Sun Pharma (Q4 FY12)

CMP Rs577, Target Rs646, Upside 12.0% 

• Q4 Revenues up by 60% yoy and 9% qoq at Rs23.3bn; 6% higher than our expectations
• Higher than expected growth was primarily led by better than expected growth in its US subsidiary, one-off like cancer drug Doxil in US , forex impact, higher other income and one time additional sale of Rs1.8bn in domestic business
• Domestic market grew by 49% to Rs8.7; (21% after adjusting for Rs1.8bn one-off)
• US clocked in strong revenue growth of 84% yoy growth and -3% qoq (~30% yoy growth in constant currency basis)
• EBIDTA margin at 41%; 300bps above our expectation; largely driven by Taro performance, business mix, one-offs and better realization of Rupee
• PAT accelerated by 79% yoy primarily on account of one offs mentioned above and greatly by other income
• Guidance for ~18-20% revenue growth on constant currency basis (Rs exchange rate of 51/$)
• We maintain Buy rating with a 9-month revised target price of Rs646

Result table

Q4 Revenues up by 60% yoy and 9% qoq at Rs23.3bn; 6% higher than our expectations

Sun Pharma reported 60% growth in sales to Rs23.3bn in Q4 FY12, is 5% ahead of our expectation. Higher than expected growth in revenues is primarily led by higher than expected growth in its US subsidiary, Taro , one-off like cancer drug Doxil in US, forex impact, higher other income and one time additional sale of Rs1.8bn in domestic business. At constant dollars, rest of the world growth is 40% for the quarter four, and 34% for the year

Domestic market grew by 49% to Rs8.7bn; (21% after adjusting for Rs1.8bn one-off)

The company reported Rs1.8bn of additional sales this year in the fourth quarter. The higher base will negatively impact domestic sales in the first half of FY13. Excluding the impact of the nonrecurring sales, growth in the core business was 21% for the quarter and 20% for the year. The segment grew well above ~16% of total domestic pharmaceutical market.

US clocked in strong revenue growth of 84% yoy growth and -3% qoq (~30% yoy growth in constant currency basis)

The US Sales of finished dosage products recorded strong revenue growth of 84% yoy to Rs10.1bn. The growth was led by better than expected growth in its US subsidiary, Taro and one-offs like cancer drug Doxil. In response to the critical shortage of the cancer drug Doxil, doxorubicin hydrochloride liposome injection, USFDA took proactive steps needed to increase available supply for patients in the US. US FDA allowed Sun Pharma to sell the product or we can say it’s a sourcing type of arrangement. So it’s a onetime but, the effect will be there in coming quarters as company is not sure till what time it would be selling the product under this agreement.  We expect core growth momentum in US will continue with new niche product launches and gaining market share in existing products. Positive trigger would be US FDA clearance of its Caraco facility in Detroit where remediation efforts are still ongoing. In last quarter Court had ruled in favor of Caraco in its patent litigation against Novo Nordisk over Caraco's generic version of Prandin, Repaglinide tablets. The company will market the product once it receives the final approval.

EBIDTA margin at 41%; 300bps above our expectation; largely driven by Taro performance, better business mix, one-offs and better realization of Rupee

Sun Pharma recorded an OPM of 41%, higher than our estimates of 38%. The yoy improvement in margin by 300bps is on account of benefits of operating leverage and cost rationalization along with better business mix at Taro forex gain and few one-offs. Taro continue to indicate that the growth may not be sustainable as the higher growth is driven by identifying niche opportunity and some part of growth is attributable to price hike in the products; so with the competition creeping in the growth might not be sustainable. But, even with this comments Taro continues to surprise. And the one-offs like cancer drug Doxil in US, forex impact, higher operating income and one time additional sale of Rs1.8bn in domestic business is not sustainable and hence we expect margin to decline in next quarter. But, with the aid of niche launches and higher operating leverage creeping in, we believe improvement in margins is inevitable. Net profit margin is at 35%, is significantly higher than the achieved in Q4 last year. This is partly again on account of one-offs mentioned earlier.

Key take-away from the conference call

• Consolidated R&D expense for Q4 FY12 is Rs1.3bn, or 5.8% of sales.

• R&D expense is estimated at 6% to 8% of net sales towards building a strong product pipeline for the global market.

• For the full year 250 ANDAs are approved out of the total of 397 products filed with US FDA

• Capital expenditure to be around Rs5bn on both at existing sites and at new sites.

• Tax rates to be higher than current rate but less than 20%.

• Sun Pharma expect to make 25 ANDA filings in FY13

• Organic growth is on track and company is open for inorganic growth in US or other big emerging market

• According to the AWACS, The company has a market share of about 4.6% for the 12 months to April 2012.

• During the year the company launched 22 products across different territories.

• The company will increase its MR strength from 2,700 to 3,030.

We maintain Buy rating with a revised 9-month target price of Rs646

We expect 21%/29% CAGR in revenue and PAT respectively over FY12-14E. We continue to remain positive on Sun Pharma over the long term on account of it’s strong footing in domestic market along with its potential to grow in international businesses. We believe with Taro integration Sun Pharma is geared up to show strong performance in the US. The other non-US international business, ROW is also expected to witness strong higher double digit growth. We maintain Buy rating with a revised 9-month target price of Rs646.