Sun Pharma: Growth worries not over yet

Expected boost to US business missing; results short of Street expectations

Sun Pharmaceutical's performance for the quarter ended December 2016 (Q3) failed to impress, thanks to subdued growth in US business. Analysts were expecting a better growth in US, driven by launch of authorised generic of anti-hypertensive Olmesartan and its combinations and boost from oncology product Gleevac generics launched in February 2016 (now included in base business), but a mere four per cent growth was disappointing. Since US business is significant (45 per cent of total revenue), the subdued show pulled down overall numbers. 

The company's US subsidiary, Taro, which so far has been a growth driver for Sun despite US regulatory issues related to Halol plant, is also seeing competitive and pricing pressure. Taro posted a 14.7 per cent decline in sales in Q3, while its operating income at $129 million fell $44.4 million despite a marginal increase in volumes. Hence, operating profit margin at 58.5 per cent was significantly lower than 67.1 per cent a year ago. 

India sales (26 per cent of revenue) at Rs 1,969 crore, too, did not impress, with a mere five per cent growth. While most domestic companies have seen muted growth due to note ban, some large peers such as Lupin have been able to post 19 per cent growth. 

Some revenue support was provided by emerging markets as well as rest of world (excluding US and emerging markets), which grew 14-33 per cent. But, given their lower contribution to revenue, it wasn't enough to lift overall revenue, which at Rs 7,683 crore grew eight per cent year on year, lower than Bloomberg consensus estimate of Rs 7,955 crore.

With the US and India businesses posting a muted performance, Sun's profitability failed to meet expectations. Thus, gross profit margins declined 410 basis points (bps) year on year and 530 bps sequentially. Lower research and development expenses (eight per cent of sales, versus target of 10 per cent) helped curb expenditure, but even then operating profit at Rs 2,455 crore fell short of expectation of Rs 2,623 crore. Likewise, net profit at Rs 1,472 crore (down five per cent year on year) was much lower than estimate of Rs 1,782 crore. While India business may rebound, pressure on US sales is not expected to see respite soon. Sun's own generic launches remain impacted given US regulatory issues at its Halol plant despite a good product pipeline. Now, even Taro's profitability has come under pressure. Besides, there are some concerns on drug price hike probes in the US, though analysts say it's not easy to prove such charges. While Sun may accumulate gains from progressing Ranbaxy integration, Halol plant clearance by US remains the biggest trigger for the stock.