Five reasons why Sun Pharma is looking at Japan to expand its global operations

Company is in talks to buy part of the Novartis branded business in Japan for about $300 millon

In what could be the largest acquisition by an Indian company in Japan, Sun Pharma is in talks to buy part of the Novartis branded business in Japan for about $300 millon. The deal would give Indian company a base to expand its business in the world’s second largest pharma market.

1. About $14 billion to $16 billion worth of drugs are coming off patent in Japan over the next two years. This coupled with increased penetration of generics should help the company achieve some traction in the Japanese market.

2. The move into Japan will help the company diversify its geographic presence. Currently India and US, its core markets, account for 75 per cent of sales. The only Indian company with a significant presence in Japan is Lupin which gets 10 per cent of its revenues from that market.

3. Sun Pharma’s focus on branded, higher margin markets should get a boost. The company’s revenues in rest of the world markets has been coming down given reduction in exposure to low margin markets. Operating profit margins had dropped from a peak of 43.5 per cent in FY14 to about 28 per cent post the Ranbaxy integration.

4. While deal valuation is estimated at $300 million, Sun Pharma would want to use the opportunity to get a good deal given regulatory issues Novartis has had to face. Earlier in the year the Swiss firm was asked to temporarily suspend its operations in Japan. Sun’s $4 billion Ranbaxy acquisition was at an attractive 2.2 times sales given the latter’s FDA issues.

5. With Sun Pharma sitting on $2 billion of cash (about Rs 13,000 crore) any value accretive acquisitions like the one the company is pursuing in Japan could lead to a rerating of the stock.