Product jitters hit pharmaceutical stocks, again

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Mumbai: For Sun Pharmaceutical Industries Ltd, gains in share price following better-than-expected June quarter results have failed to sustain. The stock, which gave up 4% gain made on Tuesday, led the losses among Nifty stocks on Wednesday.

The 16% rise in revenues in the June quarter was better than Street estimate. Growth was driven by emerging markets and the US, where the company benefited from a short-term order. Business in India recovered following a rejig in distribution.

Net profit rose by an impressive 31% from last year, aided by lower research and development (R&D) expenses and higher other income. Gross margins, however, declined from the year ago quarter reflecting unfavourable product mix. The company expects R&D and tax expenditure to rise hereon.

Further, promotional expenditure pertaining to specialty drugs is expected to remain elevated, making it difficult for the company to maintain the 22.8% operating margin clocked in the June quarter.

But it does not warrant a major correction in the stock. What may have spooked investors is the delay in the launch of specialty drug Cequa, which is now likely to be launched in Q3 FY20 against the earlier expected launch in the current quarter.

This came to light amid reports another large pharmaceutical company Dr Reddy’s Laboratories Ltd may also see a delay in launch of key drug — NuvaRing– in the US market. The reports sent shares of Dr Reddy’s tumbling, in turn pulling down the NSE pharma index by about 2%. Dr Reddy’s had alluded to the possible delay in launch of the said drug at its June quarter earnings call.

Perhaps, product challenges have deepened investor concern. With base generic drug business continuing to face price pressure, hopes are pinned on limited competition specialty drugs to drive growth.

“Sun Pharma is increasingly reliant on specialty portfolio to deliver growth in US as base business commentary remains lackluster at best. In specialty basket, key products like Ilumya are tasked with expanding market share in what is a difficult and crowded market. Management expects to launch Cequa in Q3 FY20 though associated costs are fully reflected in Q1 expenses; moreover, it believes Cequa to be an attractive opportunity even if Restatis (a similar drug in the market) is genericized,” Yes Securities Institutional Equities said in a note.

 

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