Indian Pharma Industry Benchmarking Report

7/29/2019 Indian Pharma Industry Benchmarking Report

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Industry Benchmarking

Pfizer LimitedOctober 2006

Pfi zer Ltd 2006 -1-


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List of Contents & Appendices



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Introduction

Background

The Industry Benchmarking Project has been initiated with a view to enable a betterunderstanding of the competitor landscape and the performance of various competitors vis--vis Pfizers performance across various Key Performance Indicators.

Objective

The Industry Benchmarking project enables a comparison of Pfizer against a set of competitorcompanies in the Indian Pharmaceutical Industry on a wide range of parameters. Theseparameters measure performance via efficiency, productivity and profitability in an attempt toidentify inefficiencies or areas of concern and also an insight of the broad strategies adoptedby the competitors to achieve their current status in the Industry.

The ultimate objective of this project is to institutionalize the process of competitorbenchmarking and tracking as an on-going function within the organization. This function aimsat regular performance tracking and benchmarking to provide support for the decision making

process within the organization.

At various parts in the report, some indicative reasons to the performance / non-performanceof companies on various parameters have been provided. However the basic purpose of thisreport is to design a benchmarking system to act as a management tool for trackingperformance and not to delve into a great level of detail as to the reasons behind theperformance.

Overall Approach

The primary method of analysis was based on information collected from the public domain, aselucidated below:

1. Published Annual Reports2. Analyst reports3. Market related data (IMS)4. Data gathered from Industry Associations (OPPI)

Key limitations

The key limitations involved in this analysis are the restricted access to information which isinternal to the competitor companies, i.e. organization structure, channel partners, tradeincentives, manufacturing setup, etc. These limitations place a restriction on the level ofdetail that can be achieved with the aforesaid analysis. However an attempt has been made toprovide indicative reasons to the findings brought out by the evaluation of the parameters

selected for benchmarking.



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Executive Summary

Selection of CompetitorsThe selection of companies from the Pharmaceutical Industry for the purpose of benchmarkingwas made keeping in mind the diverse nature of these companies and to ensure arepresentative mix of the Industry.

A major criterion for selecting companies was size. Care has been taken to select companies

whose India operation revenues are on par with Pfizers. The obvious intention was tobenchmark ourselves with companies of similar size. The second criterion was origin of thecompany. This was done to provide comparisons with research based companies facingconstraints and opportunities of similar dimensions and scale as Pfizers.

Using these two criteria the following list of companies was drawn up and each was theninvestigated on parameters of comparison.

MNC Indian

GSK Ranbaxy

Sanofi Aventis Dr. Reddy's Labs

Astra Zeneca Nicholas Piramal

Novartis Wockhardt

Abbott Lupin

Sun Pharma

Zydus Cadila

Glenmark

Selection & Evaluation of ParametersThe various parameters selected for evaluation have been aggregated into various groups whichhave been elucidated below:

1. Revenue related indicators2. Profitability Indicators3. Productivity & Efficiency Indicators

The various parameters under each group have been selected with a view to facilitate trackingof overall performance of various competitors, year on year and providing the management ofPfizer a well rounded view of its performance vis--vis the select list of competitors.

Detailed Parameters usedI. Strategic focus of the competitors on high growth market segmentsII. Success of Overall marketing strategy adopted by a company to achieve growthIII. Impact of the above two on Market share progressionIV. Management of COGS and its impact on Production marginsV. Improvement / Consistency in Margin of Safety (MOS) and Margins Post all Variable Costs

(MPVC)and their impact on Operating marginsVI. Improvement in ROIC through an investment approachVII. Improvement in overall efficiency reflected by improvement in levels of production and

improvement in inventory turnsVIII. Improvement in productivity of Key spends



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Overall Ranking

A: Sum of Ranks in growth parameters (I+II+III)B: Overall Rank on Growth parameters (based on least sum of Ranks under Column A)C: Sum of Ranks in Profitability parameters (IV+V+VI)D: Overall Rank on Profitability parameters (based on least sum of Ranks under Column C)E: Sum of Ranks in Efficiency / Productivity parameters (VII+VIII)F: Overall Rank on Efficiency / Productivity parameters (based on least sum of Ranks underColumn E)G: Sum of Overall ranks (A+B+C+D+E+F)H: Overall Rank on all parameters (based on least sum of Ranks under Column G)

Parameters on which the competitors have been rankedI. Strategic focus of the competitors on high growth market segmentsII. Success of Overall marketing strategy adopted by a company to achieve growthIII. Impact of the above two on Market share progressionIV. Management of COGS and its impact on Production marginsV. Improvement / Consistency in Margin of Safety (MOS) and Margins Post all Variable Costs

(MPVC)and their impact on Operating marginsVI. Improvement in ROIC through an investment approachVII. Improvement in overall efficiency reflected by improvement in levels of production and

improvement in inventory turnsVIII. Improvement in productivity of Key spends



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Summary of Findings

I. Strategic focus of the competitors on high growth market segmentsThe various competitors selected from the Indian Pharma market present a strong casefor inter-dependency between growth of the competitor and the strategic decisions madeby a competitor to operate in specific market segments vis--vis the rest of the market.Competitors with a stronger presence in market segments growing at a faster pace ascompared to the overall market have as a rule shown better growth numbers ascompared to the others. The competitors that have outpaced market growth have doneso by superior performance in fast growth market segments.

Sun Pharma is an ideal candidate to showcase the above mentioned interdependency.Almost all (99%) of Sun Pharmas revenues are from operating in fast growth marketsegments. The impact of the same on overall company growth is evident with therevenues of the company from the Indian market growing at a CAGR of ~ 18%. (5 yearCAGR, 2002 -200 6)

Astra Zeneca is another competitor that has ~ 70% revenues from fast growth segments

and an overall growth of revenues from the Indian market growing at a CAGR of ~ 16%.

Pfizer on the other hand has only ~ 16% of its revenues from fast growth market segments.Its performance in the other segments of the market have also not been up to the markresulting in a de-growth of ~ 2% over the period from 2001-2005. Another fact whichemerges from a comparison with the market leaders is the width of presence acrossdifferent therapeutic areas. Sun Pharma has an overall market representation of ~ 74%across therapeutic areas as compared to ~ 57% for Pfizer. This is an indication of a largerpresence across therapeutic areas, with a larger basket of products having an impacton the growth of the company. (Alt hough mere wid t h of pr esence does not guar ant eesuccess, it is cert ainly an enabler).

Point 1 and related appendices under Revenue Related measures present a detailed

analysis of performance of different competitors across therapeutic areas. (Page 11)

- Source: IMS MAT (06/2006)

II. Success of Overall marketing strategy adopted by a company to achieve growthA mix of strategies has been adopted by various competitors to achieve growth in themarket. While most MNCs have preferred an approach of Brand building by focusing their

efforts on large brands1, most Indian companies have adopted a different approach of

launching several new products2

as a means to achieving growth.

Among MNC companies Aventis has over 61% of its revenues being contributed by largebrands, growing at a CAGR of ~ 8%, which is a key driver of company growth (CompanyCAGR ~ 5%).

Among Indian companies, Sun Pharma has ~ 33% of its revenues being contributedthrough new product launches, growing at ~ 30% CAGR and thus driving the companygrowth of ~ 18% CAGR.

Although Pfizer has ~ 50% of its revenues contributed by large brands, their growth hasbeen fairly average at ~ 4% CAGR. Also its new launches contribute only ~ 4% to itsrevenues (CAGR ~ 21%). This performance is reflected in the fact that the overallcompany CAGR has been ~ -2%. Pfizers focus on new launches is yet to yield results asevidenced by low contribution and better growth numbers from its large brands isnecessary to boost the company growth in the near term.



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Point 2 and related appendices under Revenue Related measures present a detailedanalysis of strategies adopted by different competitors and the success achieved by them(Page 13)

1. Large Brands > Rs 30 Crore2. New product launches: products launched in the last 5 years.- Source: IMS MAT (06/2006)

III. Impact of the above two Revenue related parameters on Market share progressionThe right strategy of focus on fast growth markets and a mix of strategies of brandbuilding Vs new launches have seen Sun Pharma and Astra Zeneca, benefit the most interms of market share gained over the period of five years.

Sun Pharma has gained market share at a ~ 10% CAGR(2.6% to 3.9%)and has moved fromits 9th position in 2002 to 5th position in 2006. (IMS MAT 08/2006). Astra Zeneca has notseen any change in its market position (30th), however it has also grown its market shareat a ~ 8% CAGR (0.7% to 1%).

Pfizer has however steadily lost market share at ~ 9 CAGR to around 2.73% in 2006,moving from 5th place in the market in 2002 to 9th place in 2006. However it has arrestedsome of the slide by growing its market share in 2006 at ~ 5% over 2005. (2.61 To 2.73%)

Point 3 and related appendices under Revenue Related measures present a detailedpicture of ranks and market share progression of different competitors. (Page 15)

- Source: IMS MAT (06/2006)

IV. Management of COGS and its impact on Production marginsManagement of COGS is an important input for enhancing Production margins from yearto year. However a relatively high Production Margin% viewed on its own does not providea complete picture. The incremental production margins (as a percentage of sales)generated each year is a good metric for measuring the impact of improvement /consistency of COGS. This is because a high Production margin may be a function of the

ability of a competitor to charge a higher mark-up on its COGS and the management ofits COGS, while incremental production margins generated each year are a function ofboth better management of COGS and its resulting impact on revenue growth.

Astra Zeneca has improved its Production margins from 58% to 64% over the period 2001-2005 with better management of COGS and has on an average generated an incrementalproduction margin (as a percentage of sales) of ~ 16% each year during this period.

Glenmark has been the most consistent with its production margins ranging from 62% to64%. On an average it has generated incremental production margin (as a percentage ofsales) of ~ 15% each year during this period.

Pfizer has historically had production margins in the range of 63% to 59%, however this

translates to only average ~ 6% incremental production margin (as a percentage of sales)over the period from 2001-2005.

Point 4 and related appendices under Profitability Related measures present a detailedanalysis of Production margins and incremental margins generated as a result of bettermanagement of COGS (Page 16)

- Source: Published Annual Reports (2001-2005)



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V. Improvement / Consistency in Margin of Safety (MOS) and Margins Post all Variable

Costs (MPVC) and their impact on Operating marginsEfficient management and control of fixed and variable costs is an important input forenhancing Operating margins. Efficient management of fixed costs is reflected in thelevels of Margin of Safety at which a competitor operates. Control on variable costs isreflected in the levels of Margins Post all Variable Costs (MPVC). Improvements made ineither one or both these measures have a positive impact on Operating Margins.

GSK and Astra Zeneca have significantly improved their Operating margins by improvingtheir control on fixed costs. GSK has improved its MOS from -3% to 65% in the period2001-2005 and have thereby improved its Operating margin from -2% to 41% in the sameperiod. Astra has improved its MOS from 16% to 54% and has thereby improved itsOperating Margin from 6% to 27%.

Sun on the other hand has been consistently high both on MOS (between 57% & 66%) andMPVC (between 40% & 48%) and has therefore enjoyed operating margins in the range of23% to 31%.

Pfizer has had fairly high MPVC in the range of 35% to 45%, but its control on fixed costshas been lacking as is seen by MOS levels of 24% to 45%. This is clearly reflected in its

operating margins ranging from 8% to 20% (2005: 17%)

Point 5 and related appendices under Profitability Related measures present a detailedanalysis of MOS and MPVC enhancement leading to better Operating Margins. (Page 18)


VI. Improvement in ROIC3 through an investment approachReturn on Invested Capital helps to measure the productivity of the funds invested in thebusiness. Attaining a high total ROIC involves a balance between the amount of fundsbeing invested in the business and the returns obtained from every rupee of investedfunds. Two different approaches exists for enhancing total ROIC, namely increase ininvested capital base (provided ROIC per rupee of invested capital does not suffer) Vs

rationalizing the invested capital base (assuming some inefficiencies exist) to improvethe ROIC per rupee of invested capital and thereby improve the total ROIC.

Different approaches adopted by different competitors revealed that increase in theCapital base has also improved the total ROIC. Competitors which have adopted thesecond approach of rationalizing the capital base have had limited success. GSK and AstraZeneca are the competitors which have taken the former route and have multiplied theirtotal ROIC by ~15 and ~12 times in the period from 2001-2005. Aventis which has takenthe second route has managed to multiply its ROIC by ~2.5 times over the same period.

Pfizer, in the same period has multiplied its total ROIC by ~1.5 times, by improving theROIC per rupee of invested capital and a marginal increase in invested capital.

The importance of an investment based approach is further evidenced from thecomparison between GSK and Lupin who have a similar ROIC per rupee of invested capitalof ~0.16, however GSKs invested capital is three times that of Lupin, thereby earning itthree times as much total ROIC.

Point 6 and related appendices under Profitability Related measures present a detailedanalysis of ROIC and an investment based approach to improving total profits (Page 20)

3 ROIC is Profit Before Tax (PBT) divided by the total asset base of the company after deducting excess cash ifany left over post deduction of all current liabilities.




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VII. Improvement in overall efficiency reflected by improvement in levels of production

and improvement in inventory turnsThe long term revenue growth of a company is driven both by enhancing the netrealization from each product (by increasing its price) and by capturing a larger marketshare of the volumes sold. While none of the above in isolation or at the expense of theother can drive the growth of the company the dynamics of the Indian Pharma market,namely large volumes and low to average price points indicate that capturing a larger

share of the volumes being sold in the market does have an impact on the growth of acompany. Enhancement of the net realization of the products without reasonableincrease in volume sold will have an insignificant impact on the revenue growth of thecompany. Also the scope of this approach has a limited impact on long term growth asthe same is not sustainable in the long term. (Unless product differentiation is majorfactor).

Company ProductionImprovement

Enhancement ofInventory turns

RevenueGrowth

SunPharma

76% 41% 74%

AstraZeneca

42% 86% 65%

GSK 25% 6% 40%Pfizer 15% - 5%

An important input to driving volume growth is improvement in production levels andsimultaneous improvement / maintenance of inventory turns levels.

Sun Pharma, Astra Zeneca and GSK have successfully implemented a mix of the abovetwo approaches with volume growth driving the revenue growth the most. All thesecompanies have pursued an approach of improvement of output generated and enhancedinventory turns, ensuring better volume growth.

Point 7 and related appendices under Productivity & Efficiency Related measures present

a detailed analysis of improved production levels and enhanced inventory turns as adriver of revenue growth (Page 22)


VIII. Improvement in productivity of Key spends4Out of the expenditure that any competitor makes, a certain class of spends areproductive in nature. I.e. these spends are necessary to generate the revenues duringany year of operation. The productivity of these Key spends has a direct impact on theprofitability of the competitors.

Out of the selected list of competitors Sun Pharma leads with the highest average

productivity of these Key spends of ~ 85%. I.e. in other words Sun Pharma spends onlyaround 15% of its sales on key spends. It has also been one of the most consistent ofthe competitors with its productivity constantly ~ 85%.

GSK on the other hand has significantly improved its productivity from ~ 67% to ~ 81%from 2001-2005.

Pfizer however has been spending on an average ~ 28% on Key spends to generate salesand has been fairly low in its productivity levels ranging from ~ 69% to ~ 74%.



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Point 8 and related appendices under Productivity & Efficiency Related measures presenta detailed analysis of improvement in productivity levels (Page 24)

4 Key Spends: Employee costs including travel, marketing and Distribution costs.


Institutionalizing the Benchmarking Process

The process of benchmarking has so far dealt with the historical and current performancecomparison of select competitors on various parameters. For the purpose of institutionalizingthe process of benchmarking within Pfizer on the parameters as described earlier, a twopronged approach needs to be adopted. The ranking of Pfizer on the parameters will enablemapping of performance vis--vis other competitors and serve as an external benchmark. Onthe other hand internal benchmarks on each of these parameters (to be revised every 2 years)will serve as an internal performance measure.

Refer Appendix VII for suggested performance measurement matrix for measuring bothinternal and external performance on the select parameters.

Pf i zer Ltd 2006 -10-


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Detailed Report

Revenue related Measures:

The companies selected for Benchmarking have been compared on various profitabilityparameters.

1. Revenue Growths

3. Overall Strategy4. Impact of the above on Market Rank and Market Share

1. Revenue growths: Description:

This parameter measures the overall Growth of revenues of a company, on aCompounded Annual Growth Rate basis (CAGR) for a period of five years.

What does it indicate?A Companys revenue growth over a period of time when compared to that of its peersand to the markets in which it operates indicates the consistency of its performance. Oneof the key factors that affect a companys growth is the market in which they operate

and their growth vis--vis the growth of their operating market. A conscious strategicdecision made by a company to focus their efforts on certain segments or to reduce focuson certain other segments of the market, based on the overall growth of these segmentshas a direct impact on the growth of the company.

Comparative analysis: Strategic focus of the competitors on high growth marketsegmentsAn analysis was done comparing the growth of various competitors over the past fiveyears and examining the drivers of growth of these competitors as evidenced by thesegments in which they operate.



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Key Observations:

Higher contribution of Competitor revenues from segments in which the competitors haveoutpaced both the segment growth and overall market growth has had a significantimpact on overall company growth. Companies with higher contribution from the firsttwo blocks of competitor revenues (1. Co growth > Operating Market growth > TotalMarket growth and 2. Co growth > operating Market growth < Total market growth) haveshown better overall growth as compared to those companies which have a higher

contribution from the third block (3. Co growth < Operating Market Growth). Sun Pharmahas over 99% revenue contribution from the first 2 blocks followed by Astra Zeneca with69% contribution and GSK with 50% contribution. Pfizer at the tail end of the grid hasonly ~16% contribution from the first two blocks as the effect of the same can be seen onthe overall company de-growth of 2.36%.

Refer to Appendix I for detailed list of Therapeutic areas in which the above-mentionedcompanies have registered superior performance as compared to the market.



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2. Overall strategy adopted by the competitors to achieve their current position in themarket.

Description:The overall strategy of the competitors is evaluated on two parameters, namely adoptionof strategies of growth through brand building vs. new product launches. This attempts tomeasure the effect of the implementation of this strategy on the growth of the company.

What does it indicate?These parameters indicate the strategy adopted by competitors to achieve growth andtheir current position in the market.

Comparative analysis:Success of Overall marketing strategy adopted by a company toachieve growthAn analysis of the competitors was done to analyze the different strategies adopted bythem as per the two parameters listed above. In general it was observed that most Indiancompanies have adopted a strategy of launching several new products as a route togrowth whereas most MNCs have adopted a strategy of building large brands as a driverof growth.

*No of products launched in the last five years

Key Observations:Brand building the major growth driver for MNCs

Among the MNCs it was observed that Aventis Pharma and GSK have implemented theirstrategy of brand building with the most success with 61% and 47% respectively growingfaster than the overall growth of the company and thereby driving the company growth.The focus of these companies on brand building is also evident from the fact that theaverage size of other brands is the largest among all other competitors analyzed, bothMNCs and Indian.

New product launches driving India companies growthAmong Indian companies, Sun Pharma the fastest growing competitor has over 33% of itsrevenues contributed by new products growing faster the overall company growth.



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Among other Indian companies, Ranbaxy and Nicholas Piramal have adopted a mix ofBrand Building and new product launches with varying degrees of success.

Pfizer, like other MNCs also has over 49% of its revenues being contributed by largebrands, however over 107 other brands have an average contribution of only Rs. 3.29crore each, which is the least among all successful MNCs which have adopted a Brandbuilding strategy as a driver for growth. Also the growth of the block of its large brands isalso one of the lowest among all MNCs, with only Novartis registering a lower growth for

its large brands.



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3. Overall market share and market rank in the Indian Market Description:

This parameter measures the impact of the above two parameters, i.e. Revenue growththrough focus on fast growth segments and strategies of growth through Brand buildingvis--vis new product launches on the overall market share and rank of the competitors inthe Indian market. (The overall revenues of the company, which include exports, have

not been considered, only the revenues from the Indian market have been considered).

Comparative analysis:An analysis of the growth in market share of the selected group of competitor companieswas done and the companies were ranked in the order of the maximum growth in marketshare.

Key Observations:It was observed that Sun Pharma has performed the best on this criterion with over 10%growth in its market share. It was also the best performer in terms of market ranksgained in the five-year period from 2002 to 2006, by moving up from 9th place to 5th place.Astra Zeneca, though currently ranked 30th in the Indian market has achieved a steady7%+ growth in its market share.

Pfizer is at the tail end of the grid with the largest loss in market share among thecomparator set, losing market share at a rate of almost 9% in the five-year period.However if compared on a year on year basis Pfizer would be ranked 5 th in terms ofmarket share growth (4.8% growth over 2005, after Lupin, Sun, Astra and Dr Reddys)



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Profitability Measures:The companies selected for Benchmarking have been compared on various profitabilityparameters.

1. Gross Profit / Production margin2. Operating Profit3. Return on Invested Capital (ROIC)

1. Gross Profit / Production margin: Description: This parameter determines the profitability of the business after deducting

all variable manufacturing related costs (Cost of Goods sold, COGS) such as raw materialconsumption, power and fuel, inward freight, processing and manufacturing expenses,etc.

What does it indicate?The gross profit as a percentage to sales measures the markup that the company is ableto charge over its variable costs. This measure is a function of both the ability of thecompany to charge a markup over its variable costs and it management of its variablecosts.

Comparative analysis:

Key Observations:Improvement in Production Margins through management of COGS:Glenmark leads the list of competitors in 2005 with 64% production margin followed byAstra Zeneca and Pfizer with 64% and 59%, respectively. Astra Zeneca (8%+ fr om 01-05),and GSK (10%+ f rom 01-05)have shown the most improvement in Production margins ascompared to the competitor set.

Although Pfizer has had Production margins in the range of 59% to 63%, the same has nothad a significant impact on growth in production margins as a percentage to sales in thefive year period from 2001-2005. This is clearly seen from the analysis on management ofCOGS for the above five year period.



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Management of COGS:

A further analysis was conducted by superimposing the management of COGS (Change inCOGS / Change in Sal es), on the growth in production margin as a % of sales achieved bythese companies. It was observed that the above companies which have shown significantimprovement in their Production margins have done so by better management of theirCOGS relative to the growth in revenues.

Management of COGS (What does it indi cat e?):

The management of COGS in the context of this report is defined as the additional spendon COGS for every rupee of incremental sales generated. The impact of this measure isseen directly in the increase / decrease in the Production Margin as a higher spend onCOGS for incremental sales will have a diluting effect on margins and vice versa.

Pfizer has on an average in the period from 2001-2005 generated an incrementalProduction margin as a percentage of sales of ~ 5.6%. The Top 5 competitors on thismeasure have generated on an average 7.7% to 16% incremental production margin as apercentage to sales.

Refer to Appendix II for company wise details of management of COGS vis--vis growth inproduction margin as a % of sales.



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2. Operating Profit: Description: This parameter indicates the operating profitability of a companys business.

The Operating Profit as a percentage to Net Sales excludes all other items of profit whichare non-operating in nature (i.e. other income, extraordinary items, etc).

What does it indicate?The operating profit measures the return that a business makes from its core activities

alone. While a high production margin measures the ability of a company to charge amark-up over its variable costs, the operating profit measures the overall operatingefficiency that a company is able to exercise over its business operations. Although shortterm variations and inconsistencies may exist, a consistent high performance on thismeasure year-on-year is indicative of the control and efficiency that a company exercisesover its operations.

Comparative analysis:

Key Observations:Improvement in Operating Margins through control on fixed and variable costs:Astra Zeneca (6% to 27%) and GSK (-2% to 41%) have shown the most improvement in theirOperating margins, while Sun Pharma has been the most consistent performer in the last5 years with an Operating margin range of 23% to 31%.

Pfizer has been fairly inconsistent in its performance with Operating margins rangingfrom as low as 8% in 2003 to 20% in 2001.

An analysis was done to analyze the control on fixed and variable costs exercised byvarious competitors to enhance their Operating margins. This was done by using two



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parameters, namely Margin OfSafety (MOS) as a percentage of sales, and Margin Post allVariable Costs (MPVC) as a percentage of sales.

Breakeven Sales & Margin of SafetyBesides production costs the management of fixed costs is an important input forenhancing / maintaining operating margins. This also has a direct impact on BreakevenSales and Margin of Safety. A high margin of safety acts as a cushion, which helpsmitigate the risks faced by a business.

Breakeven Sales & Margin of Saf ety (What does it indi cate?):

Breakeven sales measure the minimum amount of net-sales (af t er having deduct ed al lvar iabl e expenses incurr ed t o genera t e such sales)that are needed by a business tocover all its fixed costs and thereby break-even. The Margin of safety indicates the salesover and above the breakeven sales, which a business generates. A low level ofBreakeven sales and thereby a high Mar gin of Saf ety is a funct i on of management ofef f i c ient management of f ixed cost s.

Margin Post al l Var iabl e Cost s (What does it indi cate?):

MPVC indicates the overall efficiency and management of variable costs exercised by acompany. A higher MPVC enables a company to have sufficient margins for covering thefixed costs and delivering a reasonable return.

It was observed in the case of the above companies, which have shown significantimprovement in their Operating margins, the efficient management of fixed and variablecosts has been a major contributor. A mix of strategies appears to have been adopted toenhance the Margin of Safety and thereby Operating Margins.

GSK and Astra Zeneca have managed to enhance their Margin of Safety to Over 50%(Benchmark Level) and Operating Margins by adopting differing strategies.

Sun Pharma has been consistent by maintaining a Margin of Safety ~ 50%. It has alsomanaged to keep its Operating Margins among the Top 3 competitors in all the yearsunder consideration, by adopting a strategy that differs from that of Astra Zeneca andGSK.

Pfizer on the other hand has so far been unable to break its way into the Top 5competitors (Ranked on this measure). Its management / enhancement of the Margin ofsafety and thereby the Operating margins has a scope for improvement.

Refer to Appendix III and Appendix III (A) for details of management / enhancement ofMargin of Safety and of management of Operating Margins.



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3. Return On Invested Capital (ROIC): Description:

This parameter measures the return (profit before tax) that a company earns on thecapital that it has invested in the business in the form of fixed assets and net currentassets (less excess cash).

What does it indicate?This parameter is a good measure of the overall productivity of the business assets andthe efficiency with which the business is run, reflected in the profitability of the assetsemployed. Thus the ROIC is a function of both the asset base employed to generaterevenues and earn returns and the actual returns earned after deducting all expenses ofthe business.

Comparative analysis:The ROIC for all the competitor companies was analyzed for the five years under review.It was observed that among MNCs, Astra and Aventis have the highest ROIC per rupee ofinvestment in assets.

* The Invested capital in Year 1 is considered as 100 and the Invested capital for each of thesucceeding years are indexed against the base year,

C.I: Comparative index, the maximum invested capital among all companies is taken as an index of100 and all the other companies' Invested capital are benchmarked against it. This index whencombined with the per rupee ROIC (1st Block of the table above), indicates the quantum of Returnsearned by each competitor. For e.g. Although the per rupee ROIC of GSK and Lupin are ~ the same(0.17, 0.16), the Invested capital index of GSK is 73 i.e. ~ 3 times that of Lupin, thus its total ROICis ~ 3 times greater than that of Lupin.



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Key Observations:

It was observed that in case of two MNC companies, the ROIC was enhanced throughrationalization of the capital base. Aventis and Novartis have shown improvement in theirROIC, through rationalization of their asset base. By reducing the current asset base to68% of that in 2001, Aventis has managed to triple their total ROIC over the five yearperiod.

On the other hand GSK has increased its ROIC by increasing its invested capital. It hasevolved its capital base to 486% of the base in year 1 has increased its total ROIC over 16times from 2001 to 2005.

Among Indian companies, Glenmark has expanded its capital base to 279% of its base inyear 1 and has improved its ROIC to 469%. This has allowed them to increase their totalROIC by over 5 times from 2001 to 2005. Nicholas Piramal has adopted a similar strategyand has managed to increase their total ROIC to over 3 times from 2001 to 2005.

Pfizer has registered improvement in ROIC with rationalization of capital base in 2003and 2004, however a clear strategy for enhancement of ROIC through expansion /rationalization of capital base does not emerge.

The Comparative Index (C.I) in the above table also enables comparison of the increasein the absolute returns earned by the competitors in the period from 2001-2005. It can beseen that although Astra Zeneca has multiplied its total ROIC over 13 times and GSK hasdone so over 16 times, the invested capital of GSK is ~ 26 times larger than that of Astra,enabling it to earn exponentially higher ROIC in absolute terms.

Refer to Appendix IV and IV (A) for details of improvement of ROIC for select companiesthrough adopting the two above mentioned approaches.



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Productivity & Efficiency Measures:The companies selected for Benchmarking have been compared on various productivity andefficiency parameters.

1. Management of Inventory turns and its impact on Revenues2. Management of Productive spends and its impact on Revenues

1. Inventory Turns and Impact on Revenues: Description:

This parameter measures the co-relation between better inventory turnover andincreased revenues.

What does it indicate?This parameter measures the impact that improved inventory turns has on the revenuegrowth of a company. Inventory turns are a function of the total production during theyear and the average inventories held out of this production. For an improvement ininventory turns to have an impact on revenue growth, there needs to be a correspondingimprovement in production levels as well. Improvement in inventory turns and

impr oved product ion levels ar e sound indicat ors of increased eff iciency levels atwhich the compet i t or operat es.

Comparative analysis:An analysis was done to measure the effect of changes in inventory turns and productionlevels on the revenue of the selected competitors. The production levels and Inventoryturns level were indexed to the base year by setting the base year as 100. A similarindexation was done for the revenues of each of the years under review. This enables themeasurement of the co-relation between improved inventory turns and improvedrevenues.

Key Observations: (Refer to Figure 1 on next page for details)It was observed that competitors that have expanded both production levels andimproved inventory turns have achieved significant growth in revenues. Sun Pharma hasimproved its production index to 176% of its base in 2001 along with improved inventoryturns index of 141% of its base in 2001. This has enabled it to improve its revenue levelsto 174% of its base in 2001. This is an indicator of the improvement in its overallefficiency levels.

On the other hand most other companies have improved production levels and have stillmaintained their level of inventory turns and have thereby achieved revenue growth. DRLhas improved its production index to 169% of its base and has maintained its inventoryturns index and has achieved a 133% growth in revenue levels over the base.

Pfizers production index has improved to only 115% of its base whereas its inventory

turns index has remained at 100% of its base. As a result it has been able to register only105% improvement in its revenue index over its base.



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2. Productive spends and their impact on revenues: Description:

This measures the productivity of the key heads of expenditure, namely employeeexpenses (including travel), marketing expenses and distribution expenses. This isbecause the afore-mentioned heads of expenditure are considered to be key factors

which affect the growth of revenues for a company.

What does it indicate?This parameter measure the incremental revenues generated year on year and theincremental spend on the key Productive expense heads needed to achieve theincremental revenues.

Comparative analysis:The competitors were analyzed to determine the levels of additional Productive spendmade in order to generate the incremental revenues, year on year. Column C in thetable below measures what is left over from every rupee of incremental revenue afterdeducting the incremental productive spends. A high number (between 0.80 to 0.90+)indicates that the spends on the above mentioned heads of expenditure are highly

productive. (In other words what % of revenues is lef t over af ter deduct ingproduct ive expendi ture)

Key ObservationsIt was observed that among the set of competitors, GSK has resorted to an approach of

rationalizing its productive spend while generating incremental revenues. Thus its focushas been on improving the productivity of its key expense heads. Column C in the tableabove indicates the improvement in productivity of Key spends. The number undereach year under column C indicates the amount left over from each rupee of sales afterdeducting the productive spends as indicated above. GSK has managed to improve itsproductivity from 0.67 paise from every rupee of sales to 0.81 paise from every rupee ofsales.

Sun Pharma on the other hand has been the most consistent in its productivity levels with~ 0.85 to 0.88 paise from every rupee of productive spends in the period from 2001-2005.



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Pfizer on the other hand has had fairly low productivity levels ranging from ~ 0.69 paiseto 0.76 paise from every rupee of sales from 2001-2005.

Refer to Appendix V and Table VIII for methodology used and scores assigned to variouscompetitors on this measure.



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Appendices



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Appendix I Revenue Growths

Sun Pharma

Legend:



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Astra Zeneca

Legend:



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GSK

Legend:



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Pfizer

Legend:

Refer to Appendix V and Table I for methodology used and scores assigned to variouscompetitors on this measure.



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Appendix II Management of COGS

Change in COGS / Change in Sales Y.O.Y Growth in PM as a % toSales

Value of Change in

COGS/Change in Sales = 0.5

Pfizer

Astra Zeneca

0.43

0.23

0.41

0.26

5.05

10.47

17.82

31.4

2002 2003 2004 2005 Efficient management of COGS has alsotranslated in to higher % of additionalproduction margin as a% to sales beinggenerated (2005: 10.5%, average of 2002-2005: 16%). This has been primarily driventhrough higher growth as compared to therest of the competitors.

GSK

-0.17-0.24

0.29

0.58

4.115.19

14.08

3.03

2002 2003 2004 2005 GSK presents a case of the most efficientmanagement of COGS as in each of theyears under consideration the additionalspend on COGS has always been less than50 paisa for every rupee of incrementalsales, except for 2005 (58 paise). This has

also translated into higher % of additionalproduction margin (as a % to sales) beingadded each year, even in the years ofsluggish growth (2002 & 2003).

The management of COGS has beenconsistent with additional revenuegenerated costing less than Rs 0.50 inCOGS. However even with a fairly lowCOGS, the additional Production margin asa % of sales, generated each year is low(2005: 3.27%, average of 2002-2005: 5.67%as compared to average of ~ 10-15% formarket leaders). This is due to the factthat sales have grown at a slower pace ascompared to the market leaders.

0.380.41

0.25

-0.01

25.78

3.2710.1

-16.46

2003 2004 20052002



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Refer to Appendix V and Table IV for methodology used and scores assigned to variouscompetitors on this measure.

Abbott

0.37 0.41

0.75

2.718.05

3.231.93

-6.2

2002 2003 2004 2005

Novartis

1.08

0.4

1.01

0.34

-0.27

4.01

0.09

6.75

2003 2004 20052002

Change in COGS / Change in Sales Y.O.Y Growth in PM as a % toSales

Value of Change in

COGS/Change in Sales = 0.50

Aventis Pharma Nicholas

0.63

0.4

0.0

0.4

5

6.29

14.07

-10.47

7.36

2002 2003 2004 2005

0.94

-0.1

0.06

0.86

0.64

6.95

10.1

1.24

2003 2004 20052002

Dr Reddys Labs

1.47

0.9

0.53

0.26

-0.84 0.85

10.59

-5.32

2002 2003 2004 2005



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Appendix III Margin of safety & management of fixed costs.

Pfizer

55 55

76

58 58

45 45

24

42 42

001 2002 2003 2004 20052

Breakeven Sales % Margin of safety % Benchmark value for MOS% (50%)

Sun

40 36 34 3843

60 64 66 6257

2001 2002 2003 2004 2005

Wockhardt

49 52 4639

59

51 48 5461

41

001 2002 2003 2004 20052

Aventis

59 5444

35 39

41 4656

65 61

001 2002 2003 2004 20052

Astra Zeneca

8477

56 5446

1623

44 4654

2001 2002 2003 2004 2005

GSK

103

68

5039 35

-3

32

5061 65

2001 2002 2003 2004 2005



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Breakeven Sales % Margin of safety % Baseline value for MOS% (50%)

Ranbaxy

8062 55

83 122

2038 45

17

-22

2001 2002 2003 2004 2005

Zydus

63 6577 78 72

37 3523 22 28

2001 2002 04 20052003 20

Refer to Appendix V and Table V for methodology used and scores assigned to variouscompetitors on this measure.



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Appendix IV

No of Times ROIC has multiplied over 2001-2005 Benchmark value (2)

15.52

12.87

4.67

2.39 2.54 2.58 2.53 2.44 2.24 1.64 1.52 1.35 0.720.56

Astra

DRL

Glenmark

Lupin

Nicholas

Zydus

Aventis

Wockhardt

Sun

Novartis

Pfizer

Abbott

Ranbaxy

GSK



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The competitor with the maximum CAGR (Compound Annual Growth Rate) of large brandsis assigned a score of 25 and the others are indexed against it.

For New Product launches: The competitor with the maximum % contribution to totalrevenues by new products is assigned a score of 25 and the others are indexed against it.The competitor with the maximum CAGR of new products is assigned a score of 25 andthe others are indexed against it.The total Score is calculated by adding up all the four scores. Thus both approaches to

growth, i.e. Brand building of existing brands and new product launches are consideredwhile computing the scores.

Refer to Table II for detailed scores.

3. Impact of the above two on Market share progression (Point 2 of Revenue relatedmeasures Page 43)This parameter is divided into two parts, namely market share progression (excluding thecurrent year) and current market share progression (year on year improvement / declinein market share). This is done in order to ensure that although the current growth /decline in market share of the competitors is considered their past growth is not ignored.This is to iron out any inconsistencies in current growth. Thus the market leader in termsof maximum historic market share growth is assigned a score of 50 and all the others are

indexed to the leader. Also the market leader in terms of maximum current growth inmarket share is assigned a score of 50 and all the others are benchmarked against it.

Refer to Table III for detailed scores.

4. Management of COGS and its impact on Gross margins (Point 1 of Profitabilitymeasures Page 44)The score for this parameter is computed on the following basis:The additional Production margin generated each year as a percentage of sales iscalculated. The average of such percentages for the period from 2002-2005 is calculatedand the competitor with the highest average is given a score of 100. The rest of thecompetitors are indexed to the leader on this measure and ranks are assigned accordingly.

Refer to Table IV for detailed scores.

5. Improvement / Consistency in Margin of safety (MOS) and Margins Post all VariableCosts (MPVC) and its impact on Operating margins (Point 2 of Profitability measures Page 45)Scores for this parameter have been divided into two parts:Part I: The average MOS for the period from 2001-2004 is calculated and the competitorwith the highest average is assigned a score of 25 and the other competitors are indexedagainst the leader. The competitor with the highest MOS for 2005 is assigned a score of25 and the other competitors are indexed against it. Thus both historical and currentperformance of the competitors in managing fixed costs is considered.Part II: The average MPVC for the period from 2001-2004 is calculated and thecompetitor with the highest average is assigned a score of 25 and the other competitors

are indexed against the leader. The competitor with the highest MPVC for 2005 isassigned a score of 25 and the other competitors are indexed against it. Thus bothhistorical and current performance of the competitors in managing variable costs isconsidered.Thus both the parts together allow equal weight-age for management of both fixed andvariable costs.Refer to Table V for detailed scores.



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Table I: Strategic focus of the competitors on high growth market segments

Pfi zer Ltd 2006


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Table II: Success of Overall marketing strategy adopted by a company to achieve growth

Pfi zer Ltd 2006


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Table V: Improvement / Consistency in Margin of safety and its impact on operating margins

Pfi zer Ltd 2006


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Table VI: Improvement in ROIC through an investment approach

Pfi zer Ltd 2006


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Table VIII: Improvement in productivity of Key spends

Pfi zer Ltd 2006


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f i zer Lt d 2006

Appendix VI:Glossary of Terms and Formulae used in this report:

P


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which they operate. Similarly for new launches to provide significant contribution infuture, their growth must also match the growth of top launches in each sub TA.

Note 3: Among the select competitors the top 5 competitors (ranked in order of their marketshare growth) are growing at an average of 10-12%, while several others have also lostmarket share. Given the vagaries of market share growth market share growth of ~ 8to9% would be necessary to maintain and grow market position from the current positionof 9th.

Note 4: The top 3 competitors ranked on these criteria have added on an average anincremental Production margin as a % to sales of ~ 13-15%. Also the management ofCOGS for these competitors has been fairly consistent, with Change in COGS / Changein Sales in the range of Rs 0.25 to Rs 0.40. Thus the internal benchmark for incrementalproduction margin as a % to sales has been set at ~9 to 10% with Change in COGS /Change in Sales in the range of Rs 0.30 to Rs 0.40. Thus revenue growth along withcontrol on costs is stressed upon.

Note 5: Management of fixed costs, reflected in Margin of Safety (MOS %) for most competitorshas been ~ 50%, while Pfizers margin of safety has been consistently below 50%.Margins Post all Variable Costs (MPVC) has been fairly consistent ~ 40%. Thus aninternal benchmark of 50% for MOS% and 40% for MPVC has been set, targeting better

management of fixed costs and consistent management of all Variable costs.

Note 6: Most competitors have multiplied their total ROIC in the period from 2001-2005 by afactor of between 2 to 5 to even 10+ times, while Pfizer has managed to multiply itsROIC by only 1.5 times. An indicative reason for this has been the fact that its InvestedCapital Index has increased to 115% of its base in 2001 as compared to close to 200% ormore for other competitors. Pfizers ROIC per rupee of invested capital has been fairlyconsistent at Rs 0.34, thus an internal benchmark of Invested capital index of 150 to180% of the base in 2001, with, a per rupee ROIC of ~ 0.20-0.30 is suggested.

Note 7: Most competitors have achieved growth through expansion of volumes sold withreasonable increase in price points. Pfizers production index has grown to only 115%of its base in 2001, while most competitors who have achieved significant growth have

done so with a significant increase in volumes. Thus the internal benchmark for theProduction Index has been set at 130 to 150% of its base in 2001, and inventory turnsindex of 110 to 115% of its base in 2001, which has a two fold effect of improvedefficiency and productivity.

Note 8: The productivity of Key spends as measured by the excess of sales (after deductingthe Key spends) divided by total sales, has been fairly low for Pfizer (~0.75 per rupeeof sales). Most competitors with significant revenue growth have their productivitylevels at ~ 0.80 to 0.90 per rupee of sales. Thus the internal benchmark for thisparameter has been set between 0.80 to 0.85 per rupee of sales.

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Indian Pharma Industry Benchmarking Report