After the merger, Taro will become a privately held company, will be wholly owned by affiliates of Sun Pharma, and its ordinary shares will no longer be traded on the New York Stock Exchange.
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Karishma Suvarna
Sun Pharmaceutical Industries has received final approval from the USFDA for its Abbreviated New Drug Application (ANDA) for generic version of Rilutek Tablets. Rilutek (riluzole) is a benzothiazole drug indicated for the treatment of patients with amyotrophic lateral sclerosis (ALS).
Earlier in this month, the company received final approval from the USFDA for its ANDA for generic version of Depo-Testosterone Injection, Testosterone Cypionate Injection USP, 100 mg/ml and 200mg/ml.
MS -
Quick Comment: Sun Pharma announced a settlement for the generic Protonix patent litigation with Wyeth (now a division of Pfizer) and Altana. Pursuant to this settlement, Sun will pay a lump sum amount of US$550mn to Pfizer. The company had net cash of US$1.3bn as of March 2013 (of which about US$520mn is with Taro, Sun's 66%-owned subsidiary) and generated US$500mn in free cash from operations.
Story so far: In Jan-08, Sun launched generic Protonix "at risk" (the underlying patent challenge court case was pending), following the District Court's denial of Wyeth's (now Pfizer) preliminary injunction (PI), and Teva's (at risk) and AG launch. The Appeals Court upheld the District Court's decision on the PI motion (May 2009). However, a jury ruled in favor of Wyeth on April 23, 2010, upholding the validity of the patent. After this, Sun stopped shipments of generic Protonix. Subsequently, the generic companies filed to overturn the jury's verdict, which was denied by the District Court in July 2010.
Implication: We estimate that Sun has grossed US$350-400mn in sales and US$250-300mn in profit from this product since January 2008. The settlement is in excess of our estimate (US$300mn) and Sun's provision (in F2Q13 - Rs5.8bn). We estimate this could negatively affect our earnings estimate by 3-4%. As well, in view of the limited surplus cash available at Sun (US$250mn), the acquisition premium in the stock could moderate for a few months. In our view, this cash erosion could raise the prospects of fund raising by the company. In our view, this cash erosion could raise the prospects of (debt/equity) fund raising by the company. In Oct-12, the Board approved a resolution to raise up to Rs80bn through equity (or equity-linked) instruments.
We reiterate our OW rating on Sun: We expect the company to continue to deliver strong growth over the next couple of years driven by solid business fundamentals. We view the recent stock price correction as an opportunity to buy for mid to longer-term investors.
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Sun Pharmaceutical Industries - Sharekhan
Recommendation: Buy
Price target: Rs595
Current market price: Rs541
Newly acquired US entities fuel growth
Result highlights
Q1FY2014 results better than expected; one-time charge erodes bottom line: Sun Pharmaceuticals Industries (Sun Pharma) reported an impressive 31% year-on-year (Y-o-Y) rise in the net sales to Rs3,482.2 crore in Q1FY2014, mainly due to consolidation of the newly acquired entities like DUSA Pharmaceuticals (DUSA Pharma) and the generic arm URL Pharma in the US market. The consolidation also helped maintain a healthy operating profit margin (OPM) of 44% (though it declined by 182 basis point YoY from a high base) during the quarter. This level of OPM was achieved despite its US subsidiary Taro Pharmaceutical Industries (Taro Pharma) reporting a pricing pressure in key products and consolidation of the newly acquired entities leading to a rise in the employee costs. A turnaround in other income and a lower effective tax rate further boosted the profit line during the quarter. However, a one-time charge of Rs2,517.4 crore related to a patent settlement case on Protonix led to a decline in the bottom line with a net loss of Rs1,276.1 crore. However, excluding the one-time charge, the adjusted net profit grew by 56% YoY to Rs1,241.3 crore (vs our estimate of Rs923 crore for the quarter).
Taro Pharma records one-time blips; expect better days ahead: During the quarter, Taro Pharma, Sun Pharma's 66.3% US subsidiary, reported a 3.7% year-on-year (Y-o-Y) decline in revenues to $153.2 million in Q1FY2014 while its net profit dropped by 6.5% YoY to $58.8 million, mainly due to (a) competition-led price erosion in its flagship product nystatin/triamcinolone combination; and (b) one-time charge related to price adjustments on contractual obligations. Excluding the one-time charge, the underlying revenue growth would be at 10% YoY. Though competition is likely to continue in key products, Taro Pharma would witness a better growth on launch of new products.
Outlook remains strong; we maintain our estimates, price target and recommendations: We find most of the growth elements intact during the quarter, with a positive surprise on contributions from the newly acquired entities in the USA (which not only made up the revenue loss from Taro Pharma but also helped maintain a healthy margin). However, given the uncertainty in currency movements and implications of the new pricing policy in India, we prefer to maintain our estimates for FY2014 and FY2015. We have Buy recommendation on the stock with a price target of Rs595 (adjusted for bonus shares), which implies 26x estimated earnings for FY2015.