Strong performance of Taro was the key contributor during the quarter. Higher other income and lower tax rate resulted in PAT being 4% higher than our estimates. The key highlight from the results and the conference call are (i) The management expects to be ready for FDA inspection at Halol by Q1FY17F; (ii) US revenues ex Taro declined $70m q-o-q as Q2FY16 had one-off sales of $40m; (iii) gGleevec market share will increase gradually and can reach ~30% over time; (iv) the supplies from Halol are improving; (v) domestic business growth was muted at 8% y-o-y, but is expected to improve going forward; (vi) there is greater focus on complex generics, specialty. The phase III topline data for MK 3222 is expected in Q1FY17F; (vii) the effective tax rate is expected to rise from current levels.
The stock is currently trading at 22.2x FY17F EPS (earnings per share) of R38.1 and 20.9x FY18F EPS of R40.6. Our earnings factor in the impact of gGLeevec exclusivity and Ranbaxy synergy. The valuations are in line with Lupin, but at a premium to DRRD and CIPLA. We maintain Neutral.
US business slowed down q-o-q
US sales at $486m were lower by $24m vs Q2FY16. This is despite the $46m increase in Taro sales q-o-q. As per management, Q2FY16 was positively impacted by one-time sales of $40m. The fall in US sales was despite sequential improvement of supplies from Halol. The management expects market share gains in Gleevec to be gradual and SUNP could achieve 30% market share over time.
Ranbaxy synergy has started to impact financials
As per management, the company is on track to realise $300m in synergy from Ranbaxy acquisitions. The synergies are being realised sooner than earlier anticipated. We have factored in $347m in synergies in FY18F. Despite increased realisation of synergy benefits, Ebitda margin ex Taro was at 18.1%, 150bps lower q-o-q. The fall in margin is primarily on account of lower US sales, in our assessment.
No large acquisition on horizon?
The management commented that it would focus on consolidating the business, rather than going after a large acquisition. We believe through acquisitions in the past, the company expanded its presence significantly in the generic business and has attained wider geographic presence. The acquisitions going forward can be smaller in size, focusing on the specialty business, in our view.
Domestic formulation growth muted; management expects growth to revive going forward
The domestic formulation business recorded growth of 8% y-o-y. This has revived from the low of 1% y-o-y in Q2FY16, but is still below the industry average. The company has reduced bonus offerings in acute therapy segments and that has adversely impacted growth in the short term. As per management, growth is likely to revive going forward.