Scrip100: The Indian power house that leaves big pharma standing
This article was originally published in Scrip
Organic growth is important, but as Sun Pharmaceutical has consistently shown, maintaining operating margins may hold the key to the continued rise of Indian pharmaceutical companies.
Drug sales from Indian companies, as a group, were 17% higher in 2013 than in 2012 reaching nearly $13bn ($11.1bn in 2012). And that performance is dampened considerably by the weakening of India's currency by 8% against the dollar: in rupees, collected Indian drug sales were up 26.8% between 2012 and 2013.
So the group of Indian public companies is doing rather better in building its pharmaceutical presence than, say, companies from France, the UK, Germany, Japan or the US. An overall 17% increase per annum in drug sales is good going in a climate of retrenchment engendered by recession, especially given that Indian producers generally are producing generic drugs and not breakthrough, premium-priced products.
Looking further back, Indian firms' drug sales have increased 54% in the last five years since 2009 (an 85% increase in rupees), and over 41% of that increase can be attributed to just one company, Sun Pharmaceuticals.
Figure 1. Sun rises: Sun Pharmaceutical has grown in the last 5 years from a middling Indian company to a dominant force
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Source: Scrip 100 data
As Figure 1 makes clear, Sun has been the stand-out performer in the Indian drug manufacturing sector. In 2009, Sun's drug sales represented 9.7% of the Indian sector's total: then, three independent firms – Dr Reddy's, Cipla and Lupin - had higher sales, as did Ranbaxy before its acquisition by Daiichi Sankyo's in 2008. By 2013, Sun's share of Indian sales was 20.7% and in 2014, with its acquisition of Ranbaxy from Daiichi Sankyo in April 2014, it will be over 30%.
The acquisition of Ranbaxy takes Sun's pro forma sales to over $4bn, raising the Indian firm above international generics rivals such as Stada ($2.67bn sales) and Hospira ($2.7bn) although still significantly behind Valeant ($5.6bn) and Mylan ($6.85bn).
Figure 2. Sun's operating margins are consistently high compared to those of other Indian companies
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Source: Scrip 100 data
Sun's sales growth is impressive but what sets Sun apart from other Indian companies is the consistently high level of its operating margins (Figure 2). While most of the Indian companies have operating margins that are 10-25% of sales, depending on the company and the year, since 2006 Sun's operating margin has been above 36%. In 2013, that margin was over 46%, the second highest operating margin within the top 50 drug companies globally. Sun has outshone Roche, Gilead, Biogen Idec, Allergan, Shire, Amgen and a host of other sparkling performers from the pharma universe. Only Pfizer of the top 50 performed better in 2013 (Figure 3).
Figure 3. Shining example: Sun (highlighted) is second in operating margin only to Pfizer among the top 50 drug sellers globally
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Source: Scrip 100 data
Operating margins for Indian companies are generally good, thanks in part to the falling value of the rupee against major currencies such as the dollar and euro. This has meant that the value of sales in Western markets has risen faster than the cost of the domestic manufacturing base for all Indian drug exporters. But a weaker rupee has a downside for ambitious Indian companies: it makes it expensive for Indian companies to acquire pre-existing market presence in Western markets. So most Indian firms with international ambitions have grown organically.
However, its higher operating margins have allowed Sun to grow more rapidly, largely through careful acquisitions of damaged companies.
At the end of 2012, for instance, it picked up a portfolio of generic products in the form of URL Pharma, a company which Takeda had acquired just a few months before and then discarded after extracting URL's one FDA-approved product that accounted for over 70% of sales.
Sun acquired another US generics company, Caraco Pharmaceuticals, gradually over a decade starting in 1997, firstly earning equity by channelling its own products through Caraco onto the US market and then completing the acquisition in 2010 after regulatory transgressions hit Caraco's stock price.
Sun's biggest acquisition before Ranbaxy was Taro Pharmaceuticals, a publicly quoted Israeli company weakened and devalued by poor management. Taro's family owners resisted Sun's advances until the Indian company managed to attain a majority shareholding in 2010.
In theory, at least, the other option for growth for Indian companies within the economic constraints of a falling currency is to expand through consolidation within India. But that route is often stymied by the continuing presence of family founders within the senior management teams. Selling Ranbaxy to Sun was much more likely with Daiichi as the majority owner than with the Singh family still wholly in charge.
The other lesson for Indian pharma from the acquisition of Ranbaxy is that regulatory non-compliance can turn a pronking company into a limping gazelle, vulnerable to predatory action.
When Daiichi Sankyo paid $4.6bn for Ranbaxy back in 2008, it hoped India's then-biggest firm would become part of its beyond-Japan globalization strategy. But Ranbaxy was already getting into difficulties with US FDA over manufacturing breaches at Ranbaxy. The continuing struggle for compliance severely hit US sales of numerous Ranbaxy products with the result that, as a Daiichi subsidiary, Ranbaxy's overall sales in effect stagnated at around the $2bn a year level. Sun's pro forma calculations suggest that Ranbaxy's sales in 2014 are closer to $1.5bn.
Watch out Wockhardt
In this respect, Wockhardt is starting to limp. India's sixth largest company by drug sales in 2012 became India's seventh largest company by sales in 2013, overtaken by a galloping Glenmark (Figure 4). Wockhardt's drug sales in 2013 were down over 20% to $829m as the firm's products hit regulatory turmoil in the US and UK, including product recalls in the UK. Wockhardt's US sales – which represented 52% of its revenue in 2012 – were down to 75% of 2012 levels as a result. Its operating margin fell from 37% of sales in 2012 to 20% in 2013. While the company says it is addressing the manufacturing that caused the compliance breaches, the spiral seems to be continuing for Wockhardt: its half-year results disclosed at the beginning of November 2014 showed its US business down 58.6% (in rupees) and representing just 26.6% of its global revenues.