1. Sell rating on Sun Pharma; A quarter miss on revenues

Sell rating on Sun Pharma; A quarter miss on revenues

Sun Pharma's base business fell due to customer consolidation and competitive pressures

By: | Updated: November 16, 2015 12:47 AM

Taro’s Q2FY16 reported results missed our estimates on revenues and profitability, though adjusting for ~$19 m price protection charge, results were largely in line. In Q2FY15, the base business declined due to customer consolidation and competitive pressures, offsetting the benefits of price hikes. Management also painted a somber outlook on Keveyis sales trajectory in the first few years, in-line with expectations. We retain our SELL recommendation.

Q2 misses estimates on revenues and Ebitda

In its Q2FY16 results, Taro reported revenues of $212m, lower than our expectations of $230m, as the company took another $19.1m price protection charge in the quarter, following $14m charge in Q1FY16. Adjusting for price protection charge, revenues were flat q-o-q and in line with our expectations. Q2FY16 should have benefitted from the full impact of price increases implemented in Q1FY15, but the benefit was completely offset by pressures on the base business due to customer consolidation and increased competitive intensity. While Q3FY16 should now see the full impact of price increases implemented in Q2FY16, the benefits of price hikes have now peaked with pricing pressure likely to restrict future growth. Ebitda at ~$130m, too missed our expectations by 11%. Adjusting for $34m forex gain, net income missed our estimates by ~13%.

Early days for Keveyis, though our deep-dive suggests only ~$58 m in sales by FY2020e: At the call, management presented a cautious outlook on Keveyis in the initial days, and while Taro is targeting co-pay assistance to all patients on Keveyis, it is still early days to assess formulary feedback. In line with our thesis, management highlighted that Keveyis might face adoption hurdles in the mild to moderate patient sub-set, though it was unable to share granular details on the segmentation of the market. We present a detailed outlook on Keveyis, highlighting potential for ~730k patient penetration and sales of ~$58m by FY2020e.


FY2016 proving to be wash-out year for SUNP: Previously, Taro was the lynchpin of growth for SUNP given the successive rounds of price hikes implemented by SUNP since FY2012. However, with the impact of price hikes now at its peak, we see structural growth challenges for the company in FY2017 as the base business pressures on the US business get amplified. While the Gleevec settlement and Ranbaxy acquisition synergies partially take care of SUNP’s FY2017 growth, given the dilution to SUNP shareholders from RBXY, value creation is likely to be modest as SUNP grapples with a slow-down in RBXY’s US sales, currency headwinds in emerging markets and discontinuation of low profitability businesses such as tenders.

Other highlights:
* Competitive intensity in the US dermatology market is likely to increase though management expects the market to remain less competitive than conventional oral solid generics.
* Cash generation declined in the quarter driven down by the cash impact of price charges recorded in Q2FY15 as trade receivables increased by $50m.
* Taro management suggested that the R&D spend is likely to stay at current levels (6-8% of sales) as the company pursues more clinical-led filings on an increasing revenue base.
* Taro now has $1.05 bn cash balance, and the management highlighted that it will continue to evaluate in-licensing and M&A opportunities, with a focus on expanding its dermatology presence in the US and potentially Canada.
* Medicaid sales account for ~15-20% of Taro’s US sales, varying each year depending on product launches. The company is yet to determine the potential impact of the implementation of Section 602 of Bipartisan Budget Act of 2015 that will cap the price increases for generics to Medicaid programme to the rate of inflation in the US.

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