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Sun Pharma announces structural changes in bid to repair reputation; puts out clarification

Sun Pharma announces key structural changes to deal with a dent in its image and plummeting stock prices

twitter-logoE Kumar Sharma | January 22, 2019 | Updated 13:46 IST
Sun Pharma announces structural changes in bid to repair reputation; puts out clarification

In what Sun Pharma calls an 'Investor Update', the biggest Indian pharma company, announced some key structural changes to repair its public image. Analysts see it as a step in the right direction but perhaps the timing may be driven by an urgent need to deal with a dent in its image and plummeting stock prices on the bourses.

In a note, Sun Pharma said:

1. Domestic formulations distribution to be transitioned to Sun Pharma's wholly owned subsidiary: Sun Pharma's distribution related to India domestic formulations business "shall be transitioned from Aditya Medisales Ltd., the current distributor, to a wholly owned subsidiary of Sun Pharma. This change will be made effective by Q1FY20, post receipt of all requisite regulatory approvals."

2. Loans & Advances: Unwinding of a transaction: As on March 31, 2018, Sun Pharma's consolidated balance sheet, reflected a liability towards obligation of supplies to Atlas Global Trading ("Atlas") amounting to Rs 2,238 crore (~US$ 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 (Page No. 91, Note 48 (iii)).

In its note, Sun Pharma said, on September 2014, the company's Halol facility (Gujarat) was impacted by USFDA cGMP issues which were finally resolved in June 2018, after nearly 4 years. These cGMP non compliances resulted in supply constraints thereby, Sun Pharma was not able to adhere to the agreed supply schedule with Atlas. As per the agreement, Sun Pharma in FY18, funded Atlas towards non-fulfillment of its supply obligations till the time such obligations are fulfilled. The said funding was included in Loans & Advances schedule of Sun Pharma's FY18 consolidated balance sheet (Annual Report FY 18, Page 162, Note No. 7, Loans (Non-Current) - Loans to Employee & Others).

The parties to the supply contract, it said, "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.

3. Appointment of auditor in subsidiary companies: In another major move, Sun Pharma has initiated steps to induct S R B C & CO LLP, its statutory auditors, as auditors of subsidiaries that are currently audited by Valia & Timbadia.

4. Loans or Guarantees to Suraksha Realty: Here, in what seems more of a clarification, the note reads, "Sun Pharma hereby confirms affirmatively that neither any loans nor guarantees have been given to Suraksha Realty. Sun Pharma would like to dispel all falsehoods being spread about its financial dealings with Suraksha Realty. The company states unequivocally that it does not have any financial transactions with Suraksha Realty."

Meanwhile, the pundits are still unsure about the clarification announced by Sun Pharma as there is very little clarity on what will be its net impact. However, Sun Pharma's profits and premium valuation may take a hit and may take some more time to correct. Sun Pharma needs to address its core issues and figure out the next course of action.

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