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The Big Picture

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Super richness has its own challenges and pitfalls. Pune-based Serum Institute of India's founder Cyrus Poonawalla — with an estimated wealth of $2.3 billion, and 23rd among the richest Indians featured by Forbes — gets more headlines for his lifestyle than business. The Poonawallas are known for their passion for horse racing and breeding, private jets and fancy cars. They own a private jet, a few choppers (with friends) and a 58-strong fleet of luxury cars such as Ferrari F-430 and Rolls Royce.

Many think the Poonawallas inherited huge wealth and they pompously flaunt it. But that is not the reality, says Cyrus Poonawalla. "The lifestyle and passion for horses or cars are a small fruit and reward for the hard labour that my 3,500 employees and I shed in the past 45 years to make what Serum is now," says the septuagenarian business tycoon.

Serum contributes to more than 90 per cent of his wealth. Cyrus and brother Zavaray started the vaccine manufacturing firm in 1966 on a 12-acre plot in Pune. Serum is fully owned by the family. The initial investment was $12,000, raised from selling horses and the rest borrowed from Cyrus's father Zoli P. Poonawalla, a horse breeder. As founding promoter, Zavaray and family hold a nominal 5 per cent in Serum.

In 2010-11, Serum's annual turnover was nearly Rs 1,300 crore, with a net profit of close to 50 per cent of sales, says Adar, Cyrus's only son and executive director of the company. That is an unusual business success, as the vaccine business is known for its low profits and few  players venture into it due to the complex technology and big investments involved.

Currently, Serum is the 5th largest vaccine maker in the world in terms of volume — 900 million doses a year. It is estimated that two out of three children immunised in the world are vaccinated by a Serum product. Now the Poonawallas are thinking even bigger; they want Serum to become the largest vaccine maker in the world, in volumes, within 3-5 years, while doubling its revenues. The company has already invested about Rs 1,500 crore and research is progressing, says 30-year old Adar, who will take over as managing director in a few years.

He Didn't Make Cars
Vaccine was not Cyrus's first big bet. Born into a family having links to India's horse racing circuit through its Poonawalla Stud Farms, he first tried his luck with cars. At age 20, along with a friend, he built a $120 prototype sports car modelled on the Jaguar D-Type. But he realised its commercial production would need huge investments and abandoned the idea. "Our farm's retired horses were donated to the government-owned Haffkine Institute in Mumbai, which made vaccines from horse serum, and a veterinary expert at our farm suggested taking up vaccine manufacturing," recalls Cyrus.

BOLD POSTURE: Adar Poonawalla says Serum has a cash balance of about Rs 800 crore and is looking for new avenues for investment

They took it forward. Research was the key and by 1974, Serum introduced the DTP (diphtheria, tetanus and pertussis) vaccine, followed by an anti-snake-venom serum in 1981. In 1989, Serum began producing its measles vaccine, M-Vac, and within a year became the country's largest vaccine manufacturer.

A turning point in Serum's business came in 1994 when it got accredited by the World Health Organization (WHO) to export vaccines from India and started supplies to UN agencies such as Unicef and Pan American Health Organization (PAHO). Today, Serum is the world's largest supplier of measles and DTP vaccines and controls 70 per cent of the paediatric vaccination market in about 140 countries, except the US and the European continent.

But that does not mean Serum is a giant in the $27-billion global vaccine market. It is a minnow when compared to, say, GlaxoSmithKline, Sanofi, Wyeth, Merck or Novartis. But the ability to supply vaccines on a big scale at low prices makes Serum the most preferred supplier of vaccines to healthcare aid agencies such as Unicef and Global Alliance for Vaccines and Immunisation (Gavi). Charity and state-funded vaccine business is estimated to be Rs 3,000 crore, says Adar. In this space, Serum's key rivals are from India — Panacea Biotec, Bharat Biotec, Biological E and Shanta Biotechnics (now part of Sanofi). Its overseas competitors include Biopharm of Indonesia and a few players from Latin America.

The Low-Cost Edge
Traditionally, the vaccine business has been a low-margin, high technology business, notes Sujay Shetty, executive director for pharmaceuticals and lifesciences at PricewaterhouseCoopers. There were only a few players such as Glaxo and Pasteur Institute in the past. "Today, demand for new vaccines against chronic diseases, emerging economies, involvement of public-private funds and awareness on prevention of diseases are driving the vaccine market." Serum does not face a big challenge from its competitors, mainly small firms, in India as the business demands use of difficult technology. "Initial investments are high in the business, but raw material costs are less," says Ranjit Kapadia, senior vice-president at Centrum Broking.

One of the reasons for Serum's monopoly is the fact that it is not easy for a new player to start making vaccine. It takes 2-3 years to come up with a vaccine. "Viabality will be an issue for a new player to make vaccines at a low cost and recover the investment within a few years," Adar explains. Even in revenues, Serum's key competitors in India — who follow a similar model — are nowhere near it. Panacea's vaccine business as on 31 March 2011 stood at Rs 833 crore, in spite of growing 29 per cent over the previous year. When Shantha was sold to Sanofi in July 2010 for Rs 3,000 crore, its estimated revenues were at `90 million (about Rs 530 crore). Now Serum sells Gavi its pentavalent vaccine at $1.75 per dose. Gavi used to pay others over $3 per dose for the same a couple of years ago.

The big breakthrough came for Serum five years ago when it decided to double vaccine capacities from about 600 million doses to over 1.1 billion doses. "At that time, the outlook for vaccines was not bright, but we saw an opportunity coming," says Adar. The company also gained considerably from foreign exchange in the past few years, while many others lost money through hedging and mark-to-market calls, he adds. Though revenues were in the range of Rs 600-700 crore about five years ago, Serum's net margins were more or less near 40-50 per cent, says Adar.

A Few Challenges
Despite the impressive record, Serum faces big challenges. Its over-dependence on public-private funded healthcare agencies poses a huge risk. More than half of its revenues come from Unicef and PAHO. Such supplies need WHO pre-qualification and the UN body conducts strict periodic audits at manufacturing facilities. Any discrepancies will invite cancellation of orders and disqualification for multiple products. Except for Serum, Indian vaccine makers such as Bharat, Shantha and Panacea had to face disqualification by WHO. "But the real threat in future for all Indian vaccine makers who depend on public-private philanthropy and government-funded vaccine supplies will be from Chinese firms and global players who are able to offer vaccines at a very low price," says an executive with a vaccine firm.

That seems a real danger. In March this year, WHO said China's drug safety authority met international standards for vaccine regulation. This will allow Chinese firms to participate in vaccine tenders. It is estimated that China has about 30 vaccine makers with a production capacity of over a billion doses. That equals the current total production capacity of Serum. Multinationals are also showing more interest in supplying to the public-private healthcare agencies, citing social responsibility factors.

So is Serum bracing up? It did try diversification a few years ago by attempting to develop cancer drugs and vaccines, but failed and had to drop those projects. Serum developed an influenza vaccine and spent Rs 20 crore to set up a plant when swine flu gripped the country, but there were no takers for the vaccine. The stocks had to be abandoned a few months ago, even after offering it free of cost to people.

Serum still can hope to cash in on the seasonal influenza vaccine, which, according to a GBI Research forecast, forms a $1.15 billion market (2010) in Asia Pacific. It is expected to grow at a compounded annual growth of 8.9 per cent during the period 2010-2017 from $1.15 billion in 2010 to $2.1 billion by 2017. Even in India, where vaccination is one of the lowest in developing world, Serum's sales are heavily dependent on government purchases. And more competition is staring at Serum in the domestic market from new players such as Zydus Cadila and Biological E.

Low-cost and prime-mover advantage alone cannot sustain Serum in the long run, admits Cyrus. "We are on a good platform to take Serum from where it is as vaccines are there to stay. It has huge potential." Enhancing the product basket with newer vaccines and non-injectable vaccine delivery platforms will be the way going forward, says Adar. In 2-3 years, Serum is planning to launch at least three new vaccines — for rotavirus infection, pneumonia and polio. Those three vaccines are expected to fetch over Rs 1,500 crore in the initial years. "If our project to develop a polio vaccine succeeds, that will help us become the world's largest producer of vaccines in terms of volume from the current fifth position," says Adar.

Now, Where To Invest?
In the twilight of his business career, Cyrus is more reclusive and confines himself to his passions — travel, stud farm and Serum. He has relinquished active roles from the Royal Western India Turf Club — where he was chairman for many years and had defeated the likes of Vijaypath Singhania and Vijay Mallya to gain control and run horse racing administration in the country. His wife Villo died at the age of 67 in June 2010. Adar, a graduate from University of Westminster, London, is married to Natasha (who belongs to the Arora business family in Pune with interests in real estate), a post graduate from London School of Economics. Adar met her in London five years ago at a business trip and soon got married.

The Poonawallas have invested close to 14 per cent stake in rival vaccine-maker Panacea. "It is just a strategic investment and is not a takeover attempt," explains Adar. Like in Panacea, the Poonawallas had also purchased about 11 per cent stake in Orchid Chemicals & Pharmaceuticals in 2008. That investment was a white knight's hand to save Orchid from a possible hostile takeover by Ranbaxy Laboratories.

Adar says Serum has a cash balance of Rs 700 crore to Rs 800 crore and is looking at new avenues for investment and expansion. The money is parked in various financial instruments. Apart from owning 400 acres in Pune and a real estate business worth Rs 400 crore, the Poonawallas also have a small investment in two hotels of the family (owned by Cyrus's brother) in London. They also hold about 19 per cent stake in UK's Xenetic Biosciences. "Earlier we had thought of investing in Indian Premier League cricket franchisee Pune Warriors, but backed out realising that most of the franchisee owners are bleeding and can't exit at will," he adds.

Adar says horse racing and breeding business is actually loss making. Revenue is not even Rs 10-12 crore a year. Upkeep of horses requires over 400 people and expenses are huge to run the 200-acre plus Poonawalla Stud Farm. Plans are there to make that business profitable, but it will take time.

Serum is an attractive choice for any multinational to take over but will they sell? "Bill Gates asked the same question. We already own private jets and God has given us plenty of money, so why should we sell," retorts Adar, with the same imperiousness of his father.


(This story was published in Businessworld Issue Dated 16-01-2012)

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