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The stock of Sun Pharmaceutical Industries fell 2.7 per cent on Monday to close at Rs 914.50, after it posted disappointing results for the December ’14 quarter (Q3 of FY15) last weekend.
Sales in America declined almost five per cent, despite a good performance by its US subsidiary, Taro. Since the US accounts for almost 60 per cent of total sales, the decline reflected on net profit, which fell seven per cent to Rs 1,225 crore, year on year.
The decline is being attributed to temporary supply constraints arising from remediation efforts following an adverse notice from the US drugs regulator, the Food and Drug Administration (FDA), after inspection of its Halol (Gujarat) facility in September. Sun has also not been able to get any new drug approvals for launches from this facility in recent months.
Taro had earlier posted a 11 per cent rise in sales over a year before at $238 million (Rs 1,470 crore) for the December quarter. Even so, Sun’s consolidated sales in the US at $413 mn were down five per cent. In rupee terms, ex-Taro, Sun’s sales at about Rs 1,380 crore declined 19.1 per cent over a year before and 14.3 per cent sequentially, estimate analysts.
Positively, domestic sales were encouraging and grew 21.4 per cent over a year to Rs 1,140 crore, compared to the industry average growth of 12 per cent. Also, Sun was able to maintain the Ebitda (earnings before interest taxes, depreciation and amortisation) margin of 44.9 per cent, despite lower sales and a high research and development (R&D) expense at 8.5 per cent of sales. R&D spends, up 25 per cent sequentially, increased due to an in-licensed product, Tildrakizumab (inflammatory disorder drug), from Merck.
Ebitda was also impacted by compliance and integration-related costs with Ranbaxy, in the process of being acquired, says Hitesh Mahida at Antique Stock Broking. he says Sun’s Q3 results were lower than expected due to temporary disruption of supplies from Halol.
The management, though, seems confident about fast normalisation of US supplies and has maintained its revenue expectation growth of 13-15 per cent for FY15, despite lower sales in Q3. Mahida says this indicates supplies will normalise from Q4 onwards. Sun is also expecting one or two Abbreviated New Drug Approvals approvals from the FDA in the fourth quarter.
The key thing to watch remains the Ranbaxy merger. The US Federal Trade Commission had, on February 2, given conditional approval; India's competition commission had already done so. The only approval to come is from the Punjab and Haryana high court. The management expects the merger to complete by March-end.
After the merger, Sun will be able to utilise the extensive distribution network of Ranbaxy across emerging markets, including India. Coupled with a large products basket and field force, it should be able to garner significant synergies. Analysts expect these to reflect from FY16 and contribute about $250 million a year in two to three years.
Mahida thereby maintains a ‘Buy’ rating on the stock, with a target price of Rs 1,150. The Bloomberg consensus one-year target price is Rs 1,024, with 81 per cent of analysts bullish on the stock.
