CRISIL Ratings Indian Pharma Booklet Apr10

8/20/2019 CRISIL Ratings Indian Pharma Booklet Apr10

1/64

April 2010

Sound Fundamentals DespiteIncreasing ChallengesSound Fundamentals DespiteIncreasing Challenges


2/64

MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER, CRISIL

& REGION HEAD, SOUTH ASIA, STANDARD & POOR'S

Roopa Kudva

SENIOR DIRECTOR

Raman Uberoi

CORPORATE AND GOVERNMENT RATINGS

Pawan Agrawal Director [email protected]

CORPORATE SECTOR RATINGS

Sudip Sural Head [email protected]

Aparna Karnik Sr. Manager [email protected]

Ateesh Chaudhary Manager [email protected]

Manita Agarwal Analyst [email protected]

Saurabh Piplani [email protected]

T K Mahesh [email protected]

BUSINESS DEVELOPMENT

Maya Vengurlekar Head [email protected]

Sachin Gupta Head [email protected] Chakraborti Head [email protected]


3/64

ForewordCRISIL is pleased to present its publication, Pharma Sector Outlook: Sound Fundamentals Despite

Increasing Challenges. This publication is part of CRISIL's endeavour to provide market participants with CRISIL's

credit outlook for India's pharmaceuticals (pharma) industry. This publication also includes three additional

commentaries on the key trends that CRISIL believes will shape the future of the Indian pharma industry, and a list of its

outstanding ratings, along with company-specific rating drivers.

CRISIL has rated 100 companies, spanning the breadth of the Indian pharma industry. The rated entities include large

players as well as small and medium enterprises, with operations in the domestic market, and the regulated and semi-

regulated markets. These companies manufacture formulations, active pharmaceutical ingredients, and intermediates,

and are also engaged in contract research and manufacturing.

CRISIL believes that the global generics markets continue to offer sizeable growth opportunities to Indian companies.

However, the risks associated with these markets are increasing as healthcare regulations in these markets are

evolving; this is expected to pose a challenge for Indian players. As Indian pharma players derive more than half their

total revenues from global markets and because these revenues are expected to increase faster than revenues from the

domestic market, the need to manage risks associated with global markets prudently has never been more

pronounced.

Contract manufacturing also provides Indian players the opportunity to participate in the global generics growth story,

while limiting exposure to some of the risks associated with global markets. India, with its low cost structure and

abundant talent pool, has an advantage as a manufacturing hub for the global pharma industry. Several global

pharma majors are gradually increasing their presence in India with a view to gain cost advantages as well as to gain

access to the domestic market. CRISIL believes that this trend will accelerate.

The domestic pharma market, although competitive, has remained relatively stable and has strongly supported the

credit quality of players by balancing exposure to risks in the global markets. The domestic market allows stability in

cash flows and provides the necessary scale for pharma companies. Local players have a competitive edge over

multinational companies in the domestic formulations market, despite the implementation of the product patent

regime in 2005.

Indian companies are investing conservatively in new drug research and are curbing ambitions in research and

development (R&D) because of the high resource intensity and longer timeframes for returns in this segment. However,

several Indian companies are undertaking research for global innovator pharma companies on a fixed-fee basis. The

nascent contract research outsourcing sector in India is expected to grow rapidly.

We hope this publication provides useful analytical insights into the Indian pharma sector. We welcome your feedback.

Pawan Agrawal

Director – Corporate & Government Ratings

[email protected]

April 2010


4/64

Contents

Pharma sector credit outlook stable despite increasing risks

Regulated markets: Increasing challenges for Indian players

Attractive opportunities in contract manufacturing for Indianpharma industry

Home-grown players retain edge in domestic pharma market

Rating distribution and brief profile of CRISIL rated pharmaceuticalcompanies

Glossary of terms

Rating changes over the 12 months through January, 2010

01

07

11

13

16

57

58


5/64

1CRISIL's ratings on most large and mid-sized Indian

pharmaceutical (pharma) companies have remained

stable in the recent past, despite a significant increase in

the companies' business risks. While the increase in

business risks has been largely on account of the

companies' rapid global expansions, their ratings have

remained stable, backed by strong domestic operations,

and conservative financial policies. The credit risk

profiles of some domestic players have also been

supported by strong parentage by global pharma majorslooking to increase their presence in India. Nevertheless,

there have been a few rating downgrades in the sector

in recent months—of companies that have faced

refinancing pressure in repayment of substantial debt

contracted to fund expansions.

India's pharma players continue to expand globally, to

capitalise on the large generics opportunity in the

regulated and semi-regulated markets. The regulated

generics markets have witnessed severe pricing pressure

as a result of government-led cost-containment

measures, and intense competition. Moreover, the

regulatory environment in the generics market has

become increasingly stringent, with players'

manufacturing processes coming under greater scrutiny,

and the sale of some products being banned. Players

operating in the semi-regulated markets, on the other

hand, have been exposed to risks such as sharp currency

movements, stretched working capital cycles, and

higher incidence of bad debt.

Going forward, India's pharma players will remain

focused on the international markets to drive growth,

despite the associated risks and challenges. Hence, the

proportion of international revenues in the overallrevenue mix of the players is expected to increase.

However, CRISIL believes that pharma companies will

contain risks from international business by adopting a

mix of the following strategies, and thus maintain stable

ratings:

• Seeking collaborations with strong global players

• Focusing on contract manufacturing options that

lend stability to revenues

• Maintaining healthy financial risk profiles and

strengthening risk management policies

• Curbing ambitions in research and development

(R&D) to avoid drain on resources

• Precluding costly litigations: by reducing focus on

launches of blockbuster drugs 'at risk', since these

invite litigations from innovators

Business risks on the ascendant

Over the past few years, India's pharma companies havefaced increasing business risks because of their

expanding global operations. These players have

aggressively scaled up operations in the regulated and

semi-regulated generics markets through a spate of

debt-funded acquisitions. Graphs 1 & 2 indicate the

increasing revenues of large and mid-sized CRISIL-rated

players from the international markets. Graph 1 shows

that the international markets contributed around 60

per cent to these players' overall revenues in 2008-09

(refers to financial year, April 1 to March 31). In addition,

while revenues from the global markets increased at a

compound annual growth rate (CAGR) of 39 per cent

between 2005-06 and 2008-09, those from the

domestic market grew at a CAGR of 21 per cent.

As Graph 2 indicates, the global markets have

contributed more than 75 per cent to the overall

revenues of some large companies such as Dr. Reddy's

Laboratories Ltd (DRL), Ranbaxy Laboratories Ltd

(Ranbaxy), and Matrix Laboratories Ltd (Matrix Labs).

Graph 1: Shift in revenue mix of large and mid-

sized CRISIL-rated players

(Source: Annual reports of players, and CRISIL estimates)

243.8

152.2

90.086.6

2008-092005-06

Domestic Overseas

300.0

250.0

200.0

150.0

100.0

50.0

0.0

R s . B i l l i o n

Pharma sector credit outlook stable despiteincreasing risks

1 Pharma companies with annual revenues of more than Rs.5 billion

Aparna Karnik Senior Manager, Corporate Sector Ratings

Email: [email protected]: 022- 3342 3456


6/64

0702

India's pharma players have entered the international

generics market to capitalise on the significant

opportunities it offers, given the large market size (the

global generics market was estimated at USD90 billion

in 2008, while the domestic formulations market was

estimated at USD6-7 billion) and imminent substitution

of drugs accounting for annual revenues of more than

USD100 billion with low-cost generic versions following

patent expiries over the next three years (refer to Graph3).

Key business segments and their risk profiles

CRISIL believes that the different markets and segments

within the pharma industry have dissimilar risk

characteristics (as Table 1 indicates). The international

generics markets, for instance, pose higher risks for

India's pharma players than the domestic market .

(Source: CRISIL estimates)

(Source: Annual reports of players)

Graph 2: Estimated revenue from international markets for large and mid-sized companies in 2008-09

Graph 3: Global generics opportunity: Regulated

markets account for more than 70 per cent of the

total market

B i l l i o n U S D

3346

28

364

623

41

0

20

40

60

80

100

120

140

2008 E 2013 P

ROW Japan Europe North America

Regulated generics markets

(Refer to commentary 'Regulated Markets - Increasing

challenges for Indian players')

Regulated generics markets such as the US, Europe, and

Japan comprise more than 70 per cent of the global

generics markets by value, and contribute around 40 per

cent to the revenues of large and mid-sized CRISIL-rated

Indian pharma companies. These markets are highlycommoditised; the large number of generics players in

these markets limits their pricing flexibility. On account

of the competition over a period of time, drug prices fall

by up to 90 per cent after the patent of the innovator

drug expires. Hence, the generic drugs market accounts

for about 50 per cent of the market by volume, but only

around 10 per cent by value. This leads to volatility in

revenues and profit margins for India's pharma players.

Generics manufacturers launching products in

regulated markets face litigation risks in case their

products are perceived as infringing upon the patents

held by innovator drug manufacturers—this leads tohigh legal costs for the former. Regulatory norms are

very stringent in the regulated markets: quality issues

can lead to high reputation risks for players. The key

buyers and decision makers in these markets are few in

number, and consolidated, thereby skewing the

purchasing power in their own favour. Typically,

decision makers are few, and consist of large public and

private health insurance funds, since these markets have

a wide health insurance coverage and social security net.

Buyers such as large retail chains are also highly

consolidated.

D r . R e

d d y ’ s L a b o r a t o r i e s L t d .

R a n b a x y L a b o r a t o t i e s L t d .

M

a t r i x L a b o r a t o r i e s L t d .

W o c k h a r d L t d .

B i o c o n L t d .

J B C h e m i c a l s & P h a r m a c e u t i c a l s

L t d .

G l e n m a r k P h a r m a c e u t i c a l s L t d .

S u n P h a

r m a c e u t i c a l s I n d u s t r i e s

L t d .

I p c a L a b o r a t o r i e s L t d .

M a n e e s

h P h a r m a c e u t i c a l s L t d .

C a d i l a H e a l t h c a r e L t d .

A l e m b i c L t d .

U S V L t d .

A

l k e m L a b o r a t o r i e s L t d .

N o v a r t i s I n d i a L t d .

M i c r o L a b s L t d .

P f i z e r L t d .

M a c L e o d

s P h a r m a c e u t i c a l s L t d .

86%83%

79%

73% 73%68%

66%

53% 53% 52%

44%40%

35%

30%

20%

0% 0%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

8%


7/64

B r a n d e d m a r k e t , h i g h e r p r i c e s t a b i l i t y

F r a g m e n t e d b u y e r b a s e , b e t t e r p r i c i n g

p o w e r

L o w e r r e g u l a t o r y r e q u i r e m e n t s

H i g h g r o w t h m a r k e t

E x i s t e n c e o f s t r o n g l o c a l r e l a t i o n s h i p s

a n d n e t w o r k s

L i m i t e d

c o m p e t i t i o n

f r o m

m u l t i -

n a t i o n a l c o m p a n i e s ( M N C s )

S t a b l e

r e v e n u e s , a l b e i t w i t h

l o w

p r o f i t a b i l i t y m a r g i n s

L a r g e o p p o r t u n i t y , a s g l o b a l p h a r m a

m a j o r s , w h i c h f a c e i n c r e a s i n g p r e s s

u r e

o n m a r g i n s , l o o k t o o u t s o u r c e t o l o w -

c o s t d e s t i n a t i o n s s u c h a s I n d i a

I n h e r e n t a d v a n t a g e f o r I n d i a , a s l o w -

c o s t m a n u f a c t u r i n g i s a s t r e n g t h

f o r

I n d i a n p l a y e r s

I t i s c u m b e r s o m e f o r t h e c l i e n t t o s

h i f t

f r o m

a n

a p p r o v e d

v e n d o r , d u e

t o

r e g u l a t o r y r e q u i r e m e n t s , w h i c h a c t a s

a n e x i t b a r r i e r

L i t i g a t i o n r i s k s , m a r k e t i n g c o s t s

a r e

b o r n e b y t h e c l i e n t

B r a n d e d m a r k e t , h i g h e r p r i c e s

t a b i l i t y

F r a g m e n t e d b u y e r b a s e , b e t t e

r p r i c i n g

p o w e r

L o w e r r e g u l a t o r y r e q u i r e m e n t s

H i g h e r g r o w t h m a r k e t

H i g h g r o w t h a n d u p s i d e

p o t e n t i a l d u e

t o

u p c o m i n g

p a t e n t

e x p i r i e s

a n d

i n c r e a s i n g

s u b s t i t u t i o n

o f i n n o v a t o r

d r u g s w i t h g e n e r i c s

I n t e n s e

c o m p e t i t i o n , w i t h

l a r g e

n u m b e r o f p l a y e r s

H i g h i n v e s t m e n t s i n b r a n d b u i l d i n g

P r e s s u r e o n m a r g i n s a s p r i c e e r o s i o n

s i n

t h e e n d p r o d u c t i s p a s s e d o n t o

t h e

c o n t r a c t m a n u f a c t u r e r

H i g h e r d e p e n d e n c e o n a f e w l a

r g e

c l i e n t s

H i g h

w o r k i n g

c a p i t a l r e q u i r e m e n t s ,

l o n g p a y m e n t c y c l e s

R i s k o f b a d d e b t s

S h a r p c u r r e n c y f l u c t u a t i o n s

I n t e n s e c o m p e t i t i o n

L a c k

o f l o c a l r e l a t i o n s h

i p s

a n d

n e t w o r k s . P l a y e r s n e e d t o i n v e s t l a r g e

s u m s

o n

m a r k e t i n g

a n d

b r a n d

b u i l d i n g

C o m m o d i t i s e d m a r k e t s , l o w

p r o d u c t

d i f f e r e n t i a t i o n

N o

p r i c i n g

f l e x i b i l i t y ,

s h a r p

p r i c e

e r o s i o n s

I n c r e a s i n g c o n c e n t r a t i o n

i n b u y e r b a s e ;

a f e w

l a r g e d e c i s i o n m

a k e r s , n a m e l y

g o v e r n m e n t

h e

a l t h

c a r e

p r o g r a m s / l a r g e h e a l t h i n

s u r a n c e f u n d s

d i c t a t e p r i c i n g

G o v e r n m e n t

f o c u s

o n

c o s t -

c o n t a i n m e n t d r i v e s p r i c e

s d o w n

G r e a t e r r e g u l a t o r y r e q u i r e m e n t s , h i g h

c a p i t a l i n t e n s i t y

H i g h l i t i g a t i o n r i s k , i n n

o v a t o r s t r y t o

p r o t e c t p a t e n t s f o r b l o c k b u s t e r d r u g s ;

w e l l - e s t a b l i s h e d p a t e n t l a w s

L a c k

o f l o c a l r e l a t i o n s h i p s

a n d

n e t w o r k s . P l a y e r s n e e d t o i n v e s t l a r g e

s u m s o n m a r k e t i n g a n d d

i s t r i b u t i o n

I n t e n s e

c o m p e t i t i o n

f r o m

g l o b a l

g e n e r i c s g i a n t s w i t h d e e p p o c k e t s

D o m e s t i c m a r k e t

C o n t r a c t m a n u f a c t u r i n g

S e m i - r e g u l a t e d g e n e r i c s m

a r k e t s

R e g u l a t e d g e n e r i c s

m a r k e t s

T a b l e 1 : K e y b u s i n e s s s e g

m e n t s a n d h o w t h e y f a r e o n

r i s k

L o

w e r R i s k

H i g h e r R i s k

7


8/64

04

Over the past few years, pricing pressures have

intensified for India's generics players in regulated

markets. This is because governments have introduced

stringent cost-containment measures to control

unsustainably high healthcare costs (see Box 1).

Box 1: Impact of cost-containment measures

by the governments in Europe

DRL and Matrix Labs made large acquisitions in

Germany (Betapharm Arzneimittel GmbH) and

Belgium (Docpharma), respectively. The

performances of the acquired entities deteriorated

significantly because of regulatory changes in the

markets where they operate. Both DRL and Matrix

Labs subsequently made large write-offs to account

for the reduced value of their investments, resulting

in reported losses in 2008-09 and 2007-08,respectively.

Large retailers and drug store chains also exert pressure

on prices, constraining the profitability of drug

manufacturers (see Box 2).

Box 2: Impact of generics drug price

competition in US

In 2006, large retailers such as Wal-Mart Stores, Inc.,

Kmart Corp, and Target Corp began offering

commonly prescribed generic drugs at USD4-5 per

month, as a strategy to attract shoppers to their

stores. By 2008, the large drug store chains were

forced to respond and launch their own low-cost

generics drugs. Pricing pressures have pushed sales

of generic drugs in the US down by 2.7 per cent in

the 12 months ended September 30, 2008, even

though the number of generic prescriptions filled

increased by 5.4 per cent during the period (Source:

IMS Health).

Increasing competition from the rapidly consolidating

global generics giants has resulted in these companies

clearly superseding their small and mid-sized Indian

counterparts in terms of negotiating power over

product pricing. Market regulators such as the US Food

and Drug Administration (FDA) have tightened their

scrutiny of issues relating to quality and compliance with

Good Manufacturing Practices (GMP). Several Indian

companies have faced actions ranging from warning

letters, to ban on manufacture of drugs (see Box 3).

Box 3: Impact of stringent US FDA action on

players

The US FDA has banned some of Ranbaxy's drugs in

the US because of alleged manufacturing norm

violations and falsification of data and results of

tests held at the company's plants in India.

Ranbaxy's US sales declined by 53 per cent in the

third quarter of 2009 (refers to calendar year,

January 1 to December 31) over the corresponding

quarter of the previous year. Also, inventory write-

offs resulted in a decline in profits for the company

in preceding quarters. Sun Pharmaceuticals

Industries Ltd's (Sun Pharma's) subsidiary in Detroit,

Caraco Pharmaceutical Laboratories Ltd (Caraco),

was found to be violating Current Good

Manufacturing Practices (cGMP) norms; US FDA

seized Caraco's inventory in June 2009 from the

manufacturing unit premises. As a result, Sun

Pharma's export sales declined by about 12 per cent

in the first half of 2009-10, over the corresponding

period in the previous year.

Semi-regulated generics markets

Semi-regulated markets such as Russia, the

Commonwealth of Independent States (CIS), Latin

America, Africa, and South East Asia (excluding India)

comprise about 25 per cent of the global generics

markets, and contribute around 20 per cent to the

revenues of large and mid-sized Indian pharma

companies. These markets are structurally similar to the

Indian markets as 'branded' generics markets. Brands

enhance players' pricing flexibility; however, they

require substantial outlay in marketing and brand-

building expenses. The markets are far more

fragmented than the regulated markets are in terms of

buyers. This is because there is lower penetration ofhealth insurance and lack of social security net; this leads

to customers paying out of their own pockets for a large

part of the cost of drugs. Also, entry barriers are lower

because of less stringent regulations.

The working capital requirements of India's pharma

companies operating in the semi-regulated markets are

higher than that in the regulated markets. Companies

are exposed to risks relating to long payment periods

and bad debt. Moreover, the semi-regulated markets

have higher risk of currency movements than the

regulated markets—this exposes the operations of

companies operating in these markets to risks relating tovolatility in margins.

Post September 2008, the local currencies in Russia, CIS,

and Latin America depreciated by more than 20 per cent

against the US dollar. High dependence on imports for

pharmaceuticals in these markets led to sharp increase

in drug costs, and therefore, a fall in consumer spending.

Drug retailers faced not only an increase in servicing

costs on foreign-currency-denominated loans as well as

an increase in creditors. This resulted in re-negotiation

of prices, extension of credit terms, and some write-offs

for rated companies (see Box 4)


9/64

Box 4: Impact of currency devaluation in semi-

regulated markets

The CRISIL-rated pharma companies with large

exposures to semi-regulated markets include DRL,

Ranbaxy, Glenmark Pharmaceuticals Ltd(Glenmark), and JB Chemicals and Pharmaceuticals

Ltd (JB Chemicals). Glenmark saw a sharp increase

in receivables and inventory; Ranbaxy's revenues in

Russia and Latin America saw de-growth of 18 per

cent for the first half of 2009. JB Chemicals wrote-

off bad loans of Rs.110 million in 2008-09.

Contract manufacturing: an attractive option

(refer to CRISIL's commentary, 'Attractive opportunities

in contract manufacturing for Indian pharma industry').

The pressing need to reduce healthcare costs is forcing

global pharma majors to outsource manufacturing to

low-cost destinations, such as India. India's pharma

companies, with their low labour costs and strong skills

in process chemistry, have the advantage of being low-

cost producers of active pharmaceuticals ingredients

(APIs) and formulations.

India has the highest number of manufacturing facilities

approved by the US FDA outside the US. Indian

companies are ahead of other countries in receiving

abbreviated new drug application (ANDA) approvals,

and drug master files (DMFs).

Contract manufacturing allows Indian players the

opportunity to participate in the global generics growth

story, and benefit from stability in revenues and growth

in volumes (albeit, at significantly lower profit margins)

without exposure to risks such as litigation. It also avoids

the need for the Indian players to make large

investments in marketing and distribution, and the

necessity of contracting large debt for funding

acquisitions in international markets.

Ratings stable for most players, supported by the

stability provided by the domestic market and

healthy financial profiles

(refer to commentary 'Home-grown players retain edge

in domestic pharma market').

Despite the increase in business risks for large and mid-

sized pharma companies, CRISIL's ratings on most

companies have remained stable. This is because most

CRISIL-rated pharma companies continue to derive

sizeable and steady revenues from the domestic market,

which has remained largely stable. This has resulted in

stable cash flows and healthy profit margins for the

companies. The domestic market still contributes nearly

40 per cent to these companies' total revenues.

The domestic formulations market has grown at a

healthy CAGR of 15 per cent over the past four years.

This has been supported by increase in the consumers'

income levels (and therefore, their purchasing power),

and also by increased awareness about health and well-being. An increasing incidence of lifestyle diseases has

led to above-average growth and profitability in chronic

therapeutic segments such as cardiovascular and anti-

diabetic care; however, the anti-infective segment

remains the largest therapeutic segment. The 'branded

generics' Indian pharma market helps bring in stable

revenues and enhances pricing flexibility. Domestic

players have retained their edge in the Indian pharma

market, as there have been few launches of new drugs

by MNCs. Moreover, domestic players have developed

strong relationships and good networks, spanning both

urban and rural areas. However, the domestic

formulations market continues to be intenselycompetitive, with more than 15,000 players. Hence,

drug prices in India are among the lowest in the world.

The operating margins of players in the Indian pharma

market are healthy and much less volatile than that of

players in the regulated markets. The operating margins

of companies are typically in the range of 15 to 25 per

cent, depending upon the product mix. The domestic

market has helped Indian companies mitigate risks

arising from operations in the international generics

markets.

Conservative financial policies have also helped playersmaintain overall credit quality, despite their large

exposures to global markets. Sun Pharma, Biocon Ltd,

and DRL, for instance, continues to maintain healthy

gearing (at less than 0.5 times) and strong liquidity.

Strong parentage has also helped players maintain

stable ratings. Several global pharma majors have

increased their presence in India through acquisitions, or

by setting up manufacturing facilities. For instance,

Matrix Labs and Ranbaxy have been acquired by Mylan

Laboratories Inc (Mylan) and Daiichi Sankyo Co Ltd,

respectively.

Stable outlook on pharma sector ratings

The domestic market has thus far mitigated the impact

of increasing risks from global exposure. As growth

from international business continues to outpace that

from the domestic market, players are expected to

proactively manage risks from global markets through a

mix of strategies. CRISIL's outlook on the pharma sector,

therefore, remains stable.

The risk management strategies adopted by pharma

players are as follows:


10/64

06

• Seeking collaborations with strong global

players: Strong global pharma players have the large

resources, strong balance sheets and local expertise

necessary to ensure long-term success in regulated

markets. In these collaborations, Indian players willremain focused on manufacturing, while their global

partners deal with large buyers and manage

relationships with local authorities (see Box 5)

• Focusing on contract manufacturing options

that lend stability to revenues: Contract

manufacturing provides Indian players the

opportunity to participate in the global generics

growth story, and benefit from stability in revenues

and growth in volumes (albeit, at significantly lower

profit margins) without exposure to risks such as

litigation. It also avoids the need for Indian players to

make large investments in marketing anddistribution and the necessity of contracting large

debt for funding acquisitions in international

markets.

• Maintaining healthy financial risk profiles and

strengthening risk management policies:

Companies are expected to be cautious in large

acquisitions of companies and brands, and fund

growth initiatives and capital expenditure prudently.

Companies are expected to formalise policies for

managing foreign exchange and other related risks.

• Curbing ambitions in R&D to avoid drain onresources: The initial enthusiasm for new chemical

entity (NCE) research seems to have diminished

because of high resource intensity and longer

timeframes for returns. The past 12 months have

seen few out-licensing deals. Indian pharma

companies such as Sun Pharma, DRL, and Glenmark

have actively hived-off their R&D for drug discovery

and innovation into separate entities in order to de-

risk the business model. The total R&D expenditure

for major pharma companies has remained low, in

the range of 4 to 6 percent. Indian companies are

also being conservative in investments on new drug

research.

• Precluding costly litigations: By reducing focus on

launches of blockbuster drugs 'at risk', since these

invite litigations from innovators, companies are

instead focusing on niche molecules with fewer

competitors and lower risks of price erosion.

Box 5: Collaborations between Indian and

global pharma players

In March 2009, Pfizer Inc (Pfizer) entered into a deal

with Aurobindo Pharma Ltd (Aurobindo) for

contract manufacturing of 39 drugs to be sold

across Europe and the US. In June 2009,

GlaxoSmithKline PLC (GSK), entered into a similar

alliance with DRL to access the current portfolio and

future pipeline of more than 100 branded

pharmaceutical products. The products will be

manufactured by DRL, and licensed and supplied by

GSK in various countries in Africa, West Asia, Asia

Pacific, and Latin America.

However, industry-level factors such as regulatory

changes in key markets, change in competitive

landscape, increasing pricing pressure remain key rating

sensitivity factors. The growth strategies, financial riskprofile and risk management policies adopted by

individual players would determine their credit risk

profiles in future.

Rating changes

CRISIL has downgraded its ratings on a few large and

mid-sized pharma companies. This is because of

refinancing pressures arising from the repayment of

substantial debt incurred by these entities to fund

expansions. Due to the turmoil in the equity markets

since September 2008, planned initial public offerings

(IPOs) and conversion of foreign currency convertible

bonds (FCCBs) did not materialise. Companies with

large exposure to semi-regulated markets of Russia, CIS,

and Latin America were faced with significant

accumulation of inventory and receivables because of

currency devaluation in these markets; this led to steep

increase in their debt levels, thereby weakening their

financial risk profiles. Currency volatility also led to large

outflows for a number of companies on account of out-

of-money derivatives contracts, which further

exacerbated the stretched liquidity position (see Box 6).

Box 6: Impact of exchange rate volatility

Depreciation in the value of the Indian rupeeresulted in large forex losses for most CRISIL-rated

companies in 2008-09. This is because the

companies had entered into derivative contracts and

long-term forward contracts with the expectation

that the rupee would appreciate against the dollar.

The net impact of these losses (realised and

unrealised) is estimated at Rs.40 billion for large and

mid-sized pharma companies rated by CRISIL, which

was 10 per cent of their revenues in 2008-09.


11/64


12/64

08

Government-led cost-containment measures have

impacted player profitability

Move towards tendering is game-changer in Germany

and Netherlands

Germany: As a result of legislative changes introduced

in 2007 (refers to calendar year, January 1 to December

31), the German generics market, which is Europe's

largest generics market, has become increasingly

tender-driven. With the new legislations, health insurers

are encouraged to enter into direct rebate agreements

with pharma companies that offer the most competitive

prices. Under this system, pharmacists are obliged to sell

products of only those manufacturers who hold rebate

contracts with the health insurers of patients. The law

also provides incentives to doctors to prescribe generic

drugs covered by such rebate contracts. By May 2008,

around 66 per cent (by volumes) of generic drugs were

sold through tenders. Generic drug prices declined by 5

to 25 per cent after 2007 because of these changes.

Netherlands: In 2008, a new tender system was

introduced, giving pharma manufacturers an incentive

to reduce prices and become direct and exclusive

suppliers to health insurance organisations for a period

of up to one year. This has resulted in a sharp decline in

generics prices, as companies compete for exclusive

large orders.

The companies that benefited through this shift have

large scale of operations, stronger balance sheets, and

broader product portfolio to offer. Large global generics

majors such as Teva Pharmaceutical Industries Ltd (Teva),

Mylan Laboratories Inc (Mylan), and Sandoz (generic

pharmaceuticals division of Novartis AG), were able to

garner a larger share of the tenders by bidding very

competitively and offering a large basket of products.

The tender-based approach implemented by Germany

and Netherlands is likely to be adopted by other nations

in the European Union (EU) over the medium term, as it

has proved to be effective in reducing costs.

Steep cuts in reimbursement prices for generic drugs inUK and France

The UK: National Health Service (NHS) is the national

insurer in the UK's pharma market, where competition is

intense. In 2007, the UK government initiated reforms in

pharmacy remuneration. As part of this reform, the

government reduced the annual reimbursement level

for generic drugs to pharmacists by USD600 million

(which is estimated to be more than 10 per cent of the

UK's generic drugs market). The cut in pharmacist

reimbursements has resulted in a decline in prices of

generic drugs. Generics prices are subject to frequent

reviews.

France: In 2008, the Government of France mandated

that the prices of new generic drugs be fixed at 55 per

cent (as against 50 per cent, earlier) lower than the

prices of innovator drugs, making it difficult for generics

players to earn adequate profits.

Box 1: Impact of government cost-

containment measures in Europe

Dr. Reddy's Laboratories Ltd (DRL) and Matrix

Laboratories Ltd (Matrix Labs) made large

acquisitions in Germany (betapharm Arzneimittel

GmbH) and Belgium (Docpharma) respectively. The

performances of the acquired entities deteriorated

significantly because of regulatory changes in the

markets where they operate. Both DRL and Matrix

subsequently made large write-offs to account for

the decrease in the value of their investments,resulting in reported losses in 2008-09 and 2007-

08 respectively.

Increasing consolidation can impact small and

mid-sized Indian players

Generics price competition in the US, triggered by large

retailers and drug store chains

There has been consolidation at all levels in the US

pharma industry—including the pharmacy chains,

wholesalers, benefit managers, and generic drug

manufacturers—resulting in fewer, but larger, players

throughout the supply chain. The top six pharmacies inthe US account for more than 50 per cent of all drug

prescriptions in the country.

Since 2006, large retailers, such as Wal-Mart Stores, Inc,

Kmart Corp, and Target Corp began offering commonly

prescribed generic drugs at very low prices to attract

shoppers. For these retailers, pharma sales contribute to

a small portion of their total revenues; they were,

therefore, able to absorb the lower margins. By 2008,

the large drug store chains were forced to respond and

launch their own low-cost generic drugs. Generic drug

manufacturers began competing and lowering prices toattract bulk orders from retailers. As a result, generic

drug sales dropped to USD33 billion in the year ended

September 2008 from USD34 billion in 2007, a drop of

2.7 per cent, despite the number of generic drug

prescriptions increasing by 5.4 per cent during the same

period.

The major beneficiaries of these changes have been

large companies that offer larger product baskets at

attractive discounts. The retailers prefer to work with a

few large suppliers who can meet their requirements,

rather than with a large number of suppliers. The

adverse effect on the profitability of the US generic


13/64

drugs manufacturers is likely to be seen over the medium term. US-focused generics companies, such as Mylan and

Watson Pharmaceuticals, Inc (Watson), are diversifying through acquisitions in other markets as a de-risking strategy.

Consolidation among generics players continues

The top three generics companies now account for over 30 per cent of the market (see Chart 4). These large

companies have been able to compete successfully and increase their market shares in the regulated markets, by

edging out the smaller and mid-sized players. CRISIL expects more consolidation to take place in the global generics

industry going forward, which will further increase the degree of competition for Indian players.

Regulatory environment has become more

stringent

The US Food and Drug Administration (FDA) has

tightened regulatory oversight over the drugs sold in US

pharma market, especially with regard to compliance.

This was triggered by several quality-related issues

including deaths of 149 people in the US in 2008

following alleged consumption of inferior-quality blood

thinner, Heparin, sourced from China. The US FDA

opened its first overseas offices in Beijing, Shanghai, and

Guangzhou in China in November 2008. In India, the

regulatory body conducts frequent on-site inspections

as part of its 'Beyond Our Borders' initiative. Several

generic drug manufacturers have been cited by US FDA

for irregularities, including global companies such as

Sandoz, and a number of Indian players such as Ranbaxy

Laboratories Ltd (Ranbaxy), Sun Pharmaceuticals

Industries Ltd's subsidiary in Detroit (Caraco

Pharmaceutical Laboratories Ltd), Cipla Ltd, and Lupin

Ltd. This could severely hamper the market reputation of

the companies under the US FDA scanner and also could

lead to termination of review of drug applications from

the site or a complete ban on manufacture and sales.

Recent regulatory issues raised by US FDA for

Indian pharma companies

• Ranbaxy faces ban on some of its drugs in the US

because of manufacturing violations andfalsification of data and results of tests held at the

two manufacturing units in India. Ranbaxy's US

sales declined by 53 per cent in the third quarter of

2009. Also, inventory write-offs resulted in a

decline in profits for the company in the earlier

quarters.

• Caraco's facility in Detroit was found violating

current good manufacturing practices (cGMP).

USFDA seized Caraco's inventory of goods in June

2009. Sun Pharma's US sales declined by 12 per

cent in the first half of 2009-10 (refers to financial

year, April 1 to March 31)

• US FDA reported several discrepancies in the

manufacturing processes of Cipla's manufacturing

unit in Bangalore in April 2009. Recently, however,

the unit was cleared of alleged violations in cGMP

norms by US FDA.

• For Lupin's manufacturing unit at Mandideep, US

FDA issued warning letters because of significant

deviations in compliance with cGMP norms in May

2009.

Source: CRISIL estimates, company annual reports

Chart 4: Top 10 generics companies—percentage market share (2008 estimates)

1.4%

1.5%

1.9%

2.8%

2.9%

3.0%

3.1%

5.9%

9.5%.

16.9%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%

Gideon Richter

Krka

Ranbaxy (acquired by Daiichi Sankyo)

Stada

Ratiopharm

Actavis

Watson (acquired Andrx)

Mylan (acquired Merck KGaA generics)

Novartis (Sandoz, acquired Hexal)

Teva (acquired Ivax, Barr)


14/64

10

Key success factors in regulated generics markets

CRISIL believes that the following factors are critical for a

generics company to succeed in regulated markets:

Managing relationships with key decision makers(public/private insurance funds): Cost bearers such as

insurance funds and governments are gaining

importance as key decision-makers in the regulated

generics markets. This is particularly true for most of the

European countries where the majority of healthcare

expenses are borne by public/private insurance funds.

These insurance funds are typically institutionalised and

highly sophisticated and control a large part of the

market. Therefore, building favourable relationships

with these entities will be critical for success in the

market.

Ability to shift the sales model towards an institutionalfocus: Promotion of products to doctors and

pharmacists, which has traditionally been the selling

norm with drug manufacturers in India, is not effective

in the current scenario in the regulated markets; this is

especially true where the markets are becoming

increasingly tender-driven. The sales focus will have to

move towards a more institutional focus.

Gaining critical size and scale: Large scale of operations

and strong balance sheets provide players with the

ability to negotiate with large and powerful decision

makers, benefit from economies of scale, and become

more competitive through sheer staying power in a

market. Diversified product portfolio and ability to give

discounts help players win tenders and gain orders from

large retailers. Having revenues from across markets

also helps mitigate risks arising from unfavourable

changes in regulations in any one market.

Pharma companies are recognising the need to gain size

and scale. Several large pharma companies have

responded with a spate of acquisitions, thereby making

the industry more consolidated globally.


15/64

Indian pharma players continue to benefit from the

increasing push by governments and pharma majors in

regulated markets to reduce drug prices. The focus on

cost reduction has led to an increase in outsourcing of

the manufacturing of drugs/drug intermediates to low-

cost destinations such as India. Indian players, with their

inherent cost advantages, skills in process chemistry,

and large number of manufacturing facilities approved

by regulators in developed markets are in an

advantageous position. Contract manufacturingprovides Indian players the opportunity to participate in

the global generics growth story, and benefit from

stability in revenues and growth in volumes (albeit, at

significantly lower profit margins) without exposure to

risks such as litigation. It also does not require Indian

players to make large investments in marketing and

distribution or contract large debt for funding

acquisitions in international markets.

Global pharma majors are increasing their presence in

India by setting up their own manufacturing facilities or

entering into alliances and tie-ups with Indian

companies for manufacture of drugs. A number of

prominent tie-ups have been announced in the recent

past. CRISIL believes that gaining control over the

manufacturing base will be seen as a logical step for

global majors to bring about vertical integration, and to

ensure that quality standards are met. For this reason, a

number of Indian companies and/or their

manufacturing facilities are likely to become targets for

acquisition in the near future.

Pressing need to reduce healthcare costs

Pharma companies, especially in the regulated markets

where the healthcare costs are as high as 15 per cent ofthe gross domestic product (GDP), are under

tremendous pressure from the respective countries'

governments to rationalise pharmaceutical prices in the

current environment. The regulatory push towards

reduction of prices is expected to continue, intensify,

and spread throughout regulated markets over the

medium term.

In addition, high research and development (R&D) costs,

shrinking pipeline of new drugs, and substitution of

patented drugs (of more than USD100 billion) with

generics on the back of expected patent expiries over

the next three years, are adding to pressures on

profitability for large global pharma companies.

The India advantage

Indian pharma companies have the advantage of being

low-cost producers of active pharmaceuticals

ingredients (APIs) and formulations because of their low

labour costs and strong skills in process chemistry.

CRISIL Research estimates that the cost of

manufacturing in India in an US FDA-approved plant is

around 45 to 50 per cent of the cost of manufacturing in

the US.

Moreover, India has the highest number of

manufacturing facilities approved by the US Food and

Drug Administration (FDA) outside the US. This reflects

India's ability to meet the most stringent quality norms

and superior technical expertise. Indian companies are

ahead of other Eastern European countries and China in

receiving abbreviated new drug application (ANDA)

approvals and drug master files (DMFs). Chart 1 shows

that India has a share of nearly 30 per cent of the total

ANDA approvals by the USFDA in 2008. Chart 2 shows

that out of the total number of DMFs in 2008, 45 per

cent were from India.

Attractive opportunities in contractmanufacturing for Indian pharma industry

26

49

72

96

92

6.8%

14.2%

19.5%

24.1%

27.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0

20

40

60

80

100

120

2004 2005 2006 2007 2008(till Sept)

No of approvals % of total approvals (RH axis )

193

274306

310267

37.3%39.8%

43.3%45.7% 45.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

0

50

100

150

200

250

300

350

2004 2005 2006 2007 2008(till Sept)

N o o f D MFs % of to ta l f il ings (RH axis)

Source: CRISIL Research

Source: CRISIL Research

Chart 1: Number and percentage of total ANDAapprovals

Chart 2: Number and percentage of total DMF fi lings

Aparna Karnik Senior Manager, Corporate Sector Ratings



16/64

12

The significant advantage that a global pharma

company can achieve by producing in India vis-à-vis in

regulated markets is indicated by the increasing number

of collaborations and tie-ups that global companies are

entering into with Indian pharma companies.

Contract manufacturing by Indian players: Pharma

companies such as Dr Reddy's Laboratories Ltd (Dr

Reddy's), Alembic Ltd (Alembic), Jubilant Organosys,

and Maneesh Pharma have extended their capabilities

to offer services in contract manufacturing to global

pharma companies. These services range from

manufacturing APIs at competitive cost, to

manufacturing complex formulations. Companies such

as Cadila Healthcare Ltd (Cadila) and Strides Arcolabs

actively enter into joint ventures (JVs) with global

pharma companies, wherein manufacturing activitiesare performed by the Indian company, while the

marketing of products is conducted by the JV partner.

Cadila's JV with Hospira Inc, USA and Nycomed S.C.A.

SICAR (Denmark) is an example of this practice. The

benefits accruing to the Indian partner could be based

either on a cost plus pricing with committed large

volumes or on a profit-sharing model. Likewise, Alembic

also manufactures APIs and formulations for global

pharma majors in the regulated market, from which it

derives around 25 per cent of its revenues.

Recent collaborations announced by globalpharma companies

In March 2009, global pharma giant Pfizer Inc (Pfizer)

entered into a deal with Aurobindo Pharma Ltd

(Aurobindo) to contract manufacture 39 drugs to be

sold across Europe and the US. The scope of the deal

was later expanded with Pfizer acquiring rights to 55

solid oral dose products and 5 sterile injectable products

for several countries emerging countries throughout

Asia, Latin America, Africa, and the Middle East. Pfizer

will handle the marketing after licensing each product

from Aurobindo; Aurobindo will handle all the steps to

obtain approvals to make generic versions, as well asmanufacture the drugs. The products are in anti-

infective, cardiovascular (CVS), and central nervous

system disorders (CNS) therapeutic segments.

In June 2009, GlaxoSmithKline plc.(GSK), entered into a

similar alliance with Dr Reddy's to access the current

portfolio and future pipeline of more than 100 branded

pharmaceuticals in CVS, diabetes, oncology,

gastroenterology, and pain management segments.The products will be manufactured by Dr Reddy's, and

licensed and supplied by GSK in Africa, West Asia, Asia

Pacific, and Latin America. In some markets, the

products will be co-marketed by GSK and Dr Reddy's.

In June 2009, Mylan Inc (Mylan) entered into an

exclusive collaboration with Biocon Ltd (Biocon) for the

development, manufactur ing, supply, and

commercialisation of multiple, high-value generic

biologic compounds for the global market. Mylan is

likely to benefit from Biocon's capabilities in research,

development, and manufacturing of high-quality

protein therapeutics, including both novel biologics and

bio-generics. In addition, Mylan's regulatory and

commercialisation capabilities in the US and Europe

create a cost-effective model to address an emerging

opportunity for generic biologics. As part of the

collaboration, Mylan and Biocon will share development,

capital, and certain other costs to bring products to

market.

A win-win situation

Collaborations present a win-win situation for both

parties, since the multi-national companies (MNCs) will

be able to reduce costs and focus on marketing activities,

while the Indian players benefit from stable and

predictable revenues and growth in volumes. Global

pharma players have also been pursuing acquisitions of

Indian players for their low-cost manufacturing and

research capabilities. Deals such as Mylan's acquisition

of Matrix Laboratories, Sanofi-Aventis's acquisition of

Shantha Biotechnics Ltd, and Hospira Inc's acquisition of

Orchid Chemicals and Pharmaceuticals Ltd's injectable

pharma business are cases in point. CRISIL believes that

more such acquisitions are likely to occur over the short

to medium term, as gaining control over the

manufacturing base will be seen as a logical step for

global majors to bring about vertical integration in their

operations, and ensure that quality standards are met.


17/64

Home-grown players retainedge in domestic pharma market

Indian players have demonstrated their strength in the

domestic pharma market by maintaining market

positions, and reporting healthy growth. The stability

provided by domestic revenues has helped Indian

pharma players retain stable credit profiles despite

increasing risks arising from their growing presence in

the international markets. The domestic market

contributes 46 per cent to the total revenues of India’s

pharma companies.

The growth story continues…The domestic formulations market, estimated at Rs.341

billion in 2008, has grown at a healthy compound

annual growth rate (CAGR) of 15 per cent over the past

four years. The growth has been driven by increase in

customer income levels and awareness, augmenting the

demand for drugs.

…. backed by buoyant chronic care segment

An increasing incidence of lifestyle diseases (especially,

chronic ailments) has led to above-average growth and

profitability in segments such as diabetic and

cardiovascular (CVS) care. The anti-diabetic segment

grew by 17 per cent while the CVS segment grew by 14

per cent in 2008 as compared to total formulations

market growth rate of about 10 per cent. The anti-

infective segment remains the largest revenue earner

with sales of about Rs.60 billion, which is 18 per cent of

the total market.

The Indian formulations market is expected to grow at a

CAGR of 10-12 per cent over the medium term, backed

by steady growth in the chronic therapeutic segments.

Local players retain market positions in domestic

market

Local players continue to hold a competitive edge over

the multinational companies (MNCs) in the formulations

market, despite the implementation of the product

patent regime in 2005. As Table 1 indicates a majority of

Indian players have improved or held on to their market

positions post 2004 (pre-product patent introduction).

The few Indian players that have slipped in the rankings

have lost positions to other Indian players. However,

most of the MNCs in the top 25 players have been

superceded by Indian players.

Table 1: Movement in top 25 players' ranking post the introduction of product patent regime

Movement in ranking

Manita Agarwal Analyst, Corporate Sector Ratings


Cipla

Ranbaxy Laboratories (acquired by MNC)

Piramal Healthcare

Cadila Healthcare

Sun Pharma

Alkem Laboratories

Lupin Labs

Mankind PharmaAristo Pharma

Dr. Reddy's Laboratories

Emcure Pharmaceuticals

Wockhardt

Torrent Pharma

Intas Pharmaceuticals

Alembic Ltd

FDC

Micro Labs

Macleods Pharma

U S V

Unichem Laboratories

Indian Players


18/64

14

From CRISIL's rated portfolio, home-grown players such

as Cadila and Sun Pharma, which have been focused on

the chronic segment, have been able to maintain their

market positions among the top seven. Companies such

as Micro Labs and Alembic, which have a higher

presence in the acute segments, have lost market

positions

Home-grown players have been able to retain their edge

due to few new product launches by MNCs. Moreover,

domestic players have strong relationships, and well-

entrenched networks spanning both the urban and rural

areas, which help them to retain their market positions.

Few new product launches by MNCs

As Table 2 shows, MNCs have launched very few

patented products in India in the four years since the

implementation of the new regime. The MNCs cite

issues relating to the implementation and enforceability

of Intellectual Property Rights (IPR) in India as a key

hurdle in launching new drugs, in addition to thelengthy patent application and approval process. MNCs

Table 2: Patented molecules launched in India (till March 2008)

Product Company Therapeutic category Launch date Status

Vfend Pfizer Anti-Infective Feb-05 On Patent

Windia (Avandia) GSK Anti-Diabetic May-05 On Patent

Viagra Pfizer Erectile Dsyfunction Dec-05 On Patent

Lyrica Pfizer Neuropathic Feb-06 On Patent

Caduet Pfizer Cardiovascular Feb-06 Off Patent

Coreg GSK Cardiovascular Mar-06 Off Patent

Genotropin Pfizer Endocrine Disorders Mar-06 On Patent

Tamiflu Roche Influenza Apr-06 On Patent

Pegasys Roche Hepatitis C May-06 On Patent

Aprovel (Avalide) Sanofi Aventis Cardiovascular Jul-06 On Patent

Stilnox (Ambien) Sanofi Aventis Insomnia Jan-07 Off Patent

Arixtra GSK Cardiovascular Mar-08 On Patent

Champix Pfizer Neuro/CNS Mar-08 On Patent

Flutivate - E GSK Dermatology n.a On Patent

Lescol XL Novartis Cardiovascular n.a On Patent

such as Novartis (India) Ltd, Hoffman La Roche, and

Bayer have been involved in legal battles alleging

infringement of patents by Indian players. Issues

regarding definition of 'invention' and eligibility of

drugs for patent protection remain a key concern for

MNCs in India.

Another strong deterrent for MNCs has been the low

affordability in the Indian market for expensive new

treatments: most drugs treating key therapeutic

diseases are already available in India at reasonable

prices. Moreover, there have been few new

breakthrough drugs discovered in the past 3-4 years for

treatment of ailments where existing proven therapies

are not adequately effective. Because of these factors,

only about 15 patented molecules have been launched

in India since April 2005 with the Government of India

remaining committed to keeping healthcare affordable

for the Indian market, MNCs may continue to face

challenges in capturing a dominant market position.

CRISIL expects MNCs to focus on niche segments and

specialty drugs going forward.

Source: Company Reports, CRISIL Research and CRISIL Ratings

n.a: Not available; Source: CRISIL Research

Movement in rankingMNCs

GlaxoSmithKline Pharmaceuticals

Abbott India

Sanofi AventisPfizer

Novartis India


19/64

5

Strong relationships, well entrenched networks,

and competitive scale

Indian players have established strong relationships with

local stakeholders—general practitioners, specialists,

public and private hospitals, and pharmacists across the

urban and rural parts of the country. Companies have

allocated large resources to marketing efforts within the

medical fraternity and have a track record of delivering

effective medicines. Indian companies have gradually

grown to a critical size and scale to meet the drug

requirements of the domestic market at reasonable

prices.

Domestic market provides stability to credit

profiles

The branded nature of the domestic market lends

stability to revenues, and enhances pricing flexibility for

players. The operating margins and cash flows of the

players in the Indian pharma market are healthy and

much less volatile than that of players in the regulated

markets. The operating margins of companies aretypically in the range of 15 to 25 per cent, depending

upon the product mix. Healthy performance in the

domestic market has helped Indian companies mitigate

risks arising from operations in the international

generics markets.

However, the intense competition—the domestic

market has more than 15,000 players—and the Drug

Price Control Order (DPCO) have collectively kept drug

prices in India among the lowest in the world and

continue to constrain the profitability of players.


20/64

0 5 1 0

1 5

2 0

2 5

0 1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

A A A

A A

A

B B B

B B

B

C

D

S t a b l e

P o s i t i v e

N e g a t i v e

R a t i n g D i s t r i b u t i o n

O u t l o o k D i s t r i b u t i o n

1

C o

m p a n y N a m e

R a t i n g

o u t s t a n d i n g

R a t i n g D r i v e r s

O u t l o o k

R e v e n u e s @

( R s M i l l i o n )

R e p

o r t e d

N e t P r o f i t @

( R s M

i l l i o n )

A d j u s t e d

G e a r i n g @

A a

n j a n e y a B i o t e c h P v t .

L t d

.

B / S t a b l e

S t r e n g t h

• S t r o n g p o s i t i o n i n q u i n i n e a c t i v e

p h a r m a c e u t i c a l i n g r e d i e n t s ( A P I s )

W e a k n e s s e s

• S t r a i n e d l i q u i d i t y b e c a u s e o f h i g h

w o r k i n g c a p i t a l r e q u i r e m e n t s

• E x p o s u r e t o r e v e n u e c o n c e n t r a t i o n r i s k s

S t a b l e

C R I S I L b e l i e v e s t h a t A a n j a n e y a w i l l b e n e f i t f r o m

a n i m p r o v e d c a p i t a l s t r u c t u r e ( b

a c k e d b y t h e

p r o m o t e r s ' r e c e n t e q u i t y i n f u s i o n ) a n d g r o w i n g

b u s i n e s s v o l u m e s , o v e r t h e m e d i u m t e r m . T h e

o u t l o o k m a y b e r e v i s e d t o ' P o s i t i v e ' i f s t r o n g

g r o w t h i n r e v e n u e s l e a d s t o

h e a l t h y c a s h

a c c r u a l s f o r A a n j a n e y a ; o r t o ' N e g a t i v e ' i n c a s e

t h e c o m p a n y c o n t r a c t s a n y f u r t h e

r d e b t t o f u n d

e x p a n s i o n s , o r f a c e s a d e c l i n e i n c a s h a c c r u a l s .

9 0 1

5 2

-

2

D / P 5

A g

i o P h a r m a c e u t i c a l s

L t d

.

W e a k n e s s

D e l a y s b y t h e c o m p a n y i n t h e

r e p a y m e

n t

o f i t s t e r m l o a n i n s t a l m e n t s b e c a u s e o f w

e a k

l i q u i d i t y .

8 1 8

1 2

-

( L i s t o f r a t e

d c o m p a n i e s i n a l p h a b e t i c a l o r d e r a s o n J a n u a r y 3 1 ,

2 0 1 0 )

16

R a

t i n g d i s t r i b u t i o

n a n d b r i e f p r o

f i l e o f

C R I

S I L r a t e d p h a r m a c e u t i c a l c o m

p a n i e s

S r .

N o


21/64

7

C o m p a n y N a m e

R a t i n g

o u t s t a n d i n g

R a t i n g D r i v e r s

O u t l o o k

R e v e n u e s @


R e p

o r t e d

N e t P r o f i t @


A d j u s t e d

G e a r i n g @

4

A l c h e m I n t e r n a t i o n a l

L t d .

A - / S t a b l e /

P 2 +

S t r e n g t h s

• C o m f o r t a b l e f i n a n c i a l r i s k p r o f i l e m a r k

e d

b y l o w g e a r i n g l e v e l s a n d a b o v e a v e r a g e

d e b t p r o t e c t i o n i n d i c a t o r s

• •

W e a k n e s s e s

• V u l n e r a b i l i t y o f b u s i n e s s t o t i m e l y a n d

a d e q u a t e p r o c u r e m e n t o f r a w m a t e r i a l ,

t h o u g h m i t i g a t e d b y p r o a c t i v e

p r o c u r e m e n t p r a c t i c e s .

• L i m i t e d s i z e o f n e t w o r t h , c o n s t r a i n i n g

o v e r a l l f i n a n c i a l r i s k p r o f i l e .

H e a l t h y p r o d u c t p o r t f o l i o i n p h y t o -

c h e m i c a l s s e g m e n t

L o n g t e r m e x c l u s i v e c o n t r a c t s w i t h b u y e r s

a n d s u p p l i e r s

S t a b l e

C R I S I L b e l i e v e s t h a t A l c h e m I n t e

r n a t i o n a l L t d .

w i l l m a i n t a i n i t s h e a l t h y f i n a n c i a l r i s k p r o f i l e

w i t h l o w

g e a r i n g a n d a b o v e - a v e r a g e d e b t

p r o t e c t i o n

m e a s u r e s . T h e o u t l o o k m a y b e

r e v i s e d t o ' P o s i t i v e ' i n c a s e o f s i g n i f i c a n t l y

h i g h e r - t h a n - e x p e c t e d c a s h a c c r u a l s i n b u s i n e s s

r e s u l t i n g i n i m p r o v e m e n t i n t h

e c o m p a n y ' s

c a p i t a l s t r u c t u r e . C o n v e r s e l y , t h e

o u t l o o k m a y

b e r e v i s e d t o ' N e g a t i v e ' i n - c a s e o

f s i g n i f i c a n t l y

h i g h

d e b t - f u n d e d

c a p e x

a n d

d e c l i n e

i n

p r o f i t a b i l i t y a n d c a s h a c c r u a l s , r e s u l t i n g i n a

w e a k e n i n g o f t h e c o m p a n y ' s

f i n a n c i a l r i s k

p r o f i l e .

1 , 5

0 0

0 . 7

0

7 8

S t r e n g t h s

• H e a l t h y f i n a n c i a l r i s k p r o f i l e a n d s t a b l e

c a s h f l o w s

• W e l l l a i d m a r k e t i n g a n d d i s t r i b u t i o n s e t -

u p f o r f o r m u l a t i o n s i n I n d i a

W e a k n e s s e s

• L a c k o f r e s e a r c h a n d d e v e l o p m e n t ( R &

D )

c a p a b i l i t i e s f o r c l i n i c a l r e s e a r c h

• I n t e n s e c o m p e t i t i o n f r o m d o m e s t i c p l a y e r s

S t a b l e

C R I S I L b e l i e v e s t h a t A l b e r t D a

v i d

L t d . w i l l

m a i n t a i n i t s h e a l t h y c a s h a c c r u a

l s a n d s t r o n g

f i n a n c i a l r i s k p r o f i l e o v e r t h e m e d i u m t e r m , o n

t h e b a c k o f s t a b l e r e v e n u e s f r o m

i t s r a n g e o f

f o r m u l a t i o n s ; t h e c o m p a n y w i l l a l�

Documents

CRISIL Ratings Indian Pharma Booklet Apr10