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SUN PHARMACEUTICALS INDUSTRIES
In line results; valuations price in potential growth
Result impacted by one-off charges and higher tax provision
Sun Pharma (SUNP) Q3FY11 EBITDA at INR 4.4 bn grew 20% Y-o-Y, in line with
our estimate of INR 4.45 bn. Net sales of INR 16 bn (57% Y-o-Y) was in line with
our estimate of INR 15.8 bn, with strong growth in domestic formulations
offsetting weaker performance in US generics (Caraco) and ROW markets. PAT,
at INR 3.5 bn (3% Y-o-Y), had a negative impact from one time impairment
charge of USD 4.4 mn and higher tax provision (76% tax rate) in Taro; adjusted
for these, PAT, at INR 4.05 bn, was in line with our estimate of INR 3.9 bn.
Domestic formulations growth boost sales (ex-Taro and Caraco)
Net sales, at INR 16 bn, grew 57% Y-o-Y (11% Y-o-Y adj. for Taro sales of USD
102 mn) led by strong growth in domestic formulations (20% Y-o-Y versus 18%
estimated) and positive impact from reversal of charge backs in the US (~USD
20 mn). Caraco sales of USD 40 mn were below our estimate of USD 51 mn due
to price erosion in base business and lower exclusivity-driven sales. API reported
lower sales of INR 1.15 bn (versus estimated INR 1.5 bn), while ROW markets
declined 8% Y-o-Y from inventory destocking in various markets (4% Y-o-Y for
9mFY11). Management sales guidance of 42% Y-o-Y over FY10 reflects 18-20%
growth in base business and ~USD 195 sales of Taro.
Turnaround at Taro will be key focus over medium term
Taro’s acquisition is a strategic fit for SUNP and will strengthen its portfolio for
the US market. However, in the short term, it dilutes overall margins of the
business (35.6% ex-Taro and 33% including Taro in FY12). We believe that
successful integration and improving operating performance of Taro will be key
priorities; however, it will be a gradual process.
Outlook and valuations: Positive; maintain ‘HOLD’
We are positive on SUNP’s long-term growth prospects. However, current
valuations discount growth in base business and incremental upsides from
exclusivity-driven revenues in the US. Hence, we maintain our target price of
INR 415, valuing the base business at 23x FY12E EPS and assign INR 12 per
share as NPV of ‘one off’ exclusivity launches. SUNP’s valuations are 15-20%
higher than peers, buoyed by INR 38 bn of cash and strong business
fundamentals. We maintain ‘HOLD/Sector Outperformer’. Key risks include
execution risk from integration of Taro and sustainability of higher growth in the
domestic market.
Results impacted by one-off charges and higher tax provision
SUNP’s Q3FY11 operating performance was in line with our estimates. However, reported
net profit was 11% below estimate largely due to one-off charges of USD 13 mn
(including impairment charge and higher tax provision in Taro).
Net sales of INR 16 bn (57% Y-o-Y, 11% Y-o-Y ex-Taro) was in line with our estimate of
INR 15.8 bn, with strong growth in domestic formulations (20% Y-o-Y) offsetting weaker
performance in Caraco (-20% Y-o-Y) and ROW markets (-8% Y-o-Y).
EBITDA of INR 4.4 bn, up 20% Y-o-Y, was in line with our estimate of INR 4.45 bn.
EBITDA margin of 27.5% versus 36.1% in Q3FY10 and 34.1% in Q2FY11, reflects full
integration of Taro (lower EBITDA margins) during the quarter and lower sales from
higher margin exclusive products (Q3FY10 and Q2FY11 margins had positive impact from
launch of Pantoprazole and Eloxatin, respectively). Fixed costs (including employee costs
and other expenses) have been higher than our estimates due to incrementally higher
cost from integration of Taro; however, this was offset by ~ USD 20 mn reversal on
provision for chargeback taken during H1FY11 by SUNP for Para IV products. Gross
margins of 73% were higher than our estimate of 70%.
PAT, at INR 3.5 bn (9% Y-o-Y), had a negative impact from one time impairment charge
of USD 4.4 mn and higher tax provision (76% tax rate) in Taro; adjusted for these, PAT
at INR 4.05 bn was in line with our estimate of INR 3.9 bn.
Domestic formulations growth boost sales (ex-Taro and Caraco)
Net sales grew 57% Y-o-Y led by strong growth in domestic formulations (20% Y-o-Y
versus estimated 18%). The company expects underlying growth in domestic business to
remain strong, higher than overall market growth across key segments of neurology,
psychiatry, orthopedics, cardiology, diabetology, gastroenterology, among others. SUNP
has launched 30 new products (YTD) which are likely to contribute 2-3% to total growth
in domestic sales.
Also, the company has reversed provision on charge-backs taken during H1FY11 (~USD
20 mn) which partly offset lower sales from Caraco. Caraco sales of USD 40 mn declined
by 22% Y-o-Y due to negative base effect from higher sales (generic Protonix launch) in
Q3FY10. However, this was lower than our estimate of USD 51 mn. Caraco distributed
product sales of USD 35 mn reflect lowest run-rate in base business sales over the past
4-5 quarters, largely due to lower-than-anticipated ramp-up from scaling-up of niche
products like Effexor XR and Rivastigmine. The company stated total market share of
Effexor XR tablet (USD 200 mn innovator size) has been 30-40%, and SUNP is focused
on increasing market share in these products.
Strong pipeline of products to drive growth in US generics
SUNP has a pipeline of niche or limited completion products which it is likely to launch
over FY12. These include generic Taxotere (USD 1.1 bn market size; likely 3-4
players), generic Gemzar (USD 650 mn market size; 5-6 players), generic Cardizem
(only generic filer for 360 mg strength; USD 70 mn opportunity), generic Eloxatin
(potential market size of USD 1 bn; SUNP has received favourable ruling suspending
injunction of lower court, which led to withdrawal of the product by June 2010;
management is likely evaluating various options including launch at risk which could
result in exclusivity sales till August 2012;) and generic Prandin (USD 170 mn market
size; launch through site transfer as the ANDA has been filed from Caraco’s Michigan
facility). These opportunities could significantly improve growth over the next six months
to a year; however, we believe the market is already discounting the rich pipeline in
valuations.
The company has fully consolidated Taro, with sales of USD 102 mn (23% Y-o-Y),
marginally higher than our estimate of USD 96 mn. Ex-Taro, adjusted net sales grew
11% Y-o-Y to INR 11.5 bn. ROW markets declined 8% (-6% Y-o-Y in constant currency)
to INR 1.3 bn. This decline was largely led by inventory destocking in various emerging
markets, partly offset by strong growth in Europe from launch of generic Taxotere. API
sales declined 18% Y-o-Y to INR 1.15 bn versus estimated INR 1.5 bn.
Management has raised sales guidance to 42% Y-o-Y versus 35% Y-o-Y earlier (including
Taro sales of ~USD 195 mn) while maintaining ex-Taro guidance of 18-20% growth in
FY11.
Turnaround at Taro will be key focus over medium term
We believe Taro’s acquisition is a strategic fit for SUNP and will strengthen its portfolio in
the US market. However, in the short term, it will dilute overall margins of the business
(35.6% ex-Taro and 33% including Taro in FY12). We believe successful integration and
improving operating performance of Taro will be key priorities for management,
however, it will be a gradual process.
Outlook and valuations: Positive; maintain ’HOLD’
We are positive on the long-term growth of business. However, current valuations reflect
medium term growth in base business and incremental upsides from exclusivity-driven
revenues. Hence, we maintain our target price of INR 415, valuing the base business at
23x FY12E EPS (including Taro) and assign INR 12 per share as NPV of ‘one off’
exclusivity launches. SUNP’s valuations are xx% higher than peers, buoyed by INR 38 bn
of cash and strong business fundamentals. We maintain ‘HOLD/Sector Outperformer’
recommendation/rating on the stock.
Other key highlights of Q3FY11 results
• Domestic business: Market share of 3.7% (2010); launched 9 new products in
Q3FY11 and 30 products during 9m FY11. Secondary sales growth of 23% versus
market growth of 17% as per ORG IMS.
• SUNP filed five ANDAs and received two ANDA approvals in Q3FY11 with YTD total
filings of 13 products and 12 approvals. Cumulative ANDA filings of 369 (including
150 filings from Taro), with 149 awaiting approval.
• Cumulative DMFs filings are 187.
• Docetaxel: Hospira has a tentative approval on the product and expects at least two
generics (including authorized generic) on day one and is awaiting final approval for
launch. SUNP could be an early launcher with limited competition in the product.
We, however, do not include the product in our estimates, pending Hospira final
approval status. Moreover, Hospira indicates that it has a single vial product (similar
to switch by innovator) which could impact SUNP’s overall prospects in the product.
Taro integration: Post favourable decision by the Israeli Supreme Court and
subsequent tender offer, SUNP has acquired majority stake in Taro (66%). SUNP
has acquired a pipeline of 150 ANDA products, largely focused on dermatology and
pediatrics. The company has also acquired Taro’s Israel and Canadian facilities.
Management plans to strengthen the product pipeline by investing into R&D over 3-4
years. The company also plans to register and launch Taro products in other
geographies, leveraging SUNP’s presence in the respective markets.
Company Description
Promoted by Mr. Dilip S Shanghvi, a first generation entrepreneur, SUNP is India’s 4th
largest pharmaceutical company. It is also one of the fastest growing Indian
pharmaceutical companies with revenue and profit growth of 26% CAGR and 30% CAGR
over FY05/10 respectively. It also has one of the highest margins amongst its domestic
peers. SUNP has a significant presence in the domestic formulation market and the US
generic market. Indian domestic formulations sales, at INR 18 bn in FY10, constitute
almost 45% of sales. With over 3,000 medical reps, SUNP has a market share of 3.7%
and is a top 5 player in the Indian domestic market. It has been consistently ranked #1
across leading therapeutic categories like psychiatry, neurology and CVs. Taro’s
acquisition in US generics space augments its ANDA pipeline with products differentiated
in dermatology and pediatrics therapies.
Investment Theme
SUNP’s core earnings from base business are expected to grow at CAGR of 37% in FY10-
FY12E, led by strength in domestic business, export formulations, new products in US
generics space and incremental sales from taro acquisition. The earnings growth is also
impacted from the lower base due to USFDA issues in Caraco, disproportionally
impacting sales and earnings in FY10. While we do not build in early resumption in
Caraco manufacturing sites, a favorable outcome will be potentially accretive by ~50-60
USD to sales for FY11-12. One–off exclusivities (~16% of FY10 gross sales) would
contribute NPV of ~20 per share to the base business value. Taro acquisition has been
completed after extended battle and is accretive to overall earnings by 7-9% in FY11-
12E.
Key Risks
Rupee appreciation: Rapid rupee appreciation could impact our sales estimate,
especially on international revenues which are currently based on a currency estimate of
USD/INR of INR 44.5 and INR 43 for FY11E and FY12E respectively.
Domestic sales growth faster than expected: We expect SUNP’s domestic
formulation sales to grow at 18-19% in FY11-12E (after adjusting for INR 2 bn of
channel sales in FY10). Any uptick from these estimates could have a positive impact on
margins and estimates for base business.
Regulatory issues: Regulatory issues including product approval delays, unfavorable
litigation outcomes and potential future adverse inspections from USFDA are structural
negatives for SUNP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SUN PHARMACEUTICALS INDUSTRIES
In line results; valuations price in potential growth
Result impacted by one-off charges and higher tax provision
Sun Pharma (SUNP) Q3FY11 EBITDA at INR 4.4 bn grew 20% Y-o-Y, in line with
our estimate of INR 4.45 bn. Net sales of INR 16 bn (57% Y-o-Y) was in line with
our estimate of INR 15.8 bn, with strong growth in domestic formulations
offsetting weaker performance in US generics (Caraco) and ROW markets. PAT,
at INR 3.5 bn (3% Y-o-Y), had a negative impact from one time impairment
charge of USD 4.4 mn and higher tax provision (76% tax rate) in Taro; adjusted
for these, PAT, at INR 4.05 bn, was in line with our estimate of INR 3.9 bn.
Domestic formulations growth boost sales (ex-Taro and Caraco)
Net sales, at INR 16 bn, grew 57% Y-o-Y (11% Y-o-Y adj. for Taro sales of USD
102 mn) led by strong growth in domestic formulations (20% Y-o-Y versus 18%
estimated) and positive impact from reversal of charge backs in the US (~USD
20 mn). Caraco sales of USD 40 mn were below our estimate of USD 51 mn due
to price erosion in base business and lower exclusivity-driven sales. API reported
lower sales of INR 1.15 bn (versus estimated INR 1.5 bn), while ROW markets
declined 8% Y-o-Y from inventory destocking in various markets (4% Y-o-Y for
9mFY11). Management sales guidance of 42% Y-o-Y over FY10 reflects 18-20%
growth in base business and ~USD 195 sales of Taro.
Turnaround at Taro will be key focus over medium term
Taro’s acquisition is a strategic fit for SUNP and will strengthen its portfolio for
the US market. However, in the short term, it dilutes overall margins of the
business (35.6% ex-Taro and 33% including Taro in FY12). We believe that
successful integration and improving operating performance of Taro will be key
priorities; however, it will be a gradual process.
Outlook and valuations: Positive; maintain ‘HOLD’
We are positive on SUNP’s long-term growth prospects. However, current
valuations discount growth in base business and incremental upsides from
exclusivity-driven revenues in the US. Hence, we maintain our target price of
INR 415, valuing the base business at 23x FY12E EPS and assign INR 12 per
share as NPV of ‘one off’ exclusivity launches. SUNP’s valuations are 15-20%
higher than peers, buoyed by INR 38 bn of cash and strong business
fundamentals. We maintain ‘HOLD/Sector Outperformer’. Key risks include
execution risk from integration of Taro and sustainability of higher growth in the
domestic market.
Results impacted by one-off charges and higher tax provision
SUNP’s Q3FY11 operating performance was in line with our estimates. However, reported
net profit was 11% below estimate largely due to one-off charges of USD 13 mn
(including impairment charge and higher tax provision in Taro).
Net sales of INR 16 bn (57% Y-o-Y, 11% Y-o-Y ex-Taro) was in line with our estimate of
INR 15.8 bn, with strong growth in domestic formulations (20% Y-o-Y) offsetting weaker
performance in Caraco (-20% Y-o-Y) and ROW markets (-8% Y-o-Y).
EBITDA of INR 4.4 bn, up 20% Y-o-Y, was in line with our estimate of INR 4.45 bn.
EBITDA margin of 27.5% versus 36.1% in Q3FY10 and 34.1% in Q2FY11, reflects full
integration of Taro (lower EBITDA margins) during the quarter and lower sales from
higher margin exclusive products (Q3FY10 and Q2FY11 margins had positive impact from
launch of Pantoprazole and Eloxatin, respectively). Fixed costs (including employee costs
and other expenses) have been higher than our estimates due to incrementally higher
cost from integration of Taro; however, this was offset by ~ USD 20 mn reversal on
provision for chargeback taken during H1FY11 by SUNP for Para IV products. Gross
margins of 73% were higher than our estimate of 70%.
PAT, at INR 3.5 bn (9% Y-o-Y), had a negative impact from one time impairment charge
of USD 4.4 mn and higher tax provision (76% tax rate) in Taro; adjusted for these, PAT
at INR 4.05 bn was in line with our estimate of INR 3.9 bn.
Domestic formulations growth boost sales (ex-Taro and Caraco)
Net sales grew 57% Y-o-Y led by strong growth in domestic formulations (20% Y-o-Y
versus estimated 18%). The company expects underlying growth in domestic business to
remain strong, higher than overall market growth across key segments of neurology,
psychiatry, orthopedics, cardiology, diabetology, gastroenterology, among others. SUNP
has launched 30 new products (YTD) which are likely to contribute 2-3% to total growth
in domestic sales.
Also, the company has reversed provision on charge-backs taken during H1FY11 (~USD
20 mn) which partly offset lower sales from Caraco. Caraco sales of USD 40 mn declined
by 22% Y-o-Y due to negative base effect from higher sales (generic Protonix launch) in
Q3FY10. However, this was lower than our estimate of USD 51 mn. Caraco distributed
product sales of USD 35 mn reflect lowest run-rate in base business sales over the past
4-5 quarters, largely due to lower-than-anticipated ramp-up from scaling-up of niche
products like Effexor XR and Rivastigmine. The company stated total market share of
Effexor XR tablet (USD 200 mn innovator size) has been 30-40%, and SUNP is focused
on increasing market share in these products.
Strong pipeline of products to drive growth in US generics
SUNP has a pipeline of niche or limited completion products which it is likely to launch
over FY12. These include generic Taxotere (USD 1.1 bn market size; likely 3-4
players), generic Gemzar (USD 650 mn market size; 5-6 players), generic Cardizem
(only generic filer for 360 mg strength; USD 70 mn opportunity), generic Eloxatin
(potential market size of USD 1 bn; SUNP has received favourable ruling suspending
injunction of lower court, which led to withdrawal of the product by June 2010;
management is likely evaluating various options including launch at risk which could
result in exclusivity sales till August 2012;) and generic Prandin (USD 170 mn market
size; launch through site transfer as the ANDA has been filed from Caraco’s Michigan
facility). These opportunities could significantly improve growth over the next six months
to a year; however, we believe the market is already discounting the rich pipeline in
valuations.
The company has fully consolidated Taro, with sales of USD 102 mn (23% Y-o-Y),
marginally higher than our estimate of USD 96 mn. Ex-Taro, adjusted net sales grew
11% Y-o-Y to INR 11.5 bn. ROW markets declined 8% (-6% Y-o-Y in constant currency)
to INR 1.3 bn. This decline was largely led by inventory destocking in various emerging
markets, partly offset by strong growth in Europe from launch of generic Taxotere. API
sales declined 18% Y-o-Y to INR 1.15 bn versus estimated INR 1.5 bn.
Management has raised sales guidance to 42% Y-o-Y versus 35% Y-o-Y earlier (including
Taro sales of ~USD 195 mn) while maintaining ex-Taro guidance of 18-20% growth in
FY11.
Turnaround at Taro will be key focus over medium term
We believe Taro’s acquisition is a strategic fit for SUNP and will strengthen its portfolio in
the US market. However, in the short term, it will dilute overall margins of the business
(35.6% ex-Taro and 33% including Taro in FY12). We believe successful integration and
improving operating performance of Taro will be key priorities for management,
however, it will be a gradual process.
Outlook and valuations: Positive; maintain ’HOLD’
We are positive on the long-term growth of business. However, current valuations reflect
medium term growth in base business and incremental upsides from exclusivity-driven
revenues. Hence, we maintain our target price of INR 415, valuing the base business at
23x FY12E EPS (including Taro) and assign INR 12 per share as NPV of ‘one off’
exclusivity launches. SUNP’s valuations are xx% higher than peers, buoyed by INR 38 bn
of cash and strong business fundamentals. We maintain ‘HOLD/Sector Outperformer’
recommendation/rating on the stock.
Other key highlights of Q3FY11 results
• Domestic business: Market share of 3.7% (2010); launched 9 new products in
Q3FY11 and 30 products during 9m FY11. Secondary sales growth of 23% versus
market growth of 17% as per ORG IMS.
• SUNP filed five ANDAs and received two ANDA approvals in Q3FY11 with YTD total
filings of 13 products and 12 approvals. Cumulative ANDA filings of 369 (including
150 filings from Taro), with 149 awaiting approval.
• Cumulative DMFs filings are 187.
• Docetaxel: Hospira has a tentative approval on the product and expects at least two
generics (including authorized generic) on day one and is awaiting final approval for
launch. SUNP could be an early launcher with limited competition in the product.
We, however, do not include the product in our estimates, pending Hospira final
approval status. Moreover, Hospira indicates that it has a single vial product (similar
to switch by innovator) which could impact SUNP’s overall prospects in the product.
Taro integration: Post favourable decision by the Israeli Supreme Court and
subsequent tender offer, SUNP has acquired majority stake in Taro (66%). SUNP
has acquired a pipeline of 150 ANDA products, largely focused on dermatology and
pediatrics. The company has also acquired Taro’s Israel and Canadian facilities.
Management plans to strengthen the product pipeline by investing into R&D over 3-4
years. The company also plans to register and launch Taro products in other
geographies, leveraging SUNP’s presence in the respective markets.
Company Description
Promoted by Mr. Dilip S Shanghvi, a first generation entrepreneur, SUNP is India’s 4th
largest pharmaceutical company. It is also one of the fastest growing Indian
pharmaceutical companies with revenue and profit growth of 26% CAGR and 30% CAGR
over FY05/10 respectively. It also has one of the highest margins amongst its domestic
peers. SUNP has a significant presence in the domestic formulation market and the US
generic market. Indian domestic formulations sales, at INR 18 bn in FY10, constitute
almost 45% of sales. With over 3,000 medical reps, SUNP has a market share of 3.7%
and is a top 5 player in the Indian domestic market. It has been consistently ranked #1
across leading therapeutic categories like psychiatry, neurology and CVs. Taro’s
acquisition in US generics space augments its ANDA pipeline with products differentiated
in dermatology and pediatrics therapies.
Investment Theme
SUNP’s core earnings from base business are expected to grow at CAGR of 37% in FY10-
FY12E, led by strength in domestic business, export formulations, new products in US
generics space and incremental sales from taro acquisition. The earnings growth is also
impacted from the lower base due to USFDA issues in Caraco, disproportionally
impacting sales and earnings in FY10. While we do not build in early resumption in
Caraco manufacturing sites, a favorable outcome will be potentially accretive by ~50-60
USD to sales for FY11-12. One–off exclusivities (~16% of FY10 gross sales) would
contribute NPV of ~20 per share to the base business value. Taro acquisition has been
completed after extended battle and is accretive to overall earnings by 7-9% in FY11-
12E.
Key Risks
Rupee appreciation: Rapid rupee appreciation could impact our sales estimate,
especially on international revenues which are currently based on a currency estimate of
USD/INR of INR 44.5 and INR 43 for FY11E and FY12E respectively.
Domestic sales growth faster than expected: We expect SUNP’s domestic
formulation sales to grow at 18-19% in FY11-12E (after adjusting for INR 2 bn of
channel sales in FY10). Any uptick from these estimates could have a positive impact on
margins and estimates for base business.
Regulatory issues: Regulatory issues including product approval delays, unfavorable
litigation outcomes and potential future adverse inspections from USFDA are structural
negatives for SUNP.
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