Date:11/02/2006 URL: http://www.thehindubusinessline.com/2006/02/11/stories/2006021103420100.htm

Back Sun Pharmaceuticals demerges innovative research unit

Our Bureau

Mumbai , Feb 10

SUN Pharmaceutical Industries Ltd has demerged its innovative research and development (R&D) into a separate company. Further cushioning of risk, in terms of taking a strategic investor on board the new company, is however not on the cards.

There are no surprises in process development and reverse-engineering where there is a definite approach and a predictable cost. But, with innovative research (where new drug molecules are identified or medicine delivery systems are developed), the fund requirements are larger, said Sun Pharma's Chairman and Managing Director Mr Dilip Shanghvi, differentiating between the two types of research that his company undertakes.

Rationale: "At the later stage (of drug development), the fund requirement escalates. And even then, the product may or may not reach the market," he said, giving the rationale behind the demerger.

The nature of innovative business is different and so is the risk-profile and skill-sets required, he said. The R&D product company would attract sector investors interested in speciality pharma, he added.

Sun Pharma intends to keep a foot in both innovative R&D and the reverse engineering-driven generics business. Research for the generics business, which drives current performance, will remain with Sun Pharma.

Demerger from April 1: The board ratified demerger scheme will be effective from April 1. As part of the scheme, shareholders of Sun Pharma would be allotted an equity share of Rs 1 each for each share of Rs 5 of the parent company. About Rs 200 crore in cash and assets worth Rs 50 crore would also be transferred to the new company, he said. The company would be listed, subject to regulatory and other clearances.

At present, the new chemical entity and New Drug Delivery Systems that the company is developing are under the new company that has the same equity holding pattern as Sun Pharma. Promoters hold about 72 per cent equity in Sun Pharma.

Future revenues: The demerged company will have 140 people and the remaining 260 researchers will be with Sun Pharma's generics business. Sun Pharma intends to continue spending about 10-11 per cent of its sales on research. Future revenues would be through out-licensing of its prospective products to other drug companies for further development or marketing, besides bringing a product to market on its own steam. But this is at least about three years away, Mr Shanghvi said.

Tax breaks: A Sun Pharma official admitted that tax-breaks on innovative research may not come, since it operates under a different entity.

However, she added that only four per cent of research spend is on innovative products, with the rest remaining with Sun Pharma. So the generic business tax breaks continue, besides other sops, she said.

Early last year, Dr Reddy's Laboratories had roped in ICICI Venture to support risk and litigation-ridden drug research initiatives.

Later in the year, to fast-track drug development, it further formed an integrated drug development company Perlecan Pharma Pvt Ltd.

Sun Pharma's strategy is a similar strategy to cushion research-related risk, said an analyst tracking the segment. Another analyst, however, felt that Sun Pharma was unlocking the real value of the company.

Till now only the generics business was being valued, this gives an opportunity to value the innovative pipeline as well, he said. Sun Pharma shares closed at Rs 787, down 1.58 per cent on the BSE.