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Sun Pharma: Wishing away the clouds - Views on News from Equitymaster
 
 
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  • Dec 23, 2000

    Sun Pharma: Wishing away the clouds

    It has been one of India’s fastest growing pharmaceutical companies. Over the last two years it has managed to grow its topline by over 30 percent year on year when the overall pharma industry has grown by not more than 12 percent per annum. Last year the company achieved a 33 percent growth in turnover, a 20 percent pretax margin and a return on networth of 24 percent. A fantastic performance by any standard. The company in question: Sun Pharma. Let’s take a look at what’s behind the company’s success.

    Sun Pharma adopted a three pronged approach over the last five years. First of all, it focussed its energies on the relatively faster growing therapeutic areas. Second, it adopted the acquisition route for building a critical mass. And finally, it has been very aggressive in new product launches which not only enables to keep its exposure to the Drug Price Control Order (DPCO) to the minimum but also enables it to charge higher prices for its products.

    Sun Pharmaceuticals manufactures formulations in niche segments such as psychiatry, cardiovascular, gastroentology and neurology. These segments are among the faster growing segments of the pharma industry. While most of the top Indian companies have focussed on antibiotics and anti–infectives, Sun Pharma focused on therapeutic areas such as depression, hypertension and cancer.

    Sun has also been extremely aggressive in the launch of new products with almost 24 new product launches in its niche areas, slated for the current year itself (10 of these have already been launched). These are expected to help the company achieve at least a 25 percent growth in the coming year too. The company derives almost 40 percent of its revenues from products introduced in the past five years. Consequently its exposure to revenues accruing from products under the DPCO is a relatively low 19 percent of domestic formulation sales.

    Over the years Sun has used the strategy of acquisitions and mergers to grow quickly. It acquired Knoll Pharma’s bulk drug facility, Gujarat Lyka Organics, 51.5 percent in M. J. Pharma, merged Tamil Nadu Dadha Pharma, acquired Natco’s brands and merged Milmet Labs.

    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 Caraco, which has registered a loss of over US$ 9.7 m for the year ended December 1999. This loss however includes the US$ 6.3 m that were incurred for R&D related to product filings. Caraco has submitted around nine abbreviated new drug applications (ANDA) which are awaiting US FDA approval. These are expected to come through in the first quarter of the calendar year 2001. The company has also clarified that the primary reason for continuing losses at Caraco is the delay in receiving approvals from the US FDA. Most of these products are relatively more complex and the company foresees relatively lower competition for these products in the generic market. Infact, 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. Keeping in view the extensive consolidation that is expected to take place in the US generic market, this may be the best option to create long term value.

    In the current year too, Caraco is expected to report a loss of US$ 5–6 million. It is expected to break even only in the later half of next year. Sun Pharma has however, not provided for this diminution in the value of its investments in its books.

    So far Sun has relied on reverse engineering the products patented abroad. However, post 2005 it would have to develop its own New Chemical Entities (NCEs). The company has already initiated research in three therapeutic areas for developing NCEs. The management however, refuses to specify which are these therapeutic areas.

    This aside, in the short term at least (until 2005) the company’s outlook seems promising. Sun Pharma is expected to post a net profit of Rs 1,134 million in the fiscal year 2001 (a 25 percent growth over 2000). The company also expects its topline to continue growing at a compounded annual growth rate 25 percent over the next two years. Bottomline, there is shine in this Sun.

     

     

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