Weak US outlook weighs on Sun Pharma’s revenue growth

Margin gains in the June quarter unlikely to sustain

Sun Pharmaceutical’s June quarter results were weighed down by weak sales in the US market, especially in the high-margin specialty segment. Its American sales slid 24.6 per cent on a sequential basis, as Sun’s specialty portfolio, as well as its subsidiary Taro Pharma’s sales, dipped 33-38 per cent. Taro Pharma, which accounted for 42 per cent of Sun’s US sales, reported its worst quarterly performance in nine years.

The derma (skin) product segment, which accounts for around two-thirds of Taro’s sales, was the worst-affected due to pricing pressures. Sales for the specialty portfolio fell on account of the lockdown, while the performance of the generic business was similar to the one reported in the March quarter.

Stocking up in the March quarter had boosted Sun’s US sales performance in that quarter, and the company had indicated a softer June quarter. Compared to the year-ago quarter, sales were down by a third, with the base quarter having a one-off in the form of a generic supply contract pegged at $40-$45 million.

Analysts at Prabhudas Lilladher believe the company’s US business will continue to face challenges due to lower revenues from specialty products, lack of approvals because of the Halol regulatory issue,

Taro’s continued weak performance, and research-related spends on psoriasis treatment drug Ilumya for new indications.

At 32 per cent, the India business contribution was the highest to the firm’s overall sales. Led by its chronic portfolio, which accounts for 56 per cent of domestic sales, the company posted a better-thanexpected 3 per cent increase in revenues for the quarter. The active pharmaceutical ingredient segment posted a sharp 20 per cent growth over the year-ago quarter.

Despite the 9.4 per cent decline in consolidated revenues, the company managed to post an improvement in operating profit margins by 770 basis points sequentially, to 24.3 per cent. This was led by lower raw material, research, and other expenditure. However, Praful Bohra of Emkay Global believes these gains are unlikely to sustain as marketing costs pick up going ahead. He believes a slow specialty ramp up, higher competition in acne drug Absorica, and an increase in field force will limit gains. These cost pressures and a gradual uptick in revenues will keep margins flat over the next two years.

While net profit was hit by a one-time settlement charge of ~3,633 crore related to Taro, adjusted net profit of ~1,146 crore was better than expectations.

Key positives are an expected improvement in the India business in the coming quarters and the resolution of the US Department of Justice overhang for Taro in the June quarter. While its focus on the specialty segment is positive for the longer term, a steady improvement in US sales over the next few quarters will be the single-biggest trigger for stock in the near term.