Retain ‘overweight’ on Sun Pharmaceuticals with a target price of R995 per share. The stock is on our Asia Pacific Best Ideas list. We expect Sun to continue to increase its earnings at a high-teens rate through its high-quality base business, focus on customers’ pipeline of complex products, unlock value in Ranbaxy, DUSA and SPARC, and make new acquisitions.
Sun Pharma announced closure of its all-stock merger deal with Ranbaxy at an EV of $4 billion (implying 2.2x EV/Sales). Following the closure, Ranbaxy will be de-listed from the stock exchanges. Ranbaxy shareholders will receive 0.8 share of Sun Pharma for each share of Ranbaxy.
Key priorities include strong business growth, increased R&D productivity and achieving 100% regulatory compliance in manufacturing (ie, operationalising Ranbaxy’s four facilities closed by FDA). Sun targets $250 million in synergy benefits over next three years through cost rationalization and business growth. Ranbaxy outsources high level of manufacturing, which Sun targets to bring in-house.
Sun emphasised that, post merger, it would have the ability to scale up consolidated $250 million in R&D spend to $500 million. This would allow the company to enrich its innovation-based product pipeline. It will look for new M&A opportunities which fulfill its strategic rationale such as greater access and scale in EMs.