Quick Take | Sun Pharma: Is this much sunlight enough for investors?  

Here are some of the measures, their impact and what remains to be done.

Measure: Sun Pharma has said it will ‘transition’ the distribution of the domestic formulations business from Aditya Medisales, a promoter-related entity, to Sun Pharma’s 100 percent subsidiary. This change, it says, will be made effective by the quarter ended June 2019, after getting statutory approvals.

Impact: This will eliminate a concern about a company related to the promoters undertaking the all-important task of distribution. Sun Pharma had disclosed that this structure was relevant earlier but not after the introduction of the Goods and Services Tax. It had also said that Aditya Medisales had earned sales of Rs 8,000 crore, Ebitda margin of 1.7 percent (Rs 136 crore) and net profit margin of 0.4 percent (Rs 32 crore). Although not significant, these profits will remain within Sun Pharma now.

Unfinished business: Now, transition is corporate-speak for buying out the distribution from Aditya Medisales. Sun Pharma may have to pay a consideration, which can become a concern since it’s a related party transaction. The deal structure appears to have been decided, since Sun Pharma intends to complete the process within six months. Knowing the structure and/or the consideration and how it was arrived at, would have helped investors get more clarity. If this comes to shareholders for approval, the details may become known then.

Measure: Sun Pharma has said it will unwind a loan transaction entered into with Atlas Global Trading, amounting to Rs 2,238 crore ($345 million). In 2013, Sun Pharma had to pay some $550 million for settling litigation on the generic version of a drug called Protonix. It assigned around $400 million of this liability to Atlas and in return promised to supply drugs to Atlas at a discounted price for a specific period. (That Atlas had assumed these liabilities was revealed in Sun Pharma’s FY14 annual report without naming the former).

But Sun Pharma was unable to supply the drugs in question, because it got hit by the Halol facility’s regulatory issues that began in September 2014 and ended after four years.

To make up for this, in FY18, Sun Pharma provided funds as loans/advances to Atlas, till the time Sun Pharma could actually fulfil its supply obligations.

In short, Atlas funded Sun and in return was to get discounted drugs. The profit it earned on this would service Sun Pharma’s obligation to Atlas. Since Sun Pharma’s supplies got delayed, it decided to fund Atlas.

Now, Sun Pharma has said that one of its subsidiaries will assume this liability and the rights related to it. This will be completed in the current quarter itself.

Impact: The overall transaction of the assumption of liabilities and right to get supplies at a discount will continue. Atlas will be replaced by a Sun Pharma subsidiary. Since both the asset and the liability will reside within Sun Pharma’s consolidated balance sheet, the transaction will get cancelled out.

Unfinished business: A question investors may have is who is Atlas? An October 2014 analysis by Anubhav Aggarwal, a Credit Suisse analyst, of 67 subsidiaries of Sun Pharma provides an answer. It says “Atlas is a group company of SuGandh Group. Another company from the SuGandh Group, SuGandh Management Consultancy, was a related party of Sun (an enterprise under significant influence of Key Management Personnel or their relatives) till 28 February 2013.”

Another question could be whether Atlas will receive a consideration for assigning these rights? If yes, then the amount and the manner of calculating this consideration should also be disclosed. A fair valuation should assure investors that their concerns are being properly addressed.

Measure: Sun Pharma has clarified that it has no financial transactions, either in the form of loans given or guarantees, with Suraksha Realty, a real estate firm where the promoters have an interest.

Impact: This clarifies that no transactions exist between the two companies, either on or off the balance-sheet.

Unfinished business: The questions that have been raised are actually of Aditya Medisales having financial transactions with Suraksha. Now, Aditya Medisales was a distributor for Sun Pharma, which means it was essentially a pass-through for the revenues that belonged to Sun Pharma. If the sums lent are small, then one could say that Aditya Medisales was a separate entity that was free to carry out independent financial transactions. But if these transactions were disproportionate to the size of its balance-sheet or cash profits required to service debt, then it could be viewed differently. This is not for Sun Pharma but for Aditya Medisales to answer, and if the regulatory authorities are investigating the matter, then for them to find out.

Measure: Sun Pharma will ask its statutory auditors to take over audit of subsidiaries that are currently being audited by Valia & Timbadia.

Impact: It addresses the concern that one of the partners in this firm was investigated in a stock rigging case. Sun Pharma had clarified earlier that this was a case pertaining to 20 years ago, and none of the partners or audit firms were a party to the investigation. While it may not seem material, the move ends any concerns that may have existed on this front.