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India Equity Research Reports, IPO and Stock News
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Quality comes at a premium
CHANGE
Market has rewarded Sun’s focussed approach
We initiate coverage on Sun Pharma with a BUY. We believe the market
has rewarded Sun’s focused approach as market cap has expanded in line
with revenue growth. Sun’s strong positioning in India, presence in niche
therapies in the US, ability to identify opportunities ahead of peers, and
focus on profitability/cash flows are key investment points.
CATALYST
Room to improve market share in India and US
Sun has the potential to gain market share even in existing therapies in
India despite rising competition. For the US, the strategy is to have a
basket of difficult-to-manufacture generics and to build a branded
generic business through Taro. Sun’s strong balance sheet allows it to
target large acquisitions. Sun’s M&A history has been very good so far.
VALUATION
SoTP-based price target of INR550
Our TP implies 14% upside potential from current levels. We value Sun’s
core business at INR473/share (23x one-year forward earnings), cash on
books at INR65/share and Para IV pipeline at INR12/share. Key risks to
our call are any slowdown in the domestic market and any liability from
the generic Protonix ‘at-risk’ launch.
COMMENT
Key highlights of the report
§ Analysis of Sun’s high field-force productivity and top brands
§ Sun’s ability to consistently beat peers in domestic formulations
§ Therapy-wise approvals in the US
§ Para IV pipeline
§ Acquisition history
Key risks
Slowdown and increased competition in the domestic market
Domestic formulation is the largest contributor to Sun’s margins. Any slowdown in the domestic market
growth rates may have an adverse impact on our estimates. Also, many companies have shifted their focus
from the acute segment to the chronic segment, thus the competitive landscape for Sun’s addressable
market is likely to increase.
Generic Protonix liability
Sun launched generic Protonix (pantoprazole sodium) ‘at‐risk’ in January 2008. This was a three-player
generic market – Sun shared exclusivity with Teva (TEVA US, Not rated), while Wyeth (later acquired by
Pfizer (PFE US, Not rated)) introduced an authorised generic. In April 2010, a federal jury in the US upheld
the validity of Pfizer’s patent covering Protonix. The jury held that the patent was not invalid, rejecting
allegations by generic companies that the patent was obvious. The judgment on the case is still awaited.
Sun stopped selling the product in the market from April 2010, though it re-entered the market once the
patent on the product expired in January 2011.
In theory, an ‘at‐risk’ launch exposes the generic firm to treble damages, meaning it could have to pay up
to three times whatever it earns from the launch. In this case, it is likely that Sun’s damages, if at all, could
be lower than the conventional treble damages as it introduced its generic post a launch by Teva and after
an authorised generic was introduced in the market by the innovator. Sun may have booked sales of
USD350m from generic Protonix during the January 2008 to April 2010 period. No new date has been set for
the ongoing litigation with Pfizer.
Valuations: Rich but quality deserves a premium
Sun traded at a premium to peers due to strong execution
Over the past five years, Sun’s market cap has increased 30%, which is equivalent to its sales CAGR of 22%
over the same period. We believe the market has rewarded the company’s focused presence in the US and
India and limited exposure to Europe. Apart from this, Sun’s ROE (excluding cash) has been over 25% for
majority of the past five years while balance sheet has improved y-y.
We expect Sun’s premium valuations to be sustained, due to its strong positioning in India and a sharp
scale-up in the US. Thus, the company’s product mix looks set to improve. Sun’s balance sheet is strong,
which should support large acquisitions without having to dilute equity. We estimate strong FY11-14
earnings CAGR of 23% for Sun’s base business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Quality comes at a premium
CHANGE
Market has rewarded Sun’s focussed approach
We initiate coverage on Sun Pharma with a BUY. We believe the market
has rewarded Sun’s focused approach as market cap has expanded in line
with revenue growth. Sun’s strong positioning in India, presence in niche
therapies in the US, ability to identify opportunities ahead of peers, and
focus on profitability/cash flows are key investment points.
CATALYST
Room to improve market share in India and US
Sun has the potential to gain market share even in existing therapies in
India despite rising competition. For the US, the strategy is to have a
basket of difficult-to-manufacture generics and to build a branded
generic business through Taro. Sun’s strong balance sheet allows it to
target large acquisitions. Sun’s M&A history has been very good so far.
VALUATION
SoTP-based price target of INR550
Our TP implies 14% upside potential from current levels. We value Sun’s
core business at INR473/share (23x one-year forward earnings), cash on
books at INR65/share and Para IV pipeline at INR12/share. Key risks to
our call are any slowdown in the domestic market and any liability from
the generic Protonix ‘at-risk’ launch.
COMMENT
Key highlights of the report
§ Analysis of Sun’s high field-force productivity and top brands
§ Sun’s ability to consistently beat peers in domestic formulations
§ Therapy-wise approvals in the US
§ Para IV pipeline
§ Acquisition history
Key risks
Slowdown and increased competition in the domestic market
Domestic formulation is the largest contributor to Sun’s margins. Any slowdown in the domestic market
growth rates may have an adverse impact on our estimates. Also, many companies have shifted their focus
from the acute segment to the chronic segment, thus the competitive landscape for Sun’s addressable
market is likely to increase.
Generic Protonix liability
Sun launched generic Protonix (pantoprazole sodium) ‘at‐risk’ in January 2008. This was a three-player
generic market – Sun shared exclusivity with Teva (TEVA US, Not rated), while Wyeth (later acquired by
Pfizer (PFE US, Not rated)) introduced an authorised generic. In April 2010, a federal jury in the US upheld
the validity of Pfizer’s patent covering Protonix. The jury held that the patent was not invalid, rejecting
allegations by generic companies that the patent was obvious. The judgment on the case is still awaited.
Sun stopped selling the product in the market from April 2010, though it re-entered the market once the
patent on the product expired in January 2011.
In theory, an ‘at‐risk’ launch exposes the generic firm to treble damages, meaning it could have to pay up
to three times whatever it earns from the launch. In this case, it is likely that Sun’s damages, if at all, could
be lower than the conventional treble damages as it introduced its generic post a launch by Teva and after
an authorised generic was introduced in the market by the innovator. Sun may have booked sales of
USD350m from generic Protonix during the January 2008 to April 2010 period. No new date has been set for
the ongoing litigation with Pfizer.
Valuations: Rich but quality deserves a premium
Sun traded at a premium to peers due to strong execution
Over the past five years, Sun’s market cap has increased 30%, which is equivalent to its sales CAGR of 22%
over the same period. We believe the market has rewarded the company’s focused presence in the US and
India and limited exposure to Europe. Apart from this, Sun’s ROE (excluding cash) has been over 25% for
majority of the past five years while balance sheet has improved y-y.
We expect Sun’s premium valuations to be sustained, due to its strong positioning in India and a sharp
scale-up in the US. Thus, the company’s product mix looks set to improve. Sun’s balance sheet is strong,
which should support large acquisitions without having to dilute equity. We estimate strong FY11-14
earnings CAGR of 23% for Sun’s base business.
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