The results of Sun Pharmaceuticals Ltd for the quarter ended June were way below market expectations, with both domestic and export revenues falling.

The company’s 76% US subsidiary, Caraco Pharmaceutical Laboratories Ltd, reported a sharp 56% drop in sales and a loss of $3.6 million (Rs17.32 crore) at the gross profit level. Caraco made its quarterly filing (Form 10-Q) with the Securities and Exchange Commission, which provides some more details on its performance.

Revenue from products manufactured by Caraco fell by 59% to $13.1 million and that from products that are manufactured as well as distributed by Sun Pharma fell 54% to $35 million.

Caraco had got a warning letter from the US Food and Drug Administration (FDA) relating to standard operating procedure (SOP) compliance at one of its manufacturing units last year, delaying some product approvals.

Late in the June quarter, FDA even seized inventory worth $22.9 million from one unit. The company has created a reserve of $8.4 million related to its seized inventory in the June quarter, which caused the subsidiary to report losses. Given the ongoing struggle with FDA, near-term performance is expected to be weak.

The generic version of Wyeth’s Protonix (pantoprazole) accounted for 46% of total revenues or about $22.1 million. According to two analysts, sales of the generic Protonix are in line with their yearly estimate of about $100 million. In the previous year, two such Para IV filings—for abbreviated new drug applications which challenge an existing patent in order to launch a slightly different generic version of the same product—with one-off revenue potential accounting for 57% of revenues.

Graphics: Paras Jain / Mint

In other words, sales of Para IV products continue to form a large portion of Caraco’s sales. Stripped of these, the core distribution business is barely growing.

Note that the distribution business hasn’t been impacted by FDA-related problems, since the issue is with some products manufactured at Caraco’s own plants.

But as far as sales of products with one-off potential goes, the soon-to-be launched generic version of Eloxatin (oxaliplatin injection), where the company has a shared exclusivity, will help cushion the drop in sales of Caraco’s manufacturing business. Even the generic Protonix sales are expected to continue for some more time, considering that the company has increased its inventory to 205 days worth of sales at the end of June compared with 140 days at the end of March.

According to Citigroup, the build-up in inventory implies that Sun is likely to continue selling Protonix. The company could also have partially been in preparation for the generic Eloxatin launch. In other words, sales of products with one-off revenue potential will continue for some time.

Sun Pharma shares have corrected by about 8% since the news of FDA inventory seizure and in terms of valuations it has given up its reign as the most valuable pharma stock.

Analysts are awaiting further clarity on FDA issue and the stock is likely to underperform in the near-term. Having said that, given the company’s strength in research and development, it is expected to have a healthy product pipeline which will drive long-term growth, and further weakness in the stock may be a good opportunity to participate in Indian pharma.

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