A look at Sun Pharma’s financial spreadsheet leaves you highly impressed with the company’s performance in the last decade. The company has been consistently logging twice the industry growth rates, operating margins continue to be amongst the best in the industry and RoCE continues to be efficient. The chart below shows historical comparison of operating margins with some other leading pharma companies.
What’s the secret behind these successes? For one, the company operates in niche formulations segments such as psychiatry, cardiovascular, gastroentology and neurology. While most of the top Indian companies have focused on antibiotics and anti–infectives, Sun Pharma focused on therapeutic areas such as depression, hypertension and cancer. The company has introduced the entire range of products and has gained leadership position in each of these areas. Being a specialty company insulates Sun Pharma from the industry growth. The first quarter results for FY02 explain this to some extent. While the industry was affected to a large extent by a slowdown in the domestic formulations market, Sun Pharma logged a growth of 26% in revenues. Over the years Sun has also used the strategy of acquisitions and mergers to grow quickly. It acquired Knoll Pharma’s bulk drug facility, Gujarat Lyka Organics, 51.5% in M. J. Pharma, merged TamilNadu Dadha Pharma & Milmet Labs and acquired Natco’s brands. Post Merger with TamilNadu Dadha Pharma the company gained presence in gynecology and oncology segments.
The company has been very aggressive in new product launches, which enables it to keep its exposure to the Drug Price Control Order (DPCO) to the minimum (19% of total sales). Sun Pharma has launched 11 products across 8 divisions in 1QFY02. These products coupled with a bundle of 33 products launched in FY01 are expected to help in sustaining growth momentum in coming years.
Lastly, aggressive marketing strategy coupled with customer centric focus of the company has made Sun Pharma’s products a favorite among doctors and specialists.
Perhaps the only area of concern is the continuing losses of its US based affiliate Caraco Pharma, which is the company’s vehicle for launch of generics. Sun has invested US$ 12.8 m (US$ 7.5 m towards equity and US$ 5.3 m towards debt) in this affiliate. Caraco continued to be in red, posting a loss of US$ 1.7 m for the quarter ended in March'01. The mounting losses of Caraco is a major concern for Sun Pharma. Caraco Pharma has recently received 3 FDA approvals, which may help the company to trim losses and breakeven sometime later next year. Sun intends to build a clearly differentiated line of generics where margin erosions are not that steep. Over a period of time it intends to move up the value chain to branded generics that offer a products/technology/delivery advantage.
Another negative perception is the lack of basic R&D. Currently, there is no guidance from the management, except for the fact that the company is spending significant resources for basic research. Though the company faces little competition from MNC’s in this segment, the situation would certainly change after product patents become a reality (Post 2005).
However, the company’s strong fundamentals and management capability cannot be ignored. Given the fact that the company operates in lifestyle segments and its products command strong brand value Sun Pharma is least prone to brand switching. Thus, the outlook for the company looks promising, at least in next few years.
Till recently, the success of Sun Pharma, to a large extent, could be attributed to the reverse engineering skills. However, to sustain growth in the long term Sun Pharma will have to display its capabilities in basic research as well as penetrate the export market.