Sun Pharma - String of Pearls vs. Big bang acquisitions - Antique

Sun Pharmaceutical Ind. Ltd. (Sun Pharma) made a second acquisition in the US in two successive months. We are confident that Sun Pharma will continue to cherry pick specific assets and try to integrate them with existing assets. With this, we believe that the probability of a big acquisition is ruled out. We believe that Sun Pharma armed with a USD1bn war chest and an enabling resolution to raise an extra ~USD1.5bn will pursue growth in the US market in phase of organic challenges.

Sun Pharmaceutical Industries Ltd. announced that Caraco Pharmaceutical Laboratories Ltd. (Caraco), its wholly-owned subsidiary, has entered into a definitive agreement with Takeda Pharmaceuticals USA, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Co. Ltd., to buy the URL Pharma, Inc.* generic business. Upon completion of the purchase, the non-colcrys generic assets of URL Pharma will be owned and managed by Caraco. The deal is subject to satisfaction of customary closing conditions, including applicable regulatory approvals.

Japanese Pharma major Takeda acquired URL Pharma in June 2012 for USD800m with a major revenue stream from Colcrys, a leading drug in gout therapy. Colcrys achieved a net sales of USD155m in four months after the buyout. URL Pharma, which achieved a sales of USD600m in 2011, earned a revenue of USD430m from Colcrys sales. Colcrys (colchicine, USP) is a prescription medicine used in adults for the treatment of flares associated with gout when taken at the first sign of a flare, as well as prevention of flares (not a pain medicine and should not be taken to treat pain from other causes). Colcrys® is a trademark of Takeda Pharmaceuticals USA, Inc. registered with the US Patent and Trademark Office and used under license by Takeda Pharmaceuticals America, Inc. URL Pharma has 288 ANDA (abbreviated new drug application) approvals for selling generic drugs and an FDA approved plant in Philadelphia. URL Pharma has presence in areas of oral diabetes, insomnia, rheumatology, gastroenterology, and cardiovascular treatments.

This is the second acquisition by Sun Pharma in less than three months. Though exact terms of the deal are not known, Takeda had acquired USD600m worth of sales for USD800m. The acquisition ballpark could therefore be USD150-200m since Caraco (Sun's subsidiary) is acquiring only non-colcrys generic assets of URL (Revenue multiple of 1.33x). Sun Pharma earlier announced the acquisition of DUSA, a US-based dermatology company, in an all-cash transaction of USD230m (INR12.5bn) in November. Sun Pharma in our view has now committed approximately USD500m to inorganic initiatives for the year. While DUSA was not supposed to be EPS accretive, clarity on the exact financial impact of this acquisition is yet to emerge.

Valuation and outlook

We have not factored in the impact of this acquisition in our estimates given the lack of details. Sun Pharma has historically traded at a 25-35% premium to the sector average. We have upgraded our estimates on the back of: 1) Higher revenue estimates of Taro; 2) Domestic market growth rate to be higher than the market @ 21%; 3) Higher R&D expenditure of 7%; 4) Competition in Taro products leading to price normalisation; 5) Revenue mix improvement.

Given the robust outlook on all business segments and best in class operational metrics, we believe this premium will sustain (23x FY14e = INR788 = 7% upside from current levels). However, the downside risk would be product approval delay, higher provision for Protonix litigation with Wyeth, and slowdown in TARO sales.

Source : Equity Bulls

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