Q1 results: Sun Pharma’s US business peeps out from clouds
What is surprising is that despite the increase in sales in the US, Sun Pharma’s gross margins have declined both from a year earlier and sequentially
If Sun Pharmaceutical Industries Ltd’s sales in the US turns around, that solves most of its problems. The company’s June quarter (Q1) results did provide a hint of that happening, which was enough to send its shares up 6.9% on Tuesday. Now, Sun Pharma’s US business sales rose 8% from a year earlier and 3% sequentially. While this is a rebound from the decline seen in preceding quarters, remove sales of its US subsidiary Taro Pharmaceutical Industries Ltd, and the numbers look even better. Sun Pharma’s own sales rose 18.3% on-year and by 17% sequentially. That’s a positive sign.
The company launched a speciality product Yonsa, a drug to treat prostate cancer, in the US market. A few more US launches are expected. The company is also awaiting approval to launch two speciality products filed from Halol, a plant that has recently been cleared by the US Food and Drug Administration (US FDA). A steady stream of launches can drive up its US business growth, while delays can flatten it. Taro’s relatively dull showing is a risk to growth.
Sun Pharma’s India business saw sales increase by 22% over a year ago, but this is partly due to a low base effect, and will normalise from the current quarter.
What is surprising is that despite the increase in sales in the US, Sun Pharma’s gross margins have declined both from a year earlier and sequentially. This was attributed to product mix and higher input costs at Taro. Higher contribution from countries such as India and other emerging markets, where margins would be relatively low compared to the US, could explain the mix part.
The company had said that its launch programme in the US market will lead to higher costs during FY19. This is visible in the 7.8% increase in employee costs over a year ago, but other expenses are down by 1.3%. Its research expenses were also 4.2% lower from a year earlier. The net result was an impressive 4.6 percentage point increase in Ebitda (earnings before interest, tax, depreciation and amortisation) margin, but note that Ebitda fell 1.9 percentage points sequentially.
Growth in the domestic pharmaceutical market is expected to sustain and that should hold up Sun Pharma’s growth, but not at the first quarter’s inflated growth rate.
Now, the company’s US business is expected to see a revival as launches pick up steam. Keeping an eye on them will give an idea of how those expectations are working out through FY19. If Taro’s US revenue growth picks up speed, that can be useful. Quarterly margins may see some fluctuations, as expenses related to US launches may be front-loaded, while revenues may take time to ramp up. Even research expenses tend to be lumpy and could swell up in a quarter.
Sun Pharma said it expects sales to grow in the low double-digits in FY19. If you annualize the first quarter revenue, it represents a 3% increase over FY18. That’s a sign that the company has already factored in growth in the US revenues in the remaining three quarters in its guidance.
A higher-than-expected growth in the US market, possibly due to an accelerated pace of launches, is what Sun Pharma’s investors should look out for, to change their view on the company’s stock.
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