Caraco’s FDA issues main obstacle in Sun Pharmaceutical’s growth path

Caraco’s FDA issues main obstacle in Sun Pharmaceutical’s growth path

Sun Pharmaceutical Industries Ltd’s revenue growth forecast of 28-30% for fiscal 2012 (FY12) indicates its management is anticipating good news flow during the year. Of course, one factor is the acquisition of a controlling stake in Israel’s Taro Pharmaceutical Industries Ltd. Taro’s numbers are reflected in Sun Pharma’s earnings, in full, since the December quarter.

But Sun Pharma has to also contend with a high base effect in the first half of FY12, which will partially offset the contribution from Taro. Sun Pharma had earned one-time revenue from the sale of certain products in the US market during the exclusivity period in the first half of FY11.

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In the March quarter, Sun Pharma’s sales rose 35% to Rs1,463 crore. Taro’s sales during this period had gained 21% to $107 million (Rs480 crore today). Adjusting for Taro’s sales, Sun Pharma’s revenue would have fallen by a bit, attributable to the one-time product revenue from the US market in the year-ago period.

While Taro has added to revenue, its profitability is relatively lower. During the March quarter, Sun Pharma’s operating profit margin fell by nearly 9 percentage points from a year ago. Lower margins at Taro were the main reason, and others were a change in Sun Pharma’s product mix and remediation charges incurred by its US-unit Caraco Pharmaceutical Laboratories Ltd. Manufacturing at these facilities has been stopped, because they were not compliant with US Food and Drug Administration (FDA) guidelines.

Though Taro’s inclusion has affected Sun Pharma’s profitability, it also provides an opportunity going ahead. Closer integration with Sun Pharma’s US operations—the US is Taro’s main market also—will lower costs and improve margins for Taro. Taro has also got a few product approvals for the US market in recent months and its Canadian manufacturing facility—which had got a warning from FDA— has been declared compliant.

A major win and hope for Sun Pharma in FY12 will be a resolution of Caraco’s issues with FDA. Becoming FDA compliant again will open the route for product introductions in the US market from a number of facilities. That could give a significant boost to sales and profit growth.

Meanwhile, Sun Pharma’s domestic operations continue to do well, growing ahead of the market. Its tie-up with Merck and Co. Inc. will see it introduce branded generics in India and emerging markets. As this side of its business scales up, it will also become a significant contributor to growth. For now, it’s back to looking at the US market for visibility on how Sun Pharma will meet its upbeat guidance for FY12 and whether Caraco gets a green signal from FDA.

Graphic by Yogesh Kumar/Mint

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