Sun Pharma –Buy- Sharekhan

| June 29, 2010 | 1 Comment

Sun Pharmaceuticals (Sun) has announced patent settlement with Orion Corporation (Orion) for the generic version of Stalevo ($120 million revenue) and Comtan ($90 million revenue), which are used in the treatment of Parkinson’s disease.

Under the terms of the settlement, Sun will be able to launch the generic version of Stalevo (for strength of 25/100/200mg and 37.5/150/200mg) in the USA on 1 April, 2012 (six months’ exclusivity). In addition to these strengths, Sun will be able to launch the generic versions of the other strengths on 2 October, 2012 and the generic version of Comtan on 1 April, 2013. Orion will supply the generic product versions to Sun.

However, the agreements are subject to review by the US FTC and the US DoJ. We expect Sun’s strong domestic business, niche US market (controlled release substances, hormones etc) and improving visibility of its patent challenge pipeline to drive a steady growth in the long term. We are of the view that news flow like key abbreviated new drug applications (ANDA) approvals for Effexor XR, resumption of sales from Caraco Pharmaceuticals and Taro Pharmaceuticals update would act as a re-rating trigger for the stock. With the impact of Caraco Pharmaceuticals and Taro Pharmaceuticals already built in the price, we believe that the stock’s valuations reflect most of the negatives and the risk-reward ratio has become favourable for investors.

Given the improving US outlook for Sun (four approvals in the past three months) and its strong track record (a robust guidance of 18-20% growth over high base of FY2010), we reckon that Sun deserves to trade at a premium compared to its peers and hence increase our target multiple to 23x from 20x earlier. We thus maintain our BUY recommendation on the stock with a revised price target of Rs2,010. At the current market price of Rs1,805 the stock is valued at 25.1x FY2011E and 21.4x FY2012E fully diluted earnings.

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