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Sun Pharma In The News

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Indian Drug Cos Should Find a Way to Participate in Innovation Business


Sun Pharma founder Dilip Shanghvi says that the innovation business requires long-term investment

Sun Pharma’s stock has been on a tear this year. It has risen 61.94% so far this year as investors chased defensives with a strong export presence. Lupin, the nearest big competitor, has jumped 42.87% while Dr Reddy’s Labs has risen 36.66%. Sun is one of the fastest-growing pharmaceutical generics firms globally. Its three-year compounded annual growth rate of 41% is higher than global majors such as Teva and Mylan. In the past one year, it has added amarket cap of more than . 50,000 crore. Dilip Shanghvi, who built Sun into a global giant, is not slowing down the pace of expansion. He wants Sun to invest in innovative products and not just be known as a generic player. He is putting in place systems and processes that will make Sun a global pharma company. Already, more than 70% of Sun’s sales come from the US and Shanghvi recently hired Israel Makov, former president and CEO of Teva, as chairman of the company, while he himself has stepped down to be the CEO. In an exclusive interview with ET’s Divya Rajagopal & R Sriram, Shanghvi talks about his plans, his fears and hopes for the future. Edited excerpts:

What do you think about Indian pharma industry’s recent run-in with regulators?

My sense is that Indian companies historically used to sell in unregulated markets. But increasingly now, a large part of the business is coming out of regulated markets. So, the understanding and assessment of requirements — structurally and organisationally — are important transition points. Also, FDA’s expectations on quality and what should be manufacturers’ responsibility are an evolving process. They say that in pharma, the current good manufacturing practice and ‘C’ are very important. So, what is GMP today might not be GMP tomorrow — it is a constantly evolving expectation. So, I think the structure is important so that people within the organisation, those who manage these processes, have the requisite power and authority to ensure that changes are managed effectively. Indian companies aren’t an exception here, because many international companies, including large pharma companies and innovation-based companies, are also going through this process. So, you cannot single out India and you can’t single out small and generic companies. It is across-the-board.

Do you think Indian pharma success stories built over 15 years have taken a beating?

Personally, I feel that a company, which looks at problems of other companies and learns from their mistakes, is a successful one. I would look at this as a learning opportunity rather than a credibility issue.

Has the FDA increased scrutiny?

My understanding is that after the low molecular weight happened in the US, Congress wanted the FDA to have a very consistent foreign manufacturing location inspection policy — all this is the result of that. FDA set up its first international office in China, the next one in India. So, it’s like we have a manufacturing facility in the US and FDA visits us frequently. I think FDA’s concerns are patient-safety.

What has been your learning experience after the Caraco FDA issue. How did you meet the required compliance?

I think, the Caraco issue taught us that we need to treat manufacturing as a global function. Since we were structured differently earlier, we had Caraco as a self-sustained single unit that had its own infrastructure for everything. Now, we are changing our structure. Technology and operations will report globally. We have a central global manufacturing compliance and global quality. We are putting in place practices and processes that are more in line with major regulatory bodies. We are working with them.

Sun gets a lot of revenue from the US. But the US market is also challenging. Regulatory issues apart, the market is highly competitive. What do you think Sun needs to do?

TheUS is a large part of our business. But for the US, we are a very small company. We are not a very large

company by US standards, so to that extent, we have the opportunity to grow our business. But the pharma market in general, irrespective of the US, is changing dramatically. That’s because of the financial constraints faced by various governments and the current international pressure on healthcare. The other major challenge for the industry is managing innovation and what you call better understanding of patients and their needs: the ability to, let’s say, tailor the treatment for specific individuals. Because as science evolves, our understanding will change and that change should allow regulatory agencies to approve drugs in the process to what it was 20 years ago. We try and stay focused on execution, understanding customer needs, innovation and cost. So, all these key drivers make the business more successful.

This quarter we saw three drugs have pepped up your numbers. How does Sun Pharma look post-2015?

This is something I have shared in the past. My limitation is that I don’t have a clear vision beyond this year. I try to stay focused on what I need to deliver this year. As for the next year, we try and see that we remain consistent. So, our focus is to see that we are growing faster than the industry. And whichever product we launch, we do better than competition. We try and manage our operations better than competition. Essentially, we try to be better than what we were the previous year.

Do you think Sun Pharma still has a lot of ground to cover?

I think, we have a long way to go before we can be happy.

Many companies want to be like Teva. How do you plan to achieve that?

You cannot be as big as Teva doing what Teva did 10 years ago. You have to do things very differently. Because environment has changed, market dynamics have changed and you have to adopt your strategy to the current environment.

How will you focus on your product portfolio?

We want our business to develop balance-ofportfolio products that will allow us to grow rather than have a one-growth engine; we want to have multiple engines of growth. So dermatology would be one of the important growth strategies, others would be specialty business within generic business. As of now, we have small business coming from Europe, but no business in Japan. So, we have to find a way to overcome these challenges.

Sun Pharma has a lot of cash on its books and you have done successful acquisitions. Do you plan more acquisitions?

We will look at opportunities to buy new businesses provided they fit in with valuation norms. So far, we have been disciplined about what we buy.

What are the key things you will look for?

Basically, you will look at any acquisition on a financial model. You do not put costs related to culture and management time spent for integration. And you have to be (aware) that all these things will happen. There would be huge cultural issues; there would issues where the senior management time will be spent in integration. If that happens, the base business suffers. We try to keep these in mind while buying. Fortunately for us, most of our acquisitions have worked. Not only in terms of EPS, but also value creation, given the depth of products in technology. That’s our approach: post-acquisition, we don’t just become a bigger company, but a company with better understanding of technology.

Some Indian companies seem to be moving away from India and investing abroad. Do you think India has lost the investment edge?

I think we are a meaningful player in India in terms of size and market share. So whenever we look at any business, we look at the opportunity to develop synergy to justify the acquisition. Synergy can be in terms of cost, market access and product range. If we make an acquisition that will help us get a justifiable synergy, we will do it. We continue to do green-field investments. On an average, we invest $150 million in green-field or brown-field ventures.

FDI in pharma has become controversial. The government wants to restrict it and it took the PMO’s pressure to get the Mylan-Strides deal approved. Do you think the Indian government is doing the right thing?

My personal sense is that pharma industry within the country is so diverse as well as fragmented. A company’s ability, if it gets acquired, to differentially price its products so that it becomes expensive is very limited. So the concern that multinational companies coming and buying the companies in India will push up the price of products for consumers is not as much a big concern for me as it is for the government.

But one of the biggest critics of FDI in pharma has been the Indian Pharmaceutical Alliance, which has supported the government in restricting FDI…

I don’t think this is a correct assessment because I think IPA’s view about foreign companies investing in India is not in any way close to what is being reflected. In a way I also read this; at some point of time we also discussed within IPA that we should clarify this position.

What do you think the Indian pharma sector should do — should it continue as a generics player, or should it go for innovation?

Indian companies should focus on becoming a much bigger generic player globally. They should also find a way to participate in the innovation business. It’s a business which requires long-term investment. And it’s a high-risk business, with high probability of failure. But if it is successful, and when it’ssuccessful, it generates value .