CRAMS Note, Overview and Outlook

CRAMS INDIA : OVERVIEW & OUTLOOK

June 2011

ICRA Limited CRAMS INDIA June 2011

ICRA Limited CRAMS INDIA 2

Agenda: CRAMS Overview & Outlook

Description Slide

Global Growth Drivers 3-6

Market Dynamics 7

Outsourcing Trends 8

Contract Manufacturing Outsourcing 9-11

Contract Research Outsourcing 12-13

Key Challenges 14

Key Players

-Divi’s Lab 15

-Dishman Pharma 16

-Jubilant Lifesciences 17

-Piramal Healthcare 18

-Biocon Limited 19

Outlook & Conclusion 20-21

Annexure 22-23

Analysts Contact 24


CRAMS – Global Growth Drivers

Patent Expiries

Falling R&D Productivity

Focus on Generics / Branded Generics

Cost Pressures

• Drugs worth US$ 97 billion expected to go off patent from 2011-15 in US compared to USS$73 billion during 2006-10 period

• New launches not enough to justify loss of existing block-buster going off patent

• Sales generated by new approvals have seen declining trend over the last few years despite increase in R&D budgets

• Average R&D cost increased to US$1.3 billion per NME; rising intolerance to side effects of new drugs reduces research productivity

• Increasing role of Generics being played out in developed countries by Insurance and healthcare providers

• Foray into branded generics segment of emerging markets to boost dwindling global revenues and profitability

• Falling R&D productivity coupled with pricing pressure has led to margin contraction

• Increase in raw material and wage inflation further impact bottomline

STRONG GROWTH PROSPECTS FOR GLOBAL CRAMS INDUSTRY BACKED BY COST PRESSURES for INNOVATIVE PHARMA COMPANIES AND INCREASING GENERICISATION



Source: USFDA, PhRMA Industry Profile 2011, Industry reports, ICRA estimates.

12.4 15.2 15.4 15.7 14.719.3

35.4

14 15.612.5

0

5

10

15

20

25

30

35

40

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

US$

bill

ion

US: Patent Expiries Schedule

$29.5 $30.8 $33.0

$47.6 $51.8

$56.1 $63.2 $63.7 $65.9 $67.4

24

17

21

36

2022

18

2426

21

0

5

10

15

20

25

30

35

40

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

New FDA approvals and R&D Spending by Year (2001-2010)

R&D spend (LHS) No. of New drugs (RHS)



Patent Expiries: Selected Products Product Company Yearly Sales ($Billion) Year of Patent ExpiryXalatan Pfizer 1.7 2011

Leavaquin Johnson & Johnson 1.6 2011Zyprexa Eli Lilly 5.0 2011Diovan (ex-US) Novartis 3.5 2011Aricept (Japan) Eisai 1.0 2011

Taxotere Sanofi-aventis 1.2 2011Concerta Johnson & Johnson 1.5 2011Lipitor Pfizer 10.7 2011Singulair Merck&Co, Inc. 4.7 2012Seroquel AstraZeneca 4.9 2012Provogil Cephalon 1.1 2012Geodon Pfizer 1.3 2012Tricor Abbott 1.3 2012

Eloxatin Sanofi-aventis 1.4 2012Viagra Pfizer 1.9 2012Lexapro Forest labs 2.8 2012

Plavix (US)Bristol-Myers/ Sanofi-aventis 6.7 2012

Diovan (US) Novartis 2.5 2012Enbrel (US) Amgen 3.3 2012Actos Takeda 4.1 2012



Patent Expiries: Selected Products Product Company Yearly Sales ($Billion) Year of Patent ExpiryCymbalta Eli Lilly 3.1 2013Niaspan Abbott 1.1 2013Lidoder Endo 1.2 2013

Oxycontin Purdue Pharma 3.1 2013

Adavir GlaxoSmithKline 8.4 2013Aciphex Eisai 1.6 2013

Plavix (ex-US)Sanofi-aventis/Bristol-Myers 3.8 2013

Epogen Amgen 2.6 2013

Seretide/Advair GlaxoSmithKline 2.5 2013Lyrica Pfizer 2.8 2013

Nexium AstraZeneca 5.0 2014Copaxone Teva 2.8 2014Celebrex Pfizer 2.4 2014Blopress (Japan) Takeda 1.5 2014

Welchol Daiichi Sankyo 0.4 2015

Aggrenox Boehringer Ingelheim 0.4 2015Aloxi Eisai 0.5 2015

Avodart GlaxoSmithKline 0.6 2015Zyvox Pfizer 0.7 2015Androgel Solvay 1.0 2015Gleevac Novartis 1.3 2015Namenda Forest Labs 1.3 2015Source: ICRA research, Moody’s, Industry Reports* Year generally reflect date that patents first begin to expire. Generic competition may not necessarily occur depending on many factors including strength of later patents, whether generics receive approval , status of patent challenges etc.


CRAMS - Market Dynamics

• Approximately 64% of the estimated US$ 67 billionglobal CRAMs market in 2010 is dominated by contractmanufacturing which includes manufacturing ofintermediates for new chemical entities (NCEs) ormanufacturing of APIs

• Contract Research predominantly consists of drugdiscovery, preclinical and clinical research and representUS$ 25 billion opportunity† globally

• Huge scope for growth as currently only ~20% of globalPharma R&D spend is being outsourced

•Out of the estimated US$3.8 billion market in 2010,approximately US$ 2.3 billion pertains to contractmanufacturing. Chemical synthesis being the majorcontributor followed by formulations & packaging

•Contract research market size at US$ 1.5 billiondisplaying strong growth driven by chemistry capabilities,skilled manpower and cost value proposition

•Players in the Indian CRO market in the year 2005 were~20, which increased to ~100 in 2008 and expected to bearound 150-200 by 2012 leading to higher competitiveintensity

29 33 37 42

1518

2125

0

10

20

30

40

50

60

70

80

2007 2008 2009 2010E

US$

Bill

ion

Global CRAMS Market†, US$ Billion

Contract Manufacturing Drug Discovery and Research

CAGR15%

Source: Industry reports, ICRA estimates, † excludes Clinical Trials

0.8 1.11.6

2.30.3

0.6

0.9

1.5

0

0.5

1

1.5

2

2.5

3

3.5

4

2007 2008 2009 2010E

US$

Bill

ion

Indian CRAMS Market†, US$ Billion

Contract Manufacturing Drug Discovery and Research


CRAMS – Outsourcing Trends

25%

15%20%

55%

15% 15%

0%

10%

20%

30%

40%

50%

60%

Discovery API dev. Dosage dev. API mfg. Dosage mfg. Packaging

Extent of Outsourcing in each area of the value chain

• Over the past few years, Pharma MNCs have begun to outsource core functions such as clinicaltrials and manufacturing with drug discovery being one of the recent core functions to be outsourced

• Late life cycle outsourcing has the highest share with API manufacturing outsourcing the highestat around 55%

• While the Outsourcing of drug & discovery development activities and dosage manufacturing islow as they form part of core activities, they represent a huge scope for future growth asintegrated CRAMS players emerge and build entrenched relationships with Pharma MNCs

Source: Industry reports, ICRA estimates.


Contract Manufacturing (CMO)

• Approximately 60% of the total US$2.3 billion Indian CMO market relates to chemical synthesis followed byformulation and packaging, which constitutes about 40%. The market has grown at a CAGR of 51% over2007-10 reflecting upon the strong potential it has to offer

• Contract Manufacturing requires upfront investments for building up requisite facilities and is capitalintensive in nature, thereby requiring long term assured supply contracts in order to recoup investments or“take or pay” type of contracts

• Indian players have taken in-organic route of acquisition to gain access to customers, regulated markets ofAmerica and Europe and niche technologies like sterile injectables, cytotoxics to build strong franchise forthemselves

Growth Drivers

• High Number of USFDA and UK MHRAapproved plants (200+)

• Well-developed chemistry skills• Sufficient product filing track record: Indian

companies have been on the fore-front , bothin terms of filing DMFs and ANDA

• Robust talent pool• Low production & R&D cost• Quality Infrastructure & established track

record of IPR compliance

Overview

Source: USFDA, ICRA estimates.

271 294 321455 380 365

736 760 799

11311021 1024

37%39% 40% 40%

37% 36%

10%

15%

20%

25%

30%

35%

40%

45%

0

200

400

600

800

1000

1200

2005 2006 2007 2008 2009 2010

DMF s Filings

DMF Filed, India (LHS) DMF filed, Overall (LHS) % India (RHS)


Contract Manufacturing (CMO)

0

50

100

150

200

India* Italy China Spain Taiwan Israel Hungary

Number of FDA approved plants for sample countries †

100%

80-85%

35-40%

0%

20%

40%

60%

80%

100%

120%

Cost Index

Overall Indexed manufacturing cost (US FDA approved plants)

US Europe India

Source: Industry Reports, ICRA estimates. † Year 2006, *For India upto 2009


Contract Manufacturing (CMO) – Domestic Trends

• Domestic branded business present an attractive opportunity for contractmanufacturing as large domestic branded generic players focus on marketing andproduct management and outsource non-core activities like manufacturing to localplayers

• Focused manufacturing players tend to be more efficient in production as well as enjoyhigher level of capacity utilization leading to lower cost of production

• In addition to above, Contract manufacturers enjoy several other cost advantages owingto economies of scale in procuring raw material coupled with exploiting tax breaksthrough setting up of facilities in such notified areas

• Large domestic capacity of contract manufacturer facilitate flexible outsourcing foroutsourcing companies based on market demand. This helps them respond rapidly toevents like new product launches (line extension etc.) or surge in demand for existingproducts

• Many contract manufacturers have also been able to develop new products (lineextensions, combinations) proactively as added service to domestic majors. FurtherNovel Drug Delivery System applications owned by these contract manufacturers helpre-launch existing products thereby leveraging its value proposition


Contract Research Outsourcing (CRO)

Growth Drivers

Overview

• Contract Research Organizations (CROs) provides services including drug discovery, new productdevelopment, formulation, pre-clinical trial management spanning till phase IIA

• The global contract research market reached at US$25 billion in 2010 growing at a CAGR of 19%during 2007-10. The Indian contract research industry has been growing tremendously over thepast few years and reached approximately US$ 1.5 billion in 2010, a CAGR of 65% from 2007-10,albeit on a small base

• The Indian Pharmaceutical outsourcing providers have capabilities to provide late stage discovery(research chemistry) and drug development services. However they are in the process of buildingup research biology skills to facilitate early stage discovery

Clinical Trials52%Pre-Clinical Trial

30%

Research Chemistry &

biology18%

Indian CRO market• Low cost & time advantage

• Availability of diverse genetic pool• Large resource of technical expertise• Increasing compliance with WHO Good

Clinical Practice (ICH-GCP)

Cost of Clinical Studies US$ MillionIndia cost advantage

Phase I Study 20-25 <50%

Phase II Study 50-60 <60%

Phase III Study 100-110 <60%

Source: Industry Reports, ICRA estimates


Contract Research Outsourcing (CRO)

Source: Industry, ICRA research

KEY GOVERNMENT INITIATIVES IN THE LAST FEW YEARSObjective Key Initiative undertaken

Collaboration between industry, academia and the government

Promoting collaboration among industry, academia and government through various programmes such as the New Millennium Indian Technology leadership (NMITLI) and Drugs and Pharmaceuticals Research Program

Focus on specialised pharmaceuticals education

The GoI has set up seven NIPERs as institutes of "national importance" to achieve excellence in pharmaceutical sciences and technologies, education and training

Duty relief for technology upgrades

The GoI has also introduced zero duty for technology upgrades in the pharmaceutical sector through the Export Promotion Capital Goods Scheme (EPCG) scheme

Promotion of Indian drug discovery platforms

Public Private partnership model to harness India's innovation capability through 50% public funding. Targeting to achieve one out of every five to ten drugs discovered worldwide by 2020 originating from India.

Tax ExemptionIncrease in weighted reduction from 150% to 200% on expenditure incurred on in-house R&D activities and from 125% to 175% on activities outsourced to specific institutions

Potential cost savings of ~60%

35-40

8-9

20-25

25100

0

20

40

60

80

100

120

Total R&D cost in US Research biology Research chemistry Development cost Total R&D cost in Idnia

Potential savings in outsourcing end-to-end research and development to India


Key Challenges for Indian CRAMS Industry

Cost Escalation & Talent attrition

Regulatory Issues

Captive CROs & intensifying competition

Competition from China

• Unavailability of skilled manpower for conducting clinical trials• CRAMs being a skill-intensive business with high gestation period,

attrition of skilled work force is a high risk for the company leading to high compensation structure

• Concerns on diligent follow of guidelines issued by regulatory bodies• Concerns on sharing details regarding NCE for want of proper

regulatory framework and risk management framework

• High level of new entrants despite high level of entry barriers owing to attractive long term opportunity

• In order to cut costs, many MNCs having presence in India are outsourcing work to captive CROs in Indian

• China emerging as a strong contender for CMO business on account of cost competitiveness, though India has a lead over China in terms of manufacturing facilities and Language skills

• Improving IPR compliance through alliances/acquisitions by global CROs

ESTABLISHING RELATIONSHIPS AND TRUST WITH INNOVATOR AND OTHER PHARMA MAJORS TOGETHER WITH PROPER RISK MANAGEMENT FRAMEWORK CRITICAL TO MITIGATE RISKS


Key Players – Divi’s Lab

• One of the largest CRAMS players - custom synthesis of active ingredients for innovator companies,other specialty chemicals like peptides & nutraceuticals. CRAMS contributing 50% of the turnover whilethe remaining from manufacture of Generic APIs

• US FDA approved facility, with 38 DMF filings and 10 Certificate of Suitability with European directorate• Relatively high product concentration with top product accounting for 18% of sale and top 5 products

accounting for 55% of the sales• Established relationship with innovator companies; top 5 companies accounting for 49% of the

revenues• Exports constitute 91% of the revenues, thereby exposing it to foreign exchange fluctuations

Financials

Business Overview

• Strong growth over the years to cross peak turnoverof Rs. 1200 crores during FY 2009. Decline in FY2010 owing to de-stocking and inventoryrationalisation by global pharma majors, recoveryduring FY11

• Healthy margins and profitability coupled withmoderate capex plans leading to consistent free cashflows

• Strong Balance Sheet with net cash position andinvestments to the tune of approximately Rs. 525crores as on March 2011Source: Industry Reports, ICRA estimates. Rs. in crore

-40%

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1400

FY06 FY07 FY08 FY09 FY10 FY11

Performance summary – Divi’s Labs

Operating Income (LHS) OI Growth (RHS)

OPBDIT Margin (RHS) PAT Margin (RHS)


Key Players – Dishman Pharma

• Research driven company with expertise in chemical synthesis, manufacturing of APIs, APIintermediates, quaternary compounds (Quats) & fine chemicals. Approximately 70% of the turnoverfrom CRAMS

• Acquisition of Carbogen-Amcis (2006) has enabled the company to be present across the value chain ofCRAMS & strengthen its position

• Entrenched relationship with Pharma MNCs with Solvay as the top customer contributing more than15% of the revenues

• US FDA approved manufacturing facilities• Exports constitute 90% of the revenues; majority to Europe

Financials

Business Overview

• Strong growth over the last few years through organicand in-organic route

• CRAMS business impacted by recessionary conditionsprevailing in Europe coupled with Rupee appreciationagainst Euro leading to overall -1.3% growth 9M FY11

• Execution of low-margin contracts lead to drop inoperating margins

• Moderately leveraged balance sheet with D/E ratio of1.0x as on March 2011

• Notwithstanding short term challenges, long termprospects remaining attractiveSource: Annual Reports, ICRA estimates. Rs. in crore

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INR

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Performance summary – Dishman Pharma




Key Players – Jubilant Life Sciences Limited

• Largest Indian CRAMS player with presence across the value chain from drug discovery research serviceto development, custom manufacturing (APIs, pyridines, sterile & non sterile products and radiology)

• Acquired Draxis Health Inc. in 2008, a Canada based contract manufacturing & radiopharmaceuticalcompany for US$255 million and in June 2007 acquired Hollister Stier having contract manufacturing ofsterile injectables. Acquisition to allow higher presence in regulated markets and on-shore presence

• Divested low margin Agri & Performance Polymers from FY11 business into a separate company toenhance business focus on Lifesciences

• US FDA approved manufacturing locations in India as well as North America with DMFs filed acrossvarious regulated markets

Financials

Business Overview

•Proprietary products (pyridines and picolines) continueto post strong cash flows supporting other businesses

•Decline in FY11 due to divestment of Agri &Performance Polymers business and slowdown ingrowth of Contract manufacturing and drug discoverybusiness

•Moderately high leverage with debt to equity ratio of1.3x as on March 2011

Source: Annual Reports, ICRA estimates.

-20%

-10%

0%

10%

20%

30%

40%

50%

0500

1000150020002500300035004000


Performance Summary - Jubilant Life Sciences




Key Players – Piramal Healthcare

• Presence in CRAMS business with assets in India and abroad. Capacity scale up in the past with Aveica(UK) acquisition and Pfizer’s Morepeth facility (UK)

• Divested Domestic formulations business to Abbott for total consideration of US$3.8 billion; intend toscale up Contract Manufacturing business through organic and in-organic route

• Focused CRAMS player with presence across the value chain from drug discovery research service todevelopment and custom manufacturing

• Recently acquired Ahmedabad based discovery services business which offers synthetic chemistry,medicinal chemistry and computational chemistry; acquisition to complement CRAMS business

Financials

Business Overview

•CRAMS revenue affected in financial year 2010owing to de-stocking by Pharma companies amidstconcerns of economic slowdown

•Recovery during FY11 (+8.6%) with positive growthduring H2 FY11; momentum likely to continue goingforward as global demand recovers

•Strong balance sheet with huge cash reservesresulting from sale of domestic formulationsbusiness to Abbott

Source: Annual Reports, ICRA estimates

-15.0%

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25.0%

30.0%

860880900920940960980

10001020104010601080

FY 2008 FY 2009 FY 2010 FY 2011

INR

cro

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Pirmal Healthcare: CRAMS Revenue and Growth

CRAMS Revenue (LHS) Revenue Growth (RHS)


Key Players – Biocon Limited

•An integrated biotechnology company with presence across the value chain - R&D, manufacturing andbuilding strengths in marketing•CRAMs presence through its subsidiaries (Syngene International Limited, Clinigene International Limited)offering contract research and clinical trials services besides Biocon offering contract manufacturingservices for select innovator products (deal with Optimer)•Research Services business focus on on discovery research in the areas of Molecular Biology, CustomSynthesis and Chemistry FTEs in pre-clinical phase besides offering clinical trial services; ResearchServices has partnerships with large global pharmaceutical companies with the company having set up adedicated facility for Bristol-Myers Squibb

Financials

• Research Services business witnessed strong revenuegrowth between FY2007 and FY2010; revenue growthin H1FY2011 moderated on account of highercompetition faced by the business besides reducedoutsourcing budgets of global pharma majors.However, there has been a recovery in revenue growthduring H2FY2011

• Profit margins impacted due to increasing competitiveintensity and commoditisation of services offered

• Biocon (on consolidated basis) has low debt levels andstrong cash balancesSource: Annual Reports, ICRA estimates for Research business

Business Overview

0.00%

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50

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FY2008 FY2009 FY2010 FY2011

INR

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re

Revenues (Rs. crore, LHS) PBIT (Rs. crore, LHS)

Revenue Growth (RHS) PBIT/OI (RHS)


Outlook & Conclusion (1/2)

• The global CRAMS market is expected to grow further to approximately US$85 billion by 2012. Increase inoutsourcing from developed to developing countries will continue as the innovator companies will lose patentprotection for many of their blockbuster drugs over the next few years; thereby forcing them to look forvarious alternatives such as, cost control and introduction of generics to their portfolio

• Outsourcing of non-core activities like manufacturing of intermediates and APIs to low cost destinations likeIndia is gaining momentum for pharma MNCs as they focus on their core R&D and brand building business

• The Indian CRAMS market stood at approximately US$3.8 billion in 2010 and is estimated to reach US$7.6billion by 2012. With high number of USFDA approved plants, skilled manpower and technical competenciescoupled with inherent cost advantage, contract manufacturing is likely to dominate the CRAMS space. TheCMO business is expected to be US$7-8 billion opportunity by 2015 as per industry estimates

2.5

3.8

7.6

0

1

2

3

4

5

6

7

8

2009 2010E 2012E

US$

Bill

ion

IndianCRAMS Market

5867

85

0

10

20

30

40

50

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70

80

90

2009 2010E 2012E

US$

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ion

Global CRAMS Market

CAGR 44%

CAGR 13%

Source: Industry Reports, ICRA estimates

Outlook & Conclusion (2/2)

• Further, Indian Companies have strengthened their presence in the market by acquiring bettertechnologies and developing technical expertise in niche segment (sterile drugs, cytotoxics, lyophilizationetc.) that offer higher margins and higher entry barriers. Acquisition of foreign facilities would accelerategrowth and foster better relationship with innovator companies, though generating adequate return onsuch investment needs to be monitored

• In the long run, companies which provide integrated drug development, research, clinical trial andmanufacturing outsourcing services will prove to be one stop shop for all the needs for innovatorpharma companies resulting in long term partnerships and better customer franchise

• Outsourcing of high end services like clinical trials (CTO) and drug discovery (CRO) will require Indiancompanies to build entrenched relationship with Innovator companies over a period of time; initiallywith smaller projects and gradually moving onto mission critical and high value add projects

• The domestic market represents a window of opportunity for CRAMs players as increasingly largerdomestic players are outsourcing manufacturing and packaging services to these players in order tofocus on marketing and sales and new product development. There ability to offer value added serviceslike drug delivery systems, combination drugs further leverages their value proposition

• Overall, the outlook for Indian CRAMS appears healthy supported by Contract ManufacturingOutsourcing for APIs and increasing presence in high end Contract research business



Annexure1: CRAMS - Overview

Drug Discovery Process

Pre-Clinical Study

Clinical Study

Custom Synthesis

Drug Substance Production

Dosage form development &

Production

Disease Study/Target

discovery, Target validation, Lead discovery, Lead

testing, Lead optimization

In-vivo, In-vitro animal toxicity

studiesPhase I, IIA

Filing of IND with FDA

Scaling up from Lab-scale to kilo level and from

kilo to Ton level

Commercial Production of

APIs/Intermediates

Commercial Production of

Formulations in different

dosages form

Area of Contract Research Area of Contract Manufacturing

Contract Research activities taken on cost plus basis of full time equivalent (FTE) basis

Contract Manufacturing activities for both New Chemical Entities and off-

patent drug.


Annexure2. CMO deals done in past by Indian Companies

Indian Company Outsourcing Partner Description

Aurobindo Pharma AstraZeneca, Pfizer Supply generic medicines for developed & emerging markets

Strides Arcolab Limited Pfizer Supply 67 generic drugs to Pfizer with focus on Oncology

Torrent Pharmaceuticals AstraZeneca Supply 18 products for various markets

Indoco Remedies Aspen Range of Ophthalmic Products for 30 emerging markets

Indoco RemediesWatson

PharmaceuticalsDevelop and manufacture generic drugs with market size of US$

670 million

Cadila Healthcare Altana, Zyban JV structure for manufacturing on patent drugs

Shasun Eli Lilly, GSK Contract manufacturing for APIs and formulations

Dishman Solvay, GSK Contract manufacturing for APIs and intermediates

Jubilant Novartis Contract manufacturing for intermediates and APIs

Matrix GSK Contract manufacturing for API

Divi's MNCs Custom chemical synthesis

Strides Arcolab Limited GSK Supply of drugs for semi-regulated markets

Ipca AstraZeneca Contract generics manufacturing of APIs

Torrent Pharmaceuticals Novo-Nordisk Contract manufacturing of formulations

Indicative


Analytical Contacts:

Anjan Ghosh Subrata Ray Gaurav Jain Anupama Arora

+91 22 30470004 +91 22 30470027 +91 20 25560195 +91 124 4545303

Mumbai Mumbai Pune Gurgaon

Documents

CRAMS Note, Overview and Outlook