Earnings estimates and target prices cuts for Sun Pharma

Analysts cut earnings estimates, target prices after firm get warning letter from US FDA for Halol plant

Sun Pharmaceutical Industry’s fortunes on the bourses continue to remain topsy-turvy. Just as the stock was gaining some strength forthe launch of its mega oncology product Gleevec generics in February 2016, the company announced the receipt of a ‘warning letter’ for its Halol plant from the US Food and Drug Administration (FDA).

The stock dipped to an intra-day low of Rs 732 (down 7.4 per cent) before closing at Rs 745.45, about 4.6 per cent lower than Friday’s closing price. Looking at the earnings estimates being cut, seeing further pressure cannot be ruled out.

The plant contributes  eight to 10 per cent to the firm’s revenues. Also, most of the injectables filings and many other products have been done from the plant. Thus, while Sun has not been seeing approvals for new launches in the US from the plant since more than a year, the approvals may not be seen for longer unless the company files for site transfers and gets approvals as it did for Gleevec generics. The US is the largest geography for Sun contributing about half to its sales and the company’s growth in the US thus remains crucial to drive earnings.

Analysts at Nomura say the warning letter at Halol presents downside risk to their sales estimates, given that Halol accounts for the largest number of pending ANDAs, including all injectables. Further, the company might be focused more on resolution at Halol than on actively pursuing site transfers.

Analysts at Motilal Oswal say early resolution is critical given that Halol remains one of the key facilities for Sun with high single-digit contribution to total sales and more than 15 per cent to US sales.

The Street, which was estimating complete resolution of FDA issues related to the plant by the middle of FY17, however has turned sceptical now and any resolution is likely to take more, claim analysts. Sun’s management feels the resolution should happen in 12-15 months from now.

Analysts who already had tweaked their FY16 estimates to account for possible delay in gains arising out of the merger of Ranbaxy with Sun, have now started tweaking their earnings estimates for FY17 and FY18 too. Though the warning letter does not mean an ‘import alert’ being issued, the sentiments have taken a hit.

Analysts at Nomura say in the case of an import alert, which they view as unlikely, they would expect exemptions for products with limited-supply (eg. Doxil generics). In that scenario, they would expect revenues of $200-300 million (current sales from plant $300-400 million), with a possible EPS impact of Rs 3.0-4.5. Analysts at Kotak Securities say though the management has maintained its guidance for FY16 of declining to flat revenue growth (which was given in July 2015), they believe there will be a delay in pick up from the Halol plant. Hence, they have lowered their EPS estimates by four-seven per cent for FY16 and FY17.

Analysts at Motilal Oswal Securities say the warning letter status leads to six per cent and three per cent cut in their FY17/18 EPS estimates, respectively. They estimate a 15 per cent earnings cut if warning letter converts into an import alert, which is a low probability event in their sense.

An interesting aspect to watch out for will be how Sun’s costs go up on remediation process. While so far analysts are only building an impact on sales, the remediation costs could also pick up leading to slightly higher dent to earnings. Analysts at Citi say their FY17-18 forecasts (over 10 per cent below consensus) builds in a warning letter (ie no approvals) from Halol. They will evaluate whether to build in higher remediation costs once they read the warning letter (not public yet) but do not see a big hit unless this escalates into an import alert.

“As outlined, an Import alert could hit FY18 EPS and our target price by 15-16 per cent and Rs 170, respectively”. Their sum-of-the-parts target price for Sun Pharma stands at Rs 1,020.