Indian pharmaceutical industry will have a dozen corporates with an annual turnover exceeding Rs 1,000 crore by the end of 2005 at the current rate of their growth. Seven Indian pharma companies have been reporting more than Rs 1,000 crore sales for last two years now. These seven companies are Ranbaxy, Cipla, Dr Reddy's, Nicholas Piramal, Lupin, Cadila Healthcare and Aurobindo.

The five companies expected to join the league of the Rs 1,000 crore group are Wockhardt, Sun Pharma, Orchid, Alkem Labs and Cadila Pharma. Among these, Alkem and Cadila Pharma are closely held companies and are not listed in stock exchanges.

An analysis of financial performances of top seven companies namely Ranbaxy, Cipla, Dr Reddy's, Nicholas, Aurobindo, Lupin and Cadila Healthcare, showed that their gross sales improved by 18 per cent to Rs 12,726 crore during the financial year 2003-04 from Rs 10,785 crore in the previous year. Dr Reddy's Laboratories and Aurobindo Pharma have not yet announced their results for the year ended March 2004. However, the annualized figures for these two companies on the basis of their first nine months working results for the year 2003-04 are indicated below.

Ranbaxy continued to remain on top with gross sales of Rs 3,465 crore for the year ended December 2003, recording a growth of 14 per cent. There is neck-to-neck competition for the second position. Cipla moved to second place with sales of Rs 2,060 crore followed by Dr. Reddy's at Rs 2,057 crore (figures are annualized on the basis of first nine months ended December 2003). Cipla notched up growth of 31 per cent in sales. Nicholas Piramal has recorded sales growth of 26.3 per cent and Lupin over 22 per cent. Cadila Healthcare's sales touched to Rs 1,172 crore as against Rs 1,028 crore in the previous year.

The operating profit before interest, depreciation, taxation and exceptional items improved by 21.9 per cent to Rs 2,916 crore from Rs 2,393 crore in the previous year. The operating margins as percent of gross sales, improved slightly to 22.9 per cent from 22.2 per cent, thanks to hefty jump in the other income of these companies. Among the sample of seven top companies, Lupin recorded highest growth in operating margins, which went up by 23.6 per cent to 22.73 per cent during 2003-04 from 18.39 per cent in the previous year. Cadila Healthcare's operating profit margins moved up by 13.5 per cent to 21.22 per cent from 18.69 per cent and that of Ranbaxy's went up by 8.2 per cent to 27.86 per cent from 25.75 per cent in the previous year.

Dr Reddy's operating profit margins declined sharply to 23.64 per cent from 27.07 per cent mainly because of lower operating profit of Rs 486.39 crore as against Rs 490.06 crore in the 2002-03 on one hand and faster growth in sales. Its sales moved up by 13.6 per cent to Rs 2057.35 crore from Rs 1810.61 crore. Similarly, the operating profit margins of Cipla has also not shown any major change and remained almost at same level at 21.87 per cent as against 21.78 per cent in the previous year.

These seven Indian pharma companies established their brands in the domestic as well as international markets and outperformed major international players in several respects. These companies have already filed many DMFs, and ANDAs during last couple of years and also received necessary international approvals. Focus on R&D and new technology, thrust on exports, new tie-up as well as mergers & acquisition, introduction of value-added generic products and cost cutting measures are expected to give boost to business in the current year. Further, pharma companies have distributed their profits towards shareholders by announcing bonus shares and dividend. The interesting trend is taking place as more and more pharma companies are looking out for contract manufacturing and outsourcing as cost cutting measure.

A significant rise in other incomes of these companies pushed up the operating profit margins during the year 2003-04. The other income of seven major pharma companies for the year 2003-04 went up sharply to Rs 596 crore from Rs 201 crore in the previous year. Ranbaxy has stated its other income at Rs 345.50 crore as against Rs 27.72 crore in the previous year. Similarly Cadila Healthcare's other income stood at Rs 71.88 crore as compared to Rs 27.60 crore in the previous year. The raw material cost increased only by 16.8 per cent to Rs 5581 crore. These seven companies spent Rs 906.49 crore on employees, which is higher by 27.5 per cent.

The reduction in interest rates and restructuring of debts worked out well for seven major pharma companies during the year 2003-04. There interest cost declined by 25.5 per cent Rs 143 crore from Rs 192 crore.

The net profit of seven companies moved up sharply to Rs 1,968 crore from Rs 1,607 crore in the previous year, recording a growth of 22.4 per cent. On one hand higher other income and reduction in interest cost pushed the net profit, but on the other hand higher provision for depreciation, tax and extra ordinary items put pressure on bottomline. The net profit margins improved marginally to 15.5 per cent from 14.9 per cent mainly on account of hefty amount of extraordinary items. Cadila Healthcare has recorded highest growth in net profit margins (net profit as per cent of gross sales) of 63.5 per cent and Nicholas Piramal India at 26 per cent. Ranbaxy achieved 11.7 per cent growth in its net profit margins.

However, there was sharp decline in net profit margin of Dr Reddy's to 15.18 per cent from 20.15 per cent in the previous year. Cipla recorded a small fall in net profit margins from 15.75 per cent to 15.23 per cent. Though the Lupin's operating profit margins has taken a quantum jump, its net profit margins improved only by 6.3 per cent to 7.71 per cent on account of provision for extraordinary item of Rs 50.89 crore during the year 2003-04. Ranbxy has shown a figure of Rs 30 crore as extra-ordinary item and added to its bottomline. Nicholas Piramal and Cadila also showed exceptional item (expenses) of Rs 21.69 crore and Rs 9.05 crore respectively.

To achieve faster growth the Indian pharma companies are now adopting the acquisition route. Recently Dr Reddy's acquired Trigenesis Therapeutics in US involving an amount of $11 million. Wockhardt also invested Rs 49 crore to acquire German pharma company 'esparma'. Earlier it has acquired Wallis Laboratories and CP Pharmaceuticals in UK. During the year 2003-04, Ranbaxy acquired RPG Aventis in Europe, Cadila acquired Alpharma France and now exploring possibilities of acquisition in Spain, Sun Pharma has already acquired Detroit-based Caraco Pharmaceutical in US and increased its stake to 63 per cent.

Further, top seven companies also entered into marketing tie-ups with foreign companies or set up their subsidiaries. The acquisition is not only in the other parts, but these companies are spreading their business by acquiring domestic companies also. Sun Pharmaceutical is set to acquired Hindustan Antibiotics in near future. According to analysts the acquisition root is saving tremendous efforts and time of these companies and M&A activity will increase in the near future.

Top seven companies are also entering into marketing tie-ups with foreign companies or set up their subsidiaries abroad. Cadila Healthcare setup Zydus Pharmaceuticals USA Inc in US and entered into in-licensing agreement with global pharma majors such as Schering and Boeringer Ingelheim for marketing. Lupin recently entered marketing tie-up with Baxter Healthcare Corporation of US for exclusively distribute its generic version of ceftriaxone sterile vials for injection. It also has also signed marketing tie-up with Allergan Inc US. These marketing tie-ups and acquisition will help the Indian pharma companies to penetrate into more profitable markets.

Indian pharma companies are focusing on R&D and investing large amounts to capture international market. Ranbaxy has incurred R&D expenditure of Rs 238 crore during the year ended December 2003. Sun Pharma has spent Rs 47.85 crore on R&D as against Rs 29.43 crore in the previous year. Nicholas Piramal India also stepped up its R&D spending by 79 per cent to Rs 30.19 crore during the year 2003-04.

Indian pharma companies set to grab major share in the international market by investing significant funds on research and development, new process and innovative products. The export earnings of Ranbaxy, Dr. Reddy's Lab, Cipla, Aurobindo and Lupin are moving fast. Ranbaxy's export earnings improved by 31.3 per cent to Rs 2429 crore during the year 2003-04 from Rs 1850 crore in the previous year. Cipla has recorded 44 per cent growth in its exports to Rs 815 crore. Nicholas Piramal's exports reached at Rs 108 crore and worked out to 8.5 per cent of total sales. Though the pharma segment has to cross several milestones before commencing the patent regime, the segment has created confidence among customers and investors by offering higher returns on investments.

The pharma companies shares have shown healthy rise during the last couple of months with substantial additions to market capitalization. The basic earning per share of Ranbaxy moved up to Rs 41.81 for the December 2003 and that of Cipla went up sharply to Rs 52.32 from Rs 41.31. Similarly, earning per share of Nicholas increased by 58 per cent to Rs 49 from Rs 31 in the previous year. Lupin also improved its EPS to Rs 23.69 from Rs 18.08 and Cadila Rs 22.75 from Rs 12.20 respectively. With smart improvement in profitability, the pharma companies recommended higher dividend during the year 2003-04. Cadila declared dividend of 120 per cent and Sun Pharma at 130 per cent on equity shares of face value of Rs 5 each. Strong reserve position helped the pharma companies to reward its investors with bonus shares. Several companies i.e. Sun Pharma (1:1 bonus ratio), Wockhardt (1:2), Alembic (2:1), Unichem Laboratories (1:1) and FDC (1:1) distributed bonus shares during 2003-04.

Though small shareholders are happy on announcement of the bonus shares, the promoters with large holding are getting major benefits. In reality, bonus shares increase the share capital and reduce the reserves. With the rise in number of shares the liquidity in the market moves up and the share price always declined in the post bonus area.

In the eighties MNCs were in limelight with higher dividends as the foreign managements were holding large stakes. The promoters of MNCs are now trying to increase the stake in Indian entities through buy-back scheme. AstraZeneca and Abbott India increased stake through buy-back of equity shares. All the MNCs are looking out for outsourcing their products and taking steps to close down manufacturing activities. Fulford (India), Merck, Pfizer and GSK have already sold their plants and giving manufacturing jobs to third party. This trend is likely to continue in current year as the companies are getting cost benefit without any worker related problem.

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