A00006 PDF Eng

Indian Institute of Management A00006
Ahmedabad October 27, 2012
LUPIN’S FORAY INTO JAPAN

Lupin Limited, a mid-sized Indian generic pharmaceutical company, was considering the
acquisition of Kyowa Pharmaceuticals, one of the top 15 Japanese generic drug manufacturers,
in April 2006. At that time, the Japanese generic drug market was attractive to Indian
pharmaceutical firms on several counts. First of all, at US$60 billion in sales, it was the world's
second largest market with the highest per capita spending. In addition, the Japanese
government, in its attempt to reduce healthcare costs, had set an ambitious target of increasing
the share of generic drugs to 30% by 2012 from less than 10% in 2007.
Kyowa was not an unknown entity to Lupin; the latter had entered into an alliance with Kyowa
in mid-2005 to market its finished dosage forms (or formulations) in Japan. The agreement had
covered many of Lupin’s important product segments. Kyowa’s role included managing
Japanese regulatory issues and marketing the products. The alliance, however, had not really
got off the ground even after two years, mainly due to the difficulties of operating in Japan, an
entirely new environment for Lupin.
Lupin had never done a major overseas acquisition. The team handling the question of the
acquisition of Kyowa was concerned about the potential complexities of a cross-border
transaction. While the team seemed convinced of the target’s overall strategic fit, it was not sure
about the value of the target to Lupin. It also wanted to chalk out a suitable deal structure to
accommodate its various operational, financial and strategic concerns.
THE PHARMACEUTICAL INDUSTRY
The pharmaceutical industry comprised of producers of branded drugs, generic drugs and bio-
pharmaceutical products and firms engaged in contract research. Pharmaceutical products
could be segmented into two broad groups based on their manufacturing stage: active
pharmaceutical ingredients (APIs) and formulations. An API was the key substance or
ingredient in a formulation. A formulation was the final product or drug given to patients in the
form of a tablet, capsule, syrup or cream.
The industry dealt in two distinct final product categories: generic drugs and branded drugs.
Branded drugs were invented through rigorous scientific research and testing, and they enjoyed
exclusive patent protection. Generic drugs were “copies” of branded drugs with the same APIs
but were launched after the patent expiry of the branded drugs. Generally, branded drugs were
low-volume but high-value products whereas generic drugs were high-volume but low-value
products.
Prepared by Professors Joshy Jacob, Sobhesh Kumar Agarwalla, and Prem Chander, Indian Institute of
Management, Ahmedabad. The authors thank Lupin’s senior management for the valuable information
shared about the case context and for their comments on the case draft.
Cases of the Indian Institute of Management, Ahmedabad, are prepared as a basis for class discussion. They
are not designed to present illustrations of either correct or incorrect handling of administrative problems.
© 2012 by the Indian Institute of Management, Ahmedabad.
This document is authorized for use only in Prof. Samta Jain/Vikash Pandey/Gaurav Gupta's Investment Banking_T-IV at Fore School of Management from Jul 2021 to Jan 2022.
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The world over, the generics market was much smaller than the market for branded drugs, and
most leading pharmaceutical firms concentrated on branded drugs, which accounted for most
of the global pharmaceutical revenues. However, generic drugs were claiming greater attention
worldwide for several reasons. First, and most importantly, many countries were seriously
trying to tackle increasing healthcare costs through cheaper generic drugs. Second, research and
development (R&D) productivity had started to decline due to stringent regulations, and the
pressure on pharmaceutical majors to maintain growth was mounting. Third, many blockbuster
drugs were about to go off-patent, which gave drug manufacturers an opportunity to offer them
as generic products. 1
R&D was one of the main growth engines of the industry. The average R&D expenditure level
of large multinational companies (MNCs) was significantly higher than that of their smaller
counterparts from the developing world. The relatively lower R&D expenditure of developing
world firms was due to their concentration on the efficient production of off-patent drugs rather
than on the discovery and development of new drugs. Further, size gave a significant
advantage to big pharmaceutical firms both in terms of absorbing large R&D related
uncertainties and providing significant scale benefits.
Many aspects of the pharmaceutical industry were highly regulated. For instance, many life-
saving drugs in India were subjected to price regulation. The industry also faced a large number
of lawsuits every year.
Inorganic growth through mergers and acquisitions (M&As) was quite common in the
pharmaceutical industry. The major M&A motives included the utilization of excess capacity
created by patent expiry and filling in the gaps in the product pipeline, better utilization of
marketing resources and cost savings. Mergers between firms that had prior licensing
relationships were very common. Due to the high costs of drug development, many
multinational firms had started to outsource their R&D activities, particularly the later stage
clinical trials, to low-cost countries such as India and China.
THE INDIAN PHARMACEUTICAL INDUSTRY
The Indian pharmaceutical industry, estimated at INR 270 billion in 2007, was the world’s
fourth largest by volume and 14th largest by value. It was a fragmented sector with nearly 10,000
generic players, out of which only about 300 were large or medium players. Exports, which
accounted for nearly 50% of the sales of Indian companies, had been growing at around 14%
annually during the decade 1996 to 2006. Most of the exports were directed towards highly
regulated markets, including the United States (US) and Western Europe. With the growth of
the Indian middle class, the Indian pharmaceutical industry was considered to have greater
potential than major markets such as the US, Japan and Europe.
A major factor that contributed to the success of the Indian pharmaceutical industry was the
process patent regime that existed prior to 2005. Reverse engineering, facilitated by the process
patent, combined with high-quality yet low-cost generic drug manufacturing, allowed many
1In 2007, eight blockbuster brands with a combined sales of US$13 billion in 2006 faced patent expiration in the US
alone.
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Indian pharmaceutical companies to achieve near global player status. The industry saw a
significant increase in capacity and range of products during this period.
However, the change from process to product patent was expected to expose the Indian
pharmaceutical industry to unprecedented challenges. Competition was expected to intensify as
global pharmaceutical firms, backed by the new patent regime, launched new products. But
there were opportunities as well. One of the opportunities was the patent expiry of a number of
major drugs in the immediate future. This was expected to open up a large generic market for
the Indian pharmaceutical industry abroad, in particular, the sizeable US generic market.
Much like their global counterparts, Indian firms also had started to actively pursue the
inorganic growth path by targeting medium and small firms the world over, particularly after
2002. These moves were rooted in the manufacturing excellence of these companies and their
access to relatively cheap manpower. Most of these acquisitions were targeted at developed
markets such as the US and Europe. For instance, Dr. Reddy’s Laboratories, one of the largest
Indian pharmaceutical companies, had acquired Betapharm, a German generic drug maker, for
US$570 million (see Exhibit 1 for key data on acquisitions by major Indian players during a
four-month period immediately prior to July 2007).
PROFILE OF LUPIN
Lupin was one of India’s top five pharmaceutical companies and had an onshore presence in
nearly 50 countries. It was a fully integrated company, providing APIs and intermediates as
well as branded products and finished dosages (formulations). It earned revenues of around
INR 20 billion and a net profit around INR 3 billion in fiscal 2006-07. Exports accounted for
nearly 47% of its revenues, out of which the advanced markets such as North America and
Europe contributed about 22%.
APIs accounted for 39% of its revenues and 50% of its exports. The revenue share of
formulations and drugs was about 61%. Its revenues had been growing at more than 20% for
several years. Its major therapeutic segments were cephalosporins (44%), anti-tuberculosis
medicines (21%) and cardiovascular medicines (15%). Being a generics drug company, Lupin’s
R&D expenditure was moderate at around 7% of its sales.
Lupin had six manufacturing facilities and an R&D center, all located in India. Five of its
manufacturing facilities were approved by the US Food and Drug Administration (USFDA),
and three by the Medicines and Healthcare Products Regulatory Agency (MHRA), UK. The
company had expanded its production facilities in the immediate past, which provided it
enough bandwidth to achieve significantly higher production volumes in the future.
It had a debt-equity ratio of 0.61 and enjoyed an A1+1 credit rating, indicating the highest
degree of safety for its short-term borrowing. 2 Lupin’s promoters held slightly more than 50%
of its share capital (see Exhibit 2 for financial data on Lupin).
2 Assigned by ICRA, an independent Indian credit rating agency.
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THE JAPANESE PHARMACEUTICAL MARKET
Japan was the world’s second biggest pharmaceutical market (9% share) after the US (48%
share), with sales of about JPY 6.28 trillion in 2006. It hosted some of the world’s largest
branded drug manufacturers. The Japanese market was traditionally dominated by local firms.
Foreign players accounted for 35% of the market in 2005. Cardiovascular drugs, with 22%
revenue share, comprised the largest segment of the market. Generic drugs had a relatively low
share in Japan compared to many other countries. Whereas generic drugs enjoyed more than
50% share by volume in the US and UK, their share in Japan was only about 17% (see Exhibit 3
for a comparison of the share of generic drugs in different countries). However, the market
share of generic drugs had grown in the recent past (see Exhibit 4). The total generic drug
market in Japan was estimated at around JPY 287 billion in 2006. 3
The low use of generic drugs had led to high medical expenditures in Japan, where the demand
for drugs was also rising on account of its large aging population. The Japanese did not seem to
have much incentive to use cheaper generic drugs as they typically paid only 10%-30% of the
drug price. 4 Sensing this, the Japanese Ministry of Health, Labour and Welfare (MHLW) had
started to promote generic drugs. It had set an ambitious target of 30% volume share for
generics by 2012. To meet this goal, it had adopted a number of measures including
incentivizing doctors and pharmacists to prescribe generic drugs.
The patent expiry of some blockbuster drugs in the past had led to the launch of a number of
generic drugs in Japan. Many Japanese branded pharmaceutical companies and foreign players
were entering the generics market. In 2005 alone, there were more than 400 newly listed generic
drugs. However, surveys had pointed out that consumer dissatisfaction with their product
quality, therapeutic effect and drug information persisted. Generic drug manufacturers had to
seriously address these issues to increase their market shares in Japan.
Generic drug firms in Japan faced many other challenges. No Japanese generic pharmaceutical
firm was fully backward integrated and this created significant cost disadvantages. The average
cost of manufacturing an API in Japan was 8-10 times higher than it was in the rest of the world.
On top of these issues, the Japanese government reduced the prices of reimbursable drugs every
two years. This meant that companies had to aggressively control costs just to stay in business.
While the major Japanese players were capable of responding to growth opportunities, a
number of lower-tier manufacturers with low profit margins were unable to meet the listing
standards of the drugs.
The pharmaceutical industry in Japan was highly regulated, and intellectual property (IP) rights
were established along international standards. The entry barriers to the Japanese market,
created by stringent regulations that included the patent regime and Japan-specific molecules,
were very high. A number of the blockbuster molecules sold there were Japan-specific and had
different strengths and dosages from the rest of the world. In the highly regulated Japanese
32008 Generic IYAKUHIN data book, Fuji Keizai Co., Ltd, obtained by the authors from Lupin.
4All Japanese citizens were insured by the government. Depending on the age group they fell into, individuals were
expected to contribute up to 30% of their medical expenses and the government contributed the remainder.
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market, where the expectations about quality and consistency were very high, acquisitions
appeared more feasible for companies from abroad than organic growth.
PROFILE OF KYOWA
Kyowa was involved in the development, manufacturing, selling and import of generic drugs.
It commanded a share of about 2% of the Japanese generic drugs market. It was established in
1954 to manufacture and sell over-the-counter (OTC) drugs. Its business strategy was to
become the market leader in generic psychiatry drugs. Headquartered in Shin, Osaka, it had a
manufacturing plant and a research center in Sanda, about a 45-minute drive from Osaka. Its
R&D function was concentrated in the research center, where 37 of its total 210 employees
worked. It spent about JPY 600 million (around 8% of sales) on R&D during the financial year
ended March 2007. (See Exhibit 5 for the sales and market share of leading Japanese generic
drug makers).
Kyowa had a well-organized team of medical representatives, an important resource for a

pharmaceutical company. It did business with almost all the big Japanese wholesalers and had
186 small distributors. Nearly 63% of its sales were through distributors (with the top 20
distributors accounting for 52% of sales) and the rest was through wholesalers.
Kyowa had a portfolio of 215 products, of which 191 were generic products. Its products catered
to a number of therapeutic segments including psychiatry, cardiovascular, respiratory and
gastroenterology. Together, these four segments accounted for 162 of its products. With 84
products, psychiatry was its major focus area, followed by the cardiovascular segment with 31
products. Out of 1,379 psychiatric hospitals in Japan, 1,258 prescribed Kyowa’s products. The
three largest segments by sales in 2006 were psychiatry (33.6%), cardiovascular (15.1%) and
respiratory (13.6%) (see Exhibit 6 for sales of its major products). On average, about 83% of its
sales revenue was from own-product sales during the 2004-2006 period. The remainder was
largely from merchandise sales (about 15%), where Kyowa only acted as a trader for products
sourced from a total of five Japanese and overseas manufacturers.
Kyowa had a total of 20 material suppliers who supplied APIs or finished products. It
purchased more than JPY 2,374 million worth of APIs and finished products in 2006. It also had
agreements with 10 contract manufacturers for various products (see Exhibit 7 for details). To
achieve a full-scale expansion of its generic products business and secure a stable distribution
system, Kyowa had completely outsourced its logistics operations, including distribution
management.
Historically, Kyowa’s sales growth had been lower than its competitors (see Exhibits 8 and 9 for
Kyowa’s financial details and Exhibit 10 for a comparison of Kyowa with other major Japanese
generic drug manufacturers).
Around mid-2006, Kyowa’s promoter family was looking to transfer ownership of the company
to strengthen its management and financial capacity to secure a much larger share of the
Japanese generic drug market.
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KYOWA’S FUTURE BUSINESS PLANS
The company had planned to launch a significant number of new products during 2007-2009, in
view of the expected growth in the generic drugs market. Specifically, it planned to launch 12
products in 2007, 20 in 2008 and five in 2009. More than a third of the projected sales for 2009
were expected from products launched after 2006 (see Exhibit 11 for key information about its
business plan for this period).
LUPIN’S INTERESTS IN KYOWA
Lupin’s key motivation for the 2005 marketing alliance with Kyowa was to leverage its strength
in generics in the growing Japanese generic market. However, the agreement did not get off the
ground as the patent of the product was extended before approval could be obtained from the
Japanese drug authorities.
Lupin could see some level of strategic fit with Kyowa, in the backdrop of the likely growth of
generics in Japan. The share was expected to reach approximately 25% by 2020 (about JPY 2.284
trillion by value), much lower than the target set by the government 5 (see Exhibit 12 for a
forecast of the generic drugs market by a leading research agency). A steep growth rate (in the
range of 10%-18%) was expected in the early years (2007-2013) as more hospitals were
incentivized to use generic drugs. 6
The market also did not expect three or four of the current large generic players to survive the
entry of other large integrated firms, as they had no backward integration and had high API
costs.
There were potentially several sources of synergy between Lupin and Kyowa. Most
importantly, the cost of APIs in Japan, much higher than anywhere else in the world, could be
substantially reduced through supplies from Lupin. There were many products for which APIs
could be supplied by Lupin (see Exhibit 13 for a list of potential API variations and the
associated costs savings).
Then there were other, though less certain, potential synergies. Most obviously, there was the
possibility of shifting some of Kyowa’s production to Lupin’s facilities in India in the long run.
This could possibly be achieved over a period of five to six years. The projected cost savings net
of additional freight and other charges was estimated to be US$0.0075 per tablet. The move
would also allow more optimization at the existing facility, leading to savings of approximately
US$0.0015 per tablet (see Exhibit 14 for the projected cost savings of such a shift).
However, achieving these synergies was not without many uncertainties. First, the Japanese
were obsessed with the quality of medicines, well beyond the desired therapeutic aspects. They
were deeply concerned with the cosmetic dimensions of drugs, such as the whiteness of the
tablets, foreign particle contaminations and minute product damages. Lupin felt that it was yet
to fully understand Japanese quality requirements, despite having had more than two years’
exposure in this market.
5 Predicted by the Yano Economic Research Institute, Japan, according to company sources.
6 Such hospitals would have 450,000 beds in 2009 compared to 178,000 beds in 2006.
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Second, a shift in production to India was possible only after Japanese drug authorities
approved Lupin’s facilities in India. Lupin had no plans to make any radical changes in the
management structure or key personnel at Kyowa. While Lupin’s major production facilities
were approved by the USFDA, they appeared to fall short of Japanese requirements. However,
the team was convinced that meeting Japanese standards was more a matter of instituting more
rigorous quality practices at Lupin’s manufacturing facilities than making substantial capital
investments.
Third, despite its attractions, Japan was a difficult and costly pharmaceutical market in which to
operate. The Japanese insisted on bioequivalence studies for all the different strengths of the
generic drug intended to be marketed, as against just one in the US. The Japanese market also
required companies to have an elaborate field force to meet with doctors and hospitals and
provide information about their generic products, which was not a requirement for generic
drug manufacturers in the US.
Finally, it was not unusual in Japan to cancel pharmaceutical mergers at an advanced stage.
OTHER CONCERNS
Given the high cost of operations in the Japanese pharmaceutical market, large-sized players
had a considerable advantage in the generics market. Size assumed significance as many other
major global generic players, including the world’s largest generic drug maker, Teva of Israel,
were planning to enter the Japanese market.
The agencies hired by Lupin for the technical, legal and regulatory audits of the target had
already submitted satisfactory reports. There were no major outstanding lawsuits against
Kyowa, and Lupin already had product liability insurance for its global operations.
Lupin, in all likelihood, was not alone in scouting for opportunities in Japan. There was credible
information in the market that one of Lupin’s Indian competitors, Zydus, which had already set
up a subsidiary in Japan the year before, was on the lookout for suitable Japanese targets. The
possibility that two major Indian firms, Ranbaxy and Glenmark, which already had joint
ventures in Japan, would make their move in the market could not be ruled out either. Interest
in the Japanese generic segment was only expected to heat up in the ensuing months.
As part of its strategic plan, Lupin was actively eyeing more acquisitions and therefore possibly
wanted to avoid significant earnings dilution (see Exhibit 15 for data relevant to the estimation
of discounting rates in Japan and Exhibit 16 for the market multiples of comparable firms).
The unlisted Kyowa had a total of 63 shareholders holding 196,000 shares. 72% of the holding
was in the hands of the family and the remainder was with financial institutions. It appeared
that the Sugiura family, who owned the company, did not have an effective succession plan and
wanted to sell out.
The top management of Lupin was looking forward to the team’s advice. Before they could
recommend any decisive step to the top management, the team had to grapple with several
nuanced questions. What was the most likely range within which the value of unlisted Kyowa
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lay? What was the most likely price range that Lupin may have to offer to get the target in the
presence of others in the fray? 7 Which key post-acquisition challenges and risks must be
considered in the valuation and pricing? Their nearly two-year long association with Kyowa
did not appear to offer any clear answers to these questions.
7 Consider April 1, 2006 as the relevant date for valuation purposes.
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EXHIBIT 1: RECENT INTERNATIONAL ACQUISITIONS BY INDIAN COMPANIES
Value Sales
Date Target Country Acquirer’s name
(US$ million) (US$ million)
July 2007 Nikho Brazil Cadilla Healthcare 26 26
Vit. D business of
July 2007 Netherlands Dishman Pharma 16.5 22.6
Solvay
May 2007 Taro Pharmaceuticals Israel Sun Pharma 454 298
May 2007 Negma Labs France Wockhardt Ltd 265 150
April 2007 Hollister-Steir US Jubilant Organosys 112.5 55
Source: ENAM Research.
EXHIBIT 2: SUMMARIZED FINANCIAL INFORMATION—LUPIN (IN INR MILLIONS)
Panel A: Summarized Income Statement

FY 2005 FY 2006 FY 2007
Total income 12,310.4 17,335.5 22,155.2
Manufacturing expenses 5,673.7 5,673.7 5,673.7
Employee cost 1,256.8 1,256.8 1,256.8
Selling and distribution expenses 1,076.2 1,629.5 1,916.9
PBDITA 1,436.7 2,968.7 4,761.3
PBDTA 1,163.6 2,665.7 4,390.4
PBT 832.0 2,264.8 3,926.7
PAT 822.9 1,790.0 2,979.8
Panel B: Summarized Balance Sheet
Liabilities and Net Worth FY 2005 FY 2006 FY 2007
*
Net worth 5,005.0 6,439.5 8,884.1
Total borrowings 4,406.4 9,123.5 8,645.5
Other liabilities 934.4 956.1 1,027.2
Total Liabilities 10,345.8 16,519.1 18,556.8
Assets:
Gross fixed assets 7,846.6 8,602.7 10,342.6
Net fixed assets 6,287.5 6,676.1 7,963.6
Investments 93.7 95.0 58.6
Current assets, loans and advances 6,738.7 13,141.7 14,755.3
Less: Current liabilities and provisions 2,774.1 3,391.2 4,220.7
Total assets 10,345.8 16,521.6 18,556.8
*It had 80.345 million equity shares outstanding as of March 2007 and its average market capitalization during March
2007 was INR 47.0 5 billion. Lupin was listed in the leading national stock exchanges in India.
Source: Data provided by Lupin Ltd.
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EXHIBIT 3: SHARE OF GENERIC DRUGS IN MAJOR MARKETS (%)
Note: Data concerning the US, UK, Germany and France are for 2008. Data for Japan is for 2007.
Source: Provided by the company and credited to the Japan Generic Medicines Association website.
EXHIBIT 4: SHARE OF JAPANESE GENERIC DRUGS (%)
Source: Provided by the company and credited to the Japan Generic Medicines Association website.
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EXHIBIT 5: GENERIC DRUG COMPANIES IN JAPAN (SALES FIGURES IN JPY MILLIONS)
FY 2005 FY 2006 FY 2007 FY 2008E

Company Name
Sales % of Total Sales % of Total Sales % of Total Sales % of Total
Sawai Pharmaceutical 26,616 7.6 34,316 8.9 37,631 9.3 44,783 10.00
Nichi-iko Pharmaceuticals 23,349 6.7 28,173 7.3 31,828 7.9 43,000 9.60
Towa Pharmaceutical 24,193 6.9 29,235 7.6 31,495 7.8 35,060 7.8
Taiyo Pharmaceutical Industry 21,402 6.1 25,937 6.7 27,424 6.8 31,000 6.9
Mylan 16,500 4.7 17,660 4.6 18,500 4.6 19,400 4.3
Nipro Pharma 12,368 3.5 13,163 3.4 13,500 3.3 14,200 3.2
Fuji Pharma 10,129 2.9 11,240 2.9 13,250 3.3 13,842 3.1
1
Taisho Pharm Industries 7,468 2.1 8,679 2.2 10,042 2.5 11,462 2.6
Nippon Chemiphar 7,835 2.2 9,013 2.3 9,680 2.4 11,422 2.5
Kyowa Pharmaceutical Industry 7,125 2.0 7,433 1.9 7,673 1.9 9,102 2.0
Meiji Seika Kaisha 4,600 1.3 5,700 1.5 7,500 1.9 9,000 2.0
Kaken Pharmaceutical 3,500 1.0 4,145 1.1 4,500 1.1 5,100 1.1
Choseido Pharmaceutical 4,211 1.2 4,729 1.2 4,754 1.2 4,973 1.1
Kyorin Rimedio 2,628 0.8 4,567 1.2 4,400 1.1 4,711 1.0
Tatsumi Kagaku 3,384 1.0 4,003 1.0 4,320 1.1 4,697 1.0
Yoshindo 3,890 1.1 4,250 1.1 4,380 1.1 4,690 1.0
Elmed Eisai 3,340 1.0 3,840 1.0 4,070 1.0 4,316 1.0
Sandoz 3,200 0.9 3,800 1.0 4,000 1.0 4,300 1.0
Ohara Pharmaceutical 2,590 0.7 3,167 0.8 3,738 0.9 4,120 0.9
Nissin Pharmaceutical 3,204 0.9 3,287 0.8 3,430 0.8 3,570 0.8
Other 158,819 45.3 160,872 41.5 157,787 39.1 166,149 37.0
Total 350,351 100 387,209 100 403,902 100 448,897 100
Top 4 Companies 95560 27.3% 117661 30.4% 128378 31.8% 153843 34.3%
1Teva announced the acquisition of Taisho on December 24, 2009.
Sources: MHLW, “2005 Iyakuhin Sangyou Zittai Chousa” and Total Planning Center, “2008 Generics Iyakuhin No Sizuou Bunseki Chousa.”
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EXHIBIT 6: MAJOR PRODUCTS OF KYOWA
Sales (JPY million)

FY 2006 Ranking FY 2005 Ranking Brand Name
FY 2005 FY 2006
1 140 Flutcasone nasal solution na* 459.38
2 3 Omeprazole 317.28 432.62
3 2 Pravastatin Na 393.05 387.13
4 10 Flunitrezapem 168.11 219.23
5 5 Lunapron 203.71 216.37
6 4 Kashilon 239.52 211.9
7 6 Lansaprazole 196.67 204.93
8 7 Sulpride 176.49 204
9 8 Calfina 175.91 194.51
10 9 Mestinon 170.17 190.14
11 11 Simvastatin 141.1 152.87
12 14 Akriden 122.07 137.99
13 21 Amel 108.3 136.5
14 19 Majoprin 110.53 129.01
15 20 Carbamazepine 108.89 127.53
16 17 Neuomil 113.04 121.83
17 29 Eparose 82.11 119.18
18 16 Nifeslow 116.05 116.77
19 1 Tamsulosin 448.5 106.25
20 24 Milmag 97.76 104.14
Total 3,489.23 3,972.28
* Not available.
Source: Provided by Lupin Ltd.
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EXHIBIT 7: MAJOR SUPPLIERS AND CONTRACT MANUFACTURES OF KYOWA
Amount
Ranking Supplier Category (JPY million)
1 Koa Shoji API/ finished products 526.4
2 Uji Pharma Finished products 466.9
3 Nihon Bulk Pharma API/ pharmaceutical vehicles 430.0
4 Daito API/ interim products 313.3
5 Miat API 201.3
6 MG Pharma Finished products 120.3
7 Kaken Pharma API 83.2
8 Valent Pharma API/ preparations 80.5
9 Sumitomo Chemical API 76.4
10 Karincos p.a. API 76.2
Total 2,374.6
Amount
Ranking Manufacturer Major Product
(JPY million)
1 Kyorin Rimedo Tanus aqua spray, Fluticason nasal solution 386.5
2 Daito Sulpiride tablet, Loxipain tablet 113.3
3 Tatsumikagaku Flunitrazepam tablet, Lunapron fine granule 70.1
4 Pharma Pack Rhinojet 37.5
5 Toyo Capsule Eparose 25.9
6 Seiko EiyoYakuhin Lucus tablet, Alfospan tablet 10.3
7 Maruko Pharma Droxipoda capsule 6.2
8 Taiyo Yakuhin Nitopress tablet 5.9
9 Meguro Kako Toccata tablet, Majoprin tablet 5.7
10 Kanae Aspizone 1.8
Total 663.3
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EXHIBIT 8: HISTORICAL BALANCE SHEET—KYOWA (FIGURES IN JPY MILLIONS)
PARTICULARS FY 2003 FY 2004 FY 2005 FY 2006

ASSETS
Property, plant and equipment
Plants and buildings 735 760 718 678
Facility fixtures and structures 314 298 280 302
Machines and provision 268 485 559 555
Tools, equipment, structures and delivery equipment 102 122 91 95
Land 1,343 1,343 1,343 1,343
2,762 3,008 2,991 2,973
Intangibles
Goodwill 251 216 147 80
Telephone/ facilities rights 9 8 6 5
Software 25 28 23 46
285 252 176 131
Investment etc.
Investment securities 168 168 168 168
Guaranty money and long-term pre-paid
expenses 92 91 107 115
260 259 275 283
Working Capital
Current assets
Cash and cash deposits 1,010 1,215 1,206 747
Notes receivable 1,374 1,362 1,356 1,578
Accounts receivable 1,694 2,101 2,710 2,549
Less: allowance for bad debt -34 -36 -41 -41
Inventory 2,027 1,535 1,757 2,146
Other current assets 65 50 23 20
6,136 6,227 7,011 6,999
Current liabilities
Notes payable 895 901 910 949
Trade account payables 375 307 244 316
Other account payables 214 143 221 127
Unpaid income tax 34 11 76 110
Deposit/ suspense receipt 21 18 20 25
Unpaid consumption tax 0 59 3 32
1,539 1,439 1,474 1,559
Net Working Capital 4,597 4,788 5,537 5,440
Deferred assets 10 56 42 28
Total Assets 7,914 8,363 9,021 8,855
LIABILITIES AND SHAREHOLDERS’ FUND
Shareholders’ Fund: Share Capital 98 98 98 98
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PARTICULARS FY 2003 FY 2004 FY 2005 FY 2006

Retained earnings
Retained surplus 25 25 25 25
Special reserve 1,873 1,963 1,983 2,023
Director retirement reserve 55 55 55 55
Unappropriated profits 224 98 155 197
2,177 2,141 2,218 2,300
Long-term liabilities
Long-term borrowing 4,005 4,646 4,660 4,530
Debentures 1,110 966 1,538 1,414
Guarantee money received 497 501 499 509
Retirement pension reserve 27 11 8 4
5,639 6,124 6,705 6,457
Total Liabilities and Capital 7,914 8,363 9,021 8,855
EXHIBIT 9: DETAILED INCOME STATEMENT—KYOWA (FIGURES IN JPY MILLIONS)
FY FY FY FY
2003 2004 2005 2006
Sales 6,768 6,783 7,241 7,595
Cost of goods sold 4,391 4,435 4,466 4,887
Gross profit 2,378 2,349 2,775 2,708
Sales cost 950 1,043 927
R&D expense 896 831 815
Administrative expenses 378 495 557
Total Selling, General and Administrative (SG&A)
Expenses 2,031 2,224 2,370 2,299
Operating profit 346 125 405 409
Non-operating revenue 80 70 42 55
Interest and dividend received 1 1 1 2
Non-operating expense 138 92 129 130
Interest paid* 77 85 90 120
Ordinary income 288 103 318 334
Extraordinary loss 70 60 152 90
Net income before tax 218 42 166 244
Income tax** 58 9 69 110
Net income after tax 161 34 97 134
* Included in non-operating expense.
** Kyowa faced a 42% tax rate.
16 of 20 A00006
EXHIBIT 10: KYOWA PHARMACEUTICALS AND MAJOR COMPARABLES—FY 2006

(IN JPY MILLION)
Kyowa Sawei Nichi-lko Towa Fuji

Pharma Pharma Pharma Pharma Pharma
Sales (FY 2006, JPY million) 7,595 26,225 27,774 23,072 11,241
No. of days of sales:
Notes receivable 71.91 57.23 68.33 111.41 24.79
Accounts receivable 113.66 101.35 94.21 45.55 125.94
Total receivable 185.57 158.58 162.54 156.96 150.73
Total inventory 93.50 114.14 61.55 95.22 75.78
Notes payable (47.53) (11.70) (50.89) (26.81) (8.81)
Trade account payables (16.35) (40.14) (25.33) (34.49) (48.15)
Net working capital 215.19 220.89 147.87 190.88 169.55
% of sales accounted by:
Product sales 83% 75% n.a. 88% 92%
Merchandise sales 15.70% 25.47% n.a. 11.59% 7.51%
Gross profit margin 36.0% 45.6% 47.3% 45.1% 44.0%
Percentage of total cost:
Material 60.67% 61.15% 70.40% 58.83% 70.00%
Labor 12.77% 14.64% 12.73% 24.60% 11.40%
Others 26.57% 24.21% 18.27% 16.57% 18.60%
Outsourcing 8.93% n.a. 7.70% n.a. n.a
SG&A / Sales 36.03% 33.63% 34.54% 34.34% 31.25%
R&D / Sales 6.69% 8.34% 4.58% 7.59% 6.68%
* Other costs mainly comprised depreciation, lease charge and utility.
17 of 20 A00006
EXHIBIT 11: KEY INCOME RELATED PROJECTIONS
a) The projection assumes April 2006 as the date of decision.

b) Sales are expected to grow at 6.46%, 15.03% and 12.79% for FY2007, 2008 and 2009,
respectively. Thereafter, it can be assumed that Kyowa’s sales will grow at the same rate as the
generics market (Scenario II).
c) Cost of goods sold as a percentage of sales is expected to remain at 62.80%, 62.50% and 62%
during FY2007, FY2008 and FY2009, respectively.
d) Forecast about different components of SG&A cost:
• Selling cost as a percentage of sales will remain at the same level as in FY2006, i.e., 12.20%.
• R&D expenses as a percentage of sales will remain at the same level as in FY2006, i.e.,
10.73%.
• Total administrative expenses are expected to grow at a rate of 1% per year (steady growth)
from FY2007 onwards.
e) Non-operating expenses (including interest paid) were expected to be JPY 131 million and JPY
159 million during FY2007 and FY 2008, respectively, and JPY 181 million thereafter. Non-
operating revenues (including interest and dividend received) were expected to remain at JPY 50
million during FY2007-FY2009. These cash flows may be ignored while computing discounted cash
flow (DCF).
f) Extraordinary loss from disposal of inventories of JPY 20 million were expected for the next six
years starting FY2008.
g) The number of days of sales of key working capital items are below:
Working Capital Item No. of days of sales
Notes receivable 67
Accounts receivable 106
Inventory 85
Notes payable (46)
Trade accounts payable (15)
Net working capital 204
Note: All other current assets and current liabilities may be assumed to be equal to the FY2007
amount. Assuming a year has 365 days, Lupin is optimistic about reducing days receivables to 96
days in FY2013 and thereafter.
h) The cash balance was expected to be maintained at around JPY 770 million.
i) Investment in fixed assets (and depreciation) on fixed assets (in JPY) are expected to be: 424
million (386 million) for FY2007, 543 million (391 million) for FY2008 and 459 million (362 million)
for FY2009, respectively. Thereafter, a reasonable assumption to make is that the investments in
fixed assets would be equal to the extent of that depreciation charged.
j) See Exhibit 13 for expected cost savings from shifting production from Japan.
k) Kyowa’s effective tax rate was 42%.
l) Kyowa’s Debt:Equity ratio after acquisition is expected to be 60:40.
m) The long-term borrowings and debentures stay at the same level as the actual balance.
18 of 20 A00006
EXHIBIT 12: GENERIC DRUGS: GROWTH RATE AND SHARE IN TOTAL PHARMACEUTICAL
MARKET
Scenario I Scenario II
Year Generic: Share in Generic: Share in
Generic: Growth Generic: Growth
total pharma total pharma
rate rate
market Market
2006 10.4% 8.4% 5.8% 7.5%
2007 18.1% 9.5% 11.3% 8.1%
2008 14.7% 10.8% 9.8% 8.7%
2009 17.3% 12.0% 13.6% 9.5%
2010 8.0% 13.3% 5.4% 10.2%
2011 13.7% 14.5% 10.6% 10.8%
2012 5.3% 15.4% 4.2% 11.4%
2013 10.1% 16.5% 9.0% 12.0%
2014 7.7% 17.6% 6.6% 12.7%
2015 7.7% 18.7% 6.6% 13.4%
2016 7.7% 20.0% 6.6% 14.1%
2017 7.7% 21.3% 6.6% 14.9%
2018 7.7% 22.7% 6.6% 15.7%
2019 7.7% 24.3% 6.6% 16.6%
2020 7.7% 25.9% 6.6% 17.5%
2021 1.0% 25.9% 6.6% 18.5%
2022 1.0% 25.9% 6.6% 19.5%
2023 1.0% 25.9% 6.6% 20.6%
2024 1.0% 25.9% 6.6% 21.7%
2025 1.0% 25.9% 6.6% 22.9%
2026 1.0% 25.9% 6.6% 24.2%
2027 1.0% 25.9% 6.6% 25.5%
2028 1.0% 25.9% 1.0% 25.5%
2029 1.0% 25.9% 1.0% 25.5%
2030 1.0% 25.9% 1.0% 25.5%
Source: Yano Economic Research Institute, Japan, provided by Lupin Ltd.
19 of 20 A00006
EXHIBIT 13: POTENTIAL SAVINGS FROM API PROCUREMENT VARIATION
Potential
2010- 2011- 2012-
Savings 2009-
Phase Molecules Qty (Kg) Savings/ Kg 2011 2012 2013
(US$ 2010
(50%) (100%) (102%)
million)
Pravastatin$ 152 11000 1.67 0 0.84 1.67 1.70
Amlodipine$ 250 2000 0.5 0 0.25 0.50 0.51
$
Risperidone 60 9000 0.54 0 0.27 0.54 0.55
Phase 1 $
Lansoprazole 130 1750 0.23 0 0.12 0.23 0.23
$
Omeprazole 180 2500 0.45 0 0.23 0.45 0.46
$
Simvastatin 60 10000 0.6 0 0.30 0.60 0.61
#
Beraprost Na 0.112 3000000 0.34 0 0 0.17 0.34
#
Zonisamide 780 200 0.16 0 0 0.08 0.16
#
Phase 2 Epinastine 60 3500 0.21 0 0 0.11 0.21
Tamsulosine# 1 300000 0.3 0 0 0.15 0.30
Zopiclone# 80 2000 0.16 0 0 0.08 0.16
#Full saving potential occurs in 2012-2013.
$Full saving potential occurs in 2011-2012.
It is also expected that Lupin will save US$0.44 million on bulk procurement of APIs in FY2010.
The potential tax savings due to the relocation of certain manufacturing activities to India were expected to be
US$0.22 million, 0.26 million, 0.44 million and 0.52 million, respectively for FY2010 to FY2013.
In estimating terminal value, one may assume that Lupin will be able to save amounts similar to FY2013 in future
years.
EXHIBIT 14: POTENTIAL SAVINGS FROM SITE VARIATION AND DIRECT MANUFACTURING
FY2010 FY2011 FY2012 FY2013

Panel A: Savings from site variation to India
(US$0.0075/ tablet, net of freight charges of US$0.0021/tablet)
Number of units to be shifted to India (million) 0 100 250 500
Projected cost savings 0 0.75 1.875 3.75
#
Panel B: Savings from capacity increase at existing facility (US$0.0015 / tablet)
Number of units with possible savings 100 300 500 750
Projected cost savings 0.15 0.45 0.75 1.125
# Current manufacturing cost/ unit was US$0.0114/ tablet and expected saving was 13%, i.e., US$0.0015 per tablet.
20 of 20 A00006
EXHIBIT 15: KEY STOCK MARKET AND EXCHANGE RATE INFORMATION
Item Rate
Japanese 10-year government bond (six month average to February 28, 2007) 1.698%
Risk premium in the Japanese market* 5.80%
Size premium in Japan 3.95%
Cost of debt for similar companies 2.43%
After-tax cost of debt 1.41%
Exchange rate (JPY/ US$) 110
Exchange rate (JPY/ INR) 2.73
* Ibbotson Associates, Japanese Equity Risk Premia Report, 2006.
EXHIBIT 16: MARKET MULTIPLES OF MAJOR COMPARABLES
Information Sawai Pharma Nichi-lko Pharma Towa Pharma Fuji Pharma

EV/ Sales 2.69 1.9 1.96 1.2
EV/ EBIT 17.02 15.4 15.4 9
EV/ EBITDA 12.28 12.91 11.31 6.54
Price to Earnings 29.07 24 26.77 17.2
Price to book value 29.96 21.44 59.91 19.93
Beta 0.53 0.41 0.69 0.63
Unlevered beta 0.48 0.35 0.68 0.63
Notes:
1. The “price to book” ratio is based on 2006 information, other calculations are based on information in March 2007.
2. Enterprise Value (EV) is calculated as the sum of equity market capitalization (based on six months’ average
share price), interest bearing debt and minority interest minus the sum of cash and bank balance and marketable
securities.

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Indian Institute of Management A00006

Ahmedabad October 27, 2012

LUPIN’S FORAY INTO JAPAN

THE PHARMACEUTICAL INDUSTRY

© 2012 by the Indian Institute of Management, Ahmedabad.

THE INDIAN PHARMACEUTICAL INDUSTRY

2 Assigned by ICRA, an independent Indian credit rating agency.

THE JAPANESE PHARMACEUTICAL MARKET

Kyowa had a well-organized team of medical representatives, an important resource for a

KYOWA’S FUTURE BUSINESS PLANS

LUPIN’S INTERESTS IN KYOWA

7 Consider April 1, 2006 as the relevant date for valuation purposes.

EXHIBIT 1: RECENT INTERNATIONAL ACQUISITIONS BY INDIAN COMPANIES

EXHIBIT 2: SUMMARIZED FINANCIAL INFORMATION—LUPIN (IN INR MILLIONS)

Panel A: Summarized Income Statement

Source: Data provided by Lupin Ltd.

EXHIBIT 3: SHARE OF GENERIC DRUGS IN MAJOR MARKETS (%)

EXHIBIT 4: SHARE OF JAPANESE GENERIC DRUGS (%)

EXHIBIT 5: GENERIC DRUG COMPANIES IN JAPAN (SALES FIGURES IN JPY MILLIONS)

FY 2005 FY 2006 FY 2007 FY 2008E

EXHIBIT 6: MAJOR PRODUCTS OF KYOWA

Sales (JPY million)

EXHIBIT 7: MAJOR SUPPLIERS AND CONTRACT MANUFACTURES OF KYOWA

EXHIBIT 8: HISTORICAL BALANCE SHEET—KYOWA (FIGURES IN JPY MILLIONS)

PARTICULARS FY 2003 FY 2004 FY 2005 FY 2006

PARTICULARS FY 2003 FY 2004 FY 2005 FY 2006

EXHIBIT 9: DETAILED INCOME STATEMENT—KYOWA (FIGURES IN JPY MILLIONS)

Source: Provided by Lupin Ltd.

EXHIBIT 10: KYOWA PHARMACEUTICALS AND MAJOR COMPARABLES—FY 2006

Kyowa Sawei Nichi-lko Towa Fuji

Source: Provided by Lupin Ltd.

EXHIBIT 11: KEY INCOME RELATED PROJECTIONS

a) The projection assumes April 2006 as the date of decision.

Working Capital Item No. of days of sales

Source: Provided by Lupin Ltd.

EXHIBIT 13: POTENTIAL SAVINGS FROM API PROCUREMENT VARIATION

Source: Provided by Lupin Ltd.

FY2010 FY2011 FY2012 FY2013

Source: Provided by Lupin Ltd.

EXHIBIT 15: KEY STOCK MARKET AND EXCHANGE RATE INFORMATION

Source: Provided by Lupin Ltd.

EXHIBIT 16: MARKET MULTIPLES OF MAJOR COMPARABLES

Information Sawai Pharma Nichi-lko Pharma Towa Pharma Fuji Pharma

Source: Provided by Lupin Ltd.

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