Experience with overseas acquisitions made in the bull markets of 2007 have made investors a bit wary of such moves by Indian companies.
But Sun Pharma’s move to acquire Israel-based generic drug maker – Taro Pharma has proved to be a winning proposition.
Sun Pharma fought a three-year legal battle to emerge the winner in its race to acquire Taro, buying a 66 per cent stake in it in September 2010.
The acquisition has paid off, as since then Taro’s financial performance has witnessed notable improvement.
US market
Taro, a generic drug maker, derives over two-thirds of the revenue from the US market.
Emerging markets including Israel account for the balance.
Taro’s strength in the dermatology segment complements Sun’s leadership in the chronic therapies such as cardiovascular, anti-diabetes and neuropsychiatry.
Price increases in specific products and sales push supported by Sun’s strong relationship with the distribution channel in the US helped Taro increase revenues by 32 per cent in 2011-12.
Cost pruning drive
Conscious efforts to prune costs by way of rationalising selling and administrative expenses, has paid off too.
As a result, Taro’s operating margins improved by 18 percentage points in just a year to 47 per cent in 2011-12.
Sun is looking to overhaul Taro’s entire product portfolio. The top three products account for more than a third of the company’s revenue.
R&D investments
After the takeover, in order to reduce product concentration risk, investments in R&D have been stepped up.
In addition to the 15 generic product filings, the company has also been investing in developing differentiated products which are subject to less competition.
It has two new drug abbreviated (NDA) filings pending approval.
Contribution from existing products coupled with new niche launches may help Taro sustain growth and profitability.
Stake sale
Taro’s Board has recently approved Sun’s proposal to buy out the balance 34 per cent stake in it.
This will entail a cost of $ 600 million for Sun.
This move, once approved by minority shareholders, will boost Sun’s net profits, increasing the distributable surplus available for its own shareholders.