Hold Sun Pharmaceuticals Ltd.
Company Background:
Sun Pharma is one of the fastest-growing companies in India’s domestic pharmaceutical market, growing at a double digit then, the industry rate. It has followed a strategy of being the first to enter niche, high-growth segments (both organic and through acquisitions). It is also filing for ANDA approvals through its US subsidiary Caraco and is looking to conclude its second key acquisition in the US (Taro Pharma).
Investment Rationale:
Sun Pharma and its Subsidiary Caraco to launch Lexapro
A long awaited patent infringement dispute has been settled between company & Forest Laboratories and its licensing partner H LundbeckAS, over Forest’s blockbuster antidepressant, Lexapro. The drug clocked revenues of US$2.3bn in FY09. As a part of the deal, Sun Pharma will license its IPR on the product to Lundbeck/Forest in return for anupfront milestone.
If Sun pharma’s IPR is used by Lundbeck/Forest, Sun pharma could get royalties on sales. Also, Caraco will get license to use Lundbeck’s patents so as to market generic Lexapro.
Formulation Exports: a key result area
Sun Pharma is maintaining its focus of launching a niche product portfolio coupled with technically complex products in the emerging markets. The company is present across 26 countries including CIS, China, South East Asia, South Africa, the Middle East, Brazil, Mexico, Peru, Colombia etc. We expect this segment to grow at 20% CAGR through FY09-11E.
US FDA seizes Caraco drugs:
The US FDA which has seized all drugs manufactured at Caraco’s Michigan facilities on account of repeated violations of the current Good Manufacturing Practice (cGMP) requirements. The U.S. FDA action would negatively impact Sun Pharma’s high-margin U.S. business going ahead.
We expect the Caraco sales to be impacted by 6 to 7% due to this. Thus we expect the impact on Sun pharma sales by 2 to 3%. As there USFDA has only seized the distribution of drugs from the Michigan facilities whereas Caraco can distribute the products manufactured from the other facilities.
Our View:
Going forward, we expect the slower growth in the business to continue for the next two to three quarters, due to the economic downturn and lack of new product launches from the Caraco facility that is under USFDA scrutiny.
However, the company’s track record of delivering consistent and robust growth makes it the best Indian player in the generic space. With a strong balance sheet with over Rs 3,500 crore in cash, Sun Pharma is well positioned to exploit newer growth avenues. Thus we remain positive on the stock.
Report card
| Attribute | Value | Date |
|---|---|---|
| PE ratio | 19.18 | 31/07/09 |
| EPS (Rs) | 61.09 | Mar, 09 |
| Sales (Rs crore) | 476.75 | Jun, 09 |
| Face Value (Rs) | 5 | |
| Net profit margin (%) | 31.01 | Mar, 08 |
| Last bonus | 1:1 | 21/04/04 |
| Last dividend (%) | 275 | 01/06/09 |
| Return on average equity | 24.09 | Mar, 08 |
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Hichens, Harrison & Co has given a fresh call to Hold Sun Pharmaceuticals Ltd.with a target of Rs. 1514
They expect the stock to react positively to the development. The stock is trading at a PER of 22.3xFY11E earnings.They make minor adjustment in the target price to consider FY11E earnings and. They maintain our Hold rating on the stock.