Sun Pharmaceuticals manufactures formulations in niche segments such as psychiatry, cardiovascular, gastroentology and neurology. It has been among the fastest growing pharmaceutical companies over the last three years. The promoters hold around 74% of the equity of the company.
Sun has been extremely aggressive in the launch of new products with almost 24 new product launches in its niche areas, slated for the current year itself (10 of these have already been launched). These are expected to help the company achieve an over 25% growth in the coming year too. The company derives almost 40% of its revenues from products introduced in the past five years. Consequently its exposure to revenues accruing from products under the DPCO is a relatively low 19% of domestic formulation sales.
Over the years Sun has used the strategy of acquisitions and mergers to grow quickly. It acquired Knoll Pharma’s bulk drug facility, Gujarat Lyka Organics, 51.5% in M. J. Pharma, merged Tamil Nadu Dadha Pharma, acquired Natco’s brands and merged Milmet Labs.
A 33% growth in turnover in a year when the overall industry grew by 9.8%, a 20% pretax margin and a return on networth of 24% is a stupendous performance by any standard. That’s what Sun Pharma has achieved in 1999–2000.
Perhaps the only area of concern is the continuing losses of its US based affiliate Caraco Pharma, which is the company’s vehicle for launch of generics. (Sun has invested $ 12.8 m – $ 7.5 m towards equity and $ 5.3 m towards debt in Caraco, which has registered a loss of over $ 9.5 m for the year ended December 1999.) Caraco has submitted around nine abbreviated new drug applications (ANDA) which are awaiting US FDA approval. Besides, Caraco needs further cash infusion for which it is planning to raise debt in the US market. Sun has however not provided for this dimunition in the value of its investments.
The last time that we wrote about the stock we had mentioned that: “Sun Pharma has changed gears alright. What remains to be seen is whether the company is able to sustain its profitability.” This was at a price of Rs 607.
The stock has come off almost 25% to its current levels of 464. The fall in valuation is partially due to the fact that the overall valuations in the market have come down over the last one week and partially due to the concerns over Caraco’s losses.
The management has already stated its intention to amalgamate Sun Pharma Exports, the company’s 100% subsidiary into Sun Pharma. This would add roughly another Rs 150 to the company’s expected profits of Rs 1134 m in FY2001. The per share earnings work out to around Rs 20 and this implies an earning multiple of 23.2 at current valuations.