Why Sun Pharma’s healthy Q1 results failed to impress investors2 min read . Updated: 14 Aug 2019, 10:49 PM IST
- The Sun Pharma stock was the biggest loser among Nifty stocks on Wednesday
- While the firm’s June quarter results seemed good at first, sustainability is under question
MUMBAI : Sun Pharmaceutical Industries Ltd’s shares gained 4% on Tuesday, after the company reported better-than-expected June quarter results. But the gains did not last long. On Wednesday, Sun Pharma was the biggest loser among Nifty stocks, falling 5.2%.
The 16% rise in revenues and 31% growth in profit exceeded Street estimates. But the expectations were soon tempered, as investors realized that the earnings momentum is not likely to sustain in the near term.
Growth in the US, a key market, was driven by a non-recurring short-term order. Besides, profits were aided by lower research and development (R&D) expenses, and higher other income. In fact, gross margins fell from the year-ago quarter, owing to an unfavourable product mix.
Sun Pharma expects R&D and tax expenditure to rise from hereon. To add to this, there is the promotional expenditure pertaining to specialty drugs. In this backdrop, analysts doubt if the 22.8% June quarter operating margin will be sustained in the near term. “Significant part of the beat was led by lower R&D and tax rate, which will normalize going forward," Jefferies India Pvt. Ltd said in a note.
Importantly, the earnings call indicated a delay in the launch of a specialty drug CEQUA (cyclosporine ophthalmic solution). The company now expects to launch the drug only in the next quarter against the earlier expectation of a launch in Q2.
The news came to light amid reports that another large pharmaceutical firm, Dr Reddy’s Laboratories Ltd, may also see a delay in launch of one of its key drugs (NuvaRing) in the US market. The reports sent the shares of Dr Reddy’s lower as well, pulling down the Nifty Pharma index.
Even so, the sharp fall in these companies’ share prices is surprising. Dr Reddy’s had already alluded to the possible delay in the NuvaRing launch in its recent earnings call. Further complexities of the specialty drug business mean delays will not be uncommon.
Perhaps the challenges are unnerving investors. With the base generic drug business continuing to face price pressures, hopes are pinned on the limited competition drugs to drive growth. With the scale-up and launches not progressing as per plan, investors are getting wary. “Sun Pharma is increasingly reliant on specialty portfolio to deliver growth in US as base business commentary remains lackluster at best. In the specialty basket, key products such as Ilumya are tasked with expanding market share in what is a difficult and crowded market. Management expects to launch Cequa in Q3 FY20 though associated costs are fully reflected in Q1 expenses; moreover, it believes Cequa to be an attractive opportunity even if Restatis (a similar drug in the market) is genericized," Yes Securities Institutional Equities said in a note