Taro provides cushion for Sun Pharma

Clearance of Halol plant by USFDA is crucial for firm's US business, which forms half of revenues

For Sun Pharmaceutical Industries, concerns on its Halol Plant, which is under the US Food and Drug Administration (USFDA) scanner, had led to benign expectations for the December 2015 quarter. Thus, a beat on profitability saw the stock rise 2.1 per cent to Rs 848.35 on Friday. But, it might be a bit early to turn bullish on the stock.

While revenue at Rs 7,047 crore came close to the Bloomberg consensus estimate of Rs 7,051 crore, partly helped by rupee depreciation, earnings before interest, taxes, depreciation and amortisation at Rs 2,134 crore was ahead of the estimate of Rs 2,099 crore, and net profit at Rs 1,417 crore was much ahead of the expectation of Rs 1,283 crore. While margins were largely stable, profits got a boost from lower finance costs, an 80 per cent decline in taxes, and other income of Rs 255 crore versus a loss of Rs 29.6 crore in the year-ago period.

Sun’s US business (45 per cent of revenue), however, continues to suffer in the absence of new approvals for launches, with Halol under the USFDA scanner. US sales declined 11 per cent year-on-year (y-o-y) to $486 million, partly due to the base effect. Last year’s numbers were boosted by the launch of a major drug, Valsartan (anti-hypertensive generics), on exclusivity. Adjusting for this, the decline would have been in low single digit. Sun’s US subsidiary, Taro, which contributed a decent $258 million to sales in the  quarter, was a key contributor. While Taro’s sales were up nine per cent, net profit at $189 million grew 33 per cent y-o-y; margins at 67.1 per cent were 410 basis points ahead of estimates. Sun’s India sales, accounting for 27 per cent of overall revenue, at Rs 1,890 crore, grew at a muted pace of eight per cent y-o-y, mainly due to the withdrawal of bonus offers in the acute segment.

  Emerging market sales (14 per cent of revenue) were also impacted by currency volatility and Sun’s strategic decision not to participate in low-margin businesses. At $151 million, emerging market sales declined seven per cent, while ‘rest of the world’ sales at $85 million (eight per cent of revenue) also fell six per cent on a y-o-y basis.

Going ahead, clearly, the USFDA’s clearing the Halol plant holds the key to Sun’s growth and its resolution will act as a major trigger. The good news is that Sun has approval to launch generics of oncology treatment drug Gleevac on exclusivity, which will drive its US growth in subsequent quarters. While this as well as most negatives are factored in the stock price, new approvals for generics launches through site transfer or clearance of its Halol plant are key monitorables in the interim till the benefits of Ranbaxy integration start accruing.