Sun Pharma

Better-than-expected financial performance, promising outlook for its domestic and international formulations business and the possibility of resumption in manufacturing at Caraco's site by the end of this year make Sun Pharmaceuticals a reasonable long-term investment bet.

The company's fairly strong pipeline of drug applications also adds to its appeal. At the current market price of Rs 1630, the stock trades at about 23 its likely FY-11 per share earnings, which seems justified by its many growth triggers.

Investors nevertheless can accumulate the stock in lots given the broader market volatility.

Improving performance

For the quarter-ended March 2010, the company reported a 2 per cent fall in consolidated revenues. This was largely led by a 21 per cent dip in its Indian branded generics (domestic formulation) sales as export formulations (excluding that of Caraco, its US-based subsidiary) grew by over 33 per cent.

But, after adjusting for the one-off sales spurt of approximately Rs 200 crore in the fourth quarter of last year, the domestic formulation growth looks healthy at about 14 per cent.

Caraco's revenues also grew 8 per cent, while overall formulations exports grew by 11 per cent. Net profits remained flat while there was a three-percentage point improvement in operating margins to 33 per cent.

For the coming year, the management has guided for 18-20 per cent growth in revenues. While this may seem difficult in the absence of high sales opportunities from generic Protonix and Eloxatin this year, it might not be very ambitious.

The growth guidance appears plausible given the low base of domestic formulations and the likely resolution of the FDA issue at Caraco. Improving business outlook for its international formulation business too could pitch in.

Upside from the expected approval for its version of Effexor XR in the US may also present an additional growth avenue, though there isn't any specific timeline on when that may happen.

Domestic dominance

Domestic formulations, which contribute over 45 per cent of the total revenues, hold the key to its growth guidance.

The company appears to be at a fairly strong vantage here with an overall market share of 3.7 per cent and leading market shares in select therapeutic areas.

A favourable revenue mix between existing and new products also strengthens its hold in the highly fragmented domestic market. Sun derives close to 70 per cent of its revenues from older products (launched before 2006), with new launches making up for the rest. This provides it with a sustainable competitive advantage over peers.

The company also plans to add, albeit slowly, to its differentiated products count; this may help it improve on its market share in the IPR regime. Besides, with global pharmaceutical companies showing increased interest in the Indian market, Sun's strong reach (2500 sales agents) and brand presence makes it a strong contender for in-licensing deals too.

Caraco issue

The likely resolution of the cGMP issues at Caraco Pharmaceuticals may also be strong growth trigger for the company. While Caraco has already received an approval from the US FDA for the remediation work plan it had submitted earlier — remedial activities are underway now — it would be able to resume manufacturing operations only on receiving a final nod from FDA. This, the management expects to get by end of the financial year.

That notwithstanding, Sun has also filed for site transfer for some of its key products.

While the management doesn't expect a dramatic increase in its market share in the US thereafter, site transfer or better still, final nod from the drug authority, would in itself be reason enough for a re-rating. Delays in approval, therefore, could present a risk to its earnings.

Strong pipeline

Between Sun Pharma and Caraco, over 84 ANDAs (abbreviated new drug applications) now stand approved, while 123 await US FDA approval.

Sun had filed 30 products in the US last year and plans to file a similar number this year too. This would help it seal a long-term growth potential in its US generic business.

In the controlled-substance segment, Sun presently has approvals for formulations of three such products. However, it is yet to capture a significant market share in them. Though the growth potential in this business remains attractive, the management expects the growth rates to remain modest given the quota system followed by Drug Enforcement Authority in the US (quotas are allotted depending on existing sales and not based on product approvals).

What to watch out for

While the company has stopped further shipment of Pantoprazole following the US Federal jury's verdict upholding the innovator's patent (Pfizer Inc.), the management is confident of the strength of its litigation. However, if the court were to uphold the patent, it may cost Sun heavily.

In such case, the company may have to cough up roughly over three times the sales loss suffered by the patent-holder (estimated at about Rs 1800-5,400 crore).

The court's verdict, therefore, will hold the key. Israel's Supreme Court ruling on the disputed Sun-Taro acquisition could be the other trigger; though there still is not enough clarity on if and when that could happen.

via BL