Brokerages Cut Sun Pharma’s Target Price On U.S. Woes

Most brokerages cut target price for Sun Pharmaceutical Industries Ltd. citing risks to profit growth as price erosion brought down revenues in the U.S. and sales fell at its Israeli subsidiary Taro Pharmaceutical Industries Ltd.

Falling domestic sales also weighed down India’s largest drugmaker’s earnings for the quarter ended June as distributors pared inventory ahead of the Goods and Services Tax. Delays at its Halol plant because of the U.S. Food and Drug Administration’s inspection add to future challenges along with price erosion in Taro’s derma franchise as well the ex-Taro business.

Billionaire Dilip Shanghvi-led company reported a surprise loss of Rs 320 crore in April-June, missing analyst estimates, due to a one-time antitrust settlement related to Modafinil drug in the U.S.

Ratings Check

• Edelweiss maintains a ‘Buy’; target price cut to Rs 525 from Rs 680.
• Edelweiss retains a ‘Neutral’ call; target price cut to Rs 500 from Rs 600.
• HSBC Global Research maintains a 'Buy'; target price cut to Rs 508 from Rs 703.
• IDFC securities keeps it at ‘Outperform’, target price at Rs 484.
• Deutsche Bank maintains a 'Hold'; target price cut to Rs 515 from Rs 440.
• Nomura retains its ‘Neutral’ rating; target price cut to Rs 600 from Rs 734.

Edelweiss

• Revenue declined 25 percent as the U.S. business sales fell 42 percent year-on-year.
• A charge of $147 million to settle antitrust litigation relating to Modafinil in the U.S. hurt profit.
• Domestic business down 5 percent due to GST-led de-stocking.
• Lowered the estimated earnings per share for financial year 2018-19 to reflect near-term pain.
• Generics business collapsing and the company is trying to shift to other branded markets.

Credit Suisse

• Price erosion in the U.S., higher expenses leading to negative operating leverage and investments in specialty business lowered the margin.
• Taro’s numbers impacted by “single-digit” price erosion in the U.S. and supply issues from the Halol plant.
• Business in India impacted by transition to GST.

HSBC Global Research

• “Bottom is near” because of the inspection at Halol plant and significant price correction of 35 percent.
• Sun Pharma’s focus on specialty pharma will protect it from volatility in the generics business in the long run.

IDFC Securities

• Factors that played a negative role are Taro's profitability, domestic sales impacted by GST and a 20-22 percent guidance for EBITDA by the second half of financial year 2018.
• Reduced earnings estimates by 29 percent for the financial year 2017-18 and 23 percent for 2018-19.
• Specialty strategy to move forward because of the launch of Bromsite and Odonzo and potential launches of Tildra and Seceira.
• Sun Pharma is best placed among peers in the domestic market and should take bold bets to move from the generics business to a specialty strategy.

Deutsche Bank

• EPS estimates cut by 27 percent for 2017-18 and 15 percent for 2018-19.
• Downside risks: Delay in resolving warning letter to its Halol plant, steeper-than-expected decline in Taro sales and slower-than-estimated growth in the Indian market.
• Sun Pharma's investment in late-stage products differentiates it from peers, which is expected to unlock value.

Nomura

• Solution to Halol plant's issues key to success in future.
• Success in specialty business important.
• Results weaker than expectations on all counts.
• Sales and EBITDA missed estimates by 8 percent and 27 percent, respectively.