Sun Pharmaceutical Industries - Taro's resolution with DOJ removes key overhang - ICICI Securities

Sun Pharma's (Sun) subsidiary, Taro Pharma, has resolved all the cases adhering to the multi-year investigations by the DOJ (Department of Justice, Antitrust Division and Civil Division) in US generic pharma industry. Taro will make a total payment of US$419mn, including US$206mn for deferred prosecution agreement and US$213m to resolve all claims pertaining to federal healthcare program. This amount of settlement is inline with street estimates based on earlier settlement by Sandoz for similar cases. Taro has strong balance sheet with cash balance of over US$1bn which is yielding very low interest income and the settlement amount can easily be paid using this cash. We believe this removes the key overhang on stock's valuation. Reiterate BUY.

- Taro settles DOJ antitrust investigations for US$419mn: Taro Pharma announced that is has reached global resolution of DOJ antitrust investigations. Taro was earlier named in the list of companies charged for generic drugs price fixing in US market for several drugs. There are two parts of this settlement. Firstly, under Deferred Prosecution Agreement, DOJ will file an Information for conduct of time period 2013-2015 and if Taro follows the agreement terms including payment of US$206mn, DOJ will dismiss the information at the end of third year. Secondly, there is a framework of understanding with DOJ Civil Division where Taro will make a payment of US$213mn to resolve all claims of federal healthcare program, subject to final agreement and agency authorization.

- No material earnings impact: Taro has more than US$1bn cash on the books and hence, this settlement amount can easily be paid. The payment of US$419mn will have one-time impact on FY21E earnings. However, we don't expect any material impact on future earnings as this cash balance is yielding very low interest income. Further, Taro's current annual FCF generation remains healthy at more than US$250mn. However, the cases with state attorneys for price fixing are yet to reach an outcome which may result in additional payments in future.

- Key concerns largely priced in: Outstanding DOJ case was a key concern that has been resolved in line with street estimates. Another concern is slow ramp-up in its specialty portfolio and competition in Ilumya. We have already factored in muted traction in the specialty portfolio and its contribution to total US sales would be ~30% in FY22E. Our estimates include Ilumya sales of US$131mn in FY21E and US$169mn in FY22E.

- Valuations and risks: We maintain our estimates and reiterate BUY on the stock with a target price of Rs585/share based on 24xFY22E earnings. We believe this resolution would help in gradual re-rating of the stock's valuation. Key downside risks: regulatory hurdles and delay in turnaround of specialty business.

Shares of SUN PHARMACEUTICAL INDUSTRIES LTD. was last trading in BSE at Rs.475.4 as compared to the previous close of Rs. 485.4. The total number of shares traded during the day was 239830 in over 5268 trades.

The stock hit an intraday high of Rs. 488.45 and intraday low of 469.4. The net turnover during the day was Rs. 113920624.

Source : Equity Bulls

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