Sun Pharma's niche drug ramp-up key to growth

Despite the Zetia launch, FY18 could be subdued given pricing pressures

Sun Pharmaceutical Industries Ltd, which has faced increased competitive intensity in its US base business, has got some respite with the approval for the generic version of cholesterol drug Zetia. The launch of the drug, sales of which is pegged at $2.7 billion, after the end of Glenmark’s six-month exclusivity, looks promising. But, analysts say there are at least four more players with tentative approvals, awaiting a final nod, and they’d be watching this to assess the quantum of gains for Sun Pharma. 

More players getting approval will lead to larger price erosion. Further, since Glenmark had reported lower-than-expected exclusivity sales in the March quarter (Q4) on the back of higher discounts for the product, it will be another variable putting uncertainty on gains that Sun Pharma can garner. The stock, thereby, closed just 0.62 per cent higher at Rs 536.45 on Tuesday.

The Street’s sentiments remain subdued looking at the uncertainty on growth and margins in the US. US subsidiary Taro, which contributed slightly more than half to Sun’s US sales in Q4, has also started witnessing price erosion. Taro’s higher-priced predominantly dermatology range had been a strong driver for Sun’s US growth and margins. Also Sun’s guidance for single-digit declines in the US business in FY18 and expecting no major approvals from the US FDA on the Halol plant has led to uncertainty on a timeline for resolution. The Halol plant had received a warning letter from the US regulator. Analysts who had factored in a resolution in FY18 have had to tweak their estimates. Analysts at HDFC Securities have cut their FY18 & FY19 earnings by 31 per cent and 19 per cent respectively, downgrading their target price considering the uncertainty on margin profile, low visibility on lucrative generic launches, and the lingering Halol issues.

Further, since Sun has seen two-thirds of the expected Ranbaxy synergies generated in FY17 and it will meet its $300-million guidance in FY18, most of these benefits will go into developing the specialty business in the form of R&D and promotional costs. Thus pressure on margins in the near-term will continue but it raises hopes on specialty products driving growth in the longer term. The management expects specialty investments to peak in FY18 and break-even by FY20. Analysts at Edelwiess, who, too, have revised estimates downwards, however believe the specialty business strategy will lend far more sustainability to Sun’s profit versus its peers and thus it remains their preferred pick in the large-cap pack. They expect launch of the psoriasis drug Tildrakizumab, epilepsy drug Elepsia, ophthalmic products Seciera and Xelpros and ramp-up of Odomzo (oncology drug acquired from Novartis) and ophthalmology product Bromsite in FY19.