Sun Pharma's Q2 show marred by one-offs; US growth to drive earnings

Domestic growth is likely to remain firm going ahead, while US growth led by new launches and speciality products should drive earnings

Sun Pharma's performance for the quarter ending September 2018 (Q2) came way below estimates, primarily led by one-offs or exceptional items.   

For instance, sale of branded formulations in India (27 per cent of consolidated revenue), at Rs 18.60 billion, declined by 16 per cent, but mainly due to a planned one-time inventory reduction in the supply chain. The higher base of the year-ago quarter also played a role. Analysts, factoring in last year's high base due to re-stocking post GST implementation, were still pegging India-based branded formulations sales to grow by about eight per cent year-on-year.

The company also accounted for Rs 12.14 billion as expenses under exceptional items relating to the Modafinil anti-trust litigation in the US. This led to Sun reporting a net loss of Rs 2.19 billion in the September quarter. However, adjusting for provisions, the net profit for Q2FY19 would have came at Rs 9.96 billion, which would still have been lower than analysts' estimates of Rs 10.45 billion. 

But, the future holds promise. On this front, Sun's US business, which accounts for 35 per cent of revenues, clocked sales of $342 million, an increase of 11 per cent over Q2 last year. In rupee terms, the growth would be stronger looking at the strengthening of the dollar. While the company's US business seems to be stabilising, growth post clearance of its Halol plant by the US FDA is likely to pick up with more approvals and product launches. Further, the company's speciality products pipeline is being looked at by the Street with interest. With the recent commercialisation of Yonsa (anti-cancer drug) and Ilumya (psoriasis drug), Cequa (ophthalmology drug) is also expected to be launched. The company is also awaiting few more approvals by the US FDA that have been filed from the Halol plant. With all these speciality launches lined up, a substantial portion of the current pipeline will be in the market by next year. 

Among few key patents pending approval are those on the formulation of Isotretetinoin, used for treating acne. Sun is currently selling Absorica for acne treatment, which is to go generic in December 2020. Receiving the approval for Isotretetinoin will ease concerns since Absorica is expected to contribute about 15 per cent to Sun's FY20 profits, estimate analysts.  

During the quarter, Sun's US subsidiary Taro had also positively surprised with net profit at $63 million, rising 19 per cent year-on-year despite sales, at $159 million, declining six per cent year-on-year. The sustenance of this trend though remains crucial. 

Overall, given the one-offs, Sun's income from operations at Rs 68.46 billion, up four per cent year-on-year, missed consensus estimate of Rs 76.01 billion. Ebitda at Rs 14.40 million (translating to Ebitda margin of 21 per cent), thus, was also lower than estimates of Rs 16.72 billion.

Moving forward, however, incremental generics business from new launches is expected to offset any erosion in its base business, while increased traction in speciality products and sustained outperformance in the domestic formulation business should drive growth, say analysts. The India business sales, too, will be on track from the current quarter.