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The stock of Sun Pharma tanked almost 9 per cent in trade on Monday, after the company reported weak performance in the March quarter.
The company's operating profit margin slipped from 44 per cent in the March 2014 quarter to a sedate 14 per cent in the recent March quarter on three counts.
Key reasons
One, integration of Ranbaxy, whose operating profit margin is estimated to be less than a fifth of Sun Pharma, dragged the Sun Pharma’s consolidated profitability. Ranbaxy’s base business margin was in the high single-digit levels prior to the merger, while Sun enjoyed operating margin in excess of 40 per cent.
Second, Sun had provided for certain one-time charges in the March quarter. This includes professional charges and expenses relating to harmonisation of Ranbaxy’s policies. This led to an almost 10 percentage point drop in the company’s consolidated operating profit margin during the March quarter.
Third, Sun Pharma is in the process of rationalising Ranbaxy’s product portfolio across geographies – India, US and other emerging markets. This led to a sharp decline in the company’s revenues and profitability.
Besides, weakness in the high-margin US market on account of price erosion driven by channel consolidation and inability to supply key products such as generic version of Doxil due to remediation efforts at its Halol plant (Gujarat) also ate into Sun Pharma’s profitability.
Research spend
Higher research spend – at 9.4 per cent of sales, on its novel Psoriasis MK-3222 molecule, in-licensed from Merck and Co also impacted Sun Pharma’s profit margin last quarter.
The company's performance over the next few quarters is expected to remain docile, as the company is in the process of integrating Ranbaxy’s products across markets.
Sun Pharma has a strong track record of turning around companies it had acquired in the past'- Taro pharma and URL Pharma being good examples. Hence, synergies - product, field force and markets - from the Ranbaxy merger should hold Sun Pharma in good stead over the next three years.
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