Earnings upgrades ahead for Sun Pharmaceutical, stock gains nearly 7%

US growth at 8%, despite declining Taro sales, giving confidence that the firm is on a recovery path in America

Sun Pharmaceutical Industries beat the Street estimates with Rs 9.83 billion net profit in the June 2018 quarter, driven by growth in key geographies of India and the US and lower drug development costs. This was better than the consensus estimates of Rs 9.11 billion. In same quarter last financial year, the company had posted a loss of Rs 4.24 billion due to an exceptional item related to a litigation settlement. Adjusted for this, the company posted 83 per cent year-on-year (y-o-y) growth in the quarter. The Street gave a thumbs up with the stock ending nearly 7 per cent higher on Tuesday.

Income from operations grew 16 per cent to Rs 71.40 billion on a y-o-y basis. This was aided by 22 per cent growth in the domestic market and an 8 per cent rise in US sales. 

Rising US sales, despite a 4 per cent decline reported by Taro (40 per cent contributor to Sun’s US sales), were impressive. This indicates confidence that Sun is on a growth path in the US after the resolution of US FDA-related (Food and Drug Administration-related) issues related to its Halol plant. 

The company has also received the establishment inspection report (EIR) from the US FDA for the Halol facility during the June 2018 quarter, marking the successful closure of the US regulator’s inspections.

While the US contributed 36 per cent to overall sales, Sun’s performance across geographies remained upbeat. India, which contributes a third to sales, had a growth rate of 22 per cent y-o-y. Emerging market sales also grew 16 per cent over a year, while active pharmaceutical ingredient sales were up 28 per cent. It is the rest of the world business that has been the weak link, with revenue being lumpy owing to cross-currency headwinds, say analysts.

Overall sales growth on a y-o-y basis was helped by a low base last year, as revenue had declined in the June 2017 quarter on account of GST-related disruptions in the domestic market and loss of exclusivity of its anti-cancer drug Gleevec. 

Nevertheless, sales from operations on a sequential basis have improved 6.3 per cent, which is positive. Notably, the reported revenue came 3.9 per cent higher than analysts’ consensus estimates.

With some traction in US sales and helped by domestic growth, operating performance also improved. Operating profit at Rs 15.21 billion improved 44.3 per cent y-o-y and 7.3 per cent sequentially. Margins have improved 422 bps over the same quarter last year.

“For Q1, we have recorded good growth in all the major markets. We are gradually crossing key milestones in our specialty initiatives with the recent commercialisation of Yonsa (anti-cancer drug) in the US, the targeted launch of Ilumya (psoriasis) and Cequa (opthalmology) in the coming quarters. We are also awaiting approvals from the US FDA for two specialty products filed from Halol. With all these specialty launches lined up, a substantial portion of our current specialty pipeline will be in the market,” Sun Pharma Managing Director Dilip Shanghvi said in a statement.

In a post-result conference call, the company’s management said research and development (R&D) and marketing expenses would go up in coming quarters, as it prepares to launch specialty products. The company has guided it will spend 8-9 per cent of sales on R&D this financial year. The increased costs may impact its profit margins in the short term, as sales ramp up of specialty products will not be immediate.

Anmol Ganjoo, director, JM Financial Securities, said the strong US showing despite the decline in Taro sales was cause for cheer, though he said the operating profit margin improvement could be transitional as most of it was primarily on account of lower R&D cost, which could revert.

Consolidated R&D investments for the first quarter in FY19 were Rs 5 billion, or 7 per cent of sales, compared to Rs 5.22 billion or 8.5 per cent of sales for the first quarter in FY18. However, R&D investments are crucial, as growth in the US hinges on specialty products under development that enjoy better margins compared to generics. 

Sun has created a portfolio of branded products, many of which are in the monetisation stage. The launch of key products like Yonsa, Ilumya and Seciera (H2FY19) should drive a recovery in US sales in FY19, say analysts at Axis Capital.

Given the Q1 performance, the company is likely to see earning upgrades as well. Ranjit Kapadia at Centrum Broking, who had “hold” ratings on the stock, says he has a positive view on the stock after the strong Q1 show, and is likely to revise his earnings estimates upwards.