Muted fourth quarter earnings drag down Sun Pharma

Shares of Sun Pharma were down over 10 per cent today, following weak fourth quarter earnings.

Consolidated net profit of Sun Pharmaceutical Industries - the country’s largest drug maker - fell 14 per cent year-on-year(y-o-y) to Rs 1,223 crore during the fourth quarter of 2016-17.

The fall in net profit was mainly attributed to pricing erosion in the US base business coupled with higher financial expenses. Consolidated revenues during the fourth quarter came in at Rs 6,825 crore. Consolidated revenues fell 8 per cent y-o-y.

Operating profit came in at Rs 1,236 crore resulting in an EBITDA margin of 18.1 per cent during the quarter, a huge 1,290 bps down from 31 per cent margin recorded in the same quarter last year. Margins are likely to be narrow over the near to medium term as the management guided for a single-digit sales decline in 2017-18.

Lacklustre US performance

Revenues from the US formulations business, one of the key drivers for the company, were Rs 3,910 crore during the quarter, witnessing a fall of 35 per cent over the same period last year. The US business accounts for 48 per cent of the company's total sales.

Sun Pharma’s US subsidiary, Taro Pharma, posted a 26 per cent y-o-y fall in its sales to $196 million during the fourth quarter mainly due to the challenging pricing environment and increased competition.

Taro's management highlighted that the pricing pressure in topical segment due to increased competition and the consolidation of buyer groups led to decline in revenue. The management also guided for pricing pressure to continue in 2017-18. This implies than pressures on the topline for the parent Sun Pharma remains.

Regulatory issues

Regulatory issues surrounding its Halol facility also dampened the US business in the US. The facility has been under the scanner of USFDA for alleged violations of good manufacturing practices, which has affected the approval for drugs produced at this facility.

The management plans to move some key products to other sites to get over this problem. Besides, the company's Dadra facility received 11 USFDA observations after the inspection completed in April 2017.

As a relief though, the company had announced in March that the USFDA has decided to lift an import alert on its manufacturing plant at Mohali in Punjab. The USFDA had imposed the import alert in 2013 when it was with Ranbaxy Laboratories. This is expected to clear the path for Sun Pharma to supply approved products from the Mohali facility to the US market.

However, USFDA’s clearance to Halol unit is vital for company's future revenue. The Halol plant contributes 7-8 per cent of Sun Pharma's overall sales and 15 per cent of its US sales .

As of March 2017, Sun Pharma has a strong pipeline for the US market with ANDAs (Abbreviated New Drug Application) for 427 products, while filings for 157 ANDAs await USFDA approval.

Other markets strong

Domestic business for Sun Pharma that accounts 28 per cent of the total sales grew 10 per cent y-o-y to Rs 1,916 crore. Price control imposed by the Indian Government has put the company’s domestic revenue under check. Sales from emerging markets and rest of the world grew strongly by 45 per cent and 37 per cent y-o-y, respectively during the quarter.

For FY17, R&D expenses were Rs 2,314 crore or 7.6 per cent of sales. Rising R&D expenditure on funding clinical development of the company’s global specialty pipeline will add more pressure on its margins.

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