CMP: Rs 440
Citigroup maintains the ‘Hold’ rating on Sun Pharma . Sun and MRK has formed a JV to tap the emerging markets with new combination drugs and formulation of incrementally innovative, branded generics. This is separate from Sun’s current branded generics biz in these markets and upside appears a few years out. While Citigroup does not see any material impact on valuation in the near term, this is positive for the margin as it adds a revenue stream over the long term. The JV seeks to leverage MRK’s front end in emerging markets, its strong regulatory expertise and clinical excellence as an innovator while Sun will bring in manufacturing and product development capabilities. However, in the absence of additional information, Citigroup is unable to quantify the incremental revenues and profitability for Sun. the target price Rs 480 is based on a sum-of-the-parts approach, valuing the base business using a P/E and ascribing an option value for its patent challenge pipeline. However, Sun deserves a premium; given its consistent track record high profitability and return rations, as well as the potential upside from the development of idle cash in the business.