Dilip Shanghvi, M&A artist for Sun pharma, now faces his greatest test
Dilip
Shanghvi ‘s deal-making mystique is called into question as Sun Pharmaceuticals
faces an array of challenges at home and abroad
When Dilip Shanghvi wants something, he has a
track record of getting it. One executive, Srinivas Lanka, recalls the founder of Sun
Pharmaceuticals Industries Ltd calling more than 100 times over three years
with a job offer two decades ago. Shanghvi was setting off on an acquisition-fuelled
strategy to transform his small generic drugmaker into an industry powerhouse,
and he wouldn’t take no for an answer.
In the end, Shanghvi won over Lanka, who
agreed to leave his job at global pharma giant Novartis AG and sign on as the
executive director in charge of Sun’s Indian business in 1996, staying until
1999. “A lot of entrepreneurs used to
call me, but not many had this kind of fire in their belly,” said Lanka. “I thought this guy has some different blood
in him.”
That kind of relentless drive has helped make
Sun India’s biggest drugmaker and best performing stock over the last 20
years—and Shanghvi the country’s second richest person, with an estimated net
worth of $15 billion. Yet now, with Sun’s shares on track for their worst
annual decline since 2008, Shanghvi, 61, has seen his deal-making mystique
called into question as Sun faces an array of challenges at home and abroad.
Shanghvi’s largest ever deal, the purchase of
Indian rival Ranbaxy
Laboratories Ltd in 2015, has been bogged down by a slowdown in
emerging markets and bans by US regulators at acquired factories that threaten
his record as a turnaround artist. Meanwhile, the political uproar over drug
prices in the US means additions to Sun’s portfolio there that have driven
revenue and the share price look increasingly unsustainable.
After 15 years where sales grew at a compound
annual rate of about 30%, Sun this year has forecast growth would slow to
between 8 and 10%, according to company statements. The shares have tumbled
more than 7% this year.
“Nothing
is visible at the moment which will provide positive upside,” said Ranjit
Kapadia, an analyst covering the stock at Centrum Broking Pvt. Ltd. “There’s nothing on the plate.”
Shanghvi declined to be interviewed for this
story.
There’s no denying that Shanghvi, who
graduated with a degree in commerce from the University of Calcutta, has had a
terrific run since launching Sun in 1983. Early on, the company differentiated
itself from the crowd of Indian makers of generic drugs with a focus on
high-margin psychiatric drugs, then branched into medicines targeting chronic
diseases like diabetes and heart disease, now more common in prospering India.
“They
focused on chronic diseases much before everybody else did,” said Nilesh Gupta,
managing director of Lupin Ltd., India’s second biggest drug company
by market capitalization. “That’s how they got completely entrenched in the
market. A chronic prescription is a lifetime prescription, an acute one is a
ten day one.”
All the while there’s been a steady stream of
acquisitions, alternately bolstering the firm’s growth or catapulting it to the
next level. Since 2001, there have been more than 20 deals worth $5.6 billion,
according to data compiled by Bloomberg. Always a voracious consumer of
industry intelligence, when it came to acquisitions Shanghvi would mobilize the
whole firm to do due diligence and look for troubled targets that could be
bought at a discount, said Shyamal Ghosh, a former Sun executive director
who retired in 2011. “Finding weaknesses
of the acquired companies was very easy for him,” he said.
Both Shanghvi’s eye for value and his
tenaciousness were exemplified in the 2010 takeover of Israel-based Taro
Pharmaceutical Industries Ltd. It took a three-year legal battle to
force Taro’s former chairman to abide by the terms of a previously terminated
takeover agreement requiring him to sell his controlling stake to Sun, but soon
after taking Taro in hand Sun had ferreted out a way to squeeze out more
profit: steady price increases on Taro’s portfolio of medicines.
Since taking control those price hikes have
amounted to a 300 percent increase across Taro’s portfolio, according to data
provider IMS Health. The move lit a fire under Taro’s profit margin, which
reached nearly 60 percent last year, according to Bloomberg data.
With each year profit margins grew at Taro,
Sun’s shares climbed, setting the stage for its biggest ever acquisition, the
$4.1 billion purchase of Ranbaxy. With the success of Taro as a precedent
investors celebrated the closing of the Ranbaxy deal in 2015, sending Sun’s
shares to a record.
Since then, Sun has led a less charmed life.
Shanghvi now faces an array of challenges, starting with a share price which
has tumbled about 35% since its peak in April 2015, wiping out more than $12
billion in shareholder value.
The exposure to emerging markets Sun bought
with Ranbaxy has proven ill-timed as a collapse in commodity prices abruptly
sent nations like Brazil, Russia and Venezuela into recession. Their plunging
currencies translated into an immediate hit to the 13% of revenue Sun now gets
from emerging markets outside India.
Worse has been the hit to Sun’s US revenues,
50% of the total, from sanctions by regulators in that country. With the
Ranbaxy deal, Shanghvi bought four plants saddled with export bans from the US
Food and Drug Administration because of deficient manufacturing practices.
But just as he was getting started turning
them around one of Sun’s own key facilities received a warning letter of its
own from the US FDA. Though less severe than the outright bans faced by the
acquired factories the warning letter prevented the launch of new US products
from the plant and hampered production there, slowing revenue growth in Sun’s
core business as it added regulatory costs on top of those he bought with Ranbaxy.
Drug
prices
What’s more, the US political backlash over
high drug prices that has drawn scrutiny to the business practices at
drugmakers like Valeant Pharmaceuticals International Inc. and Mylan NV adds a
political risk to price hikes at Taro, which combined with increased
competition is starting to make the strategy look unsustainable. Last month,
Taro said it had received a subpoena from the US department of justice asking
about pricing for its products and communications with competitors. Taro didn’t
respond to a request for comment.
“What
the street is waiting for is for other businesses to sort of take over from
Taro,” said Nitin Agarwal, an analyst at IDFC Securities Ltd who follows
the company. “To an extent that’s not happened and the stock had been soft the
last year and a half.”
Sun has requested the US Food and Drug
Administration reinspect its facility under a warning letter and cannot say
when that will occur, Freddy Castro, a company spokesman said in an e-mailed
statement. The company is also planning to submit one of the four Ranbaxy
facilities for re-inspection this year, he said, declining to comment on Taro.
The Ranbaxy transaction is living up to
expectations and is on track to realize the expected $300 million of synergies
by year three, he said.
Looking
ahead
Nevertheless 61% of analysts covering Sun,
including Agarwal, have the equivalent of a buy rating on the company,
according to a survey conducted by Bloomberg. Most point out that while it may
have been the acquisitions that catapulted Sun to the number one spot it was
years of steady growth, fueled by Shanghvi’s ability to spot the next big
treatment area, that got him within striking distance.
With the market for the simple generic
medicines he built his business on getting saturated, Shanghvi has already
begun steering his company into more complex ones that promise higher margins,
like dermatological creams, injectable medicines and highly regulated pain
killers. Next up is building a portfolio of completely novel medicines, some of
them developed in house. All that means increased spending on research and
development -- for a bigger, though less certain, payday.
Of course there’s always acquisitions. But
with Sun still waiting on the full benefits of Ranbaxy, Shanghvi has said he’s
not on the lookout for big deals at the moment, even as they’ve avoided totally
shutting the door should an opportunity arise.
Nevertheless, Sun’s stock remains becalmed as
Shanghvi continues searching for a lever that can return his company’s growth
to the form it’s had most of the last 20 years. Those who’ve worked with him
closest in that time say, in true Shanghvi fashion, he won’t rest until he
finds it.
“He has
an insatiable hunger to grow bigger and bigger,” former executive director
Ghosh said. “He’s extremely focused. He’s
not interested in anything else except the pharmaceutical business.”
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