MOSL: SUN PHARMA (Buy)-Operating performance in-line-Halol resolution key catalyst

Sun Pharma: Operating performance in-line; Halol resolution key catalyst

(SUNP IN, Mkt Cap USD21.3b, CMP INR574, TP INR675, 18% Upside, Buy)

• Revenue fell 14% YoY to INR65.9b (1.9% miss) in 3QFY18. Gross margin shrunk 330bp QoQ (-260bp YoY) to 68.2%, primarily due to higher raw material cost for Taro and change product mix. EBITDA of INR13.9b was ~1% below our estimate of INR14.1b. EBITDA margin improved ~120bp QoQ to 21.2%, led by ~20% decrease in other expenses due to cost-rationalization measures. Reported PAT declined ~75% YoY to INR3.7b, primarily due to one-time expense of INR5.1b related to change in US tax laws, adjusted for which PAT stood at INR8.8b (8.8% miss).
• Improvement in US business remains key: US business declined 36% YoY (+6% QoQ) to USD328m in 3QFY18. Note that 3QFY17 included sales from Imatinib (six months’ exclusivity). Sequential improvement in the US business can be attributed to re-coup of deferred sales from 2QFY18 and some expansion in market share. We expect pick-up in US sales from FY19, driven by Halol resolution, as well as commercialization of Tildrakuzumab in the US (FY19) and Seciera (2HFY19E). India business for SUNP grew ~10% YoY to INR22.2b.
• Earnings call takeaways: (a) Tildrakuzumab PDUFA date is in end-March 2018. (b) SUNP guided for a marginal miss in revenue for FY18, but maintained EBITDA margin guidance of 20-22% for 2HFY18. (c) SUNP rationalized its ANDA portfolio in the US due to the weak industry outlook. (d) Expect 4Q revenues to be similar to 3Q. (e) Cost-rationalization measures taken by the company will help improve margins.