India's Sun Pharma sees multiyear earnings hit as it fixes plants, integrates Ranbaxy

Sun Pharma Managing Director Dilip Shanghvi

Sun Pharmaceutical Industries founder and managing director Dilip Shanghvi said earlier this year his first priority after the purchase of Ranbaxy Laboratories was to solve regulatory and integration issues. This week, he presented the bill to investors.

After the market close on Monday, July 20, Shanghvi provided sobering details on the financial impact of the efforts to reorganize the firm as India's top drug company and the fifth largest generic producer in the world moves ahead from the heady all-stock deal selling Ranbaxy Laboratories to Sun for $3.2 billion in March of this year.

On the regulatory front, 5 manufacturing plants under the U.S. FDA scanner for quality issues--one owned by Sun at Halol and four from Ranbaxy--Mohali, Dewas, Poanta Sahib and Toansa--were front and center.

"A key priority for us is to ensure continued 24x7 cGMP compliance by continuously enhancing systems, processes and human capabilities to meet global regulatory standards at all our manufacturing facilities," the company said in a statement released July 20.

"As a part of this process and in order to address the cGMP deviations at its Halol facility, the company has undertaken various remedial measures. These remedial measures have resulted in supply constraints for some of the products. We expect this situation to continue for some more time till all the remedial steps at Halol are completed. The remedial action at the Mohali, Dewas, Poanta Sahib and Toansa facilities is on track. We are working towards the fulfilment of the requirements of the U.S. consent decree and will try to expedite the resolution for at least one of these facilities."

As well, Sun said it "may decide to discontinue certain non-strategic businesses."

All of this work, Sun said, would hit the bottom line, with integration costs also on the upswing in the near term, though moves to sell, or discontinue some Ranbaxy lines should result in savings and tighter operations in the longer term with a three-year horizon.

Sun did not provide specific figures, but said the measures needed to be taken would hit revenues and profits in the current financial year started April 1 and into the next one before recovery and growth in the 2017 financial year and then full costs savings would be evident in the following year.

"Our target for the synergy benefits from the Ranbaxy acquisition has increased by 15-20% as compared to our original target of $250 million by FY18," Sun said in the statement.

"This will be achieved by focusing on overall profitability improvement driven by revenue and procurement synergies, manufacturing rationalization and various additional cost-management measures."

On Tuesday, shares in Sun fell as much as 16%, Reuters said, on track for their biggest daily fall. Analysts who joined a call with Shanghvi after the statement was released said next year's earnings may fall 8% to 10% below current consensus estimates.

Business Line newspaper and others said that Shanghvi also told analysts on the call that two or three businesses have been identified for evaluation on core fit and were described as low-margin businesses with no long-term strategic value.

But he also said that Ranbaxy's over-the-counter business is not among those, as the high-margin, high-volume business is a key base for U.S. growth.

- here's the release from Sun Pharmaceutical
- and stories from Reuters, Business Line, the Economic Times and Live Mint

Special Report: The 25 most influential people in biopharma in 2015 - Dilip Shanghvi - Sun Pharmaceutical