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In May last year, Shanghvi (right) brought in Makov as his board’s executive chairman for a three-year term and re-designated himself as managing director.

Why Shanghvi hired his boss

Dilip S. Shanghvi built Sun Pharma into India's most valuable pharma company. And now he's hired Israel Makov, former CEO of Teva, as its chairman. The inside story.
By T. Surendar

DILIP S. SANGHVI IS AN atypical leader. He is seldom seen at industry meets, his company Sun Pharmaceutical Industries rarely hosts press conferences, and he even avoids that ultimate CEO endeavour—travel. In Mumbai’s pharma circle, a story that did the rounds was how Shanghvi’s one-time chauffeur who was employed later by Novartis India vice chairman and managing director Ranjit Shahani, complained that he had to work more in his new job. Shanghvi’s house (in Juhu, a Mumbai suburb), office, and R&D centre (both at Andheri) are all within 8 km of one another. By design. Yet, despite spending nearly all his time in his office and research facility, Shanghvi’s ideas, such as focussing on fewer therapeutic areas such as psychiatry or cardiac care and buying distressed assets, have propelled Sun’s valuation to Rs 70,560 crore, the highest among pharma companies here, and way ahead of bigger rivals such as Delhi-based Ranbaxy Laboratories or Hyderabad-based Dr. Reddy’s Laboratories. After its acquisition of Israel’s Taro Pharmaceutical Industries in September 2010, Sun has become the biggest Indian-owned exporter of pharma products to the highly regulated U.S. market. 

Shanghvi’s mind works in strange ways. Why does he need spectacle lenses that turn dark in the sun if he doesn’t ever step out? A minute passes before Shanghvi says these glasses helped him on a few bright snowy days in New York. Two years ago, Shanghvi grudgingly made a few trips abroad when the Taro buyout hit a legal hurdle in the U.S. Says Shanghvi: “I knew the photochromatic feature would be useful, though I didn’t know when.”

The photochromatic glasses may be trivia, but those who know Shanghvi say he uses fuzzy logic to arrive at decisions that turn out to be correct. Sun made a windfall profit of a few hundred million dollars in six months last year when the U.S. Food and Drug Administration, a regulatory body, allowed it to temporarily supply Lipidox, Sun’s equivalent of cancer drug Doxil, which was in short supply. The opportunity came as Shanghvi continued his research on manufacturing generics equivalents of cancer drugs, which he inherited from Tamil Nadu Dadha Pharmaceuticals (TDP) in 1997. Shanghvi was sold on the fact that cancer medicines had a big future, one of the key reasons behind the TDP buyout. Says S. Mohanchand Dadha, TDP’s managing director and promoter, and now a non-executive independent director on Sun’s board: “You always come off feeling that he was plain lucky in his deals, when he would have actually seen a hidden value.” 

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Taro, too, wasn’t just about building size; it also brought along a U.S. dermatology business that few generics companies can talk of. Keki M. Mistry, vice chairman and CEO, HDFC, India’s biggest home loan company, who also sits on Sun’s board says, “Dilip meticulously thinks and articulates his moves—an ability that has rewarded Sun’s shareholders quite well.” The stock has outperformed the Sensex 5.3 times in the last decade and the CNX Pharma Index four times—Rs 10,000 invested in Sun in January 2003 would be worth Rs 2.4 lakh today.

In May last year, Shanghvi made another extraordinary move—he hired his own boss. He brought in Israel Makov, 73, the former president and CEO of Israeli pharma giant Teva Pharmaceutical Industries, as his board’s executive chairman for a three-year term and re-designated himself as managing director. In Shanghvi style, there was no press conference to announce it to the world—just a press release. Sun also informed the stock market on the appointment of Makov, as is mandatory.

 Most owners of Indian firms still find it difficult to work with professional CEOs—and here is someone who built Sun and, with its promoters, owns 63.6% of it, bringing an outsider, and a foreigner, above him. It’s this ability to identify a higher purpose, and pursue it in a selfless manner—you could also call it enlightened self-interest—that makes Shanghvi’s headhunting the vision of the year. 

As he says dispassionately, with the business having become bigger and more complex, he needs someone to handle it, because he can’t. “Also, the cost of mistakes at this stage is very high.” But what of the fact that despite being the owner, he now has a boss? “I too need to learn from someone,” he says, adding that he wears his ownership lightly. “Ultimately, all the stakeholders should benefit.”   

Before Makov’s appointment, Shanghvi was already thinking of hiring professional managers at the senior level. He brought in Kal Sundaram as CEO and additional director on Sun’s board in April 2010. Sundaram was the first professional to be admitted directly to Sun’s board. Prior to joining, Sundaram was the managing director of GlaxoSmithKline Pharmaceuticals India and later, in a regional role, he spearheaded the British pharma company’s emerging market strategy. Sundaram has since relocated to the U.S. to look after Sun’s strategic business interests in North and South America. Last April, Sundaram replaced Shanghvi as the chairman of Taro.

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As Sun seeks to further expand globally, there may well be other reasons why Shanghvi hired Makov. As Mistry says, “Global investors who seek greater corporate governance always want the chairman and managing director’s post to be held by different executives.” Indeed, if it weren’t Makov, Shanghvi would have found someone else, though it’s not clear if that person would have been made chairman. It’s just that Makov was the best fit.

His credentials are impeccable. When he took over as CEO in 2002, Teva was already on a roll under Eli Hurvitz, the son-in-law of one of the promoters, who continued as chairman till 2010. Like Sun today, Teva was full of promise. (There are other similarities: Teva’s U.S. sales then were $1.2 billion, or Rs 6,445.2 crore, a little over Sun’s current sales; Teva’s net income was $278 million, half of Sun’s current income and it had a similar amount of cash on its books as Sun has today.) Makov came and pushed the pedal. In the U.S., there were few barriers to enter generics, consolidation among drug chains and pharmacies had begun, and the branded generics opportunity was just emerging. Makov pushed to convert Teva into a generics supermarket. “Those were still days for patented medicines, and generics were considered an emerging business,” says Makov. Generics are drugs no longer covered by patents. 

He also entered the branded generics space (it doesn’t suffer the same price erosion) with dermatology and respiratory products and launched Copaxone, Teva’s original drug for multiple sclerosis. Today, nearly 30% of Teva’s sales come from branded products that cushion the lower margins from generics. These moves, especially bulking up, put distance between Teva and other competitors and equally, countered the bargaining power of pharmacies. In short, Teva became a juggernaut with multiple levers for sales and profitability. Says Vijay Karwal, managing director and Asia Pacific head of health-care investment banking at CIMB, a Hong Kong-based banking outfit, who worked with ABN AMRO as managing director of the North American health-care practice when Makov was running Teva: “His [Makov’s] strategy was market domination by building huge scale and filling up all the white spaces in the pharma market.” Some of this happened through acquisitions.

Simultaneously, Makov raised money on the New York Stock Exchange, kept Teva’s balance sheet debt-free and integrated each acquisition quickly in readiness for the next one. Karwal says the company, under Makov, was very clear about what it wanted to touch. “It has historically appeared less interested in Indian companies as it didn’t have a strategic need to establish its presence in a low-cost environment in view of the efficiency of existing operations.”

During the Makov years (2002 to 2007), Teva grew from $2.1 billion to $8 billion. According to a Credit Suisse report, its sales and market capitalisation increased a compounded 22% in the last 18 years. Few companies have been able to show such prowess and Teva is today feared even by the likes of Pfizer.  

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Shanghvi says he knew Makov socially for years but started consulting him only after the Taro acquisition. In August 2011, Shanghvi also picked up 11% in Makov’s company BioLight, which invests in new dosage methods for cancer drugs. “Those were the testing days when we examined if we were compatible and could work together.” 
The two are markedly different. Makov is hard charging and quick-talking, while Shanghvi is reserved, perhaps even shy, and chooses his words carefully. Makov likes to delegate, empower and seek results through others, whereas Shanghvi gets involved in the nitty-gritty. An India-based senior executive from a U.S. generics competitor who did not wish to be named says Makov would be surprised by the long hours Shanghvi spends at the R&D lab.

Shanghvi believes they make a great team because of the dissimilarities. Thanks to Makov, he has already begun changing his style. “Earlier, I only had one-to-one meetings to resolve problems, but today it is one-to-many, allowing the group to come up with solutions,” he says. “I challenge myself on each occasion to see if I need to get involved with a decision.” Says a senior employee who did not wish to be named: “Increasingly, Shanghvi is seeking answers from his team rather than trying to solve problems himself.”
Asked if Makov is more Bhishma or Krishna, two legendary mentors from The Mahabharata, Shanghvi pauses for a moment and says, “Krishna.” Unlike Bhishma who was an elder statesman, Krishna was part buddy, part mentor. He also ended up on the winning side. 

There are three jobs that Shanghvi thinks are primary to his role, now that Makov is on board—running the operations, designing the organisation for future growth, and planning for the future. In the first, Shanghvi rarely consults Makov. But when it comes to strategic decisions, designing the organisation, or planning for the future, Shanghvi works closely with Makov. The strategic decisions are taken with Makov’s concurrence while for others (such as hiring key people), he keeps Makov updated through weekly calls. Makov spends four to five days a month in India, and when overseas, talks to Shanghvi once mid-week, either on Wednesday or Thursday. Beyond updates, there’s a deeper purpose behind the conversations. Shanghvi says he’s very aware of the new reality at Sun and the fact that there are two power centres now—if they regularly keep in touch, others can’t play one against the other.

For all the fame that Makov has earned, there is at least one narrative that portrays him as a greedy, power hungry CEO. A biography on Hurvitz by Professor Yossi Goldstein, published after Hurvitz’s death in 2011, paints Makov in poor light. The book, based on Hurvitz’s side of the story, claims that Makov was ousted from Teva after he tried to strike a deal to sell the company without Hurvitz’s knowledge. Without getting into too many details, Shanghvi says he discussed the book with Makov and resolved matters to his satisfaction. “These things don’t bother me,” he says. He adds that Makov continues to maintain ties with Hurvitz’s son, who is on Teva’s board. 

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Kal Sundaram, Chairman, Taro


EVEN BEFORE SHANGHVI GRADUATED,  he was working for his father’s firm, B.N. Enterprises, which was the Calcutta stockist for Torrent, Tamil Nadu Dadha, and a few other pharma companies. He wanted to set up his own pharmaceuticals factory, for which his father gave him Rs 10,000. That was the beginning of Sun Pharma. Shanghvi started selling two formulations—lithosun and nitrosun—to doctors in West Bengal. Both these were psychiatric formulations, manufactured under a loan-and-licence arrangement. An employee from his father’s company, Dilip Ghosh, joined Shanghvi to help him in the initial phase. In 1981, when he heard of the Gujarat chief minister visiting Calcutta seeking investment in his state, Shanghvi decided to move to Vapi in south Gujarat (then a hub for chemicals companies). With a bunch of like-minded people, including Sailesh T. Desai (who is still on the board), Nitin Mehta, and Upen Shanghvi, he set up a factory there with an initial investment of Rs 7 lakh raised from the partners and banks. Vapi was 180 km from Mumbai, and Shanghvi began selling to the psychiatrists in Mumbai. Demand was good enough for him to set up a marketing office there, at a relative’s house in Andheri. In 1989, when Sun’s turnover touched Rs 1 crore, Shanghvi decided to expand to Baroda (now Vadodara), where he set up his first R&D centre. 

In 1999, Sun bought a stake in ophthalmic company Milmet to enter a niche area—and also learn more about the segment. Tarun Shah of Vadodara-based boutique research firm MP Advisors, who has been associated with Sun for many years, feels Shanghvi knows enough about ophthalmology now to add another therapeutic line in the U.S. “If you watch closely, Shanghvi is still building on the foundations of being a specialty company that he started so many years ago.” He also bought a stake in the beleaguered MJ Pharma: It had a modern manufacturing plant which was good enough to become Sun’s first USFDA-approved plant for formulations. By the time Sun merged with TDP, it was one of India’s top 25 pharmaceutical companies. 

Given his reputation, his recent moves are creating a buzz. Shah feels that there are bigger things awaiting Shanghvi: “There is a good chance that Sun’s market capitalisation can surpass that of Teva in the next five to seven years.” With sales of $18 billion and capitalisation of $35 billion, Teva is the world’s largest generics company.

A June 2011 Credit Suisse report titled Indian Pharmaceutical Sector—Will the next Teva be from India? pointed out that though the top 10 Indian companies were cumulatively ranked only next to Teva by size, their share of big acquisitions was very small. The report shows that by the time Teva reached sales of $16.1 billion in FY10, it had already spent $32 billion in acquiring companies, while the second biggest, $8.3 billion Sandoz had bought $11 billion worth of firms. In contrast, though the top 10 Indian firms had sales of $11 billion, they had done $3 billion worth of acquisitions. The report also mentioned that margins in generics have a direct correlation with market share. 

Clearly, despite all their success, Indians never scaled up and created truly global firms. According to global M&A advisory IMAP Healthcare’s Pharmaceutical and Biotech Industry Global Report 2011, the worldwide market for generics drugs is projected to reach $129.3 billion by 2014, with an annualised growth of 9%. Indians don’t figure among the top 50 pharmaceutical companies. 

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A report from financial services firm Avendus Securities published last January says that proposed M&As of the top five Indian pharma firms is at 3% of market capitalisation, a five-year high, even as investments in organic growth touch 6%, the highest in seven years. Says Monica Joshi, an analyst with Avendus Securities: “If Indian firms don’t deploy the cash they make to expand their businesses, their return on capital employed is bound to fall.”

The top three, Dr. Reddy’s, Sun, and Lupin, all between $2 billion and $2.5 billion by sales, are readying themselves for the next round of growth. Dr. Reddy’s is eyeing the U.S. and plans to scale up its biosimilars business in emerging markets. Lupin has made a few smart buys in Japan (the world’s second-biggest pharma market). Analysts, however, say among the large Indian companies, only Sun and Cipla (the fourth largest) have the necessary cash flows to pull off large acquisitions. Dr. Reddy’s still has an overhang from the failed Betapharm acquisition, when it wrote off over $200 million and pared operations, while Lupin will need debt for any further buyouts. Says Anubhav Aggarwal, pharma analyst and author of the Credit Suisse report: “Shanghvi’s moves seem to hint at bigger acquisitions. And that makes it interesting.”


HIS CONTEXT ADDS AN edge to Makov’s appointment. He says he shares a vision with Shanghvi to build Sun as a global specialty pharma company rather than just a mere generics company. He also predicts that the next five years for the generics industry will be marked by consolidation. Two factors, somewhat conflicting, will drive this. By 2015, several blockbuster drugs will go off patent. A patent cliff reduces opportunities for generics companies, which may then be forced to consolidate. At the same time, the falling innovative skills of Big Pharma (Pfizer, GlaxoSmithKline, etc.), will push up demand for generics. This may again drive consolidation. Makov says even innovator companies may find high-margin generics companies such as Sun attractive for alliances. 

CIMB’s Karwal argues that the next big thing will be branded generics, and specialties. He points to Teva’s recent acquisition of U.S.-based Cephalon for $6.8 billion, where it entered a bidding war against another interested buyer, Valeant, a leading dermatology company. “The problem today is that there are no cheap deals left in the market that will allow medium-size companies to scale up.” Though Shanghvi and Makov refuse to talk about it, it’s evident that one of Makov’s tasks will be to ready Sun for some big acquisitions. While at Teva, Makov picked up SICOR for $3.4 billion and Ivax for $7.4 billion. Soon after he left, Teva bought Barr for $7.2 billion. The biggest deal Sun has done so far—Taro for $454 million.

So, nobody understands the opportunities and risks that come with acquisitions better than Makov. He admits that 75% of mergers and acquisitions fail. But the reason they didn’t at Teva had to do with the way the company approached M&A. (The Credit Suisse report states that most of the large acquisitions made by Teva bought in the intended benefits from year one.) Makov says the key ingredient of good acquisitions is a sound team to evaluate and execute deals. “Sometimes, in Teva we did not complete deals as we thought that the company was still not prepared to handle the complexity.”

Shanghvi’s statements indicate he is giving space to Makov to ready Sun. “Even at our size and spread, we are hardly a global company, but we have the aspiration to be one,” he says. For example, he feels that Sun’s manufacturing efficiencies are nowhere close to global standards, and that its management needs to think very differently.
MP Advisors’ Shah feels that Makov can bring a fundamental change in the way Shanghvi thinks about creating value. Till now, Shanghvi went after distressed, underpriced assets. On the other hand, Makov didn’t exactly pick distressed assets but chose those where he could create further value by plugging them into a fast globalising Teva.
A senior executive with a U.S.-based generics firm who did not wish to be named because he was commenting on a competitor, says the jury is still out on whether Shanghvi has managed to squeeze out performance from his cheap acquisitions. “Shanghvi’s acquisitions are still like an investor who looks for a quick profit, and not like a true global firm which can change a rough stone into a diamond.”

Shah adds that even before Makov, Shanghvi had begun to think differently. In 2008, he paid a premium to buy the manufacturing assets of Tennesee, U.S.-based Chattem Chemicals that gave him access to injectibles. Says an investment banker who has stayed invested in Sun for over a decade: “Like the Tatas or Birlas, Shanghvi now needs to break out and make a big move.”

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Another pharma industry specialist feels that Makov has already hit the ground running. Since he joined, Sun made two acquisitions—the specialty dermatology product business of Dusa, and the generics business of URL—both U.S.-based companies. The $45 million Dusa’s key product Levulan treats pre-cancerous skin conditions with a combination of drug and light—a proprietary mechanism. Says Vikas Dandekar, Mumbai correspondent at specialty pharma magazine PharmAsia: “Makov has a penchant for novel drug-delivery systems and this acquisition has his stamp.” The acquisition validates the fact that Makov wants to build Sun to be a specialty pharma company.

Sun is poised for substantial global expansion as the generics businesses are growing across the world. Makov is bullish on emerging markets in Latin America and new ones such as Japan, saying the biggest growth will come from there in the next few years. He is, however, not very excited by the opportunity for biosimilars. Unlike generics, biosimilars require a high upfront investment, substantial infrastructure, and the need to promote them, making them unviable. Though there are industry reports that Sun has made enquiries about vendors of biotech equipment and interviewed biotech personnel, Makov says it may overlook biotech for now as business models are still hazy. 

In Makov’s book, world-class operations deliver world-class strategy. While he is in Mumbai, Makov spends a lot of time talking to line managers. For one type of hospital products, which Makov won’t reveal, he is directing all the preparations for setting up the business. He is helping Sun find talent with knowledge of processes and regulatory issues, locate an approved factory, figure out pricing and finally, even build distribution. Says HDFC’s Mistry: “The board wanted someone who had experience of running a company apart from having knowledge of global business.”

Initiatives like these are driving further operational changes within Sun. Newer metrics, such as per employee productivity of bulk drugs, are being examined. Non-business parameters such as speed to market and throughput of research are being benchmarked to perform better than peers. Makov, who believes in building internal organisation strength before growing, is bringing in new managerial structures where responsibility can be delegated and demanded. 

Makov says these structures never existed in generics firms as they did not have the long history and size of large drug companies. He says it did not even exist in Teva and he created them from 1995, when he joined as chief operating officer. He doesn’t want to comment on the recent quality problems of Indian companies, but feels that the way Indian promoters look at generics is quite different from that of Teva. “Centrally-run Indian family firms are still not open to global management structures and their moves seem more adventurous than strategic,” he says. 

The changes are already beginning to play out. When Sun executives suggested that the tally of patient beds at a clinical research facility in Vadodara was 240, Makov told them that the correct number was close to 300 in two facilities. Shanghvi says Makov’s systematic approach is ensuring that execs are better prepared to answer queries at board meetings. “We now feel prepared to take on more risk to grow our business.” Who knows, he may even begin to travel more.