Sun Pharma’s Q2FY18 revenues missed estimates by 5%, and while all key segments missed estimates, its US business stood out with a $42 million q-o-q decline. Despite lower R&D costs, EBITDA missed estimates by 4%. SUNP’s US base faces challenges given lack of meaningful launches, material price erosion across portfolio and its inability to compete on market share. With Halol recovery and specialty roll-out already incorporated in FY2019/20 estimates, we see risks should initial MK-3222 ramp disappoint expectations. Reduce with revised target price of Rs 470/share.
Miss on all fronts
SUNP’s Q2FY18 revenues and EBITDA missed our estimates, largely driven by a steep $42 million q-o-q fall in the US. This follows $120 million drop witnessed over the previous two quarters. The entire US decline in Q2FY18 was triggered by SUNP’s base business with Taro reporting flat q-o-q performance. India (+11% y-o-y), EM (+16% y-o-y) and RoW (+40% y-o-y) too missed estimates modestly. Gross margins declined 120bps q-o-q, though EBITDA margins at 20.7% (16.3% ex-Taro) were largely in line with estimates, benefitting from significantly lower R&D spend in the quarter. EBITDA missed estimates by 4%, though adjusting for lower R&D, EBITDA missed by ~11%. Higher other income due to income tax refund, and lower tax rate resulted in 7% PAT beat. The management retained its guidance of single-digit revenue decline in FY2018 and H2FY18 EBITDA margins of 20-22%. We believe the revenue guidance is a tough ask, as it implies ex-US growth of 18% in H2FY18, with US likely to remain under pressure.
Spreading itself too thin?
Over the past eight quarters, SUNP has received 33 ANDA approvals, yet its FY2017 volumes in the US declined by 35% as compared to FY2013 (pro-forma) levels, reflecting in part, Ranbaxy portfolio rationalisation, as well as its inability to compete on market share in an increasingly competitive environment with sub-optimal shares in interesting products such as Suboxone tabs and missed opportunities such as Glumetza. In the current pricing environment, we believe market share gains are critical in driving operating leverage, particularly as Halol recovery continues to remain elusive, with SG&A remaining at elevated levels despite RBXY synergies, in part, due to ongoing investments in specialty roll-out. Given the intensifying competitive landscape and reimbursement pressures in psoriasis, we believe MK-3222 share gains will be gradual, and could likely disappoint on initial estimates.
Reduce with revised TP of Rs 470
We cut our FY2018 EPS estimates by ~6% and raise FY2019/20 EPS by ~2%. Sun Pharmaceuticals is trading at 24X FY2019 EPS and 20X FY2020 EPS. We expect Sun Pharmaceuticals’ US base to return back to its historic peak only in FY2021/22 as FY2018 is turning out to be a complete washout, while FY2019 will see Halol recovery, with specialty franchise contribution only turning material in FY2020/21, though this will be partially offset by Absorica generic entry in FY2021. Maintain Reduce with target price of Rs 470/share (vs Rs 410 earlier) as we roll forward to September 2019E.