Sun Pharma stock sheds 15% on price fixing concerns, slow portfolio ramp-up

The Sun Pharmaceutical Industries (Sun Pharma) stock has shed about 15 per cent from its January 2020 highs on worries of higher liability on the price fixing case, slower-than-expected ramping-up of specialty portfolio, higher research and development costs, and margin pressures. 

The near-term worry for the company is the ongoing investigation by the US Department of Justice related to price fixing and cartelisation by generic companies. Sandoz, which entered into a settlement on March 2, is the third company to admit to the antitrust charges. 

The company has agreed to pay $195 million as criminal penalty in an antitrust case. Analysts estimate that the company recorded excess sales of $375 million, which implies penalty at 52 per cent of excess sales during the 2013-15 period. 

Sandoz has also set aside $185 million to resolve potential claims related to the civil investigation into the price-fixing allegation. Sun Pharma’s US subsidiary Taro Pharmaceutical Industries was one of the biggest beneficiaries from price increases in topical formulations between 2013 and 2015. 

Saion Mukherjee and Prateek Mandhana of Nomura Research estimate the overall surplus sales at $1.02 billion over the period; the liability is expected to be $510 million. JM Financial, however, estimates that in the event of a settlement, Sun Pharma’s maximum liability, based on the volume of affected commerce during the collusion period (2013-15), will not exceed $240 million. Expected penalty for other Indian companies, such as Dr Reddy’s, Lupin, among others, ranges between $35 million and $95 million. 

The other worry is the slow ramp-up of Sun Pharma’s specialty drugs portfolio and the pricing pressures in the US market. Current revenue base of $400 million, according to analysts at Spark Capital, is largely contributed by two products of Levulan (skin-overgrowth), which was acquired through DUSA Pharmaceuticals, Inc. acquisition in 2012, and Absorica (acne treatment) through Ranbaxy acquisition in 2014-15. They indicate that the ramp-up in recent launches have been slower than expectations, with the latest launch being Cequa (dry eye disease) in October 2019. They are negative on Sun Pharma, given that capital allocation remains skewed towards higher-risk areas of specialty products.

The other worry for the Street could be regulatory headwinds from lack of compliance at its manufacturing facilities. Within a year and a half of the resolution related to issues at the key Halol plant in Gujarat, the company received more observations through Form 483, which highlighted multiple issues, according to Prabhudas Lilladher. 

While there are multiple issues related to the US market, the positive is the strong growth of the domestic market. After single-digit growth in the last few months, the Indian pharmaceutical market grew by 12 per cent in February. Sun Pharma outperformed the market for the second consecutive month, reporting a growth of 14.4 per cent in February. The outperformance in recent months is led by the top 25 brands growing upwards of 15 per cent.  

After the recent correction, valuations at 18x its 2020-21 earnings per share estimates are reasonable. Further, India and rest of the world markets continue to grow in the 10-12 per cent range, which is a positive, as they generate significant cash flows for the company. However, given the significant exposure to the US market, analysts believe investors should be cautious, as the competitive pricing environment and muted returns from the investments in speciality products would continue to weigh on the stock in the near term.