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Sun Pharma: Will Caraco turnaround? - Views on News from Equitymaster
 
 
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  • Mar 26, 2002

    Sun Pharma: Will Caraco turnaround?

    Sun Pharma's stock has moved up in last couple of months mainly on the back of developments in its US vehicle, Caraco Pharma. The company's investment in this subsidiary has been widely described as a key area of concern. With new US product approvals gaining pace, the management is expecting this subsidiary to breakeven in the current year. However, it seems to be too early to decide on the company's turnaround.

    First, why the concern? As against Sun Pharma's investment of US$ 12.8 m (US$ 7.5m towards equity and US$ 5.3m towards debt) in this affiliate, Caraco has accumualated deficit in excess of US$ 56 m, with negative networth of US$ 23 m. Additionally, Sun Pharma's contigent liability in the form of bank guarantee's for Caraco is in excess of US$ 15m. Even in 2001, Caraco continued to make substaintial operating losses, though sales recorded a sharp jump.

    Caraco: Operating losses continue...
    US$ m 2000 2001
    Net Sales 2.4 5.9
    Operating Income -6.1 -4.0
    Interest Expense (Net) 1.5 1.8
    Net Loss -7.6 -5.8

    Though Caraco's sales improved considerably on the back of 3 ANDA approvals received in last year, the company could not manage to come out of operational losses. Further, rising interest expense, inspite of resheduling/ renegotiating loan agreements, remains a key area for concern.

    Caraco currently has 6 approved product ANDAs (Abbreviated New Drug Application) and 4 ANDA's are in the pipeline. Most of these product approvals were received towards the end of year and these would help boost revenues of Caraco in the current year. Caraco's stock recently gained attenttion for receiving tentative approval for generic version of Glucophage, which is a multi billion diabetic product from Bristol Myers with sales currently pegged at US $ 1.8 bn annually.

    Though Glucophage is a blockbuster product, we do not expect major revenues for Sun Pharma. This is due to the fact that there would be several other generic companies, marketing the same product. Goldline Inc., which is a subsidiary of generic major Ivax, has already received approval for marketing the drug, a week before Sun Pharma and there are atleast 5 other companies whose application is pending. Further, Bristol Myers, the originator for the product, has already launched once a day formulation for Glucophage and is aggressively trying to switch patients to this new delivery system.

    We believe that though Caraco's business has picked up monentum, it would be too early to comment whether the company would breakeven in the current year, as targeted by the management. Considering, that all the product approvals received by the company till date are non exclusive and comparatively small in size, breakeven seems difficult. In the meantime, Sun Pharma's stock price is expected to move inline with developments over Caraco Pharma.

     

     

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