Sun Pharma takes steps to limit damage, discontinues AML and unwinds loans

Sun Pharmaceutical Industries, India’s largest drug maker which is facing investor ire for certain corporate governance practices, on January 22 announced major steps to undo the damage, including discontinuation of super stockist arrangement with related party Aditya Medisales (AML) and unwinding loans given to a third party.

The management said it had initiated steps to induct SRBC & Co, its statutory auditors, as auditors of subsidiaries that are currently audited by Valia & Timbadia, another sore point for investors.

In a filing with the stock exchanges, the company said distribution related to its domestic formulations business will transition from AML, the current distributor, to a wholly-owned subsidiary of Sun Pharma.

“This change will be effective by Q1 FY20, after receipt of all requisite regulatory approvals,” the statement to the exchanges said.

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Sun Pharma also denied granting any loans or guarantees to Suraksha Realty, a firm controlled by Sun Pharma’s co-promoter Sudhir Valia. “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,” it stated.

In response to another investor concern, Sun Pharma said its domestic formulation business is entirely routed through a promoter-owned entity called AML, a super stockist that was declared as a related party of the company only during FY18.

In an analyst call in December 2018, the management said the arrangement with AML was made for an efficient tax structure and it is ready to review the same if investors aren’t comfortable. AML had revenues of Rs 8,000 crore in FY18.

Moneycontrol had reported on January 21 about Sun Pharma discontinuing its AML arrangement.

The stock of the pharma major took a hit last week, dropping 12 percent in intraday trading on January 18 on reports of a whistle-blower complaint to the Securities and Exchange Board of India (SEBI) alleging transactions over Rs 5,800 crore between AML and Suraksha Realty, out of the money generated from the publicly-listed company.

Moneycontrol was unable to independently review the whistle-blower complaint. The report alleged the Sun Pharma’s payment to Aditya Medisales was transferred to the promoter and group companies between 2014 and 2017.

Unwinding loans

The company said it will be unwinding a loan transaction of Rs 2,238 crore with a third-party called Atlas Global Trading. The company’s FY18 annual report doesn’t mention the name of Atlas Global Trading.

“This liability was in respect of Atlas assuming the damages on account of the Protonix patent litigation settlement entered into by Sun Pharma, which was disclosed by us in our FY14 Annual Report,” the company said. It agreed to pay $500 million to Pfizer in 2013 after losing the patent battle over the latter’s acid reflex drug Protonix. In 2008, the company launched the drug at risk, which means that the certain patents of the drugs are still alive.

“In September 2014, Sun Pharma’s Halol facility (Gujarat) was impacted by USFDA cGMP issues which were finally resolved after nearly four years in June 2018. These cGMP non-compliances resulted in supply constraints and Sun Pharma was not able to adhere to the agreed supply schedule with Atlas. Sun Pharma, in FY18, has funded Atlas towards non-fulfilment of its supply obligations till the time such obligations are fulfilled as per the agreement. The said funding was included in loans and advances schedule of Sun Pharma’s FY18 consolidated balance sheet,” it said.

“The parties to the supply contract 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 and advances given to Atlas will be settled. On conclusion of this transaction, in the consolidated balance sheet, this loan and obligation will cease to exist as it gets squared up,” the pharma major added.

This transaction is expected to be concluded in FY19.

According to an old Credit Suisse report, Atlas is a group company of SuGandh Group. Another company from the SuGandh Group, SuGandh Management Consultancy, was a related party of Sun Pharma, an enterprise under significant influence of key management personnel or their relatives till February 28, 2013.