The shares of the company extended gains on Tuesday, trading at around Rs 1,763.9 apiece on NSE in the morning on Tuesday. Earlier yesterday, the shares of the company rallied around 7% to record the biggest single-day gain in nearly five years.
The company on Monday said it has entered into a definitive agreement with Organon to acquire all outstanding shares of the overseas pharma company at $14 per share in cash. Sun Pharma called Organon a global leader in women’s health with a portfolio spanning across 70 products and biosimilars commercialised across 140 countries, with US, Europe, China, Canada, and Brazil among its largest market. The US-based company has six manufacturing facilities across the European Union and emerging markets.
The Economic Times was the first to report earlier this year that Mumbai-based Sun Pharma was closing in on the $12 billion acquisition of Organon, a debt-ridden US company specialising in women’s health that was spun off from MSD (Merck Sharp & Dohme) in 2021.
Morgan Stanley on Sun Pharma
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Morgan Stanley said that Sun Pharma’s acquisition of Organon at an enterprise value of $11.75 billion will create a global pharma platform, ET Now reported. It diversifies well beyond India-US generics into women’s health and biosimilars.
The international brokerage added that revenue synergies via cross-selling and in-licensing are key upside drivers. It sees the company facing cost synergies of $350 million over the next two-four years. It noted that Sun Pharma’s net debt will rise to 2.3x EBITDA after the bulky acquisition, which is however EPS accretive from the first year itself.
Motilal Oswal on Sun Pharma
Motilal Oswal Financial Services said that Sun Pharma’s proposed acquisition of New Jersey-based Organon will provide several advantages in terms of portfolio expansion, healthcare professional connect and geographical reach. The $12 billion all-cash acquisition will expand Sun Pharma’s innovative medicines portfolio by adding women healthcare segment, boost its biosimilar offerings, and significantly expand its commercial footprint across 140+ countries, including the US, EU, China, Canada, and Brazil, it added.
Notably, Organon’s stable EBITDA margins of more than 30% and annual free cash flow of $1 billion should boost Sun Pharma’s overall financials, according to the domestic brokerage. “Organon’s revenue has been stable over the past five years, which is adequately factored in its valuation of ~6.2x CY25 EV/EBITDA. Following Sun Pharma’s acquisitions and subsequent scale-up track record, we believe there is a considerable scope to improve the company’s growth prospects going forward,” Motilal Oswal said.
The domestic brokerage maintained its ‘Buy’ call on the stock, with a target price of Rs 2,025 apiece. This implies an upside potential of nearly 17% from the stock’s previous closing price of Rs 1733.5 apiece on NSE.
JM Financial on Sun Pharma
“A larger sun, now in a slower orbit,” said JM Financial while explaining its view on the Organon deal. While the transaction significantly enhances scale, global reach and cash flow stability for Sun Pharma, it also signals a transition towards a more mature growth profile, the domestic brokerage said. “The company could have alternatively allocated similar capital towards higher-quality novel assets that may have delivered superior growth and return on capital. Accordingly, we argue the deal appears less compelling from a long-term value creation standpoint despite near-term earnings accretion,” it added.
“While Organon’s relatively low valuation may boost near-term earnings, the combined entity’s revenue/EPS shall grow only 5-6%/ 8-12% beyond FY28E. Hence, Sun Pharma may de-rate from ~25x P/E to <20x. This move not only places SUNP alongside peers such as Teva, Viatris and Sandoz in terms of scale, but also aligns it with their growth profiles and valuation ranges. We expected Sun Pharma to pursue a novel or pure specialty pharma growth trajectory; instead, it has added a segment that innovative pharma companies are increasingly looking to divest,” the domestic brokerage further said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)