Sun Pharma's dream run on bourses hits the pause button

While the Rs 3,250-cr Protonix settlement will not impact growth or stress its balance sheet, it will limit prospects of inorganic growth in the near term

Sun Pharma has finally settled a patent infringement case with Wyeth (now a division of Pfizer) for $550 million (Rs 3,250 crore). The pending decision on the $960 million damages claimed by Wyeth on Sun Pharma for launching generic version of Protonix, the drug used in treating gastro-intestinal disorders, was a concern for investors over the past week. The stock, after seeing a 52-week high of Rs 1,085.40 on May 31, post strong fourth quarter performance, has lost more than nine per cent due to the litigation.

The settlement, to some extent, comes as a relief that an uncertainty over the outcome of the decision and amount comes to an end. However, on the flip-side Sun had only provisioned for $100 million in FY13 towards potential damages. As a result, the stock lost 3.22 per cent to close at Rs 949.45.

Dampened inorganic growth prospects
Sun Pharma is cash-rich with a kitty close to Rs 4,059 crore at the end of FY13. There were expectations it would use this cash for strategic acquisitions. Past strategic acquisitions such as Taro Pharma have yielded results with Taro driving Sun's US growth for quite some time now. The company had acquired the generics business of URL Pharma and another dermatology company, DUSA, in FY13 and these too have yielded good results. A major part of the cash now will be used for the settlement and could delay acquisitions in the near term. Analysts at Elara Capital observe that with the company utilising $550 million from close to $750 million on its books, only $200 million would be left, This will dampen Sun's ambitious inorganic initiatives, over the near term. Though its US arm Taro has $450 million in cash, Sun cannot use the cash for inorganic growth without consent of Taro's board and shareholders.

Organic growth drivers in place
The company is growing well organically with both US and domestic businesses doing well. Analysts remain confident of Taro's growth in the US. The dermatology products nystatin / triamcinolone cream that contribute about 20 per cent of Taro's sales, continued to dominate with 99.8 per cent market share in spite of a product launch by Sandoz. Sun Pharma's US sales, according to Nomura Research, have grown 24 per cent sequentially during February-April period consolidating for URL sales. Combined sales of Sun, its US subsidiary Caraco and URL have grown 140 per cent year-on-year. DUSA has 3,100 dermatologists using its Blue (treatment for acne) technology. The company has plans to add 300-350 new dermatologists per annum to drive growth.

Sun Pharma has a strong product pipeline for the US market. Its cumulative ANDA filing stands at 449 of which 311 are approved. The company filed 22 ANDAs in FY13. It has filed 239 Drug Master Files of which 168 are approved. The acquired URL generics business has over 230 ANDAs. Ranjit Kapadia at Centrum Broking observes that this strong pipeline will deliver good growth in the US.

On the domestic front, IMS MAT-March '13 data show, Sun grew at 15.7 per cent against industry growth of 10.1 per cent. Of the nine major brands, eight grew at higher-than-industry growth rate, observes Kapadia. The company that derives a majority of its sales from chronic therapies is likely to see almost negligible impact of the new drug pricing policy.

Outlook
The strong existing business outlook remains unaffected by the current settlement. Neither does it stress the balance sheet of the company. Analysts at HSBC, before the settlement, had observed that near-term upside from Lipodox (anti-depressant), URL and Taro business drive optimism on the US business. The India pricing threat is minimal, in their opinion, and rupee movements favourable. Hence, they have remained overweight.

Now after the settlement, some analysts are cutting their FY14 EPS estimates on the back of $450 million which the company will account for in FY14. For instance, Rahul Sharma at Karvy Stock Broking observes that the company will have to provide the remaining Rs 2,624.6 crore in FY14. Thus, providing for the same he has downgraded the EPS by 1.5 per cent to Rs 38.9 for FY14 and by 2.6 per cent to Rs 44.8 for FY15 and arrived at a price target of Rs 1,031 with a 'hold' rating on the stock. Analysts at Elara Capital say the present correction in the stock price can be utilised to accumulate it.