Though domestic sales are robust, concerns at Caraco and Taro remain.
A healthy 23 per cent increase in domestic formulation sales helped Sun Pharmaceutical report an 11 per cent rise in consolidated revenues to Rs 1,021 crore for the December 2009 quarter. While the domestic market, which accounts for over half its consolidated sales, continues to do well, income from overseas operations suffered on account of issues at Caraco and lower sales of pantoprazole (a drug for treating excess stomach acid) in the US.
Sun’s subsidiary Caraco registered a 7 per cent year-on-year fall in sales to $52 million and a loss of $3 million for the quarter. Though the company is taking action to comply with regulations at its Detroit facility, it has so far not got approval from the US Food and Drug Administration (FDA) to resume manufacturing and has diverted production to its other plants in the US. Hopeful of a resolution to the issue, the company has recalled some employees of Caraco who were laid off earlier in the year.
Operating profit margins (OPM) came down 900 basis points to 37 per cent 36.1 per cent due to higher inventory and compliance costs at Caraco as well as lower sales of high-margin products such as Protonix. The 11 per cent fall in operating profits, higher taxes and lower other income led to a 17 per cent year-on-year drop in net profit.
One of the triggers for the stock will be the outcome of the battle for Israeli generic drug maker Taro Pharma, in which Sun Pharmaceutical has invested Rs 300 crore and holds 36 per cent stake. However, after the recent Israeli Supreme Court judgement asking Sun to maintain status quo on increasing its stake, it will take a while before the dust settles.
Another trigger for the stock is the FDA approval for the US launch of Effexor, an anti-depressant with a market size of close to $3 billion. Analysts say if the approval for the drug comes before the launch of Teva’s version in July, the company will have lesser competition and could get higher revenues.
Since the announcement of its December quarter results, the stock has gained over 6 per cent to Rs 1,542.50. At this price, it trades at 24 times its estimated 2010-11 earnings and captures all the upsides in the near-term.