We remain neutral on Sun Pharmaceuticals with a target price of R690. Our target is based on a 20x FY14f EPS of R34.5. Last week, Sun Pharma announced the proposed acquisition of US dermatology firm Dusa Pharmaceuticals for $230 million in cash.
Sun Pharma would likely make a tender offer, which will be subject to the tender of a number of Dusa shares that represent at least a majority of the total number of the latters outstanding shares. Upon completion of the tender offer, Sun Pharma will acquire the remaining shares through a second-step merger, subject to regulatory approvals, as per the company. The acquisition price is at 38% premium to the closing price of Dusa on November 7. Dusa has $31 million in cash and cash equivalents as of June 30, representing 78% of the overall balance sheet.
In our view, at $230 million, the transaction values the company at 3.97x sales (annualised H1CY12) and 36x annualised Ebitda. As of FY12-end, Sun Pharma has a total cash balance of $1 billion.
Dusa is a specialty dermatology focused company with two key brands in the market Levulan (small molecule) and BLU-U (dermatology device). Dusa also sells BLU-U device separately for treatment of moderate inflammatory acne vulgaris. The product is covered by patents running till June 2019. There are no patents for the compound itself.
However, the patents cover the device and the method use. Though a generic threat cant be ruled out over time, we believe it is unlikely to materialise in the medium term.
However, we believe this is a complementary addition to Suns dermatology portfolio in the US.
Through this acquisition, Sun Pharma forays into specialty branded space in the regulated market. Dusa brings a technology platform in dermatology.
The technology is photodynamic therapy (PDT). Under PDT, light-sensitive compounds, when exposed to light, act therapeutically.
Currently, two clinical trials are under way to further expand the area of application for the drug. Trials are also under way for shortening the treatment cycle of the drug. Dusa earns almost all its revenues from the US, but also has presence in Canada.