Lower sales in the US market could hurt the momentum in the top line and also profits.
The US market has been a good hunting ground for the Rs 3,290 crore Sun Pharma but a couple of warnings from the FDA, the US drug regulator, means that its subsidiary in that country, Caraco, may be prevented from selling new drugs there.
Already, Caraco, in which Sun owns a 72 per cent stake, disappointed the Street reporting a 32 per cent fall in sales in the December 2008 quarter. Given that revenues from the US account for roughly 40 per cent of Sun’s consolidated sales, falling sales at Caraco cannot be good news. Indeed, Caraco’s sales this year might end up flat.
Moreover, business in the home market, which fetches 50 per cent of Sun’s revenues wasn’t as brisk in the last quarter— sales were up just 15 per cent compared with 20 per cent in the previous two quarters. In other words, Sun could end 2008-09 with a top line growth of about 17-18 per cent this year compared with a growth of 58 per cent in 2007-08. That could mean a profit growth of just 16 per cent, which would be lower than expectations.
That’s why after a good run in 2008, the stock lost 8.5 per cent since the results were announced, late last week. Part of the rise in Sun’s revenues in the December 2008 quarter was due to the depreciating rupee.
The operating margin was up 250 basis points y-o-y at 45 per cent , partly because the company saved on costs. It’s unlikely though that Sun will remain as profitable next year if there are delays in the launch of products such as Effexor (anti-depressant) in the US.
In the recent past Sun has managed to sell several generic versions, exclusively in the US, which has fetched it handsome margins.Some generics such as Pantoprozole (used to treat the oeosophagus) were being sold despite the product being under litigation but Sun may choose to minimise such risks in the future. Without these, Sun’s revenues may grow in single digits, in 2009-10, on a higher base, and margins would be under pressure.
