Sun Pharmaceutical Industries (Sun) along with Caraco Pharmaceuticals (Caraco) has entered into agreements with Forest Lab and H. Lundbeck, bringing to an end the long running patent suit related to Lexapro (Escitalopram oxalate) tablets. The company has not shared any financial details of the deal.
The Lexapro settlement deal is certainly positive for Sun as it would bring to an end the prolonged litigation in addition to the upfront payment and royalty on the product sales.
On the back of superlative margins and niche product focus, Sun’s revenue and net profit have grown at a fast clip. However, due to the high base of FY2009 and the
Caraco issue the sales are likely to remain flat in FY2010.
The company’s specialty focus, strong cost competitiveness and strong balance sheet make it a preferred pharmaceutical play in such turbulent times. Further, its increasing focus on research and development clearly underlines the robustness of its business model and ensures strong growth potential for the future.
Though we maintain our positive outlook on the company, we also feel that the stock would remain under pressure until the company obtains a clean chit from the USFDA and that is unlikely in the near to medium term.
At Rs1,150, Sun is valued at 14.2x FY2010E and 13.2x FY2011E fully diluted earnings.
We upgrade our recommendation on Sun from Hold to BUY with a revised price target of Rs1,217 (14x its FY2011 earnings), incorporating the impact of the Caraco event.
However, we will revisit our numbers once Sun Pharma comes out with its revised guidance for FY2010.