Sun's US prospects improve on price hikes, approvals

Price increases by its US subsidiary Taro and approval for Ranbaxy's generic drugs have raised the confidence among analysts about American revenues

While the focus of market participants has shifted to cyclical scrips, anticipating better returns, Sun Pharmaceutical Industries' is one stock in the defensives space which has remained resilient.

Sun Pharma's stock has gained 22 per cent since June. With the company’s growth momentum likely to sustain, driven by domestic performance and acquisitions in the US market, the outlook remains positive.

On Wednesday, the company announced yet another acquisition, buying US-based Pharmalucence, to develop its presence in the niche injectibles segment. Though in the near term the acquisition might not amount to much, it remains a long-term growth driver. Hitesh Mahida at Antique Stock Broking says the company continues to remain positive on Sun and believes there is sufficient scope for it to grow both organically and inorganically.

The Street will look at growth prospects from the US market, as well as the performance of recent acquisitions such as Ranbaxy and Pharmalucence.

Positively, while there have been concerns of investors due to heightened competition for Taro Pharma’s products in the US, the price increases undertaken by the company have allayed these fears. Analysts expect healthy growth in revenues for Taro during the June quarter, too. Analysts at Credit Suisse say the benefits of the price increase by Taro in June are likely to be reflected from the September quarter. Pprice increases taken earlier in the quarter in antifungal product Ketoconazole and another dermatology product, Ovide, should help the company benefit in the June quarter itself. Analysts expect Taro's sales to increase from $187 million in the March quarter to $195 mn in the June one.

Approval of the generic version of cardiovascular drug Diovan and an exclusivity launch by Ranbaxy has also raised confidence about the company’s other products, such as acid-reflux treatment drug Nexium's generic and anti-viral Valcyte's generic on exclusivity. The company has been awaiting the US Food and Drug Administration's nod for the launch of Diovan for almost two years and for almost a year on Valcyte.

This bodes well for Sun, which has got a favourable court nod to go ahead with the acquisition of Ranbaxy. Analysts at Ambit Capital reiterate that the three first-to-file assets, Diovan ($158 mn in exclusivity sales for Ranbaxy), Nexium ($210 mn in exclusivity sales) and Valcyte ($59 mn in exclusivity sales) could jointly generate at least $400 mn in sales for Sun, with $300 mn in cash. They add that this reduces the effective acquisition enterprise value to $3.7 billion from $4 bn. As a step further, Sun has hired Mckinsey to facilitate the merger of Ranbaxy with itself.

Besides, the company continues to do well in the domestic arena. For the quarter ending June, analysts expect domestic formulations to register an 18 per cent year's growth in revenue. US sales are expected to grow by 17 per cent over a year, while exports to the rest of the world are expected to grow by 20 per cent.

Analysts at Axis Capital have raised their target multiple from 20x to 23x, as they are more comfortable on the Ranbaxy acquisition (after the generic Diovan approval) and growth potential at Taro (after the recent price raises). They maintain a 'buy' rating with a target price of Rs 819 (23x the FY16E earnings per share of Rs 36) versus Rs 783 earlier. The consensus target price of analysts polled by Bloomberg in July is around Rs 750. Long-term investors could consider it on corrections.