It’s only 30 years on that Sun Pharma is hitting its stride, having become one of the world’s most profitable generic drug makers.
Sun Pharmaceutical Industries Ltd isn’t a new kid on the block. The company was founded in 1983 with a manufacturing plant in the small Gujarat port town of Vapi, a product line consisting of five therapies to treat psychiatric ailments and a marketing team consisting all of two people.
It’s only 30 years on that the firm is hitting its stride, having become one of the world’s most profitable generic drug makers—net profit for fiscal 2013 stood at Rs.516.55 crore—and India’s biggest pharma company by market value. At Rs.1,21,811 crore, as of 6 December, Sun Pharma’s market value is about three times that of Dr. Reddy’s Laboratories Ltd, the next most valuable Indian drug maker.
With $12.6 billion of personal wealth, founder and managing director Dilip Shanghvi, 58, is ranked the fifth richest person in India and 89th in the world as of 6 December, according to the Bloomberg Billionaires Index.
Investor confidence is clearly reflected in the stock movement. From 1 January 2013 to 1 January 2014, Sun Pharma rose 54.97%, more than twice the BSE Pharma Index’s 22.89% return. Back in 1994, when the firm went public, its initial public offering was oversubscribed 55 times.
The firm had Rs.6,327 crore cash in hand as of 30 September 2013, enough to sustain the spree of acquisitions that has propelled its rapid growth in recent years.
“Sun has a strong foothold in both the domestic and overseas markets. It also has a war chest full of cash, which it is likely to use for further acquisitions both in India and overseas,” said Phani Sekhar, a pharmaceuticals analyst at Angel Broking Pvt. Ltd.
Sun Pharma made 13 acquisitions between the late 1990s and 2012, starting with the purchase in 1997 of Detroit-based Caraco Pharmaceutical Laboratories Ltd. That was a year in which it also bought stakes in two Indian pharma firms—Tamilnadu Dadha Pharmaceuticals Ltd and MJ Pharmaceuticals Ltd.
In 2010, it acquired a majority stake in Israel-based Taro Pharmaceutical Industries Ltd, a move that more than doubled its revenue in the US to $1.1 billion from $484 million. Within two years, Sun Pharma bought two more firms in the US—Dusa Pharmaceuticals Inc.and the generic business of URL Pharma Inc.
“As far as geographical expansion is concerned, we think there is a great deal of scope for growth in the US as well as emerging markets,” said Uday Baldota, senior vice-president (finance and accounts) at Sun Pharma. The US generic market is about $70 billion, where our size is just about $1.5 billion. We would also like to build our presence in Europe and Japan.”
Global acquisitions will continue to boost the overseas revenue of Sun, analysts said.
“We believe the US will continue to be the core earnings driver for Sun Pharma, with support from India and rest of the world. We estimate 22% compounded annual growth rate in core earnings per share over FY13-15,” according to the annual report on Sun Pharma by Motilal Oswal Research dated 12 September 2013.
Apart from India and the US, Sun has manufacturing facilities in Israel, Mexico, Hungary, Canada, Bangladesh and Brazil. In India, the firm has 10 manufacturing facilities spread across Gujarat, Jammu and Kashmir, Sikkim, Tamil Nadu, Maharashtra and Dadra and Nagar Haveli. Sun has eight plants in the US.
Sun Pharma has so far escaped the kind of troubles that rival Indian generic drug makers such as Ranbaxy Laboratories Ltd have had with the US drug regulator Food and Drug Administration, or FDA.
In May 2013, Ranbaxy pleaded guilty to US felony charges of selling adulterated antibiotic, epilepsy and other drugs from its Dewas (Madhya Pradesh) and Paonta Sahib (Himachal Pradesh) plants—which are still unable to supply the US market—and paid a record $500 million fine.
Again in September, FDA banned imports from Ranbaxy’s Mohali plant in Punjab. In June, the European Union also fined Ranbaxy for blocking supply of cheaper anti-depressant drugs in the market.
Sun Pharma, however, received a total of 20 Abbreviated New Drug Application (ANDA) approvals, including that for Doxorubicin Liposomal injection, a sought-after cancer-fighting medication. ANDA is an application for US generic drug approval for an existing licensed medication.
The approval for Doxorubicin is likely to benefit Sun Pharma significantly in the US considering that Janssen Pharmaceuticals Inc. (a division of Johnson and Johnson), which has a 50% share of the market for the cancer fighting drug, announced a shortage of the drug in September.
FDA gave clearance to Caraco for manufacturing three products after an inspection of its facilities and confirmed that the company is in compliance with its manufacturing good practices requirements.
Sun Pharma may also benefit from the expiry of patents on several drugs. The global generics market will grow to $430 billion in 2016, up from $242 billion in 2011, as many brand-name drugs lose their patent protections, according to a recent report from Dolat Capital, a Mumbai-based investment management and financial advisory company.
The report said $100 billion worth of drugs are expected to go off patent over the next five years. “In 2011, only 25% of global spending on drugs was for generics. In 2016, generics’ market share will increase to 35% and Indian generic firms are gearing up for this opportunity,” it said.
“Expiry of patents will leave a lot of scope for generic drug makers in the US. Also, under the Obamacare programme for affordable health, the US administration is likely to procure cheap drugs from generic pharma companies,” said Sekhar of Angel Broking.
Sekhar also said that while the Patient Protection and Affordable Care Act of the US, popularly called Obamacare after President Barack Obama, will exert downward pressure on generic drug prices, a weaker rupee and higher sales will make up for any price reductions.
Founder Shanghvi, known as Dilipbhai to close friends, started the firm by selling Lithosun to cure bipolar disorder. Even today, pyschiatric therapies dominate the product portfolio of Sun Pharma, followed by cardiology.
Sun Pharma also has a strong mix of drugs across niche therapies, including neurology, nephrology, gastroenterology, orthopedics and ophthalmology.
The firm also separated its research business into a separate unit in 2007—Sun Pharma Advanced Research Co—to provide more focus on research and development and for spreading the business risk.
“Sun Pharma’s focus has been to build a business where you create long-term value, a business which is sustainable and predictable. We have been using different strategies in different markets to achieve this objective,” Baldota explained.
“In India, we selected chronic ailments or therapies as a focus area. Drugs for chronic ailment have a long prescription life. We started with psychiatry when we began and then added other chronic areas like cardiology, diabetic and neurology among others . This helped us in building business that offers a sustainable revenue stream.”
“In the US in addition to plain generics we focused on complex products, or on products where we had technology advantage.”
The firm, however, has faced a few setbacks as well. For instance, its plan to acquire a 100% stake in Taro did not succeed.
Sun Pharma acquired a 66% stake in Taro in 2007 for $450 million, but got control of the company only in 2010 after a legal battle with the promoters, the Leavitt family. It offered to buy the balance 34% stake as well, but decided to drop the plan when some hedge fund investors did not agree with the valuations. “This is not a very big drawback. The only impact it may have is that Sun’s revenues may not grow as per their expectations,” Sekhar said.
