Accumulate Sun Pharma; target of Rs 873: Prabhudas Lilladher

Sun Pharma reported sales of Rs 77 bn (down 3% QoQ) with an EBITDA of Rs 26 bn (EBITDA margin 34.3%) and PAT of 22.3bn in Q2FY17. Adjusted for exclusivity sales of Gleevec and one‐off sales of US$25m in US, the core sales were Rs 72.9 bn, in line with our estimates of Rs 72.8 bn. With benefits of lower R&D expenses and forex gain, Sun Pharma’s overhead costs declined by 110bps QoQ, which led to similar expansion in EBITDA margin sequentially. R&D costs were at 7% in H1FY17, lower than the guidance of 9% in FY17E. Tax rate was 14.3%, in line with guidance of 14‐15% in FY17E. Adjusting for Gleevec, one‐off sales and forex gain and overhead costs, Sun Pharma’s sales growth and EBITDA margin were at 2% and 29% respectively, which are in line with the management guidance (sales growth 8‐10%, margin 28%) for FY17E.

With increasing competition and price erosion due to new generics, Sun Pharma’s Rx‐share and strategy of co‐pay card may not be enough to hold strong erosion in Gleevec sales and margin post exclusivity. The non‐Taro sales in US maintain steady state level in absence of new regulatory status in Halol. With Sun’s guidance in line with our earnings estimate, we maintain ‘Accumulate’ and retain TP at Rs 873.