indian pharmaceutical industry_oct2013

8/13/2019 Indian Pharmaceutical Industry_Oct2013

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MethodologyRisk Profiling

Quantification of Major Risks

Probability Matrix

Risk Mitigation Measures

CONTENTS

Company Performance at a Glance

Conclusion


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Introduction

Indian Pharmaceutical industry is worth INR 720 Billion and is growing at animpressive rate of 7 % CAGR for the past five years. It is the worlds 14th largest pharma player by value and third largest by volume. The sector is highly knowledge based and its steady growth is positively affecting

the Indian economy

As per a major study by global management and consulting firm, McKinsey &Company, India's pharmaceutical market experienced a boom, reaching US$ 18billion in 2012 from US$6 billion in 2005. The report further states that the Indianpharmaceutical market will be the sixth largest in the world by 2020.

India is predominantly a generic market and most of the Indian players have theirexpertise in generic segment. More than half of the total revenue of IndianPharma players is through exports.


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Introduction

The report also suggests thatIndias

pharmaceutical sector will touch US$ 45billion by 2020. The rise of pharmaceutical outsourcing and investments by multinational

companies (MNCs), allied with the country's growing economy, committed healthinsurance segment and improved healthcare facilities, is expected to drive themarkets growth.


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Market Dynamics India currently exports drug intermediates, Active Pharmaceutical Ingredients

(APIs), Finished Dosage Formulations (FDFs), Bio-Pharmaceuticals, and ClinicalServices across the globe.

The exports of pharmaceuticals from India grew to US$ 14.6 billion in 2012 from US$ 6.23 billion in 2006 07, CAGR of around 15.2 per cent.

The Ministry of Commerce has set a target for Indian pharma sector exports of US$25 billion by 2014 at an annual growth rate of 25 per cent.


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Companies Under Study

Indian Pharma sector is highly fragmented with about 24000 companies inorganized as well as unorganized players put together. The top 300companies make up 85% of the market. In this study we have taken the topfive players of the industry which contribute to about 15% by volume ofsales. The companies selected are :-

Dr. Reddys Laboratories Limited Ranbaxy Laboratories Limited Zydus Cadila Dishman Pharma

Sun Pharmaceutical Industries Limited


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Dr. Reddy Laboratories limited

Dr. Reddys Laboratories Limited (Dr. Reddys) was incorporated in India by promoter and founder Chairman, Dr. K. Anji Reddy as a Private Limited Company onFebruary 24, 1984.

On a consolidated basis (as per IFRS), Dr. Reddys revenues of Rs. 11627 Crores i9m, 2012-13 marked a growth of 26% over previous year .

Through its three businesses - Pharmaceutical Services and Active Ingredients, Global

Generics and Proprietary Products Dr. Reddys offers a portfolio of products anservices including Active Pharmaceutical Ingredients (APIs), Custom PharmaceuticalServices (CPS), generics, biosimilars, differentiated formulations and News ChemicalEntities (NCEs). ICRA has given the rating of AA + for long term and A1+ for short termfunds.


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Ranbaxy Laboratories Ltd.

Ranbaxy Laboratories Ltd. is the largest pharmaceutical company in India and one ofthe worlds top.

Ranbaxy is a member of the Daiichi Sankyo Group. Daiichi Sankyo is a leading globalpharma innovator, headquartered in Tokyo, Japan. It was taken over by Daiichi Sankyoin June 2008.

Ranbaxys total market share is 5% in Indian market. Ranbaxy is specialist in the preparation of generic drugs. Ranbaxy Laboratories Limited (Ranbaxy) is a research based international

pharmaceutical company serving customers in over 150 countries. It has groundoperations in 43 countries and 21 manufacturing facilities spread across 8 countries.

It covers all the top 25 pharmaceutical markets of the world and has a robust presence

across both developed and emerging markets.


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Cadila Healthcare Ltd.

Cadila Healthcare, earlier known as Cadila Laboratories, was incorporated in theyear 1951 by Mr. Ramanbhai Patel (1952 2001), and his business partner ShriIndravadan Modi.

It develops and manufactures a large range of pharmaceuticals as well asdiagnostics, herbal products, skin care products and other OTC products.

Cadila Healthcare Ltd. (CADILAHC) possesses a market share of 3.85 percent witha turnover of about INR 37,286 million, with net profits of INR 4,986 Million.

The pharmaceutical products of the company comprise of human formulations,veterinary formulations, and bulk drugs.

The global markets of Cadila Healthcare include Sri Lanka, Czechoslovakia,Kenya, Myanmar, Romania, Mauritius, Cambodia, Mauritius and the Russianmarkets.


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Dishman Pharmaceuticals and Chemicals

Dishman Pharmaceuticals and Chemicals Ltd is a recognized supplier of cost-effective, high quality chemical services and products to the global pharmaceuticaland chemical industry. They are involved in the manufacture of activepharmaceutical ingredients (API), API intermediates, quaternary ammoniumcompounds and fine chemicals.

In the year 1995, the company formed a joint venture company with Sch tz & Co,Germany called as 'Schutz Dishman Biotech Private Ltd.

During the year 2004-05, the company entered into an agreement with a leadingBritish company NU SCAAN, for the development & manufacture of Bulk Activesfor Neutraceutical products.

The company is also in the process of building Asia's largest facility to manufacture

cancer drugs and other high potency drugs at their Balva plant.


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Sun Pharma Limited

Sun Pharma began in 1983 with just 5 products to treat psychiatry ailments. Sun Pharma was listed on the main stock exchanges in India in 1994. Crisil has

given the rating of AA A for long term and A1+ for short term funds. Sun Pharmahas a strong market position in the fast-growing cardiology, neurology,gastroenterology, and diabetology segments in India.

These segments account for over 70 per cent of the companys domeformulation sales. For Sun Pharma as well 58% of its sales is achieved fromoverseas markets.


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Company Performance At A Glance

COMPANY PERFORMANCERANBAXY DR. REDDY CADILA SUN DISHMAN

Turnover 6,560.71 6,821.50 3,389.90 4,358.41 498.23

Total Expenditure 6,343.77 6,822.50 2,719.50 2,332.66 403.53

Profit/(Loss) before tax -164.28 1,753.20 670.4 2,025.75 94.7

Profit/(Loss) after tax -162.34 1,265.50 657.5 1,927.98 63.18

Earning Per Share (UnitCurr) 0 74.54 32.11 18.6 7.83

Dividend Rate (%) 0 300 150 425 60


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RANBAXY DR. REDDY CADILA SUN DISKey Ratios 2012 2013 2013 2013 Debt-Equity Ratio 2.38 0.25 0.56 0.01

Long Term Debt-Equity Ratio 0.76 0.04 0.27 0 Current Ratio 0.84 1.53 0.95 2.45

Turnover RatiosFixed Assets 2.01 2.2 1.65 1.57 Inventory 3.74 5.96 6.87 3.34

Debtors 2.47 3.47 5.76 3.47

Interest Cover Ratio 1.72 27.32 5.79 1,507.89 PBIDTM (%) 11.02 25.07 20.31 29.75 PBITM (%) 8.08 21.39 17.19 26.34 PBDTM (%) 6.33 24.29 17.34 29.73 CPM (%) 6.36 18.56 16.47 23.92

APATM (%) 3.42 14.88 13.34 20.51 ROCE (%) 0 20 14.83 8.3 RONW (%) 0 17.45 18.24 6.59

Company Performance At A Glance


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Risk Profiling International markets account for more than half of the total revenues of Indian

pharma players, and revenues from these markets are expected to grow fasterthan revenues from the domestic market.

However, international markets pose increasing challenges because of evolvinghealthcare regulations, intensifying competition, volatile exchange rates, andlengthening working capital cycles.

While players in regulated generics markets are facing severe pricing pressures asa result of government-led cost-containment measures, intensifying competition,and a more stringent regulatory environment, players operating in semi-regulatedmarkets have been exposed to risks related to sharp volatility in exchange ratesand stretched working capital cycles


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Risk Profiling | Economy Wide Risk

Erosion of margins in generics

Internationally the acceptance of generics have increased due to globalrecessionary atmosphere as generics are much more economical that the originaldrugs. This increase in demands has attracted many large global players togeneric space. Due to increased competition it is said that the margins in thegeneric space is set to come down. Such a situation will affect Indian players

adversely as India is one of the largest generic makers in the world.


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Risk Profiling | Company Specific Risk Dr. Reddy Labs Pvt. Ltd

Dr. Reddys long term research efforts will depend, to a large extent, upon theCompanys ability to successfully patent and commercialize its own NCEmolecules and differentiated formulations. There are significant risks ofexecution, as the process of development; and commercialization of newmolecules is time consuming as well as costly.

Ranbaxy Labs Ltd.

The depreciation of the INR against the US$, though favourable to Ranbaxy'sexport business had an adverse impact on the Company mainly on account ofapplication of the accounting standards that require Marking to Market the entirederivatives and foreign currency denominated loans outstanding. There was acharge of Rs 3.6 Bn during Q3'13 and Rs 7.6 Bn during YTD Sep'13 on account of

the forex items.


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Risk Profiling | Company Specific Risk Cadila Healthcare

NCE and NDDS research require significant investment and a longer gestationperiod, with low chances of success, which is determined by many factors. Thisexposes the Company to the risk of its drug discovery efforts, turning unproductiveat any phase.

Dishman Pharmaceuticals and Chemicals

In respect of CRAMS segment of Dishman India,Company has modified its focusand is now concentrating on a larger number of midsize contracts rather thanconcentrating only on a few large MNCs. The idea is to de-risk the business modelto the maximum extent and also fill up the available plant capacities so as toeffectively improve the capacity utilization of the plants, which will result into anincrease in the Return on Capital Employed.


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Risk Profiling | Company Specific Risk Sun Pharma

Sun Pharma is a debt-free company which shows healthy trends of debt-coverage,profitability, low working capital gaps, etc. However, the only non-systemic risk thatSun Pharma has is that it doesnt hedge a considerable part of its positions interms of foreign currency receivables, and the difference in market rates w.r.tcurrent rates will be booked as forex losses/profits.


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Risk Profiling | Key Financial Trends

Interest Cover Ratios

2013 2012 2011 2010 2009

Dr Reddy 27.32 19.2 107.25 27.62 40.74

Ranbaxy 1.72 3.4 24.71 27.9

Cadila 5.79 6.32 21.04 13.07 4.37

Dishman 2.85 2.17 2.2 3.69 4.52

Sun Pharma 1,507.89 4,014.56 0 2,158.18 468.66

Analysis: Dr . Reddy took long term debt and dur

year 2010-11, the company acGlaxoSmithKline's (GSK) oral pmanufacturing facility located in Tennesse

Ranbaxy Japan K.Kviz. Lapharma GmGermany and Ranbaxy N.A.N.V, at Awholly owned subsidiaries of the company

liquidated. But, loss on forex transactionswas 20.93 in 2010 had increased to 1431.in 2011 and company had to write off 2,648 cr in 2011.

Sun Pharma is Debt free company.


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Risk Profiling | Key Financial TrendsAnalysis:

Cadila: For this the planned capex waround 500 cr and has been funded long term loans from various banks adue to which the D/E ratio has increased

Dishman: The company has plannedcapex of Rs.40 cr in the 2012 due to whi

Debt to equity ratio has declined.

Debt to Equity Ratio

2013 2012 2011 2010 2009

Dr Reddy 0.25 0.24 0.18 0.11 0.11

Ranbaxy 0.25 0.24 0.18 0.11

Cadila 0.56 0.4 0.31 0.5 0.68

Dishman 0.72 0.8 0.8 0.62 0.53

Sun Pharma 0.01 0.01 0.01 0 0.01


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Risk Profiling | Key Financial TrendsAnalysis:

Sun Pharma : As Debtors has increafrom 2,453.18 in 2012 to 2,995.34 in 20liabilities have increased, due to increain sundry creditors., which has affected tcurrent ratio.

Dishman: There is a significant increas

the current asset of the company , fro83.97 in 2012 to 187.07 in 2013 , current ratio has increased

Current Ratio

2013 2012 2011 2010 2009

Dr Reddy 1.53 1.44 1.44 2.07 3.15

Ranbaxy 1.03 1.35 1.21 1.1

Cadila 0.95 1.14 1.45 1.35 1.19

Dishman 0.89 0.78 1.05 1.72 1.8

Sun Pharma 2.45 2.89 2.66 2.38 2.56


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Risk Profiling | Industry Risk Increased Competition - The business is negatively impacted if innovator

pharmaceutical companies are successful in limiting the use of genericsthrough aggressive legal defense as well as authorized generics deals. Inview of the number of patent expiries coming up in the near future, sales ofpatent expiry drugs in the US as well as in Europe represent significantopportunity for all generics and API manufacturers.

Foreign exchange fluctuations - Being a global company, the income isexposed to currency rate fluctuations. In 2010-11, the Indian rupee appreciatedby approximately 4% vis--vis the US dollar, from 47.44 per US$ for the yearending 31 March 2010 to 45.56 per US$ for the year ending 31 March 2011.

Appreciation of the Indian rupee may impact top-line growth for Indian

companies with higher exposure to the US dollar.


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Risk Profiling | Industry Risk Regulatory Risks - NPPP-2011: National Pharmaceutical Pricing Policy aims

bring 348 medicines under the regime of price control. This price control will belevied on every stage of manufacturing of drug. Implementation of this rule willerode the profits of the Pharma companies to a great extent.

Tightening regulatory framework in western markets - International regulatolike US FDA has of late have increased their monitoring of plant of Pharmacompanies that has approval to manufacture drugs for exports. Due to increasehealth care awareness and implementation of stringent rules in their homecountries there has been many cases where Indian manufacturers have beenreprimanded by US FDA.


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Risk Profiling | Industry Risk Counterfeiting - It is estimated that 10-12 percent of total medicines available in

Indian market are counterfeit. The Pharma companies pose to lose in two waysfrom this menace. They lose a certain market share to these counterfeit drugs. The ill effects caused to the patients on account of consumption of these duplicate

medicines lead to a huge reputation risk and also, irreparable damages to the originaldrug manufacturer.

Obsolesce - With Indian markets opening up to larger global players there alwaysexits a risk that with introduction of new efficient drugs the exiting medicinesbecomes out of favour in no time.


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Quantification of Major Risks mentioned above

Risk Prob of occurrence

Impact on occurrence

Impact number

Risk Score Mitigant

0.8 Very high 5 4 Can be countered withdevelopment of newdrugs

NPPP 2011

Tightening regulatory frame work in US

Expansion to new

1 High 4 4markets and investmentin new machinery andstricter norms

Erosion of margins ingenerics

0.6 High 4 2.4

Focus on R&D andexpansion to newmarkets like Africa anLatin America Stricter punishment foroffenders and more

0.1 Very High 5 0.5 investment in packaginto make counterfeitindifficult.

Counterfeiting

Foreign Currency risk 0.5 Medium 3 1.5 Proper hedging

Obsolesce 0.2

High

4

0.8

R&D focus


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Probability Matrix for Risks faced by the sector

Probable Impact

P r o

b a b

i l i t y o

f o c c u r r e n c e

High Medium Low

H i g h

High Priority High Priority Medium Priority

M e d

i u m

High Priority Medium Priority Low Priority

L o w

Medium Priority Low Priority Low Priority


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Risk Mitigating Measures National Pharmaceutical Pricing Policy

Indian players will have to focus more on R&D capabilities and development of new drugs.The revenue loss from exiting products can be made up by introduction of new moreefficient drugs.

Tightening regulatory framework in western markets

Indian Pharma companies have to immediately invest in their manufacturing processes tomake it more stringent and ensure complete adherence to international norms. The focus ofquality has to be put in place and fresh investment has to be made in machineryenhancement and process control.

Risk of Concentration

The Pharma companies should expand to developing markets such as Latin American, African countries. These markets have evolved at a greater growth rate than the developed

markets. This opportunity should be tapped and the Indian players should expand theirpresence in these markets as well.


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Risk Mitigating Measures Erosion of margins in generics

Leveraging extensive expertise in generic manufacturing to control cost and investment innewer machinery to keep prices under control. Ranbaxy has been up grading its machineryand replacing old machinery with better and efficient lines to remain competitive in genericbusiness space. Other players have to follow the suit to sustain in the generic market .

Counterfeiting

Working closely with the government to impose stricter laws to deter the practice ofcounterfeiting. Constantly changing packaging of medicines and making it such thatimitation is not easy. Educating end users about the about minute nuances of original drugsby use of print and electronic media.


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Risk Mitigating Measures Foreign currency fluctuation risk

These companies should avoid open position in forex and should hedge their currency riskswell. The exchange rate movements should be very closely monitored and a team ofexperts should be set up to gauge the exchange rates and thus use the fluctuations to oown benefits. As the components of exports in total sales is very high the cost of setting upsuch a team of experts will be negligible compared to the risk potential.

Obsolesce

Focus on R&D: Traditionally Indian players are not known for their R&D prowess whencompared to their global counterparts. The global majors in Pharma sector spend about 25to 30 % of their revenues on R&D. When it comes to Indian players even the top Pharmacompanies spend about 5-10% of their revenues on R&D


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Conclusion

The Pharma industry of India has been doing well for the past manyyears now. The fundamental of the pharmaceutical players in India isfound to be strong.

To summarize, it can be said that the major threats on the industrycan be avoided by the measures as below:

Focus more on research and development Expand to developing markets Focus on cost control


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Thank You

indian pharmaceutical industry_oct2013

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