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STOCK UPDATE
Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs631
Current market price: Rs598 Prandin ruling to set good precedent for generics
Key points -
Sun Pharma gets favourable ruling on Prandin: The US Supreme Court unanimously ruled in favour of generic player, Caraco Pharmaceuticals (Caraco; US subsidiary of Sun Pharmaceuticals [Sun Pharma]), which can file a lawsuit against Novo Nordisk for throwing up roadblocks that prevented the generic drugmaker from seeking the US Food and Drug Administration (USFDA)'s approval for generic Prandin. The ruling by the US Supreme Court on Prandin (a brand of Novo Nordisk) is set to establish a precedent for the generic players who are being tactically barred by innovators through overloaded patent description. This is a first-of-its-kind case where generic players have been allowed to sue a brand owner for broad-basing the patent description. The ruling would pave the way for the generic players to sue brand owners or patent holders, if the latter are not accurate in their description for which they have been granted patent. Although Caraco has yet to get the USFDA's approval for this product, circumstances seem to be in favour of Caraco and Sun Pharma. Prandin is indicated for type-II diabetes and has annual sales of $230 million.
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Broad basing of patents not allowed: Through this ruling, patent owners are told to limit the description and be accurate about the indications for which patent protection is being sought. It has been the practice for brand owners (patent holders) to first broad base the description of a patent to cover multiple uses of drugs that could be produced through a combination of one or more drugs and then prevent generic players that attempt to get approval for even products remotely related to the patented products. Ideally, these combinations of drugs which are indicated for the same or different diseases should be patented separately. The broad-basing of description in a patent prevents the generic players from getting the approval for drugs that combine even one element of the patented products. The ruling says that the generic players can counter-claim a patent holder for broad-basing patent description which could prevent the generic players from getting the approval for combination drugs.
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Facts of the case: There were three uses approved for Prandin: (a) monotherapy; (b) in combination with metformin; and (c) in combination with thiazolidinediones. But the only patent listed for Prandin in the Orange Book (which contains patent information for the USFDA) was monotherapy in combination with metformin. Caraco sought the USFDA's approval under a provision of the Hatch-Waxman Act that allows generic drugmakers to market a drug for uses not covered by patents held by branded drugmakers. (In such circumstances, a generic drugmaker is granted what is known as a carve-out label for its medicine.) However, Novo Nordisk submitted a new description of its patent which, Caraco argued, was overly broad and, therefore, amounted to patent misuse. The US Supreme Court sided with Caraco and allowed the latter to sue Novo Nordisk for broad-basing patent description.
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Caraco has to wait longer for launch of this product: Caraco has yet to get the approval for the abbreviated new drug application (ANDA) for this product from the USFDA. Also, a separate appeal concerning the validity of patents on Prandin is pending before the court of appeals for Federal Circuit after a lower court ruled in favour of Caraco. Therefore, Caraco has to wait longer to launch this product.
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We are not factoring potential revenue from Prandin at this stage: Despite the positive court ruling in Prandim, we are not factoring the potential upside from this product in our revenue model, mainly due to the uncertainty over the timing of the approval and launch.
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We maintain Buy on Sun Pharma: The combination of Sun Pharma and Taro Pharma offers an excellent business model for Sun Pharma, as was reflected in the Q9FY2012 performance of Sun Pharma (net profit growth of 25% year on year [YoY]). Sun Pharma along with Taro Pharma has one of the richest pipelines of generic products which will drive its US revenues. We expect a 20% revenue compounded annual growth rate (CAGR) over FY2011-14. However, the profits would be affected during FY2013 and FY2014 due to a higher tax incidence. We expect a 16% profit CAGR over FY2011-14.
The stock is currently trading at 25.2x and 21.8x FY2013E and FY2014E earnings respectively. Though there is a limited upside from the current market price, but we maintain our Buy recommendation on the stock with a price target of Rs631, which is 23x FY2014E EPS. We will re-visit the price target after the announcement of the Q4FY2012 results of the company.
SECTOR UPDATE
Insurance
APEs flat in March -
During March 2012, the annual premium equivalent (APE) of the life insurance industry remained flat on a year-on-year (Y-o-Y) basis but grew by 118.5% month on month (MoM) as volumes are generally higher towards the end of the fiscal. The Life Insurance Corporation of India (LIC) reported a robust growth of 15.1% year on year (YoY) while the same was offset by the private players whose APEs declined by 15.5% YoY. For full year FY2012, the APE of the industry declined by 3.4% due to a decline of 19% by private players while LIC registered a growth of 7.6%.
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For FY2012, the market share of the private players grew to 34.3% levels while that of LIC declined to 65.7%. Among the private players, SBI Life Insurance Company (SBI Life)'s market share decreased to 11.4% from 13.3% in March 2011 while that of Reliance Life Insurance Company (Reliance Life) declined to 6.4% from 8.3% in March 2011. The share of Max New York Life Insurance (MNYL) grew to 6.9% as against 6.3% in March 2011.
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In terms of APE growth for March 2012, 9 out of 18 private players posted a decline Y-o-Y with Tata AIG showed the highest contraction of 57%. Bajaj Allianz showed a growth of 32.4% YoY followed by MNYL which showing a growth of 30.4% YoY. For FY2012 the life insurance industry reported a decline of 3.4% in its APE as the new unit-linked insurance policy (ULIP) guidelines set in and insurers awaited the clearance from the Insurance Regulatory and Development Authority (IRDA) for launching new products.
APE remains flat Y-o-Y but expands 119% MoM
The APE for the life insurance sector has started recording growth on a Y-o-Y basis from September 2011 onwards as the effect of the previous year's high base wore off. However during March 2012 the APE of the industry remained flat annually but grew by 118.5% MoM as there is lumpiness towards the end of a fiscal. LIC reported a growth of 15.1% YoY whereas the private players witnessed an APE contraction of 15.5% YoY. On a month-on-month (M-o-M) basis, the APE of the private players increased by 127.2% compared with a 113.3% growth recorded by LIC.
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