Drug Billionaire Seeks Deals as Rivals Founder: Corporate India

Sun Pharmaceutical Industries Ltd., Asia’s largest generic drugmaker by market value, is seeking to acquire makers of injectable to oral liquid medicines to help it exceed industry growth estimates.

The Indian manufacturer of antibiotics to cancer drugs may also buy producers of branded ophthalmology products, said billionaire Managing Director Dilip Shanghvi in an interview. The company this year sought to acquire Swedish drugmaker Meda AB, according to two people familiar with the matter. Sun, which evaluates three to four acquisition targets every month, isn’t close to announcing any deal, Shanghvi said.

The billionaire’s strategy to build on his streak of 11 deals since 2001 may help Sun achieve its goal of expanding in Europe and Japan and increasing sales in the U.S., the company’s biggest market. The drugmaker, which reported the industry’s widest earnings margin in the 12 months to June 30, is seeking purchases at a time when Indian rivals including Ranbaxy Laboratories Ltd. and Wockhardt Ltd. are struggling to address the U.S. regulator’s warnings on manufacturing practices.

“My objective will be to find a way to grow the business faster than the competition,” Shanghvi said. “We are focused on identifying products which will allow us to operate in limited competition markets.”

The company, which acquired a stake in Israel’s Taro Pharmaceutical Industries Ltd. in 2007, is open to borrowing overseas to fund any purchase, and may sell shares “if it’s a very large acquisition,” Shanghvi said.

Growth Target

Sun is seeking “some products that we don’t have, or technologies that we don’t have,” Shanghvi said. He’s targeting 18 percent to 20 percent growth for the year ending March 31.

Shanghvi’s purchase of Taro helped Sun boost its share of U.S. revenue to 54 percent of group sales and resulted in Taro returning to profit in 2007. Shanghvi, who ended his effort to buy the rest of Taro earlier this year, said he has no plan to attempt to increase the stake for now.

Sun had 320 drugs approved for sale in the U.S., and had another 133 product applications, known as Abbreviated New Drug Applications or ANDAs, pending with the U.S. Food & Drug Administration at the end of June, Shanghvi said in a call with analysts on Aug. 9. Generic drugmakers have to file an application for each drug they seek to manufacture for the U.S.

Solid Growth

While Sun has expanded its U.S. generics business, “it still represents a very small share of the total U.S. generic sales,” said Igor Krutov, a New York-based analyst with Vontobel Asset Management Inc., which manages $28.6 billion in emerging market assets. “Judging by the pipeline of ANDAs pending approval, we expect solid growth for the foreseeable future.”

Sun has risen 49 percent in the past six months, making it the best performing stock after Lupin Ltd. in the 26-company Bloomberg Asia Pacific Pharmaceuticals Index. That helped Shanghvi boost his wealth by $5 billion, the most among India’s rich this year, to $14.2 billion, according to the Bloomberg Billionaires Index.

The drugmaker’s shares fell 0.9 percent to 639.55 rupees in Mumbai after rising to a record yesterday. The stock trades at 21 times its 2015 earnings forecasts, according to data compiled by Bloomberg. That compares with 12 times earnings for Ranbaxy and 7 times for Teva Pharmaceutical Industries Ltd., the world’s largest maker of generic drugs.

“Sun Pharma has been a long-time holding of ours,” said Vontobel’s Krutov. The price to earnings multiple “is justified, in our view, given the expected future earnings per share growth and the quality of Sun’s management.”

FDA Standards

Shanghvi, who started Sun in 1983 selling drugs to treat psychiatric ailments, will need to ensure his factories meet FDA standards.

The U.S. regulator during an inspection at Wockhardt’s factory found soiled uniforms and mold growing in a raw-material storage area of the company’s plant producing copies of the heart tablet Toprol-XL. The FDA summarized their findings in a filing obtained by Bloomberg via a Freedom of Information Act request.

The FDA has filed reports on at least four Indian facilities in the past six months and curbed exports at two drugmakers, including Ranbaxy, the country’s largest. Products from two other Ranbaxy plants were prohibited from export to the U.S. in 2008 because of quality control issues that were part of fraud allegations, which the company agreed to settle in May for $500 million.

Drug Inspections

Wockhardt has hired consultants and is working on a better compliance system to address FDA findings, it said in a response to questions e-mailed by the public-relations firm Ketchum Sampark. Ranbaxy will continue to cooperate with the FDA and “take all necessary steps to resolve the concerns at the earliest,” it said in a statement on Sept. 17

U.S. regulators are stepping up efforts to monitor the safety of medicines flowing into the country. The number of drug inspections in India has more than doubled in the past five years. The agency ran 195 checks last year, up from 13 in 2000, according to data supplied by the regulator.

Sun has been inspected seven to eight times by the FDA in the past year with no major observations, Shanghvi said. The FDA last year allowed Sun to import unapproved batches of the generic version of Johnson & Johnson’s cancer drug Doxil to address a shortage.

Doxil Shortage

J&J has said there may be yearlong shortage of the medicine after manufacturing disruptions at one of its supplier’s plants culminated with the facility, Ben Venue Laboratories Inc., calling a halt to drug production by the end of the year. The injectable treatment for ovarian cancer generated $402 million of sales for J&J in 2011, according to data compiled by Bloomberg.

Sun Pharma has the capacity to meet additional demand for the drug, Shanghvi said. His concern was the market for the drug may shrink if J&J decides not to market the product.

“This is the first time we are encountering a situation where we are the only product in the market and the innovator is not in the market,” Shanghvi said. The company is evaluating ways in which it can take over promotion of Doxil or co-market it with another company, he said.

Shanghvi’s strategy to manufacture difficult-to-produce drugs paid off with Doxil, said Prakash Agarwal, an analyst at CIMB Securities India Pvt. in Mumbai.

“They got an accelerated, fast track FDA approval and they’re monetizing it in a big way,” said Agarwal. “They’re going to have the entire market now.”

‘Management Quality’

Sun may generate $113 million of sales from Doxil in the year ended March 31, contributing 8 percent of the company’s earnings, according to Hitesh Mahida, an analyst with Fortune Equity Brokers Ltd. in Mumbai.

Taro’s shares have surged 13 fold since its 2007 low in New York trading. Teva has gained 10 percent in the same period, while Ranbaxy has more than doubled. Sun’s shares have increased sevenfold.

“Sun’s management quality and its record of execution give us a lot of comfort,” said Vontobel’s Krutov. “Sun has managed to create a lot of value through acquisitions, which is not common in any industry.”

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