Our March 2012 price target of R510 values the base business of Sun Pharmaceuticals at R494/share on 22xFY13E P/E and para IV opportunities at R16/share.
Leadership in fast-growing chronic therapies in India, acquisition and para IV-led growth for US generics, expansion in emerging markets and $1 bn cash, make for a strong investment case.
However, it is at a 20% premium to peers on FY12E P/E, and while rich valuations may continue, we think further multiple expansion is unlikely given slowing domestic market growth, low visibility of para IV opportunities beyond FY14E and potential risk from Protonix litigation. We would look to buy the stock closer to R420-R430 levels, at-least 15%-20% below our price target.
Early entry in emerging chronic segments, sales organisation focused on specialist doctors and steady product basket expansion have driven above market growth, which we expect to continue.
However, domestic market growth is slowing and the company is not immune. We estimate 15% revenue CAGR over next 3 years, slowing from 20% CAGR delivered over FY06-FY11. Estimate Taro and para IV opportunities will drive 31% revenue CAGR in the US over FY11-FY14E, though we see para IV opportunities tapering off beyond FY14.
Resolution of regulatory issues with Caraco could drive upside; adverse ruling on Protonix could dent earnings materially. Sun Pharma?s presence in emerging markets has been enhanced by Taro acquisition and recent distribution JV with Merck, while it has recently started selling in the EU. We estimate RoW revenues to grow at 26.4% CAGR over FY11-FY14E.
Sun Pharma has $1 billion cash on its books, and we estimate it will generate $1.4 bn over FY12-FY14E. It is seeking inorganic opportunities. We believe acquisition in emerging markets is high on the agenda.
The upside risks include big-ticket approvals in the US, pick-up in domestic growth and Caraco resolution. The downside risks include delays in US product launches, protracted slowdown in India and adverse ruling on Protonix.
JP Morgan