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Spark Capital: Sun Pharmaceuticals Industries – Q3 FY14 results review – Taro drives strong quarter; maintain ‘Buy’




Spark Capital Advisors(India) Private Limited


17 Feb 2014





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Taro drives strong quarter; maintain ‘Buy’ Sun Pharma’s Q3FY14 results were broadly in-line with expectations as strong Taro sales offset weak ex Taro sales in the US (despite J&Js exit from Doxil, Prandin exclusivity, gCymbalta launch). The company’s domestic formulations segment continued to outperform peers growing 20% yoy. EBITDA margin improved ~250bps sequentially despite higher R&D expenses (6.8% for the quarter vs. 5.3% in Q2FY14) on the back of continuing margin gains at Taro (EBITDA margin of 65% for the quarter vs. 61% in Q2FY14). We upgrade FY15/FY16 EPS estimates by 3%/4% mainly on the back of higher estimates for Taro and maintain ‘Buy’ rating on the stock (22x FY16E EPS of Rs. 31.9) Takeaways from post-results conference call: US sales of $434mn for the quarter benefited from strong Taro sales ($214mn including non-US sales) and strong contribution from gDoxil (Sun is the sole supplier following J&Js exit). During the quarter, FDA inspected Caraco’s facility with no Form 483 observations. Management guided for gradual roll out of products from the fascility. Sun announced approval for gTemodar (2nd entrant post expiry of Teva/Perrigo’s 6 month exclusivity, brand size of ~$400mn) During the quarter, the company filed 5 ANDAs taking the total ANDAs filed to 468. The company received approvals for 4 products taking the total number of approvals to 337 (131 products are currently awaiting FDA approval) Domestic formulations growth for the quarter was 20% yoy. RoW sales recorded growth of 32% yoy. Management mentioned Japan as a possible focus market for acquisitions. API sales decreased 17% yoy mainly due to increased captive consumption R&D expense for the quarter was Rs. 2.9bn (6.8% of sales vs. 6.6% of sales in Q3FY13). Management guided for R&D expense of ~8% of sales going forward Tax rate for the quarter was 12%. Management guided for effective tax rate of ~15% for FY14. As of Dec 2013, the gross debt stood at ~Rs. 25bn (mostly US$ denominated). Post Taro’s share buyback (for $193mn) during the quarter Sun’s stake in Taro stands at 68.9% (vs. 66% as of Sep 2013). Management revised FY14 revenue growth guidance to 29% from 25%

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