Lupin’s Foray into Japan- Group C

ASHWIN MATHEW PHILIPOSE 2013PGP009

GAURAV PILANIA 2013PGP020

ANKIT SRIVASTAVA 2013PGP068

KODALI RAMYA 2013PGP090

NIKHIL SINGHAL 2013PGP095

PALADUGU SAI SASHANKA 2013PGP098

2

Pharmaceutical Industry OverviewIn Big Pharma, its all about the pipeline

PHARMACEUTICAL PRODUCTS FINAL PRODUCT CATEGORIESAPIs (Active Pharmaceutical

Ingredients) Formulations Generic drugsBranded drugs

The pharmaceutical ingredient present in

the formulation

The final product as given to patients

Invented through research and testing,

enjoy patent protection

Launched after expiry of branded drug patents

Branded drugs account for most of the revenues of

pharmaceutical companies

Generic drugs attracted more attention due to pressure on

countries to cut down medical expenditure, growth pressure

on companies and patent expiry of blockbuster drugs

Branded drugs are low volume-high value products whereas

generic drugs are high volume-low value products

R&D expenditure, a main growth driver in the industry,

was much higher for larger firms than for its smaller

counterparts

M&A deals in the industry were aimed at utilizing excess

capacity and marketing resources, cost savings etc.

In general the industry is highly regulated and faces a number

of lawsuits every year

3

Global Pharmaceutical Market

2001 2002 2003 2004 2005 2006 20070

200

400

600

800

392 428 499 560 605 649 712

Global Sales

Global Sales

The global pharmaceutical market has recorded a growth of 95%, over the last 7 years, moving up from US$ 392 Bn to US$ 712 Bn

5%

46%31%

9%9%

Global Market Share - Key Markets (%)

Latin AmericaNorth AmericaEuropeAAAJapan

The Japanese pharmaceutical market grew by 3.6% to reach US$ 65.2 Bn. The growth registered by the Japanese market during 2007, is higher than the compounded annual growth rate (CAGR) of the previous five years

In terms of revenue, the ten key markets constitute over 80% of the global pharmaceutical industry The year 2008, is slated to witness a shift in growth from the top seven markets to emerging markets and

from primary care-driven to specialty care-driven drugs The markets of China, Brazil, Mexico, South Korea, India, Turkey and Russia are projected to experience

growth at the rate of 12-13% to reach US$ 85-90 Bn

4

Indian Pharmaceutical Industry

The transition to product patent regime led to unprecedented challenges

Major success factor of the Indian industry was the existence of the process patent regime prior to 2005

Exports account for almost half of revenues of Indian companies and has been growing at a rate of 14% for the past decade

Competition intensified but opportunities also lay in the generic drug market, which opened up after the patent expiry of a number of blockbuster drugs

The Indian pharmaceutical industry is the world’s fourth largest by volume and the fourteenth largest by value. After 2002 Indian firms started targeting firms the world over, mostly concentrating on developed markets like USA and Europe

Factors contributing to the growth are: Increasing disposable incomes and the number of

middle-class households Expansion of medical infrastructure Greater penetration of health insurance

Rising prevalence of chronic diseases Aggressive market penetration, driven by the relatively small companies Adoption of product patent

Estimated market size of Rs. 270Bn in 2007 Highly fragmented market with 10,000

generic players

5

Lupin Pharmaceuticals

44%

21%

15%

20%

Therapeutic Mix

Cephalosporins Anti-TB

Cardiovasculars Others

53%

22%

25%

Gross Sales (Geography Break-down)

DomesticExports - Advanced MarketsExports - Emerging Markets

2005-06 2006-070

20

40

60

80

100

23 22

77 78

Global Sales (Market Break-down)

Advanced Markets Emerging Markets

Sale

s Co

ntrib

ution

%

Lupin was one of the top-5 Indian Pharmaceutical Companies operating in 50 countries

It earned revenues of around Rs. 20 Bn and profit of Rs. 3 Bn

Lupin has six manufacturing facilities all located in India

It has a debt equity ratio of 0.61

Lupin’s promoters held slightly more than 50% of its share capital

2005-06 2006-070

500100015002000250030003500

1827.2

3020.6

Net Profit

Net Profit

In R

s. M

illio

n

6

Japanese Pharmaceutical Market

Japan is the world’s second largest pharmaceutical market after the

USA, with a share of 9%

The industry was traditionally

dominated by local players, who

accounted for 65% of the market in

2005

Generic drugs had a low share (around 17%) in Japan, as opposed to other

developed markets such as US and UK

(close to 50%)

The government started promoting generic drugs and set a target of 30% volume share for generics by 2012

Generic drug manufacturers faced frequent complaints related to product

quality, therapeutic effect and product

information

Japanese pharmaceutical companies also

faced cost disadvantages due

to lack of any backward

integration

Japanese market had high barriers to

entry and high expectations about

quality and consistency

7

Kyowa Pharmaceuticals

Established in 1954 and involved in the development, manufacture, sale and import of generic drugs

Business strategy- to become the market leader in generic psychiatry drugs

Out of 1379 psychiatric hospitals in japan, 1258 prescribed Kyowa’s products

Kyowa spent around 8% of its FY 2006-07 sales on R&D 63% of sales were achieved through small distributors and the rest

through wholesalers 83% of revenue was from own-product sales and the remaining were

from merchandize sales, where Kyowa acted merely as a trader for both domestic and overseas manufacturers

FY2005 FY2006 FY2007 FY2008E0%

1%

2%2.00% 1.90% 1.90% 2.00%

Market Share in Japan (% of total)

Market Share (% of total)

33.60%

15.10%13.60%

37.70%

Segments by Sales

PsychiatricCardiovascularRespiratoryOthers

FY2003 FY2004 FY2005 FY2006 FY2007E0

2000

4000

6000

8000

Sales

In JP

Y M

illio

ns

8

Lupin’s Interest in Kyowa• Japan is the world’s second biggest healthcare market after the US, generics being the negligible portion of it

• In 2005, Lupin signed an agreement with Kyowa to market finished formulations in Japan

• The policies pursued by the Japanese government towards cutting healthcare costs have resulted in the growth of cheaper generic drugs

• Normally when a company ventures outside the regulatory market in generics, profit margins tend to go down. That hasn't been the case in Japan; in fact, it added to the profitability. The company has been able to generate revenues in a very tough geography

• Lupin will be able to add significant value through its strengths in R&D and global marketing, leading to major synergies

• Recent acquisitions in Japanese market:• Zydus Cadila, the Ahmedabad-based pharma company, recently acquired 100 per cent stake in Nippon Universal Pharmaceutical,

Tokyo• Ranbaxy has 50 per cent stake in Nihon Pharmaceutical Industry, a joint venture between Ranbaxy Laboratories and Nippon

Chemiphar of Japan

9

Valuation of KyowaDCF analysis, trading comparables and transaction comparables

Assumptions and key facts

Date of acquisition Jan-07

FYE of Kyowa December

Effective tax rate 42%

Debt 40%

Equity 60%

JPY/USD exchange rate 110

JPY/INR exchange rate 2.73

Number of shares outstanding 196000

Kyowa Valuation Group C

10

Football fieldSuggested valuation for the acquisition is between USD 84m – USD 102m

DCF analysis

EV/Sales

EV/EBIT

EV/EBITDA

P/E

EV/Sales

83

84

67

81

83

82

132

150

79

89

87

119Transaction Comparables

Transaction Comparables

DCF

97 102

11

Analysis at various pricesPrice per share for the proposed valuation is USD 254 – USD 346

Enterprise Value (USD m) 50 75 100 125 150

Net Debt (USD m) 34 34 34 34 34

Equity Value (USD m) 16 41 66 91 116

Price per share (USD) 81 208 336 463 591

12

Benefits of Synergy

Provides as opportunity to Lupin to leverage its strength in the growing Japanese generic market

Current API cost in Japan which is about 8-10 times compared to elsewhere in the world could be significantly reduced through the synergy (Supply of API from Lupin

Expected savings of $0.44 million on bulk procurement of API in FY2010

Projected cost savings by shifting some of Kyowa’s production to Lupin’s facilities in India

2010-11 2011-12 2012-13% of Potential Savings Reached

50% 100% 102%

Total Savings (in $ Mn) 2.01 4.58 5.23

% Increase in Savings - 127.9% 14.2%

FY2010 FY2011 FY2012 FY2013Potential tax savings due to relocation (in $ Mn)

0.22 0.26 0.44 0.52

Projected increase in Cost Savings

- 150% 100%

13

Japanese obsession with the quality of medicines

Shifting of Kyowa’s production to Lupin’s facilities in India was possible only after the approval of

Japanese drug authorities

The highly regulated and costly pharmaceutical market in Japan

High chances of the merger getting cancelled at an advanced stage in Japan

Competition from other Indian players in Japanese generic segment

Uncertainties of Synergy

14

Stock Price Movement – Lupin

2-Jan-06 2-Jan-08 2-Jan-10 2-Jan-12 2-Jan-140

500

1000

1500

2000

2500

Close Price

• In 2008, Lupin acquired Kyowa after which stock prices of Lupin kept on rising showing steady growth of the company

• Lupin announced a 5:1 stock split on 30 August, 2010

15

Challenges and Risks - Post Acquisition

Major challenges post acquisition will be to bring synergies on time. It has been assumed in the valuation that synergy between both the companies will begin from FY2010 which needs to be achieved

Japan has strict regulatory requirements under which it become tough to maintain the profit margin and growth. Thus, managing a continuous growth of revenue in Japanese market will be a challenge

Since potential savings from site variation to India is considered, it becomes more important to maintain backward integration in operational and manufacturing activities which will increase the profitability of the company

Major challenge is to ensure the completion of acquisition process, as it is not unusual in Japan to cancel pharmaceutical mergers at an advanced stage

Fluctuation in exchange rate can affect the valuation of the company Terminal growth rate is assumed to be according to the GDP growth rate of Japan whose fluctuation can

also affect the final price of the deal

16

Post Acquisition Scenario

Lupin’s acquisition of Kyowa has been very successful as Kyowa has thrived under Lupin. After acquisition, in 2008, Kyowa became 100% subsidiary of Lupin

Kyowa targets six to seven products every year instead of an earlier target of three and is expecting to increase to 10 to 12 products per year

In December 2011, Kyowa acquired all outstanding shares of I’rom Pharmaceuticals, a Tokyo-based company that specializes in making and selling injectable, an area that was missing in Kyowa’s business plans.

Through Kyowa, Lupin already has a presence in the neurology, respiratory, cardiovascular and gastroenterology segments. I'rom gives it a presence in the hospitals and Lupin sees a lot of potential in entering the oncology and anti-infective business in the coming years

The cost of acquisition of I’rom Pharma was speculated to be in the range of US$ 80 to 100 million Currently, Lupin is also exploring in-licensing arrangements and strategic marketing alliances with various

Japanese, European and Indian companies to introduce new products into the Japanese market

17

Future acquisitions by Lupin

Lupin kept on evaluating opportunities in different parts of the globe to increase their foothold in pharma industry. Few acquisitions made by Lupin are:

2008 Lupin expanded its product basket in Japan-Kyowa and received ten products approval from Ministry of

Health & Labour Welfare, Japan Lupin acquired Hormosan Pharma GmbH, a Generic Company in Germany Lupin acquired stake in Generic Health Pty Ltd., in Australia Lupin acquired Pharma Dynamics in South Africa

2011 Lupin Acquires I'rom Pharmaceuticals through its Japanese Subsidiary Lupin and Medicis Enter into Joint Development Agreement Lupin acquires Worldwide Rights for the Goanna® Brand

2014 Lupin Acquires Laboratorios Grin S.A. De C.V., Mexico; Specialty Ophthalmic Company; Enters the Latin

American Market Lupin Acquires Nanomi B.V. - Enters Complex Injectables Space

18

Thank You!