Sun Pharmaceuticals' consolidated earnings for second-quarter 2016 were down 46%, and revenue fell 15% compared with the previous corresponding period, when the company benefited from 180-day exclusivity for Valsartan tablets in the U.S. (which typically accounts for 50% of annual sales). Additionally, there were higher depreciation expenses and one-time write-offs which resulted in lower profits for the quarter and first half. Following the result, we are lowering our earnings forecast for 2016 to INR 54 billion down from INR 66 billion, as we incorporate exceptional items related to the Ranbaxy merger integration, and lower sales growth estimate to 13% from 19% for 2016. We are, however, keeping our long-term growth outlook (five-year earnings growth of 26%, including acquisitions) and fair value of INR 992 per share, given time-value-for-money, unchanged. The stock price has been very volatile since the merger consolidation began. We believe this validates our high fair value estimate uncertainty which remains in place given expected future growth via acquisition by Sun Pharmaceuticals.
Sun's largest subsidiary in the U.S., Taro Pharmaceuticals also reported lackluster results with an earnings decline of negative 7% on the back of price adjustments taken to meet contractual obligations, and in our opinion, discounts taken to remain competitive, as new entrants target the relatively concentrated customer bases. Notably, 50% of Taro's annual sales are derived from three key clients. However, the silver lining amidst all this negative news is that the company continues to explore other areas of limited competition segments in the generics and dermatology areas, through inhouse research and acquisitions with its $2 billion in cash on the consolidated balance sheet ($1 billion in Taro alone) as of 30 September 2015. While near-term headwinds persist, we continue to remain optimistic about the long-term growth potential of this narrow moat stock.
We believe Sun is making good progress in resolving issues with FDA compliance at Ranbaxy. Management indicated it is working on making the Halol facility compliant, a key resource for exports to the U.S. for sales to improve. Furthermore, we believe withdrawing the lawsuit filed by Ranbaxy against the U.S. FDA, to challenge the revocation of Ranbaxy's tentative approvals for its generic versions of Nexium and Valcyte in the U.S., is a step in the right direction in relations with the regulator and continue to monitor developments on this front closely.
