Sun Pharma Injects Sporting Chance Of Healthy Returns In The Longs Run
Some of SPIL’s key specialty products are expected to be commercialised in the US in FY19.
The management of SPIL is optimistic about achieving low double-digit growth in consolidated revenues for FY19. The company is investing heavily in its global specialty and complex generics pipeline. It is also devoting funds for establishing the indispensable front-end capabilities for the specialty business in the US in addition to clinical trials for specialty products
Sun Pharmaceutical Industries Ltd. (SPIL) is the world’s fifth largest specialty generics pharmaceutical company. It is India’s largest and most revered pharma enterprise by size and market capitalisation. With a vertically integrated business, SPIL operats in over 100 countries. Its global consumer healthcare (GCH) business is placed amongst the top 10, across four emerging markets. Its active pharmaceutical ingredients (API) business footprint has strengthened through 14 topnotch API manufacturing facilities around the world. As per the AIOCD AWACS September-2018 report, SPIL is ranked no.1 and possesses a market share of roughly 8.3 per cent in the Indian pharmaceutical market of over Rs 26,000 crore. As per the latest SMSRC report, SPIL is ranked no. 1 based on the share of prescriptions with 12 classes of doctors. The company launched 13 new products in the Indian market for Q2FY19.
Industry Overview
The global pharma industry has garnered massive investments to aid the development of innovative medicines and treatments. However, the pricing of these products/services has remained strained for the last couple of years in key markets such as the US. The price erosion combined with the declining return ratios on investments in the US generics business has adversely affected competition. Thus, companies are scrambling to optimize their upcoming R&D investments. The US generics market played a chief role in bolstering the growth and profitability of Indian pharmaceutical companies until 2015; however, other markets have since emerged at the forefront and gained a more prominent place. As such, companies have had to direct their investments to more innovative and growth-generating avenues. In the developed markets, pharmaceutical growth will be led by the ageing population and the development of new specialty medicines. On the other hand, in the developing markets, burgeoning population, growth in disposable incomes of the middle class, rising demand for improved healthcare and increasing penetration of insurance coverage will fuel the growth momentum. While the launch of innovative products will bolster growth, the impact is likely to be offset by patent expiries of existing products. As such, pharma companies will be required to replenish their product portfolios to sustain acquisition and in-licensing momentum for the specialty segment. The future of the global healthcare industry is centered on innovation in new drug development, immunotherapy, next generation biotherapeutics, including cell-based gene therapies and digital health tools. The generic medicines will play a central role in the endeavours to reduce healthcare costs. The entry of wearable healthcare devices will ease access to precise, real-world data. This will in turn enhance the quality of diagnostic services, thereby resulting in increased pharmaceutical consumption.
The Indian pharmaceutical industry is the world’s largest supplier of generic drugs, accounting for 20 per cent of global export volume. The domestic market accounts for over 3 per cent of the global pharmaceutical industry in value terms and 10 per cent in volume. It is projected to develop at a CAGR of 9 to 12 per cent between 2018-2022, to reach a size of US$ 26-30 billion. Branded generic drugs constitute around 80 per cent of the domestic market in terms of sales. The pharma market is exceedingly fragmented and competitive.
Financial Performance
On the consolidated quarterly front, revenue from operations stood at Rs 6,937.63 crore in Q2FY19 as against Rs 6,650.34 crore in Q2FY18, posting a growth of 4.31 per cent. However, India sales stood at Rs 1,860 crore in Q2FY19, down 16 per cent. EBITDA reached Rs 1,531.21 crore in Q2FY19 from Rs 1,375.61 crore in Q2FY18, thereby rising 11.31 per cent. Consequently, the company reported adjusted net profit of Rs 996 crore in Q2FY19, thereby resulting in an adjusted net profit margin of 14.5 per cent. However, after accounting for the provision of Rs 1,214 crore for the estimated settlement amount payable to all the remaining plaintiffs related to the Modafinil anti-trust litigation in the US, SPIL recorded net loss of Rs 218.82 crore in Q2FY19 in comparison to net profit of Rs 912.12 crore in Q2FY18. Thus, SPIL reported negative EPS of Rs 0.91 in Q2FY19 versus positive EPS of Rs 3.80 in Q2FY18. R&D investments stood at Rs 452 crore in Q2FY19 versus Rs 511 crore in Q2FY18.
On the consolidated annual front, revenue from operations reached Rs 26,489.46 crore in FY18 from Rs 31,578.44 crore in FY17, thereby decreasing 16.11 per cent. The drop in revenues is attributable to weak (-35 per cent) US sales and subdued 4 per cent rise in domestic sales due to GST. EBITDA stood at Rs 5,608.13 crore in FY18 as against Rs 10,089.27 crore in FY17, plummeting by 44.41 per cent. Profit for the year attributable to the owners of the company stood at Rs 2,161.55 crore in FY18 in comparison to Rs 6,964.37 crore in FY17, posting a fall of 68.96 per cent. EPS plummeted to Rs 9 in FY18 from Rs 29 in FY17, registering a drop of 68.96 per cent. The net cash generated from operating activities dropped to Rs 3,907.15 crore in FY18 from Rs 7,082.21 crore in FY17, thereby sinking 44.83 per cent.
The business-wise revenue mix altered favourably towards domestic formulations. The US business accounted for 34 per cent, while Indian branded generics and emerging markets constituted 31 per cent and 18 per cent, respectively. Western Europe, Canada, Australia, New Zealand and other markets contributed 11 per cent to revenues, while 6 per cent is attributable to APIs and others. The erosion in the US business can be ascribed to a 64 per cent fall in Ranbaxy’s US business, 32 per cent drop in DUSA’s revenues and 30 per cent descent in Taro’s US sales.
Products Portfolio
In FY18, SPIL filed two crucial products with the USFDA, namely Ilumya and OTX-101 and received final approval for Ilumya in the US. Presently, the company is preparing to launch Ilumya, indicated for the treatment of moderateto-severe plaque psoriasis, with the potential of commercialisation in the US in FY19. SPIL also received USFDA approval for Yonsa®, which is used to treat patients inflicted with metastatic castration-resistant prostate cancer. The USFDA also extended its approval for a new label for Odomzo indicated for the treatment of patients with locally advanced basal cell carcinoma that has recurred following surgery or radiation therapy, or those who are not candidates for surgery or radiation therapy. SPIL has invested in the development of two new indications for Ilumya, that is, psoriatic arthritis and ankylosing spondylitis. The company will have to make significant front-end investments to finance the clinical trials for the same. SPIL received approval for Cequa and Kaspagro sprinkle and launched the latter in the US. Furthermore, SPIL received clearance for its Halol facility, thereby creating the potential for approvals for Xelpros XR and Elepsia.
Acquisitions
On November 26, 2018, the company entered into a definitive agreement to acquire Pola Pharma Inc., a Japanese company engaged in R&D, manufacturing, selling and distributing dermatology products in Japan. The acquisition will strengthen SPIL’s global dermatology presence. It will also facilitate access to local manufacturing capabilities, thereby permitting SPIL to launch its specialty and generic dermatology products in Japan. The acquisition of Ranbaxy brought in synergistic benefits worth US$ 300 million, thereby reinforcing SPIL’s global specialty business.
Growth Drivers
Some of SPIL’s key specialty products are expected to be commercialised in the US in FY19. However, these will require sizeable pre-launch and branding costs, as well as increasing sales force costs. The company is focusing on cost control and product rationalisation across the areas of R&D and manufacturing in order to earn reasonable returns on investments. This is of considerable consequence, particularly due to the hard-hitting pricing conditions in the US generics market. The company plans to scale up its global specialty business, such that its contribution to the consolidated revenues rises steadily in the long term. This will require immediate front-end investments, with corresponding revenue streams opening up over time. SPIL intends to allocate 8 to 9 per cent of revenues towards R&D and achieve differentiation by focusing on technically complex products. SPIL is making strategic acquisitions to bridge capability and portfolio gaps and yield high returns on investments.
Challenges
FY18 was undoubtedly an arduous year for SPIL. The US market witnessed revenue de-growth of 34 per cent to US$ 1.36 billion. SPIL’s subsidiary, Taro, witnessed a drop in revenues of 25 per cent in FY18. Fierce competition amongst manufacturers, the entry of new players, buying consortium pressures and a higher ANDA approval rate from the USFDA were dampeners. Governments, predominantly in emerging economies, are under pressure to provide affordable and quality healthcare and curb out-of-pocket spending for patients. As such, governments have implemented cost-containment policies, which while deepening market access, have counterbalanced some of the gains for the pharmaceutical industry.
The company is focusing on cost control and product rationalisation across the areas of R&D and manufacturing in order to earn reasonable returns on investments. This is of considerable consequence, particularly due to the hard-hitting pricing conditions in the US generics market. The company plans to scale up its global specialty business, such that its contribution to the consolidated revenues rises steadily in the long term.
Conclusion
The US generics industry continues to endure pricing pressure triggered by intensifying competition and customer consolidation. Despite this, the management of SPIL is optimistic about achieving low double-digit growth in consolidated revenues for FY19. The company is investing heavily in its global specialty and complex generics pipeline. It is also devoting funds for establishing the indispensable front-end capabilities for the specialty business in the US in addition to clinical trials for specialty products. While these generous investments will not generate commensurate revenues in FY19, they will undoubtedly pave the path for long-term sustainable growth. The management anticipates an eventual increase in tax rate over the upcoming years. Thus, the overall guidance for FY19 remains muted. We have a conservative outlook on margin performance due to the higher spends on specialty. However, the improving sales mix towards domestic formulations, product rationalisation in the US and the possibility of an earnings upgrade due to rupee depreciation present the potential for growth in the future. By virtue of these factors, we recommend our reader-investors to HOLD the stock