low-priced buyouts, cost control & ensuring sustainable revenues, did the trick for sun pharma. what next? STEVEN PHILIP WARNER answers…
At a time when the Indian pharmaceutical sector, once considered immune to downturns, lies battered, Sun Pharma, during FY2008-09, grew its topline by a remarkable 27.3% y-o-y to clock Rs.42.72 billion, and its bottomlines rose by 22.2% y-o-y to touch Rs.18.17 billion. All this catapulted this pharma giant to the 44th spot on the 2009 B&E Power 100 List, making it the only pharma name to feature in the rankings.
Uday Baldota, VP – Investor Relations, Sun Pharma, tells us, “We created sustainable revenues streams, with greater speed to market. A focus on cost leadership and making acquisitions which yielded high ROI proved to be the right strategies…” Although the strategic combo he gives seems straight out of the consultant’s rule book, critics claim the fact is that Sun Pharma has often appeared to be making seat-of-the-pants decisions in the most critical area of inorganic growth, namely M&As – over the past 14 years, Sun has acquired 14 distressed assets. But there is another side to the story as many of these buyouts have come at “low prices” – as Uday defends – therefore renovating them into profit-churning assets proved less challenging. And if fortune has to favour the brave – at a time when other Indian generic giants are facing the heat and are selling-off their crown jewels – Sun’s acquisitions have actually started bearing fruits, key elements powering its financial vehicle even during a downturn!
At the same time, Sun has always been open to diversifications into the right business lanes. When it laid hands on Dadha Pharma & Milmet Labs, it entered the oncological & opthalmological spaces respectively. And if its $454 million Taro deal comes through (“The deal is still on, with some court decisions awaited,” – Uday), it will get an entry into the dermatological market. Thanks to those cheap buyouts, it’s 2009 now, and Sun’s gross profit margins, which for FY2008-09 stood at an extremely high of 79.9%, have never ever looked better!
There is also the fact that Sun has always remained a cost leader in the generics drugs platform. Sun’s net operating margin is a tremendous (43%) as compared to a modest 10% for the other top ten pharma players. Has it simply a play on the raw material sourcing or is there some critical strategic intent in this situation? Sun claims that this has been because of their focus on costs, which has been the biggest priority for them; and the claim does not come without empirical evidence.
For example R&D! Sun also doesn’t believe in over-investing in R&D. Its R&D budget allocation ratio is only 0.5% of its revenues (for FY2008-09), while that figure for the industry stands at a much higher 14-15%! As per a report by E&Y, “Only 2% percent of projects in the pre-clinical phase are expected to make it to Phase I testing and, of these, only one in five are likely to be approved.” So what’s the average success rate of your primary compound finding a place as a pill in the market? A tiny 0.4%! Rahul Sehgal, President, Nestor Pharmaceuticals also propounds how Sun is taking the right route in this regard as he states, “The R&D which are required, involves a lot of cost. There was never much point in Indian manufacturers spending too much on R&D. R&D spending should now be ratcheted up – significantly and rapidly.”
Surely, Sun seems to have fared better at maintaining the balance between costs and returns during the past year; however the question stands – will this sun continue to shine even in the current year?
At a time when the Indian pharmaceutical sector, once considered immune to downturns, lies battered, Sun Pharma, during FY2008-09, grew its topline by a remarkable 27.3% y-o-y to clock Rs.42.72 billion, and its bottomlines rose by 22.2% y-o-y to touch Rs.18.17 billion. All this catapulted this pharma giant to the 44th spot on the 2009 B&E Power 100 List, making it the only pharma name to feature in the rankings.
Uday Baldota, VP – Investor Relations, Sun Pharma, tells us, “We created sustainable revenues streams, with greater speed to market. A focus on cost leadership and making acquisitions which yielded high ROI proved to be the right strategies…” Although the strategic combo he gives seems straight out of the consultant’s rule book, critics claim the fact is that Sun Pharma has often appeared to be making seat-of-the-pants decisions in the most critical area of inorganic growth, namely M&As – over the past 14 years, Sun has acquired 14 distressed assets. But there is another side to the story as many of these buyouts have come at “low prices” – as Uday defends – therefore renovating them into profit-churning assets proved less challenging. And if fortune has to favour the brave – at a time when other Indian generic giants are facing the heat and are selling-off their crown jewels – Sun’s acquisitions have actually started bearing fruits, key elements powering its financial vehicle even during a downturn!
At the same time, Sun has always been open to diversifications into the right business lanes. When it laid hands on Dadha Pharma & Milmet Labs, it entered the oncological & opthalmological spaces respectively. And if its $454 million Taro deal comes through (“The deal is still on, with some court decisions awaited,” – Uday), it will get an entry into the dermatological market. Thanks to those cheap buyouts, it’s 2009 now, and Sun’s gross profit margins, which for FY2008-09 stood at an extremely high of 79.9%, have never ever looked better!
There is also the fact that Sun has always remained a cost leader in the generics drugs platform. Sun’s net operating margin is a tremendous (43%) as compared to a modest 10% for the other top ten pharma players. Has it simply a play on the raw material sourcing or is there some critical strategic intent in this situation? Sun claims that this has been because of their focus on costs, which has been the biggest priority for them; and the claim does not come without empirical evidence.
For example R&D! Sun also doesn’t believe in over-investing in R&D. Its R&D budget allocation ratio is only 0.5% of its revenues (for FY2008-09), while that figure for the industry stands at a much higher 14-15%! As per a report by E&Y, “Only 2% percent of projects in the pre-clinical phase are expected to make it to Phase I testing and, of these, only one in five are likely to be approved.” So what’s the average success rate of your primary compound finding a place as a pill in the market? A tiny 0.4%! Rahul Sehgal, President, Nestor Pharmaceuticals also propounds how Sun is taking the right route in this regard as he states, “The R&D which are required, involves a lot of cost. There was never much point in Indian manufacturers spending too much on R&D. R&D spending should now be ratcheted up – significantly and rapidly.”
Surely, Sun seems to have fared better at maintaining the balance between costs and returns during the past year; however the question stands – will this sun continue to shine even in the current year?
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