Sun Pharmaceuticals - a bolt from the blue

The $550 mn penalty it has to pay Wyeth Inc is about 78% of its cash balance at the end of FY13

The amount spent by pharmaceutical companies on research is less than they spend on protecting it, be it original research or the post-patent opportunity they intend to tap. And rightly so, given the huge penalty they have to pay, in case they are found violating the norm.

Sun Pharmaceuticals is one such company which had to pay more than it had envisaged after it lost a patent infringement case filed by Wyeth Inc. Sun Pharmaceutical has to pay $550 million (around Rs 3,190 crore) to Wyeth, now part of Pfizer, for launching the generic version of acid reflex brand Protonix (pantoprazole). The amount of penalty is almost equal to Sun Pharmaceutical’s previous year consolidated profit of Rs 3,080 crore.

Sun Pharmaceuticals, along with generic major Teva Pharmaceutical, has been fighting the case for nearly a decade. Teva has to pay $1.6 billion as part of the settlement. The settlement was reached after a jury gave a judgment in favour of the American company. Pfizer wanted $3 billion in settlement, based on its revenue just before the launch, but ultimately settled for $2.15 billion. Had the settlement not been reached Sun Pharmaceuticals would have had to pay $960 million.

Sun Pharmaceuticals had clearly underestimated the penalty as it had provided only $100 million in its balance sheet in case of an adverse impact. The huge difference is not only going to punch a big hole in its balance sheet but will also have a severe impact on its risk taking ability.

The payment of $550 million is nearly 78 per cent of its current cash balance of Rs 4,059 crore (FY13). That leaves little cash for its much talked about acquisition. Though the company generates good cash each year, a penalty amount which was more than the sales it had achieved in the US will not only put Sun Pharmaceutical on the back foot, but also make other Indian pharmaceutical companies before tapping the US market.

With little to show for their research efforts in recent times, multinationals are aggressively protecting their patents and indulging in all kind of ways, like ever-greening their old molecules to keep their revenue taps running. In order to protect their patents even after they have expired they do not shy away from taking help from their government to arm twist Indian companies. Pfizer has been the most vocal among them, and this victory has given them, along with other multinational to strengthen their fight against generic companies.

For Sun Pharmaceutical, as has been the case with Ranbaxy which also settled a different kind of case by paying $500 million, this event can be a setback, at least for the short to medium term. Speaking on valuation, not only the market capitalization will reduce by the amount to be paid (which it did today itself falling by nearly 3% and losing nearly Rs 3,200 crore) but also the loss in opportunity cost, which has yet to be seen in the price.