BackSun Pharma’s Protonix settlement quantum sours investor sentiment
Share declines 3.2% on a much-higher-than-expected quantum of the patent-infringement damages to be paid
Premium(Hemant Mishra/Mint)
An at-risk generic drug launch in the US market is a calculated gamble that a company takes, knowing fully well the risks if the bet goes wrong. Sun Pharmaceutical Industries Ltd’s at-risk launch of generic Protonix, an anti-acid reflux drug, has backfired. It has to pay a substantial sum of $550 million ( ₹ 3,207 crore at current exchange rates) as patent-infringement damages to Pfizer Inc. and Takeda Pharmaceutical Co. Ltd as part of a settlement.
The blow was not unexpected as the matter has been in litigation—Sun Pharma had even made a partial provision—but the quantum was much higher than expected. Its share declined by 3.2% on Thursday as investors reacted to the development.
Sun Pharma had provided for a charge of ₹ 584 crore in its FY13 financials and will have to provide for the remaining ₹ 2,623 crore in FY14. The additional provision will be a one-time hit on its earnings during the fiscal year. But the profits from the sale of this drug during the at-risk period also form part of its net worth.
The net impact on the business should be considered as the settlement amount less the profit earned from the sale of this drug. A Nomura Research note estimates that Sun Pharma may have earned $400-500million in revenue from the sale of this drug.
The bigger impact, however, is on its cash balance. The total outflow represents 42% of Sun Pharma’s cash and cash equivalents, which amounted to $1.3 billion as of 31 March. Investors may have to scale back expectations for acquisition-fuelled growth funded by this cash pile, at least in the near to medium term.
But this cash pile would anyway have reduced by $600 million if Sun Pharma had not called off its plan to buy out minority shareholders in its subsidiary Taro Pharmaceutical Industries Ltd. Though Sun would have owned 100%—it owns 66% at present—of Taro, it continues to retain control and consolidate Taro’s financials with its own. The cash that it would have otherwise spent in that merger is adequate to fund the settlement amount.
In the longer term, Sun Pharma’s business will continue to generate cash and build back its cash pile. Of course, if the company finds a suitable target it can always borrow to fund the acquisition as well. The settlement is a sentiment-spoiler even if it is a one-time hit on the financials. Sun Pharma will want to put this episode behind it and move on, though it may become more cautious while evaluating at-risk opportunities. Shareholders will now await positive developments for the mood to change, such as better-than-expected financial performance, a big-ticket launch or a value-for-money acquisition.
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