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Corporate Raider

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It was the late 90s. Dilip Shanghvi was just another businessman then. To be precise, it was 1997, just before his acquisition of Tamil Nadu Dadha Pharmaceuticals in the country and Caraco Laboratories in the US. He met mediapersons on the sidelines of a pharmaceutical science conference in Baroda (Vadodara now) that was co-sponsored by the then little known Sun Pharmaceutical Industries. He was soft spoken and media-shy; and overweight too. He wore a plain white, unbranded shirt that was a wee bit tight. Shanghvi patiently listened to the long queries, responding in monosyllables. He wasn’t in a hurry, as he is now — he devoured a full plate of Makhaniya biscuits and ordered another plate. “Achieving scale with limited resources is a major task for Indian drug companies,” Shanghvi had said in that interview. He tried to illustrate his point by using weight as an analogy. “When compared with foreign giants who weigh in tonnes and tonnes, we are just milligrams; they can knock us out in the competition easily,” he said.

Since those early days, Shanghvi has taken a healthier disposition to life, and worked hard to lose weight. On the other hand, his flagship company, Sun Pharma, has continued to acquire heft and grown both in size and importance as an industry leader. His now well-known dual strategy of expansion through low-cost acquisitions and organic growth, has worked well. His acquisition formula was to first enter as a white knight to breathe life into troubled companies. He would then take control, and using his Midas touch, turn them around.

The Simple Billionaire

He and his companies may have grown in wealth, but his under-the-radar, simple disposition has hardly changed. Fast forward 18 years. Venue: Taj Krishna in Hyderabad. Date: 23 January. Time: 7:50 pm. Shanghvi is there to release the book — An Unfinished Agenda: My Life in the Pharmaceutical Industry, authored by late Dr Kallam Anji Reddy, founder of Dr Reddy’s Laboratories and the pioneer of India’s drug research industry. The grand evening party is about to start, but the chief guest Shanghvi leaves the venue soon after the book release and a brief media interaction. He is particular not to miss his routine ­— the 9:30 pm dinner with his family in Mumbai.
Dilip Shanghvi set off on his marathon journey with just Rs 10,000 in 1983
1983: Establishes Sun Pharma with five psychiatry drugs and a two-people marketing team
1983: Sets up a manufacturing facility for tablets and capsules at Vapi, Gujarat
1987: Begins all-India business
1988: Launches cardiology products
1989: Introduces gastroenterology products in India
1990: Receives first US patent for Doxycyline
1991: Establishes an R&D centre
1994: Launches the company’s IPO
1996: Acquires an API plant from Knoll Pharma at Ahmednagar, Maharashtra
1996: Expands sales network across 24 countries
1997: Sets up a new research facility in Mumbai
1997: First international acquisition – Caraco Pharmaceuticals, US
1997: Purchases equity stake in TDPL and MJ Pharma
1998: Acquires a basket of products from Natco Pharma
1999: Acquires Milmet Labs and Gujarat Lyka Organics
1999: Sets up a private venture,  Sun Petrochemicals, as a partnership with the erstwhile Indian Petrochemicals Corporation
2000:  Acquires Pradeep Drug Company
2004:  Acquires Phlox Pharma (India) and niche brands from Women’s First Healthcare (US)
2004: Starts a manufacturing JV in Dhaka, Bangladesh
2005: Buys manufacturing unit in Bryan, Ohio, US
2005: Acquires intellectual property and assets of Able Labs from US District Bankrupcy Court in New Jersey
2007: Demerges drug research unit from parent and forms SPARC as a pure research company listed on the stock exchanges
2008: Acquires Chattem Chemicals, US
2010: Acquires a controlling stake in Israel-based Taro Pharma
2011: Invests in Natco for a  minority stake
2012:  Acquires DUSA Pharmaceuticals and the generic business of URL Pharmaceuticals (both in the US)
2014: Acquires Ranbaxy to create world’s fifth largest generic pharma company
2015:  Buys key stake in wind energy company Suzlon, through a family investment vehicle
2015:  Announces merger of Ranbaxy into Sun Pharma

Dilipbhai, as his friends and industry associates address him, is not much of a social mover and shaker. His only indulgence perhaps is an occasional visit to Matunga — Mumbai’s ‘South India’ — to gorge on sumptuous dosas at the famous Mysore Cafe or a movie with his family. But he ensures he doesn’t take too many gastronomic risks — he takes lunch from home every day.
Founder and managing director of the $35.9 billion (Rs 2.27 lakh crore) Sun Pharma, Shanghvi is a man of discipline in life and business. He started Sun Pharma in 1983 with Rs 10,000, a loan from his father, and has now made it the world’s fifth largest pharma (generics) company, with sales of $4.5 billion (approximately Rs 28,000 crore).

It was never the straight and narrow path for Shanghvi. His flagship Sun Pharma clawed its way into the league of top global drug makers through a series of tricky buyouts. It is, however, his latest bet — the acquisition of India’s largest drug maker Ranbaxy Laboratories and a manifold jump in his company’s market valuation after the merger with the former — that has added to the buzz about him.

With a personal net worth of $21.6 billion in March, Shanghvi replaced Mukesh Ambani as the ‘richest Indian’. Ambani, chairman of Reliance Industries, India’s largest private conglomerate, has been a long-time topper in the Bloomberg billionaire’s list. But these distinctions haven’t changed Shanghvi much. He still looks at penny stocks for investment and hates pricey acquisitions. “Money is the outcome of my work and is incidental,” Shanghvi, who is not comfortable with the ‘richest Indian’ tag, said at a recent press conference.

Maintaining a strict control on cost and expenditure is his forte; his deep understanding of the pharmaceutical trade and sharp focus on revenue growth have catapulted Sun Pharma into the league of global pharma heavyweights. However, the formal merger with the troubled Ranbaxy, announced in March, has put Shanghvi’s business acumen to test. He has a much bigger task in hand now — business integration of these two large organisations with entirely different business cultures, and resolution of pending regulatory issues of Ranbaxy.

Shanghvi says he is trying to understand the problems in Ranbaxy, and not just superficially. Many in the industry feel that his tendency of prejudging issues (a habit that generally develops with long runs of success) may play a dampener in the changing dynamics of the business. Yet, most of them still rate him as one of the shrewdest brains in the business.

“Beneath the soft spoken, unassuming and unflappable exterior lurks the shrewdest brain in business,” Dr Reddy, who set up Dr Reddy’s Laboratories around the same time as Sun Pharma, described Shanghvi in his book.

A Quick & Sharp Approach

Shanghvi’s winning trick has been to leverage India’s low-cost manufacturing advantage and combine it with sales in the high-value US market to garner bigger profits. India’s pharmaceutical industry flourished in the 1980s, after the government abolished product patents for drugs. The country witnessed a rush of pharma startups by many small and medium entrepreneurs, who could successfully reverse-engineer patented drugs. Till that time, these drugs were only imported into the country by foreign drug giants. Besides, a bundle of other industry-friendly policies by the government to overcome the exorbitant cost and shortage of such imported medicines also helped the local companies to grow faster. 
“It may no longer be possible to set up a pharma company with Rs 10,000 as I did many years ago. The times have changed, the market has changed. The opportunities are different. New players will have to identify the current opportunities and fill such gaps,” says Shanghvi responding to a question on the business environment.
Dilip Shanghvi, India’s most successful pharmaceutical entrepreneur, says he has been interviewed more number of times in the past 10 months than ever before. Excerpts from an exclusive interview with BW’s Joe C. Mathew:

On His Beginnings
Sun Pharma was my first entrepreneurial venture. I had realised early on that I was not excited by trading. It was very transactional in nature. I wanted something more consistent and stable. And (in pharmaceuticals), it was only possible if you had a brand of your own to generate consistent prescriptions. That was the beginning. When the company was established, I did not have the money to set up a factory. I outsourced the medicines in the initial months and later set up a factory at Vapi (Gujarat). 

Business Focus
I am always excited about finding solutions to problems. I chose to begin (Sun’s operations) with (five) psychiatry medicines (and a two-person marketing team) as a solution to a problem that existed at that juncture. Psychiatry was (in 1983) not a lucrative business for most established pharmaceutical companies. About 75-80 per cent of the pharmaceutical business revolved around antibiotics and pain killers. I launched my first product Lithosun (lithium carbonate)  to solve a supply problem as there was only one other company making the medicine. The doctors were not able to provide appropriate treatment to patients due to the lack of psychiatric drugs that were otherwise easily available in other parts of the world. So my focus was to bring those products to India. In the next five years, we were able to cover the whole country. 

Loyalty Factor
As we went along, we saw neurologists also prescribe psychiatric medicines. To serve that segment better, we kept expanding our product range. Later, when we found that our medical representatives (MR) were struggling with the product differentiators, we formed business divisions focused on specific therapies; cardiac, psychiatry and other divisions. Other companies too had divisions, but not like ours. Our MRs (in each division) had a very specific subset of doctors as customers. We never focused on business opportunities (like government tenders) that happened one year but not the next. This helped us build long-term loyalty among customers and resulted in growth, revenues and shareholder value. This has been my strategy throughout. Our philosophy has not changed. From the very beginning, we focused on manufacturing, R&D and excellence in marketing.
The Philosophy
Be consistent, fair and ethical. Focus on humility. Get the best out of people. 

Acquisition Strategy
We always look at the value (of the troubled entity). If we think we can improve its performance, we find it interesting. The Ranbaxy acquisition is no different. Our assessment (of the core problem of the company) is breach of trust between Ranbaxy and the regulator (US FDA). We have to win the confidence of the regulator. We are trying to understand the problems (in Ranbaxy). Not just superficially, but the underlying problems. I believe people are, by nature, good. So why do they do wrong things? We need to understand the reason and once we have solved that, the need for cheating will be eliminated. At the same time, we will use technology to ensure that the ability to manipulate data goes away.  Ranbaxy is bleeding today. We need to improve its bottom line. I am involving all the senior executives of Ranbaxy and Sun to do this. We will be able to do that in a short period of time.

Non-pharma Investments
My strength and expertise are in running the pharma company. Every other investment I make is financial in nature. I have no involvement in running those businesses. It is Valia’s (Sanghvi’s brother-in-law Sudhir Valia) business. If at all there is any involvement (by virtue of being a board member of those companies), that would be to work towards achieving the same value system (inculcated in Sun), but not operational involvement.

Will Sun Pharma Be Sold?
I am very passionate about my business. Making money is not what excites me. I don’t get excited by any business other than pharmaceuticals.
Son of a pharma trader, Shanghvi always wanted to sell his own drugs. Reading patient information leaflets inside the boxes of medicines that his father traded sparked his passion for the business. He started his own entrepreneurial journey at the age of 27 by setting up a small manufacturing unit at Vapi in 1983 to make just five specialty products. His first product was a psychiatric drug, Lithosun, which his company still makes. Sun Pharma was thus born and it has never looked back.

In the domestic market, Shanghvi initially made a series of acquisitions at throwaway prices to strengthen his portfolio. Almost all these units were focused on specialty therapies where competition was not intense. Shanghvi selectively picked up many of these therapeutic segments looking at their high-growth potential in the country. He focused on neuropsychiatry and women’s health, areas where Sun Pharma still commands the largest market share in the country.

His aggressive marketing and sole attention to revenue growth had their own problems. Critics say that psychiatry is a medical specialty in which drug makers can easily generate prescriptions in India.

“Psychiatry drug is the easiest route to success as the diagnosis of a psychiatric problem is usually not based on proof but on doctors’ judgement,” says Dr C.M. Gulhati, a medical expert who edits Monthly Index of Medical Specialties, a ready reference book on drug formulations used by medical practitioners and chemists.

“In this segment, a doctor can take the liberty (of prescribing medicines) as he cannot be caught. Hence, it is a convenient way to promote drugs where the distinction between rationality and irrationality is narrow,” adds Gulhati, slamming companies that started off with psychiatry drugs. A Sun Pharma spokesperson, however, insisted that these practices “do not apply to his company”.

But Sun Pharma did face trouble over its drugs for women. The company’s attempt to promote anti-cancer drug Letrozole in 2009 for improving female fertility landed it in difficulty. Though Sun Pharma defended the promotion of the drug through clinical trials, it could not stand regulatory scrutiny for long with the health ministry banning the use of Letrozole for female fertility treatment.

The company denied any knowledge of unethical promotion of drugs. It passed it off as the handiwork of a few sales professionals. A Parliamentary committee probe in 2012 on the role of the office of Drug Controller General of India, however, exposed the nexus and the illegal practice.

The Letrozole experience was a setback for Shanghvi, but it did not deter him from betting big on the specialty drug market. He committed his personal investment in Hyderabad-based cancer specialty drug maker Natco Pharma in the wake of the rapidly growing global incidence of cancer. The disease was estimated to spread to 21 million people by 2030, and he figured Indian generic drug makers like Natco stood to benefit. He wasn’t wrong. His investment in Natco Pharma have multiplied manifold and the company’s shares have appreciated almost 248 per cent (from Rs 684 on 1 April 2014 to Rs 2,384 on 16 April 2015) in the last one year alone.

Rough Weather In The US
In the US market, which continues to contribute almost 60 per cent of Sun Pharma’s revenue, there was rough weather too. In June 2009, US Marshals, at the request of the Food and Drug Administration (FDA), seized drug products manufactured by Caraco from the company’s facilities in Detroit, Farmington Hills and Wixom.

“The FDA is committed to taking enforcement action against firms that do not manufacture drugs in accordance with our good manufacturing practice requirements,” said Janet Woodcock, director of FDA’s Centre for Drug Evaluation and Research, in a 2009 official statement. “Compliance with these standards prevents harm to the public.”

As the unresolved compliance issues kept Caraco from resuming operations, it had to retrench a majority of its employees and the plants remained closed till 2012, when it restarted production in phases.
Drug companies like Sun Pharma know the US market can be ignored only at their peril; so Shanghvi bid his time before he could make a re-entry.

Meanwhile, he used the time to recoup the losses in the US. He began the classic and well-documented chase to take control of Israeli drug maker Taro Pharma, with which Sun Pharma signed a merger agreement in 2007.

The Barry Levitt family, promoters of the troubled Taro, signed an agreement with Sun Pharma for merger after receiving working capital from the Indian company. The Levitts, however, tried to wriggle out of the deal and called for termination of the contract by claiming that Sun Pharma had grossly undervalued the company’s equity. But the ‘option agreement’, part of the original merger deal signed by Taro promoters, committed the latter to transfer their shares to Sun Pharma if they failed to get the entire outstanding shares from Taro’s public shareholders through an open offer. The terms of the contract were watertight. This the Levitt family learnt after losing the company to Sun Pharma in a bitter, four-year court battle.

Soon after, Shanghvi acquired a couple of other promising assets, including DUSA and URL in the US, through his ‘trademark’ distressed asset buyout route.
With victories came defeats too. On 12 June 2013, a Newark Federal Court in the US asked Shanghvi’s company to pay $550 million (Rs 3,200 crore) in damages to multinational rival Pfizer in a patent dispute case, something he had not bargained for.

Sun Pharma, along with the world’s largest generic drug maker Teva, had been fighting in the US court a patent infringement petition filed by Wyeth (now part of Pfizer), following their launch of generic copies of Wyeth’s patented acid reflex brand Protonix.

Sun Pharma and Teva launched their generic versions of this drug (Pantoprazole) in the US in 2008. While Sun had to pay Pfizer $550 million, which caused the Indian company to post a huge loss in that quarter, Teva paid $1.6 billion to Pfizer as part of the settlement.

“He wanted to fight till he won, as he normally does. But the judge didn’t budge,” one of his confidants said. The miscalculation was an aberration for the 59-year-old veteran, who had an instinctive knowledge about patents and laws.

Though he has no formal scientific training, he is an avid reader of both J.K. Rowling as well as pharmaceutical research papers. His associates say he can normally stand his ground against the best scientific brains in the industry. But in the case of Pfizer, he had misread the risk factor.

He fared better in other legal battles. “A group company of Sun Pharma fiercely fought a series of court cases against local peer Wockhardt in a bond redemption matter and recovered its investment with full return due on it in 2011,” recalls a Mumbai-based corporate lawyer.  

The Ranbaxy Buy

Shanghvi’s distressed asset buyout strategy struck another target in 2014 in the domestic market. This time it was very, very big.

The country’s then largest drug maker Ranbaxy Laboratories was in deep trouble after the FDA banned all its Indian factories that exported generic drugs to the US, a market which contributed half of the company’s $2 billion sales revenue. The issue again was compliance with US manufacturing standards. The company, which faced a probe by the US Department of Justice for an alleged forgery of regulatory documents, had to pay $500 million as penalty. Plus, it had a debt of around $800 million in its books, mainly on account of  foreign currency loans and loss in derivative transactions. As a result, Ranbaxy’s market value along with its reputation took a beating.      

The Ranbaxy acquisition by Sun Pharma was quick. The Japanese drug maker Daiichi Sankyo, which owned the controlling stake in the troubled Ranbaxy since 2008, was looking for an exit. Although Shanghvi-led Sun Pharma had a strong balance sheet and could afford to buy out Ranbaxy in an all-cash deal, it signed a no-cash, stock-swap merger deal with Daiichi.
The valuation was in line with Shanghvi’s bare-bone ‘distress’ strategy. The $4-billion valuation, including the debt of $800 million that Sun Pharma agreed to pay with the company’s stock was less than half of the almost $9 billion valuation at which Daiichi Sankyo had acquired Ranbaxy from its original promoters — the Delhi-based brothers, Malvinder and Shivinder Mohan Singh. In recent days, Daiichi has sold off its entire over 9 per cent stake in Sun Pharma when the stock was at its peak, thereby substantially reducing its losses (see Daiichi Divests). 

The recent corporate merger of Ranbaxy with Sun Pharma, which was announced this March, has made Sun Pharma the largest Indian drug maker with 9.10 per cent share in the Rs 90,000 crore domestic medicines market. It has also made the company one of the top five generic drug makers in the world with a combined sales revenue of $4.5 billion.

However, industry analysts believe that the integration of Ranbaxy, a company which has larger operations and a global presence, into Sun Pharma is not going to be easy compared to Shanghvi’s earlier acquisitions. Besides, resolving the FDA’s compliance issues and putting the company back on track in the US — where Daiichi failed — is going to be a Herculean task.    

“It is too early to say whether Dilip can make a difference. But I am sure that his understanding of the generic pharmaceutical business will help,” says former Ranbaxy CEO and managing director Arun Sawhney, who led the company during its problems with the FDA.

“You cannot judge a bowler when he is still running to deliver the first ball. You should allow him to bowl a full over,” says Sawhney, in response to the query whether Shanghvi will be able to do what Daiichi couldn’t.

Shanghvi, on the other hand, is confident of putting Ranbaxy back on track. “We are focused on fixing the problems and we should be able to integrate both the businesses and create value for our shareholders,” he says.

What Makes Him Tick?
Shanghvi cut his teeth early in pharmaceuticals when he joined his father’s drug distribution business in Calcutta. “Long years in the business have made Dilipbhai very pragmatic,” says Sudhir Valia, one of his business confidants and brother-in-law. Valia, who was actively part of the company as executive director till 2010, says Shanghvi uses his instincts in most cases. “In most deals and investments, we have been able to avoid intermediaries.”

Even in professional circles, Shanghvi has earned respect for his well-informed decisions and his ability to stick to core issues when executing these decisions.
“It’s enviable the way he keeps his composure and patience and takes time to understand an issue and processes it fast,” says Ranbaxy’s Sawhney. Even in the Ranbaxy deal, once he made up his mind to go for it, there was no wavering.

Piramal Enterprises chairman Ajay Piramal, also a poster boy of the Indian drug industry, calls Shanghvi a ‘brilliant strategist’. “He thinks far ahead of what competition can do.”

Private equity investor Sanjiv Kaul acknowledges Shanghvi as a role model. “Behind his warm persona and amenable demeanour, there is a very sharp and astute mind at work. I haven’t yet come across a more hard-working entrepreneur who always looks at creating value with every breath he takes,” says Kaul.

But a Delhi-based industry consultant, who has known Shanghvi for long, puts it straight. “He (Shanghvi) is a very clever businessman. His key strength is not in pharmaceutical sciences, but in finance. He is a great manager of money. Had he chosen to be in non-pharma sectors, he would have scripted the same success story.”

And that is precisely what Shanghvi is up to now! He is eying a series of non-pharmaceutical companies that he can buy using funds from his personal investment portfolio. Green energy is one such area of interest for Shanghvi as he believes the sector has a good growth potential in future.

He has also invested in wind power major Suzlon through an investment vehicle, Dilip Shanghvi Family and Associates, acting as a white knight out to salvage the debt-ridden company. 

“This financial investment is in sync with the government’s long-term vision; the renewable energy market has immense potential,” said Shanghvi soon after his investment in the Tulsi Tanti-promoted Suzlon.

According to him, Suzlon has the potential to emerge as a global leader in the renewable energy space, though it will take substantial effort on part of its management to achieve a significant turnaround. Meanwhile, with Shanghvi having picked up 23 per cent in the wind energy maker, investors see a potential shift of management control in favour of Shanghvi in the near future. Shanghvi and co-investor Valia denied any such move.

Shanghvi’s existing interests in chemicals and petrochemicals sector is the other big growth opportunity that he intends to explore and develop. The privately held chemicals and petrochemical entity Sun Petrochemicals, in which Shanghvi is a key promoter, has been making its presence felt in the growing exploration and production in the oil and natural gas industry.

Sun Petrochemicals is currently focused on two main areas of business — acetylene carbon black used for various applications in the chemical and electronic industries and the upstream hydrocarbon business.

Sustaining Success
Shanghvi, often known as a micro-manager, hasn’t so far established an equally strong second line of management to take on the expanded operations. But, as the stake gets bigger, he would have no option but to lean in favour of a professional team. Early signs of this change are already visible. Ex-Glaxo hand Kal Sundaram is now the chief executive officer of Sun Pharma with responsibilities of the North American business and Taro. Shanghvi has also roped in Israel Makov, who retired as chief executive officer of Teva, to chair the board of Sun Pharma.
Shanghvi’s son Alok, who co-founded a solar panel company, PV Powertech, soon after his graduation in molecular biology from the University of Michigan, is now being groomed for a larger role at Sun Pharma as head of emerging market businesses. Daughter Vidhi, who graduated from Wharton, had also been brought in to learn the ropes of the trade. Whether the family line or a set of professional managers will form Sun Pharma’s second line of leadership is not yet decided.

One should remember that Dr Parvinder Singh, the creator of the country’s first drug multinational and the largest domestic drug maker Ranbaxy, was both a visionary and a successful entrepreneur. Singh also had a history of successful takeovers and a much better professional team assisting him. But, over a period of time, a distressed and devalued Ranbaxy finally landed in the lap of Shanghvi, today’s turnaround specialist.  

Will Shanghvi be able to sustain the momentum that the Singh family and Ranbaxy could not? Only time will tell. 

The authors are C. H. Unnikrishnan & Joe C. Mathew

(This story was published in BW | Businessworld Issue Dated 18-05-2015)