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Sun Pharma--------------------------------------------------------------------------- Maintain NEUTRAL
Several meaningful adjustments in 3Q11: not a 'base business' quarter
● Shelf-stock adjustment (we est. US$15 mn) booked under ‘other
expenses’ drove the EBITDA miss: Pantoprazole saw competition
in 4Q11, but provisions were taken in 3Q. This was offset by a
reversal of provisions made for Eloxatin in 1HFY11 (we est.
~US$20 mn-plus). De-stocking in ROW markets also hurt.
● Looking forward, the 42% YoY sales growth guidance in FY11
(earlier 35%) looks typically conservative. It implies a 10-15% YoY
fall in ex-Taro sales, as the company fears further charge-back on
Pantoprazole (off-exclusivity on 19 Jan 2011). Even adj. the 4Q10
base for one-offs, it means 0% YoY growth – too low, in our view.
● FY11 ANDA filing target reduced to 20-22 from 30 due to
continuing FDA issues at Caraco and Cranberry. Sun is filing for a
basket of oral contraceptives from a dedicated facility.
● We continue to believe consensus estimates of base business
margins are a few pp too high. Underneath one-offs, provisions/
reversals of provisions, margins have eroded. Yet, recent
correction in stock has been in-line with the sector: Its valuation
premium remains.
Weaker-than-expected 3Q due to shelf-stock adjustment
This was the first full quarter of Taro integration, and clearly our
estimates on the split of Taro costs between material, personnel and
depreciation (not known earlier) need to be recalibrated. What matters
though was that EBITDA missed by 6%: Taro EBITDA reported earlier
was very much in line, implying that base business was weak. This is
despite the normally high-margin India sales doing better.
Management clarified that ‘other expenses’ included shelf-stock
adjustment taken in the US on Pantoprazole. Recall that charge-backs
are taken at the sales level (so net sales adjusts for them), but shelfstock
adjustment is booked in expenses. This adjustment was
meaningful, and could have shaved ~US$ 15mn from EBITDA: note
that this is for potential price cuts in 4Q. Reversal of some provisions
taken on Eloxatin in 1-2Q11 (we est. US$20-25 mn) provided some
buffer. De-stocking in ROW markets also impacted margins.
New guidance suggests 0% YoY sales in adj. 4Q11 ex-Taro
More adjustments on Pantoprazole was given as a reason for revising
FY11 growth guidance to only 42%. While this is higher than the 35%
YoY indicated in Nov-10, it indicates ex-Taro sales would be down 10-
15% YoY in 4Q. Adjusting for ~US$28 mn of Pantoprazole and
Eloxatin sales in 4Q10, 4Q11 would be flat YoY, suggesting this is
conservative.
Continued question mark on base business margins
We have been flagging for a while that the 33-34% base business
margins that the market estimates are too high, and these margins
have been eroding behind the significant one-offs and large-scale
provisions and their subsequent reversals. Continuing delays in
resumption of manufacturing at Caraco is an important reason.
Other takeaways
● FY11 ANDA filing target cut from 30 to 20-22: Caraco and
Cranberry filings pushed out till FDA issues are sorted out. So,
R&D expenses are to be lower. 149 ANDAs pending (incl. Taro).
● Set up of parallel distribution in the US is likely only to prove to
Caraco minority shareholders that value mostly comes from Sun,
and that the takeout price being offered for Caraco is justified.
● Sun is filing for a basket of OCs, and has a dedicated facility.
● Sun now has Rs38 bn of net cash.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sun Pharma--------------------------------------------------------------------------- Maintain NEUTRAL
Several meaningful adjustments in 3Q11: not a 'base business' quarter
● Shelf-stock adjustment (we est. US$15 mn) booked under ‘other
expenses’ drove the EBITDA miss: Pantoprazole saw competition
in 4Q11, but provisions were taken in 3Q. This was offset by a
reversal of provisions made for Eloxatin in 1HFY11 (we est.
~US$20 mn-plus). De-stocking in ROW markets also hurt.
● Looking forward, the 42% YoY sales growth guidance in FY11
(earlier 35%) looks typically conservative. It implies a 10-15% YoY
fall in ex-Taro sales, as the company fears further charge-back on
Pantoprazole (off-exclusivity on 19 Jan 2011). Even adj. the 4Q10
base for one-offs, it means 0% YoY growth – too low, in our view.
● FY11 ANDA filing target reduced to 20-22 from 30 due to
continuing FDA issues at Caraco and Cranberry. Sun is filing for a
basket of oral contraceptives from a dedicated facility.
● We continue to believe consensus estimates of base business
margins are a few pp too high. Underneath one-offs, provisions/
reversals of provisions, margins have eroded. Yet, recent
correction in stock has been in-line with the sector: Its valuation
premium remains.
Weaker-than-expected 3Q due to shelf-stock adjustment
This was the first full quarter of Taro integration, and clearly our
estimates on the split of Taro costs between material, personnel and
depreciation (not known earlier) need to be recalibrated. What matters
though was that EBITDA missed by 6%: Taro EBITDA reported earlier
was very much in line, implying that base business was weak. This is
despite the normally high-margin India sales doing better.
Management clarified that ‘other expenses’ included shelf-stock
adjustment taken in the US on Pantoprazole. Recall that charge-backs
are taken at the sales level (so net sales adjusts for them), but shelfstock
adjustment is booked in expenses. This adjustment was
meaningful, and could have shaved ~US$ 15mn from EBITDA: note
that this is for potential price cuts in 4Q. Reversal of some provisions
taken on Eloxatin in 1-2Q11 (we est. US$20-25 mn) provided some
buffer. De-stocking in ROW markets also impacted margins.
New guidance suggests 0% YoY sales in adj. 4Q11 ex-Taro
More adjustments on Pantoprazole was given as a reason for revising
FY11 growth guidance to only 42%. While this is higher than the 35%
YoY indicated in Nov-10, it indicates ex-Taro sales would be down 10-
15% YoY in 4Q. Adjusting for ~US$28 mn of Pantoprazole and
Eloxatin sales in 4Q10, 4Q11 would be flat YoY, suggesting this is
conservative.
Continued question mark on base business margins
We have been flagging for a while that the 33-34% base business
margins that the market estimates are too high, and these margins
have been eroding behind the significant one-offs and large-scale
provisions and their subsequent reversals. Continuing delays in
resumption of manufacturing at Caraco is an important reason.
Other takeaways
● FY11 ANDA filing target cut from 30 to 20-22: Caraco and
Cranberry filings pushed out till FDA issues are sorted out. So,
R&D expenses are to be lower. 149 ANDAs pending (incl. Taro).
● Set up of parallel distribution in the US is likely only to prove to
Caraco minority shareholders that value mostly comes from Sun,
and that the takeout price being offered for Caraco is justified.
● Sun is filing for a basket of OCs, and has a dedicated facility.
● Sun now has Rs38 bn of net cash.
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