Sun Pharma scouts for sizeable target in US

With close to Rs 4,500 crore cash on the balance sheet, Sun Pharmaceuticals is looking for an acquisition of ‘meaningful’ size in the US. According to a company official, the company is scouting for targets in the US and emerging markets, which could include Brazil, Russia, China, South Africa and others.

The inorganic growth strategy of Sun Pharma is driven by a rising health spend in US and other emerging markets. According to the US-based IMS Institute, global health spend is expected to touch $ 1.1 trillion mark by 2015, growing at 3-6% per annum.

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“Globally, market share for branded medicines, which fell from 70% in 2005 to 64% in 2010, is expected to decline further through 2015, to 53%,” the IMS analysis said. This means 47% of the total drugs sold in 2015 would be generics or off-patent versions of the original drug.

No wonder then, Sun Pharmaceutical, a generics player, is excited about the opportunity in the US. The ageing population in the developed markets is expected to drive incremental spending on drugs, both branded and generics.

Sun Pharma has a US-listed subsidiary called Caraco and now also owns majority control of Taro, an Israeli generic drug company.

According to the company official, the company finds valuations high. Israeli generic company Teva, the largest generics player, recently acquired Cephalon, a branded drug company with a generic subsidiary for $ 6.8 billion.

“Sun Pharma is known to play a waiting game,” a sector analyst pointed out. The company official agreed that Sun Pharmaceuticals will not strike a deal unless it meets the internal criteria set.

Generic players in India have concentrated on developed markets for growth. Companies like Ranbaxy Laboratories, Dr Reddy’s Laboratories acquired companies in Europe. However, the going has not been easy for every one.

Sun Pharma shares rose 43.6% in the last one year. The BSE Healthcare sector index rose 16.4% during the same period. “The market banks on Sun Pharma to manage cash judiciously,” the sector analyst added.

Sun’s market cap is $ 11 billion, the highest in the Indian pharmaceutical space.

The overseas business accounts for 65% of the total revenue of the company if one consolidates Taro, a subsidiary in Israel with the Sun Pharma balance-sheet.

For the year ended March 2011, Sun Pharma reported revenue of Rs 5,700 crore and a net profit of Rs 1,890 crore.

For shareholders:

• The company has said the capex for the year ending March 2012 will increase to Rs 450 crore to be used for Israeli subsidiary Taro’s facilities and in India.

• The company expects consolidated R&D at 6% of revenue for 2011-12.

• The US FDA ban on two sites in the US has resulted in some additional expenses for the company.

• Sun Pharma plans to file 30-35 new Abbreviated New Drug Applications (ANDA) with regulators for approval. This gives an indication of the generic product pipeline of the company.

• The overall global generic market opportunity is strong. Regulatory challenges are getting intense with drug regulators emulating US Food Drug and Administration rules.

For bankers/lawyers/consultants/private equity:

• Sun plans to utilise close to Rs 4,400 crore for a sizeable acquisition in the US.

• Emerging markets are also on radar.

• The company finds existing deals happening at an expensive valuation. For example, Israel’s Teva bought the US-based Cephalon for $6.8 billion.