A Financial Report on Indian Pharma Industry and an overview of Cipla Ltd and Dr Reddys An Outlook on the Indian Pharma

Sector: Some Key highlights 1. Indian Pharma industry is the worlds third largest in terms of volume and 14th in terms of value. 2. According to Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, the total turnover of India's pharmaceuticals industry between 2008 and September 2009 was US$21.04 billion. 3. Sale of all types of medicines in the country is expected to reach around US$19.22 billion by the end of 2012 4. Exports of pharmaceuticals products from India increased from US$6.23 billion in 2006-07 to US$8.7 billion in 2008-09 a combined annual growth rate of 21.25%. 5. According to PricewaterhouseCoopers (PWC) in 2010, India joined among the league of top 10 global pharmaceuticals markets in terms of sales by 2020 with value reaching US$50 billion 6. The lack of patent protection has made the Indian sector less desirable for the MNC but things are changing as of now 7. Indian companies carved a niche in both the Indian and world markets with their expertise in reverseengineering new processes for manufacturing drugs at low costs 8. Indian companies have taken some baby steps in line of Innovation which is critical for the pharma industry 9. 100% FDI is allowed in India

Pharma Industry today Indian pharma industry is mainly controlled and monitored by dominant foreign companies having subsidiaries in India due to availability of cheap labor and low cost. Most MNC employ Indians from lowest ranks to high level management. 1970 patents act, has enabled Indian companies to grow since liberalization. 1. Share of Indian Pharma on a global level is only 1-2% however it is growing at 10% per year (approx) 2. India has gained a lot on the global scene with its innovatively engineered generic drugs and active pharmaceutical ingredients (API) 3. It aims to become a major player in outsourced clinical research as well as contract manufacturing and research. 4. More than 74 US FDA-approved manufacturing facilities are based out India, more than in any country outside USA 5. The Indian pharmaceutical industry has become the third largest producer in the world and is poised to grow into an industry of $ 20 billion in 2015 from the current turnover of $ 12 billion 6. The revenue CAGR (compund annual growth rate) over the past three years had been 12.4%, but it is expected to be up at 15.3% from FY12 to FY14, 7. Currently 4-5 Indian Pharma companies are a part of the top-20 generics in the US as per 2011 IMS data 8. The net revenue CAGR from Indian coverage group has been 20% over FY2005-12 as compared to US revenue CAGR group @ 24.5%, accounting for a large portion of the growth.

Uncertainty on the Pharma Industry which may impact the margins 1. Pricing control options still being debated: Govt has proposed a market based pricing control which has been opposed by NGOs at the Supreme Court asking for a more stringent mechanism 2. National Pharmaceutical Pricing Authority (NPPA)norms make bypassing price controls difficult Hence, if a molecule is under price control, just adding another one or modifying the composition, a company cannot avoid price control. The changed composition will need to go through another round of approval for a new price point, as required 3. Manufacturing approval on generic names Health Ministry has directed the issuance of license on the name of generic drugs than brand names, however this does not stop pharma companies to market their products as brands after the approvals Incase this happens, the profitability of the Indian Pharma companies might take a substantial hit 4. Valuations have taken a hit due to uncertainity due to the Govt Policy In application of this policy, some stocks like Cipla and Cadila have already reacted and corrected a lot Sun Pharma and Lupin, are least impacted in current pricing control policy framework as many brands are not a part of the impacted essential medicine list