Significant price erosion in US takes toll on Sun Pharma

With base generics under pressure, analysts could cut earnings estimates

After the disappointment by Taro (Sun Pharma’s US subsidiary) earlier this week, the stage was set for a weak show by Sun Pharma in the March quarter (Q4). With premium pricing of products, Taro had so far driven US sales and margins for Sun Pharma, which faces delayed product approvals and launches on the back of the warning letter issued by the US FDA to its Halol plant. With Taro’s portfolio, primarily dermatology, under pricing pressure, Sun was bound to see pressure in US sales. 

However, Sun’s results were way below expectations and hence, after Monday’s cut due to Taro (Kotak Institutional Equities had cut FY18/19 estimates by three per cent each) analysts could further cut their earnings estimates.

Taro contributes more than half of Sun’s US sales, and saw revenues decline 26 per cent year-on-year (y-o-y) in Q4; fall in operating and net profit was steeper at 44 per cent and 28 per cent, respectively. Sun’s US sales were at $381 million, falling by 34 per cent. Excluding Taro, the pressure on the US business is also due to weak pricing and high base as year-ago quarter benefitted from the launch of the oncology product, Gleevec generics, on exclusivity. 

Domestic sales (28 per cent of revenue) grew 10 per cent y-o-y and the Emerging Markets and Rest of World also grew 38 per cent and 46 per cent y-o-y (in constant currency terms), 

respectively. But, it could not prevent Sun’s consolidated revenue contracting to Rs7,134 crore and coming significantly lower than Rs7,801 crore indicated by Bloomberg consensus estimates.

Consequently, Ebitda at Rs1,236 crore, too, was lower than Rs2,520 crore in the year-ago quarter, and significantly below estimates of Rs2,053 crore. Ebitda margin fell to 18.1 per cent from over 30 per cent in previous four quarters. 

Managing Director Dilip Shanghvi said, “Our Q4 performance reflects the impact of the challenging generic pricing environment in the US.” Milestone payments of Rs312 crore from Almirall S.A (Spain), which is part of the licensing agreement for the development and commercialisation of Tildrakizumab for psoriasis in Europe, also provided some cushion. But, net profit at Rs 1,223 crore declined 14 per cent y-o-y and came below estimates of Rs 1,506 crore. 

The market seems to have sensed the bad news. Sun’s stock was down 3.9 per cent on Friday, even as the results came after trading hours.

The pricing pressure is a major worry for the Street. Taro is seeing increased competition with more number of approvals (to competitors) from the US FDA. Kotak says over 250 topical steroid and AT-rated topical ANDAs have been filed, most of which are likely to be approved from FY18-20, after 50 approved in FY17. This will further increase competitive intensity for Taro. So, FDA resolution of its Halol plant is crucial for driving new product launches.