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Event Update

Sun | Sun Pharmaceuticals

April 19, 2012

ACCUMULATE

CMP

Rs603

Target Price

Rs650

Stock Info

Sector

Pharmaceuticals

Market Cap (Rs cr) 62,136

52 Week High/Low 607/422

Avg. Daily Volume (3m, ‘000) 900

Avg. Daily Value (3m, cr) 50.1

Dividend Yield (%) 0.6

Sensex 17,418

Nifty 5,308

BSE Code 524715

NSE Code

SUNPHARMA

Stock Performance

(%) SUN PHARMA NIFTY

1-week 4.7 0.6

1-month 8.0 1.0

1-year 35.9 (7.5)

Shareholding Pattern (%)

Stock Price Chart

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Analyst: Sapna Jhavar

sapna.jhavar@relianceada.com

Prandin patent case: A positive win

• Event: The US Supreme Court ruled in favor of Caraco, US subsidiary of Sun

Pharma, in its patent litigation against Novo Nordisk’s diabetes drug Prandin.

The court concluded that Caraco can seek correction of Novo’s inaccurate

use-codes over the drug; however, the court’s ruling on whether the correction

applies to Caraco’s labeling is still pending.

• Background: Prandin is approved by the USFDA for three specific uses, but

Novo’s original patent covered only one usage. Thus, post filing the ANDA for

gPrandin, Caraco also filed a section 8 statement which seeks approval for two

other uses not covered by the patent listed in the Orange Book. Novo then

changed its use-code for the ‘358 patent’, broadening the scope of the usecode

to cover all the three approved uses. Usually, the USFDA approves the

generic drug within the scope of the use-codes and does not determine the

scope of the same. Post favorable ruling, Caraco could get approval for the

two other uses without infringing Novo’s patent.

• About Prandin: Prandin (known as Repaglinide is used to cure diabetes) has a

market size of US$230mn in US and its patent is held by Novo Nordisk till

2018. Caraco holds an FTF status on the drug and is still awaiting the final

approval from the USFDA (post the site transfer).

• Impact: We believe that Sun Pharma can clock US$30mn in terms of revenues

from the gPrandin supply during exclusivity. While, Novo has filed its appeal

against Caraco in 1QCY2012, the final approval could take some time, leaving

options open for an “at-risk launch” for Sun Pharma.

Outlook and Valuation

We view this ruling as a benchmark for the generic companies where they can

appeal for either invalidity of the patent and/or counterclaim brand’s inaccurate use

codes. This procedure could stall the unnecessary delays caused to stop generic

companies in marketing their drugs.

We believe that the positive ruling could pave way of faster approval for gPrandin.

Along-with strong product pipeline (Uroxatral, Duloxetine, Pregablin, Eszopiclone,

Memantine) spread across FY2013E and FY2014E, such incremental opportunities

would boost the gains of the company. We remain positive on Sun Pharma, given

its steady performance, superior brand franchise in the domestic market, growth

prospects in the US market and the excellent M&A track record.

We factor high tax liability post the budget in our FY2013E numbers and introduce

FY2014E numbers in this note and roll over our target price on new projected EPS.

We recommend Accumulate on the stock with the price target of Rs650. Sun is

currently trading at 25x and 20.4x its FY2013E and FY2014E EPS respectively.

Risks to the view

• Delay in product approvals and higher than expected liability on Protonix

litigation

• Lower than expected performance from Taro

Year End Net Revenues EBITDA Net income (reported) RoE RoCE EPS Valuations (X)

(Rs cr) % growth (Rs cr) % margin (Rs cr) % growth % % (Rs) P/E EV/EBITDA

FY2011 5,721 39.5 1,970 34.4 1,816 34.4 19.1 20.5 17.5 34.2 30.6

FY2012E 7,637 33.5 2,986 39.1 2,258 24.3 20.0 25.0 21.8 27.5 19.9

FY2013E 8,886 16.4 3,537 39.8 2,482 9.9 18.6 25.1 24.0 25.0 16.3

FY2014E 10,527 18.5 4,263 40.5 3,040 22.5 19.0 25.1 29.4 20.4 13.0


Sun Pharma | Pharmaceuticals

Profit & Loss Statement

Y/E March (Rs cr) FY2011 FY2012 FY2013E FY2014E

Gross sales 5,807 7,739 8,999 10,667

Less: Excise duty 85 102 113 140

Net Sales 5,721 7,637 8,886 10,527

Total Expenditure 3,751 4,651 5,349 6,263

Cost of Materials 1,461 1,604 1,822 2,137

R&D Expense 286 428 533 684

Personnel 673 1,092 1,217 1,390

Others 1,332 1,527 1,777 2,053

EBITDA 1,970 2,986 3,537 4,263

% chg 44.5 51.6 18.4 20.5

(% of Net Sales) 34.4 39.1 39.8 40.5

Depre. & Amortization 204 275 297 348

EBIT 1,766 2,711 3,240 3,915

% chg 45.9 53.5 19.5 20.9

(% of Net Sales) 30.9 35.5 36.5 37.2

Interest & other Charges 0 0 0 0

Other Income 270 210 192 180

(% of PBT) 13.3 7.2 5.6 4.4

Recurring PBT 2,036 2,921 3,432 4,095

% chg 43.9 43.5 17.5 19.3

PBT (reported) 2,036 2,921 3,432 4,095

Tax 128 263 549 655

(% of PBT) 6.3 9.0 16.0 16.0

Minority Interest 91.3 400.0 400.0 400.0

PAT after MI (reported) 1,816 2,258 2,482 3,040

% chg 34.4 24.3 9.9 22.5

(% of Net Sales) 31.7 29.6 27.9 28.9

Basic EPS (Rs) 17.5 21.8 24.0 29.4

% chg 34.4 24.3 9.9 22.5

Balance Sheet

Y/E March (Rs cr) FY2011 FY2012 FY2013E FY2014E

SOURCES OF FUNDS

Equity Share Capital 104 104 104 104

Preference Capital - - - -

Reserves& Surplus 9,380 11,215 13,275 15,893

Shareholders’ Funds 9,483 11,319 13,379 15,997

Minority Interest 847 1,243 1,643 2,042

Total Loans 426 346 296 296

Total Liabilities 10,756 12,907 15,317 18,334

APPLICATION OF FUNDS

Gross Block 4,552 5,002 5,402 5,802

Less: Acc. Depreciation 2,029 2,304 2,601 2,949

Net Block 2,523 2,698 2,801 2,853

Capital Work-in-Progress 271 271 271 271

Goodwill on consolidation 772 772 772 772

Investments 2,231 2,231 2,231 2,231

Current Assets 6,017 8,143 10,557 13,661

Cash 2,194 3,105 4,815 6,892

Loans & Advances 1,128 1,451 1,688 2,000

Other 45 49 54 59

Current liabilities 1,423 1,573 1,680 1,818

Net Current Assets 4,594 6,570 8,877 11,842

Miscellaneous

Expenditure

0 0 0 0

Net Deferred Tax 365 365 365 365

Total Assets 10,756 12,907 15,317 18,334

Cash Flow Statement

Y/E March (Rs cr) FY2011 FY2012 FY2013E FY2014E

Profit before tax 2,036 2,921 3,432 4,095

Depreciation 204 275 297 348

Change in Working Capital (55) (1,065) (597) (889)

Others 1,293 0 0 0

Cash Flow from Operations 3,478 2,131 3,132 3,554

(Inc.)/ Dec. in Fixed Assets 2,710 450 400 400

(Inc.)/ Dec. in Investments (935) - - -

Cash Flow from Investing (1,774) (450) (400) (400)

Issue of Equity - - - -

Inc./(Dec.) in loans 254 (80) (50) 0

Dividend Paid (Incl. Tax) 421 423 423 423

Direct Taxes paid 148 (263) (549) (655)

Cash Flow from Financing (19) (766) (1,022) (1,078)

Inc./(Dec.) in Cash 1,685 916 1,710 2,077

Opening Cash balances 504 2,189 3,105 4,815

Closing Cash balances 2,189 3,105 4,815 6,892

Key Ratios

Y/E March FY2011 FY2012 FY2013E FY2014E

Valuation Ratio (x)

P/E (on FDEPS) 34.2 27.5 25.0 20.4

P/CEPS 30.8 24.5 22.4 9.2

P/BV 6.6 5.5 4.6 3.9

Dividend yield (%) 0.6 0.6 0.6 0.6

EV/Sales 10.4 7.7 6.4 5.2

EV/EBITDA 30.6 19.9 16.3 13.0

EV / Total Assets 6.1 5.1 4.2 3.4

Per Share Data (Rs)

EPS (Basic) 17.5 21.8 24.0 29.4

EPS (fully diluted) 17.5 21.8 24.0 29.4

Cash EPS 19.5 24.5 26.8 65.5

DPS 3.5 3.5 3.5 3.5

Book Value 92 109 129 154

Returns (%)

RoCE 20.5 25.0 25.1 25.1

RoIC 26.5 36.0 41.2 46.7

RoE 19.1 20.0 18.6 19.0

Turnover ratios (x)

Asset Turnover (Gross

Block)

1.3 1.5 1.6 1.8

Inventory / Sales (days) 81 79 80 77

Receivables (days) 75 69 75 74

Payables (days) 65 78 77 73

WCC (days) 153 166 167 172


Sun Pharma | Pharmaceuticals

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