Risk in Pharma Sector

Name Company Phone Number

Sachin Menon Lupin Ltd. 7737963223

Rajesh Bassana Ranbaxy Laboratories Ltd. 7737964017

Mohit Sethi Dr. Reddy’s Lab Ltd 7737942707

Soumitra Mukherjee

Sum Pharma Ltd. 7737963501

Rajsekhar Cipla Ltd 7737963252

Risk Profiling – Pharmaceutical Sector An overview of major risks faced by Indian Pharmaceutical Industries and their mitigants and development of a probability-impact score to quantify the risk faced by Indian Pharma players

Submitted by

Indian Pharma Industry Page 2 of 29

Contents Sectoral Introduction: 3

Companies under study: 3

Methodology: 3

About the companies: 4

Dr. Reddy’s Laboratories Limited 4

Lupin Limited 5

Sun Pharmaceutical Industries Limited 6

Ranbaxy Laboratories Limited 6

Cipla Limited 6

Risk Profiling: 7

Economy wide risk 7

Company specific risk 7

Industry Risk 7

Quantifying the risks: 9

Conclusion: 10

Appendix-I 11

CIPLA Ltd: 11

Threats, Risks and Concerns 11

Key financial ratios which impacts the company: (CIPLA) 12

Appendix-II 13

LUPIN LIMITED 13


Key financial ratios which impacts the company: (LUPIN) 16

Appendix-III 17

Dr. Reddy Laboratories limited 17


Key financial ratios which impacts the company: (Dr. Reddy) 24

Appendix-IV 25

Sun Pharma Limited 25


Key financial ratios which impacts the company: (Sun Pharma) 27


Appendix-V 28

Ranbaxy Laboratories Ltd. 28


Key financial ratios which impacts the company: (Ranbaxy) 29

Sectoral Introduction: Indian Pharmaceutical industry is worth USD 21 billion and is growing at an impressive of 9 % CAGR

for the past five years. We are the world’s 14th largest Pharma player by value and third largest by

volume. India is predominantly a generic market and most of the Indian players have their expertise

in generic segment. More than half of the total revenue of Indian Pharma players is through exports

Companies under study: Indian Pharma sector is highly fragmented with about 24000 companies in organized as well as

unorganized players put together. The top 300 companies make up 85% of the market. In this study

we have taken the top five players of the industry which contribute to about 15% by volume of sales.

The companies selected are :-

Cipla Limited

Sun Pharmaceutical Industries Limited

Lupin Limited

Dr. Reddy’s Laboratories Limited

Ranbaxy Laboratories Limited

Methodology: The study aims to identify the major risks associated with the companies under study. These risks

are then to be classified into the broad categories of:

Economy wide risk

Industry risk and

Firm specific risk


An arrangement is also devised to quantify the risks based on their probability of occurrence and

impact that each risk will have in case of their occurrence. Though both these attributes are

qualitative by assigning a number to both probability and occurrence and then multiplying both the

numbers we can devise a quantitative scale as well to measure the risk. Symbolically speaking the

arrangement would be similar to a 3x3 matrix as shown in the figure below:

Probable Impact

Pro

bab

ility

of

occ

urr

en

ce

High Medium Low

Hig

h

High Priority High Priority Medium Priority

Med

ium

High Priority Medium Priority Low Priority

Low

Medium Priority Low Priority Low Priority

The number assigned to the impact on business can be both positive and negative. A positive

number signifies that the risk will affect the business adversely and vice versa. By definition risk

stands for both deviation of expected outcome that can be both positive as well as negative. The

purpose of this study is to analyse the negative impacts only.

About the companies: As mentioned earlier in this study the top companies of Indian Pharma sector by scale has been

taken into consideration. A brief overview about the companies is as follows:

Dr. Reddy’s Laboratories Limited Dr. Reddy’s Laboratories Limited (Dr. Reddy’s) was incorporated in India by its promoter and founder

Chairman, Dr. K. Anji Reddy as a Private Limited Company on February 24, 1984. On a consolidated

basis (as per IFRS), Dr. Reddy’s revenues of Rs. 7015 crore in 9m, 2011-12 marked a growth of 29%

over previous year (Rs. 5452 crore during 9m, 2010-11). Through its three businesses -

Pharmaceutical Services and Active Ingredients, Global Generics and Proprietary Products – Dr.

Reddy’s offers a portfolio of products and services including Active Pharmaceutical Ingredients

(APIs), Custom Pharmaceutical Services (CPS), generics, biosimilars, differentiated formulations and

News Chemical Entities (NCEs). ICRA has given the rating of AA + for long term and A1+ for short

term funds.


Strong research and development (R&D) capabilities, healthy product pipeline, stable profitability

indicators. As seen from the revenue mix figures below, most of the income for the company comes

from overseas markets with North

America being the biggest contributor to the revenues.

This is also a major point to be kept in mind while analysing company risks

Lupin Limited Lupin (erstwhile Lupin Chemicals) was founded in 1968, later Lupin Chemicals Limited merged with

Lupin Laboratories Limited. Lupin revenues of Rs. 4,527 crore in FY-2010-11 marked a growth of 22%

over previous year (Rs. 3,723 crore during FY-2009-10). ICRA has given the rating of AA + for long

term and A1+ for short term funds. Growth is supported by large number of product filings across

the globe resulting from company’s robust R&D team and strong research infrastructure augurs well

for the company. The Company has significant market share in key markets in the Cardiovascular

(prils and statins), Diabetology, Asthma, Pediatrics, CNS, GI, Anti-Infectives and NSAIDs therapy

segments along with global leadership positions in the Anti-TB and Cephalosporins segments. The

Company's foray into Advanced Drug Delivery Systems has resulted in the development of platform

technologies that are being used to develop value-added generic pharmaceuticals. They have a

market presence in 70 countries. For Lupin anti bacterial – Suprax is their largest selling brand and

contributes about USD 3.50 Billion in revenue. The company has manufacturing facilities spread

India & Japan, recently acquired I’rom Pharmaceuticals through its Japanese arm. As in case of Dr.

Reddy’s Lab, Lupin also has its major share of revenues from overseas markets.


Sun Pharmaceutical Industries 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. Sun pharma revenues of Rs. 1,985 crore in FY-2010-11

marked a growth of 05% over previous year (Rs. 1,891 crore during FY-2009-10). Crisil has given the

rating of AA A for long term and A1+ for short term funds. Sun Pharma has 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 company’s domestic formulation sales. For Sun

Pharma as well 58% of its sales is achieved from overseas markets.

Ranbaxy Laboratories Limited Ranbaxy was incorporated in the year 1961 and got listed in 1973 and is India's largest

pharmaceutical company. It is an integrated, research based, international pharmaceutical company,

producing a wide range generic medicines. Ranbaxy today has a presence in 23 of the top 25

pharmaceutical markets of the world. The Company has a global footprint in 43 countries, world-

class manufacturing facilities in 8 countries and serves customers in over 125 countries. Ranbaxy

revenues of Rs. 7,709 crore in FY-2010-11 marked a growth of 36% over previous year (Rs. 5,687

crore during FY-2009-10). CARE has given the rating of AA A for long term and A1+ for short term

funds. Ranbaxy features among the top 10 generics companies in the world. The company has a

large international presence. International revenues accounted for about 81 per cent of the

company’s total revenues.

Cipla Limited Cipla was incorporated in the year 1935 by the late Dr Khwaja Abdul Hamied. The company launched

its first product in 1937 and has since then expanded to establish multi-locational manufacturing

units in India which manufacture more than 1,500 drugs. Cipla revenues of Rs. 6,368 crore in FY-


2010-11 marked a growth of 13% over previous year (Rs. 5,657 crore during FY-2009-10). CARE has

given the rating of AA A for long term and A1+ for short term funds. Cipla exports to more than 170

countries through joint venture and partnership, thereby reducing its geographical concentration

risk.

Risk Profiling: Pharmaceutical sector is the sector that is least affected by economic downturns and disturbances.

Even during the recent difficult times the Pharma industry has been growing at an impressive pace

world over.

Economy wide risk India is majorly a generic drug manufacturer. Generic drugs are copy drugs that have gone off patent

and thus act as an economical substitute to the expensive original drugs. The global economic down

turn has revived the sales of generic drugs globally. Currently the ratio of generic drug to original

drug is 36:64. It is estimated that by 2020 this ratio will become 58:42 in favour of generics. Thus

down turn in global economy instead of posing threat to the Indian Pharma sector is offering an

opportunity to grow further.

Company specific risk Majority of the risk faced by the companies in Pharma industries are common across the companies.

Most of them would be covered in industry risk. But in case of large family held companies like

Lupin, Dr. Reddy’s Lab and Cipla the risk of success is a very important risk. Especially in case of Cipla,

post Dr Y.K Hamied the success plan is not in place. This is a major risk and its impact would be

showed a detail in the risk matrix below.

Industry Risk As discussed above Pharma industry is a steadily growing industry with strong fundamentals. All of

the major Pharma players in the country are cash rich and have huge levels of retained earning year

on year. The future prospects of the industry are also bright. But never the less there are certain

risks that even this industry faces. The following are the major risks faced by Indian Pharma sector.

Regulatory risk – The recent regulatory development in India in form of NPPP-2011 could have a

detrimental effect on the growth and development of Pharma sector in India.

Risk 1 – NPPP-2011: National pharmaceutical pricing policy aims to bring 348 medicines under the

regime of price control. This price control will be levied on every stage of manufacturing of drug.

Implementation of this rule will erode the profits of the Pharma companies to a great extent.

Mitigant 1 – 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 more efficient

drugs.

Risk 2 – Tightening regulatory framework in western markets: International regulators like US FDA

has of late have increased their monitoring of plant of Pharma companies that has approval to

manufacture drugs for exports. Due to increase health care awareness and implementation of

stringent rules in their home countries there has been many cases where Indian manufacturers have


been reprimanded by US FDA. In past six months itself Lupin, Cipla and Ranbaxy have got notices

from US FDA for incomplete adherence to manufacturing norms. Sun Pharma and Dr. Reddy’s lab

have got similar notices from UK FDA and drug authorities of Germany. If such notices are repeated

then the drug companies may lose the authority to export drugs from their plants. This will have a

catastrophic effect on the whole Pharma business as Indian Pharma companies earn majority of

their revenues from exports.

Mitigant 2 – Indian Pharma companies have to immediately invest in their manufacturing process to

make it more stringent and ensure complete adherence to international norms. The focus of quality

has to be put in place and fresh investment has to be made in machinery enhancement and process

control. Also to avoid risk of concentration the Pharma companies should expand to developing

markets as well and not just focus on developed markets. In the last 3-4 years the developing

markets as well as markets like Africa and Latin America have been growing much faster than

developed countries. This opportunity should be tapped and the Indian players should expand their

presence in these markets as well.

Risk 3 – Erosion of margins in generics: Generics as explained above are copy of original drugs that

go off patent. Internationally the acceptance of generics have increased due to global recessionary

atmosphere as generics are much more economical that the original drugs. This increase in demands

has attracted many large global players to generic space. Due to increased competition it is said that

the margins in the generic 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.

Mitigant 3 – Leveraging extensive expertise in generic manufacturing to control cost and investment

in newer machinery to keep prices under control. Of late Ranbaxy has been up grading its machinery

and replacing old machinery with better and efficient lines to remain competitive in generic business

space. Other players have to follow the suit to sustain in the generic market.

Risk 4 – 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 ways from this menace. They

lose a certain market share to these counterfeit drugs and also the ill effects caused to the patients

on account of consumption of these duplicate medicines lead to a huge reputation risk to the

original drug manufacturer. This may even cause an irreparable damage to the brand as a whole.

Mitigant 4 – Working closely with the government to impose stricter laws to deter the practise of

counterfeiting. Constantly changing packaging of medicines and making it such that imitation is not

easy. Educating end users about the about minute nuances of original drugs by use of print and

electronic media.

Risk 5 – Foreign currency fluctuation risk: As shown above all the major drug manufacturers in India

earn majority of their revenues from exports. In such scenario any adverse moment in currency

fluctuation will lead to major strain on the profitability of the Pharma players. Also the imports by

these companies form only a small percentage of their total exports as a result of which there is no

natural hedge for the companies in case of currency fluctuations. Of late there have been heavy

depreciation of rupees thereby making exports more profitable but in case of reverse movement the

Pharma players tend to incur losses as well.


Mitigant 5 – These companies should avoid open position in forex and should hedge their currency

risks well. Also the exchange rate movements should be very closely monitored and a team of

experts should be set up to gauge the exchange rates and thus use the fluctuations to one’s own

benefits. As the components of exports in total sales is very high the cost of setting up such a team

of experts will be negligible in front of the potential of risk averseness that can be achieved by such

an act.

Risk 6 – Obsolesce: With Indian markets opening up to larger global players there always exits a risk

that with introduction of new efficient drugs the exiting medicines becomes out of favour in no time.

Mitigant 6 – Focus on R&D: Traditionally Indian players are not known for their R&D prowess when

compared to their global counterparts. The global majors in Pharma sector spend about 25 to 30 %

of their revenues on R&D. When it comes to Indian players even the top Pharma companies spend

about 5-10% of their revenues on R&D. The attention has to be focused on R&D to counter the

threat of obsolesce.

Quantifying the risks: The risk has been described qualitatively above. To asses risk by a quantifying measure probability-

impact framework can be used. The methodology would be as shown below:

Of all the risks identified above, each risk is to be given a number based on their probability of

occurrence. Say if a risk has 20% probability of occurrence then it should be assigned 0.20.

Impact on occurrence – If the risk identified does occur then what would be the impact on the

business that it poses. This can be classified as very high, high, medium, low and very low. A number

can be assigned to each class as very high – 5, high – 4, medium – 3, low – 2 and very low – 1.

The impact score assigned to each risk will be the product of probability of occurrence and impact

on occurrence. High the score, more severe is the risk.


The risks identified above are measured as shown below:

Risk Prob of occurrence

Impact on occurrence

Impact number

Risk Score

Mitigant

NPPP 2011 0.8 Very high 5 4 Can be countered with development of new drugs

Tightening regulatory frame work in US

1 High 4 4

Expansion to new markets and investment in new machinery and stricter norms

Erosion of margins in generics

0.6 High 4 2.4

Focus on R&D and expansion to new markets like Africa and Latin America

Counterfeiting 0.1 Very High 5 0.5

Stricter punishment for offenders and more investment in packaging to make counterfeiting difficult.

Foreign Currency risk 0.5 Medium 3 1.5 Proper hedging

Obsolesce 0.2 High 4 0.8 R&D focus

Conclusion: The Pharma industry of India has been doing well for the past many years now. The fundamental of

the pharmaceutical players in India is found to be strong. To summarise in short it can be said that

the major threats on the industry can be avoided by the measures as below:

Focus more on research and development

Expand to developing markets

Focus on cost control


Appendix-I

CIPLA Ltd:

Threats, Risks and Concerns

1. NPPP-2011: The government is yet to decide conclusively on the issues of Data Exclusivity and Data Protection which are both “Trips Plus” measures. The European Union government is pushing for Trips Plus provisions and dilution of the Patents Act through bilateral agreements. There is a lot of uncertainty with regard to the government’s position on these two vital issues.

2. Drug Pricing: Cipla has some pending legal cases on account of alleged overcharging in respect of certain drugs under the Drug Price Control Order. The aggregate amount of the demand otices received is about `1230 crore (inclusive of interest). The company has been legally advised that based on the directions given by the Supreme Court, there is no probability of the demand becoming payable by the company. Any unfavourable outcome in these proceedings could have an adverse impact on the company.

3. Tightening regulatory framework in western markets : Our manufacturing facilities are regularly monitored and approved by various regulatory authorities across the globe.These authorities have become more vigilant and strict with respect to compliance. Periodically, the US FDA conducts routine audits of all approved facilities and accordingly several of our plants including Goa, Patalganga, Kurkumbh and Bengaluru were inspected by the US FDA. Currently, all facilities continue to be approved by the US FDA.

4. Foreign currency fluctuation risk: During the year, the Indian Rupee appreciated by more than 3-4 per cent compared to the US Dollar. Such severe flauctuations in foreign currency exchange rates can have a signifi cant impact on the Company’s operations and financial results.


Key financial ratios which impacts the company: (CIPLA)

Debt Coverage Ratios Mar '11 Mar '10 Mar '09 Mar '08 Mar '07

Interest Cover 222.4 57.08 35.92 67.27 112.84

Total Debt to Owners Fund 0.07 0 0.22 0.15 0.04

Financial Charges Coverage Ratio 126.22 52.13 25.56 50.81 79.53

Financial Charges Coverage Ratio Post Tax 110.41 45.05 18.78 47.1 70.12

Liquidity And Solvency Ratios

Current Ratio 1.94 2.17 1.81 2.62 2.65

Quick Ratio 1.56 1.57 1.93 1.88 1.76

Debt Equity Ratio 0.07 -- 0.22 0.15 0.04

Long Term Debt Equity Ratio -- -- 0.02 0.15 0.04

Profitability Ratios

Operating Profit Margin(%) 20.27 24.63 23.78 20.27 23.07

Profit Before Interest And Tax Margin(%) 16.41 21.32 20.52 16.9 19.8

Gross Profit Margin(%) 16.65 21.68 20.88 17.16 24.27

Cash Profit Margin(%) 18.25 21.11 21.75 17.85 21.26

Adjusted Cash Margin(%) 18.25 21.11 21.75 17.85 20.3

Net Profit Margin(%) 14.98 18.97 14.58 16.43 18.41

Adjusted Net Profit Margin(%) 14.98 18.97 14.58 16.43 17.45

Return On Capital Employed(%) 16.22 22.16 22.39 18.17 23.4

Return On Net Worth(%) 14.54 18.31 17.89 18.72 20.7

Adjusted Return on Net Worth(%) 14.25 17.57 23.17 16.85 19.61

Return on Assets Excluding Revaluations 82.25 73.55 55.86 48.2 41.52

Return on Assets Including Revaluations 82.36 73.66 55.97 48.32 41.64

Return on Long Term Funds(%) 17.29 22.16 26.79 18.24 23.45


Appendix-II

LUPIN LIMITED


In our quest to be consistently progressive and increasingly profitable, Lupin has adopted prudent risk management measures and mechanisms to mitigate environmental, operational and business risks. The Company believes that it has created the requisite framework to handle varied economic, financial, geo-political and social risks and is continually evolving proactive strategies to counter them. Price erosion within the global generic industry, specifically in the advanced markets has been a constant threat faced by all generic players. Our consistent investments in manufacturing and our strategy to remain a vertically integrated pharmaceutical business built around the Company’s strengths in API and Intermediates will continue to be a critical differentiator and will play a crucial role in strengthening our competitive positioning for our global formulations business. Lupin would also continue to focus on value added products and niche therapy segments to grow and build value. Lupin’s current business goals and growth objectives have been well evaluated and we remain prudent in terms of outlays and budgets inspite of the fact that the Company is more than well positioned to raise debt easily and on the most competitive terms. The larger global economic and financial environment continues to have minimal impact to the Company’s financial architecture. Currency fluctuations and foreign exchange risks have also been minimized because of internal forecasting mechanisms and a well-planned currency hedging strategy. Drug Price Control Order (DPCO) continues to be a challenge within the Indian pharmaceutical space. However, over the years, Lupin’s basket of products and the chosen markets and segments it operates in, have meant that DPCO directives are becoming increasingly less material to the overall business of the Company. Prudent procurement strategies and forecasting systems have helped the Company sustain its profitability, inspite of the adverse input price volatility. Over the years, the Company has gained experience and expertise in dealing with such volatility and has been able to mitigate its impact on the business.

Credit Challenges

Globally, generic pharmaceutical business is characterised by low entry barriers and strong pricing pressures arising from cost-based competition further aggravated by Government mandated actions to reduce healthcare costs in certain markets

In spite of being amongst the larger players from India, remains small compared to global generic majors

Impending generic threat to Suprax- the company’s key branded drug in the US; however, impact limited to an extent by successful filing of citizen’s petition and launch of product line extensions


Regulatory risks in developed markets, related to patent challenges, product launches and manufacturing facilities/ processes

Likelihood of large in-organic investments towards expanding geographic presence and strengthening portfolio of branded drugs may impact financial risk profile

R&D investments in novel drug delivery and development yet to realise any substantial returns; New Molecular Entity (NME) pipeline at a very nascent stage

Any significant adverse development related to price control in domestic market could impact currently strong profitability profile

Business Risk Profile Strengthening presence in the US market through portfolio of branded products and expanding product pipeline in the U.S. generic market. Lupin’s presence in the U.S. market is based on a two-pronged strategy – (a) building branded formulation business through in-licensing and acquisition of products (b) developing a large scale generics business with presence in niche therapy areas supported by its strengths in backward integration and established relationships with channel partners. Presently, Lupin is among the few Indian pharmaceutical companies to have established a successful branded formulations business in the U.S., representing 13% of its consolidated turnover in 2009-10. Current portfolio consists of four brands namely- Suprax, Antara, AeroChamber Plus and the soon to be launched Allernaze. Suprax, the company’s largest selling branded product is yet to face generic competition in the U.S. While the patent on Suprax has already expired, Lupin management does not foresee entry of generics in the short term having successfully filed a citizen’s petition with the U.S. FDA which requires the regulator to approve the generic form by applying the same standards of evaluation as were applied to Lupin. Furthermore, Lupin has launched line extensions for Suprax with 50% of sales successfully switched to the double-strength tablets, thereby minimising the generic threat to lower-strength tablets. In the future, the company will also launch chewable tablet as well as drop formulations for Suprax. Since generic entry into a product generally starts at the lower strength tablet formulation, Lupin’s line extensions help limit the impact of the impending competition from generics for Suprax. The launch of Allernaze, initially planned for third quarter of FY 2011, has been delayed due to manufacturing related issues pertaining to scaling and validation. While the product has already received approval from the U.S. FDA, Lupin expects to sort out the manufacturing related issues soon and plans to launch the product shortly. Over the past two years, Lupin has ramped up its sales force in the U.S. from 60 to 170 representatives in light of the addition of Antara and imminent launch of Allernaze. Over the past year, Lupin has strengthened its presence in the U.S. generic market through steady commercialisation of its ANDA pipeline and is currently ranked the 5th largest generic player in the U.S. in term of prescriptions, according to IMS Health (Lupin was ranked 8th in March 2010). Lupin’s success in the U.S. generic market can be attributed to its strong relationships with channel partners, established track record of on time delivery and strong regulatory compliance in addition to robust product filings. Going forward, the continued commercialisation of the strong product pipeline including oral contraceptives (OC) will be a key growth driver for the company. Having already filed 23 ANDAs in the OC segment and approvals expected to start shortly, Lupin is now well positioned to launch these products in a phased manner starting with four products in October 2011. The next wave of OC products


(12-15) will be launched in the following year. Lupin’s foray into the OC market presents a lucrative opportunity for the company and will be supported by backward integration with the API being supplied from its Indore facility which was recently inspected by the U.S. FDA and found acceptable. Lupin’s vertical integration in OCs will help the company remain cost competitive as well as provide flexibility in manufacturing. Strong growth prospects led by Japanese government’s pro-generic policies and Lupin’s strategy to backward integrate its Japanese operation with sourcing from India result in favourable outlook Estimated at around US$ 70-75 billion and with almost 100% insurance coverage, Japan is the second largest pharmaceutical market in the world after US. Despite its size, the generic penetration is presently low (5-6% by value and 12-14% by volume). However, over the past few years, in an attempt to lower healthcare costs, the Japanese Government has introduced various reforms in order to increase the penetration of generic medicines. Despite the evolving opportunity in the generic space, the Japanese market is fairly unique on two accounts - regulatory framework related to approvals is fairly complex resulting in high entry barriers due to stringent regulatory guidelines and Japan specific molecules (number of molecules are developed and sold by Japanese companies only in Japan). This necessitates overseas players to partner with local Japanese players. In this context, Lupin acquired majority stake in Kyowa Pharmaceuticals (Kyowa), the tenth largest generic company in Japan in October 2007. Post the acquisition, Lupin had put in place a five year profit improvement plan for Kyowa with focus on improving gross margins through greater efficiencies in sourcing of APIs. In FY 2010, Kyowa reported consolidated sales of Rs. 534.1 crore representing a growth of 9%, coupled with an improvement in gross margins. Going forward, Lupin plans to launch 3-4 products in the Japanese market by the end of FY 2011. In the first half of FY 2011, Kyowa’s performance was impacted by the drug price cuts undertaken by the Japanese Government in order to control healthcare expenditure. While the compulsory price cuts are expected to remain a regular feature of the Japanese pharmaceutical market, Lupin’s ability to backward integrate at Kyowa and new product launches will help support revenue growth and profitability. In order to further expand its presence in the Japanese market and enter into the injectable segment, Lupin is likely to undertake an acquisition in the near term.


Key financial ratios which impacts the company: (LUPIN)

Debt Coverage Ratios

Mar '11 Mar '10 Mar '09 Mar '08 Mar '07

Interest Cover 34.63 27.25 12.32 18.31 8.88

Total Debt to Owners Fund 0.31 0.36 0.69 0.73 0.97




Current Ratio 1.09 0.96 0.83 0.97 1.22

Quick Ratio 1.68 1.68 1.02 1.63 2.02

Debt Equity Ratio 0.31 0.36 0.69 0.73 0.97

Long Term Debt Equity Ratio 0.07 0.06 0.28 0.31 0.59





Cash Profit Margin(%) 20.19 20.47 16 19.46 17.18

Adjusted Cash Margin(%) 20.19 20.47 16 19.46 11.8




Return On Net Worth(%) 25.69 25.64 30.31 33.66 34






Appendix-III

Dr. Reddy Laboratories limited


Given below are some key threats, risks and concerns.

Health care reforms across the globe:

Increasingly, healthcare expenses, especially public expenditure, have been the

subject of policy-makers’ attention across the globe. Both private and government

entities are seeking ways to contain healthcare costs. The consequence has been

unanticipated reductions, especially in generics and active ingredient prices.

Russia reference pricing:

The Russian government’s health care prioritization plan for the pharmaceutical

market is making a slow transition from a largely out-of-pocket market to the western

European model of centralized reimbursements. Through this, the government will

play an active role in regulating market access, particularly for high-cost medicines.

The Russian government is extremely focused on regulating price of essential drugs

by way of reference pricing, which may impact the Company’s revenues from Russia.

Price controls in india:

The Government of India through its Drugs (Prices Control) Order, 1995 (DPCO)

imposes price controls for specified pharmaceutical products under certain

circumstances. Adverse changes in the DPCO list or a widening of the span of price

control can affect pricing, and hence, revenues from India.

Regulatory and compliance (i.e. rising audit burdens, inspections and fines):

In the recent past, the pharmaceutical industry has witnessed rising regulatory and

compliance barriers, as seen in increased inspections and warning letters from

USFDA. While the Company continues to give top priority to compliance and quality

Year-on-Year, an increasing audit burden could impact the business.

Proprietary products:

Dr. Reddy’s long term research efforts will depend, to a large extent, upon the

Company’s ability to successfully patent and commercialize our own NCE molecules

and differentiated formulations. There are significant risks of execution, as the

process of development; and commercialization of new molecules is time consuming

as well as costly.

Generics:

The Company’s generic business remains challenging due to increased competition

in India and Eastern Europe. The segment has inherent risks with regard to patent

litigation, product liability, pricing pressure, increasing regulation and compliance


related issues. The business could be negatively impacted if innovator

pharmaceutical companies are successful in limiting the use of generics through

aggressive legal defense as well as authorized generics deals, development of

combination products and over-the-counter switching. In view of the number of patent

expiries coming up in the near future, sales of patent expiry drugs in the US as well

as in Europe represent significant opportunity for all generics and API manufacturers.

However, obtaining 180-days exclusivity is getting increasingly difficult in the US, and

the generics market is rapidly becoming commoditized.

Foreign exchange fluctuations:

Being a global company, the income is exposed to currency rate fluctuations. In

2010-11, the Indian rupee appreciated by approximately 4% vis-à-vis the US dollar,

from 47.44 per US$ for the year ending 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. The Company has

adopted a conservative hedge strategy to protect receivables and part of its

anticipated income.

Launch at risk:

At times, the Company seeks approval to market generic products before the

expiration of patents — based on sufficient data that such patents are invalid,

unenforceable, or would not be infringed by the Company’s products. As a result, the

Company is involved in patent litigation, the negative outcome of which could

adversely affect the business. In April 2006, the Company launched, and continues

to sell fexofenadine, the generic versionof Allegra®. This is despite the fact that there

is an ongoing litigation with the Company that holds the patents for and sells this

branded product. In the European Union, the Company also had generic launches

that involve ongoing patent litigation, negative outcome of which could adversely

affect the business. In Germany, the Company had a launch at risk of oxycodon. A

cost sharing agreement has been entered to with the supplier to reimburse part of the

losses resulting from any damage claim by innovator.

FCPA and other worldwide anti-bribery laws:

The Company is subject to the US Foreign Corrupt Practices Act, the UK Bribery Act

and similar worldwide anti-bribery laws, which impose restrictions and may carry

substantial penalties. These laws generally prohibit companies and their

intermediaries from making improper payments to officials for the purpose of

obtaining or retaining business, and require not only accurate books and records, but

also sufficient controls, policies and processes to ensure business is conducted

without the influence of bribery and corruption. The penalties are substantial,

including fines, prosecution, potential debarment from public procurement and

reputational damage. The Company’s policies mandate strict compliance with these

anti-bribery laws. However, given the high level of complexity of these laws, there is

a risk that some provisions may be inadvertently breached.


FINANCIAL RISK MANAGEMENT

The Company’s activities expose it to a variety of financial risks, including market risk, credit

risk and liquidity risk. The Company’s primary risk management focus is to minimize

potential adverse effects of market risk on its financial performance. The Company’s risk

management assessment and policies and processes are established to identify and

analyze the risks faced by the Company, to set appropriate risk limits and controls, and to

monitor such risks and compliance with the same. Risk assessment and management

policies and processes are reviewed regularly to reflect changes in market conditions and

the Company’s activities. The Board of Directors and the Audit Committee is responsible for

overseeing Company’s risk assessment and management policies and processes.

Reconciliation of the allowance account for credit losses.

The details of changes in provision for doubtful debts during the year ended 31 March 2011

and 31 March 2010 are as follows:

The details of changes in provision for doubtful loans and advances to subsidiaries during

the year ended 31 March 2011 and 31 March 2010 are as follows:

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a

financial instrument fails to meet its contractual obligations, and arises principally from the

Company’s receivables from customers. Credit risk is managed through credit approvals,

establishing credit limits and continuously monitoring the credit worthiness of customers to

which the Company grants credit terms in the normal course of business. The Company

establishes an allowance for doubtful debts and impairment that represents its estimate of

incurred losses in respect of trade and other receivables and investments.

Trade and other receivables

The Company’s exposure to credit risk is influenced mainly by the individual characteristics

of each customer. The demographics of the customer, including the default risk of the

industry and country, in which the customer operates, also has an influence on credit risk

assessment. Credit risk is managed through credit approvals, establishing credit limits and

continuously monitoring the creditworthiness of customers to which the Company grants


credit terms in the normal course of business. As at 31 March 2011 and 31 March 2010 the

maximum exposure to credit risk in relation to trade and other receivables is Rs.17,705 and

Rs.10,605 respectively (net of allowances).

Financial assets that are neither past due nor impaired.

None of the Company’s cash equivalents, including time deposits with banks, are past due

or impaired. Of the total trade receivables, Rs.14,196 as at 31 March 2011 and Rs.8,167

as at 31 March 2010 consists of customers balances which were neither past due nor

impaired.

Financial assets that are past due but not impaired

The Company’s credit period for customers generally ranges from 20 – 180 days. The age

analysis of the trade receivables has been considered from the due date of the invoice. The

aging of trade receivables that are past due, net of allowance for doubtful receivables, is

given below:

Financial assets that is impaired

The age analysis of the trade receivables that are impaired is given below:

Loans and advances

Loans and advances are predominantly given to subsidiaries for the purpose of

working capital and capital expansions; and the Company does not consider any

significant exposure to credit risks associated with such financial assets.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as

they become due. The Company manages its liquidity risk by ensuring, as far as possible,

that it will always have sufficient liquidity to meet its liabilities when due, under both normal

and stressed conditions, without incurring unacceptable losses or risk to the Company’s

reputation.


As at 31 March 2011 and 2010, the Company had unutilized credit limits from banks of

Rs.13,089 and Rs.7,850, respectively.

As at 31 March 2011, the Company had working capital of Rs.23,456 including cash and

cash equivalents of Rs.662 and current investments of Rs.3. As at 31 March 2010, the

Company had working capital of Rs.14,604, including cash and cash equivalents of

Rs.3,680 and current investments of Rs.3,577.

The table below provides details regarding the contractual maturities of significant financial

liabilities

The table below provides details regarding the contractual maturities of significant financial

liabilities

Financial Guarantees

Financial guarantees disclosed in Note 2 of Schedule 20 have been provided as counter

corporate guarantees to financial institutions and banks that have extended credits and other

financial assistance to the Company’s subsidiaries. In this regard, the Company does not

foresee any significant credit risk exposure.

Market Risk

Market risk is the risk of loss of future earnings or fair values or future cash flows that may

result from a change in the price of a financial instrument. The value of a financial instrument

may change as a result of changes in the interest rates, foreign currency exchange rates

and other market changes that affect market risk-sensitive instruments. Market risk is

attributable to all market risk-sensitive financial instruments including foreign currency

receivables and payables and long-term debt. The Company is exposed to market risk

primarily related to foreign exchange rate risk, interest rate risk and the market value of its

investments. Thus, the Company’s exposure to market risk is a function of investing and

borrowing activities and revenue generating and operating activities in foreign currencies.

Foreign Exchange Risk


The Company’s exchange risk arises from its foreign operations, foreign currency revenues

and expenses, (primarily in U.S. dollars, British pound sterling and euros) and foreign

currency borrowings (in U.S. dollars and euros). A significant portion of the Company’s

revenues are in these foreign currencies, while a significant portion of its costs are in Indian

rupees. As a result, if the value of the Indian rupee appreciates relative to these foreign

currencies, the Company’s revenues measured in rupees may decrease. The exchange rate

between the Indian rupee and these foreign currencies has changed substantially in recent

periods and may continue to fluctuate substantially in the future. Consequently, the

Company uses derivative financial instruments, such as foreign exchange forward and

option contracts, to mitigate the risk of changes in foreign currency exchange rates in

respect of its forecasted cash flows and trade receivables.

In respect of the Company’s forward, option contracts and non-derivative financial liabilities,

a 10% decrease / increase in the respective exchange rates of each of the currencies

underlying such contracts would have resulted in an approximately Rs.349 increase /

decrease in the Company’s hedging reserve and an approximately Rs.1,014 increase /

decrease in the Company’s net profit as at 31 March 2011.

In respect of the Company’s forward and option contracts, a 10% decrease / increase in the

respective exchange rates of each of the currencies underlying such contracts would have

resulted in an approximately Rs.821 increase / decrease in the Company’s hedging reserve

and an approximately Rs.745 increase / decrease in the Company’s net profit as at 31

March 2010.

The following table analyses foreign currency risk from financial instruments as at 31

March 2011:

The following table analyzes foreign currency risk from financial instruments as at 31 March

2010:


For the year ended 31 March 2011 and 2010, every 10% depreciation / appreciation in the

exchange rate between the Indian rupee and the respective currencies in the above

mentioned financial assets / liabilities would affect the Company’s net loss / profit by

approximately Rs.839 and Rs.488 respectively.

Interest rate risk

As at 31 March 2011 and 31 March 2010, the Company had foreign currency loans of

Rs.5,758 carrying an interest rate of LIBOR plus 52-80 bps and Rs.4,580 carrying an

interest rate of LIBOR plus 40-75 bps respectively. Also as at 31 March 2011 and 31 March

2010 the company had an INR loan of Rs.950 carrying an interest rate of 8.75% and

Rs.Nil respectively. Since these are short-term loans, the Company does not consider any

significant changes in the interest rates and hence, has not entered into any interest rate

swaps to hedge its interest rate risk.

For the years ended 31 March 2011 and 2010, every 10 basis points increase or decrease in

the interest rate applicable to its short-term loan from banks would affect the Company’s net

loss / profit by approximately Rs.16 and Rs.2, respectively

The Company’s investments in time deposits with banks and short-term liquid mutual funds

are for short durations, and therefore do not expose the Company to significant interest rates

risk.

Commodity rate risk

Exposure to market risk with respect to commodity prices primarily arises from the

Company’s purchases and sales of active pharmaceutical ingredients, including the raw

material components for such active pharmaceutical ingredients. These are commodity

products, whose prices may fluctuate significantly over short periods of time. The prices of

the Company’s raw materials generally fluctuate in line with commodity cycles, although the

prices of raw materials used in the Company’s active pharmaceutical ingredients business

are generally more volatile. Cost of raw materials forms the largest portion of the Company’s

operating expenses.

Commodity price risk exposure is evaluated and managed through operating procedures

and sourcing policies. The Company has historically not entered into any derivative financial

instruments or futures contracts to hedge exposure to fluctuations in commodity prices.


Key financial ratios which impacts the company: (Dr. Reddy)

Debt Coverage Ratios

Mar '11 Mar '10 Mar '09 Mar '08 Mar '07

Interest Cover 220.9 250.76 53.32 85.79 45.49





Current Ratio 1.66 1.49 1.85 1.82 2.56

Quick Ratio 1.91 1.45 2.13 1.94 2.81












Adjusted Return on Net Worth(%) 14.81 13.07 11.37 9 27.6





Appendix-IV

Sun Pharma Limited

Threats, Risks and Concerns Economy-wide Risk:

India is known for both its generic drug making capacity and generic drug consumption

market. Hence, companies like Sun Pharma with more than 200 patents and APIs to their

credit (and this is excluding the 2 acquisitions i.e. Taro & Chattern Pharma) stand only to lose

in terms of margins with the rise of generic drug consumption in India. Its market share in

India stands at 4.5 % i.e. INR 60000 Cr, and hence the risks will also be proportional.

Company Specific Risk:

Sun is a debt-free company with the following financial ratios, which show healthy trends of

debt-coverage, profitability, low working capital gaps, etc. However, the only non-systemic

risk that Sun Pharma has is that it doesn’t hedge a considerable part of its positions in terms

of foreign currency receivables, and the difference in market rates w.r.t current rates will be

booked as forex losses/profits. (Refer to ratio table for comparative analysis)

(Annual report of Sun Pharma)

Industry Risk:

NPP: This feature is applicable to companies across India and also to Russia off late owing

their respective policies to bring prices of Pharmaceuticals under control, especially their

generic and API drug sales.

(http://pharmaceuticals.gov.in/mshT2810/FTY2.pdf)

Tightening regulatory framework in western markets:

The USFDA in USA and similar organisations in many countries all across the globe are

responsible for maintaining the highest standards of drug making with respect to all drugs

manufactured or sold in India.

Besides, on the grounds of change in laws regarding mergers and acquisitions, Sun Pharma

faced significant trouble regarding its acquiring a controlling stake in Taro Pharma, an Israel

based company, owing to different judgements from courts in US and Israel (refer to links

below). Such frequent change in rules and regulations can be of concern especially if our

large players are to enter the global arena.

(http://www.moneycontrol.com/news/business/us-court-rulesfavoursun-pharmataro-

case_470096.html)

(http://www.financialexpress.com/news/tel-aviv-court-rules-against-sun-pharma-in-taro-

battle/563850/)

http://pharmaceuticals.gov.in/mshT2810/FTY2.pdf

http://www.moneycontrol.com/news/business/us-court-rulesfavoursun-pharmataro-case_470096.html

http://www.moneycontrol.com/news/business/us-court-rulesfavoursun-pharmataro-case_470096.html

http://www.financialexpress.com/news/tel-aviv-court-rules-against-sun-pharma-in-taro-battle/563850/

http://www.financialexpress.com/news/tel-aviv-court-rules-against-sun-pharma-in-taro-battle/563850/


Erosion of margins in generics:

Leading patent players like Sun Pharma, stand to lose a lot of possible revenue owing to the

growth of generics market and the intensification of competition in the market. With

innumerous patents expiring in the next few years, as the ratio shifts in favour of the

generics, the effect of this margin erosion will become more and more evident.

(http://sunpharma.com/Apipopup.do)

However, thanks to its research arm SPARC (Sun Pharma Advanced Research Company), Sun

Pharma retains its edge of introducing new patents and APIs every year at encouraging rate

and beat the generic market.

Counterfeiting:

Counterfeiting is a big challenge in India. While official sources put it at ~10% of the total

drugs sold in India, other sources claim that it stands at ~20% of the total drugs market in

India. Meanwhile, the fake drugs market in India stands at close to $ 8.5 bn a year, mostly

exported to Africa and poorer Latin American countries.

Refer

(www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CGYQtwIwAg&url

=http://www.washingtonpost.com/wp-

dyn/content/article/2010/09/10/AR2010091003435.html&ei=shTXT7PbH83OrQfS7LT8Dw&

usg=AFQjCNFVW4Erdv3RRGyONV9DC3-0WgO9-g)

Foreign currency fluctuation risk:

Transactions denominated in foreign currencies are recorded at the exchange rates that

approximate the actual rate prevailing at the date of transaction. Monetary items

denominated in foreign currency at the year-end are translated at year end rates. In respect

of monetary items which are covered by forward exchange contracts, the difference

between the year-end rate and the rate on the date of the contract is recognised as

exchange difference and the premium on such forward contracts is recognised over the life

of the forward contract. The exchange differences arising on settlement / translation are

recognised in the Profit and Loss account. The translation of the financial statements of non-

integral foreign operations is accounted for as under:

a) All revenues and expenses are translated at average rate.

b) All monetary and non-monetary assets and liabilities are translated at the rate prevailing

on the balance sheet.

c) Resulting exchange difference is accumulated in Foreign Currency Translation Reserve on

Consolidation until the disposal of the net investment in the said non integral foreign

operation.

http://sunpharma.com/Apipopup.do

http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CGYQtwIwAg&url=http://www.washingtonpost.com/wp-dyn/content/article/2010/09/10/AR2010091003435.html&ei=shTXT7PbH83OrQfS7LT8Dw&usg=AFQjCNFVW4Erdv3RRGyONV9DC3-0WgO9-g





Obsolesce:

With the introduction of new and improved drugs, fast selling and high revenue generating

drugs stand the threat of becoming obsolete in no time. Given the said scenario, it is only

obvious that constant research and a long line of new products is the only solution to the

same. Sun Pharma, while it is not free from such risks completely, is relatively safe, again

owing to its advanced research arm.

Key financial ratios which impacts the company: (Sun Pharma)

Debt Coverage Ratios Mar '11 Mar '10 Mar '09 Mar '08 Mar '07

Interest Cover 2,396.92 2,228.18 459.14 206.27 67.31

Total Debt to Owners Fund 0.01 0.01 0 0.02 0.44

Financial Charges Coverage Ratio 2,505.78 2,386.07 480.39 217.36 72.57

Financial Charges Coverage Ratio Post Tax 2,455.29 2,201.27 479.03 212.49 77.73


Current Ratio 3.04 2.14 2.53 2.52 5.57

Quick Ratio 2.68 1.52 2.17 2.27 5.25

Debt Equity Ratio 0.01 0.01 -- 0.02 0.44

Long Term Debt Equity Ratio -- -- -- 0.02 0.43


Operating Profit Margin(%) 7.9 13.63 2.91 8.38 -3.28

Profit Before Interest And Tax Margin(%) 2.72 6.88 0.54 4.35 -4.28






Return On Capital Employed(%) 21 17.05 24.57 24.21 16.83







Appendix-V

Ranbaxy Laboratories Ltd.

Threats, Risks and Concerns Economy wide risk

Ranbaxy Laboratories Ltd. is the largest pharmaceutical company in India and one of the world’s top

100 pharmaceutical companies. Ranbaxy’s total market share is 5% in Indian market. Ranbaxy is

specialist in the preparation of generic drugs. The National Pharmaceutical Pricing draft policy,

unveiled by the department of pharmaceuticals in October last year, proposes to cap prices of 348

essential medicines and their formulations at an average price of three best-selling brands.

Companies like Ranbaxy may have to face margin cuts in future with the expected implementation

of National Pharmaceutical Pricing Policy (NPPP).Price caps have the opposite effect, though, by

disincentivising the sale of innovative drugs or drug research in India.

Company specific risk

Ranbaxy has adequate financial flexibility in the form of healthy cash accruals and surplus cash

position (Rs.31 billion as on December 31, 2011) to withstand the potential payments with respect

to USFDA penalties and potential losses on the currency option contracts.

Industry Risk

NPPP-2011

In the Indian pharmaceuticals market, prices of certain pharmaceutical products are regulated by the

Drug Pricing Policy through the Drug Pricing Control Order, 1995 (DPCO). Ranbaxy has some pending

legal cases however the company has obtained orders from the respective Courts in its favor so far.

Tightening regulatory framework in western markets

The regulatory risks that Ranbaxy faces were manifested in the import alert and warning issued by

the US Food and Drugs Administration (FDA) in September 2008, regarding 30 drugs manufactured

by Ranbaxy. The actions reflected USFDA’s “concerns” over alleged “deviations” from Good

Manufacturing Practice requirements at the company’s facilities in Dewas (Madhya Pradesh) and

Paonta Sahib (Himachal Pradesh). In December, 2011, Ranbaxy entered into a consent decree with

USFDA for the resolution of affected facilities and has made a provision of Rs.26.5 billion (~USD 500

million) for eventual penalties that the US Department of Justice may levy.

Erosion of margins in generics-

Ranbaxy, however, faces intense competition and pricing pressure in the regulated generics market,

where generic players are facing severe price erosions. This is because of the commoditised nature

of its products, along with intense competition and significant government pressures to reduce

prices.

Foreign currency fluctuation risk:


In 2011 (refers to calendar year, January 1 to December 31), international revenues accounted for

about 81 per cent of the company’s total revenues.

In 2007, Ranbaxy entered into currency options to hedge its export receivables for a period of five to

seven years. The company has incurred large marked-to-market losses (MTM) on these contracts

because of steep depreciation in the Indian rupee against the US dollar in the past. Ranbaxy

reported total MTM losses of Rs.10.9 billion in 2008. However, in 2009 and 2010, the company

wrote back some of the MTM losses because of favourable movement in the US dollar to Indian

rupee exchange rate. With the depreciation of the rupee in 2011, the company reported MTM losses

of Rs.11.2 billion. As on December 31, 2011, Ranbaxy had accumulated notional losses on these

option contracts of Rs.22 billion. Given the high value and long-term nature of these contracts and

uncertainty on USD/INR exchange rate movement, the company continues to be exposed to foreign

currency exchange rate risk on the option contracts.

Key financial ratios which impacts the company: (Ranbaxy)

Debt Coverage Ratios Dec '11 Dec '10 Dec '09 Dec '08 Dec '07

Interest Cover 16.05 22.22 15.24 1.29 3.19



Financial Charges Coverage Ratio Post Tax -38.9 26.41 19.25 -5.11 8.88


Current Ratio 0.8 1.4 1.18 1.16 0.83

Quick Ratio 0.9 1.6 0.89 0.86 0.97


Long Term Debt Equity Ratio 0.73 0.57 0.68 0.8 0.9







Net Profit Margin(%) -39.11 19.74 11.72 -22.02 14.33

Adjusted Net Profit Margin(%) -39.11 19.74 11.72 -22.02 1.12


Return On Net Worth(%) -158.61 22.41 14.44 -29.5 24.34




Return on Long Term Funds(%) 33.5 15 9.02 2.94 6.19

Risk in Pharma Sector

Documents

companys hedging

tightening

pending legal

gross profit

establishing

adjusted cash

key financial

cash profit