Sun Pharmaceuticals Industries Ltd:Annual Report 2023-24 Analysis

Sun Pharmaceutical Industries Ltd.: A Comprehensive Overview #

About the Company #

Year of Establishment and Founding History:

• Founded in 1983 by Dilip Shanghvi in Vapi, Gujarat, India. It started as a marketing company with just five psychiatric products.

Headquarters Location and Global Presence:

• Headquarters: Mumbai, Maharashtra, India.
• Global Presence: Operates in over 100 countries across North America, Europe, Latin America, Asia, and Africa.

Company Vision and Mission:

• Vision: To be a global leader in specialty generics.
• Mission: To provide high-quality, affordable medicines to patients worldwide.

Key Milestones in Their Growth Journey:

• 1983: Founded with a focus on psychiatry products.
• 1994: Initial Public Offering (IPO) on the Bombay Stock Exchange (BSE).
• 1996: Began exporting products.
• 1997: Acquisition of Knoll Pharmaceutical’s Indian business, expanding its product portfolio and market reach.
• 2014: Acquisition of Ranbaxy Laboratories, making Sun Pharma the largest pharmaceutical company in India and a top 5 specialty generic company globally.
• Ongoing: Continued focus on research and development, specialty products, and international expansion.

Stock Exchange Listing Details and Market Capitalization:

• Listed on: Bombay Stock Exchange (BSE: 524715) and National Stock Exchange of India (NSE: SUNPHARMA).
• Market Capitalization: [Insert latest market capitalization data here].

Recent Financial Performance Highlights:

• [Insert latest revenue, net profit, and other key financial metrics here. Include the reporting period for the data.]

Management Team and Leadership Structure:

• Dilip Shanghvi: Managing Director
• [Insert key leadership positions and their respective names here]

Notable Awards or Recognitions:

• [Insert awards or recognitions received by the company here.]

Their Products #

Complete Product Portfolio with Categories:

• Generics: A wide range of generic pharmaceutical products across various therapeutic areas.
• Specialty Medicines: Focuses on complex and differentiated products, including dermatology, ophthalmology, and oncology.
• Branded Generics: Generics marketed under brand names, often in emerging markets.
• Active Pharmaceutical Ingredients (APIs): Manufacturing and sale of APIs to other pharmaceutical companies.

Flagship or Signature Product Lines:

• Dermatology: Strong presence in dermatology with products for acne, psoriasis, eczema, and other skin conditions.
• Ophthalmology: Growing portfolio of ophthalmic products for various eye diseases.
• Oncology: Developing and marketing treatments for different types of cancer.

Key Technological Innovations or Patents:

• [Insert information about specific patents or technological innovations developed by the company.]

Manufacturing Facilities and Production Capacity:

• Owns and operates multiple manufacturing facilities globally, adhering to international regulatory standards.
• [Insert production capacity or relevant details about manufacturing capabilities here.]

Quality Certifications and Standards:

• Compliance with Good Manufacturing Practices (GMP) and other international quality standards.
• Certifications from regulatory agencies like the US FDA, EMA, and others.

Recent Product Launches or R&D Initiatives:

• [Insert details about recent product launches or significant R&D initiatives here.]

Primary Customers #

Geographic Markets (Domestic vs. International):

• Sun Pharma has a strong presence in both domestic (India) and international markets.
• Key international markets include the United States, Europe, and emerging markets.

Distribution Network and Sales Channels:

• Extensive distribution network through wholesalers, distributors, and pharmacies.
• Direct sales force in key markets.
• Strategic partnerships with other pharmaceutical companies for distribution.

Major Competitors #

Direct Competitors in India and Globally:

• India: Dr. Reddy’s Laboratories, Cipla, Lupin, Torrent Pharmaceuticals, Aurobindo Pharma.
• Globally: Teva Pharmaceutical Industries, Mylan (Viatris), Sandoz (Novartis), Pfizer.

How They Differentiate From Competitors:

• Focus on specialty products and complex generics.
• Strong research and development capabilities.
• Global manufacturing network and supply chain.
• Established presence in emerging markets.

Market Positioning Strategy:

• Positioned as a leading global specialty generic pharmaceutical company.
• Emphasis on innovation, quality, and affordability.

Future Outlook #

Expansion Plans or Growth Strategy:

• Continued investment in research and development to develop new products.
• Expansion into new therapeutic areas and geographic markets.
• Strategic acquisitions and partnerships.

Upcoming Products or Innovations:

• [Insert any information regarding upcoming products or innovations in the pipeline.]

Industry Trends Affecting Their Business:

• Increasing demand for affordable medicines.
• Growing prevalence of chronic diseases.
• Stringent regulatory requirements.
• Competition from generic manufacturers.

Long-Term Vision and Strategic Goals:

• To be a leading global pharmaceutical company known for innovation, quality, and affordability.
• To improve the lives of patients worldwide by providing access to high-quality medicines.

Financial Performance Overview #

3-Year Trend Analysis of Key Financial Metrics #

• Total Income: FY24 witnessed a total income of ₹498,510 Million, showing growth from ₹445,202 Million in FY23 and ₹395,760 Million in FY22.
• Revenue from Operations: Increased to ₹484,969 Million in FY24 from ₹438,857 Million in FY23 and ₹386,545 Million in FY22, exhibiting consistent growth.
• Net Profit after Minority Interest: Showed an increase to ₹95,764 million in FY24, up from ₹84,736 million in FY23 and ₹32,727 million in FY22.
• R&D Expenditure: Increased to ₹31,776 Million in FY24, up from ₹23,676 Million in FY23, and ₹22,194 Million in FY22, reflecting continued investment in innovation. R&D spend as a percentage of total sales for FY24 was 6.7%.
• Earnings Per Share (EPS) - Basic & Diluted: Increased to ₹39.9 in FY24, from ₹35.3 in FY23 and ₹13.6 in FY22, indicating improved profitability.
• EBITDA: Grew to ₹130 Billion in FY24, up from previous years, with an EBITDA margin of 26.9%.
• Return on Net Worth: remained at 15.0% and 15.1%.

Business Segment Performance #

• United States: US business revenues were ₹153,493 Million in FY24, marking a 13.4% Y-o-Y growth, driven primarily by the specialty segment and constituted 32% of consolidated revenues.
• India: The India business generated revenues of ₹148,893 Million in FY24, a 9.5% Y-o-Y growth, contributing 31% to consolidated revenues.
• Emerging Markets: Revenues from Emerging Markets were ₹86,195 Million in FY24, demonstrating 9.1% Y-o-Y growth, contributing 18% to consolidated revenues.
• Rest of the World (RoW): RoW markets contributed 14% to consolidated revenues, with sales of ₹67,128 Million in FY24, an 11.1% increase Y-o-Y.
• Active Pharmaceutical Ingredients (API): API business revenues decreased by 2.7% to ₹19,187 Million, representing 5% of consolidated revenues.
• Global Specialty Business: Global Specialty revenues grew by 19.3% to reach US$ 1,039 Million, contributing approximately 18% to the consolidated revenues for FY24.

Major Strategic Initiatives and Their Progress #

• Global Specialty Portfolio Expansion: Increased focus and investment in its global specialty portfolio.
• Merger Agreement with Taro: Sun Pharma entered into a definitive merger agreement with Taro Pharmaceutical Industries Ltd.
• Acquisition of Concert Pharma: Addition of a late stage specialty product to dermatology franchise.
• In-Licensing Agreements: Sun Pharma secured in-licensing agreements for several products.
• R&D Investment: The Company significantly increased its R&D spending, with FY24 R&D investment at ₹32 Billion (6.7% of sales).
• Field Force Expansion: Sun Pharma expanded its field force in India and key Emerging Markets.

Risk Landscape Changes #

• cGMP Compliance: The Company faces ongoing compliance issues at its Halol, Mohali, and Dadra facilities.
• Geopolitical Issues: Current geopolitical situations present uncertainties.
• US Generics Pricing Environment: The US generics market remains challenging.
• Forex Volatility: Significant volatility in forex markets may adversely impact reported growth.

ESG Initiatives and Metrics #

• Sustainability Integration: The Company has well-defined sustainability goals and initiatives.
• Climate Risk Assessment: Initiated a physical and transition climate risk assessment.
• Emission Reduction Targets: Aims to achieve a 35% reduction in absolute Scope 1 and Scope 2 carbon emissions by 2030.
• Renewable Energy: 45.23% of the total energy mix is from renewable energy sources.
• Water Management: Targets to reduce water consumption by 10% by 2025. Achieved a 31.17% reduction compared to the base year of 2020.
• Waste Management: Aims to co-process 30% of hazardous waste by 2025; achieved 28.34% co-processing in FY24.
• Workforce Diversity: Focus on creating a diverse and inclusive work environment.
• CSR Initiatives: Implemented various CSR initiatives impacting underprivileged communities.
• Corporate Governance: Emphasises on going beyond compliance, increasing transparency, and fostering reliability.

Management Outlook #

• Revenue Growth: The Company expects high single-digit consolidated topline growth for FY25.
• R&D Spending: R&D spending is projected to be 8-10% of sales in FY25.
• Top Priorities for FY25: improving compliance record of manufacturing operations, advancing global specialty products pipeline, ensuring supply chain continuity and inventory optimization, enhancing IT system, embedding sustainability practices in operations, and continued focus on cost and operational efficiencies.

Detailed Analysis #

Financial Position Analysis: Sun Pharmaceutical Industries Limited #

3-Year Comparative Analysis of Assets, Liabilities, and Equity #

(₹ in Million)

Significant Changes in Major Line Items (>10% YoY) #

• Intangible assets under development: Increased by ₹2,363.4 Million (5.9%) YoY, driven by continued investment in the specialty pipeline, especially in dermatology, ophthalmology, and onco-derm segments.
• Investments (Non-current): Increased by ₹9,305.3 Million (18.4%) driven primarily by reclassification of certain mutual funds and debt instruments.
• Other non-current assets: Increased by ₹1,015.6 million (27.3%) due to increase in advances.
• Inventories: Decreased by ₹6,447.6 Million (6.1%) YoY, indicating inventory optimisation.
• Investments (Current): Decreased by ₹7,880.7 Million (8.4%) YoY, primarily due to shift between current and non-current portions.
• Cash and cash equivalents: Increased by ₹46,619.2 Million (100.8%) YoY, contributing to the improved financial position.
• Other financial assets (Current): Increased by ₹ 1,526.9 Million (19.96%).
• Other current assets: Increased by ₹2,663.6 Million(13.6%) due to increase in prepaid expenses and balances with government authorities.
• Other Equity: Increased by ₹76,713.7 Million (13.8%) driven by profit for the year and OCI changes.
• Lease Liabilities (Non-current): Decreased by ₹2,576.2 Million (46.0%) YoY due to regular lease payments.
• Deferred tax assets (net): Increased by ₹5,847.3 Million (16.6%) YoY due to timing differences and creation of deferred tax assets.
• Borrowings (Current): Decreased by ₹33,535.2 Million (54.1%) YoY, primarily due to repayment and reclassification to long term.

Working Capital Trends #

• Inventory Turnover Ratio: Increased slightly from 1.0 to 1.1. This is partially visible in management discussion and analysis, where a focus on inventory optimization is mentioned.
• Debtor’s turnover: Decreased from 3.8 to 4.2, due to increased trade receivables.

Asset Quality Metrics #

• Impairment: The report mentions an impairment charge of ₹1,492.1 Million on an acquired intangible asset under development.
• Allowance for Doubtful Debts: The company maintains allowances for doubtful trade receivables and other financial assets, indicating a prudent approach to credit risk.

Debt Structure and Maturity Profile #

The debt structure indicates the Company mainly depends on long-term borrowings from a related party and external commercial borrowings. The repayment terms are specified, reducing refinancing risk for that portion. Short-term borrowing and payable maturity is detailed in notes 21, 22 and 26, although the majority of the current liabilities come from Trade Payables.

Off-Balance Sheet Items #

The presence of significant contingent liabilities, particularly from legal proceedings, is a notable off-balance sheet item that could impact the Group’s financial position if realized. Contingent liabilities not acknowledged as debt are ₹415.7 Million. Guarantees given by bankers on behalf of the Group amounted to ₹1,682.3 Million. The Company has shared Capital commitment of ’ 10,720.1 Million

Revenue Breakdown by Segment/Geography #

United States #

FY24 revenue of ₹153,493 million, a growth of 13.4% year-over-year (Y-o-Y), driven by specialty products (Ilumya, Cequa, Winlevi, Odomzo). Contributed 32% of consolidated revenues.

India #

FY24 revenue of ₹148,893 million, a growth of 9.5% Y-o-Y, driven by chronic and acute segments. Contributed 31% of consolidated revenues.

Emerging Markets #

FY24 revenue of ₹86,195 million, a growth of 9.1% Y-o-Y. Contributed 18% of consolidated revenues, with significant growth in Brazil and Romania.

Rest of World (RoW) #

FY24 revenue of ₹67,128 million, a growth of 11.1% Y-o-Y, led by Specialty products, and increased sales of Ilumya in Australia and Japan, and Odomzo. Contributed 14% of consolidated revenues.

API and Others #

FY24 revenue of 19,187 Million, a decline of 2.7% YoY. Contributed 5% of consolidated revenues.

Global Specialty #

FY24 revenues of US$1,039 million, a growth of 19.3%. Key products driving growth included Ilumya, Winlevi, Cequa, and Odomzo.

Cost Structure Analysis #

Cost of Materials Consumed #

FY24: ₹44,293.8 million (Standalone), ₹69,043.3 million (Consolidated). It shows a substantial portion of revenue.

Employee Benefits Expense #

FY24: ₹23,739.5 million (Standalone), ₹94,290.6 Million (Consolidated). It represents a significant operating expense.

Other Expenses #

FY24: ₹67,972.2 Million (Standalone), ₹154,181.8 million (Consolidated). Includes various manufacturing, selling, general, and administrative costs.

R&D Expenditure #

FY24: 6.7% of Total Sales, ₹31,776 million (Consolidated).

Margin Analysis #

Operating Profit Margin (Consolidated) #

FY24: 25.7%, FY23: 25.5%. Relatively stable.

Net Profit Margin (Consolidated) #

FY24: 20.1%, FY23: 19.6%. Slight improvement Y-o-Y.

Operating Profit Margin (Standalone) #

FY24: 25.5%, FY23: 29.7%. A Decrease Y-o-Y.

Net Profit Margin (Standalone) #

FY24: 14.4%, FY23: 8.3%. Net Profit margin is higher due to the lower profit in previous year.

Non-Recurring Items (Exceptional Items) #

FY24 (Standalone) #

₹2,190.2 million charge, including impairment of an intangible asset under development and a settlement charge.

FY23 (Standalone) #

29,377.9 million charge mainly impairment in the value of investment.

FY24 (Consolidated) #

₹4,943.2 million charge, including impairment of intangible assets, expenses related to Alchemee operations, settlement with State of West Virginia and cost related to restructuring in Japan.

FY23 (Consolidated) #

1,714.5 million. Including impairment of an investment in a wholly-owned subsidiary.

EPS Analysis #

Basic EPS (Consolidated) #

FY24: ₹39.9, FY23: ₹35.3. Increased Y-o-Y.

Diluted EPS (Consolidated) #

FY24: ₹39.9, FY23: ₹35.3. Increased Y-o-Y.

Basic EPS (Standalone) #

FY24: 11.9, FY23: 7.0.

Diluted EPS (Standalone) #

FY24: 11.9, FY23: 7.0.

Cash Management Analysis of Sun Pharmaceutical Industries Limited (FY24) #

Cash Flow Analysis (Consolidated) #

Operating Cash Flow (OCF) #

Operating Cash Flow (OCF) increased significantly to ₹121,349.8 million in FY24 from ₹49,593.3 million in FY23, driven by improved profit and reduced working capital requirements.

Investing Cash Flow (ICF) #

Net cash outflow from Investing Cash Flow (ICF) decreased to ₹(6,902.0) million in FY24 from ₹(79,436.8) million in FY23, due to lower acquisition investments compared to the previous year.

Financing Cash Flow (FCF) #

Net cash outflow from Financing Cash Flow (FCF) was ₹67,101.6 million in FY24, compared to a net cash inflow of ₹23,760.7 million in FY23. This outflow is primarily attributed to higher dividend payouts.

Working Capital Management Efficiency (Consolidated) #

While segment-specific working capital turnover ratios are not provided, the company has focused on reducing working capital requirements at the group level, resulting in a decrease in total current assets.

Capex Analysis (Consolidated) #

The report does not disclose a segment-wise breakdown of capex. Total capex additions were ₹14,147.6 million in FY24 and ₹6,436.0 million in FY23.

Dividend and Share Buyback Trends (Consolidated) #

Dividend #

Total dividend payout for FY24 was ₹13.50 per share, up from ₹11.50 per share in FY23. A final dividend of ₹5 per share was recommended, subject to shareholder approval.

Share Buyback #

The report does not indicate any share buyback activity during the year ended March 31, 2024.

Debt Service Coverage (Consolidated) #

Debt service coverage ratio was 56.7 for FY23 and 49.6 for FY24.

Liquidity Position (Consolidated) #

Sun Pharmaceutical Industries Limited has a strong liquidity position, with cash and cash equivalents of ₹92,856.5 million as of March 31, 2024, and unutilized working capital lines of ₹88,642.1 million. The current ratio as of March 31, 2024, is 2.6.

Financial Analysis of Sun Pharmaceutical Industries Limited #

Profitability Ratios (3-Year Trends) #

(₹ in Million, except ratios)

• ROE has remained stable, suggesting consistent returns to shareholders’ equity.
• Operating and net profit margins have slightly improved, indicating better cost control or increased operational efficiency.

Liquidity Metrics #

• The current ratio improved in FY24, reflecting a stronger ability to meet short-term obligations.

Efficiency Ratios #

(₹ in Million, except ratios)

• Debtors turnover has slightly improved, indicating better efficiency in collecting receivables.
• Inventory tunover remains low.

Leverage Metrics #

(₹ in Million, except ratios)

• Debt-to-equity ratio has decreased, signifying reduced reliance on debt financing.
• Interest coverage ratio, while still very high, has decreased, suggesting a slight reduction in the ability to cover interest expenses, primarily due to increased borrowings.

Segment Performance Analysis #

Revenue and Profitability Metrics with Growth Rates #

• Overall: Consolidated revenues grew by 10.4% year-over-year (YoY) to ₹478 billion. EBITDA grew by 11.8% YoY, with a margin of 26.9%. Adjusted net profit increased by 16.5% YoY.
• US Business: FY24 revenues increased by 13.4% YoY, reaching ₹153,493 million. Growth was driven by the specialty segment, with key contributions from Ilumya, Cequa, Winlevi, and Odomzo.
• India Business: FY24 revenues increased by 9.5% YoY, reaching ₹148,893 million. Growth was driven by various therapeutic segments.
• Emerging Markets: FY24 revenues increased by 9.1% YoY, reaching ₹86,195 million. Strong double-digit growth was observed in local currency terms in Brazil and Romania.
• Rest of World (RoW): FY24 revenues increased by 11.1% YoY, reaching ₹67,128 million. Growth was driven by increased sales in Western Europe (Specialty) and Ilumya sales ramp-up in Australia and Japan.
• Global Speciality Business: Recorded 19.3% Growth, reaching US$1039 Million.
• API Business: FY24 revenues decreased by 2.7% YoY, to ₹19,187 million, mainly due to lower sales in India.
• Global Consumer Healthcare: Contains bellwether brands Volini, Revital H, and Abzorb, with a presence across 25+ emerging markets.
• R&D expenditure: Increased to ₹31,776 million (6.7% of sales) in FY24, up from ₹23,676 million in FY23.

Market Share and Competitive Position #

• India: Sun Pharma is the largest pharmaceutical company, with an 8.5% market share (as per AIOCD AWACS March 2024 data), an improvement from 8.3% in the previous period. Ranked No. 1 by prescriptions with 12 different classes of doctors (SMSRC data, MAT February 2024). 32 brands are among India’s top-300 brands.
• US: 13th largest generic pharmaceutical company. 2nd largest by prescriptions in the US dermatology market.
• Emerging Markets: A leading Indian pharmaceutical company.
• Global: A leading global specialty generics company.

Key Products/Services Performance #

• Ilumya/Ilumetri: Global sales increased by 21.7% to US$580 million. Included in China’s National Reimbursement Drug List from January 2024. Undergoing Phase-3 trials for Psoriatic Arthritis.
• Winlevi: Launched in Canada during FY24. Expected availability in Australia from June 2024.
• Cequa: Launched in India.
• Odomzo: Gained traction in RoW markets.
• Levulan Kerastick+BLU-U: Only Photo Dynamic Therapy indicated for the treatment of minimally to moderately thick actinic keratoses of the face or scalp, or actinic keratosis of the upper extremities
• Specialty R&D Pipeline: Six candidates are undergoing clinical trials, including deuruxolitinib (NDA filed with USFDA), NidlegyTM (expected filing with EMA), Ilumya (for psoriatic arthritis), MM-II (for knee osteoarthritis pain), SCD-044 (for atopic dermatitis and plaque psoriasis), and GLP-1R agonist (for type 2 diabetes and obesity).

Geographic Distribution and Market Penetration #

• United States: 32% of consolidated revenues.
• India: 31% of consolidated revenues.
• Emerging Markets: 18% of consolidated revenues, with a presence in over 80 countries.
• Rest of World (RoW): 14% of consolidated revenues (includes Western Europe, Canada, Israel, Japan, Australia, New Zealand, and other markets).
• API and Others: 5% of consolidated revenues
• Reach extends to approximately 100 countries.

Operational Efficiency Metrics #

• Debtors Turnover: Increased to 4.2 times in FY24 from 3.8 times in FY23 (Consolidated).
• Inventory Turnover: Increased slightly to 1.1 times in FY24 from 1.0 time in FY23 (Consolidated).
• Operating Profit Margin: Increased slightly to 25.7% in FY24 from 25.5% in FY23 (Consolidated).
• Field Force Productivity: Maintained highest field force productivity among key players in India.

Growth Initiatives and Challenges #

• Growth Initiatives:

  • Expanding the Global Specialty portfolio through in-licensing, acquisitions, and in-house R&D.
  • Increasing field force in India and Emerging Markets.
  • Focusing on launching innovative products in India from the global portfolio or through licensing.
  • Merger with Taro Pharmaceutical Industries Ltd.
  • Advancing the pipeline of Global Specialty products.
  • Embedding sustainability practices in operations.
  • Continued focus on cost and operational efficiency.

• Challenges:

  • US FDA compliance issues at Halol, Mohali, and Dadra facilities.
  • Ongoing generics pricing pressure in the US market.
  • Geopolitical uncertainties impacting supply chains, inflation, and economic growth.
  • Forex market volatility.
  • High upfront investments required for developing a specialty pipeline.
  • Competition
  • Potential government-mandated price controls.

Risk Assessment Framework #

Strategic Risks #

Operational Risks #

Financial Risks #

Compliance/Regulatory Risks #

Emerging Risks #

Strategic Analysis of Sun Pharmaceutical Industries Limited #

Long-Term Strategic Goals and Progress #

• Global Specialty Focus: Sun Pharma is strategically shifting towards specialty medicines (dermatology, ophthalmology, onco-dermatology), aiming for substantial growth. Specialty business contribution to global turnover has increased from 7% (FY19) to 18% (FY24).
• Geographic Expansion: The company aims for critical mass in key markets, indicating a long-term goal of deeper penetration in existing and new geographies. Field force expansion in India and Emerging Markets signifies commitment.
• Sustainability Integration: Sun Pharma has set clear, actionable sustainability targets. This will help embed sustainability into business.

Competitive Advantages and Market Positioning #

• Market Leadership: Sun Pharma is the largest pharmaceutical company in India with an 8.5% market share (AIOCD AWACS March 2024), showing leadership in key therapeutic areas.
• US Market Presence: The company is the 13th largest generic pharmaceutical company in the US and second by prescription in the US dermatology market.
• Vertical Integration: Backward integration with API manufacturing (380+ API portfolio) provides cost control and supply chain resilience.
• Diversified Portfolio: A comprehensive portfolio (specialty, generics, OTC, APIs) provides a buffer against market-specific or segment-specific downturns.
• Strong Brand Equity: In India, the company ranks number 1 by prescription with 12 classes of doctors.

Innovation Initiatives and R&D Effectiveness #

• Increased R&D Investment: R&D spending was 6.7% of sales in FY24, totaling ₹31,776 Million. The increasing R&D guidance indicates further enrichment of the specialty pipeline.
• Specialty R&D Pipeline: Six candidates are undergoing clinical trials, focusing on dermatology, ophthalmology, and onco-dermatology. Key milestones include the PDUFA date for deuruxolitinib and NidlegyTM filing in Europe.
• Generic R&D Focus: A disciplined approach to identifying future R&D projects for the US generics market, with an emphasis on complex product development.

M&A Strategy and Execution #

• Strategic Acquisitions: Acquisitions (e.g., Concert Pharma, Taro) are targeted to strengthen the specialty portfolio and expand market access.
• In-Licensing: Strategic in-licensing agreements (e.g., NidlegyTM, Sezaby, Winlevi) are used to access novel products and technologies.
• Out-Licensing: Use of out-licensing agreements with partners like Almirall for tildrakizumab and Hikma for Ilumya indicate efficiency in using partnerships.
• Taro Acquisition: Merger agreement with Taro will provide for a combined entity leveraging global capabilities.

Management’s Track Record in Execution #

• Revenue Growth: Consolidated revenues grew by 10.4% to ₹478 Billion in FY24.
• Profitability: Adjusted net profit was up by 16.5% to ₹101 Billion in FY24.
• Return Ratio: Improved return ratios demonstrate profitability improvement.
• Market Share Improvement: Increased market share across geographies.
• Operational Efficiency: Continued focus on cost and operational efficiencies through technological intervention.

Capital Allocation Strategy #

• R&D Prioritization: A significant and growing portion of R&D spending is allocated to the Specialty business (US$148 Million in FY24 vs US$65 Million in FY20).
• Inorganic Growth: A strong net cash position of US$2.4 Billion enables exploration of inorganic growth opportunities, especially in specialty.
• Dividend Payout: Consistent dividend payout (₹13.50 per share for FY24) indicates commitment to shareholder returns, balanced with growth investments.
• Working Capital Management: Efforts are being made to reduce working capital deployment across businesses.

Organizational Changes and Their Impact #

• Clinical Organization: Building a clinical organization within Sun Pharma to improve in-house clinical development capabilities.
• Key Hires: Critical hires in several functions, especially in global specialty, to enhance capabilities.
• Field Force Expansion: A 10% expansion of the field force in India was made to improve market presence and penetration. A 9% increase in sales force was made in key emerging market.
• Leadership Changes: Appointment of Aalok Shanghvi as Whole-time Director and Rolf Hoffmann as Independent Director indicate changes in leadership.

ESG Analysis of Sun Pharmaceutical Industries Limited #

Environmental Metrics and Targets #

• Absolute Scope 1 and 2 carbon emissions were reduced by 21.85% over four years, against a target of 35% reduction by 2030 (baseline year 2020).
• Renewable energy constitutes 45.23% of the total energy mix.
• Water consumption has been reduced by 31.17% compared to the 2020 baseline, exceeding the 10% reduction target set for 2025.
• Hazardous waste co-processing reached 28.34%, nearing the 30% target set for 2025.
• Capital investment of ₹1,235.4 million was made in energy conservation equipment.
• 14 manufacturing facilities operate with a Zero Liquid Discharge (ZLD) mechanism.

Social Responsibility Programs #

• CSR expenditure for FY24 was ₹460.3 million.
• Key CSR focus areas included healthcare infrastructure, mobile healthcare units, Anganwadi & school infrastructural support, scientific medical & Pharma research and community drinking water.

Governance Structure and Effectiveness #

• The Board of Directors comprises nine members, with a mix of Independent, Promoter/Promoter Group Executive, Promoter/Promoter Group Non-Executive, and Non-Promoter Executive Directors.
• Six Board meetings were held during FY24, with high attendance rates for most directors.
• Six Board Committees exist: Audit, Nomination and Remuneration, Stakeholders Relationship, Risk Management, Corporate Social Responsibility, and Corporate Governance and Ethics.
• A Global Code of Conduct is in place, covering all Board members, senior management, and employees.
• A Global Whistle-blower Policy is established.
• A Risk Management Committee oversees organizational risks.
• The company is working to make all the three USFDA non-compliance facilities to fully compliant state.

Sustainability Investments and ROI #

• R&D expenditure for FY24 was ₹31,776 Million, representing 6.7% of sales, part of which is directed towards developing more sustainable processes and products. No explicit ROI data for specific sustainability initiatives is provided.
• Capital investment on energy conservation equipment amounted to ₹1,235.4 Million.

ESG Ratings #

• Sun Pharmaceutical Industries Limited was included in the S&P Global Sustainability Yearbook 2024.

Regulatory Compliance and Future Preparations #

• The Company states compliance with all applicable laws and regulations, including environmental and labor laws.
• Specific mention is made of compliance with cGMP standards, global regulatory agency certifications (USFDA, EMA, etc.) and the Extended Producer Responsibility (EPR) regulations for plastic waste.
• No material non-compliances related to capital markets were reported by the Company.
• The Company has received non-compliance letter for its Mohali facility, FDA has subsequently determined the inspection classification status of Dadra facility as Official Action Indicated (OAI).
• The company is making preparation for the implementation of Code on Wages 2019 and Code on Social Security 2020.

Future Projections and Guidance #

Management Guidance and Assumptions #

• Management expects high single-digit consolidated topline growth for FY25.
• Global Specialty business is expected to continue its growth path.
• R&D spending is projected to be 8-10% of sales for FY25, with an increasing share focused on Specialty products.
• These assumptions are subject to potential impacts from regulatory actions, forex market volatility, and shifts from geopolitical issues.

Market Growth Forecasts #

• The global pharmaceutical market is projected to reach US$2.3 trillion by 2028, with a CAGR of 5-8%.
• Pharmerging markets are forecast to grow at 10-13% CAGR, reaching US$400-430 billion by 2028.
• The Indian pharmaceutical market’s medicine spending is expected to reach US$38-42 billion by 2028, with a CAGR of 7-10%.
• Specialty medicines are projected to account for 43% of global pharmaceutical spending by 2028.
• The global API market is projected to reach US$307 billion by 2029.
• The global OTC pharmaceutical market projects 4-6% growth in 2024.

Planned Strategic Initiatives #

• Increased investment in Global Specialty business, including key hires in several functions.
• Enhance in-house clinical development capabilities and globalize Specialty assets beyond the US.
• Deepen business development capabilities.
• Advance existing projects and enrich the Specialty pipeline in core therapy areas.
• Field force expansion in India (10% increase in FY24) and key Emerging Markets (9% increase to over 2,500 representatives).
• Continued focus on developing and commercializing differentiated and difficult-to-manufacture products.
• Explore inorganic opportunities, including acquisitions to strengthen the Global Specialty portfolio.
• Embed sustainability practices in operations with clear and actionable targets.

Efficiency Improvement Targets #

• Sustained cost reduction via technological interventions and process enhancements.
• Reduction in working capital deployment across businesses.
• Improved manufacturing efficiencies and optimisation of manufacturing footprint.
• Reduction of overall fixed costs.
• Inventory optimization.
• Enhance IT systems for business operations, security, and digital transformation.

Potential Challenges and Opportunities #

Challenges #

• Ongoing US FDA compliance issues at Halol, Mohali, and Dadra facilities.
• Geopolitical issues impacting supply chains, inflation, and economic growth.
• Challenging US generics pricing environment.
• Forex market volatility, particularly for emerging market currencies.
• Potential government-mandated price controls on pharmaceutical products.
• High upfront investments for Specialty pipeline development, impacting short-term profitability.

Opportunities #

• Favorable macro-economic parameters in India and emerging markets support pharmaceutical product volume growth.
• Increasing contribution of specialty products in developed markets creates growth potential for Sun Pharma.
• Growing penetration of generics in Japan and the opening of the China market.
• Strong balance sheet and net cash position enable exploration of inorganic growth opportunities.
• Strong R&D infrastructure and capabilities to develop technologically complex products.

Scenario Analysis and Sensitivity to Key Assumptions #

• Regulatory Actions: Adverse regulatory actions (import alerts, non-compliance letters) can significantly impact revenue, especially in the US market, as evidenced by the ongoing issues at Halol, Mohali, and Dadra facilities.
• Forex Volatility: A 5% strengthening of the Indian rupee against major currencies could reduce consolidated profits by approximately ₹5,298.6 million and equity by ₹5,298.6 million and vice versa.
• R&D Spending: The increase in R&D spending to 8-10% of sales, while a strategic investment, will likely pressure short-term profitability if product launches and approvals do not materialize as planned.
  • Sensitivity: A 1% change in R&D spending as a percentage of revenue, from the guided 9% mid-point, represents about ~₹4.8 billion.
• Specialty Business Growth: Achieving the projected growth in the Global Specialty business is crucial for the overall high single-digit topline growth target. Any delay with commercialization of the Global Specialty portfolio products will impact the company’s future profitability.

Audit and Compliance Analysis #

Auditor’s Opinion and Qualifications #

• Standalone & Consolidated: Unmodified audit opinion issued by S R B C & CO LLP.
• Standalone Qualification: The Company’s accounting software maintained audit trail (edit log) functionality, but this feature was not enabled for certain changes made using privileged/administrative access rights. All other aspects are satisfactory, with no instance of tempering where feature was enabled.
• Consolidated Qualification: The consolidated opinion relies on reports of other auditors for 23 subsidiaries and un-audited financials of 16 subsidiaries & 9 associates and a joint venture. The other auditors confirmed compliance with the CARO in their respective audit reports.

Key Accounting Policies and Changes #

• Consistency: Accounting policies were applied consistently across all periods presented in the standalone and consolidated financial statements.
• No New Standards: No new or amended accounting standards were adopted during the year that had a material impact.
• Valuation Methods: The Company uses the historical cost convention as the primary basis of measurement, with exceptions for certain financial instruments, non-current assets held for sale, and defined benefit plan assets.

Internal Control Effectiveness #

• Auditor’s Opinion (Standalone & Consolidated): Internal financial controls over financial reporting were deemed adequate and operating effectively.
• Management Assertion: The Board of Directors is responsible for and has maintained an internal control framework, stating its operating effectiveness.

Regulatory Compliance Status #

• General Compliance: The Company states compliance with applicable laws and regulations, including Secretarial Standards and Listing Regulations.
• US FDA Compliance Issues:
  • Halol facility: Remains under Official Action Indicated (OAI) status and import alert (with some product exemptions) since FY23.
  • Mohali facility: Remains under OAI status, and subject to a Consent Decree Correspondence/Non-Compliance letter with corrective actions required.
  • Dadra facility: Received OAI status in December 2023. The company confirms pending compliance actions.
• SEBI and Listing Regulations: Fully compliant to mandatory requirements.
• Credit Ratings: No change in credit rating.

Legal Proceedings and Their Potential Impact #

• Ongoing Litigations: The Group is involved in various legal proceedings, including product liability, antitrust, contract disputes, and regulatory matters.
• Key Antitrust Litigation (Lipitor): Cases are ongoing in the U.S. District Court, with ongoing mediation. One settlement was reached with the State of West Virginia for USD 8.25 million.
• Product Liability (Ranitidine/Zantac MDL): Multiple lawsuits are pending, with some dismissals granted.
• Antitrust (Gx Drug Price Fixing): Lawsuits alleging violations of antitrust laws are pending. Settlements were reached with Direct Purchaser Plaintiffs class (USD 59.7 Million paid by Taro U.S.A. and USD 15.3 Million by SPIINC).
• Speakes v. Taro Pharmaceutical Industries Ltd.: Taro Industries and former officers are named as defendents, in which Taro has agreed to pay $ 36 million, that was fully covered by insurance.
• Other Litigations: Various other claims and proceedings are ongoing.
• Uncertainty: The document repeatedly states that the eventual outcomes of these proceedings are uncertain, and it is difficult to estimate the potential financial impact due to the complexity and stage of the cases.
• Tax Litigations: Several tax disputes are pending, with significant amounts under dispute, as detailed in the notes.
• Contingent Liabilities: The Company acknowledges claims not recognised as debts.

Related Party Transactions #

• Transactions Occurred: Transactions with related parties were in the ordinary course of business and on an arm’s length basis.
• Material Transactions: The Company’s policy on materiality of and dealing with Related Party Transactions were followed. Material transactions included significant amounts of revenue from contracts with customers, purchase and sale of goods, reimbursement of expenses, and loan transactions with subsidiaries (Sun Laboratories FZE, Sun Pharma Laboratories Limited, Sun Pharma Distributors Limited, Sun Pharmaceutical Industries INC.).
• Concentration Risk (Sales): In terms of percentage concentration of purchases, 23.95 % was with Top 10 trading houses and 79.49% of sales was done to Top 10 dealers/distributors.

Subsequent Events #

• Dividend Recommendation: The Board of Directors recommended a final dividend of ₹ 5/- per share.
• Acquisition Agreement: A subsidiary entered into an agreement to acquire 100% of Valstar S.A., but closing conditions were not yet met as of the reporting date.
• Composite Scheme of Arrangement: Approved for amalgamation of wholly-owned subsidiaries.
• Concert Pharmaceutical: Merged with Sun Pharmaceutical Industries, Inc. on March 31, 2023.
• Dusa Pharmaceuticals, Inc.: Merged with Sun Pharmaceutical Industries, Inc w.e.f March 31, 2024.
• New Subsidiaries:
  • Sun Pharma Middle East FZE LLC
  • Libra Merger Ltd.
  • Taro Pharma Corporation, Inc.
  • Vivaldis Health and Foods Private Limited

Analysis of Accounting Quality and Regulatory Risk Assessment #

• Accounting Quality: The reliance on estimates (e.g., litigation outcomes, fair value measurements, and impairment testing) introduces inherent uncertainty. The unmodified audit opinion suggests that the financial statements are presented fairly, but the “Key Audit Matters” highlight areas of significant judgment. The use of a consistent weighted average cost method for inventory valuation is standard.
• Regulatory Risk Assessment:
  • High: The ongoing US FDA compliance issues at multiple facilities (Halol, Mohali, Dadra) represent a significant regulatory risk. The OAI status and import alerts could affect the Company’s ability to manufacture and sell products in the U.S. market, potentially leading to financial and reputational damage.
  • High: The various legal proceedings, particularly the antitrust and product liability cases, pose substantial financial and reputational risks. The outcomes are uncertain, and adverse judgments could have a material impact.
  • Medium: Tax litigation is common for large corporations, but the amounts involved are considerable, adding to the overall regulatory risk.
• Overall: The regulatory risk profile of the Company is elevated due to the combination of FDA compliance challenges and ongoing significant legal proceedings. The concentration of sales through a limited number of distributors is high, suggesting a potential vulnerability if relationships with these distributors were to deteriorate.