By Ayushi Gupta
The wealth of Dilip Shantilal Sanghvi, the founder of Sun Pharmaceuticals, plummeted by $14.1 billion in the last 2 years. The drop came after the company’s shares tumbled 57% since its all-time high in April 2015 due to weak earnings and inspections by the US Food and Drug Administration (US FDA) at a key plant.
What rocked Sun’s business in the US
The US is the largest market for Sun Pharmaceuticals. With rapidly changing market dynamics in the US generic industry, Taro Pharmaceuticals (overseas arm of the company) has experienced its operating profit margin declining to 26% during the quarter ended March 2017 as against 49% of the sales three years ago. Increased competition and customer consolidation have built pressure on pricing, coupled with an intense scrutiny of Indias generic industry by the US Food and Drug Administration (US FDA). The American drug regulator, US FDA, has speeded up its product approval procedure, resulting in higher number of generic drugs getting the go ahead. It authorised more than 800 new general drugs last year. The list of companies getting approval for selling these drugs is longer, while the product price is increasingly heading south.
This flood of competition has resulted in collaboration among distributors who buy from the generic medicine makers. In fact, the distributor space in the US has shrunk to just a couple of big players who command the price at which they want to buy generics. In the bargain, established players are facing erosion in both sales and profitability.
The failure at ‘Halol’
To add to the misery, the US FDA issued a warning letter to the companys Halol plant in Gujarat in 2015 that prevents new product launches from this facility to the US. The regulator made over 20 observations, mostly pertaining to sterility assurance levels which expressed the probability of having microorganisms in a sterilised facility.
The Halol plant is of significance as it contributes about 8 to 10 percent of Sun Pharmas consolidated revenue. The Company brought in consultants and invested in new systems to meet FDA expectations. Sun believed that with all of that effort, a return visit by FDA inspectors late last year would finally clear the plant of its regulatory overhang. However, the FDA issued a new 14-page list of potential manufacturing violations. This included poorly designed tests and tardiness in reporting results that Sun Pharma must address before the facility could be cleared. Consequently, Sun Pharma has been unable to create new products, revamp its sales in the US, and tackle the pricing pressure.
Shanghvi knows the way out
The outlook for FY18 looks clouded for the largest domestic generic medicine company. Shanghvi is now revisiting his earlier strategy of getting into niche products to ward off competition. This is the route he took while starting off. He had focussed on speciality and chronic therapies such as psychiatry, cardiovascular, neurology, oncology and dermatology to build his empire instead of fighting domestic and foreign incumbents in large therapies. To begin with, the revenue opportunity in these drugs was minimal but less competition translated into higher margins. This provided Shanghvi with the resources to reinvest in the business.
Shanghvi is counting on the same strategy of niche products to beat the competition. He is venturing into the speciality segment- patent drugs for niche therapies and complex generics which require a high cost for research and development and thus, provide a cushion from the competition. The company recently introduced speciality products BromSite (ophthalmic) and Odomzo (skin cancer) in the US. Also, a drug to treat psoriasis is now with the USFDA and can turn things around if it eventually gets clearance.
Will ‘the Sun’ shine again?
Till new launches are able to contribute enough to offset price erosion in its base business and the Halol facility gets a green signal, the pressure from price erosion in the US market will weigh heavily on its performance. Sun Pharma continues to invest in building speciality business but is likely to see meaningful revenue from FY19 onwards with breakeven in FY20, according to Neha Manpuria, an analyst with J P Morgan. The earnings pressure from elevated R&D (9-10% of sales) and speciality infrastructure spend should keep earnings under pressure in the near-term, she said.
Furthermore, generic medicines in India have received a new impetus with Prime Minister Modi himself advocating the usage of these medicines. The government has announced its plans to bring in a law that compels doctors to prescribe generic formulations of medicines, as opposed to specific brands. Even though the low pricing is an ever-existing danger, the governments move can prove beneficial for Sun Pharma in increasing its revenue to some extent. In this era, with a complex business environment, the companies have to continuously monitor and modify their product offerings and strategies to survive. Dilip Sanghvis Sun Pharmaceuticals has to revamp its existing strategies as per changing regulations to maintain a significant hold in the US market.
Featured image credits - Visual Hunt