The combination of Sun Pharmaceutical Industries (Sun Pharma) and its subsidiary, Taro Pharma (Taro),
offers an excellent business model. With a stronghold in the domestic formulation market, Sun Pharma
has become an aggressive participant in the para IV patent challenge space. Along with the exclusivities
in the USA, the recent consolidation of the Taro acquisition has provided the much needed boost to the
stock. Recently, the US Food and Drug Administration (USFDA) has cleared the company’s Caraco Pharma
(Caraco) plant, which can resume the production of two key drugs to start with. This will help Caraco
gradually regain the market share in the USA.
Business restructuring and full control of Taro to help sustain the strong growth : Sun Pharma is in the
process of restructuring its business. It has announced a plan to spin-off its domestic formulation
business (which contributes about 22% of its revenues) to its wholly owned subsidiary called Sun Resins
and Polymers Pvt Ltd with effect from March 31, 2012. This is being done with a view to enhance the
focus on the business and to allow for quicker responses to the competitive market conditions. Besides,
the company has announced a plan to acquire the entire stake in Taro, which will give it a
stronger foothold in the USA and Europe.
We expect the domestic formulation business to deliver a better performance after the divestment
and special focus. Besides, synergies from Taro are also likely to back-up the growth. The company has
135 abbreviated new drug applications pending approvals by the USFDA and is increasing its focus on
niche product segments. All this is likely to result in an impressive growth going forward. Accordingly,
our price target stands revised by 14% to Rs743 (implies 23x FY2014E earnings). The stock is currently
trading at 21x FY2014E earnings per share (EPS).
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