Suhani Adilabadkar
Sun Pharmaceutical Industries is the fourth largest global specialty generic company, ranked No. 1 in India and 8th in the US. It is the largest Indian pharmaceutical company in the US manufacturing specialty products, branded generics, complex and pure generics, OTC products, antiretrovirals (ARVs) and APIs.
With a footprint across more than 100 countries, Sun Pharma has a portfolio of over 2,000 products, globally, in a full range of dosage forms which includes tablets, capsules, injectables, ointments, creams and liquids, nasal sprays and hormones etc.
The company has 44 manufacturing sites approved by global health regulatory agencies, supported by a worldwide supply chain and multiple research and development (R&D) facilities across the world, investing 7% of its sales in R&D annually. The company has been rising sharply in recent days on board consideration for buyback of shares.
Quick Takes
Revenue jumped 5% YoY, operating profit declined 14% and PAT fell 30% YoY in Q3FY20.
The stock has been on a steady decline since 2015, falling 58% over the past five years.
Specialty portfolio has grown 30% QoQ from $91 mn in Q2FY20 to $118 mn in December quarter FY20.
India business has grown 13% YoY during the quarter reported at Rs. 2,517 crore.
With respect to the coronavirus impact, Sun Pharma management clarified that there would not be any significant effects as of now, as the majority of pharma manufacturing units are not located in coronavirus affected areas. Sun Pharma is highly dependent on China intermediate supplies for APIs while formulation business dependence is relatively lower.
A Mixed December Quarter FY20
Sun Pharma reported revenue growth of 5% YoY in Q3FY20 at Rs. 8,155 crore, against Rs. 7,740 crore in the same period, previous year. Growth was driven by India and the ROW business, as well as the integration of its recent acquisition, Pola Pharma (Japan). With moderate revenue growth and operating expenditure rising 13% YoY, operating profit declined 14% YoY at Rs. 1,841 crore compared to Rs. 2,153 crore in the corresponding quarter FY19.
The higher operating expense was driven by increases in staff cost, decline in Japanese business and higher marketing spend for specialty business.
Consequently, operating margin declined at 22.6% in Q3FY20 compared to 27.8% in the same period, previous year. PAT or net profit declined 30% YoY in Q3FY20 impacted by higher depreciation and taxation and stood at Rs. 1,024 crore against Rs. 1,459 crore in the corresponding quarter, previous year. The company has filed 7 ANDAs and 9 approvals were received during the quarter. Additionally, the pipeline includes 55 approved NDAs while 4 NDAs await US FDA approval. Once the darling of Indian stock markets, the stock has been on a steady decline since 2015, falling 58% over the past five years.
Specialty Business a new growth driver, but health of acquisition a question mark
Sun Pharma delivered mixed results for its December quarter FY20, impacted by the poor performance of its subsidiary Taro which in turn affected the US formulation business. Taro, Sun PHarma’s US acquisition, contributes roughly half of US revenues, and reported sales of $148 mn, down 16% YoY in Q3FY20. The US business on the whole was at $350 mn for December quarter FY20, declining 3% YoY over the same period, previous year accounting for about 31% of total consolidated sales.
In spite of lower US and Taro lower revenues, Sun Pharma invoked strong investor interest after its December quarter results came out, for which its specialty portfolio is responsible. To survive and battle it out in the US pharma industry, plain generics are not enough amidst high pricing pressure and channel consolidation. Thus, pharma companies like Sun Pharma have augmented their innovation engine and moved up the pharma value chain in the form of specialty products. Specialty business is fast becoming an additional engine of consistent cash flows and long-term growth for pharma companies.
The specialty portfolio of Sun Pharma includes dermatology, ophthalmology and oncology segments and consists of ilumyatm (for treating psoriasis), YONSA (for treating prostate cancer), XELPROS (for treating elevated intraocular pressure) and recently launched Cequa ( for treating dry eyes) to name a few.
The specialty portfolio has grown 30% QoQ from $91 mn in Q2FY20 to $118 mn in December quarter FY20. Speaking with regard to strong specialty growth numbers, Mr. Abhay Gandhi, CEO, North America, Sun Pharma said, “Our specialty revenues in U.S. have grown over September quarter, with the growth mainly driven by higher seasonal sales for Levulan and ABSORICA, improving sales of ILUMYA and ODOMZO coupled with contribution from the CEQUA launch”.
Apart from its specialty growth lever, the company also has its India business to count on. India business has grown 13% YoY during the quarter reported at Rs. 2,517 crore. India’s formulation business contributes roughly 31% of total revenues while Sun Pharma is a leader in the chronic segment. The company has 8.2% market share and its top 10 brands contribute about 16% of its India business revenue pie. Cardiac, anti-diabetic, anti-infectives, respiratory and gastrointestinal are major growth therapies for domestic formulation business.
Speaking on its India business growth strategy, India Head, Mr. Kirti Ganorkar said, “As a part of our growth strategy, we have initiated an expansion of our field force by about 10%. The main objectives behind this expansion include further widening of our strong customer reach, deep penetration of our products and ensure greater focus on all relevant brands”.
Both India and US formulation business contribute 60% of the entire revenue basket. Among the other revenue growth constituents, APIs grew 18% YoY, Rest of World (ROW) markets jumped 24% YoY and emerging markets suffered a decline of 4% YOY due to lower tender business revenues in South Africa. APIs, ROW and emerging markets contributed 7%, 14% and 17% YoY respectively in Q3FY20.
With respect to the coronavirus impact, Sun Pharma management clarified that there would not be any significant impact as the majority of pharma manufacturing units are not located in coronavirus affected areas. Sun Pharma is highly dependent on China intermediate supplies for APIs while formulation business dependence is relatively lower.
Sun Pharma has lost its sheen and even though the specialty business and India formulation business seem to be on the right track, there are high downside risks in the near future because of the poor performance of Taro, higher price erosion in US market, price-fixing allegations in US and SEBI's probe on whistle-blower complaint. Vigilance would be the key for long term investment.