euvalue - bp.eurekasecurities.netsun pharmaceuticals industries ltd: company overview sun pharma is...

1

CMP

`782

TP (12 months)

`823

ACTION Hold

Sun Pharma is India’s top drug maker and world's fifth largest specialty generic pharmaceutical company by revenue. It has a broad-based portfolio of more than 2,000 products. The company has a global presence in over 150 countries across branded and generic segments. Moreover, it owns 47 manufacturing facilities spread across 6 continents. It is backed by strong R&D capabilities across dosage forms like injectables, sprays, ointments, creams, liquids, tablets and capsules.

INVESTMENT RATIONALE

gGleevec and strong pipeline to drive the US business growth: The US

product basket remains robust with 417 approved ANDAs approved while 150 are pending for approval (including 15 tentative approvals). With the launch of generic Gleevec (USD 2.5bn market size & entitled to 180-days exclusivity) on 1 Feb 2016, the company is aiming to garner more than 30% market share during exclusivity. We expect it to contribute anywhere between 10-15% to total revenues in FY17E. Further, Taro (US Subsidiary) has launched Keveyis in Sep-15 (Keveyis is the first medicine approved by the FDA for the treatment of primary periodic paralysis) in the US and expects to generate revenues of about USD 100 mn over FY16-18E. We expect US business to grow at a CAGR of 8.4% during FY16-18E. Moreover, increased supplies from Halol facility would boost the sales momentum once FDA issues are addressed.

Domestic growth to improve steadily during FY16-18E: Sun Pharma

continues to enjoy top position based on doctors’ Rx in seven therapeutic areas, namely psychiatrists, neurologists, cardiologists, ophthalmologists, orthopaedics, nephrologists and gastroenterologists. In the domestic space, Ranbaxy acquisition has provided more therapeutic diversification to Sun’s portfolio along with significant improvement in market share from 5.5% to 8.8% (with a leadership in 12 therapies). In March 2016, Sun Pharma and AstraZeneca Pharma India Limited (AZPIL) entered into a partnership for the distribution of dapagliflozin, an innovative Type 2 diabetes medicine in India. This agreement for dapagliflozin further strengthens Sun Pharma’s partnership with AstraZeneca and bolsters its diabetes portfolio. We expect domestic business to grow at a CAGR of 13.5% during FY16-18E.

Halol facility re-inspection: The company has implemented remediation

measures at Halol and requested for re-inspection. The company is also witnessing resumption of supplies from Halol, which got affected due to remediation measures. We believe that the company has filed key ANDAs from Halol, therefore it could receive multiple ANDA approvals once FDA issues are resolved and this could drive a significant recovery in the US business.

Valuation: We expect revenues and PAT to grow at a CAGR of 12% and

21.1% respectively over FY16-18E. Further, EBITDA margins are expected to improve by 490 bps to 33.6%. We expect growth to be driven by gGleevec and gGlumetza launch, synergies from Ranbaxy integration (USD 300 mn by FY18E), scale-up of specialty products and key launches in the US. Hence, we initiate Sun Pharma with a HOLD rating with a TP of Rs. 823 at 25x FY18E earnings.

Equity | India 6th Sep 2016

Eureka Stock & Share Broking Services Ltd. www.eurekasec.com

Sun Pharmaceuticals Industries Ltd.

Equity Research Report

EuValue

Potential Upside (%) 5

Duration * Long Term

52 week H/L (Rs.) 934/706

Decline from 52WH (%) 16.2

Rise from 52WL (%) 10.7

Beta (x) 0.3

Mkt. Cap (Rs.Cr) 188,220

Book Value per share (Rs.) 130.5

*Duration: Long term (1year), Medium term (6 months) & Short term (3 months)

BSE CODE: 524715 NSE CODE: SUNPHARMA REUTERS CODE: SUN.NS BLOOMBERG CODE: SUNP:IN

SECTOR: Pharmaceuticals NPM (FY16): 19.5% O/S SHARES: 240.7 Crores AVG. DAILY VOLUME: 37.4 Lacs

FINANCIAL SNAPSHOT

SHAREHOLDING PATTERN (%)

1–YR PRICE PERFORMANCE

0

50

100

150

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

SUNPHARMA NIFTY

Promoters (%), 55.0

Public (%), 45.0

Others (%), -

As on 30th Jun’16

Y/E FY15 FY16 FY17E FY18E

Revenue (Rs.Cr) 27,433 27,744 30,980 34,791

Adj. Profit (Rs.Cr) 4,777 5,401 6,267 7,919

Adj. EPS (Rs.) 19.9 22.4 26.0 32.9

P/E (x) 38.0 34.8 30.0 23.8

P/BV (x) 7.1 6.0 5.1 4.3

ROE (%) 19.5 16.9 16.2 17.1

EuValue | SUNPHARMA

6th Sep 2016

.

2

Sun Pharmaceuticals Industries Ltd: Company Overview

Sun Pharma is world's fifth largest specialty generic and India's top

pharmaceutical company with global presence supported by 47 manufacturing

facilities spread across 6 continents. The company has expanded both

organically and through acquisitions (Caraco, Taro, Dusa, Ranbaxy). In India,

Sun Pharma enjoys leadership across 12 different classes of doctors with 30

brands featuring amongst top 300 pharmaceutical brands. In Indian

formulations, the company is a leader in niche therapy areas of psychiatry,

gastroenterology, neurology, cardiology, nephrology, orthopaedics and

ophthalmology. It covers more than 100 markets in emerging countries and six

markets in Western Europe.

Geography wise revenue breakup (FY16) Business break-up (FY16)

Source: Company, In-house research

Domestic business to grow steadily at CAGR of 13.5% over FY16-18E

Indian formulations contributed 26% to overall revenues with a leading position

of 8.8% market share. Indian formulation growth was unaffected despite NLEM

2011 implementation (price control list are just 9% of Indian formulations). Sun

pharma continues to enjoy top position based on doctors’ Rx in seven

therapeutic areas, namely psychiatrists, neurologists, cardiologists,

ophthalmologists, orthopaedics, nephrologists and gastroenterologists. Top 10

brands contribute 17% of India revenues and growth driven by a basket of

brands. In the domestic space, Ranbaxy acquisition has provided more

therapeutic diversification to Sun’s portfolio along with significant improvement

in market share from 5.5% to 8.8% (with a leadership in 12 therapies). In March

2016, Sun Pharma and AstraZeneca Pharma India Limited (AZPIL) entered into

a partnership for the distribution of dapagliflozin, an innovative Type 2 diabetes

medicine in India. Under the agreement, Sun Pharma will promote and

distribute dapagliflozin under the brand name ‘Oxra’. Sun Pharma will also gain

the rights to promote and distribute the combination of dapagliflozin with

metformin under the brand name ‘Oxrame’, following regulatory approval. This

agreement for dapagliflozin further strengthens Sun Pharma’s partnership with

AstraZeneca and bolsters its diabetes portfolio. We expect domestic business

to grow at a CAGR of 13.5% during FY16-18E.

Domestic business to grow at a CAGR of 13.5% during FY16-18E


US 48%

India26%

RoW21%

APIs 5%

Formulations

95%

APIs5%

2966 3692 6717 7254 8124 93431.7% 24.5%

81.9%

8.0% 12.0% 15.0%

0%

50%

100%

0

5000

10000

FY13 FY14 FY15 FY16 FY17E FY18E

Rs.

Cro

res

Domestic business YoY growth

Sun Pharma enjoys leadership across 12 different classes of doctors with 30 brands featuring amongst top 300 pharmaceutical brands.

Ranbaxy’s acquisition has provided more therapeutic diversification to Sun’s portfolio along with significant improvement in market share from 5.5% to 8.8% (with a leadership in 12 therapies).

EuValue | SUNPHARMA

6th Sep 2016 .

3

Domestic business Therapeutic Revenue Break-up (FY16)


Domestic business Market share (FY16)


Domestic therapy ranking improved by Ranbaxy consolidation

The acquisition of Ranbaxy has created the world’s fifth-biggest generic

pharmaceutical company by revenue. Four out of five US centric facilities remain

under USFDA scanner and we expect the company to resolve the issues

gradually over next 2years. In the domestic space acquisition has provided

diversification to Sun’s portfolio by improving ranking in Diabetologists 1(earlier

2), Consulting Physicians 1(earlier 5), Dermatologists 1(earlier 6), Urologists

1(earlier 6), Oncologists 1(earlier 8), Chest Physicians 2 (earlier 5). The

acquisition is expected to bring benefits of synergies about USD 300 mn by

FY18E with huge benefits accruing from procurement efficiencies, cost reduction,

scale up in revenue and productivity improvement. Moreover, Ranbaxy’s (50% of

Ranbaxy’s revenue comes from Ems) strong foothold in emerging markets

provides the company a ready platform to cross-sell its products and exploit its

marketing infrastructure.

Neuro-Psychiatry 17%

Cardiology 18%

Anti-Infective 12%Gastroenterology

12%

Diabetology 9%

Pain / Analgesics 7%

Vitamins /Minerals4%

Gynaecology 4%Dermatology 5%

Respiratory 4%Opthalmology 2% Others 6%

Emcure+Zuventus-2.6%

Intas-2.8%

Macleods-2.9%

Glaxo-3.3%

Lupin-3.5%

Alkem + Cachet + Indchemie-3.5%

Mankind-3.6%

Zydus + Biochem-4.2%

Cipla-4.9%

Abbott-6.2%

Sun Pharma-8.8%

EuValue | SUNPHARMA

6th Sep 2016 .

4

US launches to drive the exports revenue growth

Sun Pharma, derives 48% of its revenues from the US markets. It is the largest

generic dermatology company and the 3rd largest branded dermatology company in

the US. The company’s key focus areas include dermatology, oncology, controlled

substances and ophthalmics, among others. The company has significant

presence in generics, branded and OTC segments, with integrated manufacturing

facilities. It has the flexibility to manufacture both onshore and offshore products.

With the launch of generic Gleevec (USD 2.5bn market size & entitled to 180-days

exclusivity) on 1 Feb 2016, the company is aiming to garner more than 30% market

share. We expect it to contribute anywhere between 10-15% to total revenues in

FY17E. Further, Taro (US Subsidiary) has launched Keveyis in Sep-15 (Keveyis is

the first medicine approved by the FDA for the treatment of primary periodic

paralysis) in the US and expects to generate revenues of about USD 100 mn over

FY16-18E.

Taro accounted for 47% of US revenues with 65% EBITDA margins in FY16.

Currently, it has 35 ANDAs are pending for approval and benefits of which will flow

in from FY17E. In FY15, Taro sharply increased R&D investments and the effort

has begun to reflect in higher number of ANDA filings (filed 12 ANDAs in FY15 as

against 2-3 annual filings earlier). Further, the quality of filings is significantly

superior when compare to the existing portfolio. Currently, the US product basket

remains robust with 413 approved ANDAs and 156 are pending for approval

(including 10 tentative approvals).

We expect US business to grow at a CAGR of 8.4% during FY16-18E on account

of steady gGleevec revenues post exclusivity, gGlumetza launch, incremental

revenues from Keveyis, key launches (including para IV) and increased supplies

from Halol facility once FDA issues are addressed.

Halol facility remediation

Halol facility, which was impacted by cGMP deviations in FY15, underwent very

significant remediation efforts in FY16. These efforts are likely to culminate in to a

request for re-inspection which we are likely to put in with the US FDA in 2016.

This remediation process has temporarily impacted supplies and product approvals

from this facility. The company is also witnessing resumption of supplies from

Halol, which got affected due to remediation measures. We believe that the

company has filed key ANDAs from Halol, therefore it could receive multiple ANDA

approvals once FDA issues are resolved and this could drive a significant recovery

in the US business.

Revenue to grow at CAGR of 8.4% during FY16-18E


6,1549,784

13,720 13,250 14,787 15,560

77.3%59.0%

40.2%

-3.4%11.6%

5.2%

-50%

0%

50%

100%

0

10000

20000


Rs.

Cro

res

US Business YoY growth

With the launch of generic Gleevec (USD 2.5bn market size & entitled to 180-days exclusivity) on 1 Feb 2016, the company is aiming to garner more than 30% market share.

EuValue | SUNPHARMA

6th Sep 2016 .

5

ANDAs pipeline


Enhancing specialty segment presence through strengthening its injectable

capabilities in the US

Specialty pharma business is growing at almost double the pace of generics

business in the US and companies with focus on specialty business will continue to

deliver strong revenue growth. Sun Pharma has embarked on increasing share of

complex generics, specialty products in its global product portfolio and is aiming to

establish strong presence by taking some of initiatives such as In-licensing early-

to-late stage clinical candidates, as well as getting access to on-market patented

products. Dermatology and Ophthalmic are the key segments targeted through

these initiatives besides a few other segments. The company is among the leading

branded companies in the US dermatology segment driven by innovative products

like Absorica, Kerastick and the Topicort range of products.

In May 2016, company announced positive results from the Phase-3 trials of

Tildrakizumab to treat chronic plaque psoriasis. Post the completion of these

Phase-3 trials; it has commenced steps towards filing the Biologics License

Application (BLA) for this product with the US FDA. Persistently working for

patients across the world and targeting to increase the share of complex generics

and specialty products to overall business in the coming years. This objective will

be driven by a combination of efforts coupled with inorganic initiatives as well as

external partnerships. The company’s specialty strategy coupled with the benefits

from the Ranbaxy merger and the targeted productivity improvements should

favorably impact profitability in the long-term.

ANDA Approvals by Therapeutic Area


207

377 397 449 478597 567

84225 250 311 344

438 417

0

200

400

600

800

FY10 FY11 FY12 FY13 FY14 FY15 Q1FY17

Filed Approved

100 97

62

43 12 2921

12 1126

0

20

40

60

80

100

120

EuValue | SUNPHARMA

6th Sep 2016 .

6

ROW to grow steadily at a CAGR of 8.7% over FY16-18E

In FY16, ROW contributed 21% to overall revenues with strong presence in key

markets including emerging markets (Mexico, Brazil, Russia & CIS, South Africa),

Western Europe, Canada, Australia, New Zealand among others. Moreover,

Ranbaxy’s stronghold in emerging markets will complement company’s presence

and enable cross-selling of products. The company now has 10 manufacturing

facilities across emerging markets. In Western Europe and other markets,

company operates through distribution led model. Currently, the company is

expanding its product basket across injectables, hospital products and retail

market. In the near term, company is planning to develop and commercialize

complex generics and differentiated products to drive sustainable and profitable

growth. We expect the company to post steady growth at a CAGR of 8.7% over

FY16-18E.

ROW to grow at CAGR of 8.7% over FY16-18E


APIs: Recently acquired Opiates business to complement the current

portfolio

APIs accounted for 5% of overall revenues and grew at 38% in FY16 on account of

consolidation of the opiates business in Australia. Sun Pharma manufactures over

300 APIs across 12 locations. Around 25 APIs are added to the product portfolio

annually and clientele include large generic and innovator companies. In 2015, the

company acquired GSK Opiates business in Australia. The product portfolio

consists of poppy-derived raw materials that are primarily used to manufacture

analgesics (used for the treatment of moderate to severe pain) will complement

company’s current API manufacturing footprint globally. The global Opiates market

holds good potential and the addition of GSK’s Opiates will strengthen the

company’s positioning further.

APIs revenue growth R&D spending trend


1527 2786 6065 5746 6105 6792

37.3%

82.5%117.7%

-5.3% 6.2% 11.3%

-50%

0%

50%

100%

150%

0

2000

4000

6000

8000


Rs.

Cro

res

RoW YoY growth

31.3%37.8%

15.0% 15.0%

0%

10%

20%

30%

40%

0

500

1000

1500

2000

2500

FY15 FY16 FY17E FY18E

Rs.

Cro

res

APIs YoY growth

6.3% 6.5%7.2%

8.3%

0%

2%

4%

6%

8%

10%

0

500

1000

1500

2000

2500

FY13 FY14 FY15 FY16

Rs.

Cro

res

R&D Exp as % of sales

Ranbaxy’s stronghold in emerging markets will complement company’s presence and enable cross-selling of products.

. The product portfolio GSK Opiates will complement company’s current API

manufacturing footprint globally.

EuValue | SUNPHARMA

6th Sep 2016 .

7

Revenue to grow at CAGR of 12% with EBITDA margin expansion of 390bps We expect Sun pharma’s revenue to grow at a CAGR of 12% driven by recent gGleevec launch, gGlumetza launch in next few weeks, synergies from Ranbaxy integration (USD 300 mn by FY18E), scale-up of specialty products and key launches in the US. Hence, we expect 390bps improvement in EBITDA margin over FY16-18E led by high margin launches & cost efficiencies due to Ranbaxy integration.

Revenue to grow at a CAGR of 12% during FY16-18E


EBITDA & PAT margin to improve by 490bps and 330bps respectively


Return ratios We expect Sun pharma’s return ratios to improve further on account of contribution of high margin launches, revenue synergies and productivity improvement on Ranbaxy’s consolidation.

Return ratios


40.9% 42.3%

70.6%

1.1%11.7% 12.3%

-20%

0%

20%

40%

60%

80%

0

10000

20000

30000

40000

FY13 FY14 FY15 FY16E FY17E FY18E

Total revenue YoY growth

43.3% 43.5%

28.7% 28.7% 31.5% 33.6%

31.6% 35.2%

17.4% 19.5% 20.2% 22.8%0%

20%

40%

60%

0

5000

10000

15000

FY13 FY14 FY15 FY16E FY17E FY18E

EBITDA PAT EBITDA margin PAT margin

32.3% 35.8%

23.9%19.9% 19.9% 21.6%

23.8%30.5%

19.5% 17.4% 16.2% 17.1%0%

20%

40%


ROCE ROE

EuValue | SUNPHARMA

6th Sep 2016 .

8

Y/E FY15 FY16 FY17E FY18E

Growth (%)

Net Sales 70.6 1.1 11.7 12.3

EBITDA 12.4 1.1 22.6 19.8

Net profit (15.6) 13.1 16.0 26.4

Margin (%)

EBITDA 28.7 28.7 31.5 33.6

EBIT 26.3 28.6 29.7 32.1

NPM 17.4 19.5 20.2 22.8

Return Ratios (%)

RoE 19.5 16.9 16.2 17.1

RoCE 23.9 19.5 19.9 21.6

Per share data (Rs.)

EPS 19.9 22.4 26.0 32.9

DPS 3.0 1.0 3.0 3.0

BVPS 106.6 130.5 152.9 182.2

Valuation(x)

P/E 38.0 34.8 30.0 23.8

EV/EBITDA 23.2 23.5 18.7 15.1

EV/Net Sales 6.7 6.7 5.9 5.1

P/B 7.1 6.0 5.1 4.3

Turnover Ratios (x)

Net Sales/GFA 2.1 1.5 1.5 1.5

Sales/Total Assets 0.7 0.5 0.5 0.6

Y/E (Crores) FY15 FY16 FY17E FY18E

Pre-tax profit 6,403 7,450 8,813 10,900

Depreciation 1,195 1,014 1,240 1,322

Chg in Working Capital

(39) (1,941) (935) (1,090)

Others (496) (508) (300) (540)

Tax paid (1,740) (935) (1,322) (1,635)

Cash flow from operating activities

5,322 5,080 7,496 8,958

Capital expenditure

(2,366) (3,354) (1,500) (1,600)

Chg in investments (305) 2,392 680 800

Cash flow from investing activities

(2,671) (962) (820) (800)

Equity raised/(repaid)

- - - -

Debt raised/(repaid)

(548) (656) (2,000) (2,000)

Dividend paid (363) (291) (866) (866)

Other financing activities

(176) (477) (380) (260)

Cash flow from financing activities

(1,087) (1,424) (3,247) (3,127)

Net chg in cash 1,563 2,695 3,429 5,031

Y/E (Crores) FY15 FY16 FY17E FY18E

Share Capital 241 241 241 241

Reserve and surplus

25,397 31,164 36,565 43,617

Net Worth 25,638 31,405 36,805 43,858

Minority Interest 2,851 4,085 5,309 6,655

Total debt 8,994 8,338 6,338 4,338

Other non-current liabilities

2,719 2,303 2,419 2,540

Total Equity & Liabilities

40,202 46,132 50,871 57,391

Fixed Assets 11,020 13,361 13,621 13,898

Goodwill 3,701 4,181 4,181 4,181

Investments 2,716 1,309 1,309 1,309

Net Current assets

18,277 22,123 26,451 32,533

Other non-current assets

4,487 5,158 5,310 5,469

Total Assets 40,202 46,132 50,871 57,391

BALANCE SHEET (CONSOLIDATED)

Y/E (Crores)s. FY15 FY16 FY17E FY18E Total operating income

27,433 27,744 30,980 34,791

Raw Material cost 6,739 6,483 6,687 7,336

Employee cost 4,430 4,797 5,267 5,671

Other operating expenses

8,398 8,508 9,274 10,101

EBITDA 7,867 7,956 9,753 11,683

Depreciation 1,195 1,014 1,240 1,322

EBIT 6,672 6,942 8,513 10,360

Other Income 548 985 680 800

Net Interest cost 579 477 380 260 Profit Before Tax

6,641 7,450 8,813 10,900

Tax 915 935 1,322 1,635

Profit after tax 5,726 6,515 7,491 9,265

Minority Interest 936 1,113 1,224 1,346

P/L from Associates

(13) (2) - -

Adjusted PAT 4,777 5,401 6,267 7,919

E/o income / (Expense)

238 685 - -

Reported Profit 4,539 4,716 6,267 7,919

QUICK GLANCE-FINANCIALS AND VALUATIONS

PROFIT AND LOSS ACCOUNT (CONSOLIDATED)

RATIO ANALYSIS (CONSOLIDATED)

CASH FLOW STATEMENT (CONSOLIDATED)

EuValue | SUNPHARMA

6th Sep 2016 .

9

Disclaimer: This report has been prepared by Dion Global Solutions Limited (Dion) and is meant for sole use by the recipient. For detailed disclaimer, please refer the link below: https://bp.eurekasecurities.net/myeureka/Disclaimer.html http://14.141.46.130/researchdesk/disclaimer-A-N.html

Rating criteria

Large Cap. Return Mid/Small Cap. Return

Buy More than equal to 10% Buy More than equal to 15%

Hold Upside or downside is less than 10% Accumulate* Upside between 10% & 15%

Reduce Less than equal to -10% Hold Between 0% & 10%

Reduce/sell Less than 0%

* To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and ‘Reduce’ as Sell. * Sun Pharma is a large cap company

Escalation of Halol warning letter into import alert and delay in key ANDA

approvals from US FDA.

Adverse movement of emerging market currencies.

KEY RISKS

https://bp.eurekasecurities.net/myeureka/Disclaimer.html

euvalue - bp.eurekasecurities.netsun pharmaceuticals industries ltd: company overview sun pharma is...

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