In the Big League | Value Research A string of acquisitions of foreign companies has helped Sun Pharmaceuticals grow…
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In the Big League

A string of acquisitions of foreign companies has helped Sun Pharmaceuticals grow…

Sun Pharma has come a long way since its formation 30 years ago and now is the fourth-largest domestic formulations company with leadership in chronic segments of CNS, CV, dibetology and women's health, among others. A string of acquisitions, including Caraco (US) and Taro (Israel), have vaulted Sun Pharma into the big league. Sun now has the largest pipeline of ANDAs which is expected to run through till 2019. Sun's revenues compounded at 30 per cent in the last five years make it one of India's fastest growing pharma companies. Earnings are not far behind - compounding at 28 per cent. Sun's net margin of 37 per cent can knock the socks of any competitor.

Strengths and Opportunities:
A burgeoning US presence
Sun Pharma acquired a majority stake in Israel-based Taro Pharmaceutical Industries in 2007. This acquisition has made Sun the biggest Indian generic company operating in the US. Along with Sun's other US-based subsidiary Caraco, the company holds a total of 148 products awaiting USFDA approval. This is one of the strongest pipelines globally. Taro is especially important for Sun. Taro is one of the top three players in the low-competition dermatology market in the US. It earns an Ebitda margin of 45 per cent following recent price hikes.
Strong domestic dominance
Sun is the fourth-largest player in the domestic formulations space with a market share of 4.7 per cent. An average run-rate of 24 per cent (domestic sales) makes it one of the fastest too. Consider this. In seven specialities, Sun has an either number 1 or 2 ranking in that respective vertical. Domestic formulations now contribute an estimated 40 per cent of Sun's Ebitda. Its superior growth rate and focus on chronic and speciality is expected to help Sun maintain its momentum.
Acquisitions on the cards
Sun has been an aggressive acquirer - it has bought out 13 companies since 1997. Its current cash of around Rs 4,700 crore gives Sun enough firepower to pluck out more buys. What gives more credence to further acquisition possibilities, say industry insiders, is that Sun's current Chairman Israel Makov is also an acquisitions-driven man. Makov previously headed Teva Pharmaceutical (another generic player and one of the largest in the world). His stint at Teva saw him picking up more than 20 generic companies. If Dilip Sanghvi (founder of Sun) and Makov do actually follow through with the acquisition route, it could provide a deadly combination and one that should create immense value for Sun's shareholders in the future.

Protonix Liability
Perhaps the biggest immediate concern for Sun is the Protonix liability. Wyeth (patent holder for Protonix) has filed a claim for $960 million on Sun for infringing the Protonix patent. In a recent related ruling, Apotex (a generic manufacturer) was required to pay half of its sales of a generic of Plavix to the patent holder. In Sun's case, it launched the Protonix generic post launches by Teva and the authorised generic manufacturer and earned revenues of $300 million from it. Given that there were already two generics in the market when Sun began selling its version, the liability on Sun according to Piyush Nahar of Jeffries could be much lower - around $150 million at best.

Given Sun's premium earnings quality, the company has traded at a premium to the industry. At current prices, the stock trades at 25 times its TTM earnings. However, on a five year PEG basis it quotes at 0.8 times. Given Sun's track record at creating value and the fact that US business is looking stronger, coupled with its well-established domestic backbone, Sun is one stock you should not ignore. And if Sanghvi-Makov do team up to bring in further acquisition led growth, that could super-charge earnings for the company and its shareholders. This one is a buy and hold for keeps.

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