With signs of bottoming out of non-Taro US sales (up from $139 m to $193 m over Q2 to Q4), further material downside earnings risk seems unlikely.
Sun Pharma stock has underperformed NIFTY 78% and BSE Healthcare Index 27% over the last two years. With signs of bottoming out of non-Taro US sales (up from $139 m to $193 m over Q2 to Q4), further material downside earnings risk seems unlikely. We upgrade Sun Pharma to Neutral from Underperform. Cipla remains our preferred pick in the large-cap pharma space.
Event: Adjusting for the $20 m milestone payment received from Almirall, Sun’s Q4 Ebitda at Rs 15.5 bn was ~7% ahead of our estimates. Sun has guided for low double-digit topline growth in FY19 (Macq: 11% y-o-y).
US sales showing some signs of stability: Despite Absorica being under pressure, Q4 US sales increased 12% q-o-q to $368 m driven by an increase in share in key products and uptick in Taro. Post a weak Q4 for Absorica, Sun expects its realisation to improve due to changes in the copay programme. We expect a pick-up in Absorica, launches of Glumetza and Welchol AG, apart from the specialty launches, to provide support to FY19 US sales.
Update on Specialty: Yonsa, Ilumya and Seciera will be launched in Q1, Q2 and Q4FY19 respectively. While Odomzo’s market share has increased under Sun, the company believes that Odomzo has enough headroom to gain share. Sun maintained that the specialty business will breakeven in FY20, with a rider that breakeven could be delayed in case of additional clinical trials or specialty acquisitions.
Guiding for improved domestic FY19 growth: As per IQVIA, Sun’s India secondary sales grew by 6.8% y-o-y in Q4, underperforming the industry by 430bps. Volini has lost share due to higher competition with the spray pain-relief segment. In FY19, Sun has guided for 9%+ y-o-y domestic growth (Macq: 9%).
Key takeaways from Q4 concall: Sun expects FY19 R&D spends at 8-9% of sales. There will also be significant expenses incurred in the launches of the three specialty products in FY19. Sun has baked in Halol’s resolution in H2FY19 in its topline guidance.
Earnings and TP revision
Lower FY19/20e EPS by 8/4% due to a delay in Halol resolution, pressure in Absorica and higher specialty spends. Revise target price to Rs 460 (Rs 480 earlier).
Action and recommendation: We continue to believe any upside from specialty will be protracted. However, at ~20x FY20e PER, we believe downside is limited. Upgrade to Neutral.