Buy Sun Pharma Ltd For Target Rs 13,000 By Emkay Global Financial Services Ltd
Sun’s Organon acquisition marks a clear departure from its recent acquisition template – multiple sub-USD500mn assets over the years vs adding a company of its own scale as part of a single acquisition. That the company wanted to make a near-complete transition to being a branded/specialty-focused player has been clear over the last 5 years, though the pace + scale of it was what the street has been wary of over the last few months. Most investor concerns around growth in the acquired company (Sun is betting on better execution + in-licensing + access to newer markets), leverage (within manageable levels per the management, both the companies generate >USD1bn in FCF, and a firm commitment to quickly pare down debt), and EPS accretion (clear visibility from Year-1) were addressed during the call. The only question around the fair multiple for Sun going forward that could be raised, in our view, could be driven by the decline in the domestic sales contribution to Sun’s overall sales to 1/6th following this acquisition vs 1/3rd currently. However, Sun, at ~20x FY28E pro forma EPS (assuming no growth in Organon, but partly building-in cost synergies), is now essentially trading in line with Dr Reddy’s, which has a similar domestic sales share of 1/6th despite Sun+Organon’s estimated branded contribution of ~80%. Our bear case SoTP based on Mar-28E pro forma EBITDA (no growth in Organon + multiple the same as the acquisition’s), despite the sharp move in the stock price on 27-Apr, still implies a 15% upside; retain BUY.
Beyond the valuation argument, multiple optionalities hard to ignore
While Sun is betting on better execution to drive growth of Organon's portfolio across therapy areas, its repeated emphasis on Organon’s global commercial footprint and opportunities for in-licensing/cross-selling (given negligible portfolio overlap) offer comfort on Sun’s optimism in driving a turnaround in Organon’s growth profile. The acquisition will also mark Sun’s serious foray into biosimilars – regardless of one’s view on the broader biosimilar landscape, we believe frontend infrastructure and opportunity to tap into LOE-linked opportunities (that Organon offers) over the next decade cannot be ignored.
KTAs from the investor call
1) Organon, with >USD800mn in sales from China, will provide an ideal platform for launching Sun’s products in a market where Sun has negligible presence. Besides, Sun will expand into other new markets.
2) Sun expects to tap into potential cost synergies of ~USD350mn (procurement, people, and supply chain) over a 2–4Y period.
3) Organon has built strong brand equity, evidenced in its ability to command premium pricing even with the availability of multiple gxs (eg in China, where its portfolio has already seen the impact of volume-based purchasing).
4) Organon’s established brand portfolio could see single-digit growth on the back of interventions incl line extensions and combinations.
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