Global firms need to manage different cultures: Sun Pharma's Dilip Shanghvi

Dilip Shanghvi, Founder and Managing Director of Sun Pharmaceuticals, which has created ripples in the global pharma industry by acquiring Ranbaxy in a $4 billion all-stock deal, does not see cultural differences in the working styles of Ranbaxy and Sun as an issue.

Responding to analysts in a lengthy conference call on Monday morning, after the announcement of the deal, he said: "This (deal) is our first important step in becoming a global company and global companies need to be able to manage different cultures and produce results." Responding to a question from Alok Dalal of Motilal Oswal, he said: "Even though people are culturally different, some basic human traits, which ultimately lead to performance are common  (to all)."

He added: "We have seen that everybody wants to be part of a successful team and is prepared to work hard to achieve that, if they are given proper direction, support and encouragement... we see this no different with Ranbaxy."

The question about cultural differences becomes important as Ranbaxy has been under the scanner of US regulator, the US Food and Drug Administration (FDA) for issues related to lack of good manufacturing practices with some its important manufacturing units facing import alerts and ban. Last year on May 13, the US Department of Justice had announced that Ranbaxy had pleaded guilty and agreed to pay $500 million to resolve false claims allegations, cGMP (current good manufacturing practice) violations and false statements to the FDA.

While Sun Pharma-Ranbaxy deal now makes Sun Pharma the leading Indian pharma company, the deal is not without its challenges. Shanghvi has been telling analysts about the experience of Sun Pharma with its other acquisitions and how it had a track record of successful turnarounds of 16 acquisitions so far. He referred specifically to the 2010 acquisition of Israel-based Taro Pharmaceutical, which he said, "had consistently underperformed...The same company with almost no change and with the same people has (since) achieved beter EBITDA (earnings before interest, tax, depreciation and amortization) than Sun Pharma. "From an EBITDA of less than $ 100 million, it has in the last three years achieved an EBITDA of close to $400 million," he said.

Pointing out that the Ranbaxy deal was expected to yield synergies of around $250 million in three years, he made it clear that given the challenges Ranbaxy was facing on the manufacturing front (after coming under the USFDA scanner), for the moment Sun was not looking at synergies out of manufacturing. The focus, he said, would be first to achieve regulatory compliance.

On the challenges that Ranbaxy was facing financially, having, as one analyst pointed out, reporting loss for four out of the last six to seven years, coupled with serious regulatory issues, Shanghvi seem to still see good value and a good reason to still pay premium in the deal.

He attributed the losses largely to forex hedges that failed, and to the manufacturing challenges. "The underlying business, be it in India or emerging markets, has a robust pipeline (of products) and growth and profitability is there and therefore the valuation is justified," he said.

On why the deal was an all-stock deal and not a part stock or part cash deal? Incidentally, this is the first time, Sun promoters are diluting their stake, he told the analysts: "generally as a company, we have not done a stock transaction" but here , he said, the idea was "to develop a relationship with Daiichi Sankyo, which now becomes the second largest shareholder in Sun Pharma".

With this deal, "on a pro forma basis, the combined entity's revenues are estimated at US $4.2 billion with EBITDA of US $1.2 billion for the 12 month period ended December 31, 2013. That is a long distance covered by Dilip Shanghvi, who in 1983 set up a small manufacturing plant to make tablets and capsules at Vapi in Gujarat, had five psychiatry products in his fold and a marketing team of just two people.