A favourable court ruling has once again paved the way for Sun to launch generic Eloxatin at risk in the US market. While it is not certain whether Sun will introduce Eloxatin, a launch now would give it a head start of 20 months over other generic players.
The favorable ruling allows Sun to relaunch Eloxatin while it continues to litigate the ?consent judgment? terms with Sanofi in the lower court. Thus, any launch by Sun could be subject to damages if the court rules in favour of Sanofi. We are not sure whether Sun will launch at risk ? management is evaluating the option.
During the earlier launch, we estimate that Sun generated sales of $102 million from Eloxatin. If Sun decides to launch at risk in January 2011, it could be the sole generic company in a $1.3 billion market (pre-genericisation) for 20 months (January 2011 to August 2012). If we assume a single generic player market (30% price erosion and 40% market share) till August 2012, the NPV from this opportunity would work out to cRs17/share.
Our target price of Rs 480 is based on a sum-of-the-parts approach, valuing its base business using a P/E and ascribing an option value for its patent challenge pipeline. We value frontline pharma stocks such as Cipla and DRL at 20x 12m forward earnings. We believe Sun deserves a premium to these stocks, given its consistent track record, high profitability and return rations, as well as the potential upside from the deployment of idle cash in the business, and consequently value it at 22x 12-month forward earnings. At 22x Mar’12E EPS we arrive at a value of Rs 472 for Sun’s core business. We also ascribe an option value of Rs8 to Sun’s patent challenge pipeline.
Key downside risks that could impede the stock from reaching our target price include FDA issues at Caraco’s Detroit plant may take longer than expected to be resolved. This may also impact US sales of products from Sun’s facilities until issues are resolved. Inability to close/effectively integrate the Taro acquisition and exploit synergies could keep earnings depressed for longer than anticipated.