Sector biotech

Pharmaceuticals sector

Inexpensive drugs from India to transform the global drug industrytrend toward biosimilars

Analysts

Ryoichi UrushiharaMotoya KohtaniKaran AhujaSaion MukherjeeAvinash Ghalke

(Japan)(Japan)(Japan)(India)(India)

US/European majors procuring cheap drugs in bulk from IndiaAntibody biosimilars poised for widespread global useSigns of shift back from antibody therapeutics to small molecule drugs

21 June 2010Please read the important disclosures and analyst pp certifications on. 105-108. gl

Nomura 1

Inexpensive drugs likely to become widespread throughout the world:

Healthcare reforms in the US mean that in all the major industrialized nations, the state now has overall control of medical insurance. With industrialized economies growing at less than 2% a year, ways will have to be found to curtail healthcare spending now that it is partly or wholly the responsibility of the state. The volume of pharmaceuticals consumed is rising by about 7% a year as the world's population becomes older. As such, drug prices will have to fall more than 5% a year to prevent a squeeze on government finances. We therefore think the uptake of inexpensive drugs will become necessary globally.

Generic versions of antibody drugs: Indian generic drugmakers are attempting to cut manufacturing costs to the bone via lower personnel costs and streamlined production processes for drug materials. We estimate that production costs for low molecular weight drugs are less than 20% of costs in Japan. The Indian authorities already have approved a biosimilar for Rituxan, an antibody treatment for cancer. Although it is priced at only a 50% discount to the branded drug, very low production costs mean that the Rituxan biosimilar appears to command a gross margin of more than 80%. Antibody treatment with branded drugs costs several million yen per annum. We think biosimilars will establish themselves rapidly in industrialized nations as they will help to reduce costs for both patients and governments.

Partnerships between Western and Indian drugmakers: Major drugmakers in Europe and the US have been pursuing partnerships with Indian generic drugmakers since 2008 in order to secure supplies of inexpensive pharmaceuticals. Their aim is to generate stable earnings by supplying inexpensive drugs for the treatment of chronic conditions on global markets. This has given rise to a well-balanced business model, with the high-risk, high-return business of developing drugs for unmet medical needssuch as anticancer drugs and treatments for central nervous system disorderscomplemented with inexpensive drugs sourced from India.

Indian companies riding the wave of expansion in biosimilar industry: Among Indian drugmakers, we find Dr Reddys Laboratories [DRRD IN] (Buy; INR1,423.45, 17 June close) to be of the most interest. Dr Reddy's has been expanding its US operations, as well as supplying active pharmaceutical ingredients (APIs) for generics and partnering with GlaxoSmithKline [GSK LN] (Neutral; GBp1,215) to market drugs in emerging economies. Our next recommendation is Jubilant Organosys [JOL IN] (Buy; INR348.65), which has alliances with Eli Lilly [LLY US] (No rating; $34.39) and other overseas drug majors under which it provides not only R&D but also manufacturing support.

Pharmaceuticals sector

Inexpensive drugs from India to transform the global pharmaceutical industrytrend toward biosimilars In this report, partially based on research carried out in India, we make the case that biosimilar antibody drugs (generic versions of biotherapeutics) will become widespread in industrialized nations by 2015, for the following two reasons. First, we think conditions are right for medical authorities in Japan, the US and Europe to start approving biosimilars, including antibody biosimilars. Second, biosimilars can now be manufactured inexpensively. Regulatory and technological obstacles to the release of biosimilars are now diminishing. We think biosimilars will make rapid inroads if guidelines for their approval are established in Europe, Japan, and the United States. Industrialized nations are likely to approve inexpensive yet effective biosimilars in order to rein in growth in healthcare spending caused by the ageing of their societies. Biosimilars of antibody drugs have already been approved in India. US and European generic drugmakers have been stepping up partnerships with Indian companies to produce biosimilars, and branded drugmakers are now following suit. We think inexpensive drugs from India will transformthe contours of the global pharmaceutical industry.

21 June 2010 Japanese full report: 21 Jun

Report no. 10-236 Analysts Ryoichi Urushihara +81-3-5255-1785 [email protected] Motoya Kohtani +81-3-5255-1640 [email protected] Karan Ahuja [email protected] Financial & Economic Research Center Nomura Securities, Tokyo Saion Mukherjee +91-22-4037-4184 [email protected] Nomura Financial Advisory and Securities (India) Avinash Ghalke +91-22-405-32046 [email protected] Nomura Structured Finance Services, India Please read the important disclosures and analyst certifications on pp. 105108. gl

Nomura Securities Co Ltd, Tokyo Japanese Equity Research

(continued over)

Nomura Japanese Equity Research

2 Pharmaceuticals sector

Japanese drugmakers establishing themselves in India: Japanese drugmakers have been slow to adapt to the global shift toward cheaper drugs. In the context of this report, we therefore focus on Daiichi Sankyo [4568] (Buy; 1,607, 18 June close), which has acquired Indias Ranbaxy Laboratories [RBXY IN] (Reduce; INR442.70, 17 June close) with a view to building a presence in emerging markets, and Eisai [4523] (Buy; 2,982), which has a manufacturing plant in India. In doing so, both are taking steps to curb production costs. We also highlight JCR Pharmaceuticals [4552] (No rating; 1,264), which has already released an erythropoietin (EPO) biosimilar in Japan. Nipro [8086] (Neutral; 1,718) too is developing an EPO biosimilar for the domestic market, and we think both companies bear close monitoring. Also noteworthy is Fuji Pharma [4554] (No rating; 1,725), for its granulocyte-colony stimulating factor (G-CSF).

1. Summary: we look for sustained global demand for inexpensive drugs............. 5 2. Indian pharmaceutical industry......................................................................... 20

(1) Dr Reddys Laboratories [DRRD IN] (Buy; INR1,423.45) (Saion Mukherjee) .....................30 (2) Lupin Laboratories [LPC IN] (Buy; INR1,879.90) (Saion Mukherjee)..................................31 (3) Glenmark Pharmaceuticals [GNP IN] (Buy; INR271.80) (Saion Mukherjee).......................32 (4) Sun Pharmaceutical Industries [SUNP IN] (Neutral; INR1,698.75) (Saion Mukherjee).........................33 (5) GlaxoSmithKline Pharmaceuticals [GLXO IN] (Neutral; INR2,096.70) (Saion Mukherjee) ....................34 (6) Cipla [CIPLA IN] (Reduce; INR334.65) (Saion Mukherjee).................................................35 (7) Ranbaxy Laboratories [RBXY IN] (Reduce; INR442.70) (Saion Mukherjee) ......................36 (8) Jubilant Organosys [JOL IN] (Buy; INR348.65) (Saion Mukherjee) ....................................37

3. Antibody biosimilars destined to take hold around the world........................... 38

Shimadzu [7701] (Buy) (Motoya Kohtani).................................................................................71 Nipro [8086] (Neutral) (Motoya Kohtani)...................................................................................73

4. Japan: government promoting generics ........................................................... 75

Kyowa Hakko Kirin [4151] (Buy) (Ryoichi Urushihara)..............................................................85 Eisai [4523] (Buy) (Ryoichi Urushihara) ....................................................................................88 Nichi-Iko Pharmaceutical [4541] (Buy) (Ryoichi Urushihara) ....................................................90 JCR Pharmaceuticals [4552] (No rating) (Motoya Kohtani)......................................................92 Towa Pharmaceutical [4553] (Buy) (Ryoichi Urushihara) .........................................................94 Fuji Pharma [4554] (No rating) (Ryoichi Urushihara) ................................................................96 Sawai Pharmaceutical [4555] (No rating) (Ryoichi Urushihara)................................................98 Daiichi Sankyo [4568] (Buy) (Ryoichi Urushihara) ..................................................................100

Contents

continued from front cover


Pharmaceuticals sector 3



Companies mentioned in this report

Code/ticker Company Rating Share price Ticker Company Rating Share price 2269 Meiji Holdings Buy 3,705 SVLS IN Suven Life Sciences Limited No rating INR31.35 3101 Toyobo Neutral 159 TRP IN Torrent Pharmaceuticals Limited No rating INR557.20 4151 Kyowa Hakko Kirin Buy 847 WANB IN Wanbury Limited No rating INR77.35 4502 Takeda Pharmaceutical Neutral 3,895 WPL IN Wockhardt Limited No rating INR136.20 4503 Astellas Pharma Neutral 3,015 ZTL IN Zenotech Laboratories Ltd. No rating INR113.80 4506 Dainippon Sumitomo Pharma Buy 709 ABT US Abbott Laboratories No rating US$48.63 4507 Shionogi Neutral 1,690 ALXN US Alexion Pharmaceuticals, Inc. No rating US$54.22 4508 Mitsubishi Tanabe Pharma Buy 1,319 AGN US Allergan Inc. No rating US$61.45 4514 Aska Pharmaceutical No rating 643 AMGN US Amgen Inc. No rating US$55.44 4519 Chugai Pharmaceutical Buy 1,633 ARQL US ArQule Inc. No rating US$5.22 4523 Eisai Buy 2,982 BAX US Baxter International Inc. No rating US$42.58 4528 Ono Pharmaceutical Neutral 3,610 BIIB US Biogen Idec Inc. No rating US$49.01 4530 Hisamitsu Pharmaceutical Buy 3,335 BMY US Bristol-Myers Squibb Company No rating US$25.86 4534 Mochida Pharmaceutical No rating 848 CPD US Caraco Pharmaceutical Laboratories, Ltd. No rating US$4.43 4535 Taisho Pharmaceutical Neutral 1,749 ELN US Elan Corporation, plc, No rating US$4.95 4536 Santen Pharmaceutical Neutral 2,989 LLY US Eli Lilly & Co. No rating US$34.39 4540 Tsumura Buy 2,666 ENDP US Endo Pharmaceuticals Holdings No rating US$21.89 4541 Nichi-Iko Pharmaceutical Buy 3,330 FRX US Forest Laboratories Inc. No rating US$27.30 4552 JCR Pharmaceuticals No rating 1,264 GENZ US Genzyme Corporation No rating US$51.43 4553 Towa Pharmaceutical Buy 5,860 GILD US Gilead Sciences, Inc. No rating US$35.97 4554 Fuji Pharma No rating 1,725 HSP US Hospira, Inc. No rating US$56.18 4555 Sawai Pharmaceutical No rating 8,290 JNJ US Johnson & Johnson No rating US$59.18 4568 Daiichi Sankyo Buy 1,607 MRK US Merck & Co. Inc. No rating US$35.86 4569 Kyorin Buy 1,255 MYL US Mylan No rating US$18.36 5201 Asahi Glass Buy 936 PDLI US PDL BioPharma, Inc. No rating US$5.62 7701 Shimadzu Buy 708 PFE US Pfizer No rating US$15.47 8086 Nipro Neutral 1,718 REGN US Regeneron Pharmaceuticals, Inc. No rating US$26.55 ARBP IN Aurobindo Pharma Limited No rating INR851.55 SIAL US Sigma-Aldrich Corporation No rating US$53.38 BIOS IN Biocon Limited No rating INR310.65 TEVA US Teva Pharmaceutical Industries No rating US$54.22 CDH IN Cadila Healthcare Ltd. No rating INR630.20 WPI US Watson Pharmaceuticals Inc. No rating US$44.26 CIPLA IN Cipla Ltd. Reduce INR334.65 AZN LN AstraZeneca PLC Reduce GBp3,082 DISH IN Dishman Pharmacuticals & Chemicals Ltd. No rating INR205.60 GSK LN GlaxoSmithKline plc Neutral GBp1,215 DIVI IN Divi's Laboratories Ltd No rating INR770.05 NOVN VX Novartis AG Buy CHF54.40 DRRD IN Dr. Reddy's Laboratories Ltd. Buy INR1,423.45 ROG VX Roche Neutral CHF158.90 GLXO IN GlaxoSmithKline Pharmaceuticals Ltd. Neutral INR2,096.70 LONN VX Lonza Group Ltd. No rating CHF77.40 GNP IN Glenmark Pharmaceuticals Limited Buy INR271.80 BAS GR BASF Neutral 46.64 JOL IN Jubilant Organosys Limited, Buy INR348.65 BAYN GY Bayer AG Neutral 48.665 JPO IN Jupiter Bioscience Limited No rating INR83.30 BIM FP bioMerieux sa No rating 83.90 LPC IN Lupin Limited. Buy INR1,879.90 SAN FP Sanofi-Aventis Neutral 51.11 NTCPH IN Natco Pharma Limited No rating INR168.35 SAZ GY Stada Arzneimittel AG No rating 29.60 OPTC IN Opto Circuits India Limited No rating INR228.05 UCB BB UCB S.A. Neutral 26.96 OCP IN Orchid Chemicals & Pharmaceuticals Ltd. No rating INR154.55 YM CN YM Biosciemces No rating C$1.27 PFIZ IN Pfizer Limited, India No rating INR1,101.05 GEN DC Genmab A/S No rating DKK51.30 PIHC IN Piramal Healthcare Limited No rating INR488.55 NOVOB DC Novo Nordisk A/S Reduce DKK488.70 PLSL IN Piramal Lifescience No rating INR137.80 NZYMB DC Novozymes A/S No rating DKK688.50 RBXY IN Ranbaxy Laboratories Limited Reduce INR442.70 068270 KS Celltrion No rating KRW21,200 STR IN Strides Arcolab Limited No rating INR389.45 068875 KS LG Life Sceineces Ltd No rating KRW22,250 SUNP IN Sun Pharmaceutical Industries Ltd. Neutral INR1,698.75 Note: Share prices as of 18 June close for Japanese stocks, 17 June close for other stocks. Source: Nomura



1. Summary: we look for sustained global demand for inexpensive drugs (1) Conclusion: antibody therapeutic biosimilars likely to find a global market We recently visited 21 companies1, including Indian generic drug makers, to gauge the current status of the generic drug market. We toured manufacturing plants of four makers: Aurobindo, Eisai, Ranbaxy, and Strides Arcolab. We discovered the main focus of Indian generic drug makers is expanding scale merits as much as possible to reduce manufacturing costs, thereby facilitating the supply of a wide range of low-cost drugs.

Typically, a generic drug refers to the generic version of a small molecule drug that has a molecular weight below 300. Indian generic makers have started expanding into generic biologicals (biosimilars). Biologicals are pharmaceuticals that use biological substances as the active ingredient and products like growth hormone and anemia treatment EPO. They are typically classified as either protein drugs, which have a molecular weight of 10,00030,000, or antibody therapeutics, which have a molecular weight of 150,000 (Exhibit 1-1). Biosimilars is the term for generic versions of biopharmaceuticals. Unlike small molecule drugs that are chemically synthesized, biosimilars are produced through fermentation and thus are not completely identical to the original drug. Instead, they are mostly similar, which is why the term biosimilar was coined. Dr. Reddys Laboratories currently markets a biosimilar of antibody therapeutic Rituxan (cancer treatment) under the trade name Reditux. Sold at half the price of brand drugs, the branded drug maker lowered its price as well. Conventional stock market wisdom is that antibody therapeutic biosimilars will not be commercialized, but we believe several will be marketed in Europe and the US by 2015 (see Chapter 2). Moreover, we expect the pricing to be significantly lower than for the original drugs.

Investors belief that it would be difficult to commercialize antibody therapeutic biosimilars is based on two factors: (1) regulatory guidelines do not currently exist and (2) manufacturing costs are high. First, regulatory authorities in Japan, Europe, and the US have not yet announced approval guidelines for antibody therapeutic biosimilars. Accordingly, market watchers do not think generic makers are willing to commit substantial resources to development without knowing the requirements. Our research, however, suggests generic companies have not been idly sitting on the sidelines waiting for the regulatory authorities, but instead are engaging them in ongoing consultations prior to the establishment of guidelines. In effect, the regulatory authorities are formulating guidelines with input from the generic drug companies.

1 The 21 companies we visited are Alkem Laboratories, Aurobindo Pharma [ARBP IN], Biocon [BIOS IN], Cadila Healthcare [CDH IN], Dr. Reddys Laboratories [DRRD IN], Eisai Pharmaceuticals India Private, GlaxoSmithKline Pharmaceuticals [GLXO IN], Glenmark Pharmaceuticals [GNP IN], GVK Biosciences Private, Intas Biopharmaceuticals, Jubilant Organosys [JOL IN], Jupiter Bioscience [JPO IN], Lupin [LPC IN], Matrix Laboratories, Natco Pharma [NTCPH IN], Opto Circuits India [OPTC IN], Ranbaxy Laboratories [RBXY IN], Strides Arcolab [STR IN], Sun Pharmaceutical Industries [SUNP IN], Torrent Pharmaceuticals [TRP IN], and Wanbury [WANB IN].

India-based generic drug makers are low-cost producers

Commercialization of antibody therapeutic biosimilars

Consultations ongoing prior to establishment of guidelines



1-1. Drug categories including biologicals

Biological drugs Category (1) Small molecule drug (2) Protein drug (3) Antibody therapeutic Molecular weight 100300 10,00030,000 About 150,000 Formulation Tablet, capsule, liquid formulation Liquid formulation, freeze-dried Administration Oral, injection Injection

Blopress Antihypertensives Insulin Antidiabetes drugs Remicade Antirheumatism drug Lipitor Cholesterol-lowering drug Growth hormone Dwarfism treatment Rituxan Anticancer Example drugs Aricept Alzheimers disease EPO preparation Anemia drug Avastin Anticancer

Manufacturing Chemical synthesis/partial fermentation Fermentation/partial chemical synthesis Fermentation Clinical trials Simple comparison Similar to those required for new drugs Europe Proof of bioequivalence Development guidelines for individual products Japan Proof of bioequivalence Development guidelines for individual products (more stringent than Europe?) US Proof of bioequivalence Simple review? Complete data similar to new drugs?

(3) Antibody drug(fermentation)

(1) Sm all m olecule drug(chemical synthesis)

(2) Protein drug(fermentation)

Source: Nomura

Second, it is becoming increasingly possible to reduce manufacturing costs. Biosimilars are produced through fermentation using E. coli, yeast, and mammalian cells. Consequently, manufacturing costs are exceptionally high because initial investments, including fermentation tanks, can exceed 10bn. However, technological advances have led to significant improvements in production, with yields of the target substance having risen from 20mg/liter in the 1980s, to 5g/liter more recently. We estimate the current manufacturing cost for a biosimilar at several thousand yen per gram. This is significantly lower than the cost of branded antibody therapeutics, and we therefore see ample scope for low-cost biosimilars.

The generic drug market has not expanded merely on the back of greater supply, but has also benefited from increasing demand. The business model for generic drug makers differs from that of branded drug makers, which aggressively conduct marketing activities to sell their drugs. We think the environment is positive for growth of biosimilars as demand is there for suppliers as well as users.

Inexpensive drugs are in demand throughout the world. Developed markets need them to contain rising healthcare expenditures while emerging markets require them to support the health of their citizens amid economic expansion. Following the US healthcare reform, all major developed markets now have health insurance managed by government. Since medical expenditures are a major component of the national budget, increases in healthcare spending need to be kept in line with economic growth. Against the backdrop of developed countries increasingly facing difficulties in financing their high healthcare expenditures, low-cost

Manufacturing costs can be reduced

Business climate is conducive to suppliers and users

Universal health insurance spurs demand



biosimilars would be welcomed to replace expensive antibody therapeutics, annual costs for which can run several million yen per patient. Our review of data related to JCR Pharmaceuticals [4552] EPO biosimilar (epoietin alpha BS Injection JCR), a treatment for anemia, suggests the Ministry of Health, Labour and Welfare (MHLW) is inclined to approve biosimilars. Approval of a generic drug typically requires proof of bioequivalence, but approval was granted in the case of epoietin alpha BS Injection JCR based on proving equivalent efficacy. In fact the approval process appears to have been surprisingly easy.

According to biopharmaceutical manufacturer Lonza Group [LONN VX], biologicals going off patent in 200815 have a global market value of US$59bn while generic drug maker Teva [TEVA US] estimates patent expiries in 201620 are worth another US$23bn. Combined, this represents a potential market for biosimilars by 2020 of around US$80bn. Major patent expiries begin from 2012 and we estimate the potential market for biosimilars will increase by around US$10bn each year from that point. We further assume biosimilars will capture about 50% of that market potential, thereby reducing global pharmaceutical expenditures of 50trn by 500bn. The US market accounts for about 80% of biological sales, and we therefore expect biosimilars to reduce US pharmaceutical expenditures of 30trn by about 400bn, representing an annual reduction of 1.3% on pharmaceutical spending. Various measures to cut pharmaceutical costs were adopted as part of the US healthcare reform and we think these will slow pharmaceutical market growth to 5%. Commercialization of biosimilars could further contribute to reducing pharmaceutical expenditures.

Major US and European pharmaceutical manufacturers began forming alliances with Indian generic drug makers from 2008. Initially, the alliances centered on the supply of bulk for small molecule drugs and consignment manufacturing, but more recent partnerships have targeted biosimilars. India is already a source of low-cost drugs, and tapping the Indian generic drug makers to become global suppliers of low-cost drugs for chronic diseases could provide the branded drug makers with a stable profit stream. Branded drug companies, meanwhile, have been turning their attention to high-risk, high-return drugs that address unmet medical needs like oncology and central nervous system (CNS) diseases. Stable profits generated by the drugs for chronic diseases could be used to fund development of new drugs, thereby creating a well-balanced business model (Exhibit 1-2).

1-2. Changing business structure of major US and European pharmaceutical manufacturers

Previousmodel

Risk

Return

Combining results in

rebalancing

Unmet medical needs

Cheap drugs

Risk

Return

medium-risk, medium-return

high-risk, high-return

Low-risk, low-return

Cash f low source

Supports R&D

Source: Nomura

Antibody therapeutic biosimilars would help hold back rising pharmaceutical expenditures

Indian companies key suppliers



Our top pick among Indian generic makers is Dr. Reddys Laboratories. In addition to expanding its US business, the company is a generic drug bulk supplier and is expanding into emerging markets through an alliance with GlaxoSmithKline [GSK LN]. Next, we like Jubilant Organosys, which has formed partnerships with major branded drug makers like Eli Lilly [LLY US] and is providing both R&D and manufacturing support.

Japanese companies are late in adapting to the structural changes in the global market. Standouts are Daiichi Sankyo [4568], which acquired Ranbaxy Laboratories and is expanding into emerging markets, and Eisai, which is taking advantage of Vizaqs Indian plant to sharply lower manufacturing costs of Alzheimers disease treatment Aricept. In the biosimilar field, JCR Pharmaceuticals has already commercialized an EPO (anemia drug) biosimilar while Nipro [8086] is on track to become the second company to do so. EPO is an essential drug for dialysis patients, who are increasing in number by 10,000 every year, and there is a strong need for cheaper alternatives. Mochida Pharmaceutical [4534] and Fuji Pharma [4554] are jointly developing a granulocyte-colony stimulating factor (G-CSF) biosimilar for the treatment of neutropenia while Shimadzu [7701] is developing analysis equipment for biosimilar sugar chains.

(2) Aging population drives up healthcare expenditures and pharmaceutical costs Use of pharmaceuticals is expanding on the back of demographic trendsie, the aging populations and higher incidence of disease among the elderlyand will likely drive up pharmaceutical costs. The rise is not limited to pharmaceutical costs but also applies to total healthcare expenditures, which include medical procedures. We used Japan as a model, because it is at the vanguard of these demographic trends, and analyzed factors that boosted healthcare expenditures in the past (Exhibit 1-3). We concluded that the increase in the number of elderly over the age of 65 was the single greatest factor boosting healthcare expenditures. Japans government has attempted to lower healthcare expenditures per capita through periodic medical fee revisions, but total healthcare expenditures have continued to rise as the impact of the growing population exceeded savings from healthcare cost containment policies. In the past 15 years, the elderly population has increased at an annual rate of 3.7%. The growth rate will decline to 2.8% during 200510, 1.2% for 201015, and 0.3% for 201520, according to the National Institute of Population and Social Security Researchs Future Population Projections for Japan. If government policies to cut healthcare expenditures for the elderly were maintained at 200005 levels, expenditures would not stop increasing until 201015.

1-3. Healthcare expenditures for elderly linked to population growth: analysis of growth factors (%)

National healthcare expenditures Healthcare expenditures for elderly CY Total Per capita Population Total Per capita Population GDP

Social security costs

9095 4.00 3.68 0.31 5.80 1.60 4.14 1.96 6.51 9500 1.70 1.48 0.22 3.87 0.05 3.81 0.26 3.83 0005 0.97 0.83 0.14 2.21 -0.92 3.17 -0.04 2.36 0510E - - -0.30 - - 2.80 - - 1015E - - -0.40 - - 1.20 - - 1520E - - -0.60 - - 0.30 - - Note: Data from 2005 are compiled from National Institute of Population and Social Security Researchs Future Population Projections for Japan (December 2006). Source: Nomura

Investment points for key Indian companies

Investment points for key Japanese companies

Aging population is driving up healthcare expenditures



The incidence of disease rises with age, and thus it is easy to imagine rising healthcare cost per capita. In analyzing Japanese demographic trends, we confirmed that longer life spans translated into higher per capita healthcare costs (Exhibit 1-4). Although Japan is the leader in the aging population, the trend will become increasingly pronounced next in Europe and then the US. Accordingly, Europe and the US will likely next experience sharply expanding healthcare expenditures. Even France and Spain, which have had relatively lax policies on healthcare expenditures compared to other European countries, enacted full-scale cost-containment initiatives from May 2010. The US just passed healthcare reform and will have to aggressively implement cost-cutting measures. It is generally believed that the goal of social security is to promote and maintain the health of the citizenry. However, maintaining health of the elderly would drive up healthcare costs, thereby impeding economic expansion, and ultimately proving counter-productive. We expect to see an increased focus on curbing pharmaceutical costs.

1-4. Healthcare costs rose sharply in line with increase in life span

Age

Healthcare costs

Increased costs

Advancement of aging

Source: Nomura, based on data from Professor Ogawa et al at Nihon University

(3) Inexpensive drugs needed for all fields Given the structural changes underway worldwide, we see little prospect of growth for pharmaceutical markets in developed countries. The major countries have universal health insurance systems similar to Japans and therefore a large portion of the cost for pharmaceuticals is borne by national coffers. Substantial economic growth is unlikely in the developed countries, and thus healthcare cost-containment measures will probably be necessary. Consequently, pharmaceutical expendituresa subset of overall healthcare expendituresare unlikely to expand, and we expect net zero growth in developed countries.

Aging populations are boosting the volume of drug use in developed countries, but the size of pharmaceutical markets is being regulated because of strained national finances. It is therefore essential to bring down unit drug costs. We conclude that downward pressure on unit prices for drugs will continue so long as this demographic trend persists.

Major developed countries advancing healthcare cost containment policies

Zero growth for pharmaceutical markets in developed countries

Pharmaceutical prices need to decline



A natural result of aging populations will likely be an increase in patients suffering from cancer, CNS diseases like Alzheimers disease, and immune disorders like rheumatoid arthritis. However, given that there are few truly effective treatments for these diseases at present, there is substantial potential demand. In the case of Alzheimers disease, assuming it manifests at age 65, treatment would likely continue for 10 years at most. If a more effective treatment emerged, priority would be on concurrent use with existing drugs to improve efficacy. We expect the market for drugs addressing unmet medical needs to continue expanding.

In contrast, existing treatments for chronic diseases like hypertension, hyperlipidemia, and diabetes are already highly effective. Therefore, the market need is not for new drugs but rather cheaper ones. Assuming diabetes manifests at age 40, pharmaceutical treatment would likely continue for 35 years based on Japans life expectancy. In addition, patients of chronic diseases often suffer from additional circulatory diseaseseg, about half of hyperlipidemia patients also have hypertension. The need for cheaper drugs is substantial given the high volume of demand and the long period of treatment. Caduet, a pill that combines amlodin (hypertension drug) and atorvastatin (hyperlipidemia treatment), was marketed domestically in July 2009 targeting patients that suffer from both diseases.

We assume pharmaceuticals will overall be nearly a zero-sum market, but expect sales for drugs targeting unmet medical needs to expand while sales of chronic disease treatments contract. It would be difficult to restrict expansion in pharmaceutical volume usage, leading to a drop in unit prices. Accordingly, we think generics will become the drug of first choice. In fact, US prescriptions for cholesterol-lowering drug Lipitor have continued to decline prior to the patent expiry and there has been a similar trend for diabetes drug Actos. Even if a new drug for chronic diseases is commercialized, it has to compete with generic versions of similar drugs. Accordingly, new drug sales are unlikely to expand on the scale at which they did in the past.

1-5. Market for drugs treating unmet medical needs likely to expand while generics likely to become drug of choice for chronic diseases

Current FutureMarket s ize not expected to grow

Generic drugs

Immune diseasetreatments

Others Anticancer agents

CNS drugsGenerics

HypertensivesAntidiabetics

Cholestero l-loweringdrugs

Others

Source: Nomura

Low-cost drugs in developed markets are crucial to maintaining health in emerging markets. Makers that supply low-cost drugs to emerging markets are contributing to their economic expansion as the health and well being of workers in emerging markets is crucial to the continued economic success. This is similar to Japan during its economic expansion in the 1960s and 1970s. As the economy expands, per capita GDP rises and so does healthcare expenditures per capita (Exhibits 1-6, 1-7). The use of generic drugs could lead to a shift to the same brand drugs used in Europe and the US.

Changing structure of drug use (1): expanding market for drugs that address unmet medical needs

Changing structure of drug use (2): generic drugs will likely be first-choice treatment for chronic diseases

Market share rules are changing

Inexpensive drugs widely used even in emerging markets



1-6. Expanding pharmaceuticals in emerging markets

Em erging m arkets w ill outgrow developed markets"Annual pharmaceutical sales in emerging markets is expected to reach $400bn by 2020,

equivalent to current sales in the US and the f ive major European markets combined."

Turkey: $52bn

Korea: $66bnMexico: $60bnRussia: $38bnBrazil: $60bnIndia: $40bn

China: $82bn

Emergingmarkets

$55bn

2006 2020 (see note) (CY)

Assuming2% grow th

per yearUS$364.18bn

Eur 5$162.3bn

Eur 5$123bn

US$276bn

Note: Extrapolations from 2006 to 2020 based on IMS projection and % of 2006 sales. Source: IMS MIDAS 2006 sales data, Total Pharmaceutical Market

1-7. Healthcare expenditures rise in tandem with economic growth

0

1,000

2,000

3,000

4,000

0 10,000 20,000 30,000 40,000 50,000

Turkey

Mexico

Brazil

IndiaChina

Spain Italy

Germany

UK

US

Japan

8,000

7,000

Per capita GDP ($)

Per capita healthcare expenditures ($)

France

Russia

Source: Nomura

(4) US/European branded drug makers change business model At their 2008 annual meetings, Pfizer [PFE US] and Merck [MRK US] both announced plans to expand into the generic drug business, including biosimilars, marking a substantial change in their business models. Thereafter, US and European branded drug makers formed alliances with Indian generic drug makers, in an effort to develop a business structure that supports low-cost drugs. The flurry of major patent expiries in the 2000s that depressed earnings prompted the business model change. The branded drug makers attempted to sustain profit growth

Turning point from 2008



through external measures such as M&A but were unable to offset the negative impact of successive major patent expiries.

The US and European pharmaceutical manufacturers new business model centered on a necessary shift from the previous medium-risk, medium-return model to one focused on high risk and high return that targeted drugs to treat unmet medical needs. The strategy was unsuccessful because of repeated delays to new drug approvals. As a result, the branded drug makers needed a business that could generate stable cash flow. Supplying low-cost drugs to emerging markets and the generic drug business became the necessary stable cash cow businesses. The low-risk, low-return generic drug business generated stable cash flow to fund R&D for the high-risk, high-return new drug business. The combination of the low-risk, low-return stable businesses and high-risk, high-return new drugs businesses resulted in a net overall medium-risk, medium-return model, basically unchanged from before (Exhibit 1-2). Even now, US and European pharmaceutical majors are aggressively forming partnerships with Indian generic drug makers (Exhibit 1-8).

1-8. Alliances between Indian makers and US/European branded drug majors

Main company Partner company Type Details Dr. Reddys Partnership Development and marketing of specific drugs in emerging markets Daiichi Sankyo Partnership Joint marketing of hypertensive Olmesartan Eisai Partnership Production, distribution, marketing of antiulcer drug Parit

GSK India

Astellas Partnership Exclusive rights to antifungal Maycamine in Indian market Shantha Biotechnics Acquisition Vaccine business

Sanofi Aventis Glenmark Partnership Development and marketing of chronic pain treatment Aurobindo Partnership Licensing out of solid dosage business

Pfizer India Johnson & Johnson Sale Four healthcare products

Abbott Zydus Cadila Partnership Marketing of 24 Abbott products in 15 emerging markets Biocon Partnership Biologicals Forest Partnership Development, distribution, and marketing of hypertensive Bystolic Mylan Natco Partnership Global supply of copaxone Bayer Acquisition Bayers French generic drug business Taisho Acquisition Japanese generic drug maker Pfizer Acquisition Pfizers Italian generic drug business Kowa Partnership Joint venture with Kowa Shinyaku Aventis Partnership Marketing copaxone in North America Lundbeck Partnership Developing copaxone in Europe Lonza Partnership Development, production, and marketing of biologicals UCB Partnership Joint marketing of ProAirRHFA inhalant in US Abbott Partnership Licensing of TriCor

Teva

Hospira Sale Global rights to G-CSF biosimilar Source: Nomura

(5) Indian generic drug makers targeting biosimilars Indian generic drug makers market branded generics domestically and standard generics in Europe and the US. Branded drug makers have formed alliances with Indian generic drug makers on the back of the performance of their US/European businesses. The branded pharmaceutical majors are changing their business model by having Indian makers produce and supply drugs globally. Indian generic makers have ramped up production to generate scale merits, thereby providing cheaper drugs. One line in Aurobindos state-of-the-art plant can produce 700mn tablets monthly (8.4bn annually). If the plant site were fully utilized, annual production would reach 126bn tablets. In comparison, Japanese major generic drug maker Sawai Pharmaceutical [4555] produced a total of only 4.2bn tablets in 10/3 and its medium-term business plan calls for boosting this to 6bn by 12/3.

Overall risk-return balance of branded drug makers has not changed

Supplying drugs to US/European pharmaceutical manufacturers



Given the limited disclosure by companies, we estimated the Indian generic drug makers manufacturing costs by using publicly available information. In Japan, we used Towa Pharmaceutical [4553] and Sawai Pharmaceuticals Schedule of Cost of Goods Manufactured. We base our figures for Indian generic makers on feedback from management interviews. We concluded that manufacturing costs of Indian generic drug makers were one-seventh those of Japanese makers. Specifically, wages were one-tenth, material costs were one-fifth, and business expenses were one-twentieth. Materials represent the largest cost factor and there appears to be scope for additional reductions by the Indian makers. The cost of receptacles is significantly higher in Japan. For example, glass vials used for injectable drugs in Japan are much more expensive owing to higher domestic standards. Tablet packaging is also much cheaper in India, as Japanese tablets use a backing comprised of several aluminum sheet layers compared to only a single layer in India. This accounts for only a few yen but substantially bolsters the profit margins of Indian generic drug makers. Our initial impression following company interviews was that the Indian makers manufacturing costs were one-fifth those of the Japanese generic drug makers, but our estimates suggests these are even lower. We based our sales estimates for Indian makers on the drug price listing (Current Index of Medical Specialties) and sales were about one-tenth those of the Japanese counterparts.

1-9. Indian makers manufacturing costs are substantially lower

Japanese companies

Towa Pharmaceutical Sawai

Pharmaceutical Average Indian

companies Change

% Sales 100.0 100.0 100.0 10.0 90 Cost of manufacturing 50.0 60.0 55.0 8.2 85 Labor expenses 11.5 8.4 10.0 1.0 90 Raw material costs 29.0 37.2 33.1 6.6 80 Other expenses 10.0 14.4 12.2 0.6 95 Gross profits 50.0 40.0 45.0 1.8 96 Source: Nomura

The drugs referenced above are small molecule drugs with molecular weights of around 300, but Indian generic drug makers have expanded their efforts to include follow-on biologics or biosimilars. There are two categories of biosimilars: protein drugs with molecular weights of around 10,00030,000 and antibody therapeutics with a molecular weight of around 150,000. The Indian generic makers are targeting both categories. We cover details in chapter 2, but the European regulatory authorities have released review guidelines for biosimilars and already approved a protein drug biosimilar. No antibody therapeutic biosimilar has been approved yet. In India, Dr. Reddys Laboratories launched a biosimilar of anticancer agent Rituxan under the name of Reditux in April 2007 and posted 2009 sales of INR199mn (US$4mn, +29% y-y). Although not a biosimilar, Biocons BIOMAb EGFR (generic name: nimotuzumab) was marketed from July 2006. BIOMAb EGFR was originally discovered by YM Biosciences [YM CN] and is already commercialized in Cuba for the treatment of head and neck cancer. Daiichi Sankyo is currently conducting domestic Phase 2 clinical trials.

The business model adopted by Indian generic makers, with its focus on establishing a value chain, is superior to that of its Japanese counterparts. The biggest difference is that Indian generic makers have a vertically integrated business model and manufacture their own pharmaceutical bulk. In contrast, Japanese makers are geared for small-lot diversified production and are unable to manufacture pharmaceutical bulk in-house. We think Indian generic drug makers are far better positioned to reduce manufacturing costs on the back of

Indian manufacturing costs are one-seventh those of Japan

Entry into biosimilar market

Indian generic makers have superior business model



scale merits. Indian generic makers also stand out for their success in concurrently operating domestic and overseas (Europe and the US) businesses.

1-10. Japanese generic makers: unable to apply vertically integrated business model

Type Branded drug Generics Company origin Japan/US/Europe India Japan Region Japan/US/Europe India Overseas Japan Overseas R&D ~ { { x Bulk production { { { x x Formulation { { { { x Marketing ~ { { { x Source: Nomura

Indian generic drug makers are advancing into development of brand drugs, but we are skeptical of their prospects of successfully making the shift to innovators because (1) they lack sufficient financial clout and (2) the commercial value of drug candidates is limited. We think the issue of finances could be resolved eventually but not in the near future, given that it costs at least about 50bn (US$500mn) to develop a brand name drug. The annual R&D budget for most major generic drug makers stands at about 10bn (US$100mn), making it exceedingly difficult to develop a drug in the US (the worlds biggest market). Moreover, even if development were successful, marketing costs in the US and Europe would likely run at least 20bn (US$200mn). Japanese branded drug makers started marketing new drugs in the US from the late 1990s and formed marketing alliances with US partners to minimize sales promotion costs. Despite this, they ran deficits of around 10bn for the first several years. A loss of this level would wipe out all term profits of the Indian generic drug makers. We conclude it will be some time before return on invested capital will improve sufficiently. As for the commercial value of branded drug candidates, the main problem we see is that the candidates have the same mechanism of action as drugs from 10 years ago, making differentiation difficult. In India and Europe, many of the generic drug makers are developing diabetes drugs like peroxisome proliferator-activated receptor (PPAR) inhibitors, for which there are concerns over potential liver damage, and dipeptidyl peptidase-4 (DPP-4) inhibitors, for which large-scale clinical trials are required because circulatory-related side effects have been confirmed. The Food and Drug Administration (FDA) issued stringent review guidelines for diabetes drugs in December 2008 that required additional Phase 3 clinical trials even for Takeda Pharmaceuticals [4502] SYR-322, which had demonstrated exceedingly high safety results in animal studies. Considering global trends, we think the production of generic drugs for US and European companies will be a successful business model for the Indian generic drug makers, but are skeptical regarding the profit potential of them marketing branded drugs in India and Europe.

Expansion into branded drug business would be difficult



1-11. Drug pipelines of Indian generic drug companies Company Molecule name Indication Target Clinical trial phase

Crofelemer (inlicensed) Antidiarrhoeal CTFR inhibitor Phase 3 GRC 3886 (oglemilast) Asthma, COPD PDE IV inhibitor Phase 2 GRC 8200 (melogliptin) Diabetes mellitus (Type II) DPP IV inhibitor Phase 2 GRC 4039 (revamilat) Rheumatoid arthritis, MS inhibitor PDE IV Phase 1 GRC 10693 Neuropathic pain, osteoarthritis CB-2 Phase 1 GRC 500 MS, inflammatory diseases VLA-2 antagonist Phase 1 GRC 15300 Osteoarthritic pain, neuropathic pain, and skin disorders TRPV3 antagonist Preclinical GBR 600 Antiplatelet, adjunct to PCI/acute coronary syndrome Von Willebrand factor Preclinical

Glenmark

GRC 6211 Osteoarthritic pain, neuropathic pain, and urinary incontinence TRPV 1 antagonist Phase 1

ZYH1 Dyslipidemia PPAR alpha:gamma Phase 3 ZYO1 Obesity, diabetes CB-1 antagonist Phase 1 ZYI1 Pain Multi-modal Phase 2 ZYH2 Diabetes PPAR alpha:gamma Phase 1 ZYH7 Dyslipidemia PPAR alpha Phase 1 ZYT1 Dyslipidemia Undisclosed Phase 1

Zydus Cadila

ZYD1 Dyslipidemia GLP-1 Phase 1 Oral insulin Diabetes - Phase 2 Anti-CD6 Oncology/inflammation/autoimmune - Phase 3 Targeted immunoconjugates Oncology - Discovery Anti-CD20 Oncology - Preclinical Peptide hybrid Diabetes - Discovery Anti-EGFR Oncology - Market Biosimilar MAbs Oncology/immunology - Preclinical Insulin analogs - lispro, aspart Diabetes - Preclinical Rh-insulin, glargine Diabetes - Market

Biocon

GCSF, EPO Oncology - Market Reditux Non-Hodkins lymphoma Monoclonal antibody Market DRF 2593 (balaglitazone) Metabolic disorders (partnership with Rheoscience) - Phase 3 DRL 17822 Metabolic disorders/CVS (partnership with Argenta) - Phase 1 Dr Reddy's

Several compounds Respiratory disorders (dyslipidemia and atherosclerosis) - Phase 1 Ranbaxy P. falciparum combination Malaria - Phase 3

LLL 2011 (amigra) Antimigraine, herbal - Phase 3 LL 4218 (desoside-P) Antipsoriasis - Phase 2 LL 3858 (sudoterb) Anti-TB - Phase 2 LL 3348 (sesoris) Antipsoriasis, herbal - Phase 2 Unspecified Type II diabetes - Preclinical

Lupin

Unspecified Rheumatoid arthritis - Preclinical P276 - CDKs Head & neck cancer, multiple myeloma - Phase 2 P276 - gemcitabine combination Pancreatic cancer - Phase 1 P276 - tadiation combination Head & neck cancer - Phase 1 P1446 - CDKs Unspecified - Phase 1 NPB-001-05-Bcr-Abl Chronic myeloid leukemia - Phase 2 NPS31807 - TNF alpha Rheumatoid arthritis and psoriasis - Phase 2 P979 - TNF alpha Inflammation - Preclinical P1736-non-PPAR gamma Diabetes and metabolic disorders - Phase 1 P1201 - Lilly Diabetes and metabolic disorders - Phase 1 P2202 - Lilly Diabetes and metabolic disorders - Phase 1

Piramal Lifesciences

NPH30907 Dermaphytotypes - Phase 2 Source: Nomura

(6) Japanese generic drug makers limited to domestic market Japanese regulatory authorities, keen to reduce pharmaceutical costs, have been promoting use of cheaper generic drugs. The MHLW has set a generic drug ratio (volume basis) target of 30% by FY12, which would require a 1.5-fold increase in the market from the 2009 ratio of 20%, or annual average growth of 14%. This would translate into additional sales of more than 20bn and would largely be dependent on sharp increases in production by the three generic drug majors. These three companies control a market share of about 50%, and thus achieving the government target based solely on increased sales by them would require nearly a doubling in production. However, production capacity is limited to 1.5x current levels, thereby putting the government target for all purposes beyond reach. If production were boosted on par with the current maximum capacity, we estimate that it would result in a generic drug ratio

Government FY12 target of 30% generic drug ratio seems unrealistic



of 25%. The government is likely to revise its generic drug ratio target to 25% in the near future, citing the aforementioned points.

New incentives were adopted to further promote the use of generic drugs. Under the previous system, pharmacies were awarded a 40 incentive for each prescription that included at least one generic drug. To be eligible for the generic drug dispensing premium, pharmacies had to maintain a generic dispensing ratio of 30% or higher on a prescription basis. Effective from April 2010, the eligibility requirement for the generic drug-dispensing premium was changed to a three-tier system based on the volume of drugs dispensed rather than the number of prescriptions. When the generic drug dispensing ratio exceeds 20%, 25%, and 30%, the respective premium is 60, 130, and 170. The generic drug makers sales growth in April and May substantially exceeded the industry average, suggesting that government stimulatory measures were successful.

Japanese generic makers rely almost completely on the domestic market, in contrast to Indian generic drug makers, which have successfully expanded abroad. The low diffusion rate of generic drugs in Japan was one factor responsible for the significantly weaker profit bases of generic drug makers relative to their Indian counterparts, and a factor that prevented them from expanding overseas. We are optimistic on the growth prospects of the domestic generic drug makers but expect cash flow to be primarily channeled into investment to boost production capacity.

In contrast, overseas companies have successively expanded into the Japan market (Exhibit 1-12), although sales have fallen short of initial expectations in most cases. One reason for the limited success of foreign generic drug makers in Japan is the difficulty in competing with the exceedingly high quality of Japanese products. This same high quality is likely responsible for Japanese generic drug makers low profitability. We think a much more attractive business model would be the generic drug bulk business, which commonly maintains operating margins of around 30%.

1-12. New entrants to Japanese generic drug market: foreign and nonpharmaceutical companies

Date Company Partner company Details

Jan Novartis (Switzerland) Sandoz (Germany) Nippon Hexal Sandoz parent company, Novartis, acquired Hexal. Marketed Japans first generic recombinant biopharmaceutical in Sep 2009; aims to launch more than 10 new generic drugs annually

Mar Hospira (US) Taiyo Yakuhin Established Japanese corporation and partnered with Taiyo Yakuhin to develop injectable generics 2006

Apr Orchid Chemicals & Pharmaceuticals (India) - Established Japanese corporation

Apr Zydus (India) Nippon Universal Pharmaceutical (renamed Zydus Pharma Japan in June 2010)

Zydus established Japanese corporation in Sep 2006 and acquired Nippon Universal Pharmaceutical in April 2007 2007

Oct Lupin (India) Kyowa Pharmaceutical Industry Lupin acquired Kyowa Pharmaceutical Industry

Feb Mylan (US) Merck Mylan acquired Mercks generic drug business, including operations in Japan Torrent (India) - Established Japanese corporation (stopped operation Apr 2008) 2008

Apr Ranbaxy (India) Daiichi Sankyo (acquirer) Daiichi Sankyo acquired Ranbaxy, making it a subsidiary; collaborating in development

Jan Teva (Israel) Kowa Established joint venture (Teva established Japanese corporation in 2005), sales start from 2010 Apr Actavis (Iceland) Aska Pharmaceutical Established joint venture

GlaxoSmithKline (UK) JCR Pharmaceuticals Concluded comprehensive alliance for biosimilars; GSK became JCR Pharmaceuticals top shareholder from Mar 2010 2009

Dec Pfizer (US) - Inaugurated Japanese corporation specialty organization, sales targeted from 2011

Jan PharmaForce (US) Daiichi Sankyo Daiichi Sankyo subsidiary, Luitpold Pharmaceuticals, acquired injectable generic maker PharmaForce (Ohio) 2010

May Sanofi Aventis (France) Nichi-Iko Pharmaceutical Established joint venture, joint development of biosimilars Source: Nomura

April 2010 incentives to dispensing pharmacies is proving effective

Japanese generic makers almost completely dependent on domestic market

Overseas competitors continue to enter domestic market



We think generic drugs will eventually replace long-term listed drugs. Policies to expand the domestic generic drug market have focused on boosting demand instead of supply. Currently, the preferred cheaper alternative of physicians and patients is long-term listed drugs instead of generics. Sanofi-Aventis [SAN FP] recently announced an alliance with Nichi-Iko Pharmaceutical [4541] that not only expands the generic drug business but also transfers marketing of long-term listed drugs in Japan. The government focus over the near to medium term will likely remain on promoting use of generic drugs; however, over the longer term, we expect the emphasis to shift to reducing long-term listed drug prices. Accordingly, we think long-term listed drugs will be the key to generic drug makers continued sustainability. When we queried top management of generic drug companies as to whether branded drug makers would be more likely to transfer marketing of long-term listed drugs to domestic or foreign generic drug makers, most replied that domestic drug makers would be the preferred distributor. We think branded drug makers are likely to increasingly transfer production and marketing of low-price, long-term listed drugs.

1-13. Reorganization of long-term listed drug business

Majorpharma

Branded drug

Long-term listed drug

Medium-tierpharma

GE

GE subsidiary

GEMajor

pharmaMedium-tier

pharma

Note: GE = generic drugs Source: Nomura

The high level of quality required for drugs in Japan makes it unlikely that generic drugs manufactured by Indian companies will make substantial inroads in Japan. On the flip side, if high-quality drugs could be made very inexpensively, they could easily be sold worldwide. This combination of high quality and low cost applied to biosimilars could mark the path of sharp growth for the Japanese generic drug makers. Mass production and supply of the worlds highest-quality biosimilar bulk to Europe and the US would be an attractive business model for any Japanese drug maker. We think a promising business model would be for European/US biosimilars to be introduced to Japan, with Japanese generic drug makers being in charge of production.

(7) A return to small molecule drug business model over the long term Major Japanese companies are focusing on the development of antibody drugs, but their European and US counterparts have been changing their areas of development with a view to business expansion beyond antibody therapeutics. A typical example of this can be found in the 2007 annual report of Genentech (acquired by Roche [ROG VX] in 2009). The CEO at the time, Arthur D. Levinson, PhD, said that the company was developing small molecule drugs as

Focus on long-term listed drugs

Global suppliers of generic drug bulk

Development of small molecule drugs is gathering momentum again



its development approach to anticancer agents. Even those companies that have specialized in antibody drugs had set their sights on developing small molecule drugs, which suppress the communications system involved in cell growth. Antibody drugs are effective but cannot be made more inexpensively than small molecule drugs with lower costs, and moreover cannot be formulated as oral drugs. We think development of small molecule drugs, which can easily be made inexpensively and as oral formulations, will gain momentum as it becomes clearer how the drugs work inside organisms.

Previously, small molecule drugs targeted receptors serving as barriers between the cell interior and exterior. It was easy to get results with these drugs by opening and closing the receptors, which serve as barriers, and since the receptors are located on the cell surface, it was easy to find new receptors that could be targeted by drug development. It is now easy to detect small amounts of proteins, making it possible to target drug development efforts on cells internal communication systems, which represent the downstream function in cell growth. Specifically, Novartiss [NOVN VX] Affinitor is a new type of anti-cancer agent. The drug impedes the action of mTOR, which has a central role in cell growth, and is highly effective in renal cancer, for which there was previously a lack of effective treatments. Another drug we would highlight in this context is ArQules [ARQL US] ARQ 197 (c-MET inhibitor), which is currently in the development stage. Daiichi Sankyo has signed a joint development agreement with ArQule for overseas markets, while Kyowa Hakko Kirin [4151] is in charge of development in Japan.

1-14. Development of small molecule anticancer agents attacking from within the cell is proceeding apace

Active sites to date

Cell growth, infiltration, transfer, and apoptosis prevention

Pho

spro

ylat

ion

cas

cade

Grb2SOS

STAT SRC

kina

se

III

III

mTOP

P

AKTP

P

kina

se

I

IIIII

P Pp11 p85

PI3K

EGF EGF

Pho

spro

ylat

ion

cas

cade

RAS RAS

MAP PP

RAFP

P

MEKP

P

Receptor-typetyrosine kinase

Nonreceptor typetyrosine kinase

Nonreceptor typetyrosine kinase

(1) PI3K pathway (2) MAPK pathway

1. Receptors2. Receptor-type tyrosine kinase

3. Nonreceptor type tyrosine kinase

IV IV

GDP GTP

Active sites from now on

Source: Nomura

Now that drug development previously at the research lab stage has reached the market, companies need business strategies to take them beyond antibody therapeutics. We think there will be more examples of strategies where conditions previously treated with antibody drugs are covered by small molecules that are cheaper but have the same results. Although the examples below are not of changes from antibody drugs to oral ones, they do show shifts from injected drugs to oral drugs. For multiple sclerosis, we think the oral Gilenia will take over from injected interferon beta as the main treatment. Aside from requiring injections, interferon

The shift from receptor to intracellular action

Turning to a business model that looks ahead



beta also costs several million yen per year. Gilenia, however, can be taken orally without significant disruption to daily life and it costs only some tens of thousands of yen. The new drug is still in the approval process in the US, but on 10 June an FDA advisory panel recommended approval, making it likely that the drug could reach the US market by end-2010. It is unusual for companies to shift their focus from one antibody drug to another antibody drug, as with the switch from Remicade (antirheumatic) to Simponi (antirheumatic) in the strategy adopted by Johnson & Johnson [JNJ US].

Turning our attention to the different models in advanced countries and emerging countries, we think small molecule drugs will rapidly expand in advanced countries while antibody biosimilars become more widespread. In emerging countries, meanwhile, generics are likely to be used increasingly for currently mainstream receptor-type small molecule drugs, while in antibody therapeutics, biosimilars become more widespread and the original branded drug market shows no growth. Longer term, we think intracellular small molecule drugs will penetrate the market as branded drugs in tandem with the development of emerging economies. However, the companies supplying these drugs are likely to be European and US branded drug manufacturers, rather than their Indian or Chinese counterparts.

1-15. A return to small molecule drugs over the long term

(1) Small molecule drugs(Receptor-type)

(2) Antibody therapeutics

(3) Small molecule drugs(intracellular-type)

Sales

(1)

(2)(3)

10 15 20 25

Sales

(CY)

Advanced countries Emerging countries

Generics (1)'

Biosimilars (2)'

Branded drugs (3)

10 15 20 25 (CY)10 15 20 25

(CY)

Sales

Source: Nomura



2. Indian pharmaceutical industry The Indian pharmaceutical industry is currently going through a transitional phase in which it is being transformed from a supplier of inexpensive generic drugs globally into a hub for adding immense value to new drug R&D. Our analysis broadly highlights two key factors that have modified the rules of the game for the Indian pharmaceutical industry. These factors are:

Intellectual property rights

Evolving business models

(1) Intellectual property rights in India The Indian Patents Act of 1970 made pharmaceutical product innovations unpatentable in India and granted patents to production processes. This allowed Indian drug companies to reverse engineer molecules to produce generic versions of patented drugs. While this weakened intellectual property right (IPR) protection in the country, the Indian pharmaceutical industry flourished and rapidly increased its global footprint.

Patents (Amendment) Act, 2005

The Indian Patents Act of 1970 was amended in 2005 in order to align Indian IPRs with the WTOs TRIPS Agreement and product patents were reintroduced. The major changes included the following:

Retrospective effect of the patent regime: The patent regime was introduced with retrospect effect from 1995, ie, any new drugs patented after 1995 would receive protection. However, generic entry was made possible for drugs for which patent applications had been filed but patents had not yet been granted over 19952005. Furthermore, companies manufacturing these drugs were allowed to continue their manufacture even after the granting of the patent, with a reasonable royalty payment to the patentee.

Minor innovations made not patentable: More importantly, according to the Indian Patents Act, patentability scope is limited because minor innovations are not patentable. Minor innovations are defined under the following categories: salts, esthers, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations, and other derivatives of known substances. Unless they differ significantly in properties with regard to efficiency, these products will not be granted patents.

Pre-grant opposition and post-grant opposition: India has a distinct pre-grant and post-grant opposition process in place primarily to empower the patent office, reduce the incidence of patent litigation, and discourage evergreening and filing of minor innovations. According to the act, pre-grant oppositions have to be initiated within six months of publication of the patent application. A post-grant opposition has to be initiated within a year of the date of publication of the patent grant.

We believe that in India, the scope of patentability definition is a bigger hurdle, rather than regulatory support or the interests of big pharmaceutical companies, in realizing the potential of patented drugs. In fact, a majority of the pre-grant and post-grant oppositions for pharmaceutical products fall in the category of secondary/minor innovations. Note that unlike revocation proceedings, pre-grant opposition filings are relatively inexpensive and take place with the patent office. In addition, any party/person can file a pre-grant opposition.

Indian pharmaceutical industry is in transitional phase currently

Process patents weakened intellectual property rights in India

Patent law amended to align with WTOs TRIPS Agreement



Pre-grant opposition

Some of the pre-grant opposition filers among Indian companies include Ranbaxy, Cipla [CIPLA IN], USV, and Torrent Pharmaceuticals. Furthermore, various patient groups and nongovernmental organizations (NGOs) have also been among pre-grant opposition filers, primarily in the categories of HIV- and oncology-related drugs. Some instances of pre-grant oppositions include: (1) AstraZenecas [AZN LN] patent application for omeprazole and one of its enantiomers was rejected following a pre-grant application by Torrent Pharmaceuticals; (2) Novartiss application for an invention pertaining to crystalline ascomycin derivatives was rejected (opposition filed by Ranbaxy) because there was no inventive step in preparing the crystalline form from the amorphous form; and (3) in Boehringer Ingelheims application for powder medicament for inhalation, comprising tiotropium salt and salmeterol xinafoate, the controller general of patents, designs, and trademarks (controller) rejected opposition grounds of combination without any synergistic effects. However, the controller rejected the patent application on the grounds of no enhancement in efficiency compared with earlier known inhalable powder formulations containing the same active ingredients. The opposition was filed by Cipla.

Indias 2005 Patents (Amendment) Act was a game-changer in an industry that had prospered under protection provided by the erstwhile Patent Act. Post-2005, Indian companies were compelled to rethink, realign, and remodel their businesses in order to compete in the new regulatory framework. One direct effect of the new law was an increase in R&D spending by the Indian generic drug companies, which increased from a paltry average of about 2% of sales in the 1990s to almost 7% in 2010. Although this increase may not seem large enough at first glance, it underlines a clear shift in the overall strategy of Indian pharmaceutical companies as they learned that innovation was the way forward. Many companies, such as Piramal Healthcare [PIHC IN] and Sun Pharma, separated their R&D from their generics divisions in order to create a clear bifurcation between the two businesses. This dual strategy model was perhaps the first step in the transformation process that the Indian pharmaceutical industry is currently undergoing.

(2) Evolving business models Domestic market focus

The Indian pharmaceutical market is pegged at roughly $8bn, having grown at more than 10% a year over the last decade. The domestic market is likely to grow at 1214% a year for next few years on account of three main factors. The first is increased healthcare spending by the government. Currently, the Indian governments spending on healthcare is around 3.5% of its overall spending, compared with roughly 10% in other emerging markets. The second is higher penetration of health insurance. Currently, healthcare insurance accounts for about 5% of national healthcare spending. The third factor likely to propel market growth is greater awareness among the Indian population of quality healthcare and an increase in income levels for the population in general. With rapid growth seen in the domestic market, Indian companies such Cipla, Mankind, and Alkem and multinational companies such as Glaxo, Abbott Laboratories [ABT US], Pfizer, etc have developed clear domestic strategies and established themselves as leading players in this space.

Indian companies benefitted from the 1970 change in the patent law that did not recognize product patents. They established themselves as dominant players in absence of the multinational companies. Following the change in the patent law in 2005, multinationals have come back, but domestic companies continue to dominate because of (1) low pricing of drugs, with affordability key for the Indian population, (2) wider distribution reach compared with the global players, and (3) the introduction of new products in the market. With an eye to catering to every segment of the market, multinational players that stayed in the country following the

Pre-grant oppositions have been filed by Indian companies, multinational companies, and NGOs

Companies have increased their R&D spending

Domestic market offers big opportunity

Competition from multinational companies



patent law change in 1970 have been more successful in capturing growth in the domestic drug market. These players are now looking at introducing products from their parent pipelines in the domestic market. GlaxoSmithKline is among the global leaders in the vaccine segment, with nearly a 33% share in emerging markets. It has one of the widest ranges of vaccines in its pipeline among the big pharmaceutical companies in India. It has introduced vaccines like Rotarix and Cervarix in the domestic market and expects to launch two more vaccines (Synflorix and Infanrix Hexa) and three oncology products in India over the next 1218 months.

Various multinationals have also paid high premiums to acquire leading Indian companies in order to get a taste of the domestic market growth. While the acquisition of Ranbaxy at an EV/sales ratio of 3.7x (or $4.6bn) by Daiichi Sankyo was a harbinger of the future, the recent acquisition of Piramal Healthcares domestic business for a premium EV/sales ratio of more than 8.2x ($3.7bn) only underlines the importance of being present in the growing Indian drug market.

The saturation of urban markets has led companies in India to focus on deriving growth from the rural segment of the market. We estimate that the size of the Indian market will more than to $20bn by 2015 and that the size of the rural market will increase to around 44% of the total. We project that almost half of total growth until 2015 will come from the rural market, compared with 30% from metropolitan areas and 25% from Class I geographies. The government is also aiming to improve healthcare services for the rural masses and public spending is likely to quadruple from $1.5bn to $6bn.

The strategies that companies adopt for urban and rural markets can be very different. While the former relies on competitors aiming to capture fragments of specialty segments, the latter focuses on aggressive price cutting, promoting healthcare awareness, and deploying a large sales force. Companies like Mankind Pharma have been able to establish extensive rural networks and have aggressively promoted low-cost medicine in these areas, thereby inducing competitors to cut their prices as well. Some multinationals have forayed into the rural market as well. Novartis and Sanofi-Aventis are mentoring doctors and educating patients in rural areas in an attempt to capitalize on the rural growth story. Sanofi-Aventis also plans to launch drugs commonly used as antiinfectivrs, cough and cold medications, and pain management drugs. These drugs would be sourced from leading contract manufacturing companies in the country and would lead to the lowering of drug prices, thereby making them more affordable for the rural population of India.

During the eighties and early nineties, active pharmaceutical ingredients (APIs) were the bastion of Indian pharmaceutical companies. However, stiff competition over the years from Chinese imports has resulted in a significant price decline, thereby making API production unattractive. Most Indian companies that we have talked to view the API market as a lukewarm opportunity and they currently produce APIs primarily for internal consumption and backward integration. The exceptions to this rule are companies that produce niche APIs, such as Wanbury and Jubilant Organosys. These companies enter the market only for those APIs where they can be market leaders around the world. Wanbury has a 30% share in the world market for metformin while Jubilant maintains market leadership in carbamazepine, oxcarbamazepine, and lamotrigine.

As per Eisai India, the production of Aricept (donepezil) involves the use of a unique API that other generic makers cannot use. In order to source this API, the company had to invest a significant amount of time in training a local vendor so as to increase the quality of the API and bring it up to the mark. The company projects that by sourcing this unique API from the local vendor, they will able to cut production costs by almost 50%. However, according to some leading Indian companies, the average cost of producing one generic pill is not going fall drastically below INR0.5 (1) (Exhibit 2-1).

Acquisition of Indian companies at high premiums

Targeting bottom of pyramid

Companies need to adopt different strategies for rural markets

Cutthroat competition from Chinese APIs

Cost of production has bottomed out



2-1. Domestic market business models

Domestic market

Indian companies

Low pricing strategy

Focus on small cities & rural markets

Large sales forces

Little or no product differentiation

Low entry barriers

Branded drugs w ith an India-centric pricing strategy

Focus on large cities and mass market products

Inlicensed products from parent; low R&D spending

Product differentiation

Acquisitions of domestic companies

Multinationals

Source: Nomura

Regulated and semiregulated market focus

As noted, the passage of the Indian Patents Act of 1970 resulted in the end of product patents because it recognized only process patents. Indian pharmaceutical companies could therefore legally produce patented drugs through reverse engineering and sell inexpensive copies of these leading branded drugs in India. Over the next few years, Indian companies championed process engineering and started exporting inexpensive drugs to unregulated markets (for example, Ranbaxys Nigerian JV in 1977, Malaysian JV in 1983, and Thai JV in 1987). By the end of the 1980s, India had become a leading bulk drug exporter in the international market.

Indian pharmaceutical companies made large forays into the US market after the passing of the Hatch-Waxman Act of 1984. The act allowed generics companies to apply for Abbreviated New Drug Applications (ANDAs) by simply proving bioequivalence and without having to carry out clinical trials. By filing ANDAs and First-to-Files, these companies challenged the existing patent of the innovator through the Para IV clause of the act. This clause allowed companies to challenge the innovators patent by claiming that the patent was invalid or that it would not be infringed by the generic drug. If the challenge was successful, the generics company was provided with 180 days of exclusive marketing rights to the drug and this often resulted in immense profitability as the generic drug was marketed at a 1020% discount to the branded drug.

Protective patent laws helped establish firm foundation

Hatch-Waxman Act provided further growth impetus



In the 1980s, Indian companies started at the low end of the value chain by producing bulk drugs and vanilla generics and exporting them to the US and other international markets. By the 1990s, the production strategy eventually shifted to finished formulations and branded generics as the companies created front-end marketing presences in regulated markets and leveraged their production capabilities back in India.

The generics companies also set up their own subsidiaries in foreign markets and some large Indian companies actively pursued inorganic growth through the acquisition of smaller generics companies and API manufacturers in regulated markets. The pursuit of economies of scale gave the companies the opportunity to enter new markets by growing their businesses. The companies also invested heavily in creating world class production facilities in India as the total number of US FDA-approved manufacturing plants increased from one in 1988 to 125 in 2010, the largest number of plants outside the US. Seeing this rapid increase in the number of approved manufacturing plants, the US FDA also set up offices in India (in New Delhi and Mumbai).

The interest of Indian pharmaceutical companies in Germany was perhaps triggered by Ranbaxys acquisition of Bayers [BAYN GY] generics business (Basics) back in 2000. When Germany revamped its Reference Pricing Policy 2004, Indian drugmakers sensed another huge opportunity for generics and adopted an aggressive expansion strategy in the market. Between 2005 and 2008, Indian companies such as Dr Reddys, Torrent Pharmaceuticals, Wockhardt [WPL IN], etc, acquired six companies in total. However, the acquisitions did not reap the intended rewards because drug prices fell owing to tender-based pricing systems and other government policies. Currently, Germany remains an unattractive market for Indian pharmaceutical companies, much like the Netherlands and the UK. Most Indian companies have stated that the remaining profitable markets of the EU are France, Italy, and Spain. However, recent austerity measures proposed by the governments in these countries may play spoil-sport for the Indian companies.

Other markets, such as Brazil, Mexico, South Africa, the CIS, and Eastern Europe, have also provided instrumental growth opportunities for Indian companies. Demand for generics in these semiregulated markets has led to the establishment of manufacturing facilities, marketing capabilities, and distribution networks by Indian companies in these territories (Exhibit 2-2).

Examples of companies in regulated and semiregulated markets are Ranbaxy, Lupin, Dr Reddys, Sun Pharma, Zydus Cadila, Torrent Pharmaceuticals, etc.

2-2. International market business model

Regulated & semiregulated markets

Branded and vanilla generics, bulk drugs

Front-end marketing capabilities

ANDAs, FTFs, and Para IV challenges

Acquisitions and partnerships

Source: Nomura

Moving up value chain

Aggressive expansion through acquisitions and increase in production capacity

Germany strategy did not work effectively

Exploiting opportunities globally



Collaborative strategies

The innovators among drugmakers are witnessing a decline in R&D productivity and facing stiff hurdles in terms of sustaining earnings growth because some of the key products in their portfolios face patent expiration. Lower success in drug development implies that sales lost from patent expiry will not be replenished by new product launches. In an effort to control costs and improve productivity, the innovators are looking at options to outsource drug discovery and development. Some Indian companies have offered to collaborate with innovator drugmakers, rather than file patent litigations against them.

The Indian contract research industry is worth less than $500mn, implying less than a 2% share of the pharmaceutical R&D outsourcing market. India presents advantages with respect to cost, patient population, skill sets, and the like. As per an industry estimate, by outsourcing R&D to India, the innovator pharmaceutical companies could save up to 60% of overall R&D expenses. These savings can be realized across all stages of the drug discovery process, from research biology to clinical development. However, our estimates indicate that the largest savings can be achieved in the area of research chemistry and clinical development.

Indian contract research companies are gaining traction and have established credibility, as evidenced by various deals struck by Indian companies with major pharmaceutical makers. Jubilant Organosys currently has partnerships with Eli Lilly, AstraZeneca, and Endo Pharmaceuticals Holdings [ENDP US] to work on collaborative research. Meanwhile, Biocon has opened a dedicated R&D center in Bengaluru for Bristol-Myers Squibb [BMY US] as per a deal struck by the two companies. The R&D center employs 400 scientists who are dedicated exclusively to carrying out clinical studies. In 2007, GVK Biosciences struck a deal with Wyeth (now Pfizer) and opened a dedicated contract research center for the American company. The involvement of Indian companies is now not limited to a fee-based model as it has evolved into a collaborative model for drug discovery.

Collaboration is not restricted to research services but also extends to manufacturing services. It includes supply of APIs, intermediates, and finished dosage forms. We expect outsourcing penetration to increase, in the cases of both APIs/intermediates and formulations, as the drug majors focus on drug discovery and sales and marketing. We believe that the outsourcing industry can record growth of 1015% per annum over the next five years, with the potential for outsourcing penetration to double during the period. We see more deals and partnerships being struck in the near future as the innovator companies look at tapping into Indias outsourcing strengths.

Another strategy that has become popular within the collaborative framework is that of Indian generics companies creating separate entities for branded and generic drugs. This strategy helps create a clear distinction between the two businesses because the mindsets required to run the two can be very different. The branded drug arm usually works on discovering new chemical entities (NCEs) and carrying out clinical trials up till Phase 1. Because of limited financial capabilities, the companies aim to partner with innovator drugmakers and outlicense the molecule for upfront fees, royalty fees, and various milestone payments upon successfully bringing the new molecules to Phase 1. The innovator drug company usually retains the marketing rights for the regulated markets while the Indian company gets the marketing and distribution rights for emerging markets (Exhibit 2-3).

A recent example of this model is a Glenmark-Sanofi-Aventis deal signed in May 2010, whereby Glenmark outlicensed the development and commercialization rights of its painkiller molecule GRC 15300 to Sanofi-Aventis for an upfront payment of $20mn and milestone payments that could reach a total of $325mn. Other leading companies in this space include Jubilant Organosys, Piramal Healthcare, Divi's Laboratories [DIVI IN], Dishman Pharmaceuticals & Chemicals [DISH IN], Suven Life Sciences [SVLS IN], etc.

Major drugmakers are becoming more cost effective

Capitalizing on Indias soft skills strengths

Striking deals and gaining credibility globally

Drug discovery through different model: collaboration with global majors

Drug discovery through different model: bifurcation and outlicensing discoveries

Mutually beneficial partnerships



2-3. Collaborative strategy business model

Collaborative strategy

Collaborative drug discovery research

Initial stage clinical trials

Contract manufacturing

Outlicensing partnerships; upfront fees and royalties

Source: Nomura

2-4. Drug pipelines of Indian generic drug companies Company Molecule name Indication Target Clinical trial phase

Crofelemer (inlicensed) Antidiarrhoeal CTFR inhibitor Phase 3 GRC 3886 (oglemilast) Asthma, COPD PDE IV inhibitor Phase 2 GRC 8200 (melogliptin) Diabetes mellitus (Type II) DPP IV inhibitor Phase 2 GRC 4039 (revamilat) Rheumatoid arthritis, MS inhibitor PDE IV Phase 1 GRC 10693 Neuropathic pain, osteoarthritis CB-2 Phase 1 GRC 500 MS, inflammatory diseases VLA-2 antagonist Phase 1 GRC 15300 Osteoarthritic pain, neuropathic pain, and skin disorders TRPV3 antagonist Preclinical GBR 600 Antiplatelet, adjunct to PCI/acute coronary syndrome Von Willebrand factor Preclinical

Glenmark

GRC 6211 Osteoarthritic pain, neuropathic pain, and urinary incontinence TRPV 1 antagonist Phase 1

ZYH1 Dyslipidemia PPAR alpha:gamma Phase 3 ZYO1 Obesity, diabetes CB-1 antagonist Phase 1 ZYI1 Pain Multi-modal Phase 2 ZYH2 Diabetes PPAR alpha:gamma Phase 1 ZYH7 Dyslipidemia PPAR alpha Phase 1 ZYT1 Dyslipidemia Undisclosed Phase 1

Zydus Cadila

ZYD1 Dyslipidemia GLP-1 Phase 1 Oral insulin Diabetes - Phase 2 Anti-CD6 Oncology/inflammation/autoimmune - Phase 3 Targeted immunoconjugates Oncology - Discovery Anti-CD20 Oncology - Preclinical Peptide hybrid Diabetes - Discovery Anti-EGFR Oncology - Market Biosimilar MAbs Oncology/immunology - Preclinical Insulin analogs - lispro, aspart Diabetes - Preclinical Rh-insulin, glargine Diabetes - Market

Biocon

GCSF, EPO Oncology - Market Reditux Non-Hodkins lymphoma Monoclonal antibody Market DRF 2593 (balaglitazone) Metabolic disorders (partnership with Rheoscience) - Phase 3 DRL 17822 Metabolic disorders/CVS (partnership with Argenta) - Phase 1 Dr Reddy's

Several compounds Respiratory disorders (dyslipidemia and atherosclerosis) - Phase 1 Ranbaxy P. falciparum combination Malaria - Phase 3

LLL 2011 (amigra) Antimigraine, herbal - Phase 3 LL 4218 (desoside-P) Antipsoriasis - Phase 2 LL 3858 (sudoterb) Anti-TB - Phase 2 LL 3348 (sesoris) Antipsoriasis, herbal - Phase 2 Unspecified Type II diabetes - Preclinical

Lupin

Unspecified Rheumatoid arthritis - Preclinical P276 - CDKs Head & neck cancer, multiple myeloma - Phase 2 P276 - gemcitabine combination Pancreatic cancer - Phase 1 P276 - tadiation combination Head & neck cancer - Phase 1 P1446 - CDKs Unspecified - Phase 1 NPB-001-05-Bcr-Abl Chronic myeloid leukemia - Phase 2 NPS31807 - TNF alpha Rheumatoid arthritis and psoriasis - Phase 2 P979 - TNF alpha Inflammation - Preclinical P1736-non-PPAR gamma Diabetes and metabolic disorders - Phase 1 P1201 - Lilly Diabetes and metabolic disorders - Phase 1 P2202 - Lilly Diabetes and metabolic disorders - Phase 1

Piramal Lifesciences

NPH30907 Dermaphytotypes - Phase 2 Source: Nomura, based on company data



Productivity analysis

We analyzed the value-added generated over the last seven to 10 years by three Indian companies, namely, Aurobindo, Ranbaxy, and Torrent Pharmaceuticals. The following details were observed:

Aurobindo invested heavily in increasing capacity in 03/3, as its gross block increased almost 3x that year, from INR2.21bn to INR6.60bn. The increase in capacity was done mainly at manufacturing plants in China and India. The company is now poised to meet future production demands following the increase in its capacity.

R

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