Stock Review: SUN PHARMA

Sun Pharma's Q4 performance had the 'Taro effect' written all over it. Sun completed the much litigated Taro acquisition in September 2010 rendering its consolidated quarterly performance incomparable with the same quarter last fiscal. However, Taro has registered strong growth in sales and improvement in margins on a sequential basis indicating positive impact of Sun's management on its operations. It contributed one-third of Sun's consolidated net sales and one fourth to the latter's net profit. As a result, Sun managed to post 35% rise in net sales and 12% growth in net profit — exceeding analysts' expectations.

Barring Taro, no major momentum registered by Sun's business in the US was concerning. Existing product range in the US fell below the expectation of the company's management. While the margins on the company's revenue-earning business have remained intact, additional costs borne at the company's manufacturing sites in the US undergoing remediation have depressed the overall operating profit margins. The company's India business, contributing 40% of its total revenues, has performed well. Logging a growth of 20%, Sun's domestic formulation has grown faster than the industry. Maintaining its leadership across six chronic therapeutic areas, Sun enjoyed a market share of 4.3%. Taro's Canadian facility resolving the regulatory issues with USFDA is positive for the company. However, Sun has not given any timeline or extent of cost incurred towards remediation measures for its New Jersey and Detroit facilities in the US. This could impact the company's future cash flows. Sun expects to file only 25 new drug applications with USFDA, despite consolidation of Taro. This is lower given the fact that it has already filed 25 new drug applications in FY11, of which 10 were filed in fourth quarter itself.

The company has nevertheless put forth an aggressive guidance of 28-30% of growth in net sales for FY12 factoring the growth registered by Taro and no revenues from facilities under remediation. Sun has also guided that it is scouting for acquisitions in Europe and emerging markets. The company has insignificant presence in Europe and an acquisition may enable the company to cash into the growth opportunity in Europe much earlier. Besides, inorganic growth is not new to the company as in the past it has acquired lossmaking or distressed companies and turned them around. The markets reacted positively to these results pulling the stock up by 4.5% on Monday. Sun Pharma, the most valuable pharma company on the bourses, remains one of the most promising in the sector.