Sun Pharma to revise guidance after FDA’s raid on Caraco

Dilip Shanghvi, chairman and managing director, Sun Pharmaceutical Industries, and Sudhir Valia, director held a conference call held to discuss the FDA raid on its US subsidiary Caraco Pharmaceutical Laboratories. This event has come as big blow for Sun. It has withdrawn its current guidance and will issue a revised one, in due course. The issue is expected to have a significant short term impact on Caraco and some adverse impact on Sun’s short term performance too.

The call started with a caveat that Caraco was a separately listed company in the US, which limited Sun’s ability to give responses on the issue

Guidance withdrawn
The company has not stated a time frame for the revised guidance. Caraco makes some of its products itself and the rest are distributed (made by Sun Pharma). One-third of its $337mn (Rs 1,634 crore at 1 USD = Rs 48.5) revenues are from manufactured products, some of which are made by third-parties too.

  • As of now, Caraco will not be able to make products at its facilities and so sales will be affected.
  • The impact on manufactured products made by third-parties is not clear.
  • Sun Pharma does not expect its products, being distributed by Caraco, to get affected. Even if there is some impact it will be in the short-term.

If we assume that all of Caraco’s manufactured products (either made by it or third parties) get affected, that’s a sizeable figure. Sun’s consolidated sales figure in 2008-09 was Rs 4,270 crore ($880mn) and Caraco’s manufactured product sales contributed about 12-13% to that.

It’s a long road ahead
The current seizure has been done under a court order. It is a difficult process and Sun Pharma’s understanding is that it will have to interact with the FDA and other external lawyers to try and work out a consent decree. The decree will have a list of do’s and don’ts for the company before it comes back to compliance with FDA norms. Once it comes back into compliance, the decree will be withdrawn.

According to the management, based on what the FDA has said, Caraco is far away from the regulator’s desired level of compliance. It will have a lot of work to do before it gets there.

There is the option of shifting manufacturing of the products to other locations. The management said it have not considered this option. Shifting products, is almost like applying for fresh approvals to the FDA and the efforts involved versus benefits gained will have to be evaluated.

It is difficult for the company to predict how long it will take for the issue to get resolved. But Sun has made it clear that it stands behind its subsidiary and will focus on getting it back on its feet.

Credibility at stake
Sun said that four of its facilities in India have been audited by the US FDA in recent months and no major observations have arisen as a result of these inspections. So, it believes that it has the right processes in place.

When asked what could have been done to prevent the FDA action, Mr Shanghvi stated that he would rather look ahead, than the past. Sun gives a lot of importance to credibility and this event is a negative development for it, he said.

Delisting Caraco not being considered
One question asked was whether Sun Pharma could have averted this, by having greater degree of involvement and integration of operations with Caraco. Especially, since the FDA had no major issues with Sun’s facilities in India. Mr Shanghvi responded by stating that Caraco was a separately listed company and that SEC regulations forced it to operate on an arms length basis.

On then being asked if a delisting is being or has been contemplated, Sun said this was not the best time to consider it. The priority is to get the issues with FDA resolved. A follow-up question was why this was not done in the past. The investment consideration involved did not justify this move, said the management. That seemed to imply that the amount spent, in buying out the minority shareholders, was not worth the potential returns.

Read more from

FDA sidewinder hits Caraco, Sun Pharma suffers collateral damage

Caraco claims sound financial position, but FDA action will harm performance

Read more from the web:

Detroit Free Press: FDA confiscates 33 drugs from Caraco

Hindu Business Line: Caraco’s FDA rap to hurt Sun Pharma

Mint: Action against Caraco to hit Sun revenues

Economic Times: St hammers Sun Pharma as USFDA seizes 33 drugs of arm

Business Standard: US FDA seizes drugs at Sun unit

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