India's Sun sees sharp Q1 profit drop, but Shanghvi not worried

Dilip Shanghvi

India's top drugmaker and fifth largest in generics globally saw net profit plunge 60% in the first quarter of its financial year as it absorbed costs from its takeover of Ranbaxy Laboratories earlier in 2015, but founder and managing director Dilip Shanghvi pledged that integration would eventually bring greater rewards.

Sun said that in the first full quarter since it bought Ranbaxy Laboratories in an all-share deal from Japan's Daiichi Sankyo valued around $4 billion, net profit slid to INR4.79 billion ($74.5 million) in the quarter ended June 30, from INR12 billion in the same period a year earlier, on revenues that grew just 3% to INR65.2 billion, using adjusted figures.

But on an Aug. 10 earnings call with analysts, Shanghvi confirmed much of a July 20 warning on earnings of flat revenues and costs to overhaul operations and fix plants now under ban or scrutiny by the U.S. FDA. The surprise warning saw shares plunge--but then rebound as word on the street was that the company had a solid recovery plan that would build on all of the assets.

On Tuesday, Shanghvi said that the plan to bring all of the resources together was on track.

"Our focus has been to find a way to achieve these synergies as early as possible," he said. "And we are only talking about recurring synergies in this number. We are not talking about one-time synergy. So I would say that a large part of this synergy will come from procurement, then revenue synergy, productivity improvement and longer term I think major success we will be able to drive is from productivity increase in our R&D, so that we can file more complex and more products globally."

Shanghvi, who was dubbed India's richest man earlier this year after the acquisition, hinted that cultural issues between the companies also played a part.

"We acquired a sizeable business that was run very differently from the way in which the Sun business is run," Shanghvi said. In 2013, Ranbaxy pleaded guilty to charges in the U.S. of selling adulterated drugs and agreed to a record $500 million fine and other steps in a consent agreement with the U.S. Department of Justice.

He also said that investors should be open to more costs related to the transaction.

"Some one-off charges would continue in the near future but we expect the magnitude of the charges to be significantly less going forward," he said.

In April, Daiichi Sankyo sold its remaining 8.9% stake in Sun, exiting a deal that saw it purchase Ranbaxy for $4.6 billion in 2008 to expand globally only to run into a storm of manufacturing and management woes.

In July, Sun outlined a plan to work triage on four Ranbaxy manufacturing plants banned by the U.S. FDA in the past 5 years. And that may mean one unit may not make it, the Economic Times reported.

The plan now is to get the plants in Mohali, Dewas and Toansa back online in an orderly fashion, placing a priority on Mohali, and leaving the plant in Poanta Sahib to take down its former lead role to the U.S. market and keep producing for other markets, including the World Health Organization as well as Europe and Australia, the Economic Times said.

In addition to the Ranbaxy unit, a plant owned by Sun at Halol also has to clear U.S. FDA regulatory hurdles.

- here's the Sun's website