MONTHLY. Volume 2 Issue

Transcription

1 MONTHLY Volume 2 Issue INDUSTRY INDUSTRY FOCUS FOCUS - INDIAN INDIAN PHARMACEUTICAL PHARMACEUTICAL SECTOR SECTOR

2 Creating value, partners in growth LSI Financial Services is a leading provider of innovative financial solutions to corporate India for over a decade. It has successfully raised funds for companies through structured financial products, spanning various sectors. With in depth domain knowledge, LSI strives to add value to the client's financial supply chain ensuring an effective and efficient capital structure. Our services include: Debt Syndication Private Equity Advisory Issue Management Mergers and Acquisitions Financial Restructuring Project Advisory Services

3 From The Managing Director s Desk Dear Readers, Wish that LSI's initiative of knowledge-sharing will prove to be beneficial as you pursue through our current issue covering the Indian Pharmaceutical Industry. The Indian Pharmaceutical Industry has come a long way since independence when it was in its infancy. Since then, the sector has witnessed robust growth and has attained a turnover level of $17.4 billion. From being a major importer of bulk drugs and formulations, the industry has today become a net exporter of pharmaceutical products primarily through the introduction of a system of product patents since Indian drugs are exported to around 200 countries in the world including highly regulated markets of US, UK etc. Technologically strong and totally self-reliant, the pharmaceutical industry in India has low costs of production, low R&D costs, innovative scientific manpower and strength of national laboratories. The Government is embarking on a major multi-billion dollar initiative with 50% public funding through a publicprivate partnership (PPP) model to harness India's innovation capability. The vision is to catapult India into one of the top five pharmaceutical innovations hubs by 2020 and the target is to achieve a global niche with more major drugs originating from India by Hope you enjoy reading the series! Raj Kajaria

4 MACROECONOMIC UPDATE Highlights In December 2012, India's HSBC manufacturing and services PMI surged to 54.7 and 55.6 as against 53.7 and 52.1 respectively, in the previous month. According to Thomson Reuters report, in 2012 India's total M&A deal value increased by 12% y-o-y to $43.4 billion. India's direct tax collection surged by 10.11% to `97,591 crore in December 2012 as against `88,623 crore in the previous month. However, during April-December 2012 the collection increased by 13.70% y-o-y to `3.68 lakh crore. According to the Knight & Frank, in 2012 new real estate launches in India declined 30% y-o-y as against 7% in the previous year due to declining bank credit, high mortgage, economic slowdown and inflation. According to RBI, during April-September 2012 net profit of private corporate sector surged by 4.3% y-o-y to `91,800 crore. According to SIAM, domestic car sales decreased by 12.51% y-o-y to 141,083 units in December 2012 as against 161,247 units in the corresponding period of the previous year. The Government plans to infuse `12,517 crore in public sector banks to enhance their lending activity and meet the capital adequacy norms. RBI has increased FII investment limits in the Government securities and corporate bonds by $5 billion each, taking the total cap in domestic debt to $75 billion. The Government has approved 14 FDI proposals worth about `1,311 crore, which include Mumbai-based Hindustan Port Ltd with approximately `440 crore foreign funds. The Planning Commission has proposed 12% increase in the plan expenditure or gross budgetary support for the FY According to Mercom Capital Group LLC, during 2012 venture capital funding in solar sector decreased by 50% y-o-y to $992 million across 103 deals as against $1.9 billion across 108 deals in the previous year. In 2012, venture capital investments in India decreased by 30% y-o-y to around $762 million across 206 deals as against $1,094 million across 222 deals in the previous year. In December 2012, India's inflation rate declined to 7.18% as against 7.24% in the previous month while the retail inflation surged to 10.56% as compared to 9.90% in the previous month. The RBI has cut repo rate and CRR by 25 bps to 7.75% and 4% respectively, w.e.f. February 9, Key Economic Indicators Bank Credit ` crore as on 11th Jan 2013, previous 28th Dec 2012 Commercial Paper % as on 31st Dec 2012, previous 15th Dec 2012 Certificate of Deposits % as on 28th Dec 2012, previous 14th Dec 2012 IIP % latest Nov 2012, previous Oct 2012 Inflation % latest Dec 2012, previous Nov 2012 WPI for 'All Commodities' latest Dec 2012, previous Nov 2012 Export $bln latest Dec 2012, previous Nov 2012 Import $bln latest Dec 2012, previous Nov 2012 Forex Reserve $mln as on 18th Jan 2013, previous 11th Jan ,42, , ,27, , Source: RBI IIP sectorwise on y-o-y basis (%) Inflation on y-o-y basis (%) Mining Manufacturing Capital Goods Intermediate Goods Consumer Durables Consumer non-durables Electricity Coal Crude Refinery Cement Steel Natural Gas Fertilizers All commodities Primary Articles Minerals Fuel and Power Petrol Manufactured Product Food Products Basic Metal Alloys & Metal Products Machinery & Machinery Tools Oct '12 Nov '12 Nov '12 Dec '12 Nov '12 Dec '12 Source: Office of Economic Advisors Source: Office of Economic Advisors

5 COMMODITY UPDATE DEBT UPDATE During April-December 2012, India's steel consumption increased by 3.9% y-o-y to 55 million tonnes (MT) as against 52.7 MT in the corresponding period of the previous year. The Government has decided to increase the cap on subsidised LPG cylinders to 9, which would be effective from April 2013 onwards. The Government has imposed 2.5% import duty on crude edible oil to protect domestic farmers, while keeping the duties unchanged on refined cooking oil. The import duty on gold and platinum has increased from 4% to 6% in order to reduce the imports of these metals into the country. In November 2012, India s tea production surged by 13% y-o-y to million kg. DOLLAR Dec-12 1-Jan-13 Source: Daily Price Movement of $ and in terms of ` 4- Jan-13 7-Jan Jan-13 `/$ 13-Jan Jan-13 `/ 19-Jan Jan Jan EURO During April-September 2012, India's external debt increased by 5.8% y-o-y to $365.3 billion due to increase in nonresident deposits, short-term debt and commercial borrowings by companies. In 2012, Indian companies raised `3.36 lakh crore through private placement of debt securities against `2.11 lakh crore in the previous year. Indian Railway Finance Corporation is planning to raise `1,500 crore through ECBs or taxable bonds to meet the budgeted borrowing target of `15,000 crore by March The Government is planning to raise the cap on foreign institutional investors holding in Government and Corporate Bonds by $5 billion each to $15 billion and $25 billion respectively. In the FY , the Power Ministry would seek financial support of `1,200 crore from the Ministry of Finance for restructuring the debt of the State owned power distribution companies. BARD has sanctioned ` crore to Kerala for various rural infrastructure projects. Daily Price Movement of Gold and Silver at Ahmedabad Exchange (`) GOLD SILVER Dec-12 Source: MCX 1-Jan Jan-13 7-Jan Jan Jan Jan Jan Jan Jan-13 Daily Price Movement of Copper and Crude Oil at Mumbai Exchange (`) COPPER CRUDE OIL Dec-12 1-Jan Jan-13 7-Jan Jan Jan Jan Jan Jan Jan Source: MCX

6 CORPORATE UPDATE GLOBAL UPDATE L&T Finance Holdings has acquired Family Credit Ltd from French company, Society Generale for `120 crore. Hyderabad-based healthcare chain, Care Hospitals is planning to open 1 hospital each in Bhubaneswar and Vizag in the coming two years with an initial investment of around `300 crore. LIC has acquired additional 2.32% stake in Infosys for `3,000 crore, which has increased its current holding to 7.24%. SEBI has approved UK-based GlaxoSmithKline's offer to acquire 31.8% stake in its Indian subsidiary, GlaxoSmithKline Consumer Healthcare for more than `5,200 crore. Gujarat State Fertilizers and Chemicals Ltd has acquired 19.98% stake in Canadian potash mining company, Karnalyte Resources Inc for `250 crore. Tata Housing has signed MoU with the Gujarat Government to build affordable housing projects at Ahmedabad at an investment of `3,500 crore. Mahindra Satyam has signed a partnership agreement with Japan-based TechMatrix Corporation to jointly address strategic growth in the healthcare market and provide cloud-based healthcare solutions. Jyothy Laboratories Ltd is forming a 75:25 JV with Bangladesh's FMCG distributor, Kallol Enterprises to open its subsidiary in Bangladesh from April Apollo Hospitals Enterprise Ltd signed `400 crore contract with Belgium-based Ion Beam Applications S A to set up a proton therapy centre in India. Spice Global is planning to invest over `1,400 crore to set up its 1,000 bedded hospital in India by PRIVATE EQUITY UPDATE According to PwC, PE (Private Equity) investments in India declined by 15% y-o-y to $8.85 billion across 406 deals in 2012 as against $10.35 billion across 481 deals in the previous year. According to Venture Intelligence, South India has attracted the most number of PE investments worth $2.46 billion across 162 deals in Bengaluru was leading with 88 deals worth $1.17 billion. Aditya Birla PE, Norwest Venture Partners and Faering Capital have invested `300 crore for acquiring considerable stake in Ratnakar Bank. The fund would be utilized by the bank for an upcoming IPO. In 2012, ICICI Venture successfully closed `500 crore ($100 million) second real estate fund, the India Advantage Fund Real Estate Series 2. Through its real estate and other funds, it raised $700 million in Temasek Holdings and KKR & Co are eyeing to acquire Warburg Pincus LLC's majority stake in Indian tyre maker, Alliance Tire Group for about $400 million. Embassy Property Developments is planning to raise `500 crore from JP Morgan to fund its two projects in Bengaluru. Tholons Capital aims to launch around $50 million real estate fund to invest in the Indian luxury, boutique home and commercial realty segments. The makers of Medimix soap, Cholayil plans to raise `135 crore from Sequoia Capital to fund its expansion plans in India. Rockland Hospital is planning to raise `200 crore through PE and VC funding route. The fund would be utilized to set up 500 beds multi-specialty hospital in Greater Noida in the coming 2 years. Barbeque Nation Hospitality Ltd intent to raise `100 crore from CX Partners to fund its expansion plans. Eurozone Manufacturing PMI declined to 46.1 in December 2012 as against 46.2 in the previous month. Britain's services sector PMI shrank for the first time in two years in December 2012 to 48.9 from 50.2 in the previous month. In December 2012, inflation rate of UK remained unchanged for the third consecutive month at 2.7%. India signed MoU with Vietnam for b u i l d i n g c a p a c i t y, d e v e l o p i n g institutional framework and identifying thrust areas & opportunities for MSMEs in India. In 2012, China's economy grew 7.8% y-o-y as against 9.3% y-o-y in the previous year. In November 2012, Eurozone industrial output declined to 0.3% compared to 1.0% in the previous month. EQUITY UPDATE Equity and equity-linked issuance by Indian companies raised a total of $14.9 billion from 101 new issues in 2012, a 72% increase from the comparable period in JK Cement plans to raise up to `200 crore from institutional investors to fund its long-term growth plan, including capital expenditure. Vishwaraj Sugar Industries is expected to raise up to `374 crore through IPO during February-March The fund would be utilized to support its expansion plans. BharatMatrimony.com is planning to raise $100-$125 million through IPO in 2013 to expand its overseas operations.

7 INDUSTRY FOCUS - INDIAN PHARMACEUTICAL SECTOR The Indian pharmaceutical industry accounts for over 8% of global pharmaceutical production. The industry has over 60,000 generic brands across 60 therapeutic categories with manufacturing of more than 400 different active pharmaceutical ingredients (APIs). India is a major destination for manufacturing of generic drug and it has over 120 United States Food and Drug Administration (USFDA) approved manufacturing facilities. The domestic pharmaceutical sector, which is currently valued at $17.4 billion, contributes 1.71% of GDP and provides employment to more than 3 lakh people. Moreover, the size of the Indian formulation market, which currently stands at around `62,000, crore is growing at 15-20% annually. The industry is growing at about 8 to 9% annually. The sector meets around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectables. There are approximately 250 large units and about 8,000 small scale units, which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). The demand for pharmaceutical products in India is significant and is driven by low drug penetration, rising middle-class & disposable income, increased Government & private spending on healthcare infrastructure, increasing medical insurance penetration etc. The Indian pharmaceutical market is expected to double in five years reaching $36 billion by Globally, India ranks third in terms of manufacturing pharma products by volume. According to McKinsey & Company report, the Indian pharmaceutical market is ranked 14th among the emerging economies. By 2015, it is expected to be in the top 10 in the world, ahead of Brazil, Mexico, South Korea and Turkey. According to the Department of Industrial Policy and Promotion (DIPP), India attracted foreign direct investment (FDI) worth $ million in the drug and pharmaceutical sector between April 2009 and February Multinational drug companies are showing a healthy growth in the Indian market and are setting a new trend. Out of 25 top medicine brands by sales in 2011, 13 were global drugs major such as Pfizer, GlaxoSmithkline and Novartis. Brand-building exercise is fast becoming more evident in the Indian medicine market. The sales of the Indian pharmaceutical industry stood at $17.4 billion in 2012 and is expected to reach $36.0 billion by (E) 2015 (E) 2014 (E) 2013 (E) Revenue of Indian pharma industry ($ billion) Source: Aranca research CAGR 17.8% 36 According to Pharmaceutical Exports Council of India, the export of drugs, pharmaceuticals and fine chemicals increased by 27% y-o-y to `60,000 crore in the FY Pharma exports from India are expected to increase more than two folds over the next five years. The trade surplus in the pharma sector is likely to expand to $16.5 billion by According to CMIE, Indian drug exports are expected to increase by 22.7% y-o-y to `77,747 crore in the FY based on healthy growth in volumes and a sharp depreciation in the value of rupee. On the other hand imports are expected to surge by 22.7% y-o-y to `17,655 crore in the FY Trade data of Indian pharma industry ($ billion) Source: Aranca research Source: Aranca research Exports Net Exports (E) 2014 (E) 2015 (E) 2016 (E) Alimentary drugs contribute over 13% in the Indian pharma market whereas the cardiovascular segment represents 10% of the market share which is likely to rise due to the growing number of cardiac cases in India. Central Nervous system 6% Cardiovascular 10% Alimentary/ metabolism 13% Market segmentation of Indian pharmaceutical sector (%) Respiratory 9% Oncology 3% Other therapeutic purposes 59% The manufacturing cost of Indian pharma companies is lower by 60% than that of US firms and almost half of that of European manufacturers. Cost efficiency continues to create opportunities for Indian companies in emerging markets and Africa.

8 Relative cost of production with US cost as base India Europe US Source: Aranca research Major PE deals in the pharmaceutical sector in 2012 PE deal value in the pharmaceutical sector was $200 million across 7 deals in In recent years, several foreign players have made acquisitions in India to get a foothold in the country's pharmaceutical market and leverage on the technical and cost efficiency of Indian companies. Increasing number of companies are forming JVs to benefit from research and development, while large global firms from developed markets are venturing with Indian majors to develop new medicines. Investee Nova Medical Centers Twilight Litaka Pharma Intas Pharmaceuticals Source: Business Standard Investor Goldman Sachs, NEA Navis Capital Partners Chrys Capital M&A deals and JV's in the pharmaceuticals sector Deal size ($ million) Indian company Micro Labs Natco Pharma Glenmark Dr. Reddys Sun Pharma Piramal Orchid Chemicals Aurobindo Pharma Shantha Biotech Ranbaxy Labs Dabur Pharma Source: Aranca research Foreign company Litha Litha Sanofi Iso Ray Merck Abbot Hospira Pfizer Sanofi Aventis Daiichi Sankyo Fresenius Kabi The investment momentum in the pharmaceutical industry remains strong. In the first quarter of the FY , 7 projects with a total investment of `1,612 crore were added. The companies that announced fresh projects are Arvind Remedies, Auronext Pharma, Cadila Pharmaceuticals, Lupin, Siflon Drugs and Pasteur Institute of India. Source: CMIE Investments in the Indian pharmaceutical sector (`crore) 4, , , , , (E) Deal size ($ million) 615 3, , Type JV JV JV Licensing rights Marketing Business buyout Business buyout Generic development and supply Acquisition Acquisition Acquisition Details of Abbreviated New Drug Application filings by leading Indian pharmaceutical companies (Number) Sun Pharma Source: ICRA Ranbaxy Aurobindo Dr. Reddy s Note: There are various patent challenges being filed in USA, against various global generic pharma companies, which includes many Indian names as well. These patent challenges are referred to as 'Para IV' filing. When a generic company intends to sell innovator's drug before its patent expiry, it files an additional document called Para IV with USFDA to get the approval Lupin Cadila Approved Pending (Non Para IV) Pending (Para IV) Glenmark 14

9 Major upcoming projects in the pharmaceutical sector in India Company/Project/ Locations Ipca Laboratories Ltd Vadodara Drug Formulation Project Vadodara, Gujarat Cipla Ltd Vikhroli R & D Expansion Project Vikhroli, Mumbai, Maharashtra Aurobindo Pharma Ltd Medak Liquid Injectables Project Medak, Andhra Pradesh Intas Pharmaceuticals Ltd Matoda Plasma Fractionation Project Matoda, Ahmadabad, Gujarat Swati Spentose Pvt Ltd Valsad Steroids & Hormones Project Valsad, Gujarat Serum Institute Of India Ltd Pune Pharma Biotech S E Z Project Phase-II, Hadapsar, Pune, Maharashtra Ansal Properties & Infrastructure Ltd Lucknow Biotech Park Project Lucknow, Uttar Pradesh Product Capacity Unit Cost ( `crore) Expected completion date Drug formulations Tonnes/month 307 March 2013 Research & Development 250 March 2013 Liquid Injectibles 45 Million tonnes 200 March 2013 Plasma 1,50,000 Litres 120 March 2013 Steroids & Hormones Pharma biotech special economic zone Bio-tech parks 1,000 October March 2013 June 2013 Source: CMIE SWOT ALYSIS Strengths 1. Massive market growth potential. 2. Strong local manufacturing sector. 3. Low-cost but skilled labour force. 4. Long-established trade patterns with Western Europe and US. 5. Swift market approval time. Weaknesses 1. Least developed pharmaceutical markets in Asia with low per capita consumption. 2. Underdeveloped healthcare infrastructure. 3. Vast regional disparities in healthcare coverage. 4. Many multinationals already selling their products at low prices. Opportunities 1. Large and growing population boosting pharmaceutical and medical demand. 2. Underdeveloped market for chornic diseases. 3. The recognition of pharmaceutical patents in India from January Rising demand for generic drugs globally. 5. Increased demand for APIs produced in India. 6. Global expansion of larger local companies. 7. Increased public funding for disease eradication programmes. Threats 1. Failure to properly enforce World Trade Organization compliant patent legislation for drugs. 2. Considerable counterfeit drug industry. 3. Government failure to revise its opaque and discriminatory pricing & reimbursement policy. 4. Need for overhauling of healthcare delivery structures for better access to medicines. Government Initiatives: 100% FDI is permitted for health and medical services under the automatic route. The Government allows zero duty for technology upgrades in the pharmaceutical sector through the Export Promotion Capital Goods Scheme.

10 The Government plans to set up $640 million venture capital fund to boost drug discovery and strengthen the pharma infrastructure. In the Union Budget for , the Government has extended concessional basic customs duty of 5% with full exemption from excise duty on six specified life-saving drugs/ vaccines. These are used for the treatment or prevention of ailments such as HIV-AIDS, renal cancer etc. Probiotics are a cost-effective means of combating bacterial infections. In the Union Budget , the Government has reduced the basic customs duty on this item from 10% to 5%. Allocation for National Rural Health Mission is proposed to be increased to `20,822 crore in FY as against `18,115 crore in the previous year. Proposal to extend weighted deduction of 200% for R&D expenditure in an in-house facility for a further period of five years beyond March 31, Outlook: The Department of Pharmaceutical has introduced a 'Pharma Vision 2020' for making India as one of the leading destinations for end-to-end drug discovery and innovation and for that purpose, the department would provide requisite support by way of world class infrastructure, internationally competitive scientific manpower for pharma research and development (R&D), venture fund for research in the public and private domain etc. Pharmaceutical companies like Cipla, Ranbaxy, Dr Reddy's Labs and Lupin might soon be part of the Government's ambitious 'Jan Aushadhi' project. In an attempt to commercialize the project, the Government enters into a PPP model and encourage private sector to produce generic drugs. There are 117 Jan Aushadhi stores across the country and it is expected to touch at least 600 in the coming two years and 3,000 by The Government is embarking on an initiative with 50% public funding through a public-private partnership model to harness India's innovation capability. The vision is to catapult India into one of the top five pharmaceutical innovation hubs by The country is targeting to achieve a global niche with one out of every five to ten drugs discovered worldwide originating from India by The Planning Commission has set a target of $100 billion for the pharmaceutical sector to be achieved by 2020 and is looking at 5% share in the global drug industry in the coming five years. Snapshot of key financials of Indian pharmaceutical industry majors for the FY Parameters Sun Cipla Dr Reddys Pharmaceutical Laboratories Industries Ranbaxy Laboratories (December 2011) GlaxoSmithKline Pharmaceuticals (December 2011) Net Sales ( `crore) 4, , , , , Total Income ( `crore) 4, , , , , Operating Profit ( `crore) 1, , , , PBDIT ( `crore) 2, , , , PAT ( `crore) 1, , , Operating Profit Margin (%) PAT Margin (%) Source: Moneycontrol The emerging markets represent the fastest growing segment of the Global pharmaceutical industry. Indian Pharma companies have also been eyeing growth opportunities in some of the other fast-growing emerging markets. Among them, in Russia, South Africa and some of the countries in Latin America (Brazil, Mexico) and South- East Asia, Indian companies have strengthened considerable presence. These emerging markets with some of them being branded generics offer strong growth prospects for Indian players given the high out of pocket expenditure on healthcare in these markets (unlike developed markets) and relatively easier regulatory pathways. During the initial phase, most of the Indian players preferred acquisitions/in-organic investments to enter into these markets are now enhancing their presence through ramp up in product portfolio and therapy segments. In the coming years, Indian companies will be partnering with MNCs in emerging markets. Such alliances would benefit from the R&D and manufacturing capabilities of the Indian partners and the extensive marketing & distribution footprint of the MNCs in those markets. For instance, GlaxoSmithKline has a tie-up with Dr. Reddy's whereas Pfizer has tied-up with a number of Indian companies to launch a range of branded generics in emerging markets (besides generics in US)

11 Disclaimer: This report is based on publicly available data and other sources that we consider reliable. While every effort is made to ensure the accuracy and completeness of information contained, we do not represent that it is accurate or complete and do not take liability for errors or omission. LSI Financial Services Pvt Ltd shall not be liable for any direct or indirect damages that may arise due to any act or omission on the part of the user due to any reliance placed or guidance taken from any portion of this report.

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