We reiterate ?buy? on Sun Pharma with a target price of R640. This is based on a sum-of-the-parts (SOTP) approach, valuing its base business using a P/E and ascribing an option value for its patent challenge pipeline. We believe Sun deserves a high premium to the market and sector, given its consistent track record. We consequently value it at 24x 12-month forward earnings, an approximately 60% premium to the 15x target multiple our strategist applies to the BSE Sensex. At 24x CY14e EPS, we arrive at a value of R635 per share for Sun?s core business. We also ascribe an option value of R5 per share to Sun?s patent challenge pipeline.
With Sandoz?s entry, Taro has lost market share in its largest product (Nystatin/Triam combo) though pricing remains rational at this point. Taro could see more competition in some of its other products (especially where it had made significant price hikes) as well, hurting topline and profitability.
Sun highlighted that doxycycline pricing (& hence sales) had picked up significantly due to a shortage in the market but additional competition could enter any time. Sun continues to evaluate other opportunities in URL?s portfolio, as a large part was dormant when it was acquired.
The company intends to adopt a multi-pronged approach to drive growth in DUSA: a) Increase penetration through installation of more devices & strengthening field force, if required; b) Evaluate extension to more indications. Its superior financial muscle allows it to adopt a more aggressive approach than DUSA was able to on its own.
– Citigroup
