Finally, sunny days ahead for Sun Pharma

Lower price erosion in the current fiscal year is expected to help Sun Pharma, India’s largest drugmaker, to post a gradual improvement in sales from its US business. Analysts estimate that price erosion for the generic space, which was at 13-15 per cent last year, is expected to come down to about 8-10 per cent in FY19.

While the company, which derives 35 per cent of its consolidated sales from the US market, reported a 3 per cent fall over the year-ago quarter, on a sequential basis the US sales grew 12 per cent.

The improvement, first in at least four quarters, was on account of better results at its US subsidiary Taro as well as revenue and market share gains in key products. Taro reported better than expected results with sequential revenue growth of 13 per cent while operating profit margins improved 280 basis points.

The company has guided for a low double-digit growth in consolidated top line (FY18 consolidated sales fell 2 per cent year on year), which is a positive given that the fiscal will see higher product development costs, investments in the US speciality front end and new product launch expenses. The company also indicated that it won’t pursue products which are not profitable — a move that should help aid margins over the long term. While things should improve, why analysts do not want to call the pricing situation as the bottom is due to uncertainty on regulatory policy on prices which remains a key headwind.

Among the products that should help improve sales are the launch of three novel products — Ilumya for psoriasis, OTX-101 for dry eyes and Yonsa for prostate cancer. The other positive, according to analysts, is the expected approval for the Halol facility in the current fiscal, which could lead to a higher number of launches in the US market.

The company indicated that the facility may not need another reinspection and it has been able to remedy most of the USFDA observations. Among other markets that should aid FY19 sales are India (up 4 per cent in FY18) and other emerging markets (up 11 per cent) led by new launches.

At the current level, the stock is trading at 18 times its FY20 earnings estimates, and a sustained growth, especially in the US sales, will be the biggest trigger going ahead.