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Elephant set to move

Long-awaited Taro buyout manifesting finally

We had long awaited Sun Pharmaceuticals’ (SUNP IN) announcement regarding complete buy-out of US-listed Taro subsidiary. For the past many years, this has featured on SUNP's agenda but valuation expectations of the minority shareholders were the key hindrance to its fruition. With the latest development, expect the buyout to go through, with the support of majority of the minority shareholders. The deal values Taro at USD 1.62bn, ~2.7x the current annual revenue run rate. Taro has ~USD 900m cash on balance sheet.

Overall US generics business – Potential for improvement

The transaction gives SUNP full control on its subsidiary and the flexibility to take bold steps, so as to drive synergies between its own US business and that of Taro’s. Taro’s profitability had collapsed over the years, from ~66% EBITDA margin in FY15 to mid-single digit now. While most US generics businesses have seen significant uptick in revenue and profitability in the past few quarters, SUNP has been a laggard. We expect new initiatives and synergies to drive major improvement.

Specialty business growing; Deuruxolitinib to add on

SUNP’s specialty business continues to grow, mainly led by Ilumya, up >25% even on a base close to USD 1bn, in our estimate. Deuruxolitinib, launch of which we expect in H2FY25, may add to this growth. Deuruxolitiinb revenues may drive significant operating leverage as SUNP already has a dermatology sales force in the US (no additional cost of salesforce).

Other businesses – Outlook good

We expect reasonable growth of 8-10% to sustain in other key businesses – domestic formulations and RoW (ex-India and the US). Recent co-marketing arrangements for patented products in India and the registration of Ilumya in China could be added growth drivers.

Valuation: Maintain Accumulate; TP raised to INR 1,484

We maintain our FY24E-26E core earnings estimates. SUNP trades at 31.5x core FY25E EPS. Valuations may seem a bit stretched after the recent run-up in stock price, but we expect these to sustain given the high chances of continuous earnings upgrades from the US generics up-cycle and operating leverage in the specialty business. We raise our TP from INR 1,246 to INR 1,484, which is 31x FY26E core EPS plus cash per share. Delay in the US launch of Deuruxolitinib and slower recovery in US generics profitability are key risks to our call and estimates.

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