Sun Pharma

Investors with a 3-5 year perspective can buy the stock of Sun Pharmaceutical Industries (Sun), an integrated speciality pharmaceutical company that manufactures and markets generic medicines in India, US and several other markets.

Though competition and pricing remain concerns for generic companies with a US exposure, Sun Pharma’s strength lies in its product basket and superior cost management in testing times.

That explains Sun’s better profitability as well as performance against competitors.

At the current price of Rs 1,403, the stock trades at a valuation of 20 times its estimated 2008-09 earnings per share.

The valuation is justified, given its superior fundamentals and growth prospects.

In India, Sun Pharma currently has a 3.3 per cent share in a highly fragmented market and enjoys a position of strength in brands catering to therapy areas of psychiatry (Repace), neurology (Oxetol), cardiology (Aztor) and gastroenterology (Pantocid) amongst others.

As it continues to build on marketing initiatives to strengthen customer relationships, Sun’s domestic formulation business will continue to grow faster than the industry growth of 13 per cent.

Sun Pharma’s consolidated net revenues increased by 58 per cent and net profit zoomed by 225 per cent, on the back of significant non-recurring income booked in the fourth quarter due to exclusive product launches in the US.

After adjusting for one-off gains, core sales are likely to have grown by more than 20 per cent on a year-on-year basis, according to our estimates.

The challenge for Sun, however, remains in skilfully parrying the expectations of growth — that too, on a higher base — even as the exclusivity period in products comes to an end.

While sales from one exclusive product generic, Ethyol, will provide cushion in the near-term, Sun Pharma and its US subsidiary, Caraco, have applications for US generic drug approvals catering to 89 products awaiting USFDA nod, making this one of the strongest product pipelines among generic companies.
Promising pipeline

Sun’s niche product pipeline with exclusive (or shared exclusive) opportunities also shows promise.

Interestingly, it has also started settling patent lawsuits — a positive strategy — with innovator companies for products (such as Exelon and Effexor) which save significant litigation costs and provide assured revenue visibility in future.

Near-term risks could be in the form of uncertainty surrounding Sun’s Taro Pharma acquisition, heightened competition in key therapy areas of the domestic market, and greater vulnerability to currency fluctuations, with international business now accounting for over 50 per cent sales.