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Sun Pharmaceuticals (SUN.BO)
Alert: Takeaways from Caraco’s 3QFY11 10Q Filing
Facility remediation on; Alternate sites explored — Corrective action is on but
Caraco has not provided any timeline for resolution. Meanwhile, the FDA has
released Caraco from the bond obligation (US$15m – part of the Consent Decree)
after the latter disposed off the seized inventory released by the FDA. The
company indicated that it has transferred some products to alternate sites & await
FDA approval for the same.
Update on Prandin litigation — Caraco indicated that it has done a site transfer
for Prandin to an affiliate’s site. We believe it could launch ‘at risk’ if it gets
approval. Caraco has challenged Novo Nordisk’s ‘358 patent (2018 expiry) and
believes that it is eligible for 180d exclusivity (though Sandoz has challenged this
exclusivity). In Jan 2011, the lower court found the patent invalid; Novo has
appealed. Meanwhile, Caraco has filed a Writ in the Supreme Court for further
hearing on its challenge to the OB use code amendment by Novo Nordisk.
Other litigation / related updates — 1) Eloxatin: Sun continues to challenge the
term of the ‘Consent Judgment’ entered with Sanofi & is evaluating options after a
District Court vacated the stay on launch (our earlier note: Sun Pharmaceuticals
(SUN.BO) - Eloxatin Saga Continues – Launch at Risk, a Possibility for Sun); 2)
Protonix: No further update; 3) Precedex: Hospira/Orion have filed a suit against
Caraco’s ANDA filing for a generic version of Precedex
Update on Sun’s open offer for Caraco — An independent committee of
Caraco’s board is evaluating Sun’s proposal to acquire all outstanding shares of
Caraco at US$4.75/sh. Several minority shareholders filed class action suits
against the Caraco board, Sun and its affiliates alleging breaches of fiduciary
duties in relation to the proposal as well as unfair price and the process of taking
the company private.
Caraco 3Q snapshot — 1) Sales included own products (cUS$5.7m) & distributed
products (cUS$34.7m) – down c22% YoY on lower P-IV sales (3QFY10 had
Protonix); 2) Gross margins were up c230bps YoY but higher SG&A (+22% YoY)
led to an operating loss (cUS$5m); 3) Net loss at US$3m (US$3m in 3QFY10); 4)
Filed 2 ANDAs during the quarter; markets 52 products & 33 ANDAs awaiting
approval
Sun Pharmaceuticals (SUN.BO; Rs417.10; 2L)
Sun Pharmaceuticals
Valuation
Our target price of Rs480 is based on a sum-of-the-parts approach, valuing its
base business using a P/E and ascribing an option value for its patent challenge
pipeline.
We value frontline pharma stocks such as Cipla and DRL at 20x 12m forward
earnings. However, we believe Sun deserves a premium to these stocks, given its
consistent track record, high profitability and return rations, as well as the potential
upside from the deployment of idle cash in the business, and consequently value it
at 22x 12-month forward earnings. At 22x Mar'12E EPS we arrive at a value of Rs
472/sh for Sun's core business. We also ascribe an option value of Rs8/sh to
Sun's patent challenge pipeline.
Risks
We rate Sun Pharma shares Low Risk in line with the recommendation of our
quantitative risk-rating system, which tracks 260-day historical share price
volatility. Key downside risks that could impede the stock from reaching our target
price include: 1) FDA issues at Caraco's Detroit plant may take longer than
expected to be resolved. This may also impact US sales of products from Sun's
facilities until issues are resolved; 2) Inability to close/effectively integrate the Taro
acquisition and exploit synergies could keep earnings depressed for longer than
anticipated; 3) Any damages to be paid in litigation on Protonix with Wyeth; and 4)
A stronger IPR law in India could lead to a gradual slowdown in growth rates for
the Indian market. Key upside risks include: 1) any new first to file/limited
competition launch could act as positive catalysts. 2) Faster than expected
improvement in Taro's financials
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sun Pharmaceuticals (SUN.BO)
Alert: Takeaways from Caraco’s 3QFY11 10Q Filing
Facility remediation on; Alternate sites explored — Corrective action is on but
Caraco has not provided any timeline for resolution. Meanwhile, the FDA has
released Caraco from the bond obligation (US$15m – part of the Consent Decree)
after the latter disposed off the seized inventory released by the FDA. The
company indicated that it has transferred some products to alternate sites & await
FDA approval for the same.
Update on Prandin litigation — Caraco indicated that it has done a site transfer
for Prandin to an affiliate’s site. We believe it could launch ‘at risk’ if it gets
approval. Caraco has challenged Novo Nordisk’s ‘358 patent (2018 expiry) and
believes that it is eligible for 180d exclusivity (though Sandoz has challenged this
exclusivity). In Jan 2011, the lower court found the patent invalid; Novo has
appealed. Meanwhile, Caraco has filed a Writ in the Supreme Court for further
hearing on its challenge to the OB use code amendment by Novo Nordisk.
Other litigation / related updates — 1) Eloxatin: Sun continues to challenge the
term of the ‘Consent Judgment’ entered with Sanofi & is evaluating options after a
District Court vacated the stay on launch (our earlier note: Sun Pharmaceuticals
(SUN.BO) - Eloxatin Saga Continues – Launch at Risk, a Possibility for Sun); 2)
Protonix: No further update; 3) Precedex: Hospira/Orion have filed a suit against
Caraco’s ANDA filing for a generic version of Precedex
Update on Sun’s open offer for Caraco — An independent committee of
Caraco’s board is evaluating Sun’s proposal to acquire all outstanding shares of
Caraco at US$4.75/sh. Several minority shareholders filed class action suits
against the Caraco board, Sun and its affiliates alleging breaches of fiduciary
duties in relation to the proposal as well as unfair price and the process of taking
the company private.
Caraco 3Q snapshot — 1) Sales included own products (cUS$5.7m) & distributed
products (cUS$34.7m) – down c22% YoY on lower P-IV sales (3QFY10 had
Protonix); 2) Gross margins were up c230bps YoY but higher SG&A (+22% YoY)
led to an operating loss (cUS$5m); 3) Net loss at US$3m (US$3m in 3QFY10); 4)
Filed 2 ANDAs during the quarter; markets 52 products & 33 ANDAs awaiting
approval
Sun Pharmaceuticals (SUN.BO; Rs417.10; 2L)
Sun Pharmaceuticals
Valuation
Our target price of Rs480 is based on a sum-of-the-parts approach, valuing its
base business using a P/E and ascribing an option value for its patent challenge
pipeline.
We value frontline pharma stocks such as Cipla and DRL at 20x 12m forward
earnings. However, we believe Sun deserves a premium to these stocks, given its
consistent track record, high profitability and return rations, as well as the potential
upside from the deployment of idle cash in the business, and consequently value it
at 22x 12-month forward earnings. At 22x Mar'12E EPS we arrive at a value of Rs
472/sh for Sun's core business. We also ascribe an option value of Rs8/sh to
Sun's patent challenge pipeline.
Risks
We rate Sun Pharma shares Low Risk in line with the recommendation of our
quantitative risk-rating system, which tracks 260-day historical share price
volatility. Key downside risks that could impede the stock from reaching our target
price include: 1) FDA issues at Caraco's Detroit plant may take longer than
expected to be resolved. This may also impact US sales of products from Sun's
facilities until issues are resolved; 2) Inability to close/effectively integrate the Taro
acquisition and exploit synergies could keep earnings depressed for longer than
anticipated; 3) Any damages to be paid in litigation on Protonix with Wyeth; and 4)
A stronger IPR law in India could lead to a gradual slowdown in growth rates for
the Indian market. Key upside risks include: 1) any new first to file/limited
competition launch could act as positive catalysts. 2) Faster than expected
improvement in Taro's financials
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