Sun Pharmaceutical Industries rated ‘Hold’ by Jefferies as margins likely to decline

By: | Published: November 19, 2016 6:03 AM

Sun reported results better than expected led by margins 350 bps ahead of expectation.

Sun reported results better than expected led by margins 350 bps ahead of expectation. The beat was led largely by lower other expenses. There was no clarity on Halol resolution and this could take c5 months. Going forward, we expect decline in Taro margins, increased competition and investment in R&D and front end to offset benefits from Ranbaxy synergies and Halol resolutions. Retain Hold.

Results better than expected

Sun Pharma reported results better than expected led by margin beat. Revenue growth at 16% was in line with expectation. The quarter revenues had one-off sales of $25 million. US revenues ex Taro ex Gleevec saw q-o-q growth led by better Halol supplies.

Margins see strong improvement

The key positive in Q2 was the 350 bps margin beat. The beat was led largely by lower other expenses. Management indicated that part of this was driven by Ranbaxy synergy benefits. Margins though had some benefit of lower R&D and other one-off costs.

Concall highlights

R&D costs are expected to increase going forward. It has built out the opthalmic front end and launch preparations for Bromsite are complete. The launch will happen in Q3FY17. It filed 2NDA in the quarter. Pricing pressure remains high and will likely sustain. On Halol, getting complete resolution (EIR) can take 5 months given the delays at USFDA.

Transition phase and Taro to impact margin and earnings

While we expect Ranbaxy synergies to accrue over next 18 m and Halol utilisation to improve over this period, we believe that 1H marks a peak in near term margins. This is because: (i) we expect 700 bps decline in Taro over FY16-18; (ii) significant investment in front end for speciality business, benefits of which will accrue only from FY19; and (iii) hike in R&D spend to c9%. We expect FY17 margins of 34.3% helped by gGleevec, but margins will drop to 32.8% by FY19 as Taro margins erode.


We adjust our estimates for the quarter. Our FY17-19e EPS changes by 6-2%. While we believe Sun has one of the best product pipeline, the company is in transition mode toward speciality. Additionally, moderation at Taro offsets the benefit from Ranbaxy and Halol. The stock trading at 21x FY18 PE leaves limited room for upside. Retain Hold with revised DCF based TP of R720. Risks: Pricing in US; higher tax rate.

Other highlights

US base business (ex Taro ex Gleevec) revenues saw small growth q-o-q led by better supplies at Halol. It filed 2 NDAs in the quarter and 3ANDAs R&D spends stood at 7.3% of sales. It is awaiting USFDA inspection of Halol. Management indicated that it can take >4 m post inspection to get clearance. Ranbaxy merger is progressing on schedule and on track to generate $300 m synergies by FY2018. It received 6 approvals in Q217 and 144 ANDAs and 4NDAs await approval. The quarter had c25m USD sales which were one-off. On Glumetza management did not provide a timeline for launch.


Company Description

Sun Pharma is an international speciality pharma company, with a large presence in the US and India, and a footprint across 40 other markets. It has two subsidiaries Caraco and Taro.


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