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
 Pharmaceutical Industry Overview
In Big Pharma, its all about the pipeline

PHARMACEUTICAL PRODUCTS FINAL PRODUCT CATEGORIES

APIs (Active Pharmaceutical
Ingredients)
Formulations Branded drugs Generic drugs

The pharmaceutical Invented through

The final product as Launched after expiry of
ingredient present in research and testing,
given to patients branded drug patents
the formulation enjoy patent protection

Generic drugs attracted more

R&D expenditure, a main
attention due to pressure on Branded drugs are low volume-
Branded drugs account for growth driver in the industry,
countries to cut down medical high value products whereas
most of the revenues of was much higher for larger
expenditure, growth pressure generic drugs are high volume-
pharmaceutical companies firms than for its smaller
on companies and patent low value products
counterparts
expiry of blockbuster drugs

M&A deals in the industry

In general the industry is highly
were aimed at utilizing excess
regulated and faces a number
capacity and marketing
of lawsuits every year
resources, cost savings etc.
2
 Global Pharmaceutical Market
Global Sales Global Market Share - Key Markets (%)
800 712 5%
605 649 9% Latin America
600 560
499 9% North America
392 428
400 Europe
AAA
200 46% Japan
0 31%
2001 2002 2003 2004 2005 2006 2007
Global Sales

The global pharmaceutical market has recorded a The Japanese pharmaceutical market grew by
growth of 95%, over the last 7 years, moving up 3.6% to reach US$ 65.2 Bn. The growth registered
from US$ 392 Bn to US$ 712 Bn 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 3
 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

middle-class households
Competition intensified but
opportunities also lay in the

 Expansion of medical infrastructure

generic drug market, which

Factors contributing to the growth are:

opened up after the patent

 Greater penetration of health insurance

expiry of a number of
blockbuster drugs
 Increasing disposable incomes and the number of






Exports account for

Indian Pharmaceutical Industry

almost half of revenues

of Indian companies and
has been growing at a
rate of 14% for the past
decade

Major success factor




of the Indian
industry was the
relatively small companies
Adoption of product patent

existence of the
process patent
regime prior to 2005
generic players

Rising prevalence of chronic diseases

The transition to
product patent
Aggressive market penetration, driven by the

regime led to
unprecedented
challenges
4
Highly fragmented market with 10,000
Estimated market size of Rs. 270Bn in 2007
 Lupin Pharmaceuticals
Therapeutic Mix Global Sales (Market Break-down)
90
20% 80 77 78  Lupin was one of the top-5

Sales Contribution %
70 Indian Pharmaceutical
60
44% 50
Companies operating in 50
Cephalosporins Anti-TB
40 countries
15%
Cardiovasculars Others 30 23 22  It earned revenues of
20
10 around Rs. 20 Bn and profit
0 of Rs. 3 Bn
21% 2005-06 2006-07
 Lupin has six manufacturing
Advanced Markets Emerging Markets
facilities all located in India
Gross Sales (Geography Break-down)  It has a debt equity ratio of
Net Profit 0.61
3500
 Lupin’s promoters held
25% 3020.6
3000 slightly more than 50% of its
In Rs. Million
Domestic 2500 share capital
2000 1827.2
Exports - Advanced Markets
53% 1500
Exports - Emerging Markets 1000
22% 500
0
2005-06 2006-07
Net Profit
5
Japanese Pharmaceutical Market

Generic drugs had a Generic drug

Japan is the world’s Japanese market
low share (around manufacturers faced
second largest had high barriers to
17%) in Japan, as frequent complaints
pharmaceutical entry and high
opposed to other related to product
market after the expectations about
developed markets quality, therapeutic
USA, with a share of quality and
such as US and UK effect and product
9% consistency
(close to 50%) information

Japanese
The industry was
The government pharmaceutical
traditionally
started promoting companies also
dominated by local
generic drugs and faced cost
players, who
set a target of 30% disadvantages due
accounted for 65%
volume share for to lack of any
of the market in
generics by 2012 backward
2005
integration

6
 Kyowa Pharmaceuticals
Market Share in Japan (% of total) Segments by Sales
3%
2.00% 1.90% 1.90% 2.00%
2% 34% Psychiatric
38%
2% Cardiovascular
1% Respiratory
Others
1%
0% 15%
FY2005 FY2006 FY2007 FY2008E 14%

Market Share (% of total)

 Established in 1954 and involved in the development, manufacture,

Sales
sale and import of generic drugs
 Business strategy- to become the market leader in generic psychiatry 8000

drugs
 Out of 1379 psychiatric hospitals in japan, 1258 prescribed Kyowa’s 6000

In JPY Millions
products
 Kyowa spent around 8% of its FY 2006-07 sales on R&D 4000
 63% of sales were achieved through small distributors and the rest
through wholesalers 2000
 83% of revenue was from own-product sales and the remaining were
from merchandize sales, where Kyowa acted merely as a trader for 0
both domestic and overseas manufacturers FY2003 FY2004 FY2005 FY2006 FY2007E
7
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

8
Valuation of Kyowa
DCF 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%
Kyowa Valuation
Group C
JPY/USD exchange rate 110
JPY/INR exchange rate 2.73

Number of shares outstanding 196000

9
Football field
Suggested valuation for the acquisition is between USD 84m – USD 102m

Transaction EV/Sales 82 119

Comparables

P/E 83 87

97 102

EV/EBITDA 81 89
Transaction
Comparables
EV/EBIT 67 79

EV/Sales 84 150

DCF DCF analysis 83 132

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 2012-13
% of Potential Savings 50% 100% 102%
Reached
Total Savings (in $ Mn) 2.01 4.58 5.23
% Increase in Savings - 127.9% 14.2%

 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
FY2010 FY2011 FY2012 FY2013
Potential tax savings
due to relocation (in $ 0.22 0.26 0.44 0.52
Mn)
Projected increase in - 150% 100%
Cost Savings
12
Uncertainties of Synergy

 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

13
Stock Price Movement – Lupin
Close Price
2500

2000

1500

1000

500

0
4 4 4 4 4 3 3 3 3 3 3 3 2 2 2 2 2 2 1 1 1 1 1 1 0 0 0 0 0 0 9 9 9 9 9 9 8 8 8 8 8 8 8 7 7 7 7 7 7 6 6 6 6 6 6
ct-1 ug-1 un-1 pr-1 eb-1 ec-1 ct-1 ug-1 ul-1 ay-1 ar-1 an-1 ov-1 ep-1 ul-1 ay-1 ar-1 an-1 ov-1 ep-1 ul-1 un-1 pr-1 eb-1 ec-1 ct-1 ug-1 un-1 pr-1 eb-1 ec-0 ct-0 ug-0 ul-0 ay-0 eb-0 ec-0 ct-0 ug-0 ul-0 ay-0 ar-0 an-0 ov-0 ep-0 ul-0 ay-0 ar-0 an-0 ov-0 ep-0 ul-0 un-0 pr-0 eb-0
-O -A -J -A -F -D -O -A 1-J -M -M 8-J 8-N 0-S 13-J -M -M 3-J 8-N 7-S 28-J 2-J 4-A 4-F 8-D 2-O 6-A 1-J 6-A 3-F 3-D 7-O 6-A 1-J -M 7-F 0-D 8-O 8-A 2-J -M -M 7-J 8-N 2-S 17-J -M -M 9-J 2-N 5-S 28-J 5-J 5-A 6-F
20 18 19 22 19 24 28 28 7 5 1 18 21 2 2 2 1 1 2 2 2 2 2 2 6 2 3 2 2 6 3 1 22 21 1 2 2

• 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
 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

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
 Lupin Acquires Nanomi B.V. - Enters Complex Injectables Space 17
Thank You!

18