Analysts upgrade Sun Pharma on improving visibility

Taro should continue driving the US business and regulator approval for Lipodox supplies

Sun Pharmaceuticals Industries has risen by 43% on bourses in the last one year.

Even in the last one month while many of its peers lost some of the gains Sun Pharma has continued to outperform rising 11% against Sensex’s 2% fall. What more, analysts see more gains in the offing and the stock’s premium valuations to hold as the company’s prospects are improving and growth is expected to be strong. Analysts at Citi observe that “Sun stands out among peers due to a superior business mix (leadership in niche areas in India & US, growing traction in Rest of the World), excellent track record on delivery and industry leading financial metrics”. While consensus target price for the stock trading at Rs 799 stands at Rs 842.45 as per Bloomberg data, many foreign research houses have raised their target prices to Rs 900 and even more in the past few days. For instance, while Credit Suisse has revised its target price to Rs 900 after Taro hiked prices of its products a few days back, Citi has raised it to Rs 970.

Taro booster
Of late, Credit Suisse citing industry checks observed that Taro Pharma (Sun’s subsidiary) has been able to push through price increases in three products. The three products, as per the research house, contribute to 35% of Taro’s sales. While the research house maintains its "outperform" rating on the stock, it has raised the target price to Rs 900 from Rs 840, in part by factoring higher sales estimates for Taro.

Taro Pharma has been a key driver of Sun Pharma’s US business. While at the end of first quarter of FY13 concerns were being raised that the subsidiary’s profitability may reduce on rising competition, no such impact has been seen till now. The December 2012 quarter proved to be the best ever quarter for Taro with revenues at $185 million thereby beating all estimates. Gross margins at 75.4% were healthy while EBIDTA margins at 58.4% improved 443 basis points, compared to the September 2012 quarter. The recent price hikes along with strong product pipeline will help Taro sustain growth rates going ahead.

While Sun has dropped plans to raise its stake in Taro from 66% to 100%, the move is being looked at positively. The premiums being demanded by minority shareholders would have led to large cash outgo and in turn limited Sun’s ability to go for more acquisitions.

Recent acquisitions to boost growth

While Sun completed the acquisition of US-based Dusa Pharmaceuticals during the December 2012 quarter strengthening its dermatology segment, it also acquired the generic business of URL Pharma from Takeda Pharmaceuticals USA. Analysts at ICICI Direct observe that Sun has time and again demonstrated an uncanny knack of acquiring unique players to bolster its US portfolio, which now owns a huge basket of 403 ANDAs (abbreviated new drug delivery applications). Caraco, Taro, Dusa and now URL (generics business) are all capable of maintaining the growth tempo.

Monica Joshi at Avendus Capital, too, has raised her forecasts with the inclusion of Dusa and URL. She estimates the Dusa acquisition to be EPS accretive from FY15 but adds that URL’s vast generic product basket (280+ ANDAs with minimal overlap) could accelerate portfolio growth and improve profitability of Sun Pharma. Now that the Taro acquisition (remaining stake of 34%) is being officially put to rest, backed by cash and bank balances of $1.2 billion as well as shareholders’ approval to raise funds, Sun is likely to step up its inorganic initiatives, building blocks for long‐term sustainability, believe analysts.

Overall, analysts at Citi see healthy growth in revenue, EBIDTA and EPS for Sun (compounded annual growth of 18%, 19% and 23%, respectively over FY13-15). While assuming higher competition in generics of Doxil from FY15, they still expect healthy growth in the US market (including DUSA, URL), India and Rest of World markets for Sun. The anti-cancer drug brand “Doxil” by Johnson & Johnson had seen shortage in the US markets and Sun had been approved by the FDA to supply the drug in the interim. However, later Sun has received FDA approvals to continue selling the drug in the US. Analysts see Rs 3.70 addition to FY14 EPS due to the sale of the drug.