Sun Pharmaceutical bullish on Japanese market as peers lose interest

India’s largest drugmaker, Sun Pharmaceutical Industries, is expanding in the Japanese market when most of its peers have indicated they are not bullish on it. 

Mumbai-based Lupin is Japan’s sixth-largest drug generics player but it recently said the annual price cuts imposed there had made the market unattractive. It would continue to grow there but only in single digit (in value terms). 

There were also reports that Lupin was looking at selling its Japanese subsidiary, Kyowa. The company did not confirm any such development but it had earlier this year divested the Japanese injectables business to Neo ALA Co, wholly owned subsidiary of Abu Dhabi-based Neopharma Group. 

Most Indian players have exited Japan over the past decade. Ranbaxy was one of the early entrants. It exited a joint venture with Nippon Chemiphar in December 2009. Dr Reddy’s Laboratories, Orchid Chemicals and Cadila Healthcare wound up their Japan business in the following years. They found it did not make enough strategic sense to stay invested in a highly regulated market, one where margins were comparatively lower than in other developed ones. 

A senior official at a pharma firm that had exited its Japan business some years before recently described to Business Standard how the regulatory landscape in Japan has been changing. The government there wants nearly 80 per cent of the pharma market to be of generic drugs by 2020. 

Sunnier

For Sun Pharma, however, its rest-of-the-world markets grew 49.1 per cent during the second quarter. Analysts said this was due to consolidation of Pola Pharma in Japan. Sun had completed its acquisition of Japan-based Pola last January, to strengthen its presence in the dermatology segment. Pola makes and distributes branded and generic products in Japan, the portfolio primarily of dermatology products. 

Sun forayed into the Japanese prescription market in 2016 with the acquisition of 14 established prescription brands from Novartis. Why is it bullish on Japan, when others are wary of the price cuts there? 

Dilip Shanghvi, managing director, said during a recent earnings call: “For long-listed brands, there would be a decline in pricing. The Pola portfolio is a mix of branded product and long-listed products but the majority are of our branded products.”

Sun Pharma has also indicated higher research and development spending in the coming quarters for its speciality business. This would include clinical studies for the China and Japan markets. Shanghvi says of these: “These are mostly products we are developing for markets other than China and Japan. Looking at the size of these (latter two) markets, we do not rule out developing something specific for them.”

Analysts say Sun is betting on the branded products portfolio to sail through pricing pressure in the Japanese market. 

“If it is able to gain significant market share in Japan in the branded segment, then it may make sense in the future. However, Sun has to be very careful about its Japan strategy now, as the country is increasingly becoming a generic drugs market,” said a Mumbai based analyst.  The Japanese market has annual price erosion of seven to eight per cent. 

Sun has also indicated it would continue to focus on developing and utilising Active Pharmaceutical Ingredients for captive consumption and for benefits from vertical integration. Lupin manufactures in India for the Japan market, where it uses its plants primarily for packaging. Sun did not elaborate on its manufacturing rationalisation plan for Japan. Pola Pharma has two manufacturing facilities in Saitama, with capabilities to manufacture topical products and injectables. 

Meanwhile, Sun is in the process of consolidating at Pola Pharma. During the second quarter, Sun’s staff cost was up 10 per cent in absolute terms due to annual increments, speciality staff cost increase and the addition of Pola. The other expenses were also higher due to branding and promotional activities for the speciality business and consolidation of Pola on Sun Pharma Distributors.