CMD Dilip Shanghvi says Sun Pharma will stay focused on the US.
“Will you stop using a purse just because your pocket was picked at some point of time?” The question comes from Dilip Shanghvi, the soft-spoken chairman and managing director of Sun Pharmaceuticals, India’s largest drug firm by market capitalisation.
The mild aggression gives way to philosophy soon enough. “In life, you have to go through a series of events and have to learn from each and every experience,” Shanghvi, 54, says in the ground floor conference room of his corporate headquarters in Mumbai.
Shangvi is talking about the recent setbacks (he prefers to call them challenges) his company went through. First, the so-far unsuccessful attempt to acquire Israel-headquartered Taro Pharmaceuticals, and second, the regulatory trouble for its US subsidiary, Caraco.
He doesn’t hide his disappointment over the Taro promoter family going back on their commitment to sell a stake to Sun Pharma and says his team would be more careful from now on.
Neither setback would, however, prompt him to go off the beaten track — a conservative company focused on its bottom line rather than top line, and that will stay focused on the US. “We are not ashamed of being called conservative. It is our way of doing business,” he says.
Shanghvi has reason to be proud of his way of doing business. His 26-year-old company, four years older than his son, Aalok (who works as a product executive with the company), has been one of the most efficient Indian drug companies globally.
In 2008-09, Sun Pharma’s net profit was a whopping Rs 1,818 crore on net sales of Rs 4,272.3 crore. Both sales and profit had increased 27 per cent and 22 per cent, respectively, over the previous year.
The company has been growing at an average of 34.72 per cent in turnover and 43.77 per cent in terms of net profit for the past five years (see table). It is sitting on a cash reserve of over Rs 3,500 crore at a time when most other Indian drug makers are feeling the burden of over-leveraged costly acquisitions.
“We are not a topline-driven company and what matters to us is the value we create for our shareholders,” says Shanghvi.
However, many analysts say, unlike other generic companies, Sun Pharma is trying to build its entire business by focusing on only two geographies — India and the US. Revenues from emerging markets are just about 10 per cent of the total. Intense competition and decline in the growth of drug prescription sales in the US also do not augur too well for US-centric generic companies, they say.
Shanghvi, a drug trader-turned manufacturer, says he respects other people’s opinions, but is sure about his strategy, which has served the company quite well all these years.
“The US is the world’s largest market and we will remain focused on that market in future as well,” he says. Sun Pharma did five acquisitions in the US, starting with the loss-making Caraco Pharmaceuticals in 1997, for an initial investment of just $7.5 million.
Revenues from the US may be affected in the current year due to regulatory issues at Caraco, Shanghvi admits, but will not give any prediction. Sun Pharma, which earns over 10 per cent of its turnover from business with Caraco, holds a 76 per cent stake in that company. Sun Pharma aims at compensating the losses with better sales in the domestic market and from continued sale of own products in the US.
In June 2009, US marshals had raided Caraco’s manufacturing facilities in Michigan, Farmington Hills and Wixom, and seized 33 different drugs. The FDA, the regulator, banned Caraco from manufacturing and selling these drugs in the US until there is assurance that the firm complies with manufacturing standards.
Shanghvi frankly admits he is not sure when the regulatory issues with Caraco could be sorted and bring the company back to track.
“FDA makes regulatory changes and they make us aware of those changes through action. Unfortunately, Caraco had to face such an action,” he said.
But he is not sitting idle. Caraco has entered a Consent Decree with FDA, the first step to rectify defects and to resume manufacturing operations. Consultants are working on remedial measures. Caraco is also retrenching about 350 employees in the US, to trim costs. Shanghvi has also brought in a new management team for Caraco.
On Taro, Shangvi says, it isn’t a problem, it’s an opportunity which Sun tried to exploit. In May 2007, Sun Pharma had agreed to buy Israel-based Taro for $454 million. Taro unilaterally terminated the agreement after a year, as Taro’s fortunes turned around to post profits.
Following this, Sun had sued Taro in the US for not honouring the deal and launched a hostile open offer to acquire the remaining shares, invoking provisions of the merger agreement. Taro had questioned the validity of the special tender offer in an Israeli court, which ruled in favour of Sun Pharma. Now the issue is pending before the Supreme Court of Israel, for the final judgment.
“Our lawyers say we have a very strong case and we are confident of winning the case,” said Shanghvi. Sun Pharma is now the largest stakeholder in Taro, with 36 per cent of equity, and will have to shell out another $40 million or so to acquire another five million shares to access about 12 per cent shareholding of the promoter family of Taro Chairman Barrie Levitt.
| STEADY STRATEGY | ||||||
| Year | Net sales | %chg* | Net profit | %chg* | M-cap | %chg* |
| March ‘05 | 1,191.07 | 20.96 | 396.2 | 25.51 | 9,763.64 | 45.07 |
| March ‘06 | 1,636.82 | 37.42 | 573.25 | 44.69 | 17,944.88 | 83.79 |
| March ‘07 | 2,132.05 | 30.26 | 784.27 | 36.81 | 21,929.87 | 22.21 |
| March ‘08 | 3,360.32 | 57.61 | 1,486.90 | 89.59 | 25,175.44 | 14.8 |
| March ‘09 | 4,279.52 | 27.35 | 1,817.73 | 22.25 | 23,038.79 | -8.49 |
| Consolidated figure in Rs crore * Change over previous year | ||||||
The hostile situation is not a deterrent for Sun Pharma in pursuing the acquisition, even after two years. So far, none of the executives or staff of Taro, other than the promoters, have opposed takeover by Sun Pharma, says Shanghvi.
“It is a case of honouring a signed agreement. Whatever may be the outcome, our investment in Taro is still profitable,” sums up Shanghvi. Sun has invested about $105 million in Taro to acquire its 36 per cent stake.
Despite the huge cash reserves, Shangvi has no plans for another buyout in the near future. “Let me first digest the ones that I have already acquired,” he says, with a laugh.
