“In each of the market that we are focusing, we want to grow faster than the market”

When the Rs 8,000 crore-plus Sun Pharmaceutical Industries appointed Israel Makov as Chairman, it caught the attention of industry-watchers.

Coming from the usually low-profile Sun Pharma, this was an eye-catcher.

So was Sun morphing into a global company?

After all, in April it had appointed the ex-GlaxoSmithKline executive, Kal Sundaram, as head of the US region. Sundaram was also made head of Taro, the Israeli generic-drugs maker that Sun acquired after a long, cross-country battle.

The market rumblings around Sun turned into an excited buzz when about 10 days ago it decided to spin-off its domestic formulations business.

Such streamlining, say some analysts, is usually undertaken by companies when they plan to bring in a strategic investor. Sun disagrees.

Why Makov

Sun Founder and Managing Director, Dilip Shanghvi, had met Makov when he picked up equity in Bio-Light Israeli Life Sciences Investments Ltd, where Makov had been appointed as Chairman. Sun, through its MJ Pharmaceuticals, had picked up 11 per cent in Bio-Light about a year ago.

“I have a lot of respect for what Makov has been able to accomplish,” says Shanghvi, of Makov’s stay at Teva. “From my point of view his capabilities will help Sun Pharma to internationalise,” he adds.

“As a company we would like to find a way to grow on a constant basis. The idea would be that in each of the market that we are focusing, we want to grow faster than the market. Historically if you see our performance, we have been able to do that consistently.”

Taro onwards

Sun had, in 2007, made a $454-million proposal to acquire Taro. The deal was concluded in 2010.

And over the last four months, there have been a set of new appointments and initiatives.

A seasoned pharma consultant says, Sun is looking to become global, possibly like the Israeli generic-drugs major Teva. Makov, after all, was associated with the generics-giant Teva and has a world-view.

But, the consultant adds, it is unlikely that Sun will concede control via equity or a sell-off, just yet.

Sun has invested much time and energy in getting Taro under its wing, he points out.

Others, though, think that Sun is streamlining its Rs 2,800-crore domestic formulations business towards a divestment of some sort.

“The domestic formulations spin-off looks like a precursor to a stake-divestment, or joint-venture,” observes Ranjit Kapadia, Senior Vice-President with Centrum.

But at Sun, officials lean towards the globalisation theory.

Founder’s take

So how will things change now?

“Ultimately, we have to create an organisation,” says Shanghvi, “that is more process-run, has systems and has checks, balances and controls. We need to be able to find a method to grow on a much larger basis.”

If Sun meets its projected financial targets, it will be close to $2 billion, a relatively small size compared to industry peers.

“So how do you continuously grow even when you become a much bigger company, these are all challenges that we have not seen. Also when we buy companies, the integration, cultural challenges …”

Explaining Sundaram’s appointment, Shanghvi says, the US is increasingly becoming a large part of the company’s business. So it required a senior person to manage that business and the transition.

Besides, a possible acquisition is also on the agenda.

For FY12, Sun clocked sales of $725 million, up 49 per cent. In the first quarter or three months ended June 30, 2012, the US registered sales of $285 million, up 105 per cent, and accounted for 57 per cent of total sales.

Sun is also, at present, dealing with manufacturing issues raised by the US regulatory body, the Food and Drug Administration, regarding manufacturing facilities under wholly-owned subsidiary Caraco.

Remediation efforts are underway at these plants.

“So we want to see that this is overcome and put in place an appropriate process so that this will not happen again,” says Shanghvi.

Minority discontentment

But making Taro a wholly-owned subsidiary is proving problematic. Sun holds 66 per cent in Taro and, earlier last week, it had sweetened its offer to minority shareholders to mop up the remaining outstanding shares.

Sun’s initial proposal for Taro’s remaining shares was $24.50 a share. The revised proposal upped the price over 60 per cent at $39.50 , an outgo of $600 million for Sun.

Though the revised proposal has an approval from the Taro Board, the company’s minority shareholders are unhappy, saying that it did not reflect the potential and value of Taro.

“The Board’s acceptance does not weaken the minority position. The wording of the sun release was set to make it look like a done deal. However, Israeli law protects us from such a poor deal. They need 50 per cent of minority shareholders to approve the deal but this seems unlikely. Also the low offer makes it easier for a competitor to make a fair offer that works for all,” says Mitch Sacks, Chief Investment Officer, Grand Slam Asset Management, LLC.

Last October Grand Slam had written to the Taro board asking it not to accept the earlier proposal.

And in a recent open letter to fellow-minority shareholders in Taro, Grand Slam has urged them to reject Sun’s “inadequate offer”.

Power interests

There is another twist in the plot. Sun promoters have invested in the power sector, as well.

“Our interest in power is a function of our looking at a business that will give us stable returns,” says Shanghvi, adding that his brother-in-law, Sudhir Valia, is looking after this business.

Knowing him, it would not be a one-off investment, quips Shanghvi.

Media-reports indicate investments of Rs 5,000 crore in a 1,000 MW plant. Shanghvi also holds minority interest in fellow-drug maker Natco.

An indication that the complete story at Sun is only beginning to dawn on the industry.

jyothi@thehindu.co.in

Edited by TCA Srinivasa-Raghavan

(This article was published on August 19, 2012)
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