Sun Pharma: Still stuck on Halol
The waiting game continues as Sun Pharmaceutical Industries Ltd’s Halol facility in Gujarat is yet to be re-inspected by the US Food and Drug Administration (FDA). The need for an all-clear to this facility—which got adverse observations that led to a stoppage of new approvals—rises as time passes. The September quarter showed a sharper-than-expected decline in the company’s US business.
Sun Pharma’s sales declined by 12% sequentially and by 44% from a year ago. The decline from a year ago was partly due to a high base, as it contained exclusivity period sales of the generic Gleevec, a cancer drug.
The management said that pricing pressure continued to be significant, but added that sales from a few products may get captured in the coming quarters.
Undoubtedly for the US business, a resolution at Halol remains the main factor. While the company has taken steps to transfer some key affected products to other sites and also has other filings from unaffected sites, those could take time.
The management also said that while it may face some delays in launches for a few other products, it is maintaining its guidance for the full year. That could change if things worsen in the second half.
Sun Pharma’s other markets had better news to offer. Domestic market sales improved smartly, mirroring the experience of other pharmaceutical firms whose sales recovered after the disruption caused prior to the goods and services tax (GST) roll-out. Sales in emerging markets grew solidly, but partly due to an acquisition.
Sales are not strictly comparable since this quarter’s sales are net of GST, while earlier quarters include excise duty.
Sun Pharma’s Ebitda (earnings before interest, tax, depreciation and amortization) declined by 56.5% from a year ago but improved by 25.6% sequentially. The main reason behind the sequential improvement was a decline in other expenses; the company’s research expenses fell by 14.8% on a sequential basis.
The sequential increase in Ebitda was amplified by an increase in other income, partly due to an income-tax refund, and as a result, its profit after tax rose by 59% sequentially. From a year ago, profit declined by 59.7%.
While Sun Pharma’s profitability may have improved due to the sequential decline in expenses, that may not be sustainable. It is investing in building a speciality portfolio which can see costs increase. Research and development expenses can also be unpredictable and may rise. Although these investments will deliver longer-term growth, and shield the company to an extent from cut-throat competition and pricing pressures, they will take time.
The September quarter results serve to underscore the importance of getting the Halol facility back in the game. Why FDA is taking its own sweet time to do a re-inspection is not clear but it is causing an agonizing wait for Sun Pharma and its investors