Thursday, August 23, 2012

Sun Pharma - Will it continue to grow with the same pace and strength?

Sun Pharma is one of the most efficiently managed generic companies in the world. In 2012, it  returned almost 60% of the investment in gross block to shareholder in terms of net profits.  Innovator pharma companies which are supposed to generate much higher returns would rethink about their business, when they look at Sun.  Sun  currently holds over $1billion in cash and cash equivalents and is looking at acquisition to further expand. Other Indian pharma companies which have invested as much in capital have not been able to generate proportionate returns (Table 1).

Why is Sun Pharma so capital efficient ?
Extraordinary focus on the US and Indian market and their intrinsic ability to make the best out of these two markets has allowed them such returns. The 2012 profits although have been aided by several one-off opportunities, but this does not mean we might not see the same kind of profits again. It may not be a stretch to assume Sun Pharma making such one-off opportunities as a recurring business income, as we all know about its supernatural ability to spot them ahead of competition. In 2012,  a weaker rupee together with dramatic price increases for dermatology products sold by its US subsidiary Taro helped Sun's profits.

Sun Pharma in looking for Acquisitions
Historically, Sun has made the best acquisitions, with particular focus on distressed assets. Now when growth opportunities getting limited in the US and India, Sun in looking at expanding to other geographies. It is looking for acquisitions that can aid further growth, but the shareholder expectations are high and they would need to spot yet another Caraco / Taro to sustain its existing stock price premium and profitability. With innovators also eying generic assets, it may not be easy for Sun, but you never know Sun.