Sun Pharmaceutical Industries Ltd’s sales declined by 14.7% over a year ago and its operating profit fell by 36.9% in the September quarter (Q2). Quite a few analyst estimates had pencilled in almost similar numbers. But there were some surprises on how the numbers were reached.

The biggest was in its India business, which contributes 26% of sales, as sales rose by a mere 1% over a year ago. Most companies reported low domestic sales growth, partly due to soft sales in the acute segments. A relatively dry monsoon hits sales growth of drugs for ailments that spike with the weather. A bad monsoon means less business for doctors too! Sun Pharma said it also withdrew bonus offers from the market to improve profitability. This has affected near-term sales growth, but the company says it is confident of improving its share of prescriptions, and sales growth will recover.

The company’s US market sales growth was expected to be subdued over a year ago, chiefly due to a high base effect. On a sequential basis, however, sales have risen by 4.5% in dollar terms. Its subsidiary Taro Pharmaceutical Industries Ltd’s sales declined by 1.4% but ex-Taro, Sun Pharma’s US market sales rose by 9.2%.

Sun Pharma said it has focused on profitability in the emerging markets and rest of the world segments, and avoided business (such as tenders) where margins are low. This has affected growth in both categories. That may explain why, on a sequential basis, margins have improved by 91 basis points to 28.3%, while it has declined by 9.9 percentage points over a year ago. A basis point is 0.01%. High margins were due to the sales of a drug under 180-day exclusivity period in the US market.

What next? A successful resolution of the Halol plant’s compliance-related issues with the US Food and Drug Administration (FDA) is critical. Future sales growth can be much better if that happens. But the warning letter issued to Dr Reddy’s Laboratories Ltd last week must also be making Sun Pharma’s investors worried. They will be hoping for a favourable outcome.

Barring that, the integration of the Ranbaxy Laboratories Ltd’s business continues to have some impact, in terms of integration costs. Sun Pharma said that it is on course to realize the stated synergies of the acquisition. Some of its recent acquisitions abroad should start contributing to better growth rates.

In the near term, FDA’s yes or no to the Halol plant will be a key trigger for the Sun Pharma stock. A no will force investors to go back to the drawing board to assess if it can still maintain sales growth levels, through other strategies. A recovery in domestic sales growth should also be a welcome sign.

In the longer run, the US market is proving to be a tough market for Indian companies, as price pressures build up in pockets. But companies have been hiking prices of products as well, which is inviting criticism and calls for investigations by political parties. How that risk plays out is also worth watching. In the past six months, the Sun Pharma share has declined by 14%.

The writer does not own shares in the above-mentioned companies.