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Sun Pharma: Research meet excerpts
Jan 9, 2006

Sun Pharma is the fifth largest pharma company in the domestic market with a strong focus on the lifestyle segment and increasing forays in the international markets. We met the management of the company late last week to discuss about the company’s future growth prospects. Here are the excerpts of the meeting. About the company

Sun Pharma is a leading domestic pharma company with a 3.27% market share (as per August 2005 ORG IMS MAT data) and a strong presence in the lifestyle therapeutic segment such as cardiology, neurology and diabetology. It started focusing on the exports market by acquiring Caraco Pharma in the US in FY02. Further, the company increased its stake in the latter to 61% in FY04, thus taking over the majority control. Exports contributed to around 40% to the company’s revenues in FY05. With the help of Caraco, Sun Pharma has been able to grow its US business, which brings in synergies by way of backward integration in both manufacturing and R&D.

Strategic focus: Sun Pharma’s strategy is to focus on four key areas to spur growth. The first is the emphasis on speciality prescription brands in India and the emerging markets. The second is to strengthen its presence in the US generics market. Third is to focus on speciality APIs where the competition is not likely to be as fierce and investments in new drug discovery and delivery systems.

Speciality focus: Sun Pharma is a speciality company aiming to augment its revenue streams by focusing on chronic therapy segments such as cardiology, neurology and diabetology. More importantly, the company is looking to differentiate its products by using complex technology, which will mean relatively lesser competition. Two of the technologically complex products, which the company is currently focusing on, are Lipidox and Lupride Depot. Sun Pharma has planned a phased product rollout, wherein it will first launch products in the domestic market, then the semi-regulated markets and then scale up the products for launches in the regulated markets of US and Europe.

Increasing US presence: Sun Pharma has stated that the key to compete in the increasingly competitive US generics market is to focus on lowering the cost. In 2002, Caraco signed an agreement with Sun Pharma Global, a wholly owned subsidiary of Sun Pharma, for transfer of 25 products over the course of five years. As per the agreement, Sun Pharma would get a certain stake in Caraco in lieu of every ANDA filed by Caraco for which Sun Pharma will be the technology provider. At present, Caraco has selected 15 products and it is expected to take around 18 months for the remaining products to get transferred. It must be noted that currently Sun Pharma’s stake in Caraco stands at 73%, which is expected to increase to 76% based on the technology transfer.

ANDA status: Currently, 37 ANDAs are pending approval between Caraco and Sun Pharma, out of which 13 are from Caraco’s stable, largely comprising of Para III filings. The remaining 24 are from the Indian site comprising of large volume products having thin margins, products involving legal challenge and products which are not in the tablet form (Caraco currently manufactures dosages only in tablet forms). Recently, Caraco won a Para IV challenge to manufacture and market the generic version of Ultracet. It has also received the US FDA approval. The market for this drug is pegged at US$ 300 m. However, it must be noted that there are two generic players other than Caraco present in this market, which include an authorized generic and the generic version launched by Par ‘at risk’.

European focus: Sun Pharma has plans to enter the European generics market through the partnership route. At present, the company is working with a partner in the three key European markets, which are UK, France and Germany. The company is planning to establish a presence in the bulk space and does not intend to compete in the formulations space.

Branded generics market witnessing healthy growth: The management expects the branded generics market, which contributes around 7% to total revenues, to grow at 40% plus per annum over the next two years. Here again, technically complex specialty products with relatively lesser competition are expected to drive growth in these markets as well. The company is focusing on those markets, which have similar market characteristics as India in terms of brand promotion. These markets include the CIS countries, China, South East Asia, South Africa and the Middle East. It is also eyeing the markets of Brazil, Peru, Mexico and Columbia. At present, Sun pharma has around 740 products registered across 26 countries with another 350 awaiting registration.

Effect of the product patent law: In FY05, Sun Pharma launched 40 new products contributing 6% to sales. In the last three years new product launches have contributed around 28% to sales. However, the scenario is likely to change with the introduction of the product patent law in India. It must be noted that the company does not expect the law to impact domestic companies including Sun Pharma atleast till 2008. Till then Sun Pharma will be looking to launch pre-1995 products in the domestic markets. However, from a long term standpoint the company expects the new product contribution to come down to 4% of sales as against the current 6%.

New drug discovery: Sun Pharma currently has completed Phase I human trials on its NCE in Europe. While the company has not yet divulged the details of this molecule, it is expected to enter Phase II trials and the company is preparing to file for an investigational new drug application (IND) for the same in the US. The company on the completion of Phase II trials will reveal further details on this molecule.

Acquisition strategy: Sun Pharma’s acquisition strategy involves acquiring under performing businesses that offer significant value proposition and turning them around. In the last ten years, the company acquired 12 such businesses, which includes the bulk plants at Ahmednagar and Halol, TDPL brands (oncology, fertility, anesthesiology, pain management) and the ophthalmology brands. Recently, the company acquired two manufacturing facilities at Hungary and Ohio, US. While the Hungarian acquisition will increase Sun Pharma’ bulk capacity and enable it to strengthen its presence in the international markets, the Ohio acquisition will equip the company in filing new products in the US markets. The Hungarian acquisition will also give Sun Pharma an entry in the controlled substances space, wherein currently it does not have a presence. The company will also contemplate making further such acquisition in the future.

Capex: Sun Pharma ahs outlined a capex of Rs 1 bn, which will largely be used for scaling up operations for the acquisitions that it has made. It has recently raised zero coupon FCCBs to the tune of US$ 350 m to fund further acquisitions.

What to expect?

At the current price of Rs 688, the stock is trading at a price to earnings multiple of 22.5 times its annualised 1HFY06 earnings, which seems stretched. We shall soon be initiating our coverage on the company.

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