MOSL: SUN PHARMA (Buy)-Margins improve sequentially- US remains under pressure

​Sun Pharma: Margins improve sequentially; US remains under pressure

(SUNP IN, Mkt Cap USD19.3b, CMP INR526, TP INR610, 16% Upside, Buy)

• Revenue fell 15% YoY to INR65.9b (2.5% miss) in 2QFY18. Gross margin shrunk 480bp YoY (-130bp QoQ) to 71.5%. EBITDA of INR13.15b was ~5% above estimate. EBITDA margin expanded to 20% v/s 17.1% in 1QFY18. Margin improvement for Taro also aided operational performance. PAT of INR9.1b was ~10% above estimate, led by a tax rate of ~10% (est. of ~15%).
  
• Deferral of sales, new competition in Doxil impact US sales: US business fell 44% YoY (-12% QoQ) to USD309m in 2QFY18. Although Taro sales increased ~5% QoQ, ex-Taro US sales declined ~55%, primarily due to new competition in Doxil (DRRD launched) and deferral of sales (gain in Absorica market share not reflected in 2Q sales). We expect ramp-up in US sales in coming quarters on the back of Coreg CR launch (only generic player) and Absorica/Odomzo ramp-up. We expect a pick-up in US sales from FY19, driven by Halol resolution and commercialization of Tildrakuzumab in the US (FY19E) and Seciera (2HFY19E). India business grew at ~10% YoY to INR22.2b.
  
• Concall takeaways: (a) MK-3222- EU approval deferred to CY18-end/CY19-beginning; US approval expected in 2018. (b) Maintained top-line guidance of high-single-digit decline in FY18 (our estimate: -12% YoY); EBITDA margin guidance also maintained at 20-22% for 2HFY18; (c) Rationalized ANDA portfolio in US due to weak industry outlook. (d) On track to file Seciera in 3QFY18. (e) Glumetza: did not launch the product as the company has not been able to achieve the sigma level. (f) SUNP expects US FDA inspection at Halol before CY17-end; (g) rice collusion probe: SUNP confirmed that no wrongdoing has been done from the company's side.