By Christian Zeron,
Money and Investing Writer
The Food and Drug Administration has officially regulated the importation of pharmaceutical products from Sun Pharmaceutical Industries Ltd. This ban has the potential to cause the multibillion dollar Mumbai based pharmaceutical producer notable financial strife.
Indian entrepreneur Dilip Shanghvi founded Sun Pharma in 1983 with only one treatment for psychiatric illnesses and within 29 years has grown it to be India’s most valuable pharmaceutical company. Sun Pharma’s success has helped Shanghvi’s net worth hit $13.6 billion, according to the Bloomberg Billionaires Index.
Sun Pharma is a key player in the world of generic pharmaceutical production. Its model is relatively simple and without change.
Private pharmaceutical research companies develop, patent, market and sell its treatments to the market at a premium price to cover not only operating costs but also the often massive initial investment of funds and time.
Eventually, these pharmaceutical companies who developed the treatment from the ground up, lose their patent and the treatment becomes available for all certified producers to manufacture and sell. Sun Pharma is one of those manufacturers who avoids development and research costs and awaits patent expiration dates to mass produces generic treatments and sell internationally.
Generic drugs, which made up almost 80 percent of the 4 billion prescriptions written in the U.S. in 2011, helped Americans save $193 billion that year.
In late February, prior to the FDA’s actions, Sun Pharma released a positive earnings report that read: “Q3 net sales are at an increase of 50 percent over last year. Material cost as a percentage of the net sales is 18.3 percent, lower than Q3 last year. Staff costs as a percentage of the net sales were at 12 percent, lower than Q3 last year.” This financial breakdown released to the public not only demonstrated the great worth of Sun Pharma, but also its considerable sales growth and margin spread.
After this earnings report, the FDA began their importation restrictions on Sun Pharma. The specific regulations on imports from Sun Pharmaceuticals are referred to as “red list” regulations. This means any products from Sun Pharmaceuticals can be detained by authorities without physical examination. When the news of FDA crack down surfaced, Sun Pharma shares dropped 5.2 percent to 572.95 rupees on the National Stock Exchange of India.
The infringements the FDA reported Sun Pharmaceuticals committed were classified as “non-compliance of current good manufacturing practice regulations”. Specifically, Sun Pharmaceuticals conceded to mass error when they recalled 2,528 bottles of their diabetes treatment after reports of a customer finding tablets of a drug used to treat seizures in their bottle. The Food and Drug Administration has made it clear that their priorities lie not on any one manufacturer but rather on the welfare of the American consumer; therefore, mistakes such as this are not tolerated.
The United States generic pharmaceutical market, being estimated at $93 billion, is heavily reliant on India’s pharmaceutical production industry. Annually, the United States imports $14.6 billion in Indian manufactured pharmaceutical products. Sun Pharma has not been the only Indian manufacturer to be on heavy watch by the Food and Drug Administration, more than 20 other companies have been identified as dangers to the American consumer.
Sun Pharma’s recent press release spoke regarding their progress in regaining full importation rights: “The company remains fully committed to compliance and has already initiated several corrective steps to address the observations made by the U.S. FDA.” Despite the challenge posed by the FDA, Sun Pharma maintained its initial forecast of 29 percent sales growth for the year ending March 2014.
Sun Pharmaceutical’s ability to mass produce generic treatments has made them fabulously successful; but will it be that same strategy of mass production that ends their market opportunity? One should find it hard to believe that self-made multibillionaire entrepreneur and Sun Pharma founder Dilip Shanghvi is going down without a fight.
A version of this article appeared in the Tuesday, Mar. 25 print edition.
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