Sun Pharma (SUNP) has announced that it has entered into an agreement to acquire 85.1% stake in JSC Biosintez— a private Russian pharmaceutical company with manufacturing facilities in Russia and marketing products primarily to Russia and the CIS region. Biosintez had revenues of RUB 3.2 billion ($52 million) in 2015. As per SUNP, the deal is expected to be completed by end of 2016. We believe that the deal valuation is reasonable at 1.15x 2015 EV/Sales and has the strategic intent of gaining access to local manufacturing facilities in Russia.
Reasonable valuation at 1.15x EV/Sales
As per disclosures by SUNP, the acquisition deal includes cash consideration of $24 million and debt assumption of $36 million by SUNP. With sales of $52 million in 2015, EV/Sales valuation of 1.15x seems reasonable to us when compared to other EM deals (2-3x).
Strategic intent of meeting 2020 localisation targets
SUNP is estimated to have generated sales of $90-100 million from the CIS region (including Russia) in FY16, majorly from its acquired Ranbaxy business. As per the Russian Government’s policy of “Pharma2020”, all pharma MNCs operating in Russia need to increase their local manufacturing content. We believe this acquisition would give SUNP access to additional manufacturing facilities in Russia thus aiding it to achieve the localisation targets by 2020.
Group CFO moves out to US
In another development, the group CFO Uday Baldota has resigned from his post effective Apr’17. He will be relocating to the US to take over the post of CEO of Taro (US subsidiary of SUNP). Taro’s current CEO Kal Sundaram would be returning to India. We view these management changes as largely neutral to the future prospects of the company.
We rate SUNP Buy due to compelling valuations. We believe SUNP deserves premium valuation in comparison to sector average because of 1) industry leading margin and return profile, 2) net cash balance sheet, 3) proven execution track record, 4) superior integration capabilities of acquired M&A assets, and 5) investment in specialty portfolio.
Our price objective of Rs 790 is based on simple average from triangulation of fair value derived from three methodologies, namely: 1) three-stage DCF valuation which gives a fair value of Rs 907, 2) EV/IC vs RoIC based on Sep 2018E, which gives a fair value of Rs 716, and 3) target P/E multiple of 21x on Sep 2018E EPS, which gives a fair value of Rs 743.