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Sun Pharma’s Q3 results leave investors underwhelmed

A quarter of unimpressive results and an outlook that appears to hinge on wait-and-watch will not be music to the ears of Sun Pharma shareholders


Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

Sun Pharmaceutical Industries Ltd’s share has fallen out of favour with investors, having lost 23.4% of its value from a year ago. The drug maker’s December quarter’s performance and commentary do not give any reason to alter that pessimism.

Sales growth in main markets such as the US and India was slower than expected. Profitability brought no good news either and declined sequentially, which was expected, but it fell sharply over a year ago as well. On its Halol plant, the news was on expected lines; the company has submitted a response to the US Food and Drug Administration, remediation work has begun and it is waiting to hear from the regulator.

Sun Pharma’s US market sales in dollar terms rose by 4% over a year ago and declined by 9% sequentially. Growth was expected to suffer as the preceding quarter had one month of exclusivity-period sales of the generic version of cancer drug Gleevec. However, the December quarter included sales of authorized generic of four versions of olmesartan, a drug to treat blood pressure. Still, growth did not hold up.

The main reason for this underperformance is continued pressure on the pricing front. In addition, disruption in supplies of unspecified products and lumpiness in sales of some products also contributed.

Surprisingly, the India business growth at 5% year-on-year too was lower than expected. While demonetization was expected to hit sales growth, its portfolio tilt towards chronic categories (ones requiring long-term medication such as cardiology or neurology) would have protected it to an extent. Normalcy has still not returned and the trade’s inability to hold inventory (due to the cash shortage) appears to have affected sales growth.

The regions that saved the day to deliver overall sales growth of 8.4% year- on-year were the emerging markets block and “rest of the world ” (RoW) markets. Growth in the RoW markets was helped by sales of products acquired from Novartis AG in Japan. Licensing income saw other operating income jump sharply over a year ago but decline sequentially.

Thus, total operating income rose by 11.1% over a year ago but fell by 4.1% sequentially. However, expenses rose sharply, due to higher material cost arising from purchases of the authorized generic products. That’s why its operating profit margin fell 52 basis points over a year ago and by 7.4 percentage points sequentially. Its profit before tax rose by 3% over a year ago, but net profit fell by 11.4% due to a higher tax incidence. Sequentially, net profit declined by 30.5%.

A quarter of unimpressive results and an outlook that appears to hinge on wait-and-watch will not be music to the ears of Sun Pharma shareholders. The company said it is trying to transfer key product approvals filed from Halol to other sites, to avoid getting stuck if the plant takes longer to get an okay. A green light to this plant remains a key event to watch out for in the near-to-medium term. If sales growth in the US and India picks up in the coming quarters, that too should perk up the sentiment somewhat.

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