First question is for Dilip sir. If you could throw some light in terms of the cultural fit of the two organization and how it flows into your integration strategy? And the related question on that is how much of the top management bandwidth would be allocated toward the integration of this acquisition? And in your view, is there any impact of that which you could foresee on Sun Pharma's business?
Dilip Shanghvi: No, thank you Kunal. I think both very important questions. My belief is that everybody wants to succeed in life. Many times if they're not successful it's not because they don't want to, it's because they don't know how to. When it's in both Taro as well as in case of Ranbaxy, we saw that large number of people given proper direction, encouragement, resources and the confidence that they can take decision and continue to progress turned around both the companies. So I don't visualize a situation where this is going to be a very different journey. We will first understand what is it that was needed so that this company can become more successful. Because if you look at their performance, they have large number of products which are $100 million plus globally. So this is a company which knows how to establish brands and to continue to sell them at a significant premium even when there are multiple generics which are available. So we will leverage and understand what is their strength rather than imposing what we think is the right way to do things because there are many ways to succeed in life. And our experience both in Ranbaxy as well as in Taro has been that it's a journey where you learn from acquired company and also transfer some of your operating processes. So, I'm reasonably confident that we should be able to achieve this because if we could achieve transformation in Ranbaxy because I see that what we acquired was a company which was losing money, I think you don't see that separate in our profitability in Sun's consolidated statement. But I know that the businesses which were at one point of time Ranbaxy are not very different in terms of overall profitability compared to the Sun part of the business. Regarding management bandwidth: like both Kirti and Jayashree explained in the presentation, we will be forming a integration management office which will both manage the integration as well as manage the transition. There will be a certain amount of time that of senior management which will be spent on this. However, what I'm excited about is the opportunity to be able to also strengthen the existing management capability of Sun because we will have a large number of performing managers coming in from Organon. And also as a combined company, I think our ability to hire future talent will also go up.
One on the synergies estimate that you have shared of around $350 million. If you could share more details between the revenue as well as cost driver side of it, and second part on the cost of debt.
Jayashree Satagopan: As far as the synergies are concerned, as I mentioned the $350 million estimated is purely on the cost front where we think there are multiple opportunities that one could look at. We have opportunities in terms of procurement, there could be opportunities in terms of people working together, there could be opportunities also in terms of certain supply chain front. So these all are initial estimates, as we go along and we fine-tune these, we would be in a position to share further detail. As far as the debt is concerned, currently the debt profile of Organon, they have a gross debt of about $8.5 billion and cash of close to $900 million. The net debt is having an interest charge of about 5.5%. It is there are certain long-term debts in the nature of bonds and as we get to the closing our intent is to see if we could work with the lenders for swap of some of these and we would also look at financing it through our own bankers. At this point in time, as we go through the credit rating, we believe our credit rating would be substantially higher than that of Organon's and therefore it should give us the ability to have a good cost of financing comparably.
I want to understand your revenue drivers for innovative portfolio and biosimilars. So what kind of roadmap you have in terms of acquiring or in-licensing assets to support growth and in absence of any in-licensing assets what's your comfort on the growth for these two segments?
Kirti Ganorkar: No, thank you for your question. I think in my presentation I focused on innovative part of the business which is growing from 20% to 27%. But what is important is how this business will grow in future and as I said there are good amount of licensing opportunities because Organon is number three in women's health including both contraception and fertility. And if you notice on the slide what we said there are more than 100 assets under development in women's health and there is lot of unmet need at a patient level. So this gives an opportunity for us to in-license product which are close to market or which are into different phases of clinical studies. That is regarding the women's health. At the same time, they also have a innovative portfolio, so they have product called VTAMA which is promoted to dermatology and they also have product called Emgality which is a migraine product which is also promoted in Europe. So if you look at the total basket of innovative product between Sun and Organon, this will continue to grow. We may have to do some of the in-licensing. If you don't do in-licensing then you know like the innovative part of Sun is growing, but the same kind of growth is not there on Organon side.
In the past Sun's management indicated the challenges which biosimilars face on the reimbursement part. So what's your view on reimbursement and competition dynamics in the US specifically?
Alok Shanghvi: So I think the market continues to evolve. I wouldn't say that the market has sort of settled down. I think there continues to be a change in the, let's say, regulatory environment from a approval perspective and there also continues to be dialogue in terms of one the interchangeability of the products in the commercial environment and how that would play out in the future. So the market continues to evolve, but now that we would have a commercial footprint, our view is that you know we will continue to leverage that and license more products.
On the synergy, the $350 million flowing largely from cost side. On the revenue side are we considering maintaining Organon revenues and what is the scope of cross-selling opportunities?
Kirti Ganorkar: I think I'm more excited about the sales synergy, yes. And because both the companies and the global platform will give us lot of sales synergy on both the side. As an example like you know Sun develops many complex generics in Europe market, but we don't have a front-end, retail front-end to market those products. So there is a good sales synergy in terms of selling the Sun's portfolio using Organon as a platform and good examples are like Europe market, some of the emerging market. At the same time Organon also has a very well established product business, innovative business which we can also sell through Sun's network. So both the side I can look at. This is on the existing product. At the same time Sun is also developing many complex generic product, which can also be sold through this platform. So on sales side there is a good synergy. I think we have not given number because these are all initial days and we would like to do a careful evaluation of what kind of sales synergy we can generate. But broad idea is to grow the business. As you know the Organon is growing business for 1% to 2%, but with the sales synergies can be grow business to the next level.
If we look at established brands, all the products are genericized and not growing and seeing some kind of structural decline. What kind of the growth you are looking in these brands, what was the challenge Organon was facing and how you are going to change this business in terms of growth trajectory?
Kirti Ganorkar: I think good question what you're asking is, yes. So there are two things to this, one is the established product business and as what Dilip bhai said in spite of large number of generics they are able to maintain their market share and they are also able to command a premium price. As an example if some of the product I look at in China for a brands there are 20, 30 generics, but still they are able to maintain 20%, 30% market share. So that means there is a brand value in each of these markets and there is a brand equity. Now where do we bring the next level of growth in established product business is to come with the new ideas. So there are we have good number of ideas based on our previous experience in developing branded generic business is on a line extensions. So some of these products will go through clinical studies, some of these product can be approved based on bioequivalence studies, but some of these line extension would help us to grow this established product to the next level. And we have some thought about it, but it will take some time for us to develop and commercialize this product. This can be line extension of existing established product and there can be ideas even combining two products together. So when I look at and put these two things together, I'm hopeful that the established product business which is stagnant today and not growing will also turn around and will start showing some single digit growth, yes.
On Nexplanon, would you kind of want to rate this in terms of the complexity by your experience like would this be the most complex generic and would you expect a generic to come in by 2030 when the patent expires?
Kirti Ganorkar: I think what you need to appreciate is now we just announced the deal and Nexplanon is also Organon product. So till the deal close, we will not be able to comment on Nexplanon or Nexplanon generics, yes. Only thing I would say it's a complex product to develop, yes.
Would there be more investment required to revive growth for Organon, either on the biosimilar commercial side or for VTAMA? Have we come to a number in terms of the incremental investment required? Does the net debt at 2x-2.3x limit more acquisitions on the specialty side for the next two-three years?
Kirti Ganorkar: As I said, this would require in-licensing of product. And we will also look at in-licensing of product which are closer to market and it means that we will also need to invest in in-licensing of these products as we commercialize them. But your specific question like VTAMA they already have commercialized this product. And it's a dermatology product, so it's complemented with our portfolio in the US. So like that for in-licensing opportunities, we may have to invest. Now what do we do and when do we do next transaction, I don't think we can comment it right now. But we keep on looking at the opportunities which require our business to grow to the next level. That's what I can say, yes.
What prompted the change in acquisition strategy from sub-$500 million assets to a company of Sun's similar scale? Does this acquisition provide scale to also break into the US commercial channel?
Dilip Shanghvi: No, I think we've consistently maintained that we want to strengthen our capability to develop and strengthen our innovative product business. Organon gives us a what you call global reach both whenever we license or buy a company to launch the product in multiple geographies ourselves so that we can capture the full value. So I think the idea is to strengthen our ability to become a partner of choice. At the same time have enough cash flow and ability to invest in business. So as I said, I think priority is to find a way to repay the debt using the surplus cash flow, but along the way if we get some interesting close-to-market product, we will look at those opportunities. I think we believe that with the strong cash flow with combined company will generate, it will significantly strengthen our ability to become a more important global player.
On the revenue side, should we expect Organon's organic growth to remain in the flattish range, and to grow the business to mid-to-high single digit, we would be depending essentially on the in-licensing deals?
Dilip Shanghvi: No, I think what Kirti said is that the focus is on execution. So if you look at other companies which are in established product business like Abbott or many of the European companies which have products for which the main compound patents have expired, Recordati, and there are many other companies. So I think the idea is to learn from these companies, understand what is it that they do differently and find a way to grow the business. So I don't think that it's linked to any particular things whether licensing or this, even a better execution can help us in terms of improving the growth. So many things say like sometimes investment in marketing can help us in growing.
Organon's pipeline seems to be a bit sparse. Is it going to be more of a long-term effort or do you see growth picking up in Organon over the next few years?
Dilip Shanghvi: I think that is the reason why Kirti has not given details about future growth potential, because we need to do a much more detailed analysis, but I think as a company we invest in long-term value creation, so we're not looking at everything in terms of six month, one year. But longer term I think we see huge opportunity to transform the company.
What kind of employee strength does Organon have? How is it split? And is there any sense of the level of attrition that Organon is facing currently?
Abhishek Sharma: So we have disclosed and of course Organon has also disclosed that there are about 10,000 employees out of which 4,000 is in the field force. And these are spread across geographies including commercial field force which is marketing their innovative, biosimilars as well as established products across geographies. Dilip Shanghvi: Comment, what I think Abhishek has been trying to say is that as a public company, it would not be appropriate for us to share something. However, all the questions that you're asking related to Organon and also cost and future cost I think have been part of our diligence and our valuation exercise.
What is the nature of R&D capabilities coming from Organon? Is there any scope for rationalization of the R&D spend there?
Dilip Shanghvi: No, I think if I look at Ilumya actually was discovered by Organon. And it went to Schering Plough and then from Schering Plough went to Merck and then finally we licensed it. So we have to go back to the roots. I don't think that capacity exists, but the skill set and capability existed at some point of time. So we have to look. But what we are sure of is the capability to do development on some of the very long acting product because Nexplanon if you see is a long acting contraceptive which is continuing to work up to now 5 years and they are continuing to do the study so that the life can be further extended. So this technology can potentially be applied to many other drugs and diseases, which are chronic in nature, at the same time are let's say can be managed with very highly potent drugs. So you don't have to load a large amount of drug into the device. So we see a opportunity to bring some of these kind of products to market in the short term.
How should we look at EPS accretion in the first full year of closing of this transaction?
Jayashree Satagopan: So we believe this will be EPS accretive from the beginning. Shyam Srinivasan: You mean in the first 12 months of the closure of the transaction? Jayashree Satagopan: Yes, yes. Kirti Ganorkar: There is a negligible overlap between Sun and Organon. It's a very negligible and the few product which we may have to divest, but other than that there is no major divestment required for the for the business going forward. And yes, it is the EPS accretive from day one, yes.
Based on your experience with Ranbaxy, what are the key learnings that can be used to integrate Organon? And will most synergies materialize in the second year?
Dilip Shanghvi: No, I think openness to understand the strength of the acquired company because it's human nature to think that because you are acquiring a business you know, more and you know, better. We've seen that there are strengths in all the companies. So get into the acquisition with an open mind, look at the challenges that the business faced, their strengths as well as weakness. And help them overcome their weakness and find a way to leverage their strength. I think everybody given an opportunity to contribute and perform generally does very well. Jayashree Satagopan: It will take a period of two to four years to get the full potential of the synergies.
On the cross-selling opportunity, what I can see is that lot of our specialty products are yet to be launched in large ex-US markets. Would you start filing in these geographies now with expectation that when acquisition closes you'll be able to launch, or wait for the acquisition to close?
Kirti Ganorkar: No, good I think it's interesting observation what I see. I will use ILUMYA as an example, like you know now ILUMYA we have registered in more than 35 countries and still we are not present globally the way the Organon will have footprint across 140 countries, still an opportunity for ILUMYA to registered in large number of countries. As an example like we don't have any footprint in South Korea. And South Korea is also one of the interesting market for product like ILUMYA and our innovative business. So we can start the process of registering the product and post close transaction you can commercialize the product using the commercial vehicle what we have we will get through Organon. So like that each of our innovative portfolio which has not been scaled up to global level, there is a opportunity for us to scale it to those levels. We'll enter 10 new markets where we are not present today and most importantly we will do it through our own field force and through our own company that would also help us going forward.
Dilip Bhai mentioned the opportunity to bring long-acting product technology to market. My understanding is this is technology probably licensed from Merck. With Organon do we get a license to use this for other products?
Dilip Shanghvi: No, I think it's a Organon technology. It's a contraceptive developed in-house. So it's not a Merck technology.
On established product portfolio in China, has the impact of volume-based pricing already kind of in the numbers?
Abhishek Sharma: Yes, if you would go through Organon disclosures, you would see that majority of their EB portfolio in China has already undergone VBP, so that impact is already factored in.
Over the years you would have evaluated several assets from an acquisition standpoint. What was the single biggest reason that made you bid for Organon?
Dilip Shanghvi: No, I think if you look at numbers, it's very self-explanatory. Two different companies with similar top line and actually their EBITDA is higher than Sun, one valued at close to $10 billion, the other in excess of $40 billion. The key difference is the growth. What I think as a company we've demonstrated is our ability to find a way to grow the business. So, if we apply the same logic, the kind of value creation that we can do for the combined company available to Sun, say because one of my biggest concern has been that Ranbaxy transaction we did for stock and thereby diluted Sun shareholders by almost 15%. If we had done either a stock-cash deal or only cash deal. So this time we decided to do a cash deal. There is a certain amount of debt that we're taking, it's within the safety margin of what people consider to be safe and with an intention to repay the debt. So, I think if you look at the numbers part of the story reveals itself.