Sun Pharma eclipsed by 75% fall in profit

Halol plant clearance and speciality business monetisation crucial for earnings growth

Asixteen per cent decline in revenue and a one-off tax expense of ~5.13 billion resulted in a 75 per cent fall in Sun Pharmaceutical Industries’ consolidated net profit in the third quarter of 2017-18.

India's largest drug maker by revenue reported a net profit of ~3.65 billion in the quarter, against ~14.71 billion in the year-ago period.

Revenue from operations declined about 16 per cent year-on-year to ~66.53 billion due to weakness in the US business, which continued to see pricing pressure and the impact of delayed product approvals. The company is in the process of resolving the issues raised by the US Food and Drug Administrator (USFDA) regarding its Halol plant. This has been affecting the pace of product approvals and launches.

The results were below Bloomberg's revenue and profit estimate by over 5 per cent and 61 per cent, respectively. Consensus estimates for revenues stood at ~69.60 billion and profit at ~9.44 billion.

Apart from lower revenues, net profit was hit by a tax expense of ~5.13 billion. The group had to recalculate some tax components due to changes in US laws in December.

Adjusting for one-offs,the net profit of ~8.78 billion represented a decline of 40 per cent and were still below estimates

“Our Q3 performance reflects a gradual improvement in profitability over the first half of this year, despite a challenging US generic pricing environment,” Sun Pharma Managing Director Dilip Shanghvi said in a statement. “During the quarter, we took another step forward in enhancing our specialty business…. We will continue to evaluate opportunities in the specialty segment to further enhance this business.”

A 30 per cent decline in sales of subsidiary Taro, which contributes about half to US revenues, also caused a 35 per cent sales decline in the US. Lower contribution from anticancer drug Gleevec and hypertension drug Olmesartan, too, led to a decline in sales. The US contributes 32 per cent to Sun’s sales.

India, which contributes about 32 per cent to sales, saw a six per cent growth. This was lower than that of peers; Cipla had reported 15 per cent growth. Emerging markets, which contribute about 19 per cent, saw a growth of 10 per cent year-on-year.

The company’s operating profit of ~13.98 billion too disappointed, as had analysts estimated ~15.22 billion.

After a disappointing performance on all counts, all eyes will be on the resolution of USFDA’s issues.

Analysts as Ranjit Kapadia at Centrum broking said the results were below expectations and he would be watching the developments on Halol plant’s inspection and clearance. The plant would be inspected in the March quarter. Rahul Agarwal, director, Wealth Discovery, said there was nothing to cheer for in the earnings report.

Analysts at Credit Suisse have said the key event for Sun Pharma in the near term would be the Halol inspection.

Analysts at Motilal Oswal said the stock would remain under pressure in the near term due to challenges related to growth and margins. They said recovery would happen in 2018-19 if the Halol plan problems were resolved and there was visibility in the monetisation of the specialty business.

In post result conference call, Sun Pharma managing director Dilip Shanghvi said the company's Q4 revenue is expected to be similar to its Q3 number and that research and development costs would be slightly lower than 9-10 per cent of sales, which the company had guided earlier.

This was because the company had decided to continue development of some generic drugs with low sales potential. Shanghvi said the company continued to look at acquisitions to build its ophthalmic and dermatology business.