Though the Rs 1,400-crore (Rs 14 billion) Sun Pharmaceuticals has made substantial investments in R&D over the past five to six years, the corporate decision to convert this intellectual asset into a future growth-driver by demerging the innovative research arm come only now.
In an interview with C H Unnikrishnan, Sun Pharma chairman and managing director Dilip Shangvi says a cautious approach has always ensured the company has not regretted its moves.
Even with a war chest of over Rs 3,000 crore (Rs 30 billion) that was created a couple of years ago for acquisitions in the United States generics space, the company is still sitting on the money with no major progress on this end?
We are committed to a more focused growth in the US generic space. However, the valuations in the US are not as realistic as they should be. More importantly, we are in no hurry to make such decisions. So far, we have made three acquisitions in the US. But none of these deals were big and most of them were desperate sells, which came to our plate with comparatively small investments.
But since these assets have the potential to reward us later, we are confident that the investment will never be a cause for regret. Our experience with all the past growth strategies and acquisitions, including our US subsidiary Caraco Pharma Lab, had proved the same. At the same time, we are very serious about big acquisitions in the US as we see this market as our main growth driver. It will happen soon.
Why only the US on the growth radar?
As the largest pharmaceutical market in the world, both in terms of value and volume, the US has always been the target of any growth-oriented pharma company. Though almost all large and medium companies in India are directly or indirectly present in this market, the total market share of India in the US pharma market is still negligible compared to the market's actual potential. Hence, the US will remain an important market in Sun's growth strategy for some more time.
Do you need to invest more in the three manufacturing units and research facilities you bought?
The company had invested $23.15 million in the R&D assets and two manufacturing units of Able Labs, which were auctioned recently, and another $10 million in Valeant Pharma's facilities in Ohio and Hungary. We would be required to invest another $15 million over the next three years in these assets to start operations.
Sun Pharma has spun off its innovative research group into a separate company. What are the reasons?
Over the past few years, the company has been making substantial investments in R&D activities, including new drug delivery systems. These investments in innovative R&D carry higher risk and often generate higher returns, but over a longer term when compared to investments in the generic pharma business.
We believe that our R&D business has tremendous potential for growth and long-term profitability. After having nurtured it for these initial years, it has reached a stage where it requires a focused organisation. Hence, we wanted to reorganise both the businesses and undertakings. Additionally, the demerger will also provide scope for independent collaboration and expansion, without committing the existing organisation in its entirety.
Why did it take so long for such a decision?
With significant acceleration expected in the innovative business over the next few years, the growth in R&D spend may be much faster than the growth of the generic business. Keeping this in view, we believe this demerger is timely and should help create shareholder value.
It offers investors an option to separately hold investments in businesses with different investment and return characteristics, depending on what matches their risk and return expectations. Certainly, derisking the company's R&D efforts was another important motive behind the demerger.
If the businesses had stayed together, R&D investment would have been 15 to 18 per cent of turnover, as we have been one of the largest R&D spenders among the domestic players. Our R&D expenditure in the third quarter of 2005-06, had gone up by more than 65 per cent, to Rs 64.5 crore (Rs 645 million) from Rs 38.6 crore (Rs 386 million) in the corresponding period the previous year.
You had also proposed to list the new research company on stock exchanges. Is there a time frame fixed for it?
Yes. We will work towards an early listing of the new company. As and when it requires additional resources, we'll open it for a fresh public offering as well.
As part of the demerger, will there be a split of assets, resources and people between Sun Pharma and the new innovative research entity?
Assets, resources and people currently engaged in innovative R&D will be part of the new company. About 100 scientists will move to the new company. However, the details of the split are being worked out.
What will be the ownership structure of the new company? Has its valuation been done?
The new company will be owned by the existing shareholders of Sun Pharma in the same proportion as their stake in the company. Shareholders of Sun Pharma will be allotted one equity share of Rs 1 each of the new company for every one equity share of Rs 5 each of Sun Pharma. At the same time, the new company will not be a subsidiary of Sun Pharma. The valuation will depend on the company's R&D pipeline and other related activities.
Where will the new company source its funding from?
During the asset split, around Rs 250 crore (Rs 2.5 billion) cash available with Sun Pharma will go to the new company, which will enable it to sustain its operations for some time. But, depending on its investment needs, it would decide on the timing and source of funding. Funds may also be raised through options such as equity, debt and out-licensing of its pipeline candidate.
Sun Pharma and the new company may have some asset- or resource-sharing arrangements to begin with. In the future, depending on the business needs, the two companies may evaluate partnerships or alliances, including marketing rights for specific geographies. Both the companies will independently evaluate all options of such partnerships or alliances with other companies too.
Will this strategic decision help reducing the R&D spend of Sun Pharma?
About 35-40 per cent of R&D spend - this roughly 10 to 11 per cent of our sales - had been on innovative R&D. This will now shift to the new company. However, it is expected that the spend on generic R&D may increase from current levels over the next few years.
We are committed to a more focused growth in the US generic space. However, the valuations in the US are not as realistic as they should be. More importantly, we are in no hurry to make such decisions. So far, we have made three acquisitions in the US. But none of these deals were big and most of them were desperate sells, which came to our plate with comparatively small investments.
But since these assets have the potential to reward us later, we are confident that the investment will never be a cause for regret. Our experience with all the past growth strategies and acquisitions, including our US subsidiary Caraco Pharma Lab, had proved the same. At the same time, we are very serious about big acquisitions in the US as we see this market as our main growth driver. It will happen soon.
Why only the US on the growth radar?
As the largest pharmaceutical market in the world, both in terms of value and volume, the US has always been the target of any growth-oriented pharma company. Though almost all large and medium companies in India are directly or indirectly present in this market, the total market share of India in the US pharma market is still negligible compared to the market's actual potential. Hence, the US will remain an important market in Sun's growth strategy for some more time.
Do you need to invest more in the three manufacturing units and research facilities you bought?
The company had invested $23.15 million in the R&D assets and two manufacturing units of Able Labs, which were auctioned recently, and another $10 million in Valeant Pharma's facilities in Ohio and Hungary. We would be required to invest another $15 million over the next three years in these assets to start operations.
Sun Pharma has spun off its innovative research group into a separate company. What are the reasons?
Over the past few years, the company has been making substantial investments in R&D activities, including new drug delivery systems. These investments in innovative R&D carry higher risk and often generate higher returns, but over a longer term when compared to investments in the generic pharma business.
We believe that our R&D business has tremendous potential for growth and long-term profitability. After having nurtured it for these initial years, it has reached a stage where it requires a focused organisation. Hence, we wanted to reorganise both the businesses and undertakings. Additionally, the demerger will also provide scope for independent collaboration and expansion, without committing the existing organisation in its entirety.
Why did it take so long for such a decision?
With significant acceleration expected in the innovative business over the next few years, the growth in R&D spend may be much faster than the growth of the generic business. Keeping this in view, we believe this demerger is timely and should help create shareholder value.
It offers investors an option to separately hold investments in businesses with different investment and return characteristics, depending on what matches their risk and return expectations. Certainly, derisking the company's R&D efforts was another important motive behind the demerger.
If the businesses had stayed together, R&D investment would have been 15 to 18 per cent of turnover, as we have been one of the largest R&D spenders among the domestic players. Our R&D expenditure in the third quarter of 2005-06, had gone up by more than 65 per cent, to Rs 64.5 crore (Rs 645 million) from Rs 38.6 crore (Rs 386 million) in the corresponding period the previous year.
You had also proposed to list the new research company on stock exchanges. Is there a time frame fixed for it?
Yes. We will work towards an early listing of the new company. As and when it requires additional resources, we'll open it for a fresh public offering as well.
As part of the demerger, will there be a split of assets, resources and people between Sun Pharma and the new innovative research entity?
Assets, resources and people currently engaged in innovative R&D will be part of the new company. About 100 scientists will move to the new company. However, the details of the split are being worked out.
What will be the ownership structure of the new company? Has its valuation been done?
The new company will be owned by the existing shareholders of Sun Pharma in the same proportion as their stake in the company. Shareholders of Sun Pharma will be allotted one equity share of Rs 1 each of the new company for every one equity share of Rs 5 each of Sun Pharma. At the same time, the new company will not be a subsidiary of Sun Pharma. The valuation will depend on the company's R&D pipeline and other related activities.
Where will the new company source its funding from?
During the asset split, around Rs 250 crore cash available with Sun Pharma will go to the new company, which will enable it to sustain its operations for some time. But, depending on its investment needs, it would decide on the timing and source of funding. Funds may also be raised through options such as equity, debt and out-licensing of its pipeline candidate.
Sun Pharma and the new company may have some asset- or resource-sharing arrangements to begin with. In the future, depending on the business needs, the two companies may evaluate partnerships or alliances, including marketing rights for specific geographies. Both the companies will independently evaluate all options of such partnerships or alliances with other companies too.
Will this strategic decision help reducing the R&D spend of Sun Pharma?
About 35-40 per cent of R&D spend - this roughly 10 to 11 per cent of our sales - had been on innovative R&D. This will now shift to the new company. However, it is expected that the spend on generic R&D may increase from current levels over the next few years.
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