in India. Some of these provide limited competition opportunities. We
do not incorporate these opportunities in our estimates yet. While some of
the recent launches like Exelon and Effexor XR aid earnings in FY11, we see
bigger ones like Taxotere, Eloxatin, Stalevo, Comptan, Naispan and Gleevec
over FY12-16.
Leadership in chronic therapies in domestic market
Sun Pharma is by far the leader in lifestyle related therapy areas like
cardiology, neurology, gastro-enterology and metabolic disorders. It has
delivered the fastest growth in domestic market among listed peers with
24.5% cagr over last five years. We see strong growth in lifestyle related
segments and expect Sun Pharma’s domestic revenues to grow at 23% cagr
on reported basis (19% cagr on normalized basis) over FY10-3CL.
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