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Sun Pharmaceuticals (SUN.BO)
Alert: Takeaways from India Pharma Conf., Dec. 6-7
Takeaways from Mumbai – Sun Pharma presented at our India Pharma Mini-
Conference in Mumbai. Below are key takeaways.
Growth on track – Sun continues to remain confident of growth in all key markets
even as it addresses outstanding issues on regulatory compliance (Caraco,
Cranberry) and looks to integrate the recent acquisition of Taro. We continue to
find FY11 sales growth guidance conservative and expect newsflows on certain
key product opportunities (docetaxel / Taxotere, gemcitabine / Gemzar) over the
next few months. Sun remains a good long-term fundamental story in our view, but
stock valuations are likely to constrain upside.
Update on key markets – a) India: robust growth to continue – Sun intends to stay
focused primarily on specialty segments and urban areas. b) USA: growth will
continue to be driven by filings from India and some niche/limited competition
products – management also focusing on getting Caraco's operations back on
track & integrating Taro into the biz. c) Europe: remains an attractive market
despite several regulatory changes – focus on complex generics. d) Emerging
markets: will continue to grow at a fast pace – focus on deepening product basket
and adding sales force; competition to be stiffer going forward.
Key product opportunities in US – a) Decent traction in recently launched Effexor-
XR & Exelon generics; b) Docetaxel - awaiting final approval; will have to evaluate
the possibility of an 'at risk' launch once it comes through; c) Gemzar - likely to be
a very competitive market post Teva's exclusivity launch / forfeiture. On Protonix,
Sun remains confident of its legal position in patent infringement litigation.
Other takeaways – a) Caraco: expressed interest to buy out minority shareholders –
Caraco board has to take a call. On course with corrective action at the plant, but
even on resumption, market share gains will be slow. b) Taro: focus on securing
future pipeline (improving R&D productivity, filing more products) plus some cost
rationalization (already let go of some people) – will provide a status update on
audit in Dec '10 – have to still take a call on strategy re Taro's innovative R&D.
Sun Pharmaceuticals
Valuation
Our target price of Rs480 is based on a sum-of-the-parts approach, valuing its
base business using a P/E and ascribing an option value for its patent challenge
pipeline. We value frontline pharma stocks such as Cipla and DRL at 20x 12m
forward earnings. However, we believe Sun deserves a premium to these stocks,
given its consistent track record, high profitability and return rations, as well as
the potential upside from the deployment of idle cash in the business, and
consequently value it at 22x 12-month forward earnings. We also ascribe an
option value to Sun's patent challenge pipeline.
Risks
We rate Sun Pharma shares Low Risk in line with the recommendation of our
quantitative risk-rating system, which tracks 260-day historical share price
volatility. Key downside risks that could impede the stock from reaching our target
price include: 1) FDA issues at Caraco's Detroit plant may take longer than
expected to be resolved. This may also impact US sales of products from Sun's
facilities until issues are resolved; 2) Inability to close/effectively integrate the
Taro acquisition and exploit synergies could keep earnings depressed for longer
than anticipated; 3) Any damages to be paid in litigation on Protonix with Wyeth;
and 4) A stronger IPR law in India could lead to a gradual slowdown in growth
rates for the Indian market. Key upside risks that could push the shares above our
target price include: 1) any new first to file/limited competition launch could act
as positive catalysts. 2) Faster than expected improvement in Taro's financials
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