INDUSTRY SNAPSHOT

PHARMACEUTICAL INDUSTRY The Indian Pharma industry has witnessed a lot of activity over the past couple of years. Many companies have spent significant amounts and are now moving towards reaping the benefits of these efforts. The amounts spent were towards research and development (R&D), product portfolio restructuring, acquisition of brands/companies, revamping/debottlenecking of works (drug making factories) and making efforts to exploit the US generic markets. They have been active in overseas markets too. Consider this. Over 25% of the Drug Master Files (DMF) (Type II) filed in the US during January-March 2003 were by Indian companies. The international pharmaceutical industry is dominated by the developed world. With a global market share of 49 per cent, the US is the worlds single largest pharmaceutical market, on account of a large growing population, a higher level of innovation, stronger purchasing power and an effective patent protection environment (resulting in higher realizations). Even though the developed markets already enjoy a high degree of penetration of pharmaceuticals, the growth opportunity from these regions continue to be attractive across the entire value chain bulk drugs, formulations and value-added formulations. Opportunities In The Generics Market: The international generics market, offers, perhaps the biggest opportunity for growth over the foreseeable future. Nearly 60 products with over US$ 40 bn in sales are expected to lose their patents over the coming decade. In the US alone, this generics opportunity is expected to be worth $19 bn by 2005. Indian companies are well-placed to capitalize on this emerging opportunity. They enjoy a relatively low cost of innovation and strong chemistry and formulation skills. Because of their ability to make generics at a low cost, they are best suited to assist consumers in the developed market. In the second week of June, US President George W Bush announced new regulations, which would limit the US pharmaceutical industry's tactics to delay generic drugs from reaching the market. The new regulations will

limit original drugmakers to one 30-month stay to block the entry of generic drugs by filing patent lawsuits. Currently, drug makers delay competition from generic drug makers by using multiple and consecutive delays. The new regulations will take effect from August 18. The step is expected to result in savings of about $3.5 bn annually for patients in the US and is seen as a popular step among the US public. Since the US government healthcare system takes the tab for prescription drugs, the saving in costs will help the strained US healthcare system. Delhi-based Ranbaxy Labs is expected to be the largest beneficiary of this development as it is the largest among Indian generic drug exporters to the US. Dr Reddy's Labs, Cipla and to a lesser extent Sun Pharma are also expected to gain from the development. R&D Activities: The pharmaceutical industry is a knowledge driven industry and is heavily dependent on Research and Development for new products and growth. However, basic research (discovering new molecules) is a time consuming and expensive process and is thus, dominated by large global multinationals. Indian companies have recently entered the area and initial results have been encouraging. Patents play an important role in encouraging Research and Development. The new WTO rules imply that India will have to switch to a product patent regime post 2005 from its current process patent regime. This would alter the scenario in the Indian market over the next 10-15 years. Indian companies are climbing the value chain by moving to developed markets and from bulk drugs to formulation exports. As a result, Indian companies are expected to produce six of the top 10 drugs that are scheduled to lose patent protection over the next five years. Indian companies are targeting opportunities arising in the regulated and unregulated markets. For instance, the unregulated markets, which are similar to India in terms of regulatory processes and patent laws, are an easier destination to access. These countries are defined as the least developed markets as per the World Health Organisation (WHO) and have upto 2016 to change their patent laws. Margins are higher in these regions than in India but entry barriers are low. In formulations, product registrations are a prerequisite and margins are higher in South East Asia, CIS, Russia and the Middle East compared to those in bulk drugs.

Markets in Latin America and South Africa are more evolved with relatively low competition. The low cost manufacturing structure and a friendly patent regime has encouraged growth in the Indian pharma industry leading to intense competition, high volumes and low prices. In the domestic market, old and mature categories like anti- infectives, vitamins, analgesics are degrowing or stagnating while new lifestyle categories like cardiovascular, CNS, anti diabetic are growing at double-digit rates. The growth of a company in the domestic market is thus critically dependent on its therapeutic presence. Improving cash flows of companies within this sector should result in better R&D investment which would provide base for better monopoly products and increased profits. The industry is also poised to capitalize on the big opportunities presented by generics. In exports it will in due course move from emerging markets to developed markets thus projecting good prospects for the industry in years to come. The China Angle: Another development is the emerging Chinese angle to Indian pharma companies' operations. Companies such as Aurobindo Pharma and Chennai-based Orchid Pharma have operations in China through JVs and other working arrangements. Using the high quality infrastructure, cheap finance and cheap labour of China helps the Indian companies in effecting huge cost savings to their end products. The government of India is said to be finalising a set of financial sops for the pharma sector. This is expected to further give a fillip to investment in the sector.

MAJOR PLAYERS
WOCKHARDT Wokhardt is the fifth largest company in the domestic market with a market share of 2.6%. It is one of the few (genuine) listed stock that captures the biotech industrys promise. Its been one of the early entrants in the biotech industry in India. The company has met with few initial successes and has a strong pipeline. In the domestic market, Wockhardt has focused on innovative marketing

methods and aggressive new product introductions to increase its market share. It boasts of 7 brands in the ORG list of top 300 brands. The company has a very strong presence in the antibiotics and pain management segments and has products covering 47% of domestic therapeutic segments. The companys growth strategy for the international markets is to increase market share in niche products and introduce new products through alliances. In the formulations segment, Wockhardt is exporting to developing countries and to UK. A major achievement for the company is that its Co-Proxamol tablets now command 10% market share in the UK market. The company has more than 500 registrations in several developing and developed countries. Going forward growth in this segment would come from launch of nutraceutical and biotech products in the international markets besides growing from organic means. IPCA LABS Ipca Laboratories is a leading Indian pharmaceutical company engaged in the business of pharmaceutical formulations, API and drug intermediaries. The company derives 51% of revenues from formulations, 40% from the bulk drugs and the rest from sale of intermediates. It has emerged as a leading player in the pharmaceutical sector with leadership status in some therapeutic groups. Ipca Laboratories has floated a wholly owned subsidiary in Brazil with an initial outlay of $0.3 million to market its formulation drugs. As part of its business plan to tap the $12 billion pharmaceutical market in Brazil, Ipca is also planning to explore possibilities of setting up a manufacturing facility as well in Brazil. Ipca is looking at registering at least 30 products that will include cardiac, diabetic and anti-bacterial products, among others. With exports showing a meteoric rise over the past 10 years, Ipca is poised to make considerable growth this year. Today more than 50% of Ipca's turnover comes from exports to over 75 countries Australia, Canada, Ethiopia, Italy, Russia and other CIS countries, Sri Lanka, UK, USA etc. Ipca has consolidated its presence in the bulk drugs and drug intermediates market in the US and Europe. The company is recognised as the world leaders in various products

and has major MNC's as its valued customers. The companys wide product range includes Antimalarials, Antiemetics, Antibiotics, Analgesics, Antidiabetics, Cardiac Care products and Cough and Cold therapy products. Ipca commands the leadership in the antimalarials segment in the domestic market. Today, the company is one of the basic manufacturers in the world of Atenolol (antihypertensive), Chloroquine (antimalarial), Furosemide (diuretic) & Pyrantel Salts (anthelmintics) and is also one of the largest suppliers of these bulk drugs and their intermediates. The company has an unique distinction of being the only company in the country having treatment for malaria and its relapse in various formulations and dosage forms. The market for malarial drugs in India is about Rs 80 to 85 crore, of which the company has a dominant market share in excess of 60%. Though Ipca is quoted at attractive valuations, growth triggers akin to Dr. Reddys or Ranbaxy are missing. Going forward, strategic thrust for the company is to become a globally competitive integrated manufacturer of bulk drugs and formulations. This integrated nature of operations helps the company to become a cost effective manufacturer and supplier of drugs in the world. This is evident from IPCA's arrangement with a multinational pharmaceutical major to cater to their requirement of PHPA - an intermediate for Atenolol on a regular basis. Besides, the company has an arrangement with another MNC to manufacture formulations - both branded and generics, which are off-patent on a 'neutral' label.

FINANCIAL HIGHLIGHTS (FIGURES IN RUPEES CRORE: Rs. Cr.)

Company WOCKHARDT IPCA Full Year 200212 200303 Company WOCKHARDT IPCA Equity 36.26 12.50 B. V (Rs.) 101.8 169.4 Last Quarter 200309 200309 Sales 699.9 486.4 Sales 212.7 157.9 PBIDT% 20.2 18.9 Net Profit 108.8 57.5 Dividend % 65 90 EPS (Rs.) 29.6 44.9

PBIDT % Net Profit 25.1 20.9 47.6 21.7