China's war on healthcare costs lures India's biggest drugmaker

Sun Pharmaceutical Industries Ltd. is scouting for a partner in China to help it win a larger piece of the world's second-largest drug market, where the government is on a mission to drive down healthcare costs.

With recovery underway in its U.S. business, Sun Pharma's billionaire founder Dilip Shanghvi is homing in on China and believes market watchers are underestimating the potential there for India's largest drugmaker.

"There is a big opportunity for us," Shanghvi said in an interview with Bloomberg News Editor-in-Chief John Micklethwait in Mumbai on Thursday. "That would create a significant new revenue stream, which is not factored in our valuation when analysts look at it."

China has rolled out an ambitious multi-city bulk procurement program that's driving down prices and providing an opening for Indian manufacturers like Sun PharmaNSE 0.23 % to compete. It's importing more drugs, reimbursing more ..

The policy push comes as many generic drugmakers are still reeling from a brutal price war in the world's biggest drug market, the U.S. While Sun Pharma's Indian rivals, like Dr. Reddy's Laboratories Ltd. and Cipla Ltd., are already expanding in the Asian nation, Shanghvi has mostly kept mum about his plans there.

Scaling Up

India's top drugmaker will start scaling up its China business in six to nine months, according to Shanghvi. The unit will contribute "some percentage" to Sun's $4 billion of overall sales within three years from almost nothing right now, he added.

The $160 billion Chinese drug market "is now a focus for Indian generics" as U.S.-approved drugs are cleared faster, Jefferies analyst Piyush Nahar wrote in a Feb. 27 note.

"While the reforms make China an attractive market, ramp-up and profitability will have significant challenges," Nahar wrote. "Unlike U.S., distribution is important in China and will need a local partner and higher spend."

Analysts are split on the prospects of Sun Pharma's stock, which has lagged the rise in the S&P BSE Sensex this year. In the last four years, it has plummeted nearly 52 percent compared to the Sensex's 42 percent climb.

Sun Pharma's large portfolio of U.S.-approved products should help the drugmaker ramp up its China business with little investment, Shanghvi said.

"We see enormous interest in China for products that we have global rights for," Shanghvi said, adding that the company "would be comfortable making significant financial commitments," in the Asian nation longer term.

Source:Bloomberg