Sun Pharma hoping recovery in US in second half, street wary
Mumbai: After its US sales hit a four-year low in the September quarter, India’s largest drug maker Sun Pharmaceutical Industries Ltd expects improvement in the US business in the second half of the current fiscal on the back of new product launches, but investors remain cautious.
The company reported US sales of $309 million in the September quarter, the lowest in the last 18 quarters, due to price erosion in existing products and pending regulatory issues at its manufacturing facility at Halol in Gujarat.
The contribution of US business to overall sales also fell to 30% from about 50% a year ago.
The US Food and Drug Administration (FDA) had issued a warning letter to the Halol unit in December 2015 for violation of good manufacturing practices. Since then, new product approvals have been held back by the regulator, in turn hurting the company’s earnings in the US.
In a conference call with analysts on 14 November, Dilip Shanghvi, managing director of Sun Pharma, maintained his guidance of a single-digit decline in total revenue in the current financial year and said that the second half would be better than the first with operating margin improving to 20-22% from 20% in the September quarter.
However, Shanghvi cautioned that the challenging environment in the US due to price erosion on account of consolidation in the distribution channel suggests a risk to the company’s FY18 revenue guidance.
Analysts too remain wary of Sun Pharma’s outlook and believe recovery in the near-term hinges on clearance of the Halol plant by the USFDA.
“Sun has lost about 40% of its (US) sales from the peak of $2.2 billion in FY15. Although US sales may be nearing the bottom, there is little visibility of revival. New approvals are the key, which would also depend on Halol resolution,” brokerage firm CLSA said in a report.
“We believe the worst may be behind for Sun Pharma in terms of material earnings downgrades but recovery signs are still fragile. The company’s high base in US generics leaves it vulnerable in the current pricing environment, particularly given that there have been no meaningful launches to help offset the competitive pressure,” Citi Research said in a report.
The brokerage added that the outcome of the US FDA reinspection at Halol is the next catalyst but meaningful upside in the stock would come from progress on the specialty products’ front.
Sun Pharma has been investing to build a pipeline of specialty products for the US market to counter the challenges in the generic drugs business. Currently, it is much ahead of other Indian generic drug firms in getting into the specialty products business in the US.
On the specialty front, Sun Pharma has already launched cancer drug Odomzo and opthalmic solution Bromsite in the US and plans to launch dry eye drug Seciera and psoriasis drug tildrakizumab in the US in FY19.
Broking firm Morgan Stanley said meaningful specialty ramp up for Sun Pharma appears at least two years away. “Seciera may be adversely affected if its ramp up coincides with generic Restasis launch and tildra will be a launch in crowded interleukin market with relatively lower efficacy.”
While long-term prospects for Sun Pharma appear to be bright, the pain may continue for some more time.
On Friday, shares of Sun Pharma ended up 0.7% at Rs548.55 on the BSE, while benchmark Sensex index closed up 0.3% at 33,679.24 points.
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