Tuesday, 01 July 2014

Asian Daily

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Sun Pharma -------------------------------------------------------------------- Maintain OUTPERFORM Addressing investor concerns about Taro price increases EPS: ◄► TP: ◄► Anubhav Aggarwal / Research Analyst / 91 22 6777 3808 / anubhav.aggarwal@credit-suisse.com Chunky Shah / Research Analyst / 91 22 6777 3872 / chunky.shah@credit-suisse.com

● We upgraded Taro and Sun Pharma on Friday on the back of significant price increases (link to Taro's detailed report). We highlight key investor queries on our upgrade.

● Query 1: Have previous price increases been sustained for Taro? Taro has approvals for 140 ANDAs and has taken price increase in >30 products and there have been no roll-backs.

● Query 2: How often has the competition matched Taro's prices? Competition has followed Taro so far as: (1) competition benefits more from price increase than volumes and (2) top 5 players control 70% of Derma generic market.

● Query 3: Does Taro always lead price increases? Price increases have been initiated by other players and Taro has followed.

● Query 4: Which products will Taro next take price increases on? Given the history of price increases over the past three years, more price increases can't be ruled out but they are difficult to predict.

● Query 5: When does own ANDA pipeline of Taro kick in? The benefit of Taro's pipeline should be visible from FY17 (expect <10 approvals till FY16) and Taro has to depend on price increases over FY14-16 for growth.

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Investor feedback on Taro's price increase

We upgraded Taro and Sun Pharma on Friday on the back of significant price increases (link to Taro's detailed report). We highlight key investor queries on our upgrade.

#1. Have previous price increases been sustained for Taro?

Taro has approval for ~140 ANDAs in the US and we have already seen Taro taking price increases in more than 30 of these products. We have highlighted some of these products in Figure 1. It is important to note that: (1) there have been multiple instances of price increases in these products and (2) there have been no roll-backs of prices so far in the last three years.

Figure 1: Taro has not rolled back prices increase so far

Product Price increase

since Mar-11

# of instances of

price increase

Remarks

Nystatin triam - Cream 59x 5 No roll backs Nystatin triam - Ointment 45x 5 No roll backs

Clomipramine 27x 1 No roll backs

Clobetasol Propionate - Cream 21x 2 No roll backs Clobetasol Propionate - Ointment 18x 2 No roll backs

Fluocinonide - Cream 17x 3 No roll backs

Fluocinonide - Liquid Lotion 8x 3 No roll backs Nystatin - Cream 12x 2 No roll backs

Desonide Cream 11x 2 No roll backs

Hydrocortisone Val - Ointment 8x 7 No roll backs

Acetazolamide 5x 3 No roll backs

Ketocanazole 2x 1 No roll backs Source: Price Rx, Credit Suisse estimates

#2. How often has the competition matched Taro's prices?

Given the industry structure in Derma generic market where the top five players control 70% of the Derma generic market (Taro, Sandoz, Perrigo, Actavis and Mylan), it is more beneficial for others to follow price increases rather than benefit from higher volumes. Figure 2 shows how competition followed Taro on Desonide to match prices.

Figure 2: Instance of how competition followed Taro in Desonide

0

20

40

60

80

Dec-10 Jan-11 Apr-13 May-13 Aug-13

Taro Perrigo Actavis

Perrigo initiates price increase & Taro follows

Taro initiates & Perrigo follows

Actavis matchesTaro & Perrigo

USD

Source: Price Rx, Credit Suisse estimates.

#3. Does Taro always lead price increases?

Price increases have been initiated by other Derma players and Taro has followed them on multiple occasions (Figure 3).

Figure 3: Taro is not always the first to raise prices

Product Price

Hike

Price hike

initiated by

Date Taro price

increase date

Triamcinolone Acetonide - Cream 5x Sandoz 1-Jul-10 15-Apr-11 Fluocinonide - Liquid Lotion 3x Sandoz 15-Feb-12 13-Mar-12

Betametha Dipr Clotrim - Cream 11x Actavis 13-Feb-12 3-Apr-12 Desonide 11x Perrigo 5-Jan-11 13-Mar-11 Source: Price Rx, Credit Suisse estimates.

#4. Which products will Taro next take price increases on?

Typically, price increases are mainly for products where there are limited therapeutic substitutes and payors lack choices to shift prescriptions. Given the history of price increases in the last three years, more price increases cannot be ruled out but it is difficult to predict the next one.

#5: When does own ANDA pipeline of Taro kick in?

Taro has 27 pending ANDAs out of which we expect approval of <10 products over the next two years. Substantial benefit of Taro's ANDA pipeline should be visible from FY17; Taro has to depend on price increase over next two years for growth.

Bbg/RIC SUNP IN / SUN.BO Rating (prev. rating) O (O) Shares outstanding (mn) 2,071.16 Daily trad vol - 6m avg (mn) 2.7 Daily trad val - 6m avg (US$ mn) 27.1 Free float (%) 36.3 Major shareholders Promoter 64%

Price (30 Jun 14 , Rs) 686.25 TP (prev. TP Rs) 760.00 (760.00) Est. pot. % chg. to TP 11 52-wk range (Rs) 686.3 - 482.5 Mkt cap (Rs/US$ bn) 1,421.3/ 23.7

Performance 1M 3M 12M

Absolute (%) 13.0 19.7 36.1 Relative (%) 8.0 6.5 5.1

Year 03/12A 03/13A 03/14E 03/15E 03/16E

Revenue (Rs mn) 80,195 112,999 160,044 190,207 221,284 EBITDA (Rs mn) 32,676 49,567 71,196 84,846 98,010 Net profit (Rs mn) 26,567 37,547 57,218 64,165 74,990 EPS (Rs) 12.8 18.1 27.6 31.0 36.2 - Change from prev. EPS (%) n.a. n.a. 0 0 0 - Consensus EPS (Rs) n.a. n.a. 27.7 28.0 32.3 EPS growth (%) 46.3 41.3 52.4 12.1 16.9 P/E (x) 53.5 37.9 24.8 22.2 19.0 Dividend yield (%) 0.3 0.4 0.7 0.8 1.0 EV/EBITDA (x) 41.9 27.4 19.0 15.4 12.8 P/B (x) 5.8 9.5 8.3 6.4 5.1 ROE (%) 24.5 27.6 35.7 32.7 29.8 Net debt(cash)/equity (%) (39.2) (37.3) (35.5) (45.0) (52.3)

Note 1: Sun Pharmaceutical Industries Ltd is engaged in manufacturing speciality pharmaceuticals and active pharmaceutical ingredients. Its brands are prescribed in chronic therapy areas like cardiology, psychiatry, neurology, gastroenterology.