Indian Pharmaceutical and Healthcare

sector as investing opportunity.

The Pharma sector is down by more than 15% from an all-time high. Is it a buying opportunity,
or should we wait and watch?

Performance of Nifty Pharma sector and Nifty since 2000.

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Industry Outlook
Indian pharmaceutical industry is known for its generic medicines and low-cost vaccines
globally. Transformed over the years as a vibrant sector, presently, Indian Pharma ranks third in
pharmaceutical production by volume. In the last nine years, the Indian Pharma sector has
grown steadily by a CAGR of 9.43%. The Pharma sector has been consistently earning a trade
surplus. During 2020-21, total pharma export was ₹180555 crore (USD 24.35 Bn) against the
total pharma import of ₹49436 crore (USD 6.66 Bn), thereby generating a trade surplus of USD
17.68 Bn.

The Indian pharmaceutical industry also plays a significant role globally. India has the highest
number of United States Food and Drug Administration (USFDA) compliant Pharma plants
outside the USA. 500 API manufacturers are contributing about 8% of the global API Industry.
India is the largest supplier of generic medicines with a 20% share in the global supply by
manufacturing 60000 generic brands across 60 therapeutic categories.

Factors supporting the growth of Indian Pharma:

● According to the Indian Economic Survey 2021, the domestic market is expected to grow
3x in the next decade. India’s domestic pharmaceutical market stood at US$ 42 billion in
2021 and is likely to reach US$ 65 billion by 2024 and further expand to US$ 120-130
billion by 2030. India's biotechnology industry comprises biopharmaceuticals, bio-
services, bio-agriculture, bio-industry, and bioinformatics.
● The Indian biotechnology industry was valued at US$ 70.2 billion in 2020 and is
expected to reach US$ 150 billion by 2025. India’s medical devices market stood at US$
10.36 billion in FY20. The market is expected to increase at a CAGR of 37% from 2020
to 2025 to reach US$ 50 billion. As of August 2021, CARE Ratings expect India's
pharmaceutical business to develop at an annual rate of ~11% over the next two years
to reach more than US$ 60 billion in value.
● Pharmaceutical is one of India's top ten attractive sectors for foreign investment. 100%
foreign investment is allowed under automatic route in Medical Devices. Foreign
investments in pharmaceuticals in greenfield projects are allowed up to 100% under the
automatic route, and for brownfield pharmaceutical projects, foreign investment beyond
74% to up to 100%, Government approval is required.
● Indian pharmaceutical sector supplies over 50% of the global demand for various
vaccines, 40% of the generic demand for the US, and 25% of all medicines for the UK.
● According to the Indian Economic Survey 2021, the domestic market is expected to grow
3x in the next decade. India’s domestic pharmaceutical market stood at US$ 42 billion in
2021 and is likely to reach US$ 65 billion by 2024 and further expand to US$ 120-130
billion by 2030. In terms of overall revenue, the Indian pharmaceutical market increased
by 13.9% in January 2022. India is the largest producer of vaccines worldwide,
accounting for ~60% of the total vaccines as of 2021.

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 ● As of August 2021, CARE Ratings expect India's pharmaceutical business to develop at
an annual rate of 11% over the next two years to reach more than US$ 60 billion in
value.
● As per the Union Budget 2022-23: Rs. 3,201 crores (US$ 419.2 million) has been set
aside for research, and Rs. 83,000 crores (US$ 10.86 billion) has been allocated for the
Ministry of Health and Family Welfare. Rs. 37,000 crore (US$ 4.83 billion) has been
allocated to the 'National Health Mission.’
● In June 2021, Finance Minister Ms. Nirmala Sitharaman announced an additional outlay
of Rs. 197,000 crores (US $26,578.3 million) that will be utilized over the next five years
for the pharmaceutical PLI scheme in 13 key sectors such as active pharmaceutical
ingredients, drug intermediaries and key starting materials.
● Over the next five years, India's medical spending is expected to increase by 9–12%
placing it among the top 10 nations worldwide. The ability of companies to orient their
product portfolio towards chronic therapies for diseases like cardiovascular, anti-
diabetes, anti-depressants, and anti-cancers, which are on the rise, will also play a role
in future domestic sales growth. Speedy introduction of generic drugs into the market
has remained in focus and is expected to benefit Indian pharmaceutical companies.
● To achieve self-reliance and minimize import dependency on the country's essential bulk
drugs, the Department of Pharmaceuticals initiated a PLI scheme to promote domestic
manufacturing by setting up greenfield plants with minimum domestic value addition in
four separate ‘Target Segments’ with a cumulative outlay of Rs. 6,940 crores (US$
951.27 million) from FY21 to FY30.

As GDP per capita increases and healthcare spending increase significantly. Developed
economies have a very expenditure on Healthcare as % of GDP vs. developing economies.
This gives us comfort that there is significant headroom for growth in this sector for India.

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Different Business segments in Pharma and Health
Care sectors
When a new medicine is released, it’s patented and sold under a brand name. When that patent
expires, generic versions of the drug may be sold by other companies. These differ in minor
ways from the branded version but must have similar efficacy.
Branded drugs are more expensive because they’re newer, generally groundbreaking, and often
for conditions that are difficult to treat. However, these same innovative medicines become
generic after a certain period.

● Unbranded Generics

• Pricing pressure easing in the US market as companies start optimizing their portfolios (price
erosion now at 4% vs. 17% in 2017)
• China which is dominated mainly by MNCs (~85% ms) is now looking at Indian companies to
introduce generics (China market size USD150bn)

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 ● Branded Generics
• Branded generics has high sustainable cash flows, low capex & high RoE with high barriers to
entry (8-10% growth & 40%-80% RoE)
• Increasing lifestyle-related diseases, better diagnostics and affordability driven by Ayushman
Bharat (affordability to expand from 150-200m individuals to 500-600m individuals over time)

● APIs/CDMO/CMO
The active pharmaceutical ingredient (API) is the foundation of a final drug product and is a
crucial consideration when choosing a Contract Development and Manufacturing Organisation
(CDMO).
To understand API contract manufacturing, first, it is necessary to understand what is meant by
an “active ingredient.” Also called the “bulk active” or “bulk drug substance,” the API is the part
of the drug that produces the intended effect in the diagnosis, cure, mitigation, treatment, or
prevention of disease or that affects the structure or any function of a human or animal.

The term includes those components that may undergo a chemical change and be present in a
modified form intended to furnish the specified pharmacological activity in a finished drug
product. An API is formulated with other components that don’t perform the intended chemistry
or biochemistry in the body. These components are called “inactive ingredients.” Active and
inactive ingredients are mixed in various dosage forms (such as tablets, capsules or liquids) to
yield a drug product.

● Hospitals

• Indian hospital players have incurred huge capex to increase capacity, which is coming to an
end (Mature hospitals RoE at ~20% vs. consolidated 4%-12%)
• This may lead to better margins, cash flows, and lower debt resulting in re-rating of the
business

Capex phase essentially over; time to monetize

● Diagnostics
• Diagnostics is 85% unorganized. With the increase in health awareness, the organized players
are expected to benefit the most
• Broader market is growing at 10% pa, and organized is gaining a share. High RoE and low
reinvestment need

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Future Outlook
The pharmaceutical industry in India is a significant part of the nation's foreign trade and offers
lucrative potential for investors. Millions of people around the world receive affordable and
inexpensive generic medications from India, which also runs a sizable number of plants that
adhere to Good Manufacturing Practices (GMP) standards set by the World Health Organization
(WHO) and the United States Food and Drug Administration (USFDA).

Among nations that produce pharmaceuticals, India has long held the top spot. Medicine
spending in India is projected to grow 9-12% over the next five years, leading India to become
one of the top 10 countries in medical spending. Going forward, better growth in domestic sales
would also depend on the ability of companies to align their product portfolio towards chronic
therapies for diseases such as cardiovascular, anti-diabetes, anti-depressants, and anti-
cancers, which are on the rise.

The Indian Government has taken many steps to reduce costs and bring down healthcare
expenses. The National Health Protection Scheme, which aims to offer universal healthcare, the
aging population, the rise in chronic diseases, and other government programs, including the
opening of pharmacies that offer inexpensive generic medications, should all contribute to
boosting the Indian pharmaceutical industry. Speedy introduction of generic drugs into the
market has remained in focus and is expected to benefit Indian pharmaceutical companies. In
addition, the thrust on rural health programs, lifesaving drugs, and preventive vaccines also
augurs well for pharmaceutical companies.

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Pharma Outperformed During High Inflation, as shown in the
data given below.

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Valuations below 10-yr average

Name CMP Rs. Mar Cap P/E CMP / CMP / Debt / EV / Cash
Rs.Cr. FCF Sales Eq EBITD Cycle
A

Sun 1025 245931.8 31 41.6 6 0.1 21.5 259

Pharma.Inds
.

Cipla 1111.4 89691.5 34.6 35 4.1 0.1 18.5 179

Dr Reddy's 4403.2 73313.4 23.6 36.8 3.3 0.1 13.1 251

Labs

Torrent 1613.1 54593 45.5 38.4 6.2 0.7 22.1 187

Pharma.

Zydus Life. 393.6 39835.3 20.3 21.6 2.5 0.2 12.3 183

Lupin 714 32486.2 423.5 68.8 2 0.4 25.8 227

Nifty 13000 922687.1 31 40.3 4 0.2 18.9 214.3

Pharma

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Laurus Labs Ltd
ABOUT
Laurus Labs is principally engaged in offering a broad and integrated portfolio of Active
Pharmaceuticals Ingredients (API), including intermediates, Generic Finished dosage
forms (FDF), and Contract Research services to cater to the needs of the global
pharmaceutical industry.

KEY POINTS
Integrated Pharma Company Laurus Labs is a fully integrated pharmaceutical and
biotechnology company with a leadership position in Active Pharmaceutical Ingredients
(APIs) in selected high-growth therapeutic areas and a significant focus on anti-
retroviral, Hepatitis C, and oncology drugs.

Business segments
A) Synthesis (42% revenue of H1FY23 ) Co. offers Contract development and
manufacturing services for global pharmaceutical companies. Its facilities can
manufacture specialty ingredients in nutraceuticals, dietary supplements, and
cosmeceutical products with natural extraction capability.

Product and service offerings - Commercial scale contract manufacturing, Clinical

phase supplies, Analytical and research services, Nutraceuticals, dietary supplements,
and cosmeceutical products.

B) API (40% revenue of H1 FY23) Co. manufactures a wide array of APIs and
advanced intermediates and is a market leader in various high-value and high-volume
APIs such as ARV APIs

Product and service offerings - Anti-retroviral (ARV), Anti-diabetic, Cardiovascular,

Proton Pump Inhibitors (PPIs), Oncology

C) Finished Dosage Formulation (16% revenue of H1 FY23) Backed by its API portfolio,
the company develops and manufactures oral solid formulations for LMIC, North
America, and European Union (EU) markets

Product and service offerings- Anti-retroviral (ARV), Anti-diabetic, Cardiovascular,

Proton Pump Inhibitors (PPIs), Central nervous system (CNS)

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D) Bio (2% revenue of H1 FY23) Co. Offers fermentation-based product development
and manufacturing expertise as a service (CDMO) to novel protein companies and bio-
manufacturers — from clone development, strain engineering, process development,
and scale-up to large-scale commercial manufacturing planning to add 1 million liters of
fermentation capacity for Laurus Bio which will come online only in 2023-24

Manufacturing Facilities Co. operates six manufacturing facilities in Vishakhapatnam,

Andhra Pradesh, and one in Hyderabad. At five of these facilities, it manufactures Drug
Substances. The sixth facility manufactures both Drug Products and Drug Substances.
These facilities have received approvals from various regulatory agencies across the
globe.

Geographical Revenue Bifurcation

India – 72% in FY22 vs. 68% in FY21

Outside India – 28% in FY22 vs. 32% in FY21

R&D
R&D operations Co. has a team of 790 scientists who operate a Kilo Lab facility at its
R&D center in Hyderabad and has spent 202 Crs (4% of revenue) towards R&D in
FY22. The company has been granted 184 Patents, 73 Drug Master Files, and 60+
products commercialized since its inception.

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Financial Analysis

Income statement

Balance sheet

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CashFlow Statement

● Strong momentum continued delivering ₹ 4,660 Cr Revenues and 33% growth.

Sustained robust growth in CDMO and API business
● EBITDA: ₹ 1,307 Cr, increased by 26%, resulting in a margin of 28% - supported
by revenue diversification
● Net Profit: ₹ 687 Cr, increased by 15%, despite higher tax rate
● R&D Spent: ₹ 153 Cr (3.3% of revenues) and increased by 3%
● Capex nearly in-line; as we continue to deliver on Key investment projects
● Effective Tax rate for 9M FY 23 is higher at 28% due to the change in SEZ profits
exemption limit u/s 10AA from FY 23 for five years, further evaluating to switch
over to composite rate

CAPEX
CAPEX Plans Company has proposed a Capex of about ₹1,700 crores be carried out
during FY23 and FY24 in a phased-wise manner to meet the future increase in demand.
The proposed CAPEX will be a mix of greenfield and brownfield projects in all the
company's segments. Out of the CAPEX of about ₹1,700 crores, the company proposes
to avail term loan of ₹300 crores during FY23, and the balance is proposed to be funded
through internal accruals and advances from the customers.

A growing number of products. Laurus is among the leading API manufacturers in ARV
and oncology segment. Its customers include Mylan, Natco, and Aurobindo Pharma.

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The company has grown from a one-product company in 2010 to 60+ commercial
products in 2020. The company has 116 patents.

Management Comments in Recent time

Q3 FY2022
- Aspirational $1 billion in sales in FY 2023 will be supported by several anticipated
approvals and good progress in multisite capacity expansion across API, formulations,
and CDMO divisions. Diabetes and cardiovascular are the two where we are expecting
approvals. Europe and the North American markets
- Laurus Bio commissioned two more fermenters of 45KL each, taking to a total capacity
of 180KL.
- On the CAPEX front, we invested close to INR 246 crores during the quarter and about
INR 770 crores in the nine months.
- As the INR 200 crore explains, our synthesis business is tiny for our capabilities. So we
do expect it will be growth in this business. By FY ‘25, we want this business to be at
least 25% of our overall revenue.
- The operating deleverage reduced the EBITDA margins because we have the facilities,
the teams, and the investments into R&D; all of those are happening without revenues.
That was the reason for EBITDA de-growth. At the same time, the gross margin
improvement is because of the product mix. All of you know that ARV APIs do not have
high gross margins compared to the rest of the business. So ARV APIs for 25% or less
than 25% of our sales these quarters, the Q3. Our gross margin was enhanced.
- 25% of your gross block is not yielding revenues right now.
- As of now, the contract is not giving any revenues. So that's one sign we have contracts
in place multi-product multi-year. And two products may go from phase two to phase
three and commercial in the next two to three years.

Q4 2022

- During the year, we also successfully forayed into disruptive CAR-T technology by
investing in the Immuno act for a substantial minority stake.
- Laurus has signed and will be part of the MPP license for Pfizer's oral COVID vaccine,
increasing the broad access in LMIC markets. Coming to the developed markets, we're
observing a stable market share for our products.
- In Europe, we have a basket of eight approved products, of which we have already
launched three products and will be launching more products based on the market
opportunity.
- Our brownfield expansion at unit 2 is progressing as per our expectations and is
expected to add significant capacity to our FDF operations, taking the capacity to 10
billion units.

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 - Overall R&D spending to sales for this quarter and full year was at 4% of our revenues;
we have 62 products in the R&D pipeline, either under development or under validation
with an addressable market size of $40bn brand sales.
- For FY 22, CDMO business grew very strong, over 75% year on year.
- Our proposed Greenfield investment to set up a dedicated R&D center for our CDMO
division at Hyderabad and three manufacturing units in Vizag under Laurus Synthesis is
progressing as per our expectations. New sites for this division will be able to handle
steroids, hormones, high potent molecules apart from large-scale products.

Q1 FY 2023
- On the CAPEX front, we invested close to Rs.209 crores for the quarter, and as we
guided, we are expected to invest around Rs.2000 crores in the two years’ time between
FY 2023 and FY 2024
- multi-year, multi-product contracts signed with Global Life Science contract. We are
currently developing products that will go into that manufacturing site, and one NCE
validation is going on the site. So, the revenue from that contract is not that significant
right now, but it will become meaningful once we qualify the plant, possibly in the second
half of the next financial year.
- On the expense side, there is a power shortage in our manufacturing area in Andhra
Pradesh. In the last quarter, we have sourced a lot of power from private sources and
used diesel. We also spent about Rs.33 crores additional expenditure towards power
and some foreign exchange loss. You know the foreign exchange loss is restated
because of the not incurred loss. So, that is also reflected in the other expenses.

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 Conclusion

India’s pharmaceuticals market has grown in confidence and firmly moved on to an accelerated
growth path. The central question now rests around the true nature and the full extent of this
market’s potential. Backed by solid fundamentals, the market is giving rise to a variety of business
opportunities. We feel confident that strong player intent, investments and actions will underpin
future growth and enable the Indian pharmaceuticals market to break into the global top tier.

The pharma supply chain in India is complex with several carry and forwarding agents (CFAs),
and more than 8,50,000 retailers. A large number of stocks keeping units (SKUs) (>250,000)
further increase the complexity of stock management, especially with variation in brand
preference across geographies. For e-pharmacies, holding inventories of 2.5 lakh SKUs across
geographies is a challenge56. With fragmented and unorganized supply chains, chances of the
product being counterfeit becomes higher.

According to EY’s primary research, all stakeholders — patients, doctors and pharma companies
— agree that e-pharmacies provide access and convenience benefits. However, they also have
concerns related to data privacy, prescription genuineness, medicine substitution, quality, stock
availability and timely delivery. The table below captures the concerns by stakeholder type and
the response of e-pharmacies regarding the same.

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