Sun Pharma's third-quarter 2016 showed a recovery, as consolidated earnings per share moved to INR 5.9 per share, from INR 4.6 in the second quarter and INR 2.0 in the first quarter. The US business (45% of total sales this quarter) continued to support overall performance at the firm. The star of the US business, Taro Pharmaceuticals (25% of total sales), continued to report volume declines, albeit with improved gross margins as it shifted product mix to higher-margin categories and specialised products, auguring well for further strengthening of Sun’s narrow economic moat. Taro sales were up 8.7% during the quarter, with gross margins moving to 82.9%, up from 81.4% in the year-ago quarter.
On a nine-month basis, the consolidated business recorded gross margins of 75.7%, ahead of our 74.0% estimate for 2016. However, EBIT margins of 25.1% were shy of our 29.4% 2016 estimate, as the firm spent additional dollars behind research and development, as well as remediation measures. Given the recovery seen in earnings this quarter, we are keeping our INR 24.8 EPS estimate intact. The Feb. 1 launch of Gleevec, with 180-day exclusivity in the US market, should help the firm further boost earnings in the last quarter of the year. Sun has also launched a special scheme for discounted prescriptions for Gleevec, to make it affordable for cancer patients, which should help it gain the necessary traction beyond the 180-day exclusivity period.
Our key concern remains the Halol facility, which may constrain product supply to the US market (other than Gleevec). Management expects things to improve by first-quarter 2017, with a subsequent visit and clearance received by the US Food and Drug Administration to begin manufacturing from Halol. We maintain our INR 992 per share fair value estimate and very high uncertainty rating on the stock, recommending it only to investors with a high risk tolerance and a long-term horizon in mind.
