We maintain our ?reduce? rating on Sun Pharmaceuticals due to valuation concerns and retain our 12-month price target of R664, which is based on 20x FY2014e adjusted EPS of R33.3. Further, we expect marginal near-term financial impact from the current generic portfolio following the deal with Takeda to acquire URL Pharma?s US generic business.
Sun Pharmaceuticals has entered into an agreement with Takeda to acquire URL Pharma?s US generic business. The consideration to be paid for the acquisition has not been disclosed. The purchase will not include Colcrys (molecule: colchicine) which will be retained by Takeda. Sun Pharma does not expect this transaction to be material in nature and will be funded from cash in hand ($1 billion in cash as Q2FY13).
According to Takeda, the URL generic business (excluding Colcrys) had CY2011 sales of $72 million in the US (12% of total URL sales of $600 million). Felodipine is the largest product within the generic portfolio with sales of $12 million (2% of URL sales). The deal is expected to be closed in a few months subject to regulatory approval.
In April 2012, Takeda acquired 100% stake in URL Pharma for $800 million. Takeda was keen to expand its presence in the US gout treatment market through the acquisition of Colcrys (74% of URL CY2011 sales). URL?s US generic business is not of core interest to Takeda and has been on the block. Overall, we view the acquisition by Sun Pharma as an opportunistic move with potential upsides, driven by pipeline opportunities. URL?s current US generic sales are likely to be lower than $72 million given that there have been two additional players in the felodipine market ? Torrent (December 2011) and Wockhardt (August 2012). The portfolio of 20 products comprises mainly plain oral solids (tablets and capsules). Since CY2004, URL shifted focus from generics to developing branded products. The focus on generics appears to be niche extended release products with higher entry barriers. We have identified three of the generic filings by URL ? Ambien CR, Mucinex and Coreg CR. It is not clear if the deal will include the rights to these products and if Sun Pharma will have access to the technology.
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