Sun to demerge r&d unit

Sun Pharmaceutical Industries (Mumbai, India) will demerge its innovative r&d, namely its NCE (new chemical entity) and NDDS (new drug delivery systems) programmes, into a separate company as of 1 April.

It cited 'the difference between generic reverse engineering and innovative r&d in terms of risk profile, longer timeframes and considerably larger resource requirements' as the key reasons for the split.

Dilip Shanghvi, chairman and md, said that he expects the new r&d company to attract sector investors interested in speciality pharma. Research for the generics business, which drives the company's current performance, will remain with Sun Pharma. Tax-breaks are not expected, as the demerged company will operate under a different entity.

Further cushioning of risk, in terms of taking a strategic investor on board, is also not expected, a fact which Mahesh Sawant, an analyst with Frost & Sullivan, says 'may not augur well for the new company in the short term'.

Comparing Sun's demerger to India-based Dr Reddy's Laboratories' integrated drug development company Perlecan Pharma, formed last September with an equity infusion of US$52.5m from Citigroup Venture and ICICI Venture, Sawant added that: 'It would have been a good option for the company [Sun] to get into contract research, since many foreign companies are looking at India to outsource research. Without that option, the new company may not be attractive for short term investors.' Perlecan explores options for in-licensing molecules for development.

However, Alok Gupta, country head of life sciences at Yes Bank, believes that the move will give the company improved flexibility: 'The positive side is that the move will take the cost out of the company's balance sheet, since r&d is risky and cash-uncertain. However, the gains will be when the company looks at it as an independent business, and looks for innovative funding opportunities.'

Indeed, as the company expects to increases its spend on NCE and NDDS from 30% to 50% of its r&d budget over the next three years, and Shanghvi believes that if the businesses were not to demerge, r&d costs would have risen form around 10-11% of turnover to 15-18% of turnover.

As part of the scheme, shareholders of Sun Pharma will be allotted an equity share of Rs 1 (US$0.02) for each share of Rs 5 (US$0.11) of the parent company held on the record date. About Rs 200 crore (US$45.1m) in cash and Rs 50 crore (US$11.3m) in assets will be transferred to the new company, which will have 140 staff. Revenues will come from out-licensing of prospective products for further development or marketing, and possibly by bringing a product to market on its own, although Shanghvi expects this to be at least three years down the line.