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● Sun has delivered the most resilient growth in domestic market unlike
peers and the performance in the US has exceeded expectations. We
increase our target price by 8% to Rs576 (from Rs535) as we factor in
the: (1) improved performance at Taro in 2Q12, (2) stake increase in
Taro and (3) margin increase for ex. Taro business.
● Our new target price has further potential upside as we assume
(1) only half the price increases taken by Taro in 2Q12 would
sustain and (2) Sun may have to pay 20% higher to its offer to
purchase the remaining stake (33.7%) in Taro. Additional potential
upside exists from the use of remaining US$500 mn cash, as
investment yield for Sun is low at 6-7%.
● We see potential upside to FY12 sales growth guidance of 28-
30% as after the guidance both currency and Taro performance
have been in Sun’s favour. This reduces the ask for incremental
US ex. Taro sales to only US$20 mn in 2H12, if Taro maintains
the current run rate—else incremental US sales needed is US$50
mn which is possible given the pending launch of Cardizem CD,
Prandin exclusivity etc.
● Our FY12/13 estimates increase by 9/8% as we factor in improved
performance at Taro and higher ex. Taro margins.
Strong sales growth at Taro is driven by price increases
Taro’s quarterly sales run rate increased significantly in 2Q12 to US$138
mn from an average of US$107 mn in the past three quarters. A
comparison with the Derma peers suggests that most of the increase
came through price increases in the Derma portfolio. IMS suggests that
Perrigo and Nycomed have also increased prices of several derma
products.
As the price increase is across the industry, it gives confidence that a
large part of the increase should sustain for Taro and this provides
potential upside to our estimates. We assume only half the price
increases would sustain for Taro.
Figure 1: Derma sales trend—players have pushed price increases in CY11
(US$ mn) 2006 2007 2008 2009 2010 9M11* 3MSep-11*
Taro 192 177 206 228 252 453 628
Perrigo# 181 172 187 196 245 359 386
Nycomed# 345 379 391 430 482 510 524
*Annualized, # ex. Imiquimod cream. Source: IMS health, CS estimates
FY12 sales growth guidance is likely to be exceeded
We see potential upside to FY12 sales guidance of 28-30% growth as
after the guidance two things have been in Sun’s favour: (1) currency
and (2) strong Taro performance in 2Q12. Both reduce the
requirement of the US ex. Taro sales to meet guidance. If Taro
maintains 2Q12 run rate, then only US$20 mn incremental US sales
are required in 2H12 to achieve the upper end of guidance—else
incremental US sales needed are US$50 mn, which should be
achievable given contribution from significant products such as
Cardizem CD, Prandin exclusivity etc.
Figure 2: Growth required for Ex-Taro US sales to meet FY12 guidance
(Rs mn) 2H11 2H12 YoY % Remarks
Sales 30,342 39,075 29% Growth required for 28% FY12 sales growth
India 11,989 13,921 16% @18% base business growth
Taro 9,464 11,855 25% Slowdown in Taro assumed
EMs 2,362 2,854 21% Same growth rate as 1H12
Bulk 2,337 2,471 6% Same growth rate as 1H12
US ex. Taro 4,191 7,975 90% Reconciling number
Source: Company data, Credit Suisse estimates
Offer to acquire remaining Taro stake is accretive
Sun Pharma has announced its offer to acquire the remaining shares
of Taro (Sun currently holds a 66.3% stake in Taro) at US$24.5 per
share and this involves cash outflow of US$368 mn. The proposed
acquisition would be accretive as Sun's investment yield is low at 6-
7% and cash gets valued at 1x, but Taro's new profit should get Sun's
market multiple (20x+). Additionally, with full control, synergy benefits
may be realised at a faster pace.
However, given the substantial improvement in Taro’s operations in
2Q12, we believe that Sun may end up paying 20% higher than the
current offer (Sun’s final payment to Caraco was 10% higher than its
initial offer). In terms of approval, majority of the minority shareholders
need to approve the buyout and for evaluation of Sun’s current offer, a
special committee of the independent directors has been formed.
Maintain OUTPERFORM; increase target price to Rs576
Sun trades at a premium of 10-15% to the large-cap peer average,
given its higher RoCE, a strong balance sheet and a strong execution
track record. Our average multiple for large-cap pharma companies is
20x and therefore we value Sun at a 15% premium, at 23x FY13E
earnings.
Figure 3: Both Taro and Sun ex. Taro surprised positively on margins
3Q11 4Q11 1Q12 2Q12
Taro EBITDA Margin 29% 35% 35% 48%
Sun EBITDA Margin 27% 28% 33% 35%*
*Ex. currency benefits, reported was 38%. Source: Company data, Credit Suisse estimates
Risks to OUTPERFORM call
Risks to our estimates and view include: (1) potential Protonix-related
liability but hearing on the same has not yet started, (2) MNCs’
expansion in chronic therapy in India impacting Sun’s market share—
clarity on MNCs’ success would appear only in the next two years.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Sun has delivered the most resilient growth in domestic market unlike
peers and the performance in the US has exceeded expectations. We
increase our target price by 8% to Rs576 (from Rs535) as we factor in
the: (1) improved performance at Taro in 2Q12, (2) stake increase in
Taro and (3) margin increase for ex. Taro business.
● Our new target price has further potential upside as we assume
(1) only half the price increases taken by Taro in 2Q12 would
sustain and (2) Sun may have to pay 20% higher to its offer to
purchase the remaining stake (33.7%) in Taro. Additional potential
upside exists from the use of remaining US$500 mn cash, as
investment yield for Sun is low at 6-7%.
● We see potential upside to FY12 sales growth guidance of 28-
30% as after the guidance both currency and Taro performance
have been in Sun’s favour. This reduces the ask for incremental
US ex. Taro sales to only US$20 mn in 2H12, if Taro maintains
the current run rate—else incremental US sales needed is US$50
mn which is possible given the pending launch of Cardizem CD,
Prandin exclusivity etc.
● Our FY12/13 estimates increase by 9/8% as we factor in improved
performance at Taro and higher ex. Taro margins.
Strong sales growth at Taro is driven by price increases
Taro’s quarterly sales run rate increased significantly in 2Q12 to US$138
mn from an average of US$107 mn in the past three quarters. A
comparison with the Derma peers suggests that most of the increase
came through price increases in the Derma portfolio. IMS suggests that
Perrigo and Nycomed have also increased prices of several derma
products.
As the price increase is across the industry, it gives confidence that a
large part of the increase should sustain for Taro and this provides
potential upside to our estimates. We assume only half the price
increases would sustain for Taro.
Figure 1: Derma sales trend—players have pushed price increases in CY11
(US$ mn) 2006 2007 2008 2009 2010 9M11* 3MSep-11*
Taro 192 177 206 228 252 453 628
Perrigo# 181 172 187 196 245 359 386
Nycomed# 345 379 391 430 482 510 524
*Annualized, # ex. Imiquimod cream. Source: IMS health, CS estimates
FY12 sales growth guidance is likely to be exceeded
We see potential upside to FY12 sales guidance of 28-30% growth as
after the guidance two things have been in Sun’s favour: (1) currency
and (2) strong Taro performance in 2Q12. Both reduce the
requirement of the US ex. Taro sales to meet guidance. If Taro
maintains 2Q12 run rate, then only US$20 mn incremental US sales
are required in 2H12 to achieve the upper end of guidance—else
incremental US sales needed are US$50 mn, which should be
achievable given contribution from significant products such as
Cardizem CD, Prandin exclusivity etc.
Figure 2: Growth required for Ex-Taro US sales to meet FY12 guidance
(Rs mn) 2H11 2H12 YoY % Remarks
Sales 30,342 39,075 29% Growth required for 28% FY12 sales growth
India 11,989 13,921 16% @18% base business growth
Taro 9,464 11,855 25% Slowdown in Taro assumed
EMs 2,362 2,854 21% Same growth rate as 1H12
Bulk 2,337 2,471 6% Same growth rate as 1H12
US ex. Taro 4,191 7,975 90% Reconciling number
Source: Company data, Credit Suisse estimates
Offer to acquire remaining Taro stake is accretive
Sun Pharma has announced its offer to acquire the remaining shares
of Taro (Sun currently holds a 66.3% stake in Taro) at US$24.5 per
share and this involves cash outflow of US$368 mn. The proposed
acquisition would be accretive as Sun's investment yield is low at 6-
7% and cash gets valued at 1x, but Taro's new profit should get Sun's
market multiple (20x+). Additionally, with full control, synergy benefits
may be realised at a faster pace.
However, given the substantial improvement in Taro’s operations in
2Q12, we believe that Sun may end up paying 20% higher than the
current offer (Sun’s final payment to Caraco was 10% higher than its
initial offer). In terms of approval, majority of the minority shareholders
need to approve the buyout and for evaluation of Sun’s current offer, a
special committee of the independent directors has been formed.
Maintain OUTPERFORM; increase target price to Rs576
Sun trades at a premium of 10-15% to the large-cap peer average,
given its higher RoCE, a strong balance sheet and a strong execution
track record. Our average multiple for large-cap pharma companies is
20x and therefore we value Sun at a 15% premium, at 23x FY13E
earnings.
Figure 3: Both Taro and Sun ex. Taro surprised positively on margins
3Q11 4Q11 1Q12 2Q12
Taro EBITDA Margin 29% 35% 35% 48%
Sun EBITDA Margin 27% 28% 33% 35%*
*Ex. currency benefits, reported was 38%. Source: Company data, Credit Suisse estimates
Risks to OUTPERFORM call
Risks to our estimates and view include: (1) potential Protonix-related
liability but hearing on the same has not yet started, (2) MNCs’
expansion in chronic therapy in India impacting Sun’s market share—
clarity on MNCs’ success would appear only in the next two years.
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