Stay (Financially) Healthy With This Stock

The pharmaceutical stocks are trading under pressure these days on account of uncertainty of policies of the newly elected US president Donald Trump. There are various policies which might impact the pharmaceutical sector and may impact pricing of drugs in the US. These policies may lead to significant fall in the prices of Indian pharma products in the US.

Considering the volatility in the pharma sector stocks, Sun Pharmaceutical Industries (SPIL) is available at attractive valuations with robust financials and, therefore, this market leader will able to manage policy pressures in future and so the fall in the price of Sun Pharma stock will be limited. SPIL is driving long term growth by building sustainable revenue streams. 

It is enhancing share of speciality business globally and achieving differentiation by focusing on technically complex products. SPIL has vertically integrated operations and optimisation of operational costs help company in cost leadership. The company has balance between profitability and investments for the future. It will use acquisitions to bridge critical capability gaps. SPIL is ensuring acquisitions yield high return on Investment. The company is focusing on payback timelines.

UNDERSTANDING BUSINESS 

Sun Pharmaceutical’s business segments include US business, Indian branded generics business, emerging markets, global consumer healthcare business and active pharmaceutical ingredients (API). Its rest of the world geographical segment includes western Europe, Canada, Australia, New Zealand and other markets.

The company offers its products to therapy areas such as cardiology, neuro-psychiatry, gastroenterology, anti-infective, diabetology and dermatology. SPIL’s manufacturing units are situated in India, the United States and Brazil, among others. SPIL’s domestic formulation business is among the fastest growing in the Indian pharmaceutical industry. 

After merger with Ranbaxy Laboratories, the company is now the segment leader with a market share of 8.7 per cent in the domestic formulation market, followed by Abbott India, which has a market share of 6.5 per cent.

INDUSTRY

The Indian pharmaceutical market is the third largest in terms of volumes and thirteenth largest in terms of value. India is the largest provider of generic drugs globally with the Indian generics accounting for 20 per cent of global exports in terms of volume. The Indian pharma industry is expected to grow by over 15 per cent per annum between 2015 and 2020 and will outperform the global pharma industry,which is set to grow at an annual rate of 5 per cent.

The Indian market is expected to grow to USD 55 billion by 2020, thereby emerging as the sixth largest pharmaceutical market globally by absolute size.

R&D EXPENSE 

SPIL has been increasing its R&D expenditure year-on-year to enhance new drugs in future. The company has spent Rs.2300 crore on R&D in FY16 contributing 8.3 per cent of its total revenue to R&D for the same financial year. Its strong cash flows and large scale of operations support R&D investments. SPIL has strong research teams in generics, finished dosage development, biological support and chemistry.

 The company has 2000 scientists globally with capabilities across dosage forms like orals, liquids, ointments, gels, sprays, injectables. It is developing noninfringing formulations and development of specialty or complex products.

STRONGEST ANDA PIPELINE

In terms of Abbreviated New Drug Applications (ANDA), SPIL cumulatively has 424 products, out of which 149 products now await USFDA approval, including 14 tentative approvals. The company’s focus areas include dermatology, ophthalmology and oncology.

It has filed 419 Drug Master File/ Certificates of suitability (DMF/CEP) and 306 have been approved. At the same time, the company has filed 1120 patents, of which 773 have been approved.

INORGANIC STRATEGY

In calendar year 2016, SPIL has cracked five deals. The company has acquired global rights for Seciera & Odomzo which will help enhance specialty pipeline globally. The company has also acquired Biosintez, a local manufacturing facility which will help the company to enhance presence in the Russian market. SPIL has signed licencing agreement with Almirall for Tildrakizumab for psoriasis This will help the company strengthen the distribution of Tildrakizumab in Europe.

It has acquired 14 brands from Novartis which gave the company entry into Japan. SPIL has signed a distribution agreement with AstraZeneca for Oxra & Oxramet (brands of dipagliflozin, used for diabetes treatment).

CLEARING CLOUDS OVER HALOL FACILITY

SPIL’s Halol, Gujarat, plant is an important facility as it contributed 10 to 15 per cent to its US sales before the factory received a warning letter from the US Food & Drug Administration (USFDA) for violation of manufacturing norms in December 2015.

The USFDA re-inspected the Halol facility in Q3FY17 and has issued nine observations. The company has submitted response and corrective action plan to the USFDA for resolving these observations. It is in the process of implementing these corrective steps and await USFDA’s response. 

SPIL has responded to the 483s received from USFDA for Halol and it has been updating the USFDA with the progress on the remedial efforts. The company’s management is confident of resolving the issue over the next few quarters. It is planning to shift production of key products from its Halol factory to other plants.

SUPREME FINANCIALS 

On the financial front, SPIL’s revenue increased 17.65 per cent to Rs.24421 crore in 9MFY17 as compared to the same period in the previous financial year. The company’s EBITDA too rose 45.11 per cent to Rs.8542 crore in 9MFY17 on a yearly basis. 

Its EBITDA margin expanded by 662 basis points to 34.98 per cent in 9MFY17 as compared to the same period in the previous fiscal. SPIL’s net profit boosted 83.43 per cent to Rs.5741 crore in 9MFY17 as compared to the same period in the previous financial year.

The company’s net profit margin expanded by 737 basis points to Rs.26.58 per cent in 9MFY17 as compared to the same period in the previous fiscal. On the segmental revenue front, SPIL’s India sales were up by 8 per cent to Rs.5,833 crore in 9MFY17. The company’s US finished dosage sales also rose 13 per cent to Rs.11,129 crore in 9MFY17 on a yearly basis.

Its sales in the emerging markets increased 17 per cent to Rs.3292 crore in 9MFY17 on a yearly basis. SPIL’s sales to rest of world also rose 10 per cent to Rs.1839 crore in 9MFY17 as compared to the same period in the previous financial year.company’s recent acquisitions of DUSA, URL Pharma and Ranbaxy Laboratories, have added strength in the US region, with the geography accounting for 52 per cent of its sales in FY16.

SPIL has been growing tremendously with robust financial performance in recent years. The company’s topline increased at a CAGR of 28.66 per cent over the last five financial years ending with FY16. Its EBITA too rose at CAGR 20.91 per cent in FY12-FY16. SPIL’s bottomline also increased 12.16 per cent CAGR during the last five fiscals.

TARO’S FINANCIAL PERFORMANCE

SPIL’s US subsidiary Taro’s revenue decreased 14.7 per cent to Rs.1471 crore in Q3FY17 on a yearly basis due to negative impact of increased competition and challenging pricing environment. 

The company’s EBITDA declined 26 per cent to Rs.836 crore in Q3FY17 as compared to the same period in the previous fiscal. Its EBITDA margin at 56.9 per cent contracted by 889 basis points on YoY basis. Taro’s PAT was also down by 26.6 per cent to Rs.808 crore in Q3FY17 on a yearly basis. 

FORECAST

SPIL is on track to achieve USD 300 million from Ranbaxy synergies by FY18. The focus areas for integration include GMP compliance, sourcing efficiencies as well as revenue synergies. It has plans to shift key products from Halol. SPIL’s Tildrakizumab NDA filling will be done by Merck in FY18. The revenue from sale of rights to sell Keveyis is part of other operating income.

VALUATIONS 

On the valuation front, SPIL’s share price is trading at trailing twelve months (TTM) PE of 21.86x as compared to its peers such as Cipla (40.32x) and Dr. Reddy’s Laboratories (45.95x). The share price is attractive as against industry PE of 24.87x. The company has given dividend yield of 0.15 per cent to its shareholders. SPIL’s ROE and ROCE stood at 20.47 per cent and 19.43 per cent, respectively, in FY16. The company’s total debt stood at Rs.8,518 crore in FY16.

Its debt-to-equity ratio is 0.27x with an interest coverage ratio of 15.19x in FY16. Post-merger of Ranbaxy Laboratories, SPIL is now the fifth-largest specialty generics company in the world, after Teva, Sandoz, Activas and Mylan. However, the near-term performance of the company has been impacted on the back of supply constraints at the Halol facility although the company has taken corrective measures including site transfers. The completion of company’s synergy with Ranbaxy will yield fruitful returns in the coming financial year. We recommend our reader-investors to BUY the stock.