Project work

On
“PHARMACEUTICAL INDUSTRY”

To fulfil partial requirement of Masters of business

Administration Programme.

Guided By:
Submitted by:

Ms.Priyanka Pathak
Nitin Vasu
(National Management College)
Ahmedabad.

Acknowl
edgement
I am highly indebted to ms. priyanka pathak for PROVIDING me her valuable time
to accomplish MY project
I heartily convey my gratitude to Prof. Amit vasvada whose appearance in my life
gives me great encouragement to understand things differently.
I also thankful to our classmates and information technology without them it wou
ld have been difficult for me to carry my data analysis.

TABLE OF CONTENT
TABLE OF CONTENTS
CHAPTER - 1
1.1 INTRODUCTION
PHARMACEUTICAL INDUSTRY
GLOBLE PLYAERS OF PHARMACEUTICAL INDUSTRY
INDIAN PHARMACEUTICAL INDUSTRY
TRADE PERFORMANCE
1.2 INDUSTRY ANALYSIS
A SWOT Analysis
THEART FROM CHINA

CHAPTER - 2

COMPANY ANALYSIS
2.1 COMPANY ANALYSIS – DR. Reddy
2.2 COMPANY ANALYSIS - Sun pharmaceutical
CHAPTER – 3

3.1 CONCLUTION
3.2 BIBLIOGRAPHY

CHAPTER -1

1.1 Introduction to Pharmaceutical industry

Over the last 15 years, the pricing and other competitive strategies of pharmace
utical companies have been altered by revolutionary developments in information
technology, new state drug substitution laws, federal legislation, and the emerg
ence of market institutions that include health maintenance organizations (HMOs)
and pharmacy benefit managers (PBMs). The industry has also undergone significa
nt structural changes that include growth of the generic drug segment and substa
ntial horizontal and vertical consolidation (e.g., acquisitions of PBMs by drug
companies) by drug companies. This report first examines these institutional and
structural changes, and then focuses on the nature of competition in the new en
vironment. The purpose of the report is to identify and discuss both possible an
titrust concerns and plausible precompetitive explanations of the emerging prici
ng and other competitive strategies of pharmaceutical companies in this changing
environment. Definitive conclusions on whether particular strategies are antico
mpetitive, competitively neutral, or precompetitive are likely to involve facts
specific to these strategies and must await further study. This report is intend
ed as an initial step in developing a more complete understanding of the competi
tive dynamics of pharmaceutical markets subject to ongoing informational, instit
utional, and structural changes.
The report covers four primary areas of analysis. First, the report examines how
information technology has altered competition among drug companies. Less than
two decades ago, the information flows in the prescription drug industry were re
latively simple. A pharmacist would fill each prescription as specified by the d
octor, unless the patient was willing to accept a generic substitute. Retail pha
rmacies would manually order drugs from drug wholesalers, who would deliver the
product and replenish their own inventories with drugs ordered from pharmaceutic
al companies. Physicians obtained drug information from reports on clinical tria
ls published in medical journals and distributed by drug company salesmen, or in
their regular practice by observing the success or failure of drugs prescribed
for their patients. Competition among drug companies was focused on gaining the
allegiance of prescribing physicians.

More recently, as described in the report, the doctor's prescription has become
just the starting point in determining what drug the pharmacist dispenses. Today
, pharmacies are typically part of PBM networks that administer the drug benefit
s portion of health insurer plans for employers and others. Computers linking ne
twork pharmacies to PBMs enable pharmacists to check which brand name or generic
substitutions are required by the patient's health insurer, whether the doctor
is prescribing according to health plan policy, what co-payment amount applies,
and when drug stocks are low. The same computer technology allows pharmacies to
manage their drug inventories. The drug dispensing records of pharmacies are inc
reasingly being used to develop new products and services. Most importantly, pre
scription drug usage and cost information can theoretically be merged with the p
atient care records of doctors and hospitals, conceivably placing significant nu
mbers of patients in large, possibly nationwide clinical trials for existing pre
scription drugs. Through disease state management (DSM), the firms administering
prescription drug insurance plans can learn more than was previously known abou
t how well various drugs work, both relative to other drugs and to non-drug ther
apies. This information enables insurers and other drug buyers to focus more att
ention on comparisons of drug alternatives and their prices. While the tradition
al focus was on gaining the allegiance of prescribing physicians, drug companies
now also compete for placement in health plan protocols and for contracts with
HMOs.
Second, the report describes how this evolving information technology, coupled w
ith other industry changes, has increasingly prompted drug companies to charge d
ifferent prices to different groups of buyers. The report also discusses the com
petitive implications of this differential pricing. In recent years, price disco
unts offered by pharmaceutical companies have spread beyond large hospitals, the
traditional recipients of discounts, to involve other segments of demand, and t
hese price discounts may be linked to ongoing changes in the drug industry. Thes
e practices may have evolved partly because certain groups of buyers have adopte
d cost-containment measures similar to those used historically by hospitals. In
addition, information technology has permitted some groups of buyers to substitu
te more easily among alternative drug treatments.
As described in the report, price differences -- two-tiered pricing (i.e., lower
prices to HMOs and PBMs and higher prices to others), special prices to Medicai
d recipients, and drug company rebate programs -- may simply reflect unrecognize
d cost or service differences associated with the sale of pharmaceutical product
s. Alternatively, these price differences may amount to competitive forms of pri
ce discrimination. While such price discrimination may be consistent with compet
ition, the report describes the conditions under which alternative forms of pric
e discrimination may harm competition. In particular, competitive harm is most l
ikely to emerge when doctors and patients have few therapeutic drug alternatives
, and when entry into drug markets is difficult. These conditions may apply to a
number of drug categories as discussed in the report.
Third, following the discussion of pricing and other strategies of pharmaceutica
l companies in this new competitive environment, the report discusses different
forms of vertical consolidation that have emerged in this changing industry. The
focus of attention is on the potential for these vertical strategies to lead to
anticompetitive pricing by pharmaceutical companies. The major vertical issues
addressed in the report are information exchanges among vertically integrated dr
ug companies, vertical contracting practices, and vertical integration. Possible
anticompetitive exchanges of information arise because acquisitions of PBMs
by drug companies may permit more effective monitoring of deviations from price
coordination arrangements within prescription drug markets. Drug companies could
better monitor and detect deviations because ownership of a PBM can provide dru
g companies with direct information on competitors' bids and transaction prices.
If a drug company learns through its PBM that its rebate offers to PBM customer
s are higher than rival offers, it could reduce its rebate offers to these PBMs.
Other factors necessary for effective coordination are discussed, along with po
ssible efficiency explanations for these exchanges of information.
The report also examines why vertical contracting practices and vertical integra
tion have become more widespread, and focuses attention on how pharmaceutical co
mpanies might use these arrangements to increase drug prices. Importantly, the c
omputer-based distribution of drugs at retail and mail-order pharmacies cruciall
y depends on provisions in vertical contracts between drug companies and HMOs or
PBMs. The competitive implications of key contract provisions, including most-f
avored-nation (MFN) and volume-based rebate provisions, are addressed in this re
port. In addition to efficiency explanations for these provisions, their possibl
e use as devices to raise prices is considered. For example, volume discounts in
drug company contracts with HMOs could induce them to maximize their rebates by
transacting exclusively with those companies offering the most attractive terms
. Exclusive dealing arrangements like this might force competing drug companies
to use more costly means of marketing their drugs or could otherwise foreclose c
ompetition among them. The report outlines the conditions under which such verti
cal contract provisions may lead to higher prices. These require an assessment o
f the marketing alternatives available to rivals and an evaluation of conditions
of entry in drug and other downstream markets. Similar foreclosure analyses are
applied to examine the competitive implications of PBM acquisitions by pharmace
utical companies. Fourth, the substantive analysis concludes by addressing some
ways in which the changing environment in the drug industry may affect an antitr
ust analysis of horizontal mergers between and among pharmaceutical companies. F
ollowing summaries of public information about both horizontal mergers and Feder
al Trade Commission (FTC) enforcement actions in this industry, the discussion f
ocuses broadly on possible forms of merger-related anticompetitive conduct. Give
n the growing importance of bidding competition among drug companies for contrac
ts with buyer agents that include HMOs, the report reviews bidding models to con
sider the possibility of merger-related price increases to these buyers across m
ultiple product categories.
Overall, among other findings, the report raises several possible antitrust conc
erns and a number of potential efficiency explanations involving the conduct of
pharmaceutical companies.

• Legislative mandates and the application of information technology have

transformed this industry in ways that have shifted the focus away from non-pric
e forms of competition (e.g., competition for the allegiance of physicians) towa
rd forms of price competition (e.g., competition for HMO contracts and preferred
drug formulary placements). Along with describing these new forms of competitio
n, the report raises the possibility that information technology networks might
facilitate price coordination among pharmaceutical companies.
• Industry transformations raise the possibility of anticompetitive forms
of price discrimination in drug markets that are difficult to enter and in situa
tions where doctors and patients have few alternative therapies. Price differenc
es in these markets, however, may also be consistent with competitive forms of p
rice discrimination.
• MFN provisions in vertical contracts between drug companies and PBMs may
facilitate price coordination in either upstream prescription drug or downstrea
m PBM service markets by making it costly for firms to engage in selective price
cutting, or by raising competitor costs in other ways. These provisions are als
o the same as those found to produce efficiencies in the supply of other product
s that include their use as an efficient mechanism for adjusting prices in rapid
ly changing markets.
• Volume rebate provisions in vertical contracts between drug companies an
d buyers could amount to exclusive dealing arrangements that could lead to highe
r drug prices if, for instance, they result in anticompetitive foreclosure. Excl
usive dealing agreements could, at the same time, reduce the risks of buyers by
guaranteeing them adequate supplies of drugs or by otherwise generating efficien
cies in the sale of prescription drugs.
• Vertical acquisitions of PBMs by drug companies could lead to higher dru
g prices if the transactions result in anticompetitive foreclosure or if they fa
cilitate anticompetitive exchanges of drug price information. These acquisitions
can also produce transaction-cost and other efficiencies, even if they lead to
the anticompetitive foreclosure explained in the report or otherwise cause highe
r prices.
• Horizontal mergers in this environment of change may lead to broader for
ms of anticompetitive conduct that include anticompetitive bidding in a multi-pr
oduct setting under certain conditions described in the report.
These findings suggest that antitrust authorities need to apply the standard cas
e-by-case approach to antitrust analyses of vertical and horizontal issues that
arise in this industry. The report raises the potential for competitive harm in
a number of areas, but also highlights the need to evaluate alternative efficien
cy explanations before challenging any of the pricing or other strategies at iss
ue.

1.2 Major players of pharmaceutical industry.

U.S. pharmaceutical companies

U.S. companies play a key role in the world pharmaceutical industry – 8 out of 1
5 leaders of this market are headquartered in the United States; moreover, the l
argest world pharmaceutical company, NJ-based Pfizer, has sales of pharmaceutica
l products that are approximately 1.5 times higher than those of its closest com
petitor.
Table provides a segment decomposition of the largest U.S. pharmaceutical compan
ies. Segment shares were calculated on the basis of 2004 sales as stated in annu
al financial reports.
Several factors are worth mentioning. First, for almost all companies presented
in the table, the pharmaceutical segment is the largest; and only for one of the
m, world giant Johnson & Johnson, sales of pharmaceutical segment are below 50%.

Second, only two companies, Merck and Eli Lilly, concentrate their resources alm
ost exclusively on pharmaceutical industry; each of these two companies has abou
t 94% of sales from this business segment. Although this approach potentially ca
n reward shareholders of these two companies because of using capital in the bus
iness segment with one of the highest returns, lack of diversification (especial
ly in less risky segments) requires even more thorough planning of the new medic
ines pipeline.
Finally, the majority of leading pharmaceutical companies also work in Consumer
Health, Animal Health, Nutritional Products or Medical Devices / Diagnostics bus
iness segments. This approach allows not only achieving synergies of working in
these segments, but also smoothening a highly volatile pattern of revenues in th
e pharmaceutical industry.

Pfizer J&J Merck BMS Wyeth Lilly* Abbott Schering-Plough

Pharmaceutical 87.8% 46.9% 93.7% 80.0% 80.4% 94.2% 69.0% 77.6%
Consumer Health & Nutritional products 6.7% 17.6% 10.0% 14.7%
13.1%
Animal Health 3.7% 4.8% 5.8% 9.3%
Medical Devices and Diagnostics 35.5%
31.0%
Other Healthcare 10.0%
Other 1.8% 6.3%
Table summarizes major areas of focus of U.S. pharmaceutical companies in which
they have either highly successful products or significant investments in resear
ch and development. It is obvious that areas that have a huge market and promise
high rewards, such as anti-bacterial/anti-infection, anti-inflammatory/analgesi
cs, cardiovascular diseases, neurology/psychiatric disorders, and oncology attra
ct the majority of leading pharmaceutical companies and create a fierce competit
ion among them.

Major area of focus of U.S. pharmaceutical companies.

Pfizer J&J Merck BMS Wyeth Lilly Abbott Schering-Plough
Allergies X X
Anti-bacterial / anti-fungal / infections X X X X
X X X X
Anti-inflammatory / analgesics X X X X
X X
Cardiovascular diseases X X X X X X
X
Dermatology X
Endocrine disorders X X
Eye diseases X X
Gastrointestinal X X
Hematology X
Immunology X X X X
Metabolic diseases X X X X
Neurology / psychiatric disorders X X X X
X X X
Oncology X X X X X X X X
Respiratory diseases X X
X
Urogenital conditions X X X
Virology (including HIV) X X X

The pharmaceutical industry is currently undergoing a period of active transform

ation lead by the largest companies in the industry. The recent acquisition of P
harmacia by Pfizer (before acquisition Pharmacia on its own was among largest ph
armaceutical companies of the world) in 2003 led to an even stronger position of
Pfizer as the largest company in pharmaceutical industry. As the result of this
acquisition that was valued at $56 billion Pfizer increased its total assets by
152% and its sales by 38.5% (see Tables 2.3, 2.4).
Another example of ongoing consolidation in the industry is the acquisition of G
uidant by Johnson & Johnson (transaction is valued at $25.4 billion). So far as
this acquisition was not completed by year-end 2004 it did not have an impact on
total assets and sales of the company provided in Tables 2.3 and 2.4.
It is worth emphasizing the importance of multiple smaller acquisitions of start
-ups and patents by leading pharmaceutical companies. As it was discussed in Par
t 1 of this paper, the pharmaceutical industry bears higher-than-average level o
f risk to a significant extent because of the high level of uncertainty regardin
g the success or failure of any particular drug development. Therefore, by acqui
ring small companies that are on their last stages of developing new medicines,
leading pharmaceutical companies reduce their own risk.

Recent acquisitions by major U.S. pharmaceutical companies

Company acquired* Core business of target Purchase price, bln. USD
Pfizer Pharmacia Prescription pharmaceutical products, consumer healthcar
e products and animal healthcare products $56.0
Esperion Therapeutics Biopharmaceutical company with no approved produ
cts $1.3
Johnson & Johnson Guidant Treatment of cardiac and vascular disease
$25.4
Consumer Pharmaceuticals Non-prescription pharmaceutical products
(former JV of J&J and Merck) $0.6
Egea Biosciences R&D in synthesis of DNA sequences, gene assembly
and construction of large synthetic gene libraries
Biapharm SAS Skin care products
Micomed Spinal implants
Merck
Aton Pharma Development of novel treatments for cancer and other dis
eases $0.1
Banyu Pharmaceutical R&D, manufacturing and sales of drugs for cardio
vascular diseases and antibiotics $1.5
Bristol-Myers Squibb Acordis Materials for Wound Therapies products $0.2
Eli Lilly Applied Molecular Evolution Treatment of non-Hodgkin's lymph
oma and rheumatoid arthritis $0.4
Abbott
TheraSense Advanced diabetes management technology $2.3
i-Stat Diagnostic testing
Spine Next SA Spine-care business

Introduction to Indian Pharmaceutical Industry.

“The Indian pharmaceutical industry is a success story providing employment for

millions and ensuring that essential drugs at affordable prices are available to
the vast population of this sub-continent.”
Richard Gerster.
The Indian Pharmaceutical Industry today is in the front rank of India’s science
-based industries with wide ranging capabilities in the complex field of drug ma
nufacture and technology. A highly organized sector, the Indian Pharma Industry
is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually
. It ranks very high in the third world, in terms of technology, quality and ran
ge of medicines manufactured. From simple headache pills to sophisticated antibi
otics and complex cardiac compounds, almost every type of medicine is now made i
ndigenously.
Playing a key role in promoting and sustaining development in the vital field of
medicines, Indian Pharma Industry boasts of quality producers and many units ap
proved by regulatory authorities in USA and UK. International companies associat
ed with this sector have stimulated, assisted and spearheaded this dynamic devel
opment in the past 53 years and helped to put India on the pharmaceutical map of
the world.
The Indian Pharmaceutical sector is highly fragmented with more than 20,000 regi
stered units. It has expanded drastically in the last two decades. The leading 2
50 pharmaceutical companies control 70% of the market with market leader holding
nearly 7% of the market share. It is an extremely fragmented market with severe
price competition and government price control.
The pharmaceutical industry in India meets around 70% of the country s demand fo
r bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablet
s, capsules, orals and injectibles. There are about 250 large units and about 80
00 Small Scale Units, which form the core of the pharmaceutical industry in Indi
a (including 5 Central Public Sector Units). These units produce the complete ra
nge of pharmaceutical formulations, i.e., medicines ready for consumption by pat
ients and about 350 bulk drugs, i.e., chemicals having therapeutic value and use
d for production of pharmaceutical formulations.
Following the de-licensing of the pharmaceutical industry, industrial licensing
for most of the drugs and pharmaceutical products has been done away with. Manuf
acturers are free to produce any drug duly approved by the Drug Control Authorit
y. Technologically strong and totally self-reliant, the pharmaceutical industry
in India has low costs of production, low R&D costs, innovative scientific manpo
wer, strength of national laboratories and an increasing balance of trade. The P
harmaceutical Industry, with its rich scientific talents and research capabiliti
es, supported by Intellectual Property Protection regime is well set to take on
the international market.
The Indian pharmaceutical industry is one of the developing world’s largest and
most developed, ranking 4th in the world in terms of production volume and 13th
in domestic consumption value.2 India’s industry, valued at $5.3 billion in 2005
, represents less than one percent of the global pharmaceutical industry ($550 b
illion).3 Over the last 30 years, India’s pharmaceutical industry has evolved fr
om almost nonexistent to a world leader in the production of high quality generi
c drugs. India has garnered a worldwide reputation for producing high quality, l
ow cost generic drugs.
The industry currently meets India’s demand for bulk drugs and nearly all its de
mand for formulations, with the remainder supplied by foreign multinational corp
orations (MNCs).
India’s pharmaceutical industry is one of the fastest growing segments of the In
dian economy
With an average annual growth rate of 14 percent during 2002-2005. Overall, the
Indian market for Pharmaceuticals is projected to grow at an average annual rate
of between 15 and 20 percent during 2005 - 2010. The surge in production has be
en driven by legislative reforms, the growth in contract manufacturing and outso
urcing, value added foreign acquisitions and joint ventures, India’s mastery of
reverse engineering of patented drug molecules, and India’s efforts to comply wi
th its World Trade Organization (WTO) Trade Related Intellectual Property Agreem
ent (TRIPs) obligations. When India joined the WTO in 1995, its pharmaceutical e
xports were valued at less than $600 million. By 2005, its exports had grown to
$3.7 billion and accounted for more than 61 percent of industry turnover. Curren
tly, Indian pharmaceutical companies produce between 20 and 22 percent of the wo
rld’s generic drugs (in value terms) and offer 60,000 finished medicines and nea
rly 400 bulk drugs used in formulations. With changes in India’s patent laws in
the early 1970s, Indian drug producers became experts in ‘reverse engineering’ a
nd increased its supply of less expensive copies of the world’s best-selling pat
ent protected drugs. India’s pharmaceutical industry grew and prospered in a hig
hly regulated environment with government price controls on a significant number
of formulations and bulk drugs. In January 2005, India amended its patent laws
governing pharmaceuticals, bringing them into conformance with the WTO TRIPs agr
eement. Under the new patent law, Indian drug markers can no longer manufacture
and market reverse-engineered versions of drugs patented by foreign drug produce
rs. To replace sales lost to TRIPs compliance, many of India’s leading pharmaceu
tical producers have increased their exports of generic drugs to the United Stat
es and Western Europe and entered into research and development agreements, merg
ers and acquisitions, and other alliances with foreign pharmaceutical firms.

ADVANTAGE INDIA
Competent workforce: India has a pool of personnel with high managerial and tech
nical competence as also skilled workforce. It has an educated work force and En
glish is commonly used. Professional services are easily available.
Cost-effective chemical synthesis: Its track record of development, particularly
in the area of improved cost-beneficial chemical synthesis for various drug mol
ecules is excellent. It provides a wide variety of bulk drugs and exports sophis
ticated bulk drugs.
Legal & Financial Framework: India has a 53 year old democracyand hence has a so
lid legal framework and strong financial markets. There is already an establishe
d international industry and business community.

Information & Technology: It has a good network of world-class educational insti

tutions and established strengths in Information Technology.
Globalisation: The country is committed to a free market economy and globalizati
on. Above all, it has a 70 million middle class market, which is continuously gr
owing.

Consolidation: For the first time in many years, the international pharmaceutica
l industry is finding great opportunities in India. The process of consolidation
, which has become a generalized phenomenon in the world pharmaceutical industry
, has started taking place in India.
THE GROWTH SCENARIO
India s US$ 3.1 billion pharmaceutical industry is growing at the rate of 14 per
cent per year. It is one of the largest and most advanced among the developing c
ountries.
Over 20,000 registered pharmaceutical manufacturers exist in the country. The do
mestic pharmaceuticals industry output is expected to exceed Rs260 billion in th
e financial year 2002, which accounts for merely 1.3% of the global pharmaceutic
al sector. Of this, bulk drugs will account for Rs 54 bn (21%) and formulations,
the remaining Rs 210 bn (79%). In financial year 2001, imports were Rs 20 bn wh
ile exports were Rs87 bn.
STEPS TO STRENGTHEN THE INDUSTRY
Indian companies need to attain the right product-mix for sustained future growt
h. Core competencies will play an important role in determining the future of ma
ny Indian pharmaceutical companies in the post product-patent regime after 2005.
Indian companies, in an effort to consolidate their position, will have to incr
easingly look at merger and acquisition options of either companies or products.
This would help them to offset loss of new product options, improve their R&D e
fforts and improve distribution to penetrate markets.
Research and development has always taken the back seat amongst Indian pharmaceu
tical companies. In order to stay competitive in the future, Indian companies wi
ll have to refocus and invest heavily in R&D.
The Indian pharmaceutical industry also needs to take advantage of the recent ad
vances in biotechnology and information technology. The future of the industry w
ill be determined by how well it markets its products to several regions and dis
tributes risks, its forward and backward integration capabilities, its R&D, its
consolidation through mergers and acquisitions, co-marketing and licensing agree
ments.

The Indian Pharmaceuticals sector has come a long way, being almost non-existing
during 1970, to a prominent provider of health care products, meeting almost 95%
of
country’s pharmaceutical needs. The domestic pharmaceutical output has increased
at a
compound growth rate (CAGR) of 13.7% per annum. Currently the Indian pharma
industry is valued at approximately $ 8.0 billion. Globally, the Indian industry
ranks 4th in
terms of volume and 13th in terms of value. Indian pharmaceuticals industry has
over
20,000 units. Around 260 constitute the organized sector, while others exist in
the small-
scale sector.

The exports constitute almost 40% of the total production of pharmaceuticals in

India.
India’s pharmaceutical exports are to the tune of $3.5bn currently, of which for
mulations
contribute nearly 55% and the rest 45% comes from bulk drugs.
The export revenue now contributes almost half of the total revenue for the top
3 pharma
majors: Dr Reddy’s, Ranbaxy and Cipla. The other major exporters are Wockhardt
Limited, Sun Pharmaceutical Industries Ltd. and Lupin Laboratories. The formul
ations
and exports are largely to developing nations in CIS, South East Asia, Africa, a
nd Latin
America. In the last 3 years generic exports to developed countries have picked
up.

Exports of Drugs, Pharmaceuticals and fine chemicals

1999-2000
Rs.7230.16cr
($1.60 bn)

2000-2001
Rs.8757.47cr
($1.95 bn)

2001-2002
Rs.9834.7cr
($2.18 bn)

2002-03
Rs.11925.4cr
($ 2.65 bn)

2003-04
Rs.14100.00cr
($3.13 bn)

Growth of pharmaceutical exports

y
1999-2000 2000-2001 2001-2002

2002-03

2003-04
15.57%
Source: DGCIS
20.73%
11.13%
21.2%
18.24%
2. POST 2005 SCENARIO

By issuing the patent ordinance, India met a WTO commitment to recognize foreign
product patents from January 1, 2005, the culmination of a 10-year process. In t
his new
scenario, the Indian pharmaceutical manufacturers won’t be able to manufacture p
atented
drugs.

To adapt to this new patent regime, the industry is exploring business models, d
ifferent
from the existing traditional ones.

New Business Models include:

• Contract research (drug discovery and clinical trials)
• Contract manufacturing
• Co-marketing alliances

Emerging Models to Capture the Outsourcing Opportunity

R&D

Manufacturing

Marketing
Traditional
Business
Models in
Indian Pharma
Industry

Emerging
Business
Models in

Model I: Integrated Operations

Model III: Contract

R&D
DD& D CTO
Model

Model II: In House Manufacturing and

Marketing of Own Products

IV:
Indian
Pharma
Industry
DD&D: Drug Discovery & Development
CTO: Clinical Trials Organization
CM: Contract Manufacturing
Source: E&Y
Manufacturing

C M
for

Suppli
es

Model V: Contract/
Co-Marketing
Alliance

The focus of the Indian pharma companies is also shifting from process improvisa
tion to
drug discovery and R&D. the Indian companies are setting up their own R&D setups
and
are also collaborating with the research laboratories like CDRI, IICT etc.

Government Run Research Organizations: Industry Collaborations

CDRI (Lucknow)
Novo Nordisk, Denmark
Krebs Biochemicals Ltd.,
Hyderabad
IICT (Hyderabad)
Dr. Reddy’s Laboratories,
Hyderabad
Lupin Laboratories Ltd.,
Mumbai

CCMB (Hyderabad)
Shantha Biotechnics Pvt.
Ltd., Hyderabad
Dr. Reddy’s Research
Foundation, Hyderabad
Avon
Organics
Ltd.,
Cadila Laboratories Ltd.,
Bangalore Genei Pvt. Ltd.,
Hyderabad
Cipla Ltd., Mumbai
Ahmedabad
SOL Pharmaceuticals Ltd.,
Bangalore
Dabur

Research
Hyderabad
Foundation, Sahibabad
Dabur India Ltd., Ghaziabad Neuland
Hyderabad
Laboratories,
Biological Evans Ltd.,
Hyderabad
Duphar Interferan Ltd.,
Mumbai
Hindustan Latex Ltd.,
Thiruvananthapuram
IPCA Labs Ltd., Mumbai
Lupin Laboratories Ltd.,
Mumbai
Sun Pharmaceuticals Ltd.,
Mumbai
Cipla Ltd., Mumbai
Nectar Laboratories Ltd.,
Hyderabad
Orchid Chemicals, Chennai
Malladi
Drugs
and
Trident Labs Pvt. Ltd.,
Pharmaceuticals, Chennai
Nicholas Piramal India Ltd.,
Mumbai
Lumen Marketing Co.,
Chennai
Hyderabad
Unichem Laboratories Ltd.,
Mumbai
Armour Chemicals Ltd.,
Mumbai
Ranbaxy Laboratories Ltd.,
New Delhi
Bombay
Mumbai
Drug
House,
Themis Medicare Ltd.,
Mumbai
Cheminor Drugs Pvt. Ltd.,
Hyderabad
Torrent
Pharmaceuticals
Torrent Pharmaceuticals Ltd.,
Ltd., Ahmedabad
Unichem Laboratories Ltd.,
Mumbai
Wockhardt Ltd.,
Aurangabad
Ahmedabad
Coromandal
Hyderabad
IDPL, New Delhi
Pharma,

Contract Research
In 2002, the industry for clinical trials in India was $ 70 million. This market
is growing
at a rate of 20% per annum. According to experts, it will be an industry worth a
nywhere
between $500 million to $1.5 billion by 2010. The global R&D spend is to the tun
e of
$60 billion, of which the non-clinical segment accounts for $21bn and the clinic
al
segment accounts for $39bn. In terms of Indian prices, this translates into $7bn
(at 1/3rd
of US/EU costs) and $7.8bn (at 1/5th of US/EU costs) repectively. This constitut
es a total
potential of $14.8bn for the Indian pharma companies.
Contract manufacturing
Many global pharmaceutical majors are looking to outsource manufacturing from In
dian
companies, which enjoy much lower costs (both capital and recurring) than their
western
counterparts. Many Indian companies have made their plants cGMP compliant and In
dia
is also having the largest number of USFDA-approved plants outside USA.
The Pharma companies are going for compliance with International regulatory agen
cies
like USFDA, MCC etc. for their manufacturing facilities.
70

60

50

40
30

20

10

0
61

60

25

22
9

7
India
Italy
Spain China Taiwan Hungary Israel

Indian companies are proving to be better at developing APIs than their competit
ors from
target markets and that too with non-infringing processes. Indian drugs are eith
er entering
in to strategic alliances with large generic companies in the world of off-paten
t molecules
or entering in to contract manufacturing agreements with innovator companies for
supplying complex under-patent molecules.
Some of the companies like Dishman Pharma, Divis Labs and Matrix Labs have been
undertaking contract jobs for MNCs in the US and Europe. Even Shasun Chemicals,
Strides Arcolabs, Jubilant Organosys, Orchid Pharmaceuticals and many other larg
e
Indian companies started undertaking contract manufacturing of APIs as part of t
heir
additional revenue stream. Top MNCs like Pfizer, Merck, GSK, Sanofi Aventis,
Novartis, Teva etc. are largely depending on Indian companies for many of their
APIs
and intermediates.
The Boston Consulting Group estimated that the contract manufacturing market for
global companies in India would touch $900 million by 2010. Industry estimates s
uggest
that the Indian companies bagged manufacturing contracts worth $75 million in 20
04.
Contract Manufacturing Service Providers Across the Service Chain

Indian Service Provider

Dishman
Divi’s Laboratories
Nicholas Piramal (NPIL)
Shasun Drugs & Chem. Ltd.
Matrix Laboratories Ltd.

IPCA Labs
Shasun Drugs & Chem. Ltd.
Jubilant Organosys
Torrent Pharma
Morepen Laboratories

Activity

Contract Manufacturing for

Patented Drugs
Custom Synthesis & Scale
Ups

Contract Manufacturing for Specialized Generics

Contract Manufacturing for Old Generics/ Old Molecules

7

Select Contract Manufacturing Deals in India

Indian Company Multinational

Product
Lupin Laboratories

Nicholas Piramal
Fujisawa
Apotex
Allergan
Cefixime
Cefuroxime Axetil,
Lisinopril (Bulk)
Bulk and formulations

Wockhardt
Advanced Medical Optics Eye Products
Ivax Nizatidine (anti-ulcerant)
Dishman Pharmaceuticals Solvay Pharmaceuticals
Eprosartan Mesylate
IPCA Labs
Orchid Chemicals &
Pharmaceuticals
Merck
Tillomed
Apotex
Bulk Drugs
Atenelol
Cephalosporin and other
injectables
Sun Pharma
Eli Lilly
CVS
Products,
anti-

Kopran

Synpac Pharmaceuticals
infective drugs and Insulin
Penicillin –G Bulk Drug
Cadila Healthcare
Altana Pharma
Intermediates
Pantoprazole
for

Biocon
Boehringer Ingelheim
Bristol Myers Squibb
Gastrointestinal and CVS
Products
Bulk Drugs
 Trade Performance.

Pharmaceutical exports of India and its growth rates over the periods 1990–94,
1995–99 and 2000–04. It can be observed that India has increased its pharmaceuti
cal exports at a rapid pace in the 1990s. The total pharmaceutical exports in 20
04 stood at US $2.2 billion, nearly five times the figure pertaining to 1990. Th
e exports have consecutively achieved higher growth rates, 14 per cent in 1990–9
4, 23 per cent in
1995–99 and 44 per cent in 2000–04. In relation to a group of selected twenty‐ni
ne countries, India is much ahead of fifteen countries in terms of growth perfor
mance in pharmaceutical exports during 2000–04. India’s 44 per cent growth rate
is higher than that of the US, China, Italy, Indonesia, Malaysia, Mexico, Brazil
, Rep. of Korea, Portugal, Japan, Thailand, South Africa, Argentina, Singapore a
nd Hong Kong. However,
19 irrespective of its impressive export growth rates, India’s share in the glob
al pharmaceutical exports has not shown any improvement. In fact, it is hovering
around 1 per cent of market share. India’s recent export growth rate has not ye
t translated into
gains in export share as India’s growth performance is much lower when compared
to the 60 per cent growth rate of world pharmaceutical exports during 2000–2004
and also its contribution to the global sum is minimal.

1.2 SWOT OF INDIAN PHARMACEUTICAL INDUSTRY

STRENGTHS
• Cost Competitiveness
• Well Developed Industry with Strong Manufacturing Base
• Well Established Network of Laboratories and R&D infrastructure, strong
motivated scientific force
• Self reliant technology for production
• Access to pool of highly trained scientists
• Strong marketing and distribution network
• Rich Biodiversity
• Low R&D Costs
• Competencies in Chemistry and process development
• Cost effective technologies for bulk drugs production and well developed
capital equipment industry
• Increasingly, India is being regarded as a manufacturing base by global
pharmaceutical companies.
WEAKNESS
• Low investments in innovative R&D.
• Lack of resources to compete with MNCs for New Drug Discovery Research a
nd to commercialize molecules on a worldwide basis.
• Lack of strong linkages between industry and academia.
• Lack of culture of innovation in the industry
• Low medical expenditure and healthcare spend in the country
• Inadequate regulatory standards
• Production of spurious and low quality drugs tarnishes the image of indu
stry at home and abroad.

OPPORTUNITIES
• Significant export potential
• Licensing deals with MNCs for NDDS
• Marketing alliances to sell MNC products in domestic market
• Contract manufacturing arrangements with MNCs
• Potential for developing India as a centre for international clinical tr
ials
• Niche player in global pharmaceutical R&D.
• Strong base of scientific as well as technical manpower and also due to
pioneering work done in process development
• Supply of generic drugs to developed markets.
THREATS
• Product patent regime poses serious challenge to domestic industry unles
s it invests in research and development.
• DPCO puts unrealistic ceilings on product prices and profitability and p
revents pharmaceutical companies from generating investible surplus
• R&D efforts of Indian pharmaceutical companies hampered by lack of enabl
ing regulatory requirement.
• Entrants of newer players in highly fragmented market.

THREAT FROM CHINA

China is becoming a major competitor to India, especially in exports of active
pharmaceutical ingredients (APIs). China’s pharmaceutical industry ranks no.7 in
the
world and is expected to become the world’s 5th largest by 2010. China’s domesti
c drug
sales have been estimated at about US$8 billion in 2003 and the exports are grow
ing at
the rate of about 20% per annum.
The reasons for Chinese competitive advantage are:
• The electricity costs are lower in China as compared to India. The power
costs range
from Rs.1.50 to 2.50 per KWH as against Indian cost of Rs.4.5 to 6.0 per KWH.

Labour charges are 40% lower in China than India.

• More favourable labour policies like policy of hire and fire in China
• On the whole China is more cost competitive in manufacturing sector.
• China has already implemented clear intellectual property laws and data
exclusivity
rules that take it one step ahead of India in attracting foreign players. In 199
2, a pact
was signed with US, which heralded the Product patent regime coming in force in
China.
• China has established a large number of profit oriented research and dev
elopment
institutions, which are today independent of government funding in contrast to
institutions in India, which are mostly dependant on government funding.

CHAPTER -
2

INDUSTRY ANALYSIS

DR.REDDY’S

Dr. Reddy’s is a global, vertically integrated pharmaceutical company with a pre

sence across the value chain, producing and delivering safe, innovative, and hig
h quality finished dosage forms, active pharmaceutical ingredients and biologica
l products. Our products are marketed across the globe, with an emphasis on Nort
h America, Europe, India, Russia and other emerging markets. We conduct NCE drug
discovery research in the areas of metabolic disorders and cardiovascular indic
ations at our research facilities in Atlanta (USA) and Hyderabad (India). Throug
h our Custom Pharmaceutical Services business unit, we provide drug substance an
d drug product development and manufacturing services on a proprietary basis.
PHARMACEUTICAL SERVICES & ACTIVE INGREDIENTS
Active Pharmaceutical Ingredients (API)
Our capabilities span 24 major chemistries including stereo-selective synthesis,
cryogenics, hydrogenations and cyanations. Our strong IP, Regulatory and Analyt
ical skills are evident in the 84 US DMFs we have filed, the highest in India an
d second highest in the world. Our manufacturing facilities are capable of suppo
rting the product development effort through the concurrent scale-up and pilotin
g of feasible routes as they are developed by the R&D teams. State-of-the-art eq
uipment and instruments give us the edge to compete globally. Our operations are
fully integrated through supply-chain and ERP systems (SAP R/3), which enable s
eamless response to customers, all the while keeping the environment around our
plants clean, green and safe.
Custom Pharmaceutical Services (CPS)
In an industry cluttered with chemical manufacturers, CPS stands out bec
ause of our understanding of the pharmaceutical business and the associated expe
rtise needed. Rather than just being a chemical provider, CPS offers a service m
ix covering the entire pharmaceutical value chain. We execute cost-effective and
time-bound projects for our customers, and provide them with CGMP-compliant pro
ducts manufactured in FDA-inspected, ISO-certified facilities. A team of experie
nced project managers ensures smooth progress of projects from initiation to clo
sure in order to avoid any cost and time overruns.
GLOBAL GENERICS
Generic Formulations
Geographic diversification, cost containment, strengthening our product portfoli
o and building scale – we at Dr. Reddy’s are strong in all these aspects in the
generics space. We are now the fourth largest player in Germany after the acquis
ition of betapharm, and are constantly looking for opportunities to maximize the
potential of our current and future portfolio in different territories across t
he US and EU. We have the necessary expertise for customer-specific packaging, c
ompliance packaging, and anti-counterfeit packaging. In fact, Dr. Reddy’s has wo
n several awards globally for our packaging efforts, including the Asia Star, Am
eriStar and WorldStar awards.
Branded Formulations
Dr. Reddy’s brands are today recognized and trusted across several conti
nents. Brands like Omez (Omeprazole), Nise (Nimesulide), Stamlo (Amlodipine), Ci
prolet (Ciprofloxacin), Enam (Enalapril) and Ketorol (Ketorolac) are leaders in
their category in several countries, with many of them being used by more patien
ts than use the innovator’s product. Over 1.5 million patients across the world
take ‘Omez’ for their acid peptic disorders every single day! Entrepreneurship,
coupled with the will to make a difference drives our 2,000-strong field force t
o reach out to over 210,000 doctors and 115,000 pharmacies in more than 40 count
ries across the world.
PROPRIETARY PRODUCTS
Discovery Research
We have put in place a state-of-the-art, fully-integrated discovery infrastructu
re to strengthen our effort to discover and develop therapeutically useful New C
hemical Entities (NCEs) and market them globally. Our two Discovery Research cen
ters – one in Atlanta, USA, and the other in Hyderabad, India, have more than 30
0 scientists actively involved in a number of drug-discovery and clinical develo
pment programs.
Differentiated Formulations
Our Differentiated Formulations business deals with assets like acquired
proprietary technologies, internally developed proprietary drug-delivery platfo
rms, and current internal compounds under pre-clinical and clinical development.
Our initial global therapeutic area focus is on dermatology and oncology, two t
herapeutic areas that best leverage our internal assets. A key component of the
strategy in this area is a strong, targeted business development effort to accel
erate market entry.
Biopharmaceuticals
Our Biologics Development Center spans an area of 36,000 sq. ft., with developme
nt and manufacturing suites for both E. coli and mammalian cell culture. It cate
rs to the highest development standards of cGMP, GLP and applicable levels of bi
o-safety. Grafeel (Filgrastim), our first biologics product to enter the market,
enjoys a market share of almost 50% in India and has been able to reach many mo
re patients than the innovator’s product due to its affordability. Our second pr
oduct Reditux (Rituximab) is the first biosimilar monoclonal antibody to be deve
loped and launched anywhere in the world.

Company Analysis
During 2006–07, Simvastatin and Finasteride had contributed to Rs. 15,813 millio
n or 24 percent of Dr. Reddy’s total revenues and the Company’s market share for
Fexofenadine was 11 percent as on 31 March 2007. The current year, 2007–08, saw
no such launch — which led to a fall in revenues compared to 2006–07.
Second, there were issues regarding betapharm, the Company’s generics acquisitio
n in Germany. For one, the German generics market remained very challenging. Dur
ing the year, the government introduced further amendments in its health care la
w, which now requires patients to use medicines endorsed by their sick funds. Th
is increased the bargaining power of these funds and resulted in lower prices. F
or another, in the first half of the year there were supply chain problems with
betapharm’s contract manufacturer, Salutas, which led to reductions in the quant
ity of formulations for the market. The supply chain problem was a blessing in d
isguise. It helped accelerate the process of migrating the production of a large
number of betapharm’s products to Dr. Reddy’s operating facilities in India and
the supply pipeline has been restored. This is discussed in detail later in cha
pter.
Nevertheless, the combination of lower realizations and supply chain constraints
led to the revenues from betapharm remaining at same level; Rs. 8,189 million i
n 2007–08 versus Rs. 8,004 million a year earlier. We believe that the worst in
Germany is probably over and that, thanks to migrating production to more effici
ent and lower cost facilities in India, Dr. Reddy’s is well poised to profitably
leverage demand growth in 2008–09.
Third, the Company’s Custom Pharmaceutical Services (CPS) business out of Mexico
was also hindered by supply chain constraints in the beginning of 2007–08. Thes
e were linked to the supply of a key material for naproxen, the largest manufact
ured
product in the Mxico facility. This, too, has had a positive outcome. The Compan
y has now set up its own plant near Hyderabad at a cost of U.S.$. 14 million for
manufacturing the necessary raw material to ensure uninterrupted supply.
Fourth, 2007–08 saw exceptional fluctuations in the Indian rupee-US dollar excha
nge rate. The average daily US dollar value for 2007–08 was Rs. 40.28 compared t
o Rs. 45.24 during the previous year. While the Company took adequate foreign ex
change cover against its exports, depreciation of the US dollar adversely affect
ed realizations.
Dr. Reddy’s key financial highlights for 2007–08 are given below.
Despite the fall in revenue and profits, the Company’s underlying business drive
rs have actually strengthened over the year. Here are some facts:
The Branded Formulations business grew by 16 percent to generate revenue of Rs.
15,241 million in 2007–08, was driven by growth in both India as well as interna
tional markets. Revenues in India grew by 16 percent to Rs. 8,060 million, while
revenue from international markets increased by 17 percent to Rs. 7,181 million
. In the international market, growth was primarily in Russia, the other CIS cou
ntries, Romania, Vietnam and Venezuela. Today, the Company sells over U.S.$. 100
million worth of
branded formulations in Russia alone.
In India, 2007–08 saw Dr. Reddy’s launching RedituxTM, a monoclonal antibody. Th
e product contributed to a revenue of Rs. 154 million, and demonstrated the Comp
any’s technological prowess in manufacturing a product in the biologics space.
We launched 10 new products in the US generics market in 2007–08, including two
over-the-counter (OTC) products. We have filed 122 cumulative Abbreviated New Dr
ug Applications (ANDAs) up to date. As on 31 March 2008, there were 70 ANDAs pen
ding for approval at the US Food and Drug Authority (USFDA), including 10 tentat
ive approvals.
Regarding Active Pharmaceutical Ingredients (APIs), the Company filed 23 Drug Ma
ster Files (DMFs) in the US during the year, taking the total filings to 127. It
also filed 9 DMFs in Canada, 13 in Europe and 9 in the rest of the world.
The Company has also completed three acquisitions after 31 March 2008. These are
:
a. A part of the Dow Pharma small molecules business in the UK. We have acquired
relevant customer contracts, associated products, process technologies, intelle
ctual property rights, trademarks and the Dow Pharma small molecules facilities
at Mirfield and Cambridge. The two sites and the business employ approximately 8
0 people. We have also acquired a non-exclusive
license to Dow’s Pf nex ExpressionTechnology™ for bio-catalysis development.
b. Jet Generici Srl in Italy, which provides us with access to an essential prod
uct portfolio, a pipeline of registration applications, and a sales and marketin
g organization.
c. BASF’s pharmaceutical contract manufacturing business and manufacturing facil
ity at Shreveport, Louisiana, USA. The business involves contract manufacturing
of generic prescription and OTC products for branded and generic companies in th
e US. It also includes customer contracts, related ANDAs, NDAs and trademarks as
well as the Shreveport facility — which is designed to manufacture solid, semi-
solid and liquid dosage forms, and employs about 150 people.
During the year, the Company invested Rs. 6,293 million on manufacturing, R&D fa
cilities and other capital expenditure — the highest level of investment in a si
ngle financial year up to date. These investments will create the capacity to su
pport Dr. Reddy’s strategic growth agenda.

Dr. Reddy’s Market Performance

Revenues
The Company’s consolidated revenues decreased by 23 percent to Rs. 50,006 millio
n in 2007–08 (U.S.$. 1.25 billion). This was largely on account of four reasons
discussed earlier in the overview. These are:
a. No major US generics launch in 2007- 08. In contrast, in 2006–07, the Company
launched Simvastatin and Finasteride, the generic versions of Zocor® and Prosca
r® respectively of Merck, as authorized generic products and Ondansetron, the ge
neric version of Zofran®, under 180-days exclusivity. During 2006–07, Simvastati
n and Finasteride had contributed to Rs. 15,813 million or 24 percent of Dr. Red
dy’s total revenues. However, post-patent expiry, their prices decreased signifi
cantly leading to considerable reduction in revenues from these products.
b. The revenues from betapharm have largely remained at the same level at Rs. 8,
189 million in 2007–08 versus Rs. 8,004 million a year earlier. This was due to
pricing pressures in the German generics market as well as supply chain problems
with betapharm’s contract manufacturer, Salutas. The latter problem has been su
bsequently resolved with the manufacture of a large number betapharm’s products
migrating to Dr. Reddy’s facility in India.
c. The Company’s Custom Pharmaceutical Services (CPS) business out of Mexico was
also hindered by supply chain constraints in the beginning of 2007–08. The Comp
any has now set up its own plant near Hyderabad for manufacturing the necessary
raw materials.
d. Exceptional fluctuations in the Indian rupee-US dollar exchange rate and a si
gnificant weakening of the US dollar vis-à-vis the rupee. Having said this, it i
s important to note Dr. Reddy’s overall growth in revenues from 1999–2000 to 200
7–08. Chart A plots the data in US dollars. It shows a 27 percent exponential tr
end rate of growth (i.e. trend CAGR) over the last nine years. It also shows tha
t the Company, despite its lower performance in 2007–08, is solidly positioned a
s a more than U.S.$. 1 billion entity — and is poised for further growth.

Table 1 gives Dr. Reddy’s consolidated financial performance by businesses under

US GAAP.
In 2007–08, the share of revenue between the international business and India w
as split 79 percent to 21 percent. The revenue composition between geographies c
hanged considerably. This was due to the absence of authorized generics sales in
the US during 2007–08. Hence, North America (US and Canada) contributed to 23 p
ercent of total revenues in 2007–08, versus 44 percent in 2006–07. Europe (exclu
ding Russia and the CIS) accounted for a larger share of revenues: 32 percent of
the total in 2007–08, compared to 23 percent in 2006–07. Russia and other count
ries in the CIS contributed to 11 percent of the total in 2007–08
— up from 7 percent in 2006–07. India accounted for 21 percent of total revenues
in 2007–08, versus 14 in 2006–07. Chart B shows the differences in revenue comp
osition over the two years.

Active Pharmaceutical Ingredients and Intermediates (API)

Revenues from API remained largely at the same level amounting to Rs. 11,805 mil
lion in 2007–08 compared to Rs. 11,883 million in 2006–07. Sales outside India a
ccounted for 80 percent of this business’ revenues, compared to 83 percent in th
e previous year.
The international business of API slightly declined to Rs. 9,453 million in 2007
–08, from Rs. 9,806 million in the previous year. In 2006–07, the Company had po
sted significant sales of sertraline hydrochloride, largely driven by launch of
its generic version in US.
In the current year, the prices of this product and revenues from it have signif
icantly decreased. However, this was partially offset by launch of other product
s in 2007–08. Revenue from Europe increased by 19 percent to Rs. 2,521 million i
n 2007–08, primarily on account of increased sale of products such as olanzapine
, escitalopram, ramipril and losartan. There was, however, a fall in sales of se
rtraline and amlodipine maleate. North America revenue grew by 13 percent, from
Rs. 2,030 million to Rs. 2,289 million in 2007–08, mostly on account of increase
d sales of finastride and olanzapine.
Sales in the emerging markets reduced by 18 percent — from Rs. 5,659 million in
2006–07 to Rs. 4,644 million in 2007–08. This was largely on account of de-growt
h in Israel due to lower revenues from sertraline hydrochloride, which was parti
ally offset by growth in Turkey, Japan, South Korea and Mexico.
Revenue from India increased by 13 percent to Rs. 2,352 million in 2007–08, due
to growth in the sales of clopidogrel, ramipril and fexofenadine. Chart C gives
the geographical distribution of API revenues during 2007–08. Table 2 gives the
revenues from the Company’s top 10 API products in 2007–08 and 2006–07, and thei
r growth.

Branded Formulations
Branded Formulations has been the star performer in 2007–08. Its revenues rose b
y 16 percent — from Rs. 13,087 million in 2006–07 to Rs. 15,241 million in 2007–
08. This was driven by almost 16 percent growth in revenues in both India as wel
l as international markets.

India
Revenues in India grew by 16 percent to Rs. 8,060 million in 2007–08, thanks to
the performance of the top-10 brands, especially Omez, Razo and Atocor. Omez, th
e Company’s brand of omeprazole, grew by 16 percent compared to overall market g
rowth of 7 percent, driven by continued success of a line extension, Omez D. Dr.
Reddy’s Omez now accounts for 47 percent of the total market.
Revenues from sales of Razo, Dr. Reddy’s brand of rabeprazole, grew by 38 percen
t compared to overall market growth of 23 percent. The growth was aided by a spe
cific market campaigns, and the brand now has a market share of around 12 percen
t. It also
features in the industry’s list of Top 300 Brands. Atocor, Dr. Reddy’s brand of
Atorvastatin, grew by 29 percent compared to overall market growth of 38 percent
. The growth was largely due to the launch of a line extension, Atocor N. The br
and is currently ranked 4th with an 8 percent market share.
During the year, the Company launched Rituximab, the first monoclonal antibody b
io-similar, under the brand name of RedituxTM. The product contributed Rs. 154 m
illion in revenues in 2007–08.
The Company’s top-10 brands accounted for revenues worth Rs. 3,724 million (46 p
ercent of Branded Formulation’s Indian revenues), and grew by 17 percent.
Table 3, in the next page, gives the data for the top- 10 formulations brands in
India in 2007–08 and the previous year.
International
Revenue from international markets increased by 17 percent — to Rs. 7,181 millio
n in 2007–08, from Rs. 6,122 million in 2006–07. This growth was primarily drive
n by Russia, CIS countries, Romania, Vietnam and Venezuela.
The Russian pharmaceutical market witnessed a growth of 15 percent for calendar
year 2007. In this high growth market, Dr. Reddy’s revenues grew by 13 percent —
due to strong contributions in the OTC segment as well as by prescription sales
. The growth was largely led by key brands such as Omez, Nize, Keterol and Cetri
ne. Due to the Company’s robust growth, it maintained its rank at 14th (Pharmexp
ert MQT, March 2008), with a market share of 1.2 percent. Fiscal 2008 saw Dr. Re
ddy’s Russian sales cross the U.S.$. 100 million mark.
Revenue from CIS countries increased by 25 percent, largely contributed by Ukrai
ne, Belarus and Uzbekistan. Romania grew by 38 percent, Vietnam by 21 percent an
d Venezuela by 68 percent. Chart D gives the geographical distribution of the Br
anded Formulations business.

Generics
The Company’s revenues from Generics decreased from Rs. 33,224 million in 2006–0
7 to Rs. 17,782 million in 2007–08. This was largely due to the lack of sales of
authorized generics (AG) in 2007–08 — which had contributed 48 percent of this
segment’s revenues in 2006–07.
North American revenue reduced from Rs. 23,617 million in 2006–07 to Rs. 8,024 m
illion in 2007–08, again due to lower sales of AG products, which had accounted
for 67 percent of this geography’s revenues in 2006–07. Excluding AG, the rest o
f the Company’s North American generics portfolio witnessed significant volume g
rowth which more than offset pricing pressure.
During the year, Dr. Reddy’s commenced its own OTC business with the launch of R
anitidine and Cetirizine. These products contributed Rs. 263 million of revenues
. Revenues from Europe grew to Rs. 9,715 in 2007–08 from Rs. 9,603 million in 20
06–07.
Betapharm revenues increased to Rs. 8,189 million from Rs. 8,004 million despite
an unfavorable pricing and supply environment. With German demand looking up an
d given the transfer of production of many products to India, we expect improvem
ents in betapharm’s revenues as well as profits in 2008–09. Revenues from rest o
f Europe declined from Rs. 1,599 million in 2006–07 to
Rs. 1,526 million in 2007–08, largely on account of decline in prices in UK.
Custom Pharmaceutical Services (CPS)
Revenue in this segment reduced to Rs. 4,818 million in 2007–08 from Rs. 6,600 m
illion in 2006–07.
As discussed earlier, this was on account of decrease in revenues from our key p
roducts — naproxen and naproxen sodium — on account of severe shortage of raw ma
terial at the beginning of the year. The problem has been resolved with the Comp
any setting up its own plant at Miryalaguda, near Hyderabad, for manufacturing t
he necessary raw materials for its CPS business.

Regulatory Activity
A strong product pipeline strengthens the foundation of any pharmaceutical compa
ny. Dr. Reddy’s has continued with its commitment to build a robust generics and
API pipeline.
In 2007–08, the Company filed 19 ANDAs in US including 10 Para IV filings. These
ANDAs address innovator revenues of about U.S.$. 7.9 billion (IMS MAT, December
2007). Dr. Reddy’s has filed 122 cumulative ANDAs as of 31 March 2008. 2007–08
also saw the highest number of approvals for the Company’s ANDA filings: 13 fina
l approvals from the US and 4 from Canada, in addition to 7
tentative approvals from the US. As of 31 March 2008, the Company’s US Generic p
ipeline comprises 70 ANDAs pending with the USFDA, including 10 tentative approv
als.
Regarding APIs, the Company filed 54 DMFs in 2007–08. Of these, 23 were filed in
US, 9 in Canada, 13 in Europe and 9 in other countries. As on 31 March 2008, th
e Company had cumulative filings of 281 DMFs, with 127 in the US

Indian GAAP Consolidated Financials

Table 11 gives the break-up of Indian GAAP consolidated financials for 2007–08 a
nd 2006–07.

Revenues
Gross sales decreased by 24 percent to Rs. 49,700 million in 2007–08. Previous y
ear net sales include revenues from sales of Authorized Generics products, which
did not materialize in 2007–08. Excluding sales from these products, the Compan
y’s revenues would have decreased by 3 percent.
API Gross sales decreased by 2 percent to Rs. 11,804 million. This was on accoun
t of decrease in revenues from the ‘Rest of the World’ markets, and was partiall
y offset by increases in India, North America, Europe and some other markets.
Formulations Gross sales of this segment increased by 16 percent to Rs. 15,650 m
illion, driven by well diversified growth across all key geographies.
Generics Gross sales decreased to Rs. 17,428 million from Rs. 33,518 million in
2006–07. As explained earlier, this was due to higher revenues from authorized g
enerics (simvastatin and finastride), and new launches (ondansetron and fexofena
dine) in
2006–07.
CPS Gross sales decreased from Rs. 6,080 million in 2006–07 to Rs. 4,818 million
in 2007–08. This was due to decline in revenues from our key products – naproxe
n and naproxen sodium — arising of supply problems with their key raw materials.
The problem
has since been addressed.
Material Costs
Material costs decreased to Rs. 17,847 million in 2007–08 from Rs. 27,432 millio
n in 2006–07. As a percent of total income, material costs fell to 34 percent in
2007–08, from 41 percent in 2006–07. This was due to lower sales of authorized
generics in 2007–08 (which had contributed 24 percent to total revenues in 2006–
07) and had a higher material cost ratio than others.

Personnel Costs
Personnel costs increased by 14 percent to Rs. 7,311 million in 2007–08. This wa
s on account of annual increments and increase in number of employees.
As a share of total income, personnel costs increased from 10 percent in 2006–07
to 14 percent in 2007–08 — due to the fall in revenues.
Operating and Other Expenses
Operating and other expenses rose by 4 percent to Rs. 12,620 million in 2007–08.
The increase was due to higher advertisement costs, rise in power and fuel, and
repairs and maintenance expenses due to increase in production and commissionin
g of two new manufacturing plants; and increase in carriage outwards because of
higher sales volumes. This increase was partially offset by a fall in legal and
professional and communication expenses and also of the Directors’ remuneration
due to fall in profits. As a share of total income, this head of expense increas
ed from 18 percent in 2006–07 to 24 percent in 2007–08, due to fall in sales.
Depreciation and Amortization
Depreciation and amortization increased by 6 percent to Rs. 4,018 million in 200
7–08 because of increase in gross block and intangibles. Additional investments
were incurred towards normal capital expenditure as well as new projects in CPS,
API and Generics.
Amortisation marginally decreased from Rs. 2,369 million in 2006–07 to Rs. 2,280
 million in 2007–08 due to amortisation of intangible assets in Trigenesis, and
impairment of product related intangibles at betapharm.
R&D
R&D expenses increased by 41 percent to Rs. 3,447 million in 2007–08. As a share
of total income, it increased from 4 percent in 2006–07 to 7 percent in 2007–08
— largely due the decrease in income from sales.
Finance Expenses
Finance expenses for 2007–08 amounted to Rs. 958 million, compared to Rs. 1,526
million in 2006–07. This was primarily on account of a repayment of Euro 140 mil
lion towards loan taken in 2005–06 for the acquisition of betapharm, and a decre
ase in
working capital loans in the current year compared to previous year.

Income Tax
Provision for income tax (inclusive of fringe benefit tax) for 2007–08 amounted
to Rs. 1,077 million against Rs. 2,744 million in 2006–07. This was due to an ov
erall decrease in taxable profits.
Profit After Tax
PAT decreased from Rs. 9,659 million in 2006–07 to Rs. 4,381 million in 2007–08.
The PAT to total income ratio in 2007–08 was 8 percent, versus 15 percent in 20
06–07.
Internal Contro ls and Ris k Manage ment
Dr. Reddy’s has a comprehensive system of internal controls with the objective o
f safeguarding the Company’s assets, ensuring that transactions are properly aut
horized, and providing significant assurance at reasonable cost, of the integrit
y, objectivity and reliability of financial information. The management of Dr. R
eddy’s duly considers and takes appropriate action on recommendations made by th
e statutory auditors, internal auditors, and the independent Audit Committee of
the Board of Directors. More on internal controls is given in the chapter on Cor
porate Governance.
In a very dynamic business environment, the traditional base business model is e
xposed to much volatility, both upwards and downwards. While the upsides create
nonlinear value for the organization, there is a conscious attempt to protect it
against the downsides.
As a step towards this, and continuing with the progress achieved during the ear
lier years, a basic framework for the Enterprise-wide Risk Management (ERM) has
been developed in collaboration with Ernst and Young. It comprises three phases:
1. Assess Define the risk classification framework, rating criteria and develop
a risk library.
2. Enhance Conduct workshops for prioritization of these risks, identify risks t
hat matter as well as their root causes and document the associated mitigation p
lans.
3. Monitor Define the risk management organization structure at the business lev
el, enable the maintenance of risk management framework on an ongoing basis and
monitor the progress on mitigation plans.

The significant risks include those related to changing regulations and related
compliance, increasing pricing pressure due to market externalities, foreign cur
rency fluctuations and uncertainties around innovation efforts. The Company has
a formal risk management structure with defined roles and responsibilities.
The Company’s Board of Directors, through its Audit Committee, approves the over
all risk management strategy, regularly monitors the risk management process and
takes high level decision, when required, on risk management matters.
Business unit heads provide overall guidance on ERM, ensure compliance with the
defined risk framework, up-date the risk register and either through the Chief R
isk Officer or in business unit presentations, give quarterly update to the Audi
t Committee of the Board.
The functional heads — within business units and for shared services — identify
risks, analyze and prioritize these in terms of the probability of occurrence an
d their impact, prepare mitigation plans and regularly monitor the risks.
Threats , Risks and Concerns
The Company operates in the pharmaceutical industry whose environment and the la
ndscape are rapidly changing. The industry is highly regulated, dependent upon t
he ownership of intellectual property, subject to product related litigations an
d characterized by a high level of uncertainty regarding product development and
launch. The Company’s inability to obtain necessary regulatory approvals for it
s products or failure of a product at any stage may disturb its future revenue p
rojections.
Drug discovery Dr. Reddy’s long term Discovery operations will depend, to a larg
e extent, upon its ability to successfully patent and commercialize its own disc
overy molecules and specialty products. There are significant risks of execution
, as the process of development and commercialization of new molecules is time c
onsuming as well as costly.
Generics The Company’s generic business remains challenging due to increased com
petition from India and Eastern Europe. The segment has inherent risks with rega
rd to patent litigation, product liability, pricing pressure, increasing regulat
ion and compliance related issues. The business could be negatively affected if
innovator pharmaceutical companies are successful in limiting the use of generic
s through aggressive legal defense as well as authorized generics deals, develop
ment 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 opportu
nity for all generics and API manufacturers. However, obtaining 180-days exclusi
vity is getting increasingly difficult in the US, and the generics market is bec
oming rapidly commoditized.
Drug pricing In India, the Government of India through its Drugs (Prices Control
) Order, 1995 (DPCO) imposes price controls for specified pharmaceutical product
s under certain circumstances. Adverse changes in the DPCO list or a widening of
the span of price control can affect pricing, and thereby the Indian revenues.
Foreign exchange fluctuations In fiscal 2007–08, the Company saw unprecedented a
nd significant fluctuations in the US dollar-Indian rupee exchange rate coupled
with an 11 percent depreciation of the dollar. Given that the Company has a majo
r portion of its revenues in US dollars, it has suffered on account of reduced r
upee realizations. Although the Company has taken adequate foreign exchange cove
r for its exports, further depreciation in the dollar may have adverse impact on
profits.
Germany As of 1 April 2007, GKV-WSG law to regulate the German health care syste
m took effect. The law has significantly increased the power of the insurance co
mpanies (sick funds) by allowing them to enter into direct rebate contracts with
suppliers of pharmaceuticals. It further incentivizes doctors to prescribe gene
ric drugs covered by such rebate contracts. The pharmacist is also required to d
ispense such drugs as are covered by rebate contracts. About 85 percent of betap
harm’s sales are prescriptions covered by sick funds. Thus, successfully conclud
ing rebate contracts with insurance companies is a critical success factor in co
mpeting in the generic prescription market. Betapharm today has rebate contracts
with sick funds covering 77 percent of the insured population in aggregate. Dur
ing 2007–08, the reference prices for generics were reduced on 1 January 2008. I
nsurance companies may continue to put pressure on margins by further adjustment
s to the reference prices. Patent With implementation of GATT in 2005, India sta
rted recognizing product patent protection with effect from 1 January 2005. It i
s expected that the new
product launch opportunities for Indian manufacturers of API and finished dosage
s will narrow over the next few years.

Outlook
Notwithstanding the setbacks in 2007–08, Dr. Reddy’s looks forward to a strong p
erformance in 2008–09. We believe that our core businesses of API and Formulatio
ns will show robust revenue growth and consequently, greater margin contribution
. The Company’s North American Generics business is expected to deliver stronger
performance with new launches and upsides.
The Generics business in Europe should see stabilization after the effects of si
gnificant regulatory and industry changes in 2007–08. Our initiative to shift so
me of the betapharm’s supplies to India has already started delivering value. Wi
th more products being shifted in 2008–09, the business will be further de-riske
d. By setting up a dedicated facility at Miryalaguda, near Hyderabad, for supply
ing inputs to Mexico, the Company believes that it has taken necessary steps to
ensure that supply chain constraints do not affect the CPS business. We expect h
ealthy growth of this segment in 2008–09. In addition, our strategic acquisition
s in US and UK are also expected to create value for shareholders.
We have been steadily building capabilities and resources over the years, and st
rengthened these further with several initiatives at improving productivity and
reducing costs. We see these initiatives coming to bear in 2008–09 and thereafte
r — thus contributing to
greater value creation. Moreover, we have committed significant investments in i
nfrastructure and facilities for almost all our businesses to support revenue sc
ale-ups in the near future.
In line with our stated philosophy and strategy, we will continue to pursue both
organic and inorganic options to achieve faster and more profitable growth. Hav
ing set aggressive targets across geographies and businesses, we look forward to
a good 2008–09.
 CHAPTER - 2

INDUSTRY ANALYSIS

SUN PHARMACEUTICAL

Introduction
Established in 1983, listed since 1994 and headquartered in India, Sun Pharma is
an international, integrated, speciality pharmaceutical company. It manufacture
s and markets a large basket of pharmaceutical formulations as branded generics
as well as generics in India, US and several other markets across the world. In
India, the company is a leader in niche therapy areas of psychiatry, neurology,
cardiology, diabetology, gastroenterology, and orthopedics. The company has stro
ng skills in product development, process chemistry, and manufacturing of comple
x API, as well as dosage forms.
The company has demerged its innovative research and development (R&D) into a se
parate company. Sun Pharma will spend $60‐75 million (more than Rs 300 crore) ov
er the next three years through its innovative research entity for initiating an
d completing clinical studies to support products in its pipeline.
Sun Pharma began in 1983 with just 5 products to treat psychiatry ailments. Sale
s were initially limited to 2 states - West Bengal and Bihar. Sales were rolled
out nationally in 1985. Products that are used in cardiology were introduced in
1987, and Monotrate, one of the first products launched at that time has since b
ecome one of our largest selling products. Important products in Cardiology were
then added; several of these were introduced for the first time in India.
Realizing the fact that research is a critical growth driver, we established our
research center SPARC in 1993 and this created a base of strong product and pro
cess development skills.
Sun Pharma was listed on the main stock exchanges in India in 1994; and the Rs.
55 crore issue of a Rs. 10 face value equity share at a premium of Rs. 140/- was
oversubscribed 55 times. The minimum 25% that was required under the regulation
s then for listing was offered to the public, the owner family continues to hold
a majority stake in Sun Pharma. We used this money to build a greenfield site f
or API manufacture, as well as for acquisitions. For the acquisitions, typically
companies or assets that could be turned around and brought on track were ident
ified.
Our first API manufacturing plant was built in Panoli in 1995, for access to hig
h quality actives ahead of competition, and to tap the vast international opport
unity for speciality APIs.
Another API plant, our Ahmednagar plant, was acquired from the multinational Kno
ll Pharmaceuticals in 1996, and upgraded for approvals from regulated markets, w
ith substantial capacity addition over the years. This was the first of several
sensibly priced acquisitions, each of which would bring important parts to the l
ong-term strategy.
By 1997, our headquarters were shifted to Mumbai, the commercial capital of the
country. We began on the first of our international acquisitions with an initial
$7.5 million investment in Caraco Pharm Labs, Detroit. By 2000, we had complete
d 8 acquisitions, each such move adding new therapy areas or offering an entry t
o important international markets. A new research center was set up in Mumbai fo
r generic product development for the US market. In India, as new therapy areas
were entered into post acquisition; customer attention, product selection and fo
cused marketing helped us gain a foothold in areas like orthopedics, gynecology,
oncology, etc. From a ranking at 38th in 1994, by 2000 we were ranked 5th with
a leadership in 8 of the 11 therapy areas that we are present in. The year 2000
was the year of turnaround at the US subsidiary, Caraco, as it began to receive
approvals after successful inspection by the USFDA. In December 2004, a research
center spread over 16 acres was inaugurated by the President of India, with spe
cial lab space for drug discovery and innovation. The post 2005 years have witne
ssed important acquisitions to strengthen our US business- the purchase of manuf
acturing assets for controlled substances in Cranbury,NJ; that of a site to make
creams and lotions in Bryan, that of Alkaloida, a Hungary based API and dosage
form manufacturer , and recently, Chattem Ltd., a Tennessee-based controlled sub
stance API manufacturer.
The tally at the end of 2008:
17 manufacturing plants in 3 continents
8000 employees
2 World class research centers
Brand selling in markets worldwide
A growing presence in the US generic market
Increasing research investments
60% of sales from international markets

MILESTONES
1983
Sun Pharma begins operations in Kolkata with 5 psychiatry - based products, firs
t with 2 people and then with a 10 - employee team. Year 1 turnover - Rs. 1 mill
ion. Within a year, the marketing effort is expanded to cover all eastern states
. A compact manufacturing facility for tablets/capsules is set up at Vapi.
1986
Administrative office is set up in Mumbai. Customer coverage extends to select c
ities in Western India.
1987
Marketing operations are rolled out nation-wide.
1988
With the launch of the brands Monotrate and Angizem, the first few cardiology pr
oducts are launched. We feature for the first time in a market audit by the pres
cription tracking company, ORG* at rank 107th with 0.1% market share.
1989
The corporate office is shifted to Baroda, in the western state of Gujarat. Prod
ucts used in gastroenterology are introduced. Exports to neighbouring countries
begin.
1991
Construction begins at the first research center SPARC (Sun Pharma Advanced Rese
arch center), with 46,000 sq ft of research space, and investments of almost the
size of that year s profits. The company s turnover is Rs. 9.74 cr, and market
rank is 70th.
1993
SPARC, the first research center, is inaugurated by His Excellency Shri K. R. Na
rayanan, the Vice President of India. An office is begun in Moscow. Products are
now registered across 10 markets.

1994
After an IPO in October, we are listed on the major stock exchanges in India. Th
e offering is oversubscribed 55 times. A dosage form plant at Silvassa starts pr
oduction. Major expansion at the plant in Vapi is completed. For the first time,
a brand from the company, Monotrate, features among the top 250 pharma brands i
n the Indian market. Experimenting with a focused marketing approach, a separate
division, Synergy, is carved out to market Psychiatry/ Neurology products.
1995
Our first API plant at Panoli starts production.
A new division, Aztec, now renamed Azura, is begun for cardiology products, with
a further reallocation of products across divisions. Inca, a new division to ma
rket critical care medication to intensive care units begins operations. Interna
tional marketing is strengthened with offices in Ukraine and Belarus.
1996
An API-manufacturing unit at Ahmednagar, the first of the our acquisitions, is b
ought from Knoll Pharma. An equity stake is also picked up in Gujarat Lyka Organ
ics Ltd., a manufacturer of Cephalexin Active with a USFDA approval for the inte
rmediate, 7ADCA. At the close of the year, we rank 27th with 2 products among th
e country s top selling 300 pharma brands. Product registrations are now in plac
e across 24 countries.
1997
We begin the first of our international acquisitions. As part of a technology-fo
r-equity agreement, a stake is acquired in a generic dosage form manufacturer; t
he Detroit-based Caraco Pharm Labs. An equity stake is taken in MJ Pharma, a man
ufacturer of several dosage form lines with UK MHRA approval for Cephalexin caps
ules.
TDPL, a company with an extensive product offering (oncology, fertility, anesthe
siology, pain management) is merged with Sun Pharma. Non profitable/small generi
c lines and several smaller brands are dropped to rationalize the product mix. T
DPL s products offer a ready entry with known brands and customer equity into ne
w high growth therapy areas like oncology and gynecology. Marketing is reorganiz
ed once again, this time into 6 speciality-focused divisions. A research and dev
elopment facility over 6,000 sq ft in Mumbai, our second research site, is estab
lished. This center is equipped to make dosage forms and create supporting techn
ical documentation for the generic markets in North America and Europe.

1998
A basket of brands, which include several in the respiratory/asthma area, are ac
quired from Natco Pharma. Our new formulation plant at Silvassa commences operat
ions.
1999
Rank moves within the top 10 in the domestic market. For a quick entry in ophtha
lmology, Milmet Labs is merged into Sun Pharma. The Cephalexin API manufacturer
Gujarat Lyka Organics is merged with Sun Pharma. 6 brands now feature among the
leading 300 prescription pharma brands in India.
2000
Ranked 5th among all companies in the domestic market on a monthly basis. Pradee
p Drug company, a Chennai based API manufacturer is merged with Sun Pharma.
Plans are shared to set up a new research campus in Chennai, which is later drop
ped as a suitable site is found in Baroda where we have an existing base.

2001
A new formulation plant is built in Dadra. This new plant is spread over a 5-acr
e site with built up area of 120,000-sq. ft. and has been designed and built to
comply with international regulatory requirements, such as the UKMHRA and USFDA.

The erstwhile TDPL division is renamed Spectra. A new division, Arian, targeting
cardiologists/physicians and diabetologists, is launched.
2002
Forbes Global ranks Sun Pharma in the list of best small 200 companies for 2002
(turnover less than $500 million).
Sun Pharma is selected as the best company by Express Pharma Pulse, for overall
performance for 2002 (in the category A - market share over 2.5%).
4 manufacturing sites win the prestigious IDMA awards.
Work commences on a new, state-of-the-art drug discovery campus in Baroda; this
16-acre site, with space for 400+ scientists on completion, will be commissioned
over the next two years.
Work begins on a new R&D center in Mumbai, with 50,000 sq. ft. floor area for pr
ojects aimed at the North American and European markets.

2003
Forbes Global ranks Sun Pharma in the list of the best small 200 companies for 2
003 (turnover less than $500million).
Sun Pharma is rated amongst the best-managed companies for 2003 across all secto
rs. (Business Today-AT Kearney study of best-managed companies)

2004
Sun Pharma acquires common stock and options from 2 large shareholders of Caraco
, increasing stake to over 60% from 44% at a total outlay of about $42 million.
By 2007, this stake has reached 75% on a diluted basis.
The formulation site in Halol, India (the erstwhile MJ Pharma site) receives app
roval from USFDA, UK MHRA, South African MCC, Brazilian ANVISA and Columbian INV
IMA.
The BT Stern Stewart survey places Sun Pharma among the top 20 wealth creators i
n India and among the top 3 wealth creators in the pharma sector.
Construction at a formulation manufacturing site at Jammu is completed.
Our first joint venture manufacturing unit, in Dhaka, Bangladesh is commissioned
. This modern site is spread over 25,000 sq. ft.
Two of Sun Pharma s API factories receive USFDA approval, taking the total numbe
r of US FDA approved sites to three.
Sun Pharma acquires a Cephalosporin Actives manufacturer, Phlox Pharma, with Eur
opean approval for cefuroxime axetil amorphous. By 2007, a formulations facility
to make sterile and non sterile formulations have been built, and the API and n
on-sterile sections have been approved by the USFDA.
Niche brands are bought from the San Diego, US based Women s First Healthcare. (
WFHC, not listed). These brands are the gynecological Ortho-Est® (estropipate),
and the antimigraine preparation Midrin®.
Forbes Global ranks Sun Pharma in the list of most valuable companies for 2004 (
turnover less than $2bill).
2005
Sun Pharma buys a plant in Bryan, Ohio, US and the business of ICN, Hungary from
Valeant Pharma.
Sun Pharma acquires the intellectual property and assets of Able Labs from the U
S District Bankruptcy court in New Jersey in December 2005.
Dilip Shanghvi, the CMD, receives the E&Y Entrepreneur of the Year award in heal
thcare and life sciences for 2005.
Sun Pharma is selected by Forbes amongst the best 200 companies (sales less than
USD 1 billion) in Asia. This is the fourth time in 5 years that the company has
been selected.
2006
Announced the demerger of innovative business with pipelines, people, equipment
and funding, into a new company.
2007
Completed the demerger of the innovative business, with requisite legal and regu
latory approvals. SPARC ltd, the new company, is listed on the stock exchanges i
n India, the first pure research company to be so listed.
In May 2007, we, along with our subsidiaries, signed definitive agreements to ac
quire Taro Pharmaceutical Industries Ltd., (TAROF, Pink Sheets), a multinational
generic manufacturer with established subsidiaries, manufacturing and products
across the U.S., Israel, Canada for $454 mill. This all-cash deal is subject to
Taro shareholder approval and requisite regulatory clearances
2008
Chattem Limited
In November 2008, we along with our subsidiaries, acquired 100% ownership of Cha
ttem Chemicals, Inc.,a narcotic raw material importer and manufacturer of contro
lled substances with a approved facility in Tennessee. This will offer vertical
integration for our controlled substance dosage form business in the US.
(*ORG - Operations Research Group Audit of Retail Chemist Sales, later renamed t
he IMS -
ORG Retail Store Audit. Both ORG and IMS are the trademarks of their registered
owners)

Company Analysis

US Generics
In 2007, generics accounted for 67% of the US market, up from 63% in 2006 accord
ing to IMS data shared by the generics industry association, GPhA. In 2008, drug
s with over $20 billion in sales lose patent protection, augmenting the pipeline
substantially. Generics accounted for 20% of dollars spent as prescription drug
s last year, up from 17% in 2003. At Patient Benefit Managers such as Costco, ov
erall drug costs increased 2% in 2007, compared with 5.4% in 2005. This was larg
ely due to the huge pipeline of generic drugs that began to come off patent and
this pipeline extends to 2015.
Healthcare (after the economic situation) is one of the topmost priorities for c
andidates for the Presidential elections. Although the stance taken differs marg
inally, it continues to be pro-generic. One of the democrat candidates has gone
on record saying that if elected President, they would increase funding for FDA
s Office of Generic Drugs to speed reviews of new medicines and eliminate loopho
les in US law that allow Big Pharma to block generic copies.
Another Democrat candidate has said he would prevent brand name pharma from bloc
king copies and would encourage wider use of generics in US health programs incl
uding Medicare for the elderly & Medicaid for the poor.
The leading Republican candidate, has briefly mentioned that he would support la
ws that would allow Americans to buy drugs from Canada and other countries. He h
as also proposed improvements in the approval process for generics & biotech med
icines.
As more generics come off patent, brand name companies began to increase the pri
ce on commonly used medicines in order to protect margins. For example, AARP, an
advocacy group pointed out that Big Pharma raised the price of 220 branded medi
cines most commonly used by senior citizens as part of Medicare part D prescript
ion drug plans.
Annual growth in the generic market was 3.8% according to IMS after years of 10-
20% increases, due to pricing pressure on generics shortly after patent expiry,
larger number of players, some impact of large chains like Wal-Mart & Target off
ering generics at substantially reduced prices such as $4/mo. However, this decr
ease in prices was not matched by an increase in volumes.
The 3-4% growth rate for a market previously growing at double digit rates, desp
ite several important patent expiries, is indicative of the pricing pressure tha
t continues in the market. Technically complex products including several antica
ncers that went off patent saw approvals for as many as six filers on the day of
launch, commoditising these generics. With increasing competition, companies co
ntinued to seek
first to file opportunities or at risk launches. We expect this trend to continu
e now that the likelihood of triple damages is much lower than it was earlier. A
ccording to some estimates, such at-risk launches could account for $22 billion
expiry revenue in 2008.
 Medicare & Generics growth:
Last year we’d written about how the new prescription drug benefit, part of the
Medicare Reform Act of 2003, had expanded the market by extending coverage for b
asic medication to the previously uncovered. An IMS study of Medicare Part D at
the end of the first year offered significant insights. Of the estimated 29.3 mi
llion enrollees, 23.9 million or 75% had joined the plan. The previously uninsur
ed benefited the most from Part D, saving 60% of their cost & increasing pharmac
eutical use 26%. Induced demand (new patient starts & improved compliance from P
art D) was the highest among non-dual eligible beneficiaries, highest in classes
that treat chronic & asymptomatic conditions.
Medicare part D enrollees filled 15% of the total retail Rx in 2006, mostly for
hypertension, lipid regulating agents, antidepressants. Among Part D beneficiari
es, seniors previously uninsured received the greatest benefit, paying 60% less
per Rx than they did earlier. Many Part D beneficiaries appear to have changed t
heir usage pattern of Rx drugs, measured by new therapy starts, and changes in c
ompliance level.
Unbranded generics accounted for 58% of Part D scripts as versus 57% share of al
l retail Rx. 2007 may see some uptake from the 4-5 million eligibles still not i
nsured and over 2 million new Medicare beneficiaries entering the system.
In our view their leveling off would continue as the majority of beneficiaries a
re now covered.
Sun Pharma in the US
Our US sales is the second largest part of our business and the fastest growing
part. This year, our US operations accounted for 41% turnover, a number expected
to increase, as we continue to bring important products from our pipeline to th
e market.
This was a year of stellar US sales on account of exclusivities received on Tril
eptal, Protonix and at the end of the fiscal, Ethyol. Caraco reported sales of $
350 mill up 200%, and other than these products, with much the same product bask
et as competition. When we receive approval for Effexor XR after patent expiry t
he sales numbers would reflect this growth.
Our generic formulation is a tablet form of Wyeth s $2.6 billion antidepressant
originally marketed as a capsule. We have a “will-not-sue” covenant on this prod
uct. This year witnessed 2 approvals from the Cranbury site, the first of filing
s from this site to be thus approved. Caraco received 11 approvals during the co
urse of the year, Sun Pharma received 13 approvals.
Competition & pricing continue to be intense in the US even for products that ar
e considered to be complex, limiting the pricing flexibility available. Manufact
uring flexibility is one of the advantages that have been built into our US busi
ness-across our sites we have the ability to handle all kinds of dosage forms, f
rom simpler tablets and capsules to more complex injectables & sprays. A large p
art of our US generic production utilizes API that has been scaled up inhouse fo
r speed to market and tighter cost controls.
At our Cranbury & Bryan sites, product development & filing continue to be the p
rimary activity. We expect to have news flow about approvals and subsequent sale
s over the next 2 years. As we have shared earlier, our Hungary API site is expe
cted to feed the Cranbury site for controlled substances, allowing greater value
addition. Alkaloida, Hungary, continues to manufacture and market API for custo
mers in Europe. In view of both the stringent manufacturing controls required an
d the restrictions governing free movement of controlled substances that are abu
se prone, we believe this will remain an interesting market going ahead.
According to IMS, emerging markets are expected to become an even larger part of
global growth in the years ahead. Annual pharma sales in emerging markets is ex
pected to cross $400 bill by 2020, equivalent to current sales in the US & five
other major European markets. Currently, emerging markets account for 13% of wor
ldwide market growth, and are expected to reach 50% market growth by 2020. Count
ries like India, China, Brazil, Russia, Mexico are expected to grow 12-13% where
as mature markets are likely to grow at low single digit rates.
Emerging market needs are quite different in terms of product portfolio and comp
etition is fairly intensive
For Sun Pharma, our markets across China, Russia, Brazil, Mexico & neighboring c
ountries continued to be the fastest growing part of our business. In most of th
ese, the race is to emerge as the first branded generic and build up prescriptio
n share.
In several markets such as Brazil and Mexico, there have been internal compulsio
ns that have resulted in preference for local industry over imports and in some
cases even a re-examination of licenses. On a positive note, in some countries l
ike Mexico, branded generics from internationally approved sites in India have b
een gaining acceptance and prescriptions, at times at a preference over locally
made generics. With inflation and an increasing need for cost containment, one c
an expect increasing preference for branded generics or locally manufactured gen
erics. In some countries like Sri Lanka, years of civil strife have put pressure
s on the economy, and resulted in a preference for generics/branded generics ove
r the long term. Companies with strong political affiliations have emerged as st
rong competitors in some countries. Structural changes in some markets, for inst
ance in the way medication budgets are administered in a now-decentralized Russi
a, have necessitated a change in the way we market brands in that country.

Our origins as a developing country company with strong product promotion skills
and a ready portfolio of brands in speciality areas to choose from, strengthens
our international plans. We pick & choose products from the range that we marke
t in India, depending on country-specific requirements. Encorate chrono, a seizu
re medication, and Pantocid, an antiulcerant, continue to be amongst the largest
brands we market internationally. In the thirty - odd countries of our focus, w
e continue to build a presence with speciality brands. Across markets, our empha
sis is on prescription based trade sales. We continue to bring to market importa
nt products like Prolomet XL, Octride injection as well as Lupride injection, wh
ere the technological complexity means that competition is limited.
Lipodox, our formulation of targeted doxorubicin is under registration in 7 coun
tries; Octride (injectable octreotide) is marketed in 9 countries. Lupride depot
, the one & three-month formulation of the peptide lupreolide, is now in 6 marke
ts. In addition, complex products like Prolomet XL are under registration in sev
eral markets, including those where these are expected to be the only generic. S
everal complex products that have been successfully marketed in India are under
registration across interesting markets. The marketing model that we follow in t
hese countries is fairly similar to our relationship building approach in India.
Our well -trained 450 person team, (including agent’s representatives exclusive
to Sun Pharma), makes doctor calls in these markets. Activities such as doctor
group meetings, conference participation and symposia have helped us establish a
presence. We continue to be watchful of investments & profits across markets.
Europe:
In the key markets of Europe such as UK, France & Germany, we continued with our
efforts to register products selectively and look for an appropriate partner to
bring these our generics to market. We expect to have more news flow to share g
oing ahead.
API Markets
NMR lab, Analytical Area, R&D Center, Baroda 19
The world market for APIs is estimated to be $46 bill by 2010, with higher growt
hs forecast for India & China, and annual growth of 14%. India is uniquely posit
ioned to compete for a chunk of this global market, with 2005 sales of $2 billio
n and forecast sales of $4.8 billion by 2010, an average yearly growth rate of 1
9.3%. An expertise in chemistry skills, reasonable labor & environment costs, en
ergy controls and competitive domestic sector are likely to make the country one
of the top API manufacturers globally,
outstripping China & Italy. API sales of Indian companies are geared to highly r
egulated markets such as the US, supported by strong DMF documentation, GMP comp
liance etc. India & China accounted for 57% of the western European generic mark
et in 2005 and were expected to hold 67% market share by 2010.
According to a Frost & Sullivan report. API market in Europe is highly competiti
ve with large number of small & medium sized suppliers. European API suppliers f
ace issues such as lack of capability differentiation, overcapacity, limited new
product launches & a number of opportunities limiting M & A s. 80% of Europe s
API were exported to the US, a market in which India & China have made inroads a
nd are affected by efforts to streamline supply chain economics by large compani
es in order to rationalize costs.
At Sun Pharma, 10% of current turnover is from API sales to external customers a
nd this does not take into account the API we use inhouse. We are able to compet
e with speed to market & sensible costs not only in the US generic market, but i
n India as well, on account of sourcing advantages. We continue to use our facil
ities to file interesting ANDAs including those for peptides, steroids, and horm
ones.

Manufacturing
Worldclass sites, 17 plants in all, across three continents enables us to compet
e with a tight handle on cost and time to market across the geographies we are p
resent in, and compete with interesting products that are difficult to replicate
. During the course of the year we completed projects in streamlining, upgradati
on and expansion across several of our plants.
API Manufacturing:
Our expertise in API manufacturing enables us to work with innovative companies
as a sourcing partner & benefit from the advantages of integration with a tight
handle on cost & delivery. Our API filings strengthen our presence worldwide & s
pecially in the US where it enables us to source API for ANDA opportunities. In
addition to sourcing for very large products (like pantoprazole) we expect to us
e the dossier development & filing
capability for anticancers, steroids, hormones as well.
Alkaloida, our Hungarian manufacturing site that we’d acquired in 2005, is a fac
ility that can make API of controlled substances like morphine, codeine and thei
r derivatives from the initial stages. Over time, we intend to integrate the sou
rcing of API from this plant to our controlled substance formulations factory in
Cranbury, US. In readiness for filing, extensive engineering changes were carri
ed out over the previous year, GMP standards
enforced & utilities upgraded significantly.
At our Panoli API plant which we commissioned in 1995 & expanded several times o
ver the course of the last decade, we doubled our plant size with an expansion.
The new site houses plants for anticancer and steroid API manufacture, a large w
arehouse, utility block, tank farm & solvent storage. Plant 6 is large multiprod
uct API facility for regulated markets such as the US, plant 7 is dedicated for
making sex hormones, and includes a sterile facility. Since these hormones are e
ffective in minute quantities, the plant has stringent controls and the
highest checks on utilities.
At Ahmednagar, an oncology plant over four floors with 18 reactors and 8.21 kilo
litre capacity with separate air handling systems and restricted material moveme
nt was commissioned.
We expect to scale up complex anticancers such as oxaliplatin, capcetabine, gemi
citabine at this plant, which has been built to USFDA specifications.
At our Karkhadi plant, a plant to manufacture formulations has been made operati
onal and the area for non-sterile formulations such as liquids & tablets has sin
ce received USFDA approval for cefuroxime axetil. We expect our API business to
continue to feed our dosage form business, and strengthen our ability to compete
internationally.

Formulation manufacturing:
We have a solid manufacturing base now across continents, with international gra
de, approved or approvable plants that can handle a range of dosage forms in Ind
ia or elsewhere, specifically in the US. Our plants in Halol, India hold approva
ls from a large number of regulatory authorities including the USFDA, UK MHRA .
On the US mainland, we have three plants, through our subsidiary Caraco, plants
in Cranbury (for controlled substances)
and Ohio (for topicals such as lotions & creams).
Halol has witnessed increase in area from 14,000 sq. mt. as recently as 2004, to
29,500 sq. mt. now. Our Halol plant holds USFDA approval for tablets, capsules,
injectables & nasal sprays, and in the course of the past year we received seve
ral injectable ANDA approvals out of this site. A separate solid dosage form are
a for anticancer tablets & capsules, equipped with totally different air handlin
g units, was commissioned, this area meets international regulatory standards. T
he area for injectable oncologicals was expanded and the lyophilization capacity
was enhanced with two large lyophilizers installed.
A team from the UKMHRA inspected the plant including the injectable area, and we
passed this audit with flying colors as no observations were received even for
complex injectables. Manufacturing area to handle the production of non-sterile
formulations was increased from 3300 sq. mt. to 10,000 sq. mt. in order to suppo
rt increase production. QC area was expanded almost three times and a state of t
he art warehouse built. These
areas will support our plans for the US market. At our Silvassa formulations pla
nt a pellet manufacturing area
spread over 4800 sq. ft. and supporting QC was built. This will enable us to com
pete for important products such as Pantocid, Panlipase, Duloxetin. At the close
of the year our Dadra plant also received approval
from the US FDA.
Caraco:
To cater to US growth plans, Caraco has been expanding manufacturing considerabl
y, shifting distribution and storage of finished goods to an independent facilit
y. An expansion project to create new manufacturing capacity has begun, adjacent
to the current plant. This plant will be built at a cost of $17 million and add
140,000 sq. ft. area. Last year, Caraco had acquired a small packaging facility
for $ 1.7 million to improve bottling and packaging costs. The analytical area
has been expanded, and space for inventories, offices, administrative and sales
offices leased.
Bryan:
Sun Pharma Inc. s Bryan site makes oral liquids, semisolids & topicals. We conti
nue to develop & file products for US FDA approval.
Cranbury:
With its 80 person strong staff the site continues to develop & file products in
cluding those containing controlled substances. In addition to nimodipine, appro
vals for hydroxyzine and benzonatate were received from this plant.

Quality
The worldover, quality is reaching a mean with increasingly stringent requiremen
ts. An expert quality team, international level quality processes and documentat
ion and top level commitment to quality are the pillars
of our quality system. Emphasis on quality alertness is a starting point. Corpor
ate QA has trained our plant teams to handle areas such as equipment/utility bre
akdown, impact analysis, incidence investigation, walk through observations and
effective audits. Our central quality team works closely with partners such as v
endors, material and machinery suppliers. To ensure GMP compliance regular CQ au
dits are conducted covering all manufacturing locations. Your Company has adequa
te internal controls for its business processes across departments to ensure eff
icient operations, compliance with internal policies, applicable laws and regula
tions, protection of resources and assets, and accurate reporting of financial t
ransactions. The Company also has an internal audit system which is conducted by
independent firms of Chartered Accountants so as to cover various operations on
continuous basis. Summarized Internal Audit Observations/Reports are reviewed
by the Audit Committee on a regular basis. The finance and accounts functions of
the Company are well staffed with qualified and experienced members.
 Business
Products
Major revenue driver for Sun Pharma is its formulations business while the bulk
drugs business is achieving higher growth in terms of sales. The company has a s
ignificant portion of its revenue from exports.
Major markets for the company are Africa, Asia Pacific, CIS and Middle East for
exporting both bulk drugs as well as formulations. The management expects 45% of
its revenue from exports by 2000, which has become a major thrust area.
The US$ 300 Bn global pharma industry is research driven. New drug R&D costs bei
ng prohibitive, it is limited to pharma MNCs of developed nations. High prices o
f under-patent drugs are causing a shift to generics, especially in the US. In o
rder to spread the R&D costs over a larger base, pharma MNCs are consolidating t
hrough mergers/alliances.
In the Rs 125 Bn Indian pharma sector, prices of over 60% of the drugs/formulati
ons are government controlled through DPCO. In the domestic bulk drugs market, l
ow entry barriers have resulted in over capacity and price wars. Thus major play
ers with foresight are shifting to formulations, where brand image and distribut
ion network act as entry barriers. Most players are increasing their marketing/m
anufacturing network in order to enhance exports. However, the recent announceme
nt regarding reduced DPCO coverage will bring about major changes in the bottoml
ine of pharma companies.
Growth Drivers
Sun Pharma has focused on domestic formulation market with presence in the high
growth areas of cardiac care, GI tract, respiratory, psychiatry and CNS, pain ma
nagement and orthopedics and gynecology. It ranks 17th in domestic formulation m
arket with 136 brands.
Business Strategy
Sun Pharma has merged Sun Pharma Exports for better business rationalisation. Th
e company has a wide portfolio of molecules ranging from latest generation produ
cts to off patent drugs in each of its therapeutic areas. This strategy has paid
well to the company for establishing brand loyalty among the doctors throughout
the nation and also ease of prescription for them. Sun Pharma plans to build sp
ecialty franchise with new products and products that offer a patient centered u
sage plus.
Product expansion
Sun pharma has growth plans through new product launches in the existing as well
as new therapeutic areas and higher exports. It has acquired Caraco a US based
pharma firm and also has taken majority stakes in M J Pharmaceuticals and Gujara
t Lyka which gives the Company an edge in exports in terms of FDA approval and p
roduct range.
The company had acquired a bulk drug plant from Knoll Pharmaceuticals and starte
d commercial production at Ahmednagar, Maharashtra. The company has received a E
uropean certificate of suitability (CoS) for one of its products, while three mo
re CoS applications and two more drug master files (DMF) applications are likely
to be made over the next six months. SPIL s growth will be driven by new produc
t launches in existing/new therapeutic areas and higher exports.

Recent Developments
New product launches
Sun Pharma is ranked 2nd in terms of the value of new launches as 33 new product
s, valued at Rs 259 Mn, were launched this year. This along with the continuous
growth in formulation exports has helped maintain its dominance in the niche car
diovascular, diabetes and CNS areas.
Sun has been a pioneer in launching new molecules in the therapeutic categories
where the company has a strong franchise like CNS and cardiac, which implies tha
t the company has been able to retain core customers (specially doctors) even in
case of changing molecular preferences. Sun has off late been concentrating on
its efforts on building strong brands. Sun has invested Rs 430 Mn over the last
five years and plans to invest Rs 400 Mn over the next two years and has identif
ied niche therapeutic areas for research investments.
Achievements & Awards
The USFDA recently visited and cleared the company s Ahmednagar plant. As per th
e C-MARC data for Jul-Oct 2000, Sun Pharma is now ranked 1st with gastroenterolo
gists and cardiologists in the country. The formulation facility at Silvassa was
awarded the prestigious IDMA gold medal for quality excellence for the year 200
0, while the formulation plant at Vapi received a merit award.
Risks and Concerns
Effect of product patent regime
Historically, India has only recognised process based patents. So Sun Pharma has
thrived on reverse engineering of under-patent drugs without payments of royalt
y. Now, under WTO, India too will have to enforce product patents from the year
2005 AD. Sun Pharma will have to prove its research capabilities or will have to
be a marketing company for the MNC s.
Caraco Pharma
The continuing losses of the company s US based affiliate Caraco Pharma has been
a cause for concern. The USFDA has given its clearance to the facility recently
. In response to the FDA citation, the company has scaled back manufacturing and
new drug development to focus on upgrading the facility. The recent development
in this area has been the USFDA approvals for two of the Abbreviated New Drug A
pplications (ANDAs). The company has four other ANDAs pending approval. To date,
Sun Pharma has invested $7.3 million towards equity and $5.3 million towards de
bt in Caraco, and expects Caraco to break even by 2002.
Competition in the Generic market
The US market generic business is extremely big and lucrative but equally compet
itive. Historically only the earliest one or two players are rewarded in the fir
st year, while the prices start crashing with the entry of the new players. Thus
success there will depend on world-class research and development with early en
try capabilities. Competition in the form of well-entrenched Indian and Latin Am
erican firms is a major threat.

AIOCD Suspension and settlement

The All-India Organisation of Chemists & Druggists (AIOCD) called for a nationwi
de suspension of trade from May 19 2001 with Sun Pharma products and asked membe
rs to suspend purchase of Sun Pharma brands on account of outstanding dues amoun
ting to Rs 20 Mn that had not been settled. The dues relate to the transfer of b
rands from Natco Pharma and the treatment of return goods for these brands. The
company has reached a settlement to clear the outstanding by the end of next mon
th. The company s offer also includes an additional retailer margin of 0.5%.

Investment Rationale:

The company has a target to file 30 ANDAs with the US FDA in FY08E to strengthen
its generic pipeline. ORG‐IMS estimates the Indian pharmaceutical market (in te
rms of retail formulation sales) to register 12‐14% growth for next 12‐15 years.
The market is expected to reach US$30mn in revenues by 2020 (vs. US$7.1bn at pr
esent).
Sun Pharma will spend $60‐75 million (more than Rs 300 crore) over the next thre
e years through its innovative research entity for initiating and completing cli
nical studies to support products in its pipeline.
The company has maintained its guidance of sales growth of 15‐18% in rupee terms
for FY08E, generic R&D expenses at 8‐10% of sales (including R&D capex) and ove
rall capex of Rs1.25b. The company expects to maintain EBITDA margins at 32‐33%
for FY08E.
Based on DCF valuations, we arrive at a price target of Rs. 1164. At the current
price of Rs. 950, the stock is trading at 20x FY08E EPS of Rs.48.7 and 17x FY09
E EPS of Rs.56.7. We initiate coverage on Sun Pharmaceuticals with a BUY rating.
The key downside risk to our target price is the Company’s merger with Israeli
company Taro getting further delayed.
Acquisition of Caraco
Founded in 1984, Caraco is located in the Metro Detroit area and its facilities
have a total foot print of approximately 180,000 sq ft. In 1997, Sun became Cara
co’s majority shareholder, and subsequently, the two companies entered into a te
chnology transfer agreement. Between the technology transfer and marketing agree
ments, along with Caraco’s internal product development, there are over 60 produ
cts awaiting approval from the FDA, as of December 31, 2006, that potentially co
uld be marketed by Caraco in the U.S. and Puerto Rico. In addition to the pipeli
ne of products offered by Sun, Caraco has signed three definitive agreements wit
h third party developers or formulators, which will provide for an alternate str
eam of products that will complement Caraco’s current portfolio.
Caraco reported strong 1QFY08 top‐line growth of 43% to US$35.4m and EBITDA marg
ins of 25.9%. Sales growth was partly driven by products marketed under marketin
g agreement with SPIL. Caraco management has maintained its guidance of 30% reve
nue growth for FY08 led mainly by new launches and some of the niche low‐competi
tion products launched recently.

Acquisition of Taro
Taro has a good franchise in dermatological products and owns manufacturing unit
s in Israel and Canada that complement Sun s current manufacturing and developme
nt capabilities in the US. Since 1950, Taro has developed, manufactured, and mar
keted high‐quality branded and generic pharmaceutical products. Taro has strong
presence in dermatology and topical products, which enjoy relatively less compet
ition against other products, and in which SPIL has little presence. Taro has st
rong product basket of 100 ANDAs (with 26 awaiting approval) and one NDA.
Taro s prescription and over‐the‐counter medications are used primarily in derma
tology, pediatrics, cardiology and neurology. In all, we produce more than 180 p
harmaceutical products, including topical preparations (creams, ointments, gels,
and solutions), oral medications (tablets, capsules, powders, liquids) and ster
ile products (injectables, ophthalmic drops, powders).

Concerns
 Appreciating rupee may hit exports.
 Stiff Competition from global players.
 Delay in acquisition of Taro subject to shareholders approval.
 High raw materials prices.
 Threat from substitutes is quiet high in Pharma industry.
 Sun Pharma has not shown any ability to build any big brand so far.

The Domestic Formulations contributed to a large part of sales at 56% with a gro
wth of 26% on YoY basis with a market share of 3.3% and the Export Formulations
segment has seen a growth of 21% on YoY basis. 9 key products were launched duri
ng the quarter and the total number of patents applications submitted now stands
at 414 with 72 patents granted.

Basic principle of EVA is that the cost of capital should not be ignored but kep
t at the forefront of investors’ minds. EVA is the economic profit that the comp
any makes after deducting the money cost of capital. Therefore the Economic Valu
e Added that is the profit after the costs of a company’s capital is Rs. 592.87
crores. The EVA in FY07 has increased by 40% as compared to FY 06 which is a goo
d sign for the investors.

The asset turnover ratio has increased from 0.40 to 0.50 which gives an indicati
on of improving efficiency of the company. However the rise is not significant a
nd so the company should try to use the assets more efficiently. The Equity Mult
iplier has decreased from 2.24 times to 1.45 times which is not a good sign and
it should increase it to around 2 times. The NPM has also increased which gives
indication about the improving profitability of the company.
CHAPTER-3

CONCLUSION (CAMPARISION OF SUN PHARMA AND DR.REDDY’S.

SUGESSION - Share of Sun Pharmaceutical Industries Ltd. Is good stock and worth
Buying. It has good average return on equity and good Percentage of dividend iss
ued more profit margins. And fundamentally company is good.
So our suggestion as investor investment goes to Sun Pharmaceutical Industries L
td.
BIBILOGRAPHY:
WWW.GOOGLE.COM
WWW.NSE.COM
WWW.SUNPHARMA.COM
WWW.DRREDDYS.COM
WWW.ROCKON.CO.IN
WWW.TIMESOFINDIA.COM
WWW.ECONAMICSTIMES.COM
WWW.PHARMAFORCASTASEA.COM
WWW.MONEYCONTROL.COM
WWW.WIKIPEDIA.COM
WWW.ABOUT.COM