Stock Review: SUN PHARMA

 

 

FOR Sun Pharma – the most valuable listed local pharma company — it is as good as it gets. The company is back on the growth track, now has full control over Taro Pharma and its US subsidiary, Caraco, is also poised to do well.

   Sun Pharma clocks nearly half of its revenues from the domestic market, 70% of it from sale of products in five segments — cardiology, psychiatry, neurology, diabetology and gastroenterology. It has close to 3.7% share of the domestic market, enjoying leadership across its key segments. After India, the US is the largest market for the company, where it earns 28% of its consolidated revenues. At 13% of total sales, the branded generic segment across 40 markets is another promising area for the company. Sun also manufactures bulk drugs (active pharmaceutical ingredients) for captive consumption as well as for sale outside. This segment typically contributes 10-11% to the company's total turnover.

   The consolidation of Taro is a high point for Sun Pharma, which is also planning to delist Caraco for greater control and achieve better integration of its US business.

Growth strategy

Taro Pharma, which was integrated with Sun in September 2010, is an EPS-accretive acquisition. For Sun, it brings established branded US generics in dermatology and paediatric segments onto the table. It has 150 abbreviated new drug applications (ANDAs) filed with the US FDA and two manufacturing sites in Israel and Canada. Taro is likely to consolidate Sun's position in these therapeutic segments.

   After facing a regulatory clampdown by the US FDA in 2009, Caraco has had its manufacturing suspended. It now sells distributed products. As part of the remediation process, Caraco expects to manufacture two products by the end of the fiscal and add another couple of products by the next fiscal. As Caraco's sales recover, the company's US business will pick up gradually.

   Sun has built a strong pipeline of generic products to be introduced in the US market. Together with Taro, the company has 363 products filed with the US FDA, of which 146 are awaiting approval.

   In the last five fiscal years, Sun Pharma's consolidated net sales rose at a compound annual growth rate of 26% to . 4,103 crore in FY10. Its consolidated net profit has increased at a CAGR of 24% to . 1,351 crore during the same period. Sun is a dividendpaying company with an average payout of 26% of its profits.

   With the consolidation of Taro, Sun has revised its growth guidance for FY11 to 35% increase in net sales. It has infused around $170 million (around . 765 crore) for a 53% stake in Taro. The management intends to post a benchmark return of 20% to 25% on its investment.

   Trading at a trailing price to earnings multiple of 28, Sun Pharma is not overvalued in relation to its peers. Frontline pharma companies such as Cipla, Lupin and Cadila Healthcare are also trading at similar valuations. Most developments impacting the company in the near and medium term though have been factored into the current valuations. However, there could be worry in the form of a one-time inventory or debtors write-off in the case of Taro. Caraco is still in the process of resolving its compliance-related issue with the US FDA. Improving the performances of its subsidiaries Taro and Caraco, therefore, remains one of the major priorities for the company as also consolidating and increasing its share in the domestic market. Any execution lapse may hamper the company's growth prospects.