Abstaining from big global acquisitions, hiving off its new drug research into a separate company, and focusing on select patent challenges seem to have paid off for Sun Pharmaceuticals. The Mumbai firm has become the most valuable drug maker in India, toppling Cipla from the top spot, at a time when shares of bigger rivals have taken a beating in the race for a multi-billion European asset.
Sun’s market capitalization—a measure of the value of a listed company obtained by multiplying its scrip price by the number of outstanding shares—stood at Rs19,670 crore on 13 March. Cipla, India’s biggest drug maker by domestic sales, is valued at Rs18,370 crore and is followed by Ranbaxy Laboratories, Dr Reddy’s Laboratories and GlaxoSmithKline India.
Sun and Cipla have been on a bit of a see-saw in occupying the number one spot—Sun first pipped Cipla to the post on 11 January, dropping back to the second spot later—since the beginning of this year. But Sun has held onto the top in the last fortnight.
With good reason, say analysts. “Sun’s net margins are 35% as compared to the industry average of 25% and the return on capital is as high as 40%,” says a Mumbai-based analyst, who prefers to remain off the record.
Adds boutique investment bank Edelweiss’ assistant vicepresident Nimish Mehta: “They have shown very consistent growth in their revenues as well as their profits along with high margins. The proposed hiving off of the new drug research activities into a separate company will unlock value for shareholders.”
Sun is No.1 in India in speciality medicines for psychiatry, neurology and cardiology, besides a significant presence in skin-care products, a high-value business. The company reported net profits of Rs199 crore on Rs603.6 crore total income in the October-December quarter.
Another company that has benefited from a risk-hedged conservative approach is Cipla. The company’s aggression on the domestic market and collaborative approach overseas have made it seem safer in the short run. Markets favour Cipla’s low-risk strategy of not chasing large assets that carry integration risk and avoiding big spending on new molecules, says Sujay Shetty, associate director with management consultant PriceWaterhouseCoopers.
So if the Indian investor discounts big acquisitions, new drug research and patent litigation—cornerstones of the growth strategy of drug makers with global ambitions—then what does he value?
“Sustained growth in earnings in the range of 30-35% is what appeals to us,” said ChrysCapital’s managing director Sanjiv Kaul. “Companies like Cipla and Sun have a business model that is more focused on steady, sustained growth in earnings whereas other companies that are higher on the risk-reward matrix will see spikes in their valuation,” he added.
It’s not as if Sun Pharma has not been involved in buyouts. While delivering higher earnings consistently, it has made very few acquisitions—typically of loss-making companies at low prices—and turned them around. It bought Caraco in US in 1997 and turned it around in three years. In 2005, it acquired a bankrupt US-based Able Labs for $23.15 million (Rs102 crore) and manufacturing facilities of Valeant Pharmaceuticals in Hungary and Ohio for $10 million.
Sun’s managing director Dilip Shanghvi says his company’s focus will remain on tightly-controlled costs and a focus on high-margin businesses. “We don’t want to over promise and under-deliver,” he told Mint.
(Ashwin Ramrathinam contributed to this story.)