Morgan Stanley has recommended overweight rating on Sun Pharmaceuticals with target price of Rs 1209. Research firm view the recent correction as a good entry point. The stock is trading at 20x and 16x F08E and F09E EPS.

Morgan Stanley report on Sun Pharma:

We believe that Sun’s stake in 180 days co-exclusivity for generic Protonix (pantoprazole, USD 2.5 billion brand sales) is under-estimated, and the company is quite likely to benefit from this product opportunity. This is based on our information search on FDA site and court documents.

What underlines our belief?

1) Sun filed its ANDA on the same day as Teva, February 2, 2004, 2) with Para IV certification on the later patent (No. ‘903, 2016 expiry) for which Wyeth/Altana did not litigate, 3) Protonix’s ANDA filings are governed by post MMA rules (i.e. filed after Dec 8, 2003) and 4) Teva’s Protonix press release stated “As one of the first companies to file an ANDA…Teva has been awarded 180 days exclusivity”.

What could be the commercial impact?

We think Sun could gross USD 100-150 million in profits from this opportunity (assuming 50-60% price erosion and 25-35% market share). Importantly, it may win sole exclusivity for the injectable form (USD 80 million sales). We think there could be one more player to share exclusivity for the oral form (baked into our profit assumptions).

What are the timelines?

While there is an outside chance of generic launch in 2007 (if Wyeth’s PI is denied in Sep’07 and generic companies launch at risk), more realistically we expect exclusivity trigger once ‘579 expires in July’10.

What is the risk?

Sun changed its certification to Para IV on ‘579 patent and, this being one of the first post MMA cases, Sun’s exclusivity could be subject to FDA’s interpretation of co-exclusivity rules – low probability risk, in our view.

We re-iterate our Overweight rating on the stock and view the recent correction as a good entry point. The stock is trading at 20x and 16x F08E and F09E EPS.