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SUN PHARMA: Announces termination of distribution agreement with Caraco from Jan-2012; To distribute products in US itself; No major financial implication; Maintain BUY

Sun Pharma’s US subsidiary, Caraco, has announced that the distribution agreements with Sun will be terminated from Jan, 2012.

Sun Pharma has decided to terminate the agreement citing margin constraint due to competitive pricing pressure and decided to distribute on its own.

For 2QFY11 and 1HFY11, products covered by this agreement accounted for US$89.7m and US$216.8m respectively.

Sun Pharma offers Caraco, gross margins in the range of 8% to 20% on these products. By terminating the agreement, Sun will save this cost in future.

However, Sun will have to incur the additional marketing and distribution cost to sell these products on its own.

We do not expect any major financial implications of this development on Sun. Key drivers for future include:
 1. Ramp-up in US business and resolution of Caraco’s cGMP issues
 2. Monetization of the Para-IV pipeline in the US
 3. Taro integration with potential for improvement in its profitability
 4. Launch of controlled substances in the US. Based on our current estimates, the stock is valued at
     38.4x FY11E and 29x FY12E core earnings.

   Maintain Buy.