Morgan Stanley: Still UW on Sun Pharma

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Sun Pharmaceuticals- Buy at Rs 917.5 and add on dips to Rs 840 - Rs 857 for Target of Rs 958 in 1 quarter :HDFC Sec

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Sun Pharmaceuticals - CCI’s Conditional Nod Lifts Overhang; Event Update :: Edelweiss

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Sun Pharma (2QFY15) : Margins disappoint but outlook strong. Maintain BUY :: HDFC Sec, link

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Sun Pharmaceuticals - Inline Quarter; Tildrakizumab Prospects Look Bright; Result Update Q2FY15:: Edelweiss

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Sun Pharma, Taro back on track; margins improve further :: ICICI Securities, PDF link

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Sun Pharmaceutical Industries Limited (SPIL)|Q2FY15 Result Update | Domestic formulation and Taro drive earning for the quarter :: IndiaNivesh

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Sun Pharmaceuticals - It's a big deal; event update:: Edelweiss PDF link

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We perceive Sun Pharmaceuticals’ (SUNP) exclusive worldwide licensing deal with Merck for Tildrakizumab is another transformational step like its recent Ranbaxy acquisition. It not only takes the company closer to evolving into a specialty player, but also on approval (2016/2017) the drug could become a meaningful addition to its business. We are upbeat on the company’s capital allocation policies and believe that it will continue to be on the prowl for exciting opportunities (given large cash) that will drive long-term value, as in the past.

Inks exclusive marketing deal with Merck for psoriasis drug

SUNP has bagged exclusive worldwide commercialisation rights for Merck’s Tildrakizumab (MK-3222, details on Page 3) undergoing Phase III trials (details on page 4) for the treatment of chronic plaque psoriasis (details on Page 2-4) for an upfront payment of USD80mn. Merck will receive milestones and tiered royalties (mid-single digit through teen) on sales and will continue all clinical development/regulatory activities, which will be funded by SUNP. On approval (possible in FY16/17), SUNP will also be responsible for all regulatory activities, including subsequent submissions, pharmacovigilance, post approval studies, manufacturing and commercialisation. The global psoriasis market is large and is expected to touch USD8bn by CY16.

What’s the big deal?

(a) step towards becoming a specialty company, expect more activity towards this effort in the future; (b) SUNP is the first Indian company to own worldwide rights for a Phase III drug, and on approval will be first to commercialise a novel medicine in regulated markets; (c) Tildrakizumab (an IL-23 blocker) is expected to have fewer side effects than existing products (Humira, Enbrel) and could garner peak sales of USD500mn-1.5bn (20-60% of FY14 sales); (d) strengthens its existing branded derma franchise (DUSA, Ranbaxy’s derma franchise including Absorica); (e) further upside if other potential indications for Tildrakizumab including psoriatic arthritis and Crohn’s click in the future; (f) for the ongoing two Phase III trials (c2000 patients), we believe SUNP may need to spend another USD200-300mn over next 2-3 years before filing.

Financials

Year to March	FY13	FY14	FY15E	FY16E
Revenues (INR mn)	112,999	160,804	185,590	206,633
EBITDA (INR mn)	49,749	71,956	84,123	94,041
EPS (INR)	17.1	25.6	31.8	37.2
P/E (x) (based on recur. EPS)	46.6	32.7	25.0	21.5
ROE (%)	26.0	31.4	30.7	28.3

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Sun Pharmaceutical- Taro 4QFY14 Results: Below expectation on lower revenue: JPMorgan

Sun Pharmaceutical Industries Ltd. (SUNP IN) Taro 4QFY14 Results: Below expectation on lower revenue		Neutral Price Target: Rs625.00 PT End Date: 31 Mar 2015

SUP’s subsidiary, Taro reported 4QFY14 sales of $187Mn (+13% YoY and -12% QoQ), which was well below JPMe. The company in its press release continued to highlight the slight decline in volume in the quarter and, therefore, we believe that most of the growth was driven by pricing benefit for its key products. In our view, the lower than expected revenue and sequential decline highlights some pricing benefit due to limited competition going away. We have highlighted this as a key risk to SUNP’s growth and margins given the declining volume trend in Taro seen over the last two years.

· EBITDA margin at 56.5% vs. 65% in 3Q and ~60% in 9MFY14. EBITDA margins for the quarter declined q/q due to lower sales revenue and sharp increase in SG&A ex. depreciation (+26% YoY and +22% QoQ). R&D as % of revenue was at 7% with R&D expense increasing 8% YoY (-13% QoQ). Gross profit for the quarter was 75.5% vs. 80.7% in 3Q and 76.7% in 9MFY14 with cost of sales flat YoY (+11% QoQ as 3Q costs was particularly low).

· Other details. Shares outstanding declined QoQ (42.4Mn vs. 44.7Mn in 3Q) post the completion of buyback last quarter, which will increase SUNP’s holding to ~69% (vs. 66% previously). Net cash as of Mar-14 was $615Mn vs. $532Mn last year. The company filed 11 ANDAs in FY14 vs. 9 in FY13 and currently has 27 ANDAs pending for approval.

· Takeaways for SUNP 4QFY14 results: SUNP reports results on 29th May and has scheduled a conference call at 10AM IST on 30th May. We believe that post the lower than expected operating results reported by Taro, there is potential downside risk to SUNP’s 4QFY14 results. We assume 36% growth in PAT (to Rs13.7bn) YoY in the quarter. Our estimates for SUNP are Rs42bn for revenue and EBITDA at Rs18.5bn (margin 44.1%).

Figure 1: Taro’s EBITDA Margin Trend

Source: Company reports

Figure 2: Taro's R&D Cost and as % of sales

Source: Company reports.

Table 1: Taro Quarterly Results Summary

US$ MM, except per share	Mar-13	Mar-14	% YoY	Dec-13	% QoQ	FY13	FY14	% YoY
Sales	165.1	187.2	13.3	213.6	(12.4)	671.0	759.3	13.2
Gross Profit	119.5	141.4	18.3	172.5	(18.0)	494.8	580.0	17.2
Gross Margin (%)	72.4	75.5		80.7		73.7	76.4
EBITDA	67.4	105.7	56.8	139.0	(23.9)	346.3	446.8	29.0
EBITDA Margin (%)	40.8	56.5	(8.6)	65.1		51.6	58.8
D&A	(4.3)	(4.2)	2.6	(4.1)	2.3	(17.8)	(16.6)	6.7
Interest	1.1	1.2	(15.5)	1.4	(13.6)	1.5	5.2	(241.3)
FX Income/(expense)	0.7	3.9	(472.2)	2.5	55.1	2.4	7.1	(194.5)
Other income/(expense)	1.4	0.4	(70.9)	0.4	(6.7)	3.4	1.4	(59.1)
PBT	66.3	107.1	61.5	139.3	(23.1)	335.9	443.9	32.2
Tax	(16.1)	(17.4)	8.4	(23.5)	(25.9)	(67.8)	(82.7)	22.0
Tax rate	24.3	16.3		16.9		20.2	18.6
PAT	50.2	89.7	78.5	115.8	(22.6)	268.1	361.2	34.7
Income from discontinued ops	(1.2)	(0.1)	91.6	(0.1)	94.0	(1.2)	(0.3)	73.3
Minority Interest	0.1	0.1	(19.8)	(0.1)	(181.0)	(0.7)	(0.5)	(28.9)
PAT	49.2	89.6	82.3	115.6	(22.5)	266.2	360.4	35.4
FD EPS	1.10	2.12	92.6	2.59	(18.2)	5.98	8.14	36.3

Source: Company reports

Investment Thesis

SUNP trades at a premium to domestic peers that we believe is justified by the company’s strong profitability (40%+ EBITDA margin vs. 15-25% for other Indian companies), robust balance sheet (FY14E net cash Rs48bn) and successful acquisitions. However, slowing growth in Taro, limited opportunities for margin expansion and uncertainty around any possible acquisition provide little upside potential, in our view.

Valuation

Our Mar-15 price target of Rs625 is based on a P/E of 24x Mar-16E base EPS, a 20% premium to the domestic peer group, plus FTF opportunities at Rs17 per share.

SUNP SOTP summary

	Rs/share
Base EPS	24.8
Target P/E Multiple	24	20% premium to current domestic peer group average
Base Target Price	606
U.S. Opportunities
FTF	7.9	gPrandin, gCymbalta, gGleevec, gLunesta and gCrestor
Other Opportunities	8.8	gTaxotere, gEloxatin, gLexapro and gAbilify
SUNP Target price	625

Source: Company reports and J.P. Morgan estimates.

Risks to Rating and Price Target

Key upside risks to our view include a better-than-expected ramp-up of DUSA sales, continued INR weakness and potential value-accretive acquisitions. Downside risks include adverse regulatory rulings, delays in U.S. product launches and a protracted slowdown in India.

Morgan Stanley -Sun Pharmaceutical

Sun Pharmaceutical
Industries
Taro Tender Offer Suggests
Inexpensive Valuations?
Quick Comment: Taro (US$4bn market cap, 65.9%
owned by Sun) announced that it has commenced
repurchase of its ordinary shares (up to US$200mn) at a
price not greater than US$97.5 per share nor less than
US$84.5 per share. At these prices, if the offer is fully
subscribed, the number of shares to be purchased
represents approximately 4.6-5.3% of Taro’s currently
issued shares. The offer will expire at midnight (EST) on
December 23, 2013.
Rationale: Taro had approximately US$741mn in cash
as of October 31, 2013. The company said it aims to
return part of this cash to shareholders through this
tender offer and retain the balance for future use. The
annualized F2Q14 results (US$96mn net profit), which
may be sustainable if competition intensifies, implies
9.5-11x P/E multiples (at extreme end of offer pricing).
Taro stock is up 96% YTD and significantly vs. Sun’s
acquisition value (roughly US$260m for 66% stake three
to four years ago).
Implication: Taro’s tender offer at the current stock
price suggests management’s assessment for greater
value in the stock. Alternatively, the decision may be
driven by the low fixed-income yield on the surplus cash.
It would be interesting to note Sun’s reaction to this offer
(i.e., whether it participates or not). If it participates, then
we believe that will lead to a transfer of excess cash
from Taro to Sun. Both companies are generating strong
cash flow.
Investment thesis: We expect strong growth trajectory
for Sun in the quarters ahead driven by its solid base
business, value unlocking in URL/DUSA and greater
market share in Doxil. Surplus cash on the balance
sheet should add an M&A premium to the stock. We
retain our OW rating on the stock and it is part of our
Asia Best Ideas list.

Sun Pharmaceutical Industries Hikma’s Raised Guidance = Doxycycline Upside – Staying OW :: Morgan Stanley Research

Sun Pharmaceutical
Industries
Hikma’s Raised Guidance =
Doxycycline Upside –
Staying OW
Quick Comment: Hikma Pharmaceuticals PLC (Hikma)
has again increased its guidance for 2013 for its
generics division, due to doxycycline upside (refer
Exhibit 1 for guidance trend). It has now guided for
revenues of US$200 mln and operating profits margin of
above 30% for the generics division. To refresh, this is
the second upward revision to its Mar’13 guidance ($104
mln sales; flat margins), which was raised in May’13
($150 mln sales, low teen margins). The new guidance
implies incremental sales of US$100 mln with 60%
operating margins for 2013, driven by doxycycline.
Background: Due to doxycycline drug shortage in the
US, there was a sharp rise in prices in Feb’13. The
US$20 mln per month category peaked to US$125 mln
in March 2013, has now marginally tapered off to about
US$106 mln in May 2013 (as some players have
restored part of their supplies). Refer Exhibit 4.
Sun’s angle: URL/Mutual (acquired by Sun in Dec’12)
is a beneficiary of doxycycline hyclate shortage since it
has 18% market share. Refer Exhibit 3. Based on URL’s
current market share and Hikma’s (22% market share)
guidance, Sun could gross about US$80 mln pa in
revenues with high margins (5% of F14 EPS). We have
assumed 6 months contribution from doxy in our model.
If the pricing continues to hold longer, there is upside
risk to our numbers. Note though that once supplies are
restored in the market, doxy prices could compress.
We reiterate our OW rating on Sun: The company has
solid fundamentals as underlined by multiple growth
levers – domestic business, US (non Taro pipeline),
value unlocking in URL/DUSA and SPARC pipeline.
Please see our latest report – Sun Pharmaceutical
Industries – Asia Insight: Best Getting Better, dated May
12, 2013 for details.

Sun Pharma – BUY -- Defining the Earnings Arc -IIFL

Multiple swing factors, big enough to make material swings in
FY14 and FY15 growth and profitability, make Sun Pharma
earnings projection difficult. Despite that, we believe that the
recent stock price correction and the earnings upside from
weakened INR make Sun’s valuation attractive. In the median
case, we expect 21% core earnings growth in FY14 and 14% in
FY15. If all factors play out favourably, FY14 earnings growth
could be as high as 44%; on the downside, earnings could
remain flat for the year. We raise our FY14, FY15 core earnings
estimates by ~8% to factor in the weaker INR; raise our target
price to Rs1,114. Maintain BUY.

Sun Pharmaceutical- Target Price (INR) 950 USD550mn payout is a mild hurdle on the M&A path: Avendus

SUNP and TEVA have admitted to patent infringement on gProtonix. Of
the windfall USD2.15bn payoff to PFE, the burden for SUNP falls at
USD550mn, payable in 2013. The payout a) Is significantly higher than
the cUSD105mn provision of 2QFY13; b) And cuts SUNP’s consolidated
net cash by c50%, the balance is held by TARO, to which SUNP has no
direct access; c) It reduces SUNP’s ability for an immediate big‐ticket
acquisition and even smaller, bolt‐on deals; and d) Though smaller in
impact, SUNP’s INR‐denominated cash reserves continues to take a hit
from the weakening INR. Our Jun14 TP is lowered to INR950; maintain
Hold. An immediate, knee‐jerk reaction is likely, led by the expected
impact on acquisition plans in the near future. However, with strong
cash flows, SUNP’s long term funding capabilities stay intact.

Morgan Stanley Research, Sun Pharmaceutical Industries 4Q Beat, Robust F14 Guidance – 18-20% Growth

Sun Pharmaceutical
Industries
4Q Beat, Robust F14
Guidance – 18-20% Growth
Quick Comment – Sun reported F4Q13 results
ahead of our expectations: Sales were up 32% yoy
(7.7% qoq) and operating margins expanded 10bps to
41.3% (contracted 320bps qoq). Together that led to a
23% rise in net profits to Rs10.1 bln (our forecast was
Rs8.7 bln). During the quarter, Sun benefited from a
sharp (but temporary) spike in doxycycline, generic
Doxil launch and DUSA (full quarter)/URL (2 months).
Strong F14 guidance: On a high sales base of F13 (up
41% to US$2 bln), Sun has guided for 18-20% growth in
constant currency terms in F14. This will include the
full-year benefit from URL/DUSA ($100 mln incremental
uplift), but F14 guidance also absorbs one-off
opportunities in F13 (Lipodox, doxycycline) and Taro
pricing risk. Other elements of guidance include – R&D
expenses (6-8% of sales), Rs8 bln capex, 25 ANDA
filings and 18-20% tax rate. The company has net cash
of $1.3 bln as of March 2013.
Conference call highlights: Sun remains excited
about the growth prospects in regulated markets. It
continues to pursue its plans to gain scale in controlled
substance-based drugs in the US. It seeks to scale up
DUSA’s 6% share in the actinic keratoses (AK) market
through higher device installation and rising usage per
device. SPARC is in dialogue with FDA for levetiracetam
XL, and one way to overcome bioequivalence in fed
condition is to increase the patients in trial. Starhaler has
been launched in May in select cities in India. Near-term
risks include 1) possible entry of Sandoz in Taro’s
largest product (nystatin/trim) and 2) upcoming jury trial
in June 2013 for Protonix.
We reiterate our OW rating on Sun: We expect the
company to continue to deliver strong growth over the
next couple of years. Please see our latest report – Sun
Pharmaceutical Industries – Asia Insight: Best Getting
Better, dated May 12, 3013 for details

Numero uno position Sun Pharma :: Centrum

Numero uno position
Sun Pharma’s (SPIL) results for Q4FY13 were better than our expectations. The company reported a growth of 32%YoY in revenues, 10bps in EBIDTA margin and 23%YoY in net profit. Sales growth in US formulation business was 77%YoY and in RoW it was 22%YoY. The results of DUSA and URL generic business have been consolidated from Q4FY13 and will contribute for the full year in FY14. SPIL has demerged its formulations business into a 100% subsidiary for better focus. The Protonix lawsuit hearing is scheduled in June’13. The management has given a guidance of 18-20% sales growth in FY14. We have a Buy rating for the scrip and revised target price of Rs1,258 from Rs892 (based on 26x Sept’14 EPS of Rs48.4).

Excellent sales growth: SPIL reported 32%YoY growth in revenues from Rs23.36bn to Rs30.87bn in Q4FY13. Domestic formulation revenues (25% of total) declined by 11%YoY from Rs8.77bn to Rs7.80bn due to additional sales in Q4FY12 and change in the treatment of sales returns. Its US formulation business (57% of total) grew by 77%YoY from Rs10.11bn to Rs17.88bn. The RoW formulation business (13% of revenues) grew by 22%YoY from Rs3.23bn to Rs3.94bn. SPIL’s API business (5% of total) grew by 11%YoY from Rs1.53bn to Rs1.70bn.

Margin improves: SPIL’s margin for Q4FY13 improved by 10bps from 41.2% to 41.3% due to the decline in material cost by 380bps from 21.0% to 17.2% of net sales due to higher sales in the US market. Personnel cost dropped by 70bps from 14.9% to 14.2% due to strong sales growth. Other expenses grew by 440bps from 22.9% to 27.3% due to additional expenses of DUSA and URL generic business.

Angel Broking: MphasiS- RU2QFY2013 Coal India - RU4QFY2013 Tree House - RU4QFY2013 Sun Pharma - RU4QFY2013 Cipla - RU4QFY2013 Indoco Remedies - RU4QFY2013 Page Industries - RU4QFY2013

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