Lupins Foray into Japan

- Group C

ASHWIN MATHEW PHILIPOSE

GAURAV PILANIA
ANKIT SRIVASTAVA
KODALI RAMYA
NIKHIL SINGHAL
PALADUGU SAI SASHANKA

2013PGP00
9
2013PGP02
0
2013PGP06
8
2013PGP09
0
2013PGP09
5
2013PGP09
8

Pharmaceutical Industry Overview

In Big Pharma, its all about the pipeline
PHARMACEUTICAL
APIs (Active
PRODUCTS

Pharmaceutical
Ingredients)

The pharmaceutical
ingredient present
in the formulation

Branded drugs account

for most of the revenues
of pharmaceutical
companies

Formulations

The final product as

given to patients

FINAL PRODUCT
CATEGORIES

Branded drugs

Generic drugs

Invented through
research and
testing, enjoy
patent protection

Launched after
expiry of branded
drug patents

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

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

R&D expenditure, a main

growth driver in the
industry, was much
higher for larger firms
than for its smaller
counterparts

Global Pharmaceutical Market

Global Sales
800
600
400
200
0

392

428

499

560

605

Global Market Share - Key Markets (%)

649

712
9% 5%
9%
31%

2001

2002

2003

2004

2005

2006

46%

Latin America
North America
Europe
AAA
Japan

2007

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

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 projected3

 Rising prevalence of chronic diseases

Major success
factor of the
Indian industry
was the
existence of the
process patent
regime prior to
2005
The transition
to product
patent regime
led to
unprecedente
d challenges

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 worlds
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

Indian Pharmaceutical Industry

Estimated market size of Rs. 270Bn

in 2007
Highly fragmented market with
10,000 generic players

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
4

Lupin Pharmaceuticals
Therapeutic Mix

Global Sales (Market Break-down)

100

44%

15%
21%

Cephalosporins
Anti-TB
Cardiovasculars
Others

60

Sales Contribution %

40

23

20
0
Advanced Markets

Gross Sales (Geography Break-down)

Exports - Advanced
Markets

2006-07

Emerging Markets

Net Profit

Domestic
53%

22

2005-06

3020.6

3000

25%

22%

77

80

20%

78

2000

In Rs. Million

1827.2

1000
0

2005-06

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
Lupins promoters held
slightly more than 50%
of its share capital

2006-07

Net Profit
5

Japanese Pharmaceutical Market

Generic drug
Generic drugs
manufacturers
Japan is the
had a low share
Japanese market
faced frequent
worlds second
(around 17%) in
had high
complaints
largest
Japan, as
barriers to entry
related to
pharmaceutical
opposed to
and high
product quality,
market after the
other developed
expectations
therapeutic
USA, with a
markets such as
about quality
effect and
share of 9%
US and UK
and consistency
product
(close to 50%)
The governmentinformation
Japanese
The industry
started
pharmaceutical
was traditionally
promoting
companies also
dominated by
generic drugs
faced cost
local players,
and set a target
disadvantages
who accounted
of 30% volume
due to lack of
for 65% of the
share for
any backward
market in 2005
generics by
integration
2012
6

Kyowa Pharmaceuticals
Market Share in Japan (% of total)
2%

2.00%

1.90%

1.90%

Segments by Sales

2.00%
38%

34%

1%
0%

14% 15%
FY2005

FY2006

FY2007

Psychiatric
Cardiovascul
ar

FY2008E

Market Share (% of total)

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 Kyowas 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

Sales
8000
6000
4000

In JPY Millions

2000
0

Lupins Interest in Kyowa

Japan is the worlds 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 towardscutting 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

Valuation of Kyowa

DCF analysis, trading comparables and transaction comparables

Assumptions and key facts

Date of acquisition
FYE of Kyowa

Jan-07
December

Effective tax rate

42%

Debt

40%

Equity

60%

JPY/USD exchange rate

110

JPY/INR exchange rate

2.73

Number of shares outstanding

Kyowa Valuation
Group C

196000

Football field

Suggested valuation for the acquisition is between USD 84m USD 102m
Transaction
Comparables

EV/Sales

82

P/E

83

119

87
97

EV/EBITDA

81

102

89

Transaction
Comparables
EV/EBIT

DCF

67

79

EV/Sales

84

DCF analysis

83

150

132

10

Analysis at various prices

Price 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

11

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
2010-11 2011-12

% of Potential
Savings Reached
Total Savings (in $
Mn)
% Increase in
Savings

2012-13

50%

100%

102%

2.01

4.58

5.23

127.9%

14.2%

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

FY201of Kyowas production to Lupins facilities in
Projected cost savings by shifting some
FY2011 FY2012 FY2013
0
India
Potential tax
savings due to
relocation (in $ Mn)
Projected increase
in Cost Savings

0.22

0.26

0.44

0.52

150%

100%

12

Uncertainties of Synergy
Japanese obsession with the quality of medicines
Shifting of Kyowas production to Lupins 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

13

Stock Price Movement Lupin

Close Price
2500

2000

1500

1000

500

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
14

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

15

Post Acquisition Scenario

Lupins 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 Irom Pharmaceuticals, a
Tokyo-based company that specializes in making and selling injectable, an area that
was missing in Kyowas 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 Irom 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

16

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
17
Lupin Acquires Nanomi B.V. - Enters Complex Injectables Space

Thank You!

18