Sun Pharma’s R&D Fo­cus a Good Sign

The Economic Times - - Companies: Pursuit Of Profit -

timesin­ter­ ET In­tel­li­gence Group: The real test of an in­vest­ment hap­pens dur­ing tough times, and the coun­try’s most valu­able pharma com­pany is go­ing through one such pe­riod. How­ever, in­vestors would rather ap­pre­ci­ate the com­pany’s ef­forts to in­vest in its fu­ture while try­ing to main­tain its cur­rent base busi­ness in a chal­leng­ing time. S u n Phar ma’s third-quar­ter per­for­mance while be­ing dis­ap­point­ing hardly had any­thing new for the Street. Af­ter a strong per­for­mance in the firsthalf of the fis­cal, the com­pany had main­tained its an­nual rev­enue guid­ance at 8-10%— mak­ing it ev­i­dent that the sec­ond-half per­for­mance was go­ing to be sub- dued — es­pe­cially with the end of Gleevec ex­clu­siv­ity sales in the US and the sup­ply dis­rup­tion as­so­ci­ated with the Halol plant where the res­o­lu­tion of USFDA is­sues is still go­ing on. The com­pany posted 8% growth in con­sol­i­dated rev­enues — low­est in the past five quar­ters. The per­for­mance in both the US and In­dia was dis­ap­point­ing — with rev­enue growth at 4% in case of the for­mer and 5% for the lat­ter. In the US, the com­pany is fac­ing pric­ing pres­sures, lumpi­ness in the busi­ness, cus­tomer con­sol­i­da­tion as well as an on­go­ing Depart­ment of Jus­tice (DOJ) probe on price col­lu­sion. Be­sides, there is a lot of un­cer­tainty about what the new Trump Pres­i­dency will mean for the pric­ing of generic drugs. (On a trail­ing four quar­ters ba­sis)

The de­mon­eti­sa­tion move partly im­pacted the com­pany’s do­mes­tic busi­ness, which was al­ready fac­ing head­winds like in­creased com­pe­ti­tion, reg­u­la­tory changes and price con­trol.

In this con­text, what ap­pears to be a strong sil­ver lin­ing is that the com­pany’s com­mit­ment and in­vest­ment in grow­ing its spe- Sun Pharma cialty prod­uct pipe­line through re­search and ac­qui­si­tions. Sun has iden­ti­fied der­ma­tol­ogy, oph­thal­mol­ogy and on­col­ogy as its key ar­eas of foray. The com­pany is in­vest­ing its cash flows in en­hanc­ing its spe­cialty pipe­line of dif­fer­en­ti­ated prod­ucts, which in­ci­den­tally can­not pro­duce com­men­su­rate re­turns on the rev­enue and profit fronts im­me­di­ately. Sun spent 7% of its rev­enues on R&D for the nine months of this fis­cal. The ben­e­fits ac­cru­ing from the Ran­baxy ac­qui­si­tion are be­ing ploughed back into in­vest­ment in re­search. Sun’s in­or­ganic g rowth con­tin­ues through a se­ries of small strate­gic ac­qui­si­tions in niche ther­a­peu­tic ar­eas and key growth mar­kets of Rus­sia and Ja­pan. Lit­tle won­der, 80% of the 47 an­a­lysts track­ing the com­pany’s stock have a ‘buy’ rec­om­men­da­tion on it, as per data from Bloomberg. For now, phar ma in­vestors, which were used to see­ing su­per nor­mal per­for­mance of com­pa­nies sell­ing low-priced gener­ics, will have to start get­ting used to the com­pa­nies now play­ing the long-term R&D game as do­ing the gener­ics busi­ness in­creas­ingly be­comes less at­trac­tive.


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