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Sun Pharma’s prolific run on the bourses that saw a brief pause has resumed. The stock had corrected from its 52-week high of Rs 581.40 on July 31 to closing lows of Rs 482.5 on August 21, but has recovered to Rs 556 now. The correction can be attributed to overall negative sentiments in the market, profit-booking in pharma counters and concerns over rising competition for Taro.
Taro (an Israel-based subsidiary), which derives 80 per cent of revenues from the US, has been a key driver of Sun’s US business (accounts for 54 per cent of consolidated revenues). While there are concerns over Taro’s near-term prospects, its long-term prospects remain healthy. Also, its recent exclusive agreement with NovaBiotics for its investigational new drug, Novexatin is seen in positive light.
Nevertheless, Sun’s other acquisitions like URL, Dusa, Caraco as well as strong product line up should help sustain strong growth in its US business. Further, a weak rupee will only add to the growth. Analysts at Nomura observe that the change in their currency assumptions (rupee-dollar at 64 from earlier 60) leads to a 9-12 per cent increase in their EPS estimates for FY15/16. Notably, the domestic business (a fourth of revenues) is also seen outperforming the industry. In this backdrop, the Sun scrip still remains a top pick in the pharma segment, with 25 of 39 analysts polled by Bloomberg during August-September having a Buy rating. Though the consensus target price remains close to Rs 580, analysts like Ranjit Kapadia at Centrum Broking has already raised his target price to Rs 689.
Taro: New licensing pact
Taro has entered into an exclusive licensing and co-development agreement with NovaBiotics for its “Investigational new drug-Novexatin” (anti-fungal treatment). While Phase II-A studies have been completed successfully, the drug’s Phase II-B studies are continuing in the US. And, Taro will not only partner for studies in the US but the UK, too. Though financial disclosures have not been made, Taro is likely to get some milestone payments.
Though the drug is yet to clear the remaining stages of clinical trial, Edelweiss analysts, who expect the drug to compete with Sanofi’s Penlac topical solution (market size $135 million) and the widely used Oral Terbinafine or generic Lamisil ($500 million brand size in US), expect it to be a high potential drug candidate, with superior safety and efficacy profile, and see it as a stepping stone for Sun to build specialty derma franchise. Success with this drug can boost Taro’s prospects significantly.
While Taro is doing well with its strong dermatology range, its largest contributing product, Nystatin/Triam (anti-fungal and steroid combination to treat skin problems) has started facing competition. Analysts at Edelweiss estimate that potential price correction in select derma products of the Taro franchise could result in loss of sales value of $87 million (14 per cent of business), which will impact the margins of the business.
Nevertheless, Sun’s US growth may not feel much heat, as Dusa and URL, acquired in FY13, are paying dividends. Despite Taro’s sales at $153 million during the June quarter declining 3.7 per cent, Sun’s US revenues grew 32 per cent compared to the year-ago period. Analysts attribute this to the acquisition of Dusa and URL, and the benefit of rupee depreciation.
URL has continued to benefit from the shortage of antibiotic Doxycycline and had undertaken price hikes March. Even though the drug supply has been restored, analysts at Sharekhan expect $60-80 million (of $128 million total revenue for URL estimated by them for FY14) to come from this product, with operating margins in the range of 50-55 per cent.
Besides, Sun has a strong product range for the US. It had filed ANDAs (abbreviated new drug applications) for four products in the June 2013 quarter. After counting these and adjusting for filings that were dropped, cumulatively ANDAs for 453 products have been filed by Sun and Taro with the USFDA (as on June 30, 2013). ANDAs for nine products received approvals in the June quarter, taking the total number of approvals to 320. In addition, 19 tentative approvals have been received.
Further, Caraco (another US subsidiary) had gained close to 54 per cent generics market share of anti-diabetic brand Prandin at the end of August. Caraco had launched the generic version of Prandin with 180 days exclusivity in July. Hitesh Mahida at Fortune Equity Brokers observes Prandin remains a two-player market as there has been no authorised generic launch, which is aiding Caraco significantly. This will add upside to his assumptions of sales and profits at $30 million and $15 million, respectively, which he had made assuming a three-player market with 50 per cent market share for Caraco and 40 per cent price erosion during the 180 day exclusivity period. Post exclusivity, too, it is likely to remain a limited competition product with four-five players.
