Dilip Shanghvi of Sun Pharma refused to follow other firms as they made big acquisitions in Europe. He cherry picked distressed assets instead. The move is now paying off
Dilip Shanghvi, 55, sounds almost apologetic when he says that he has to travel overseas more often these days. In the last three years, as chairman and managing director of Mumbai-based Sun Pharmaceuticals, India’s most valuable drug firm, Shanghvi has had to move out of his comfort zone in Andheri, a chaotic western Mumbai suburb, where he lives and works, to meet global investors and law firms to sort out some pressing issues.
But travel for Shanghvi is only going to increase. In September, Shanghvi won a protracted international court battle to gain control of an Israeli drug firm, Taro Pharmaceuticals, which he had bought from its owners three years ago. The buy will propel Sun’s sales to the US markets to more than 60 percent from the current 35 percent. When we met Shanghvi a few months earlier, he wasn’t very optimistic. Shanghvi was already planning a life without Taro. He had then suggested in jest, “Sun Pharma should be a good story [to write about] even without Taro.”
If Shanghvi was anxious about the impending court decision on Taro, he did not show it. He is a man of few words. Sun Pharma rarely organises press conferences and Shanghvi shies away from all public appearances. He hardly ever travels to South Mumbai or engages consultants to help in his strategy. A movie buff, he pours over market data with his top team, reads voraciously, and leaves his imprint on all of Sun’s plans.
Today, if you were to say that the Rs. 3,861 crore (revenue) Sun Pharmaceutical’s growth has been meteoric, you would just be repeating what was said even a decade ago. The company is still the fourth largest company in the pecking order among pharmaceutical companies in India, but it makes the biggest profits. Its market capitalisation at Rs. 39,800 crore is 50 percent more than its nearest competitor’s. Tarun Shah of Mehta Partners, a Baroda-based boutique pharma consulting firm, has seen Shanghvi from close quarters for 15 years. He says, “Eight out of ten times, Dilipbhai has a contrarian idea which has also turned out correct.”
Senior industry leaders too feel Shanghvi is wired differently. Y. K. Hamied, 74, chairman and managing director of Cipla, has completed 50 years working at the Rs. 5,624 crore Mumbai-based company, the biggest Indian drug firm. He says, “Dilip is a very smart guy who has kept surprising everyone else around.”
Even as this article was being written, Shanghvi was engaged in back-to-back meetings and conference calls to bring Taro under his fold and carry on with his other businesses. He is also said to be quickly recalibrating his strategy to keep up the over 20 percent compounded pace of growth his company has experienced in the last few years. Shanghvi says, “We are not fixed on growing big or anything. Our focus is primarily the pace of growth and profitability.”
Last year, Sun Pharma’s sales dipped as the US regulatory authority, FDA, found irregularities in the manufacturing facilities of the Detroit-based Caraco Pharmaceuticals, a company owned by Sun. With Taro stuck in courts, it appeared for a brief period that Sun would have to find newer ideas to keep the growth ticking. Shanghvi was seriously considering entering emerging markets like Brazil in a big way and starting the ground work to establish a large independent business there.
Now, assuming charge of Taro, according to senior company officials, will see Shanghvi’s immediate attention shifting back to the US, the biggest and the most profitable market for aggressive Indian generic players like Sun. Till now, Caraco brought in around $300 million in sales (prior to FDA’s manufacturing restrictions). Now, Taro will add another $350 million to sales, doubling Sun’s US business share overnight. Taro has manufacturing units in Canada and Israel, and market presence in new geographies like Ireland. Says a senior Sun executive, who did not wish to be named: “Dilipbhai will now sit down and focus to get the maximum out of Taro’s business before doing something new.”
Shanghvi explains his thought process succinctly. He says that in the fast growing US generic space, there are three large companies: Teva, Sandoz (the generic arm of Novartis) and Mylan. Then there is the mid-sized Watson and then the field is open with a clutch of sub $1 billion companies, mostly from India. There is also prior experience for Sun. Though Sun’s sales in emerging markets grew at about 45 percent, the contribution to sales from these markets was a mere 2 percent in the last two years. However, during the same period US grew 25 percent, propelling Sun’s overall growth and profits. In the next five years, several blockbuster drugs will come off the patent list to be legally replicated by firms like Sun. Shanghvi says, “There is enough head room to grow, especially as we are focussed in the niche therapeutic segments.”
Taro is expected to help significantly in US expansion process which had slowed down after the Caraco incident. Taro brings in a unique range of dermatological and topical products, which have stringent controls in the US. That also means that there are fewer companies that manufacture and distribute these products. As the distribution of drugs in the US market is controlled by a few large firms, they prefer firms that offer a differentiated basket of products. An analyst with a foreign broking firm says, “Taro should help Sun products reach a larger audience.”
Analysts like Mehta Partners’ Shah feels that Shanghvi has been quietly preparing for the US market for many years. Unlike other companies like Mumbai-based Wockhardt or Hyderabad-based Dr. Reddy’s Laboratories, Shanghvi did not waver and make big buys in Europe. He kept to his old habit of cherry picking distressed assets and extracting value rather than make big bang moves. Both Caraco and Taro are examples of this strategy.
(This story appears in the 22 October, 2010 issue of Forbes India. To visit our Archives, click here.)