US Pricing Squeeze Clouds Sun Pharma Q2; Site Re-Inspection Critical
Executive Summary
Further evidence of the impact of pricing pressure in the US was provided when Sun Pharma reported a sharp fall in profits in Q2 (although it beat the expectations of some analysts). Sun also expects a delay in EU approval for its late stage psoriasis asset, tildrakizumab, but US approval timelines appear unchanged, at least for now.
Sun Pharmaceutical Industries Ltd. reported a 59% decline in net profits for the second quarter ended September at INR9.12bn ($139.4m), while sales were down 15% to INR65.90bn, dented by ongoing pricing pressure in the US and continued investments towards developing the firm’s global specialty business. (Also see "Tepid Q3 For Sun But Momentum In Specialty Build-Up" - Scrip, 16 Feb, 2017.)
US finished dosage sales plunged 44% to $309m in Q2. Sales in India and emerging markets were up at INR22.2bn (+11%) and $196m (+16%) respectively. While emerging markets growth was broad-based across various markets, it was partly boosted by the consolidation of the Biosintez acquisition in Russia. (Also see "Sun Acquires Russian Firm Amid Localization Push" - Scrip, 23 Nov, 2016.)
Sun’s founder and managing director, Dilip Shanghvi, acknowledged that the company’s overall performance in Q2 was “not in line” with the firm’s past performance. The fall in US revenue, he said, was mainly due to lower sales of generic Gleevec (imatinib), pricing pressure in the US due to customer consolidation and a delay in approval of “important” products from the Halol facility. Sun’s Halol site in the western state of Gujarat is awaiting FDA re-inspection as it seeks to restore its compliance status. (Also see "Sun Hit As US FDA Raises Fresh Concerns Over Key Halol Plant" - Pink Sheet, 7 Dec, 2016.)
“We expect our performance to gradually improve in the second half of this year,” Shanghvi said at the earnings call, post market hours, on Nov. 14.
Sun’s current product offering in the US market comprises approved ANDAs for 422 products with filings for 136 ANDAs awaiting US FDA approval, including 15 tentative approvals. Four ANDAs were filed and three approvals were received in the quarter.
The company noted that sales and net profit for the second quarter and the first half of FY2018 were not strictly comparable with the relevant periods of the previous year since US sales for Q2 and the first half of last year includes the benefit of the 180-day exclusivity for generic Gleevec which expired in July 2016.
In addition, following the implementation of India’s new Goods and Service Tax (GST) with effect from July 2017, India sales are now reported net of GST while sales in Q2 and the first half last year included excise duty which is now subsumed in GST. Dubbed the biggest tax reform since India’s independence, GST replaces most indirect taxes currently in place, eliminating a multiplicity of taxes and their cascading effect in the country.
Halol Approval - Key Trigger?
Sun’s weak number still beat some analysts’ estimates, though regulatory approval for the Halol site is seen as critical for further momentum.
Jefferies said that Sun’s results were ahead of its expectation led by a margin beat. “Revenues were 2% below expectation. Margins though surprised positively at 20.7%. Lower tax rate and higher other income led to earnings 19% ahead of expectation,” Jefferies equity analyst Piyush Nahar said in a note dated Nov. 14.
HDFC Securities said that Sun’s second quarter was a “marked improvement” over Q1, with the domestic business recovering from the GST impact, higher sales of subsidiary Taro, and lower R&D spends. (Also see "Sun Plunges To Quarterly Loss, Outlook Challenging" - Scrip, 14 Aug, 2017.)
Nevertheless, the stock broking firm noted that Sun’s management had maintained its top-line guidance of single-digit decline in FY18 despite revenues falling in the first half and “no visibility” on product approvals from Halol in the second half due to a delay in re-inspection.
“With the domestic business expected to normalize from second quarter FY18 and dwindling US sales, we believe that this would be difficult to accomplish,” HDFC securities said in its results review Nov. 15.
Both Jefferies and HDFC Securities have emphasized that a compliance all-clear at Sun’s Halol site was critical for its growth trajectory. Jefferies said that the key “near term trigger” for Sun remains the Halol inspection [by the FDA]. “We expect Sun to see recovery from the second half, though it will be gradual,” the added.
HDFC Securities said that with remediation at Halol completed, re-inspection remains the “key monitorable for a re-rating.”
Sun has been shifting some of the products filed from Halol to alternate sites as part of risk mitigation efforts.
Psoriasis Asset
Meanwhile, Sun referred to a potential delay in regulatory approvals for its late stage psoriasis asset, tildrakizumab, in Europe, although US plans appear unaffected. The FDA accepted the tildrakizumab BLA in May this year.
Sun’s boss Shanghvi said that the European approval is likely to be “moved from mid-2018 to end-2018 or early-2019” due to the “extension of the scope of the clinical sites” under review by the European Medicines Agency.
No further specifics were shared immediately, but Sun said it continues to expect the BLA approval in the US in FY2019.
The EMA accepted the tildrakizumab filing in March 2017. Sun entered into a licensing pact with Almirall SA in 2016 for the development and commercialization of tildrakizumab for psoriasis in Europe. Earlier this year, Sun sealed a long-term manufacturing pact with South Korea’s Samsung BioLogics for tildrakizumab.
Sun also indicated that it is in the process of ramping up Odomzo (sonidegib), acquired from Novartis AG , in the US. (Also see "Sun Acquires Novartis Cancer Drug In Specialty Push" - Scrip, 22 Dec, 2016.) It expects to leverage its dermatology sales force there to co-promote the product to dermatologists. Sun already promotes Levulan [aminolevulinic acid HCl] to dermatologists in the US for actinic keratosis – precancerous lesions.
Sun recently announced the approval of a new label for Odomzo by the US FDA, reflecting sustained duration of response for 26 months in the treatment of locally advanced basal cell carcinoma.
“This will help in strengthening the position of this product in the US market,” Shanghvi said.