Sun Pharma

Growing presence in the US generics market, strong domestic franchise in chronic segments and a promising pipeline of ANDA (abbreviated new drug applications) filings make a strong case for remaining invested in the stock of Sun Pharmaceuticals. At the current market price of Rs 1,104, the stock trades at about 16 times its likely FY-09 per share earnings.

Shareholders may be better off adopting a wait-and-watch approach given the lack of clarity on USFDA’s stance on Caraco Pharmaceuticals and the potential fall in revenues from the sale of Protonix, earlier launched ‘at risk’.

Besides, the pending court ruling in Sun’s takeover of Taro and the opportunity loss due to the now delayed launch of non-AB rated generic version of Effexor XR also add to the near-term concerns on the stock.
Key growth drivers

In the domestic market, the company has a strong presence in the chronic therapy segment, which enjoys not just high margins but also high entry barriers in terms of prescription-driven sales. Sun currently has a market share of over 3.4 per cent in India.

Besides its stronghold in therapy areas, Sun’s continuous efforts to strengthen customer relationships and improve marketing initiatives may help it clock steady growth in its domestic formulations business. The domestic branded generics segment, which has enjoyed a three-year CAGR over 29 per cent, contributed about 43 per cent of revenues in FY-08.

That said, it is Sun’s presence in the US generics market that offers growth momentum. This segment, which made up 41 per cent of revenues, has grown at a CAGR of over 70 per cent in the last three years.

Apart from sales of distributed products, which include Sun’s Para IV products — Protonix and Ethyol — that were launched ‘at-risk’, the company’s long pipeline of new drug application filings also offer potential for long-term growth.

That between Sun and Caraco , there are over 96 new drug applications pending approval by the FDA stands testimony to the growth opportunities that lie ahead of the company.
Inorganic growth

With valuations of many global generics players trimmed in recent times, Sun has indicated that it could pursue growth opportunities through acquisitions. In that context, Sun’s cash-rich status (net cash of $550 million) and strong cash flows, plus its track record of turning around the companies it acquires, lends comfort. While Sun’s acquisition of Israel-based Taro Pharmaceuticals continues to remain under a cloud, Sun’s position has been strengthened by a Tel Aviv district court ruling in its favour.

In a recent development in this case, the Israeli Supreme Court has given both Sun and Taro a month’s time to reach an out-of-court settlement. While it is difficult to predict the outcome, Sun has so far not given any indication of backing out from the deal, even as it scouts for other takeover candidates to further growth.

Sun’s recent acquisition of the US-based Chattem Chemicals furthers this strategy. This acquisition will give Sun a better launch pad in the US, given Chattem’s narcotic import registration as well as its fully operational USFDA and DEA approved facilities in mainland US.
Potential opportunities in US

The ‘at risk’ launch of Protonix has so far yielded good revenues for Sun, but could taper off in the coming quarters as the management has said after reaching its internal sales target it will consider going slow on its sales.

In terms of the other exclusive revenue opportunity, Ethyol, while the exclusivity period has expired, Sun continues to rake in profits as prices have remained firm.

That there are only two more players, the innovator and an authorised generic player besides Sun in the market, may explain the firm price trends.

But, the USFDA’s decision to uphold the petition filed by Osmotica may cap it the near-term earnings prospects. Sun may now have to file an ANDA citing Osmotica’s drug as reference which, in essence, will delay its launch, resulting in an opportunity loss.