Sun Pharma: Cloudy weather

The financial impact of the US FDA warning should not be severe. However, the firm needs to ensure that the issues are sorted out.

It’s unfortunate that the US FDA has sent out warning letters to Caraco, a subsidiary of Sun Pharma. The management, however, says that would not disrupt sales though the FDA may withhold approval of pending new drug applications. That could hamper the pipeline; of the 96 ANDAs (abbreviated new drug applications) awaiting approval, 19 are from Caraco. Industry watchers believe that there shouldn’t be any serious financial implications though they are a tad anxious.

Meanwhile, Sun Pharma’s sales in the September 2008 quarter were up a robust 76 per cent y-o-y to Rs 1,178 crore driven by some brisk business in US formulations — Caraco itself grew 197 per cent y-o-y to $122 million. Drugs that sold well were generic Pantoprazole (used to treat ulcers in the oesophagus) and Ethyol ( an injection used prior to cancer treatment) and together they contributed around $70-80 million of the sales of US formulations. These two drugs, the company says, will not be impacted by the FDA enquiry.

But Sun has to contend with the ongoing legal tussle with Wyeth over generic Pantoprazole which it continues to sell ‘at risk’ probably because the product fetches high gross margins estimated at around 80 per cent. Sun is making the most of rival Teva having exited the market ; as of now it’s just Sun and Wyeth, which has an authorised generic, who continue to sell Pantoprazole. Should Wyeth win the case, Sun could be saddled with damages.

Sun has done well in the home market too, turning in a revenue growth of 20 per cent. However, the operating profit margin (OPM), at nearly 46 per cent — up by close to1300 basis points —disappointed analysts who had pencilled in higher margins expecting better realisations from Para IV drugs — products that are sold exclusively by generics players for a certain period of time.The net profit, though, grew 124 per cent to Rs 490 crore, partly boosted by higher other income. Sun should end FY09 with revenues close to Rs 4,300 crore and a net profit of Rs 1,800 crore . However, the litigation on various fronts, including that for Taro, is worrying.