Sun Pharma Shares Plunge 13% On Weak Forecast. Should You Buy?

Sun Pharma shares fell over 13 per cent to an intraday low of Rs 493 on Monday after India's biggest drugmaker said that its sales in the US, its biggest market, might fall this year because of pressure on drug prices. "The US generics industry is facing rapidly changing market dynamics, (and) increased competitive intensity and customer consolidation is leading to pressure on pricing," Dilip Shanghvi, managing director of Sun Pharma, told analysts after the company reported lower-than-expected fourth-quarter earnings. "We may even have a single digit decline in consolidated revenue for full-year 2018 versus full-year 2017," he added.

After Dr Reddy's Lab and Lupin, Sun Pharma, world's fifth-largest generic drugs maker, is the latest to offer a bleak US forecast. A wave of consolidation between US drug distributors has hit the negotiating power of drugmakers and there is also uncertainty around big healthcare policy changes by US President Donald Trump, analysts said.

"For many things there is a new normal that is getting established," Mr Shanghvi said in response to analysts queries on how the company planned to deal with the increasing challenges. "We are clearly at the level of profitability where we were 12 years back ... we need to execute better."

Sun Pharma plans to make niche products where there's less competition, such as in areas of ophthalmology and dermatology, the company said.

Sun Pharma has been working on fixing problems at its Halol plant in India, where the US Food and Drug Administration has raised concerns about quality control violations. Mr Shanghvi said the company was continuing to fix those issues as it awaited another inspection.

Hit by a 34 per cent fall in US sales, Sun Pharma's profit for the January-March fell 14 per cent to Rs 1,224 crore, compared to Thomson Reuters's average of analyst's estimate of Rs 1,500 crore.

However, Sun Pharma's revenue in its second biggest market, India, were up 10 per cent, but the business will face a one-time hit from the new GST tax regime that the government plants to implement July onwards, Mr Shanghvi said.

Domestic brokerage Edelweiss Securities has cut its target price on Sun Pharma to Rs 680 from Rs 860 earlier, but retains its "buy" call on the stock. "We revise down FY18/19 estimated EPS (earnings per shares) to reflect near-term pain. We believe, specialty business strategy will lend far more sustainability to Sun Pharma's profit versus peers and thus it remains our preferred pick in the large-cap pack," the brokerage said.

Citi also has a "buy" call on Sun Pharma for a target of Rs 680. However, CLSA has maintained its "sell" rating on Sun Pharma for a target of Rs 500.

Sun Pharma shares closed 11.55 per cent lower at Rs 502.60 apiece compared to 0.10 per cent gain in Nifty. (With agency inputs)