Sun Pharma’s damage-control exercise does not quell the many concerns

PT Jyothi Datta Mumbai | Updated on January 22, 2019

But some analysts question why this disclosure was being made only after much prodding.

In its third major clarification in two months, drug-maker Sun Pharmaceutical Industries has said that it was making a few operational changes involving its domestic distributor for finished medicines and auditor of its subsidiaries, among others.

The move attempts to quell whistle-blower and investor concerns and the associated price volatility around its stock. Sun Pharma’s stock price had fallen over 12 per cent on Friday but has since recovered to end Tuesday, up almost 5 per cent at ₹418 on the Bombay Stock Exchange.

Market-watchers, though, are divided on whether Sun’s clarifications take issues head-on or end up confirming some of their worst fears.

Distribution change

Sun on Tuesday said that it has “transitioned” the distribution of its domestic formulations business from Aditya Medisales Ltd (AML), its current distributor, to a wholly owned subsidiary of Sun Pharma. The change will become effective by the first quarter of FY20, after regulatory approvals were received.

Last month, Sun Pharma promoter and Managing Director Dilip Shanghvi had indicated that a distribution change could be considered by the management, as questions had been raised on routing domestic finished drugs through a related entity. AML had become a related party only in FY18, he had said.

Explaining its transaction with third party Atlas Global, Sun said that its consolidated balance sheet (as on March 31,2018) had reflected a liability towards obligation of supplies to Atlas Global Trading amounting to ₹2,238 crore ($345 million).

“This liability was in respect of Atlas assuming the damages on account of Protonix patent litigation settlement entered by Sun Pharma which was disclosed in Sun Pharma’s Annual Report FY14,” Sun clarified.


But some analysts question why this disclosure was being made only after much prodding. “The amount involved is over ₹2,200 crore. This should have been said upfront in a transparent manner and not tucked away in an annual report,” an analyst said, adding that his discomfort was similar with the disclosure on AML as well.

Sun explains that its Halol facility (Gujarat) came under the US Food and Drug Administration’s scanner over its Current Good Manufacturing Practices (cGMP) in September 2014. This was resolved in June 2018, nearly 4 years later.

“The parties to the supply contract have now agreed in principle, that Atlas will assign its rights and obligations arising from this contract, to a wholly owned subsidiary of Sun Pharma. This assignment will ensure that the Loans & Advances given to Atlas will be settled. On conclusion of this transaction, in the consolidated balance sheet, this loan and the obligation will cease to exist as it gets squared up. This transaction is expected to be concluded in FY19,” it added.

Addressing other investor sore points, Sun said it had initiated efforts to induct SRBC & CO LLP, its statutory auditors, as auditors of its subsidiaries as well, presently audited by Valia & Timbadia. But on the contentious loans or guarantees to Suraksha Realty, Sun Pharma said, “neither any loans nor guarantees have been given to Suraksha Realty.” Shanghvi’s brother-in-law is Sudhir Valia is part of the “dream team” of Suraksha Reality.

Published on January 22, 2019

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