Sun Pharma rallies 4% as Credit Suisse upgrades to outperform, sees 23% upside

Sun Pharmaceutical Industries share price rallied for third consecutive session Thursday, up 4 percent intraday after Credit Suisse has upgraded rating on the stock to outperform from neutral, citing strong growth trajectory.

The stock surged more than 10 percent in three consecutive sessions.

The research house also hiked its target price to Rs 595 (from Rs 490 earlier), implying potential upside of 23 percent due to higher specialty valuation (net present value Rs 35 per share), FY19 EPS up by 5 percent, separating specialty loss of 15 percent from core profits.

"EPS for FY19/20 is 10 percent higher than consensus due to our view of lower erosion on generics and constructive stance on specialty," it said.

Sun has already invested more than USD 600 million in seven specialty assets.

"Proprietary analysis shows peak sales of these assets should be more than USD 700 million, and should swing contribution of Specialty from (15 percent) of profits to +15 percent by FY22," the research house said.

Increasing contribution of specialty addresses growth concerns in generics (10-12 percent profit CAGR), and helps Sun revert to 20 percent profit growth trajectory, it added.

It feels strong free cash flow (more than USD 500 million) should help acquire more assets and deepen presence in chosen specialties.

Monetisation by Sun Pharma has already started with two drugs in the market, and the lead derma drug MK-3222 should be launched next year, it said.

Credit Suisse stayed negative on the US generic market, and expects high single-digit price erosion.

However, for Sun, the research house expects the lower price erosion to mid-single digit (and increase FY19 EPS by 5 percent) as Taro's EBITDA has already halved (from FY16) and product concentration is also lower now; and ex-Taro US sale has already seen an erosion of 34 percent in the last two quarters and 55 percent of the remaining sale is immune to the price erosion risk.

Key risks according to Credit Suisse are Halol resolution delay, Dadra Form 483, and Department of Justice (DOJ) penalty.

The research house said Halol re-inspection is in third quarter of FY18 and this could unlock several key filings (Focalin XR, Ganirelix, Lupron, Vagifem, Protonix IV, Invega, Makena).

Further MK-3222 approval is likely in Q4FY18 and is key driver for breakeven of specialty by FY20, it added.

The buying in healthcare space is also because of undervaluation after its recent correction due to US pricing pressure but that seems to have priced in now.

At 10:54 hours IST, the stock price was quoting at Rs 517.65, up Rs 14.70, or 2.92 percent on the BSE.