No depression, just growth

Suman Layak        Print Edition: November 30 2008

Dilip Shanghvi IS NOT easy to rattle. The US Food & Drug Administration had just issued a warning to his US subsidiary Caraco and investors took it as a cue to push down his company's stock by five per cent. But the Chairman & Managing Director of Sun Pharmaceutical Industries, the domestic leader in psychiatry, neurology, cardiology therapies, was his usual calm self as he spoke to Business Today on the evening of November 4, the day the markets hammered the stock.

What helped sun outperform
1 Comparatively less dependence on the US and Europe
2 Virtually no debt on balance sheet
3 The high-risk research business has been hived off
4 Generics of pantoprazole and amifostine doing well in US, with very little competition

Dilip Shanghvi Chairman and Managing Director
Dilip Shanghvi
"This warning allows us to improve our focus on quality. We expect to be back in compliance soon. The regulators have visited four of our factories in the last one year with very limited issues. But we are concerned," Shanghvi says over the phone as he shuttles between meetings in Mumbai.

Following the FDA caution and the 5 per cent fall in the stock price, brokerage house Angel Broking changed its outlook for the stock from buy to neutral. But the next day, when the BSE Sensex went down by 4.82 per cent, the Sun Pharma scrip recovered 10 per cent.

No one will deny Shanghvi his right to exude confidence-it has been a great 12 months for Sun and an even better first half for 2008-09. The company has reported a 76 per cent year-on-year growth in sales and a 134 per cent growth in net profits for the quarter ended on September 30, 2008, following up on a 133 per cent sales growth and 241 per cent profit growth for the quarter ended June 30, 2008.

And Sun did this when other pharma majors were struggling. As Ranjit Kapadia, Research Head at Prabhudas Lilladher, points out, the earnings before interest, depreciation, tax and amortisation (EBITDA) margin of 45 per cent reported by Sun is way ahead of the 35-36 per cent achieved by Glaxo, the next best in the industry.The strategy has been-in the words of Shanghvi- "Creating stable businesses and creating strong cash flows."

First to file opportunities
Angel Broking changed its outlook on the stock on November 4 after assigning a buy and a target price of Rs 1,600 on October 24. Sarabjit Kaur Nangra, Research Head at Angel, says: "The growth has been fuelled by exports to US and that is based on the success of its two generics- pantoprazole and amifostine. The company may sustain this kind of growth for another quarter."

Both these products were launched as a part of patent challenges that Sun had filed on established products in the US-Protonix and Ethyol. Being the first to file the challenge, Sun gets a 180-day exclusive period to market its product after it is approved by the FDA. Sun Pharma seems to be making the most of this period now, and Shanghvi says that between Sun and Caraco there are quite a few other first-to-file opportunities waiting to be exploited.

"We have abbreviated new drug applications (ANDA) for 61 products approved in the US. ANDAs for another 96 products await approval of the USFDA, which include some Para IV challenges (patent challenges) and within these a few first-to-file (FTF)." Shanghvi asserts: "Even if we take away the US exports story, the underlying business remains strong." The Research Head of Anagram Stockbroking, V.K. Sharma, corroborates Shanghvi, and says Sun's revenues are not too dependent on the US and Europe and that it is precisely this factor that has helped Sun perform better than the pack. But that might change soon. Total exports accounted for a little over half of sales in the quarter to September 30. While exports grew by 173 per cent, domestic sales grew by a little more than 22 per cent.

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