Sun Pharma: Acquiring Growth

The merger of India’s largest pharmaceutical company, Ranbaxy Laboratories, last year with Sun Pharmaceutical Industries skyrocketed the latter to becoming the country’s second fastest-growing company after Cairn India in the middleweight group.

The merger was important in more ways than one. It propelled the Mumbai-based drug maker to becoming the country’s largest and the world’s fifth largest generic pharmaceutical company on a consolidated basis. It also helped Sun Pharma triple its revenue to Rs 7,731 crore from just Rs 2,725 crore a year ago as a local drug maker.

The Indian pharmaceutical market, which is currently worth Rs 96,000 crore, grew at 12-13 per cent in the last four years. This has made the pharmaceutical industry one of the fastest growing for not only Indian companies but also several multinational drug makers. A series of price control measures by the government and the growing generic competition has dampened value growth in the country. However, these companies grew rapidly by reaching out to the largely untapped semi-urban and rural pockets.

Sun Pharma, promoted and led by the astute billionaire, Dilip Shanghvi, has always followed an inorganic growth strategy both in India and abroad. It acquired Ranbaxy in April 2014 for $4 billion (about Rs 24,000 crore) through an all-stock merger deal. The merger was announced in March 2015, after prolonged delays due to investor complaints and a pending investigation by the Competition Commission of India (CCI). This deal, as it was the case with other Sun Pharma acquisitions, was a distressed asset buyout. Ranbaxy was under severe financial stress due to a prolonged US export ban imposed for breaching strict regulatory norms.

Sun Pharma’s other major buys included the 1999 takeover of troubled US drug maker Caraco Pharmaceutical Laboratories, followed by a merger deal with Israel’s Taro Pharmaceutical Industries. In the latter case, the final merger took place only after a fierce and long legal battle with the Israeli promoters.

For Sun Pharma, the Ranbaxy acquisition and merger was a shot in the arm to expand by integrating a much larger product portfolio and market network of the acquired entity. It also helped Sun more than double its sales network as well as production base in the country. “The synergy benefits of the Ranbaxy acquisition have begun to reflect in our financials,” says Shanghvi.

The company, which posted total (consolidated) revenue of Rs 20,376 crore during the April-December period of the current fiscal, drew about 27 per cent its sales revenue from India. The India sales, as predicted after the Ranbaxy merger, grew 7 per cent to Rs 5,493 crore during this period. Sun currently has about a 9 per cent share in the pharmaceuticals market. While the company’s smaller Indian business continued its growth trajectory especially since the Ranbaxy acquisition, its global business faced serious challenges.

The company, which earns more than 70 per cent of its sales from the global generic markets, mainly the US (45 per cent), faced a decline in sales in most markets during the first nine months of this fiscal.

While the growing competition in the global generic drug markets and the related value erosion remains a big threat for Indian drug makers, a couple of recent setbacks specific to Sun Pharma has raised a question mark over its sustainability in the global market. Regulatory issues pending against its manufacturing facilities in the US are a major concern for the company. More serious is the collapse of a four-year-old research and development joint venture with US drug giant Merck to develop and commercialise new and niche products. These will threaten Sun’s future product pipeline; but pharma industry analysts continue to be upbeat about the company as Shanghvi is credited with a sharp business sense and his ability to push his low-cost, high-profit strategy.

unni@businessworld.in; @unni_ch