Sun Pharma: one more tough quarter, all eyes on Halol inspection now
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One plant inspection stands between Sun Pharmaceutical Industries Ltd’s and a potential improvement in its US generics business. The loss it posted in the June quarter has shock value but it can be pinned on a one-off event, a Rs951crore charge towards a settlement. The settlement itself was known but the amount was not disclosed earlier.
The bigger concern is that it did poorly even after adjusting for this settlement. The company’s sales declined by 23% over a year ago, while its Ebitda declined by 62.5%. The sharp decline over a year ago is partly explained by a high base, due to sales during the 180-day exclusivity period from generic Gleevec, a cancer drug. That ended in July 2016.
Sun Pharma’s US sales declined by 36.8% sequentially, which the company attributed to continued pricing pressure. Its US unit Taro Pharmaceutical Industries Ltd’s also reported poor results. Sun Pharma’s Ebitda margin narrowed by 4 percentage points sequentially but its gross margin improved sequentially. The company attributed this to a favourable mix and is a number that should be watched in subsequent quarters. Gross margin here is computed by reducing cost of goods sold from sales.
Employee costs rose, however, partly due to the additions to its sales team for speciality products in the US. So far, Sun Pharma continues to invest in research, manufacturing and in marketing, despite the dip in its fortunes. It is building a speciality business for the US market and is also working on developing a pipeline of more complex generic products for the US and other regulated markets. That is important to secure future growth and cash flows.
Meanwhile, the slump in its US generics business is hurting. An external factor is pricing pressure in the US generic market, which is not new but is not showing signs of letting up. Sun Pharma’s approval pipeline has also thinned, chiefly because its Halol plant is under the US Food and Drug Administration scanner. The company said remediation is complete and it is now awaiting an inspection. When that happens and if it gets cleared, pending approvals should come through. This can lift sales growth, despite the market troubles.
Till then, it’s a painful wait for its shareholders as sales can be expected to decline. Sun Pharma’s net profit (before exceptional charges) declined by 72.3% from a year ago and by 53.2% sequentially. One-off provisions, such as what was witnessed in the June quarter, are more difficult to absorb when the going is tough.
Its sales guidance for FY 2018 is for a single digit decline but it provided an update during the conference call, that it expects Ebitda margins to improve from 17% levels to 20-22% in the second half. This does not factor in new approvals from Halol but considers a recovery in India post-GST. Better Ebitda margin are one hope for shareholders to hold on to. Sun Pharma’s shares are down by a third from three months ago, and these results give no reason for that slump to reverse.