Sun Pharmaceutical Industries Ltd won an Israeli court ruling last week, paving the way for India's top valued drugmaker to take control of Taro Pharmaceutical and boosting its outlook. The verdict eases an overhang over Sun's shares, but uncertainty over the financials of Taro and an ongoing issue with the U.S. Food and Drug Administration over the manufacturing standards at its U.S. unit are key worries for investors.
BOOSTER SHOT
K.K. Mital, head of portfolio management services at Globe capital in New Delhi, said he was asking his clients to buy the share as Taro would give the company a shot in the arm. "The court ruling in Sun Pharma's favour is a positive trigger to bring back investors' interest in the company," he said. Sun shares have climbed almost 16 percent this year, compared with a 14 percent rise in the sector index, and Mital said the price does not reflect the benefits of Taro's acquisition.
According to data from Thomson Reuters StarMine, 14 brokerages have a buy on the stock while six have a sell and 12 have a hold. The verdict will allow Sun to raise its holding in Taro, a generic drugmaker with a strong footing in the U.S. market, to more than 50 percent from 36 percent it now holds.
Sun has spent about $100 million for its current stake, and analysts see the final figure at $150 million-$250 million for the controlling holding. "Taro has a lot of synergy with Sun. It has a strong distribution strength in the U.S. which Sun can use and it has presence in key therapeutic areas," said Bino Pathiparampil, who tracks the stock at IIFL Capital. "The market is not pricing in any of this," he said, adding the deal should add more than 5 percent to Sun's shares.
WATCH YOUR STEP
However, Sun's pending manufacturing standard compliance issue with the U.S. regulator is also a worry. In mid-2009, the U.S. authorities seized drugs made by Sun's U.S. unit, Caraco, for violating manufacturing standards. Last month, the FDA issued a warning to Sun uncovering manufacturing problems at its plant in New Jersey.
"I do not see a quick resolution of the FDA issue," said Sarabjit Kour Nangra, vice president of research at Angel Broking, who rates the stock neutral. "We are not expecting a major upside from Taro. Sun's domestic business is doing fairly well. But any upside, if any, from here on will have to come purely from any exclusive drug launches," she said.
According to StarMine SmartEstimate, which gives more weight to recent forecasts of top-rated analysts, Sun shares are trading at 21.2 times price to earnings, in line with rival Ranbaxy Laboratories' 21.9 times but pricier than Dr Reddy's Laboratories' 20 times. "At current valuations, there's no room for the valuations to expand given the concerns and the muted earnings growth that is expected over the next two years," Nangra said.
BOOSTER SHOT
K.K. Mital, head of portfolio management services at Globe capital in New Delhi, said he was asking his clients to buy the share as Taro would give the company a shot in the arm. "The court ruling in Sun Pharma's favour is a positive trigger to bring back investors' interest in the company," he said. Sun shares have climbed almost 16 percent this year, compared with a 14 percent rise in the sector index, and Mital said the price does not reflect the benefits of Taro's acquisition.
According to data from Thomson Reuters StarMine, 14 brokerages have a buy on the stock while six have a sell and 12 have a hold. The verdict will allow Sun to raise its holding in Taro, a generic drugmaker with a strong footing in the U.S. market, to more than 50 percent from 36 percent it now holds.
Sun has spent about $100 million for its current stake, and analysts see the final figure at $150 million-$250 million for the controlling holding. "Taro has a lot of synergy with Sun. It has a strong distribution strength in the U.S. which Sun can use and it has presence in key therapeutic areas," said Bino Pathiparampil, who tracks the stock at IIFL Capital. "The market is not pricing in any of this," he said, adding the deal should add more than 5 percent to Sun's shares.
WATCH YOUR STEP
However, Sun's pending manufacturing standard compliance issue with the U.S. regulator is also a worry. In mid-2009, the U.S. authorities seized drugs made by Sun's U.S. unit, Caraco, for violating manufacturing standards. Last month, the FDA issued a warning to Sun uncovering manufacturing problems at its plant in New Jersey.
"I do not see a quick resolution of the FDA issue," said Sarabjit Kour Nangra, vice president of research at Angel Broking, who rates the stock neutral. "We are not expecting a major upside from Taro. Sun's domestic business is doing fairly well. But any upside, if any, from here on will have to come purely from any exclusive drug launches," she said.
According to StarMine SmartEstimate, which gives more weight to recent forecasts of top-rated analysts, Sun shares are trading at 21.2 times price to earnings, in line with rival Ranbaxy Laboratories' 21.9 times but pricier than Dr Reddy's Laboratories' 20 times. "At current valuations, there's no room for the valuations to expand given the concerns and the muted earnings growth that is expected over the next two years," Nangra said.
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