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A REPORT ON EIC ANALYSIS OF

PHARMACEUTICAL INDUSTRY IN

INDIA

REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF

THE COURSE SECURITY ANALYSIS

SUBMITTED TO: Prof. Ajay Kumar Panda

SUBMITTED BY:

KHUSHBOO SINHA (09bshyd0372)

SAMEER GARG (09bshyd0727)

PRIYANKA BHARDAWAJ (09hyd0598)

PRAGATI CHORARIA (09BSHYD0235)

PARTH SHETH (09BSHYD0548)

AAYUSHI JAIN (09BSHYD0010)

SECTION E

DATE OF SUBMISSION: 5TH

SEPTEMBER, 2010.

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TABLE OF CONTENTS

PAGE NO.

Brief introduction of the project 3

1. ECONOMIC ANALYSIS 4Parameters identified in the economic analysis 27

2. INDUSTRY ANALYSIS 31Challenges 46

Opportunities 48

Future outlook 52

3. COMPANY ANALYSIS 53Dcf valuation 53

Assumptions 55

Ranbaxy valuation and interpretation 56

Cadila healthcare valuation and interpretation 57

Aventis valuation and interpretation 59

Pfizer valuation and interpretation 60

Cipla valuation and interpretation 61

4. REFERENCES 63

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BREIF INTRODUCTION OF THE PROJECT

The project is about EIC Analysis of pharmaceutical industry in India. In the economic analysis

first the Indian economy has been analyzed in detail after which the important factors are taken

from this analysis which have a major effect on the pharmaceutical industry. For more accuracy

correlation has been seen between these important factors and the pharma industry growth rate.

These variables are discussed in detail in the economic analysis.

For industry analysis best efforts are put to know the in and out of the pharmaceutical industry in

India. On the basis of growth of the industry, major players both domestic and foreign, their

market share and the recent developments in the industry are studied in detail.

For the purpose of doing company analysis, from our industry analysis major players in this

industry were identified. These major players are listed on NSE. Then their valuation was done

by forecasting their financial statements from 2010-2014 with the help of information available

for the past 9 years. Finally we arrive at the intrinsic value per share of these major players using

discounted cash flow methods and compared them with the current market price.

After this detailed analysis we have recommended whether the stocks of these major players are

worth buying or not.

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1. ECONOMIC ANALYSIS

1.1. BRIEF INTRODUCTIONThe Indian economy is the fourth largest economy in the

world on the basis of purchasing power parity (PPP). It is one of the most attractive destinations

for business and investment opportunities due to huge manpower base, diversified natural

resources and strong macroeconomic fundamentals. Also, the process of economic reforms

initiated from 1991 has been providing an investor friendly environment through a liberalized

policy framework spanning the world economy. Indias diverse economy encompasses

traditional village farming, modern agriculture, handicrafts, a wide range of modern industries,

and a multitude of services. Slightly more than half of the work force is in agriculture, but

services are the major source of economic growth, accounting for more than half of Indias

output, with less than one-third of its labor force.

1.2. POLITICAL FRONT

India, the largest democracy of the world, has a multi party system with predominance of small

regional parties. We can in general classify all these parties into 3 main alliances:

United progressive alliance (UPA) National democratic alliance The Third front (formed

recently) The INDIAN NATIONAL CONGRESS and its allies in the UPA were re-elected to a

second five year term in the recently held LOK SABHA general elections 2009. The UPA

coalitions victory wasnt as surprising as the margin of their victory. The BHARTIYA

JANATA PARTY (BJP) acts as opposition in the house. The biggest astonishment was brought

about by the stumbling of several of the prominent regional parties. The rise in their prominence

has been one of the most significant political developments in the Indian national politics with

over 30 political parties represented in the parliament. In the lead-up to the elections, there were

speculations that the reign of the national parties had come to an end and the political future here

on will lay with the plethora of regional parties. While some of them did succeed in increasing

their rank and position, the majority of the seats that changed hands went to Congress. Albeit

regional parties will remain important in the Indian national politics given the role they play in

multi-party coalitions, the 2009 election results reflect that the national parties still have the

edge. Thus, the elections held in 2009 provided the congress- led UPA coalition in a

strengthened position, which thereby again ensures its uninterrupted rule over the next five years.

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The winning partys situation now is much stronger than the previous term when it required

significant support from outside the coalition. The UPAs strengthened position will allow the

government to move forward on the investment-related reform, albeit gradually.

1.3. ECONOMIC MACRO FACTORS AT A GLANCE:

Source: http://www.economywatch.com/budget/india-budget-2009/economic-survey-2008-2009-

02-7.html

1.4. GROSS DOMESTIC PRODUCT:

Gross domestic product is one of the measures of the national income and output for a given

countrys economy. It is the total value of all final goods and services produced in the domestic

territory of the country within the specified time period. GDP is widely used to gauge the health

of the economy, as its variations are relatively quickly identified.

The fiscal year 2009-10 had a difficult start. There was a significant slowdown in the growth rate

in second half of 2008-09, following the financial crisis that began in the industrialized nations in

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2007 and spread to the real economy across the world. The growth rate of the GDP in 2008-09

was 6.7%, with growth in the last two quarters hovering around 6%. There were apprehensions

that this trend would continue for some time, as the full impact of the economic slowdown in the

developed world worked through the system. It was also a year of reckoning for the

policymakers, who had taken a calculated risk in providing substantial fiscal expansion to

counter the negative fallout of the global slowdown. Inevitably, Indias fiscal deficit increased

from from the end of 2007-08, reaching 6.8% of GDP in 2009-10

. Source: compiled from different websites

A delayed and severely subnormal monsoons added to the overall uncertainty. The continued

recession in the developed world, for the better part of 2009-10, meant a sluggish export

recovery and a slowdown in the financial flows into the economy. Yet over the span of the year,

economy posted a remarkable recovery, not only in terms of overall growth figures but more

importantly, in terms of certain fundamentals, which justify optimism for the indian economy in

the medium to long run. The recovery was impressive because of three reasons: Despite a decline

of 0.2% in agricultural output, the growth happened It foreshadows renewed momentum in the

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manufacturing sector which has more than doubled from 3.2%in 2008-09 to 8.9% in 2009-10

Recovery in growth rate of gross fixed capital formation which had declined significantly in

2008-09

1.4.1. QUARTERLY TREND OF GDP GROWTH AND SECTORS

ASSOCIATED

The recovery in GDP growth for 2009-10, as indicated in the advance estimates, is broad based.

Seven out of eight sectors/ sub-sectors show a growth rate of > 6.5%. The exception is

agricultural sector and allied sectors where growth is estimated to be -0.2% over 2008-09.

Sectors including mining and quarrying; manufacturing and electricity, gas and water supply

have significantly improved growth rates > 8% in comparison to 2008-09. The construction

sector and trade, hotels, transport and communication have also improved their growth rates over

the preceding year, though to a lesser extent, however, the community social and Personal

services recorded a significant pick-up in growth as a consequence of continued fiscal expansion

with release of 60% of sixth pay commission arrears in September 2009. Financing, insurance,

real estate and business services have retained their growth momentum at around 10% in 2009-

10. In terms of sectoral shares, the share of agriculture and allied sectors in GDP at factor cost

has declined gradually from 18.9 in 2008-09 to 15.7% in 2009-10. During the same time the

share of industry has remained the same at 28%, while that of services has gone up from 53.2 to

56.3% in 2009-10.

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Table 1.2 : Quarterly growth rates of GDP at constant 2004-05 prices Source: CSO

1.5. PER CAPITA GROWTH

The growth rates in per capita income and consumption, which are gross measures of welfare,

have declined in the last two years. This is a reflection of the slowdown in the overall GDP

growth. The per capita income has declined from a high 8.1% in 2007-08 to 3.7% in 2008-09 and

then recovered to 5.3% in 2009-10 (measured in terms of GDP at constant market prices) Per

capita consumption has also shown a declining trend since 2007-08. The growth in per capita

consumption was lower than per capita income up to 2007-08; however since then it was higher

in two years n became lower again in 2009-10 The average growth in per capita consumption

over the period 2005-09 was slower at 6.08% than that in per capita income at 6.52%.

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Source: CSO Note: Income is taken as GDP at market prices Consumption is PFCE

(private final consumption expenditure)

1.7.1. INDEX OF INDUSTRIAL PRODUCTION

Indias Advantage: The sheer size of the Indian market has the obvious appeal. The rapid

growth of the Indian economy is likely to make India the fifth largest consumer market in the

world by 2025 from 12th in 2005, according to study by Mc Kinsey Global Institute. According

to a report by the FICCI and YES bank, India is poised to become the global manufacturing hub

for the luxury brands over the next five years with the manufacturing of luxury items becoming a

US$ 500 million industry during this period. Moreover according to a study by ASSOCHAM,

India will emerge as the fourth strongest economy among the G-20 countries after China, Russia

and South Korea from there global crisis, given it robust forex reserves, high GDP growth rate

and various fiscal and monetary measures taken to tackle the downturn. Given the backdrop of

the global financial crisis the manufacturing sector fell by 0.20% in the third quarter of the FY2008-09 compared to the growth of 6.06% in the second quarter of the same financial year. The

Index of Industrial Production (IIP) is an important indicator of the growth of the manufacturing

sector. Manufacturing output has a weight of around 80% in IIP. Thus it becomes all the more

important to analyze IIP.

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INDEX OF INDUSTRIAL PRODUCTION

Though the growth of the industrial sector started the slowdown in the first half of 2007-08 the

overall growth during the year remained as high as 8.5%. The index of industrial production has

shown a U shaped curve since the first quarter of 2007-08. It was 11.6% in the end of 2006-07

which decreased steadily for 8 quarters to become 0.5% in the fourth quarter of 2008-09, which

indicated the impact of recession on Indian Industry and it is this time we say that the industrial

sector witnessed a sharp slowdown as a consequence of successive shocks, the most important

being the knock-on effects of the global financial crisis. As the data here represents, the pace of

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slowdown accelerated in the second half of 2008-09 with the sudden worsening of the

international financial situation and the global economic outlook. The year 2008-09 thus closed

with the industrial growth at only 2.4% as per the Index of Industrial Production (IIP). Since last

3 quarters it has shown upward trend and in Oct-Nov 2009, it reaches 11.0%, which indicated the

recovery. The slowdown in manufacturing over successive quarters started from Q1 of 2007-08.

This was more or less replicated by the mining sector and closely followed by electricity.

However, in the third quarter of 2008-09, the manufacturing sector witnessed a sharp drop in the

growth which turned negative in the fourth quarter. Growth of mining sector declined over

successive quarters of 2008-09 to reach a 0.5 in the fourth quarter. However, the IIP expanded by

11% in Y-O-Y terms in November 2009, recording highest growth rate since October 2007.the

healthy growth performance in November has lifted the growth in April-Nov 2009 to 7.6%

which is substantially higher than the growth of 4.1% displayed in the same period in 2008.

Moreover, the IIP has recorded growth in excess of 9% in four consecutive months, which

suggests a sustained revival of industrial growth.

The index of industrial production slowdown raised concerns regarding slowdown in the India

Incs earnings given that the manufacturing sector accounts for a major chunk of the Indian stock

market capitalization. The low IIP numbers indicated a slowing output and thus low offtake

which inturn implied rising uncleared inventory which again acted as a hindrance in fresh

investment and additional capital formation thus dragging the economy downwards. However

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with the three stimulus packages by the government, the economy is on the recovery phase. IIP

Growth in November 2009 was boosted by 11.9% and 9.5% growth of the manufacturing and

mining/ quarrying sub-sectors, respectively, while electricity displayed a low growth of 3.3%.

The robust growth recorded by the IIP index, particularly the manufacturing sub-sector, point

towards healthy consumer demand, restocking of inventories and renewed investment growth. In

addition to domestic consumer demand, manufacturing growth has been supported by the recent

upturn in exports, which resumed expansion in Y-O-Y terms in November 2009. However, the

favorable growth rates in November 2009 also reflect a benign base effect, with low growth of

the IIP index and the three sub-sectors in November 2008.

Source: CSO

1.8. SERVICES SECTOR

Service sector is one of the crucial sectors of the Indian economy, contributes 56.3% to the Gross

Domestic Product (GDP) of the country. The sector has played a very important role in the

economy with its contribution of around 58% of the overall average growth in GDP in the last 8

years between 2000-01 to 2008-09. Apart from the high contribution to GDP, the sector

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also has been recognized globally as the prime driver of accelerated and diversified growth of the

economy. The service sector which is known to be Indias workhorse for well over a decade now

has continued to grow rapidly. The above chart shows the performance of the service sector over

the time frame. The sector has a tremendous potential to grow. The graph represents a decline in

2008-09 which continues till 2009-10 due to dampening effect of events like the financial crisis.

It comprises of the subsectors like trade, hotels, transport and communications; financing,

insurance, real estate, and business services; and community, social and personal services. As

against a growth of 9.3% in 2008-09 it grew at 8.7% in 2009-10. While there has been a

significant dip in the growth of community social and personal services in 2009-10, the other

sub-sectors have either retained their growth momentum or improved upon it. The telecom and

financial services related to asset management rose more than 20 percent, while other businesses

related to tourism, franchising, life insurance; housing, finance, education and retail grew by 10-

20%.

Source: data compiled from various websites and articles

The growth of service sector has not been confined to the domestic market alone. It has also

reflected in the trade front. Indias share in the global trade services has been increasing. A

redeeming feature for India is in commercial services exports as it ranks 9th in 2008 with a 2.8%

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share in the worlds trade worth $106 billion. India ranks 12th in import of the commercial

services at $91 billion and accounting for a share of 2.6% in the global trade in commercial

services. The sector has further derived benefit from the timely action taken by the RBI and the

government of India in terms of stimulus packages which have fuelled the growth across major

segments.

1.9. INFLATION:

Inflation can be defined as a phenomenon of a persistent rise in the price level of goods and

services in an economy over a period of time. It is a situation where too much money is chasing

too few goods. It is the decline in the real value of money-loss of purchasing power in the

medium of exchange which is also the monetary unit of account. Whereas deflation is exactly

opposite situation of inflation. It is a phenomenon of sustained decrease in the price level of

goods and services. It is a situation where too little money chases too many goods and services.

It occurs when annual rate of inflation fall below 0% resulting in the increase of real value of

money-negative inflation. India calculates the inflation considering 1993-94 as the base year.

The movements in the rate of inflation reflect changes in demand and supply conditions in the

economy. Inflation management therefore, involves controlling the demand situation as well as

reining in inflationary expectations through various monetary measures. On the supply side it

would encompass various administrative and fiscal measures.

Source: data from different websites has been compiled into graph

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The table above shows the index of food grains. A major concern during the year 2009-10

especially in the second half, was the emergence of high double digit inflation primarily due to

the rise in global commodity and fuel prices. The year 2008-09 started with 8.0% WPI inflation

and reached a peak of 12.8% in august 2008. The subsequent global economic meltdown starting

September 2008 brought a fall in international commodity prices and thus reversed the trend and

WPI inflation slipped into negative territory during June to August 2009, thus coming to a 30

year low.

Source: the figure has been compiled by data collected from many sources

The WPI trend regained and on a y-o-y basis, the WPI headline inflation in December 2009 was

reported to be 7.31% but for food items (primary and manufactured) with a combined weight of

25.4% in the WPI basket, it was 19.8%. Thus unlike the first half of 2008-09 when global cost

push factors resulted in inflation as high as 13% in August 2008, with inflation in primary and

manufactured products just below the overall average and that in fuel and power group over

17%, the upsurge in prices in second half of 2009-10 has been more concentrated to food

products only, with primary food articles at 17.9% inflation rate as recorded in Jan 2010. A

significant part of this inflation can be attributed to supply side constraints in some essential

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commodities, precipitated by delayed and sub-normal south west monsoons and expectations of

shortage. Since December 2009, there have been signs indicating high food prices, together with

gradual hardening of non-administered fuel product prices, spreading to other non-food product

prices creating anticipation for high generalized inflation over next few months. The current

spectra of double digit inflation of around 17.81% in food articles, both in primary and

manufactured groups with an exception of edible oils, mainly is ascribable to supply side

constraints. The food prices remained high because of a high minimum support price and low

production of pulses and coarse cereals. Because of high food inflation the consumer has to

shell out more money for buying the same basket of commodities and thereby eroding their real

income. The impact of rising CPI is felt more by the poorer sections where he has to spend more

to earn his bread. As per the figures above, Consumer Price Index, which represents the prices

paid by the retailers for the finished goods and services at the local grocery store or in the

shopping mall, has not mirrored the fall in the Wholesale Price Index. The CPI has always

remained higher than WPI inflation signifying the benefits of lower inflation not being passed on

to the end consumer. In order to control the inflation the government has taken several measures.

On the monetary front the RBI has initiated calibrated changes in rates to swipe out the excess

liquidity in the system by rising of the SLR and CRR as it is necessary to ensure that the

monetary policy stance does not lead to pressure on prices. Along with this, suitable fiscal and

administrative measures have also been taken by the government like reducing import duties,

keeping buffer stocks etc are also taken by government to contain the food price inflation and

preventing it to spreading over to generalized inflation.

1.10. FOREIGN INVESTMENT

Foreign investment is the investments originating from other countries. India has been one of the

most preferred destinations for the foreign investments despite its political uncertainty,

bureaucratic hassles, shortages of power and infrastructural deficiencies. It presents a vast

potential for overseas investment and is actively encouraging the entrance of foreign players into

the market. The country has been rated as the third most attractive investment destination in the

world as per the global survey conducted by Ernst and Young. Foreign Investments can largely

be in two forms namely FDI (Foreign direct investment) and FII (Foreign institutional

investment)

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1.10.1. FOREIGN DIRECT IVESTMENT

Foreign direct investments occurs when an entity or investor from one country (home country)

obtain or acquire the controlling interest in an entity in another country (host country) and then

operates and manages the entity and its assess as part of the multinational business of the

investing entity. Encouraged by the continuous liberalization of the foreign direct investment

(FDI) policy, simpler procedural relaxations, the sustained growth in the economy and a

profitable investments regime, a host of global corporations are keen on investing in India. The

FDI norms were recently relaxed in order to meet more foreign investments. Thus this kind of

relaxation gives confidence in the minds of the investors in our fast expanding economy.

FOREIGN INVESTMENT: Financial year MONTH 2008-09 (FDI inflows in US$) 2009-10

(FDI inflows in US

The above table shows the comparison of the FDI inflows in the FY 09 and FY 10. The FDI

inflows have shown a negative dip of approximately 1% in the given year for the period April-December as compared to the previous year for the same period. The Data shows that the FDI

inflows were seriously impacted by the global credit squeeze since October and it was only this

October that the inflows have started improving. FDI was UD$ 2.33 billion in October 2009,

about 56% up over the same month last year, while in November it surged by 60% to US$ 1.73

billion. The increase was 13% to US$ 1.54 billion in December.

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Source: data from various websites has been compiled into graph

However if we analyze the monthly inflows, we can more clearly understand the effect of the

crisis on the inflows. FDI inflow to India started showing a declining trend from October 2008

reflecting improvements at the same time next year. During April-Nov 2009-10, the total FDI

inflows stood at Rs. 93,354 crore (US$ 19379 million) as against Rs. 85700 crore (US$ 19791)

during the corresponding period 2008-09, signifying a growth of 9% in rupee terms and a decline

of 2% in US dollar terms; the divergent patterns in growth rates being attributable to exchange

rate changes during the period. Sectors like agricultural services, sea transport and electrical

equipments have shown a quantum jump in FDI flows during 2009-10.

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Though the numbers in the figures above show the impact of the global financial crisis due to the

large number of banks which faced bankruptcy because of their exposure to poor quality assets,

the country is now in the recovery phase. Improved global sentiment and strong industrial output

in numbers along with the increasing consumer confidence are increasingly attracting foreign

investors in the country. India has been ranked at the third place in the global foreign direct

investments this year, following the economic meltdown, and will continue to remain among the

top five attractive destinations for the international investors during the next two years, according

to UNCTAD survey report 2009-10.

1.10.2. FOREIGN INSTITUTIONAL INVESTMENT

A category of investment instrument that are more easily traded, may be less permanent, and do

not represent a controlling stake in an enterprise, these include investment via equity instrument

or debt of a foreign enterprise which does not necessarily represents a long term interest.

Investment fund include hedge funds, insurance funds, pension funds and mutual funds. Foreign

Institutional Investors (FIIs) are the largest institutional investors in India with holdings valued at

over US$ 75.12 billion as on march 12, 2010. They largely determine the direction of the market.

They are also the most successful portfolio investor in India with 102% appreciation since

September 30, 2003.

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The most immediate impact of global financial crisis has been on the FII investment. Before the

eruption of the global financial crisis, the FIIs had been the net positive investor in the Indian

markets and as such they were bullish on the Indian markets. However after the crisis, FIIs

turned out to be net sellers in the market. Portfolio investment became extremely volatile and

largely negative (indicating net outflows) since the beginning of 2008, and this has dominated

the overall foreign investment trend. Today when the economy of the country though not

completely revived is on the track of recovery, the FIIs have also started regaining their

confidence. Let us have a look at the following numbers which will make the facts much more

clear. The trend of strong FII inflows to the tune of US$ 6.3 billion witnessed during April-June

2009 gained further during July-Sept 2009 and the period saw an infusion of US$ 7.37 billion.

So far in the December quarter, foreign fund houses have made a net investment of about

US$4.73 billion in the stock market In the case of debt instruments, FIIs have made a net

investment of about US$ 1.1 billion 2009, according to the market regulator SEBI data. During

the year, the number of registered FIIs increased by 114 to 1708, while the tally of registered

sub-accounts rose by 458 to 5330, according to SEBI. Portfolio investment mainly comprising of

FIIs investments and ADRs/GDRs saw large net inflows to the tune of US$ 17.9 billion in April-

September 2009 due to large purchases by FIIs in the Indian capital market.

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1.10.3. OVERVIEW OF TOTAL FOREIGN INVESTMENTS

After the global financial breakdown, the speed with which things have improved is quite

impressive. The revival gathered momentum in the second quarter of 2009 and has remained

buoyant since then. The government and RBI are to be commended for the steps they took. The

foreign capital inflows are growing rapidly as a result of improved global sentiments and

increased business confidence but the problem is that much of these are taking form of portfolio

investments and not FDI which is long term in nature. The dilemma for India now is how to

direct these investments into long term or direct investments.


The above chart shows the total foreign investment split up to direct investment and portfolio

investment from the period 2004-05 to April-Sept 2009. It can be seen from the graph that both

direct and portfolio investment are showing an increasing trend, however, FDI shows moderate

trend implying stable net inward flow. On the other hand FII reflects a sudden positive swing in

its value during the last one year (showing increased business confidence among the foreign

investors).

1.11. FOREIGN EXCHANGE RESERVES

Foreign exchange reserves are an important element in the analysis of an economys external

position. These are the assets held by central banks and monetary authorities in the form of

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foreign exchange (FCA) and gold, special drawing rights (SDRs) , reserve tranche position

(RTP) and IMF reserve positions. The level of foreign exchange is largely the outcome of RBIs

intervention in the foreign exchange market to smoothen exchange rate volatility and valuation

changes due to movement of US$ against major currencies of the world and are accumulated

only when there is absorption of the excess foreign exchange flows by the RBI. Country wise

details reveal that India is the fourth largest foreign exchange reserves holder in the world.


Before the burst of the global financial crisis India had built up huge foreign exchange reserves

driven by the inflow of the hot money especially in the form of portfolio capital of FII

investment which started declining in June 2008. Taking into account the valuation effect after

the pull out of money by Foreign Institutional Investors and other form of outward remittances,

Indias foreign exchange reserves recorded a decline of US$ 57 billion during 2008-09 to US$

252.0 billion as at the end March 2009. However, with the increase in the global business

sentiments and the good show exhibited by Indian economic macro factors, all of them showing

positive signs of speedy recovery, the global capital inflows from foreign markets ahs increased

in 2009-10 as a result of which an upswing can be seen in the forex reserves of the country.

Another major factor was 3 major developments took place in forex reserves in 2009-10:

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Investment of foreign exchange reserves in financing infrastructural projects.

IMF allocation of SDRs to member countries including India.

Purchase of gold from the IMF by RBI.

These 3 developments along with the increase in global capital inflows led to a rise in the forex

reserves once again.

Source: data has been compiled from various websites

The above graph shows the trend in foreign exchange reserves over April-December 2009. As

can be noticed from the graph the reserves increased over the year on an average but if we notice

more closely we can see a declining trend in December 2009 which is majorly because of

valuation effects of rupee depreciation with respect to US$ dollar terms. As the economy is

recovering dollar is regaining its demand in the international market which therefore has lead to

the increase in value of dollar.

1.12. EXCHANGE RATE

Exchange is the rate at which one currency can be converted into another thus; it has to be

guided by principles of careful monitoring and management of exchange rates with flexibility,

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while allowing the underlying demand and supply conditions to determine its movements over a

period.

In 2008-09 fiscal, the rupee depreciated against major international currencies due to

deceleration in capital flows and widened trade deficit. The annual exchange rate of rupee in

2008-09 was Rs. 45.99 per US dollar, Rs 64.98 per euro and Rs. 46.22per 100 yen indicating

depreciation of 12.5%, 12.2% and 23.5% respectively over the annual exchange rate during

Source: Indian economic survey 2009

In 2009-10 fiscal, the rupee strengthened against the US dollar on the back of significant turn

around in FII inflows, continued inflows under FDI and NRI inflows, better macroeconomic

performance of the Indian economy and weakening of US dollar in International markets. This

along with political stability expectation arising as an outcome of general elections buoyed the

market sentiments and strengthened. The movement of the exchange rate in the year 2009-10

indicated that the average monthly exchange rate of the rupee against the US dollar appreciated

by 9.9% from Rs. 51.23/ US$ in march 09 to Rs. 46.63/ US$ in Dec 09 mainly on the account

of weakening dollar in International market.

1.13. BALANCE OF TRADE

The balance of trade is the difference between the monetary value of goods that are exported and

the goods that are imported in an economy over a certain period of time. It is also called the net

exports and symbolized as NX. When monetary value of goods exported is greater than

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monetary value of goods imported, there arises a situation of trade surplus and when the

monetary value of goods exported is less than the monetary value of goods imported, then arises

the situation of trade deficit or trade gap (informally).

The years 2008 and 2009 were tumultuous ones for global trade. The simmering sub-prime crisis

in the US in 2007 which triggered the global financial crisis in September 2008 spread its

tentacles in full leading to a full blown global recession resulting in unprecedented fall in globaltrade. With the deepening of the global recession, the beginning of 2009-10 saw acceleration in

the fall of export growth rate. The upwardly revised export growth figures for the first half of

2008-09 also contributed to the faster decline in the growth rate. While the export growth rate

was negative 22.3% in April-Nov 2008-09, in November 2009, it became a positive 18.2%after a

13-month long period of negative growth. In December 2009, the recovery in the field continued

with a positive Y-O-Y growth of 9.3% and a growth of 10.7% over previous month. During

2009-10 (April-December), import growth was a negative 23.6% accompanied by a decline in

Both POL and non-POL imports of 29.8% and 20.7% respectively. Gold and silver imports listed

a negative growth of 7.3% primarily on the account of volatility in gold prices (continuous rise in

price of gold dampened its demand). A slowdown in Industrial activity and lower demand for

exports was reflected in the non-POL non bullion imports. However December 2009 reported a

positive import growth of 27.2% partly due to base effect and partly due to increase in growth of

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POL products (reason behind this being pick in oil prices and industrial demand). There have

been significant changes in composition and direction of both exports and imports in this period.

1.14. BALANCE OF PAYMENTS

Balance of payments, one of the major indicators of a countrys status in international trade,

summarizes all the economic transactions involving payments flow between any individual

country and all the other countries. It includes the current account, capital account and the

financial account

Fiscal 2009-10 has witnessed a global recovery after a crisis of severe worldwide proportions.

The risks of the double-dip recession however remain, with the need for caution in the dealing

with high public debt and unfurling of fiscal and monetary stimuli. The Indian economy also saw

a turnaround, registering 7% growth during H1 (April-September 2009) of 2009-10, after

touching a low of 5.8% in the third and fourth quarters of 2008-09. As per latest BoP data for

2009-10 fiscal, exports and imports showed a substantial decline during April-September (H1) of

2009-10 compared to the corresponding period in 2008-09. Despite this, the BoP improved on

the back of a surge of capital inflows and rise in the forex reserves, which have been

accompanies by rupee appreciation reflected in higher net capital inflows and lower trade deficit.

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2. PARAMETERS IDENTIFIED:

After the economic analysis it was identified that GDP, Interest Rate and FDI can be the major

variables affecting the pharmaceutical industry for this purpose the correlation between these

variables and the pharmaceutical industry was seen the results are as follows:

YEAR GDP(RealGrowthRate%)PharmaceuticalSector

(GrowthRate%)

2000 5.5 7

2001

6

7.12

2002 4.3 7.28

2003 4.3 4.77

2004 8.3 8.2

2005 6.2 8.7

2006 8.4 9.4

2007 9.2 10.1

2008 9 10.8

2009 7.4 11.6

Source:http://www.indexmundi.com

0

2

46

8

10

12

14

1 2 3 4 5 6 7 8 9 10 11

MovementofGrowthinPharmaSector

visavisGrowthinGDP

GDP(RealGrowthRate%)

Pharma(GrowthRate%)

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CorrelationCoefficient 0.79

The Correlation coefficient of .079 shows a significant positive relationship between the growth

in Real GDP and Pharmaceutical sector. When the pharmaceutical sector grows it helps in

pushing the Indian GDP up. However since the GDP is also determined by many other factors

we can see that in the latter years (2008-2010), growth in the pharmaceutical sector is robust butthe GDP growth is falling.

YEAR AvgAnnualINFLATION(CPI) Inflation(Growth%)

PharmaceuticalSector

(GrowthRate%)

1999 4.6

2000 6.7 45.65 7

2001

5.419.40

7.12

2002 5.6 3.70 7.28

2003 5.3 5.36 4.77

2004 5.4 1.89 8.2

2005 3.8 29.63 8.7

2006 4.2 10.53 9.4

2007 4.1 2.38 10.1

2008 5.3 29.27 10.8

2009 6.4 20.75 11.6

Source:http://www.indexmundi.com

40.00

20.00

0.00

20.00

40.00

60.00

1 2 3 4 5 6 7 8 9 10

Years

MovementofGrowthinInflationRatevisavis

GrowthinPharmaSector

Inflation(Growth%)

Pharma(Growth

%)

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Inflation does not hamper the growth in Indian pharmaceutical industry as the industry is highly

regulated and the raw material inputs are subsidized by the government of India. This is

substantiated by a low correlation figure of 0.25.

YEAR FDI(inMillionUSD.)FDIGrowth(%)

Pharma(GrowthRate%)

1999 2439

2000 2098 13.98 7

2001

4222

101.24

7.12

2002 3134 25.77 7.28

2003 2634 15.95 4.77

2004 3755 42.56 8.2

2005 3697 1.54 8.7

2006 9273 150.82 9.4

2007 12699 36.95 10.1

2008 21153 66.57 10.8

2009 20921 1.10 11.6

50.00

0.00

50.00

100.00

150.00

200.00

1 2 3 4 5 6 7 8 9 10

MovementofGrowthinPharma

SectorvisavisGrowthinFDI

FDIGrowth(%)

PharmaGrowth(%)

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The correlation between pharma sector and FDI is also not very high.

Therefore the GDP growth of the country does affect this sector significantly but not interest

rates and FDI.

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2. INDUSTRY ANALYSIS1.1 Background

The Indian pharmaceutical industry is a success story providing employment for millions andensuring that essential drugs at affordable prices are available to the vast population of this sub-

continent. Richard Gerster

The Indian pharmaceutical sector has come a long way, being almost non-existent before 1970 to

a prominent provider of healthcare products, meeting almost 95 per cent of the country's

pharmaceuticals needs. The Industry today is in the front rank of Indias science-based industries

with wide rangingcapabilities in the complex field of drug manufacture and technology. It ranks

very high in the third world, in terms of technology, quality and range of medicines

manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac

compounds, almost every type of medicine is now made indigenously, 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 approved byregulatory

authorities in USA and UK. International companies associated with this sectorhave stimulated,

assisted and spearheaded this dynamic development in the past 53 years andhelped to put India

on the pharmaceutical map of the world.The Indian Pharmaceutical sector is highly fragmented

with more than 20,000 registered units with severe price competition and government price

control. It has expandeddrastically in the last two decades. There are about 250 large units that

control 70 per cent of the market with market leader holding nearly 7 per cent of the market

share and about 8000 Small Scale Units together which form the core of the pharmaceutical

industry in India (including 5 Central Public Sector Units). These units produce the complete

range of pharmaceutical formulations, i.e., medicines ready for consumption by patients and

about 350 bulk drugs, i.e., chemicals having therapeutic value and used for production of

pharmaceutical formulations. Following the de-licensing of the pharmaceutical industry,

industrial licensing for most ofthe drugs and pharmaceutical products has been done away with.

Manufacturers are free to produce any drug duly approved by the Drug Control Authority.

Technologically strong andtotally self-reliant, the pharmaceutical industry in India has low costs

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of production, lowR&D costs, innovative scientific manpower, strength of national laboratories

and anincreasing balance of trade.

The total Indian production constitutes about 13 per cent of the world market in value terms and,

8 per cent in volume terms. The per capita consumption of drugs in India, stands at US$3, is

amongst the lowest in the world, as compared to Japan- US$412, Germany- US$222 and USA-

US$191.

1.2 Current Status

India's US$ 9.4 billion pharmaceutical industry is growing at the rate of 14 percent per year. It is

one of the largest and most advanced among the developing countries. The Indian

pharmaceutical industry can reach a market size of US$ 11.6 billion by 2009

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A beginning has been made with the signing of General Agreement on Tariffs and Trade in

January 2005 with which India began recognizing global patents. Soon after, the Indian

pharmacy market became a sought after destination for foreign players. Foreign direct

investment into the countrys pharmacy industry touched US$ 172 million during 2005-06

having grown at a CAGR of 62.6 per cent during the period beginning 2002-06. The sector

recorded strong growth in the second quarter ended September 2006, driven by launch of new

generic drugs with 180 days exclusivity period in the US market. The top ten pharmacy

companies reported an impressive 57 per cent growth in consolidated net profit at US$ 314.3

million, as against US$ 200.7 million in the same quarter of the previous year, while

consolidated net sales were up 51 per cent at US$ 1.7 billion.

There are 74 U.S. FDA-approved manufacturing facilities in India, more than in any other

country outside the U.S, and in 2005, almost 20 per cent of all Abbreviated New Drug

Applications (ANDA) to the FDA were filed by Indian companies. Growth in other fields

notwithstanding, generics are still a large part of the picture. London research company Global

Insight estimates that Indias share of the global generics market will have risen from 4 per cent

to 33 per cent by 2007. The focus of the Indian pharma companies is also shifting from process

improvisation 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.

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1.3 The Changing Prescription

As per WTO, from the year 2005, India granted product patent recognition to all new

chemical entities (NCEs) i.e., bulk drugs developed then onwards. This introduction of

product patent regime from January 2005 is leading into long-term growth for the future

which mandated patent protection on both products and processes for a period of 20 years.

Under this new law, India will be forced to recognize not only new patents but also any

patents filed after January 1, 1995. Under changed environment, the industry is being forced

to adapt its business model to recent changes in the operating environment.

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Indian pharmaceutical industry is mounting up the value chain. From being a pure reverse

engineering industry focused on the domestic market, the industry is moving towards basic

research driven, export oriented global presence, providing wide range of value added quality

products and services, innovation, product life cycle management and enlarging their market

reach. The old and mature categories like anti-infectives, vitamins, analgesics are de-growing

while, new lifestyle categories like Cardiovascular, Central Nervous System (CNS), Anti

Diabetic are expanding at double-digit growth rates. The Indian companies are putting their act

together to tap the generic drugs markets in the regulated high margin markets of the developed

countries. The US market remains to be the most lucrative market for the Indian companies led

by its market size and the intensity of blockbuster drugs going off patent. An estimated US$45

billion of drugs expected to go off patent by 2007 in US alone. The Indian pharmaceutical

industry is also getting increasinglyU.S. FDI compliant to harness the growth opportunities in

areas of contract manufacturingand research. Indian companies such as Ranbaxy, Sun Pharma,

and Dr. Reddy's areincreasingly focusing on tapping the U.S. generic market. Outsourcing in the

fields of R&D and manufacturing is the next best event in the pharmaceutical industry. Spiraling

cost, expiring patents, low R&D cost and market dynamics are driving the MNCs to outsource

both manufacturing and research activities. India with its apt chemistry skills and low cost

advantages, both in research and manufacturing coupled with skilled manpower will attract a lot

of business in the days to come.

The Indian Government's decision to allow 100 percent foreign direct investment into the drugs

and pharmaceutical industry is expected to aid the growth of contract research in the country.

MNCs in India is facing the problem of having a very high Drugs Price Control Order (DPCO)

coverage, weakening their bottom lines as well as hindering their growth through the launch of

new products. DPCO coverage is expected to be diluted further in the near future benefiting the

MNCs.

1.4 Emerging Trend

The Indian pharmaceutical industry is now discovering new opportunities of growth in clinical

research, contract research, manufacturing and innovation opportunities. This path can lead the

Indian pharmaceutical industry to huge success endeavors.

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Research & Development

Research & Development is the key to the future of pharmaceutical industry. The pharmaceutical

advances for considerable improvement in life expectancy and health all over the world are the

result of a steadily increasing investment in research. There is considerable scope for

collaborative R & D in India. India can offer several strengths to the international R & D

community. These strengths relate to availability of excellent scientific talents who can develop

combinatorial chemistry, new synthetic molecules and plant derived candidate drug

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The R & D expenditure by the Indian pharmaceutical industry is around 1.9 per cent of the

industrys turnover, which is a little low as compared to foreign research based pharmaceutical

companies. However, now that India is entering into the Patent protection area, many companies

are spending relatively more on R & D. When it comes to clinical evaluation at the time of

multi-center trials, India is providing a strong base considering the real availability of clinical

materials in diverse therapeutic areas.

According to a survey by the Pharmaceutical Outsourcing Management Association and

Bio/Pharmaceutical Outsourcing Report, pharmaceutical companies are utilizing substantially

the services of Contract Research Organizations (CROs). Indian Pharmaceutical Industry,

with its rich scientific talents, provides cost-effective clinical trial research. It has an excellent

record of development of improved, cost-beneficial chemical syntheses for various drug

molecules. Some MNCs are already sourcing these services from their Indian affiliates.

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Product development

For years, firms have made their ways into the global market by researching generic competitors

to patented drugs and following up with litigation to challenge the patent. This approach remains

untouched by the new patent regime and looks to increase in the future.

However, those that can afford it have set their sights on an even higher goal: new molecule

discovery. Although the initial investment is huge, companies are lured by thepromise of hefty

profit margins and the recognition as a legitimate competitor in the globalindustry.

Small and medium enterprises

The excise structure changed so that companies now have to pay a 16 per cent tax on the

maximum retail price of their products, as opposed to on the ex-factory price. Consequently,

larger companies are cutting back on outsourcing and what business is left is shifting to

companies with facilities in the four tax-free states - Himachal Pradesh, Jammu & Kashmir,

Uttaranchal and Jharkhand. SMEs have been finding it difficult to find the funds to upgrade their

manufacturing plants, resulting in the closure of many facilities. In terms of the global market,

India currently holds a modest 1-2 per cent share, but it has been growing at approximately 10

per cent per year. India gained its foothold on the global scene with its innovatively-engineered

generic drugs and active pharmaceutical ingredients (API), and it is now seeking to become a

major player in outsourced clinical research as well as contract manufacturing and research.

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1.5 Domestic Demand

The industry has enormous growth potential. Factors listed below determine the rising demand

for pharmaceuticals.

The growing population of over of a billion

Increasing income

Demand for quality healthcare service

Changing lifestyle has led to change in disease patterns, and increased demand for new

medicines to combat lifestyle related diseases More than 85 per cent of the formulations

produced in the country are sold in the domestic market. India is largely self-sufficient in case of

formulations. Some life saving, new generation under-patent formulations continue to be

imported, especially by MNCs, which then market them in India. Overall, the size of the

domestic formulations market is around Rs160 billion and it is growing at 10 per cent per

annum.

Demand for drugs for treatment of lifestyle-related diseases such as diabetes, cardiovascular

diseases, and central nervous system are on the increase. There are around 700,000 new cases of

cancer each year and total of around 2.5 million cases. It is estimated that there are around 40

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million people in India with diabetes and the number is rising, 5.1 million HIV/AIDS patients,

and 14 million tuberculosis cases. According to industry reports, while the Indian pharmaceutical

industry witnessed a growth of 7 percent, the cardio-vascular segment recorded 15 to 17 percent

growth and anti-diabetes segment of over 10-12 percent growth.

Historically, the low cost of domestically produced drugs together with government controlled

prices, and the absence of patent regulations had made the market less attractive

1.6 Exports

Over 60 per cent of Indias bulk drug production is exported. Indias pharmaceutical exports are

to the tune of Rs87 billion, of which formulations contribute nearly 55 per cent and the rest 45

per cent comes from bulk drugs. In financial year 2005, exports grew by 21 per cent. The Indian

pharmaceutical market has been forecasted to grow to as much as US$ 25 billion by 2010 as perOrganization of Pharmaceutical Producers of India (OPPI) estimates. However, Espicoms

market projections forecast more modest but stable annual market growth of around 7.2 per cent,

putting the market at US$ 11.6 billion by 2009. Domestic pharmaceutical exports, growing at 30

per cent per annum, touched a new height of US$4.8 billion in the financial year 2006-07. The

Years exports will push the drug sectors contribution to Indias Forx earnings to 7.75 per cent

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from the current 5 per cent. The growth in drug exports, despite the pressing generic competition

in the global markets, is attributed to increased Abbreviated New Drug Applications (ANDAs)

approvals in the US market and contribution from unconventional markets in Latin America,

Australia and the emerging markets in the Middle East and African Region. The export revenue

now contributes almost half of the total revenue for the top three pharmaceutical majors: Dr

Reddys, Ranbaxy and Cipla. The other major exporters are Wockhardt Limited, Sun

Pharmaceutical Industries Ltd. and Lupin Laboratories. The formulations and exports are largely

to developing nations in CIS, South East Asia, Africa and Latin America . In the last 3 years

generic exports to developed countries have picked up. In the coming years, opening up of US

generics market and anti AIDS market in Africa will boost exports.

Revenue from Export

India accounts for less than two per cent of the world market for pharmaceuticals, with an

estimated market value of US$10.4 billion in 2007 at consumer prices, or around US$9 per

capita. India currently represents just U.S. $6 billion of the $550 billion global pharmaceutical

industry but its share is increasing at 10 percent a year, compared to 7 percent annual growth for

the world market overall. Also, while the Indian sector represents just 8 percent of the global

industry total by volume, putting it in fourth place worldwide, it accounts for 13 percent by

value, and its drug exports have been growing 30 percent annually. Cipla, Nicholas Piramal,

Ranbaxy, Zydus Cadila, Dr. Reddys are the few Indian pharmaceutical companies, which areknown at the global level due to their quality products. The Indian market for over-the-counter

medicines (OTCs) is worth about $940 million and is growing 20 percent a year, or double the

rate for prescription medicines. The industry's exports were worth more than $3.75 billion in

2004-05 and they have been growing at a compound annual rate of 22.7 percent over the last few

years, according to the government's draft National Pharmaceuticals Policy for 2006, published

in January 2006. The Policy estimates that, by the year 2010, the industry has the potential to

achieve $22.40 billion in formulations, with bulk drug production going up from $1.79 billion to

$5.60 billion.

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Indian exports are to more than 200 countries around the globe including highly regulate markets

of US, Europe, Japan and Australia. More than 400 Bulk Drugs and about 60,000 Formulations

(60 categories) are produced in India.

1.7 Import

Imports have registered a CAGR of only 2 per cent in the past 5 years. Import of bulk drugs have

showed down in the recent years

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1.8 Growth Drivers

Indias population is just over one billion at present and projected to rise to 1.6 billion by 2050

and India will become the worlds most populous country. It is estimated that by 2025, 189

million Indians will be 60 or older up from about 63 million in year 2004. This projection shows

the demand of pharmaceutical drugs will rise in coming years. The government had promised to

increase public expenditure on healthcare from 0.9 per cent of GDP in 1999 to 2 per cent of GDP

by 2010. India manufactures more than 96 generic group drugs. Indian government has framed a

favorable policy to boost foreign investment in the pharmaceutical sector. Tax holidays are

offered to industrial operations established in specified Special Economic Zone or under

developed areas, deduction of profits earned from exports, liberal depreciation allowances,

deduction of capital R & D expenditure; and relief on all contributions to approved domestic

research institutions are some examples. Foreign Direct Investment up to 100 per cent is

permitted through the automatic route and Automatic approval for Foreign Technology

Agreements also is available in the case of all bulk drugs cleared by Drug Controller General

(India), all their intermediates and formulations, except those restricted by the Government of

India.

India has excellent skilled and educated manpower. There are 115,000 scientists with theirmasters degrees and 12,000 with Ph.D. in chemistry alone pass out every year. Clinical trials

account for over 40 per cent of the costs of developing a new drug, and Rabo India Finance (a

subsidiary of the Netherlands based Rabo Bank) estimates that a standard drug could be tested in

India for as little as $ 90 million 60 per cent of the sum it would cost to test in the US.

Maximum US FDA approvals outside USA are with Indian Companies approx. 197.Largest

No. of US Drug Master Files (DMF) 213 (38 per cent of DMFs filed in First half of 2005 are

from India)

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1.9 Vision 2020

Responsibilities and Resources would make an important beginning in the transition of efficient

and effective use of pharmaceutical in building a prosperous and healthy India. In doing so,

following issues have been identified for realizing the Pharma Vision 2020.

The Indian pharmaceutical industry shall ensure that essential drugs at affordable prices are

available to the vast population of this sub-continent and also continue providing employment

for millions.

India shall implement all the rules and regulations, which guide, monitor and control the

activities of the providers of the healthcare system in the country and shall examine the way to

bring them up to international standards. The government should implement the

recommendations of Mashelkar committee and constitute the Central Drug Authority at the

earliest.

The basic course of education should be designed to ensure that the newly qualified pharmacist

has the necessary knowledge and skills to commence practicing competently in a variety of

settings including community and hospital pharmacy and the pharmaceutical industry.

Continuing professional development must then be a lifelong commitment for every practicing

pharmacist. Concept of National schools of pharmacy should be established to develop andintroduce model curriculum.

Pharmacists should become knowledgeable to participate in medication management and

outcome monitoring. Pharmacy profession should orient concept of pharmacy practice at

community and hospital pharmacies through appropriate training and compensation.

The pharmacy profession will make the clinical trial industry in India to grow to over a billion

dollars in the next five years and position itself as a destination of choice for CRO services by

way of strict implementation of patent laws, single window clearance of clinical trial protocols

by regulatory clearances and shall accord industry status to this sector.

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India will emerge as a major global player in the field of pharmaceuticals exports and as a

provider of quality medicines at low costs. It shall also emerge as a major player in the generic

drugs market in USA and Europe.

India shall attain new heights in herbal drugs research in shaping Indian Systems of Medicine

into a popular system of medicine of the future for holistic health care and ensuring health care

for all - especially for the welfare of the poor.

Indias Patents Act should ensure that it does not exceed the requirements of TRIPS, and that

prioritizes access to medicines and public health, while retaining the right to participate in the

compulsory license scenario. India should lead a movement of developing nations and create a

TRIPS south and G-20 alliance is a step in that direction. The Government should take

immediate steps to remove the anomalies in the Indian Pharmacopoeia Commission created by it,

and give necessary teeth to truly function as an independent and autonomous scientific body.

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CHALLENGES AND OPPORTUNITIES

2.1 Challenges

2.1.1 Underdeveloped new molecule discovery programThe main weakness of the industry is an underdeveloped new molecule discovery program. Even

after the increased investment, market leaders such as Ranbaxy and Dr. Reddys Laboratories

spent only 5-10 per cent of their revenues on R&D, lagging behind Western pharmaceuticals like

Pfizer, whose research budget last year was greater than the combined revenues of the entire

Indian pharmaceutical industry. This disparity is too great to be explained by cost diffentials, and

it comes when advances in genomics have made research equipment more expensive than ever.

The drug discovery process is further hindered by a dearth of qualified molecular biologists. Due

to the disconnect between curriculum and industry, pharmas in India also lack the academic

collaboration that is crucial to drug development in the West.

2.1.2 Hue & cry against exploitation

In clinical testing persons from developing countries will be used to generate data about possible

effects of a drug. A feeling of unrest among them or some section of society might develop that

we are being used as guinea pigs. It might lead to demonstrations or legislations which will

hamper the growth of industry.

2.1.3 Back lash against outsourcing

Similar to BPO there might be unrest in developed nations that outsourcing of clinical trials will

lead to job loss culminating into legislation banning the whole procedure.

.

2.1.4 IP leakage

IP leakage is one of the major concerns by companies outsourcing research work to India. So any

major incident of IP leakage by Indian company can taint the image of whole industry.

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2.1.5 Restricted items

There are a lot of items that are restricted under the EXIM policy from free trading. These items

are given under annexure 1. These restrictions are a weakness for the industry and hence pose to

be a threat for its development.

2.1.6 Reservation for small scale industries

Some drugs are reserved for exclusive manufacture by the small scale units. These are

Niacinamide, Paracetamol, Glycero Phosphates, Nicotinic Acid. The present investment limit for

units to qualify as a small scale unit is Rs. 30 million.

2.1.7 No brand value

India has a low beep on the radar screen of MNC drug companies as no potential clinical testing

has been ever outsourced to India. So we have a low brand value in global arena.

2.1.8 Safety concerns

With recent high profile product withdrawals, there are also concerns that regulatory agencies

will tighten up safety and efficacy testing requirements. A particular focus will be on the

application of pharmacogenomic techniques to improve safety profile, but the advent of such

techniques in the long run will improve industry productivity as more pharmacogenomic data iscollated.

2.1.9 Generic competition

Generic substitution is a policy for healthcare cost containment. National reimbursement and

insurance bodies are providing physicians and pharmacists with incentives for prescribing

cheaper generic drugs. There is increased pressure on revenues for pharmaceutical companies,

which have to concentrate on lifecycle management. The pharmaceutical industry will

experience a significant reduction in the revenues associated with their blockbuster products as

generic competition captures market share. As a result, given that R&D productivity is low and

the cost of developing new drugs at an all time high, the pharmaceutical industry faces

considerable hurdles with respect to maintaining revenue and earnings growth in the future.

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2.2 Opportunities

The Indian pharmaceutical industry has a lot of strengths and hence ample of opportunities. A

few important strengths are mentioned below.

2.2.1 Competent workforce

India has a pool of personnel with high managerial and technical competence as skilled

workforce. It has the largest English speaking population in the world. Professional services are

easily available.

2.2.2 Cost-effective Chemical Synthesis

Its track record of development, particularly in the area of improved cost-beneficial chemical

synthesis for various drug molecules is excellent. It provides a wide variety of bulk drugs and

exports sophisticated bulk drugs.

2.2.3 Legal & Financial Framework

India has a 53 year old democracy and hence has a solid legal framework and strong financial

markets. There is already an established international industry and business community.

2.2.4 Information & TechnologyIt has a good network of world-class educational institutions and established strengths in

Information Technology.

2.2.5 Globalization

The country is committed to a free market economy and globalization. It has a 70 million middle

class market, which is continuously growing.

2.2.6 Consolidation

The international pharmaceutical industry is finding great opportunities in India as the process of

consolidation has started taking place in India.

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2.2.7 Low priced products

The industry has thrived so far on reverse engineering skills exploiting the lack of process patent

in the country. This has resulted in the Indian pharmaceutical players offering their products at

some of the lowest prices in the world.

2.2.8 Quality assurance

The quality of the products is reflected in the fact that India has the highest number of

manufacturing plants approved by US FDA (61 plants), which is next only to that in the US.

2.2.9 Dominance in the market

Multinational companies have traditionally dominated the industry, which is another trend seeing

a reversal. Currently, it is the Indian companies which are dominating the marketplace with the

local players dominating a number of key therapeutic segments.

2.2.10 Self-reliance

Displayed by the production of 70 per cent of bulk drugs and almost the entire requirement of

formulations within the country.

2.2.11 Other Strengths

Low cost of production, Low R&D costs, Innovative Scientific manpower and Increasingbalance of trade in Pharma sector are also significant strengths of the Indian pharmaceutical

industry.

2.2.12 R&D

Both the Indian central and state governments have recognized R&D as an important driver in

the growth of their pharma businesses and conferred tax deductions for expenses related to

research and development. They have granted other concessions as well, such as reduced interest

rates for export financing and a cut in the number of drugs under price control.

Government support is not the only thing in Indian pharmas favor, though; companies also have

access to a highly-developed IT industry that can partner with them in new molecule discovery.

Two major institutes in pharmaceutical R&D are

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Primary Research Facility Mumbai

It gets technical and financial assistance from NIH, USA. It is established on 25 acres of land

with an Investment of US$ 16.7 million and has a facility to house 7500 breeding stocks. The

center has received US$ 3mn grant from US and US$ 4 million from ICMR.

International Animal Research Facility Hyderabad

Government of Andhra Pradesh has allotted 100 acres of land at the Biotech Park in Genome

Valley for International animal research facility. Department of Biotechnology has also provided

US$ 4.4 million for the same. The facility will be of international standards with animal testing

facilities, hi-tech equipment, a strong technical board and ethical committee.

2.2.13 Clinical Research- India, Most Significant Emerging Geography

Indian clinical research industry is estimated at over US$ 100 million. It complies with ICHGCP

protocols. It is a growing body of trained and experienced investigators. India is expected to

capture about 10 per cent of the global clinical research market by 2010.

Big Pharma organizations are contributing patients from India for multicentric global trials for

FDA/EMEA submissions. Seven of the top 10 global CROs have a presence in India. The above

mentioned advantages arer an asset and have strengthened the Indian pharmaceutical industry,

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thus generating a great deal of opportunities for the sector to flourish. The major opportunities

that the industry enjoys today are as under.

2.2.14 Labor force

With one of the largest and most genetically diverse populations in any single country, India can

recruit for clinical trials more quickly and perform them more cheaply than countries in the

West.

2.2.15 The Indian Generics market

The Indian generics market is witnessing rapid growth opening up immense opportunities for

firms. This is further triggered by the fact that generics worth over $40 billion are going off

patent in the coming few years which is close to 15 per cent of the total prescription market of

the US. The Indian pharmaceutical companies have been doing extremely well in developed

markets such as US and Europe, notable among these being Ranbaxy, Dr. Reddy's Labs,

Wockhardt, Cipla, Nicholas Piramal and Lupin. The companies have their strategies in place to

leverage opportunities and appropriate values existing in formulations, bulk drugs, generics,

Novel Drug Delivery Systems, New Chemical Entities, Biotechnology etc.

2.2.16 Smaller bio tech firms

With pharmaceutical companies struggling to maintain R&D productivity, biotechnologycompanies present opportunities to enhance product pipelines. Increasing convergence of the

pharmaceutical and biotechnology sectors was observed during 2004. The demand for

biopharmaceuticals is encouraging pharmaceutical companies to invest in smaller biotech firms.

2.2.17 Ageing and obese population

Healthcare needs will increase and drugs will be used for longer. For instance, an ageing global

population is poised to drive pharmaceutical drugs for indications such as Alzheimers disease.

Drugs that address rising multifactorial disorders such as cancer as well as lifestyle disorders

such as obesity are also likely to experience strong revenue growth.

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4.3 Future Outlook

Indian companies are climbing the value chain by moving to developed markets and from bulk

drugs to formulation exports. As a result, Indian companies are expected to produce six of the

top 10 drugs that are scheduled to lose patent protection over the next five years. Indian

companies are targeting opportunities rising in the regulated and unregulated markets. Research

focus of large companies has shifted towards discovery of New Chemical Entities keeping in

view the product patent era commenced from 1st Jan., 2005. The big players will speed up the

launch of new products and will look at brand acquisition from other relatively smaller players.

The latter will either close down or be taken over by larger players. Hence the currently

fragmented industry may consolidate further. The Indian Pharma sector is growing

exponentially. Its value in 2004 was US$ 6 billion and US$ 10 billion by the end of year 2006.

According to the Mc Kinsey study Indian Pharma industry is poised to grow to US$ 25 billion

with market capitalization of almost us$ 150 billion from the current $US 6 billion generic based

drug industry.

With the global players extending their bid to tap Indias manufacturing prowess, contract

manufacturing is estimated to generate US$ 1 billion in revenue in 2010. The growth is likely to

be driven by increasing outsourcing of late-stage and off-patent molecules by big-pharmaceutical

organisations. On-patent molecules in highly competitive therapies e.g., proton pump inhibitors(PPI) also being outsourced.

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3. COMPANY ANALYSISINTRODUCTION

After studying the economic and industry analysis of pharmaceuticals industry five major players

in this sector in India were identified. The basis of selecting the five companies were their

respective market share, their scale of operations and all companies selected are listed in the

India stock markets from last ten years. It was important to take all the listed entities as in

company analysis valuation has been done to arrive at the intrinsic value per share of each

company. For doing this it was necessary to have a parameter with which the intrinsic value per

share of the company can be compared. The following five companies were chosen for company

analysis.

Ranbaxy Pharmaceuticals Ltd. Aventis Cipla Pfizer Cadila Healthcare

VALUATION METHOD UNDERTAKEN

For the purpose of valuation of the above five companies discounted cash flow method was used.

The DCF analysis is based on the premise that ownership is essentially a claim on the cash flowsgenerated by a firm's assets .The method entails estimating the unlevered free cash flows

(FCFF) available to all investors and discounting these cash flows back to the present using anappropriate cost of capital to arrive at a present value for the assets (Enterprise Value).The company's operations value (prior to adjustments for non-operating assets) can be brokendown into 2 components:

PV of free cash flows up to a cut point for terminal value calculation PV of terminal valueThe discount rate r is the Weighted Average Cost of Capital (WACC) which reflects therequired returns by both debt and equity investors for investments with the same risk profile.

DCF Analysis: The Process

Step1

Projections: Project the operating results and free cash flows of a business over the forecastperiod.

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Assumptions and methods used:

For the valuation of all the companies following assumptions and methods were used.

Performance of the companies is forecasted for next 5 years on the basis of data taken forthe last 8 9 years.

The balance sheet and the profit and loss statements of the companies are forecasted onthe basis of past historical trend and with the help of excel and moving average method.

We have started with the forecast of the TOP LINE i.e. the net sales for each company.

After 2009 the industry is expected to grow in the range of 12 15% in the next fiveyears therefore the growth in revenues has been taken on this basis.

For the purpose of forecasting the capital expenditures and working capital requirementsof the companies, the annual reports were studied of all the companies which gave details

of how much the company is planning to expand in the coming years and on the basis of

which it was decided what would be the future capital expenditure and working capital

requirements of the company.

The growth rates after 2014 i.e. the terminal value for different companies has beenarrived after studying the patterns of their cash flows, their expected expenditure in the

coming years and the amount of their debt holdings.

Risk free rate has been taken 8% 5 year government security rate and for the purpose ofcalculating the risk premium the 3 years effective returns of the Indian stock market

has been taken.

Tax rate charged to different companies varies as per the tax holidays and other subsidiesprovided to them by the Indian Government.

The companies which are debt free and are not planning to raise debt in future, their freecash flow to equity has been assumed to be free cash flow to firm.

The data is available till December 2009 and march 2010 for all the five companies butthe intrinsic value per share will be compared with the closing prices of stocks of these

companies on 3

rd

September 2010, so as to determine whether the stock is undervalued orovervalued.

Recommendations will only include whether the stock of the company is worthpurchasing as of now and what is its long term prospects.

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RANBAXY PHARMACEUTICALS LIMITED:

FCFF

Head/item 2009 2010 2011 2012 2013 2014

PAT 573.19 405.69 423.80 465.28 615.82 682.59

29.22 4.46 9.78

32.35 10.84

INTEREST(1t) 26.05 70.70 107.00 91.2 96.45 123.13

171.41 51.33 14.76 5.76 27.65

WorkingCapitalchanges 273.39 1246.59 59.00 217.39 2.93 126.17

555.97 104.73 268.43 101.35 4392.715

CAPEX 136.72 29.69 169.79 193.098 385.47 455.84

78.27 471.73 13.72 99.62 18.25

DEP 97.45 101.34 105.40 109.61 114.00 118.56

4 4 4 4 4

FREECASHFLOW 833.36 698.53 525.42 690.40 437.87 594.62

WACC 13.30% g 9.50%

PVofFreeCashFlow $851.67

terminalvalue 17134.61

PVofTerminalValue 9177.50

PresentValue(FCFF)OFFIRM 10,029.18

PredictedValuepershare 238.55

FCFE

Head/item

2010 2011 2012 2013

2014D/E 1.50321034 1.6232515 1.58733805 1.53292714 1.54102821

ebit(netincome) 405.699622 423.807417 465.284012 615.828579 682.59368

capexdep 71.65 64.39276 83.4802664 271.476396 337.278453

(1d)(capexdep) 36.055021 40.132884 49.031137 144.67714 182.47716

(1d)*workingcap

changes627.29785 36.7758223 127.685768

1.566479

68.2666808

FCFE 996.942449 427.164479 386.629381 762.072197 796.804157

TV 22960.5408

pvoffcfe 2,367.75 PVOFTV 12297.9455

persharevalueOFFCFE 348.84 TOTALVALUEOFEQUITY $14,665.69

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Interpretation:

The intrinsic value per share for the company comes out to be Rs 238.55 per share as per FCFF

and as per FCFE it comes out to be Rs. 348.84. Closing price of the stock on NSE was Rs 514.10

on 3rd September 2010, hence we can see that the stock is overvalued by 47.37%. currently the

debt holding of the firm is Rs 3348.8 crs and huge part of it is due in 2011 therefore in the short

to medium term we would recommend to not to purchase the stock as there would be pressure

on the cash flows of the firm but it is a good investment for the long term as the company is in

aggressive expansion mode which are highly expected to produce good results in the future.

CADILA HEALTHCARE

FCFF

Head/item 2009 2010 2011 2012 2013 2014

PAT 265.9 266.55 283.31 113.50 124.92 147.87

0.24 6.28 59.93 10.05 18.37

INTEREST(LESS) 65.61 41.40 49.28 57.21 69.32 74.77

36.89 19.02 16.10 21.15 7.85

WorkingCapitalchanges 88.5 52.67 45.26 50.71 48.76 37.22

159.51 185.92 12.05 3.84 23.66

CAPEX 53 3.73 72.03 79.23 169.57 195.01

92.95 1828.18 10 114.00 15

DEP 82.6 64.18 70.61 77.66 89.31 102.71

22.28 10 10 15 15

FREECASHFLOW 272.61 421.08 285.90 118.44 65.22 93.12

WACC 8.00% G 7.00%

PVofFreeCashFlow 840.35



PresentValue(FCFF)OFFIRM 7,621.62

PredictedValue

per

share

558.36

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FCFE

Head/item 2010 2011 2012 2013 2014

D/E 1.10 1.10 1.11 1.14 1.13

netincome 266.55 283.31 113.50 124.92 147.87

capexdep 60.45 1.42 1.56 80.25 92.29

(1d)(capexdep) 6.32 0.15 0.18 11.30 12.18

(1d)*workingcapchanges 5.51 4.95 5.99 6.86 4.91

FCFE 254.71 288.41 119.69 143.09 164.97

TV 17652.07

pvoffcfe 795.59 PVOFTV 12013.70

persharevalueOFFCFE 304.68

TOTALVALUEOF

EQUITY 12,809.30

Interpretation:


and as per FCFE it comes out to be Rs. 304.68. Closing price of the stock on NSE was Rs 633.15

as on 3rd September 2010, hence we can see that the stock is overvalued by 108%. And the

market value one year before was around Rs. 315. Thus, we can see that the stock prices have

moved by almost 100% in the last one year, showing the effect of good growth in the market for

this sector. Looking at the market conditions, the stock seems to be highly inflated and we

recommend a purchase on the stock when it comes down to the level of Rs. 300- Rs 320.

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AVENTIS

FCFF

2009 2010 2011 2012 2013 2014

PAT 157.41 198.16 232.79 232.36 256.83 284.26

DEPRECIATION 11.59 12.05 12.53 13.03 13.55 14.1

CAPEX 2.06 4.67 5.02 1.71 1.78 1.85

WCCHANGES 125.44 56.44 122.92 93.77 117.03 93.67

CASHFLOW 41.5 149.10 117.37 149.90 151.56 202.83

PV 135.54 97 112.62 103.52 125.94

COSTOFCAPITAL 10%

BETA 0.37

RISKFREERETURN 8%

RISKPREMIUM 5%

PVOFCASHFLOW 574.64

TERMINALVALUE 5375.14

PVOFTRMNLVALUE 3337.53

FREECASHFLOWTOEQUITY 3912.18

PREDICTEDVALUEPERSHARE 1698.65

MARKETVALUE/SHARE(31STDEC2009) 1699

MARKETVALUE/SHARE(31AUGUST

2009)

1801

Interpretation:


and the value for FCFE is same as FCFF because the firm is debt free. Closing price of the stock

on NSE was Rs 1801 as on 3rd September 2010, hence we can see that the stock is overvalued by

only 6%. Since the firm is absolutely debt free it has not much pressure on its cash flows. The

firm has been consistently performing well from the last few years and the future prospect also

looks good.

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PFIZER:

FCFF

Head/item 2010 2011 2012 2013 2014

PAT 194.99 228.67 225.23 252.39 270.08

INTEREST(1T) 0 0 0 0 0

Working

Capital

changes

302.97 98.19 38.37

96.69 7.52CAPEX 2.96 13.03 6.51 25.37 4.97

DEP 6.42 6.68 6.95 7.22 7.51

FREECASHFLOW 501.43 124.12 200.33 137.55 265.10

COSTOFCAPITAL 11.50% G 11.00%

PVofFreeCashFlow $936.91



PresentValue(FCFE)OF

FIRM Rs35,08

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