Madhuchanda Dey Moneycontrol Research
Sun Pharmaceutical reported Q2 FY18 numbers that were in line with the subdued expectations of the Street. Other than the early signs of the India business gradually getting back on track, the result and the commentary weren’t significantly different from the previous quarter.
The continued pricing pressure in US generics business and Sun’s investment in building a speciality business marred the performance.
The management maintained its earlier guidance of single-digit revenue decline in FY2018 and EBITDA margin performance of 20-22 percent in the second half. While FY18 remains to be prima facie a year of no gains, FY19 could be a tad better (contingent on US FDA clearing its key facility of Halol).
Early signs of contribution of speciality business will only be visible from FY20 onwards. However, we do see light at the end of the tunnel and are buyers at every weakness with a medium term investment horizon.
The quarter at a glance
Sun Pharma reported a decline in its revenue year-on-year (YoY). While the India branded formulations business staged a smart recovery with restocking gathering momentum post GST-led disruption in the previous quarter, the US business continued to exhibit weakness.
Although the Taro business has improved sequentially, the ex-Taro business declined significantly. Sales in the year-ago quarter, however, had included the benefit of generic Imatinib exclusivity which expired in July-2016. Besides Imatinib, the overall pricing pressure in the US generics market also impacted growth. A part of the sale is also postponed to Q3.
The emerging market growth was boosted by the consolidation of the Biosintez acquisition in Russia and the Rest of World piece was helped by the consolidation of revenues from the acquisition of 14 brands from Novartis in Japan.
Despite a rather strong domestic formulations growth, the decline in gross margin points to pricing pressure in the base business of US. However, the company is continuing to invest in the US Speciality business and hence, the EBIDTA (earnings before interest depreciation and tax) margin will be under pressure although it has improved sequentially and will continue to do better in the second half of the fiscal.
The company has a pipeline 136 ANDAs (abbreviated new drug application) awaiting US FDA approval. While Sun has initiated site transfer from Halol, one could expect momentum in the pipeline post Halol resolution as the company mentioned regulatory approvals are coming faster.
Why repose faith?
The company has progressed in putting together a product pipeline particularly in the dermatology and ophthalmology spaces. The pipeline has been built out primarily through acquisition and in-licensing. The company has chalked out strategy for marketing the drug for treating advanced basal cell carcinoma (Odomzo) although the launch of drug for treating psoriasis (tildrakizumab) in Europe may be delayed.
Sun Pharma expects nearly 18 percent of revenue in FY 20 to come from the speciality business like dermatology and ophthalmology, around 6 per cent from the branded drug business, and about 45 per cent from the complex generics business that involves long-acting injectables and controlled substances.
Investors have to keep in mind that Sun Pharma continues to be the market leader in India with a focus on the chronic segment and is extremely well entrenched in specialities like cardiology, psychiatry, neurology etc.
While the US FDA resolution of Halol could ease near term pain, long term investors should gradually accumulate the stock that is currently available at 23x FY19 earnings for its transformative journey in a market where few players will meaningfully survive.
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