Z Score Model analysis on Pharma industry

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Risk Management in Bank
Assignment no: 2
Submitted to:
Prof.S.S.Shantha Kumari
VITBS
Submitted by:
S Ranganathan-14MBA0129
J Venkadesh-14MBA0055
P Yuvaraj-14MBA0041

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Table of Content:
S NO CONTENT PAGE NO
1 Economic Analysis 4
2 Industry Analysis 5
3 Industry Life cycle 14
4 PORTER’S COMPETITIVE FORCES 17
5 SWOT Analysis 19
6 PESTEL Analysis 21
7 Recent Merger and Acquisition 23
8 Company Analysis 24
9 Review of Literature 28
10 Data analysis 31
11 Findings 34
12 Conclusion 36
13 Appendix 37

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TABLE of CONTENT
S NO Content Page no
1 NET WORKING CAPITAL 31
2 TOTAL ASSETS 31
3 EBIT 31
4 NET SALES 31
5 BOOK VALUE OF EQUITY 31
6 RETAINED EARNINGS 31
7 BOOK VALUE OF DEBT 32
8 VARIOUS RATIOS USED IN Z SCORE MODEL 32
9 THE Z SCORE HEALTH ZONE FOR SELECTED
PHARMA COMPANIES
33

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INTRODUCTION
ECONOMIC CONDITION IN INDIA:
India is set to emerge as the world’s fastest-growing major economy by 2015 ahead of China, as
per the recent report by The World Bank. India’s Gross Domestic Product (GDP) is expected to
grow at 7.5 per cent in FY 2015-16, as per the report.The improvement in India’s economic
fundamentals has accelerated in the year 2015 with the combined impact of strong government
reforms, RBI's inflation focus supported by benign global commodity prices. According to IMF
World Economic Outlook April, 2015, India ranks seventh globally in terms of GDP at current
prices and is expected to grow at 7.5 per cent in 2016.
India’s economy has witnessed a significant economic growth in the recent past, growing by 7.3
per cent in FY2015 as against 6.9 per cent in FY2014. The size of the Indian economy is
estimated to be at Rs 129.57 trillion (US$ 2.01 trillion) for the year 2014 compared to Rs 118.23
trillion (US$ 1.84 trillion) in 2013. The steps taken by the government in recent times have
shown positive results as India's gross domestic product (GDP) at factor cost at constant (2011-
12) prices 2014-15 is Rs 106.4 trillion (US$ 1.596 trillion), as against Rs 99.21 trillion (US$
1.488 trillion) in 2013-14, registering a growth rate of 7.3 per cent. The economic activities
which witnessed significant growth were ‘financing, insurance, real estate and business services’
at 11.5 per cent and ‘trade, hotels, transport, communication services’ at 10.7 per cent.
According to a Goldman Sachs report released in September 2015, India could grow at a
potential 8 per cent on average during from fiscal 2016 to 2020 powered by greater access to
banking, technology adoption, urbanization and other structural reforms. India’s Index of
Industrial Production (IIP) grew by 4.2 per cent in July 2015 compared to 3.8 per cent in June
2015. The growth was largely due to the boost in Electricity sector growth, which was 3.5 per
cent in July compared to 1.3 per cent in the previous month.
India’s Consumer Price Index (CPI) inflation rate raised to 3.66 per cent in August 2015
compared to 3.69 per cent in the previous month. On the other hand, the Wholesale Price Index
(WPI) inflation rate remained negative at 4.95 per cent for the tenth consecutive month in August
2015 as against negative 4.05 per cent in the previous month, led by low crude oil prices.

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India's foreign exchange reserve stood at a high of US$ 352 billion in the week up to September
18, 2015 – indicating an increase of US$ 631.5 million compared to previous week.
Owing to increased investor confidence, net Foreign Direct Investment (FDI) inflows touched a
record high of US$ 34.9 billion in 2015 compared to US$ 21.6 billion in the previous fiscal year,
according to a Nomura report. The report indicated that the net FDI inflows reached to 1.7 per
cent of the GDP in 2015 from 1.1 per cent in the previous fiscal year.
Numerous foreign companies are setting up their facilities in India on account of various
government initiatives like Make in India and Digital India. Mr. Narendra Modi, Prime Minister
of India, has launched the Make in India initiative with an aim to boost the manufacturing sector
of Indian economy. This initiative is expected to increase the purchasing power of an average
Indian consumer, which would further boost demand, and hence spur development, in addition to
benefiting investors. Besides, the Government has also come up with Digital India initiative,
which focuses on three core components: creation of digital infrastructure, delivering services
digitally and to increase the digital literacy. Finance Minister Mr Arun Jaitley stated that the
government is looking at a number of reforms and resolution of pending tax disputes to attract
investments.
Currently, the manufacturing sector in India contributes over 15 per cent of the GDP. The
Government of India, under the Make in India initiative, is trying to give boost to the
contribution made by the manufacturing sector and aims to take it up to 25 per cent of the GDP.
ABOUT INDIAN PHARMACEUTICALS INDUSTRY:
The Indian pharmaceuticals market is the third largest in terms of volume and thirteen largest in
terms of value, as per a report by equity master. Branded generics dominate the pharmaceuticals
market, constituting nearly 70 to 80 per cent of the market. India is the largest provider of
generic drugs globally with the Indian generics accounting for 20 per cent of global exports in
terms of volume. India enjoys an important position in the global pharmaceuticals sector. The
country also has a large pool of scientists and engineers who have the potential to steer the
industry ahead to an even higher level. The UN-backed Medicines Patents Pool has signed six
sub-licences with Aurobindo, Cipla, Desano, Emcure, Hetero Labs and Laurus Labs, allowing

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them to make generic anti-AIDS medicine Tenofovir Alafenamide (TAF) for 112 developing
countries.
MARKET SIZE
According to India Ratings, a Fitch company, the Indian pharmaceutical industry is estimated
to grow at 20 per cent compound annual growth rate (CAGR) over the next five years. Presently
the market size of the pharmaceutical industry in India stands at US$ 20 billion. As on March
2014, Indian pharmaceutical manufacturing facilities registered with the US Food and Drug
Administration (FDA) stood at 523, highest for any country outside the US. India's
biotechnology industry comprising bio-pharmaceuticals, bio-services, bio-agriculture, bio-
industry and bioinformatics is expected grow at an average growth rate of around 30 per cent a
year and reach US$ 100 billion by 2025. Biopharma, comprising vaccines, therapeutics and
diagnostics, is the largest sub-sector contributing nearly 62 per cent of the total revenues at Rs
12,600 crore (US$ 1.90 billion).
INVESTMENTS
The Union Cabinet has given its nod for the amendment of the existing FDI policy in the
pharmaceutical sector in order to allow FDI up to 100 per cent under the automatic route for
manufacturing of medical devices subject to certain conditions. The drugs and pharmaceuticals
sector attracted cumulative foreign direct investment (FDI) inflows worth US$ 13.34 billion

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between April 2000 and June 2015, according to data released by the Department of Industrial
Policy and Promotion (DIPP).
Some of the major investments in the Indian pharmaceutical sector are as follows:
 Stelis Biopharma announced the breakthrough construction of its customised, multi-
product, biopharmaceutical manufacturing facility at Bio-Xcell Biotechnology Park in
Nusajaya, Johor, Malaysia's park and ecosystem for industrial and healthcare
biotechnology at a total project investment amount of US$ 60 million.
 Strides Arcolab entered into a licensing agreement with US-based Gilead Sciences Inc to
manufacture and distribute the latter's cost-efficient Tenofovir Alafenamide (TAF)
product to treat HIV patients in developing countries. The licence to manufacture
Gilead's low-cost drug extends to 112 countries.
 Founder and Executive Chairman, Apollo Hospitals, Mr Prathap C Reddy informed that
the Apollo Hospitals Enterprise (AHEL) aims to add another 2,000 beds over the next
two financial years, at a cost of around Rs 1,500 crore (US$ 226.26 million).
 CDC, the UK’s development finance institution, invested US$ 48 million in Narayana
Hrudayalaya hospitals, a multi-speciality healthcare provider, with an aim to expand
affordable treatment in eastern, central and western India.
 Cadila Healthcare Ltd announced the launch of a biosimilar for Adalimumab - for
rheumatoid arthritis and other auto immune disorders. The drug will be marketed under
the brand name Exemptia at one-fifth of the price for the branded version-Humira.
Cadila’s biosimilar is the first in class and an exact replica of the original in terms of
safety, purity and potency of the product, claims the company.
 Torrent Pharmaceuticals entered into an exclusive licensing agreement with Reliance Life
Sciences for marketing three biosimilars in India — Rituximab, Adalimumab and
Cetuximab.
 Piramal Enterprises Ltd acquired US-based Coldstream Laboratories for US$ 30.6
million in an all-cash transaction.
 Indian Immunologicals Ltd plans to set up a new vaccine manufacturing facility in
Pondicherry with an investment of Rs 300 crore (US$ 45.25 million).

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 SRF Ltd has acquired Global DuPont Dymel, the pharmaceutical propellant business of
DuPont, for US$ 20 million.
 Marksans Pharmaceuticals acquired US-based Time-Cap Laboratories, a manufacturer
and marketer of solid dose generic pharmaceuticals, including private label over-the-
counter medications, generic prescription drugs and nutritional supplements.
 Intas Pharmaceuticals is the first global company to launch a biosimilar version of
Lucentis, the world’s largest selling drug for treatment of degenerative eye condition
called Razumab.
GOVERNMENT INITIATIVES
The Addendum 2015 of the Indian Pharmacopoeia (IP) 2014, published by the Indian
Pharmacopoeia Commission (IPC) on behalf of the Ministry of Health & Family Welfare, is
expected to play a significant role in enhancing the quality of medicines that would in turn
promote public health and accelerate the growth and development of pharmaceutical sector. The
Government of India unveiled 'Pharma Vision 2020' aimed at making India a global leader in
end-to-end drug manufacture. Approval time for new facilities has been reduced to boost
investments. Further, the government introduced mechanisms such as the Drug Price Control
Order and the National Pharmaceutical Pricing Authority to deal with the issue of affordability
and availability of medicines. Romania is keen to tie up with the Indian pharmaceutical
companies for research and develop new drugs. "Romania will collaborate with India for license
acquisition to sale India's drugs in Europe," said Mr Mario Crute, Counsellor in Ministry of
health in Romania at GCCI. The country will tie up with the Indian pharmaceutical companies
for research and develop new drugs.
Some of the major initiatives taken by the government to promote the pharmaceutical sector in
India are as follows:
 Indian and global companies have expressed 175 investment intentions worth Rs 1,000
crore (US$ 150.84 million) in the pharmaceutical sector of Gujarat. The memorandums
of understanding (MoUs) would be signed during the Vibrant Gujarat Summit.
 Telangana has proposed to set up India's largest integrated pharmaceutical city spread
over 11,000 acres near Hyderabad, complete with effluent treatment plants and a

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township for employees, in a bid to attract investment of Rs 30,000 crore (US$ 4.52
billion) in phases. Hyderabad, which is known as the bulk drug capital of India, accounts
for nearly a fifth of India's exports of drugs, which stood at Rs 95,000 crore (US$ 14.3
billion) in 2014-15.
 The government has planned to set up Rs 500 crore (US$ 75.4 million) venture capital
fund to boost domestic pharmaceutical industry and to provide cheaper loans to entities
looking to establish or upgrade manufacturing facilities.
 At the launch of Cluster Development Programme of pharmaceutical sector, Mr Ananth
Kumar, Minister of Fertiliser and Chemicals, announced that six pharmaceutical parks
will be approved and established this year which will have sufficient infrastructure and
facilities for testing and treatment of drugs and also for imparting training to industry
professionals.
The Indian government has taken many steps to reduce costs and bring down healthcare
expenses. Speedy introduction of generic drugs into the market has remained in focus and is
expected to benefit the Indian pharmaceutical companies. In addition, the thrust on rural health
programs, lifesaving drugs and preventive vaccines also augurs well for the pharmaceutical
companies.

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STEEP GROWTH EXPECTED IN PHARMACEUTICAL EXPENDITURE:
 Over 2012–20, total healthcare spending is expected to rise at a CAGR of 20 per cent to
US$ 280 billion from US$ 65 billion
 Industry revenues are expected to expand at a CAGR of 12.1 per cent during 2012-20 and
reach US$ 45 billion
 Pharmaceutical sales, as a percentage of total healthcare spending, are expected to
increase to 27 per cent by 2016 from 18.9 per cent in 2008nbsp.
EMPLOYMENT TRENDS
With the expected growth rate of 14% per annum, Indian Pharmaceutical sector is expected to
create more jobs in India in 2014 and add 45,000 fresh openings to its current strength. Not
marred by recession or inflation, the pharma sector has a competitive advantage of prospering
steadily and thus attracts lots of young professionals looking at pharmaceutical as their
prospective career option. This sector has also been responsible in creating a rich talent pool of
researchers, scientists, doctors and project managers. The need of skilled manpower in the
pharmaceutical industry ranges widely from R&D, Quality Assurance (QA), Intellectual
Property (IP), manufacturing to even sales and marketing. What the pharma industry needs is to
have better policies to retain and nurture the existing talent and equip them with necessary skills.
However, this sector is emerging as a popular choice amongst Gen Y, since the nature of work,

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primarily treating patients and research for new drug discoveries plays an integral role in meeting
their key career aspirations.
BUDGET HIGHLIGHT ON PHARMA INDUSTRY: (union budget 2015: overall
positive for health care, but offers no direct benefits to pharma):
The Union Budget by Finance Minister Arun Jaitley is being lauded for moving forward on
Make-in-India by correcting the inverted duty structure. But this policy poses a huge challenge
for the Indian pharmaceutical industry, which is dependent on cheap raw material imports from
China. "Correcting the inverted duty structure is a move in the right direction but its impact on
the pharmaceutical industry will have to be seen," says D.G. Shah, Secretary General of the
Indian Pharmaceutical Alliance (IPA), which has major Indian pharmaceutical companies as its
members. "The government has also been wanting to encourage manufacturing of raw material -
basic drug ingredients - in India under its API (active pharmaceutical ingredients) initiative but if
raw material import duty goes down to that extent it will be a challenge to manufacture those raw
materials in the domestic market."
Overall, the Budget offers no direct benefit to the pharmaceutical industry, though it is certainly
positive for the health-care sector. Because of various initiatives, the net disposable income for
the middle class goes up, which again could mean more money going into health care. "It's a
good overarching Budget which is now destination-focused not merely directional," says Kiran
Mazumdar-Shaw, Chairman and Managing Director, Biocon.
HITS AND MISSES FOR PHARMACEUTICAL INDUSTRY
1. Hits: Extension of health cover and through initiatives to boost health insurance; this will
reduce out-of-pocket spending.
2. Misses: Little encouragement for investment into R&D. There is no direct
funding/support for research and development/ innovation. Second, reduction in
minimum alternate tax (MAT) benefit has not been extended for R&D.

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FOR HEALTH CARE:
1. Hits: Sangita Reddy, Joint Managing Director, Apollo Hospitals Enterprise, says that,
while the percentage of budgetary allocation to health care has not increased, the Budget
has enabled EPF funds to also go into health care. Also, insurance and universal health
coverage has been stimulated in a unique and strategic manner, she says.
2. Misses: Not creating a health cess like the education cess is a big missed opportunity
because lack of funding is a major issue in the health-care sector.
INDUSTRY LIFE CYCLE: (1970-2015):
Pre-1970s: The first Indian pharmaceutical company, Bengal Chemicals and Pharmaceutical
Works, which still exists today as one of 5 government-owned drug manufacturers, appeared in
Calcutta in 1930. For the next 60 years, most of the drugs in India were imported by
multinationals either in fully-formulated or bulk form. The government started to encourage the
growth of drug manufacturing by Indian companies in the early 1960s, and with the Patents Act
in 1970, enabled the industry to become what it is today. This patent act removed composition
patents from food and drugs, and though it kept process patents, these were shortened to a period
of five to seven years. The lack of patent protection made the Indian market undesirable to the
multinational companies that had dominated the market, and while they streamed out, Indian
companies started to take their places. Although some of the larger companies have taken baby
steps towards drug innovation, the industry as a whole has been following this business model
until the present (EXIM Bank Report 2007). During this period, the size of Indian
pharmaceutical industry was small, both in terms of number of firms and volume of production.
MNCs dominated the market, both in terms of volume of production and patent holdings, in
India. The patent regime, based on Indian Patents and Designs Act, 1911, recognized both
product and process patents. Due to monopoly status enjoyed by the MNCs, drug prices
remained high during this period.
1970 – 1995: Up until the 1970s, India‘s pharmaceuticals market was mainly supplied by large
international corporations. Only cheap bulk drugs were produced domestically by state-owned
companies founded in the 1950s and 60s with the help of the World Health Organisation (WHO).
These state-run firms provided the foundation for the sector‘s growth since the 1970s. Back then,

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India‘s government aimed to reduce the country‘s strong dependence on pharmaceutical imports
by flexible patent legislation and to create a self-reliant sector. In addition, it introduced high
tariffs and limits on imported medicines and demanded that foreign pharmaceutical companies
reduce their shares in their Indian subsidiaries to two fifths. This made India a less attractive
location for international companies, many of which left the country as a consequence.
Especially India Drugs and Pharmaceutical Ltd. (IDPL) are credited with speeding up the
development of a national pharmaceutical industry. Government of India introduced a new
Patent Act, which came into effect in 1972, recognizing only process patent and not product
patent. The Act enabled Indian firms to use reverse engineering process‘, to manufacture drugs,
without paying royalty to the original patent holder. The Act, along with Drug Price Control
Order, provided little incentive for MNCs to introduce new pharmaceutical products in India.
During this period, the number of domestic pharmaceutical firms increased considerably, from
around 2000 units in 1970 to 24,000 units in 1995. Production of bulk drugs increased from Rs.
18 crores in 1965-66 to Rs. 1518 crores in 1995, while that of formulations increased from Rs.
150 crores to Rs. 7935 crores during this period.
1995-2005: As there was no efficient patent protection between 1970 and 2005, many Indian
drug producers copied expensive original preparations by foreign firms and produced these
generics by means of alternative production procedures. This proved more cost-efficient than the
expensive development of original preparations as no funds were required for research, which
contained the financial risks. At the same time, India‘s pharmaceutical companies gained know-
how in the manufacture of generic drugs. Hence, the name ―pharmacy of the poor‖ is frequently
applied to India. This is of significance not least for the domestic market as disposable income is
as little as EUR 1,900 per year for roughly 140 million of the total of 192 million Indian
households (Just et al 2006) which means the majority of Indians cannot afford expensive
western preparations.
The year 1995 recorded another milestone for the Indian pharmaceutical industry. One of
the Agreements under the World Trade Organization was complying with the Trade Related
Intellectual Property Rights (TRIPS) provisions. The TRIPS Agreement reintroduced product
patent in India. Further, during this period, tariff and non-tariff measures have come down. Such
developments have worked in favor of Indian pharmaceutical industry to undertake activities
such as clinical research and new drug development. Indigenous producers dominated the market

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accounting for more than 70% of the market share. Exports also continued to increase during this
period, due to strong R&D process and low manufacturing cost.
POST-2005: India's new product patent regime is the result of the WTO's Doha Round of
negotiations in 2001. Final agreement was reached on TRIPs ground rules for patent protection
among WTO member countries, stating that both processes and products should be protected.
Subsequently, on March 22, 2005, India's parliament approved the Patents (Amendment) Act
2005, bringing in a system of product patents backdated to January 1, 2005. The new regime
protects only products arriving on the market after January 1, 1995, abolishing the previous
process patent system established by the 1970 Patent Act. Since the introduction of product
patents the MNCs have largely returned, the most recent being Merck & Co, which inaugurated
its wholly owned subsidiary MSD India Pvt Ltd in July 2005 after being absent for
approximately 20 years. Assocham believes the new patent regime will enable the development
of innovative new drugs, which will increase profitability for MNCs. It will also force domestic
players to focus on R&D, which, for those who can afford to do so, will have long-term
beneficial effects (Associated Chambers of Commerce and Industry of India Report to
Government, 2005).
Current situation:
The Indian pharmaceuticals market is the third largest in terms of volume and thirteen largest in
terms of value, as per a report by equity master. Branded generics dominate the pharmaceuticals
market, constituting nearly 70 to 80 per cent of the market. India is the largest provider of
generic drugs globally with the Indian generics accounting for 20 per cent of global exports in
terms of volume.India enjoys an important position in the global pharmaceuticals sector. The
country also has a large pool of scientists and engineers who have the potential to steer the
industry ahead to an even higher level.
India's biotechnology industry comprising bio-pharmaceuticals, bio-services, bio-agriculture,
bio-industry and bioinformatics is expected grow at an average growth rate of around 30 per cent
a year and reach US$ 100 billion by 2025. Biopharma, comprising vaccines, therapeutics and
diagnostics, is the largest sub-sector contributing nearly 62 per cent of the total revenues at Rs
12,600 crore (US$ 1.90 billion).

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PORTER’S COMPETITIVE FORCES:
Porter's Five Forces Model helps strategic business managers analyze the industry in which their
companies operate to determine what can be done to get an advantage over their existing
competitors and also to determine how attractive a particular industry would be for new entrants.
Porter's Five Forces are:
 Threats of entry posed by new or potential competitors.
 Degree of rivalry among existing firms.
 Bargaining power of buyers.
 Bargaining power of suppliers.
 Closeness of substitute products.
Below is an anlysis of the Pharmaceutical Industry using the above named forces:

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1. Threats of entry posed by new or potential competitor (LOW):
 High entry barriers due to costs associated with research & development of new drugs
(i.e. years of investment in R&D for a drug that may/may not work)
 Government regulation (i.e. FDA)
 The threat of entry posed by new or potential competitor is a LOW competitive force due
to the above entry barriers & regulatory constraints.
2. Degree of rivalry among existing firms (HIGH):
 High rivalry among main companies in the industry. For example the current rivalry in
the erectile dysfunction space where Bayer & GlaxoSmithKline claim that Levitra works
faster or Eli Lilly & ICOS claim that Cialis works longer than Pfizer’s Viagra.
 The degree of rivalry among existing firms is a HIGH competitive force
3. Bargaining power of buyers (MEDIUM):
 Hospitals & other health care organizations buy in bulk quantities and exert pressure on
pharmaceutical companies to keep prices in check.
 Regular patients have lost bargaining power due to price increases in generic drugs
 The bargaining power of buyers is a MEDIUM competitive force.
4. Bargaining power of suppliers (LOW):
 Sales for the pharmaceutical industry concentrate in a handful of large players and that
has decreased the bargaining power of suppliers.
 The bargaining power of suppliers is a LOW competitive force.
5. Closeness of substitute products (HIGH):
 Demand for generic versus brand name drugs has increased because of the costs.
 Generic drug companies do not have the high costs associated with the research &
development of new drugs and that allows them to sell at cheaper prices.
 The closeness of substitute products is a HIGH competitive force.so overall and based on
the above analysis of Porter’s Five Forces; we can conclude that the pharmaceutical
industry is not attractive for new entrants.

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SWOT ANALYSIS:
The SWOT analysis of the industry reveals the position of the Indian pharma industry in respect
to its internal and external environment.
Strengths:
 Indian with a population of over a billion is a largely untapped market. In fact the
penetration of modern medicine is less than 30 per cent in India. To put things in
perspective, per capita expenditure on health care in India is $93, while the same for
countries like Brazil is $453 and Malaysia $189.
 The growth of middle class in the country has resulted in fast changing lifestyles in urban
and to some extent rural centers. This opens a huge market for lifestyle drugs, which has
a very low contribution in the Indian markets.
 Indian manufacturers are one of the lowest cost producers of drugs in the world. With a
scalable labor force, Indian manufactures can produce drugs at 40 per cent to 50 per cent
of the cost to the rest of the world. In some cases, this cost is as low as 90 per cent.
 Indian pharmaceutical industry possesses excellent chemistry and process reengineering
skills. This adds to the competitive advantage of the Indian companies. The strength in
chemistry skill helps Indian companies to develop processes, which are cost effective.
Weakness:
 The Indian pharma companies are marred by the price regulation. Over a period of time,
this regulation has reduced the pricing ability of companies. The NPPA (National Pharma
Pricing Authority), which is the authority to decide the various pricing parameters, sets
prices of different drugs, which leads to lower profitability for the companies. The
companies, which are lowest cost producers, are at advantage while those who cannot
produce have either to stop production or bear losses.
 Indian pharma sector has been marred by lack of product patent, which prevents global
pharma companies to introduce new drugs in the country and discourages innovation and
drug discovery. But this has provided an upper hand to the Indian pharma companies.
 Indian pharma market is one of the least penetrated in the world. However, growth has
been slow to come by. As a result, Indian majors are relying on exports for growth. To

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put things in to perspective, India accounts for almost 16 per cent of the world population
while the total size of industry is just 1 per cent of the global pharma industry.
 Due to very low barriers to entry, Indian pharma industry is highly fragmented with about
300 large manufacturing units and about 18,000 small units spread across the country.
This makes Indian pharma market increasingly competitive. The industry witnesses price
competition, which reduces the growth of the industry in value term. To put things in
perspective, in the year 2003, the industry actually grew by 10.4 per cent but due to price
competition, the growth in value terms was 8.2 per cent (prices actually declined by 2.2
per cent)
Opportunities:
 The migration into a product patent based regime is likely to transform industry fortunes
in the long term. The new patent product regime will bring with it new innovative drugs.
This will increase the profitability of MNC pharma companies and will force domestic
pharma companies to focus more on R&D. This migration could result in consolidation
as well. Very small players may not be able to cope up with the challenging environment
and may succumb to giants.
 Large number of drugs going off-patent in Europe and in the US between 2005 to 2009
offers a big opportunity for the Indian companies to capture this market. Since generic
drugs are commodities by nature, Indian producers have the competitive advantage, as
they are the lowest cost producers of drugs in the world.
 Opening up of health insurance sector and the expected growth in per capita income are
key growth drivers from a long-term perspective. This leads to the expansion of
healthcare industry of which pharma industry is an integral part.
 Being the lowest cost producer combined with FDA approved plants; Indian companies
can become a global outsourcing hub for pharmaceutical products.
Threats:
 There are certain concerns over the patent regime regarding its current structure. It might
be possible that the new government may change certain provisions of the Patent Act
formulated by the preceding government.

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 Threats from other low cost countries like China and Israel exist. However, on the quality
front, India is better placed relative to China. So, differentiation in the contract
manufacturing side may wane.
 The short-term threat for the pharma industry is the uncertainty regarding the
implementation of VAT. Though this is likely to have a negative impact in the short-
term, the implications over the long-term are positive for the industry.
PESTLE ANALYSIS
Political
There is now growing political focus and pressure on healthcare authorities across the world.
This means that governments will be looking for savings across the board. Some of the questions
the industry should ask are:
 What pressures will be put on pricing?
 What services will be cut?
 Will the same selection of drugs be available to everyone?
In addition to this, could there be more harmonization of healthcare systems across Europe or the
USA? What impact will reforms have on insurance models?
Economic
The global economic crisis still exists yet government reports still show that spend on healthcare
per capital continues to grow. Will the current healthcare models exist tomorrow? The growth in
homecare (as seen in the Nutrition sector) demonstrates how nursing services have moved to the
private sector and have become a key business offering. The reduction in consumer disposable
income will have an impact on those countries using health insurance models particularly where
part payment is required.
These economic pressures are seeing an increased growth in strategic buying groups who are
forcing down prices. Increased pressure from shareholders has caused a consolidation of the
industry: more mergers and acquisitions will take place over the coming years.

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Social / Culture
The increasing aging population offers a range of opportunities and threats to the pharmaceutical
industry. The trick will be to capitalise on the opportunities. There is also the problem of the
increasing obesity amongst the population and its associated health risks.
Patients and home carers are becoming more informed. Their expectations have changed and
they have become more demanding. Public activism has also increased through the harnessing of
new social networking technologies. How can pharmaceutical companies get closer to consumers
without over stepping the regulatory boundaries?
Technological
Technological advancements will create new business prospects both in terms of new therapy
systems and service provisions. The online opportunities will see the growth in:
 New info and Communications technologies.
 Social Media for Healthcare.
 Customized Treatments.
 Direct to Patient Advertising.
 Direct to patient communications.
Legislation
The pharmaceutical industry has many regulatory and legislative restrictions. There is also a
growing culture of litigation in many countries. The evolution of the internet is also stretching
the legislative boundaries with patient’s demanding more rights in their healthcare programmes.
Environmental
There is a growing environmental agenda and the key stake holders are now becoming more
aware of the need for businesses to be more proactive in this field. Pharma companies need to
see how their business and marketing plans link in with the environmental issues. There is also
an opportunity to incorporate it within their Corporate Social Responsibility programmes.
Marketing and new product development should identify eco opportunities to promote as well.

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MERGERS AND ACQUISITIONS TO DRIVE GROWTH IN PHARMA SECTOR:
Acquisition-led growth to emerge as key sector theme: A confluence of factors, ranging from
strong balance sheets following several years of robust cash flow generation to confidence in
successfully integrating acquisitions, is set to drive an even faster pace of M&A activity in the
sector. As M&A continues, the recent acquisition multiples could set the benchmark for
secondary market valuations. US sales contribute c.30-50% of sales for most large Indian
companies; others with lower US exposure are adding to their presence in this market by
acquiring assets (Cipla—Invagen and Exelan). While non-US markets like Japan, Latam and the
EU are large, every company has a different strategy in these markets, as they continue to pose
challenges in relation to entry, regulation and currency volatility.
Indian pharmaceutical companies will continue to use their under-leveraged balance sheets to
pursue inorganic growth by acquiring assets in both the Indian and US markets. While regulatory
risks will remain a sector overhang, the risk-reward profile appears favourable, with current
valuations discounting recent moves by the FDA (S&P BSE Healthcare underperformed BSE
Sensex by c.10% in last 3M).

23
Regulatory challenges notwithstanding, we estimate that current business operations should drive
an EPS CAGR of 24% for the sector for FY15-18E. The big outperformance should be from Sun
(26.3% EPS CAGR in FY15-18E) and Lupin. We see downside risk to the consensus earnings of
Dr. Reddy’s, which faces headwinds in the US.
Acquisitions by Indian pharma companies (with a few exceptions) have a payback period of 5-7
years under modest growth assumptions (Sun—Taro, Torrent— Elder).
Introduction to company:
List of Top 10 Pharmaceutical Companies in India are:
 Sun Pharmaceutical
 Lupin
 Dr. Reddy's Labs
 Cipla
 Aurobindo Pharma
 Cadila Healthcare
 GlaxoSmithKline
 Glenmark Pharmaceuticals
 Divi's Laboratories
 Torrent Pharmaceuticals

24
Some other leading pharmaceutical companies are:
 Aventis Pharma
 Surya Pharma
 Biocon
 Orchid Chemical
 Abbott India
 Sterling Bio
 Alembic Pharma
For our studies we going to take,
 Biocon
 Dr. Reddy's Labs
 Cipla
DR. REDDY'S LABS
Located in Hyderabad, Telangana, Dr. Reddy's Laboratories is a multinational pharmaceutical
entity. It was founded in 1984 as a manufacturer of APIs. A vast range of pharmaceutical
products are offered by Dr. Reddy's Labs. It has 60 APIs and 190 medications to treat various
kinds of ailments.
It is now India's third largest pharmaceutical company in terms of market capitalisation, which
was valued at Rs. 56,638.13 crore on 15 June 2015.

25
Its products and services may be categorised as below:
 Generic Formulations
 Active Ingredients
 Pharmaceutical Services
 Biosimilars
 Propriety Products
CIPLA
Dr. K. A. Hamied set up Cipla Limited in 1935, which is one of the biggest biotechnology and
pharmaceutical multinational companies of India today. APIs and formulations are produced at
34 state-of the-art Cipla plants spread across the country. Primarily, medicines for treatments of
ailments like depression, obesity, cardiovascular diseases, arthritis and diabetes are developed by
Cipla.

26
It is India's fourth largest pharmaceutical company accounting for a market capitalization worth
Rs. 47,025.38 crore on 15 June 2015.
Its products and services may be categorised as below:
 APIs
 Formulations
 Veterinary
BIOCON
Biocon, Asia’s largest biotechnology company, started itself with seed capital of Rs.10, 000 in
1978, is now a billion dollar company. The company manufactures biotechnological products
catering to the healthcare segment. It is engages itself in all phases of the product cycle from
discovering to development & then commercializing the same drugs. This pharmaceutical
company has fermentation–based technology, creating cost effective drugs. Syngene and
Clinigene, subsidiaries of Biocon conduct R& D programs for international pharmaceutical and
biotechnology majors.

27
Biocon produces anti diabetic agents like Acarbose, Pioglitazone, Repaglinides & Rosiglitazone.
In the biological segment it produces Insulin, Erythropoietin (EPO), Filgrastim (GCSF),
Streptokinase & Monoclonal Antibodies. The drug major produces mycophenolate mofetil,
sirolimus and tacrolimus. It also produces & market mix of specialty & industrial enzymes for
industries like paper, brewing, beverages, food, brewing, textiles & distilling. The company’s
drug portfolio consists of lovastatin, simvastatin, pravastatin and atorvastatin.
Methodology:
Literature review:
(S Christina Sheela and Dr.K.Karthikeyan,2012)they evaluated financial health of
pharmaceutical industry in India through Z score model.by taking data of cipla
Pharmaceutical,Dr,reddy’s Laboratories and Ranboxy laboratories its observed that Cipla and
Dr.reddy’s are in too healthy zone where Ranbaxy is in healthy zone.finally they concluded that
the overall financial health of cipla and Dr.reddy’s are very good and Ranbaxy is uncertain to
predict.
(PROF. JYOTI NAIR,2013)analysed the performance of pharma companies in India and
predict the solvency of selected companies using Altman‟s „Z‟ score model which is based on

28
Multi variate Discriminant analysis.Financial ratios can be used to predict potential distress.
Application of Z score model could identify companies with weak fundamentals. EBIT, MPS
and Sales are the significant variables affecting Z score. Study of financial ratios and observing
trends will help the management in evaluating the performance of the company and initiate steps
to avoid financial distress and bankruptcy.
S.K (2004) analysed the practical implications of accounting ratios in risk evaluation and came
to the conclusion that accounting ratios are still dominant factors in the matter of credit risk
evaluation. And they used Z model to measure the financial distress of IDBI and concluded that
IDBI is likely to become insolvent in the years to come.
As reported by (Dr. Shurveer S. Bhanawat,2012) year 2009-10 may be considered a successful
year for the Pharmaceutical industry because it reported the highest average ratio of Z-Score i.e.
7.27.The Altman Z-Score of the companies under study in the pharmaceutical sector reveal that
the financial health of these companies is good. Cipla, Dr reddys, Glaxo, Merck, Piramal
Healthcare and Wyeth are financially very healthy and have no cause of concern as regards
financial health . The Z-Scores of these companies are well above 3 indicating very safe zone.
Aurobindo and Torrent fall in the grey zone having Z-Scores between 1.8 and 2.99 but still there
is no cause for alarm as they too are in the comfort zone. So from their studied it can be
concluded that the companies of the pharma sector are financially quite healthy and there is no
scope of bankruptcy or any cause of concern as regards the financial health in this sector in the
coming years. The investors in this sector have their investments safe. The management also has
no reason to worry as regards the financial health of these companies is concerned.
(V.Dheenadhyalan ,2008) adopted Z score model to predict the corporate failure of steel
authority of Indian Limited.The Z score of SAIL showed a rising trend through the study period
and it was concluded that the financial health of the SAIL was good.

29
Altman Z score Model:
The Z-score is a linear combination of four or five common business ratios, weighted by
coefficients. The coefficients were estimated by identifying a set of firms which had declared
bankruptcy and then collecting a matched sample of firms which had survived, with matching by
industry and approximate size (assets). Altman applied the statistical method of discriminant
analysis to a dataset of publicly held manufacturers. The estimation was originally based on data
from publicly held manufacturers, but has since been re-estimated based on other datasets for
private manufacturing, non-manufacturing and service companies.
The original Z-score formula was as follows:
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 0.99X5.
X1 = Working Capital / Total Assets.
Measures liquid assets in relation to the size of the company.
X2 = Retained Earnings / Total Assets.
Measures profitability that reflects the company's age and earning power.
X3 = Earnings Before Interest and Taxes / Total Assets.
Measures operating efficiency apart from tax and leveraging factors. It recognizes
operating earnings as being important to long-term viability.
X4 = Market Value of Equity / Book Value of Total Liabilities.
Adds market dimension that can show up security price fluctuation as a possible red flag.
X5 = Sales / Total Assets.
Standard measure for total asset turnover
Zones of Discrimination:
 Z > 2.99 -“Safe” Zone-Too Healthy
 1.81 < Z < 2.99 -“Gray” Zone-Healthy
 Z < 1.81 -“Distress” Zone-Not Health

30
Data Analysis:
TABLE NO: 1&2
YEAR
NET WORKING CAPITAL
CIPLA BIOCON DR.REDDY’S
2013 2712.75 493.7 3244.1
2014 2648.34 526.9 4817.1
2015 3211.26 1048.3 5228.5
TABLE NO: 3&4
TABLE NO:5 &6
YEAR
TOTAL ASSET
CIPLA BIOCON DR.REDDY’S
2013 9826.36 2323 9372.5
2014 10960.01 2524.2 11993.5
2015 12461.79 2651 13758.8
YEAR
EBIT
CIPLA BIOCON DR.REDDY
2013 1,539.97 347 1753.2
2014 1,818.34 408.6 2454.4
2015 2,011.86 428.3 2059.9
YEAR
NET SALES
2013 8,202.42 1938 8434
2014 9,380.29 2202.5 9728
2015 10,131.78 2241.6 10011
YEAR BOOK VALUE OF EQUITY
2013 110.35 110.3 458.29
2014 125.57 120.84 548.41
2015 138.00 129.18 624.13
YEAR RETAINED EARNINGS
2013 4429.50 1500.7 4615.6
2014 5497.26 1663.7 5988
2015 6310.28 1872 6998.5

31
TABLE NO: 7
TABLE NO: 8 CALCULATIONS FOR VARIOUS RATIOS USED IN Z SCORE MODEL
FOR SELECTED PHARMA COMPANIES:
YEAR BOOK VALUE OF DEBT
2013 965.81 67.5 1589.1
2014 877.34 107.4 2664.5
2015 1380.61 117.3 3124.80
YEAR CIPLA BIOCON DR.REDDY
X1 X2 X3 X4 X5 X1 X2 X3 X4 X5 X1 X2 X3 X4 X5
2013 .27 .45 .156 .11 .83 .21 .64 .14 1.6 .83 .34 .49 .18 .28 .89
2014 .24 .50 .16 .14 .58 .20 .65 .16 1.1 .87 .40 .49 .20 .20 .81
2015 .25 .50 .16 .09 .81 .39 .70 .16 1.1 .84 .38 .50 .14 .19 .72
AVG .25 .48 .15 .11 .83 .26 .66 .15 1.2 .85 .37 .50 .18 .23 .81

32
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 0.99X5.
Table no:9 statement showing the z score health zone for selected pharma companies:
Pharmaceutical
Company
Z Score
Model
Financial
Health
Inference Remark
Cipla 2.36 Healthy Financial viability is considered health. The failure in the
situation is uncertain to predict.
Biocon 3.26 Too Healthy It Financial health viable and not to fall.
Dr.reddy 2.96 Healthy Financial viability is considered health. The failure in the
situation is uncertain to predict.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
X1 X2 X3 X4 X5 X1 X2 X3 X4 X5 X1 X2 X3 X4 X5
Cipla biocon Dr.reddy
Z score model
2013 2014 2015 Avg

33
PHARMACEUTICAL COMPANY Z SCORE MODEL FINANCIAL
HEALTH
CIPLA 2.36
BIOCON 3.26
DR.REDDY 2.96
Findings:
X1- Working Capital / Total Assets.
Working capital is the excess of total current assets. The ratio of working capital to total assets
shows liquidity position of relative to total capitalization. "Consistent operating losses will cause
current assets to shrink relative to total assets. A negative ratio, resulting from negative working
capital, is a serious problem". The ratio of working capital to total assets shows the liquidity
position of the company. The ratios of working capital to total assets are calculated in table no 8.
It is observed from the table that the ratio ranges between .24 to .27 for Cipla,.21 t0 .39 for
Biocon and .34 to .38 for Dr.reddy’s.
0
0.5
1
1.5
2
2.5
3
3.5
Cipla Biocon Dr.reddy
Z Score Model Financial Health

34
RETAINED EARNINGS TO TOTAL ASSETS (X2)
The ratio of retained earnings to total assets indicates that how much portion of total assets has
been financed by retained earnings. Higher the ratio greater the financial stability of the company
at times of low profitability periods. And also it depicts that the company utilizing its own
earnings as cheaper source of finance rather than debt finance. The percentages of retained
earnings of all the three companies are mentioned in the table no 8. From the table it is observed
that on an average 0.45 to .50 of total assets of Cipla, 0.64 to .70 of Biocon and 0.49to 0.50 of
Dr.Reddy’s are financed by its retained earnings. The decreasing trend of retained earnings
indicates that the unsustainable growth of the Cipla when compare to other companies like Dr.
Reddy's Laboratories and biocon Laboratories Ltd. And this situation may compel Cipla in the
bankruptcy at low profitable times.
EARNING BEFORE INTEREST AND TAX TO TOTAL ASSETS (X3)
This ratio expresses operating performance and productivity of the assets which is mentioned in
table no 8. This ratio varies from 0.15 to .16 for Cipla, 0.14 to 0.18 for Dr. Reddy's Laboratories
and 0.14 to 0.16 for Biocon. Tthe operating efficiency of the company is very low for both
Biocon and Cipla.
BOOK VALUE OF EQUITY TO BOOK VALUE OF TOTAL DEBTS (X4)
This ratio is used to ascertain the soundness of the long-term financial policies. The company
having 1:1 equity-debt mix is considered as quite good. Excessive debt tends to cause
insolvency. Fixed interest paid on debt whereas variable dividend is paid on equity. If debt is
more than the equity it will reduce the profit of the company, despite increases the profitability
of the shareholders. It will be a curse in times of bad performing. From the table 8 it is observed
that on an average equity portion of Cipla is 0.09 to 0.14, Dr.Reddys is 0.19 to 0.28 and Biocon
is 1.1 to 1.6 in comparison to debt portion in the capital structure. The highest equity portion of
total capital of Biocon and the lowest portion of equity is Cipla. On the basis of the analysis
pertaining to this ratio, it may be conclude that the financial health of the Biocon is quite good
when compare to others and it provides a margin of safety to its creditors in times of bankruptcy.

35
SALES TO TOTAL ASSETS (X5)
Sales revenue plays a pivotal role in overall performance of the companies because all the
operations are more or less depend on the sales revenue. Sales to total assets ratio measure the
power of the asset in generating the sales. Higher ratio indicates the better performance and
while poor ratio indicates the poor financial management of the companies in the optimum
utilization of its assets in generating the sales revenue. The ratio varies from one company to
another. From the table 8 it is observed that the average ratios of sales to total assets of the
selected sample pharmacy companies are cipla Pharmacy ranges from 0.58to 0.83, Dr. Reddy's
0.72 to 0.89 while it was 0.83 to .87 for Ranbaxy Laboratories Ltd during the study period.
While comparing the performance of all three companies, the performance of Dr.Reddy’s is best,
Biocon is better and cipla is the lowest.
CONCLUSION:
The Z score of cipla, biocon and Dr,reddy ‘s based on the Altman’s model during the study
period(i.e. 2013-2015) it’s observed from the table no 9 that the companies are in both healthy
and too healthy zone. Comparing with three companies biocon are in too healthy zone where it is
successful in its financial performance and not to fall bankrupt. But Cipla and Dr, reddy’s where
its financial viability is considered healthy and the failure in the situation is uncertain to predict.
Finally we can be concluded that the Biocon is good and too healthy zone .whereas Cipla and
Dr.Reddy’s are uncertain to predict and healthy zone.
Based on their financial performance evalution by using Altman Z score model, loan can be
provided to all three companies. Whereas biocon takes more priority when compare to other two
company i.e., Dr,Reddy’s and cipla.

36
APPENDIX:
Reference:
 Frederick Nsiah and Prince Aidoo(2015),Financial Performance of Listed Pharmaceutical
Companies on Ghana Stock Exchange, Research Journal of Finance and Accounting, Vol.6,
No.2,ISSN 2222-1697.
 S.Christina Sheela and Dr.K.karthikeyan(2012),Evaluating financial health of pharmaceutical
industry in India through Z score method, International Journal of social Science
&Interdisciplinary research,Vol.1,No.5,ISSN 22773630,
 Dr. Shurveer S. Bhanawat and Amitha Singhvi, An Analysis of Financial Health of Indian
Pharmaceutical Industry.
 Prof. Jyoti Nair(2013), Performance Analysis And Solvency Prediction Of Indian Pharma
Companies, International Journal of Marketing, Financial Services & Management Research,
Vol.2, No. 5, Issn 2277- 3622.
 D. Sasikala,(2011), Financial Distress Bankruptcy Measures In Alembic Pharma Z-Score
Model, International Journal Of Research In Commerce, Economics & Management,
Volume No. 1 Issue No. 7, Issn 2231-4245.
Website Reference:
 http://info.shine.com/industry/pharma/2.htmlhttp://info.shine.com/industry/pharma/2.html
 http://www.rediff.com/money/2004/aug/27pharma.htm
 http://studentsviewonstrategicmgmt.blogspot.in/2008/03/porters-five-forces-analysis-
for.html
 http://www.businesstoday.in/union-budget-2015-16/hits-and-misses/union-budget-2015-
impact-on-healthcare-pharma-sector/story/216313.html
 http://www.rediff.com/money/2014/jun/24pharma.htm

37
 http://www.strategic-planet.com/2011/01/a-pestle-analysis-for-the-pharmaceutical-
industry
 http://www.financialexpress.com/article/markets/indian-markets/pharma-sector-mas-to-
drive-growth-in-pharma-sector/175393/
 http://business.mapsofindia.com/india-
company/pharmaceutical.html#sthash.eRmsQhio.dpuf
 http://www.moneycontrol.com
 http://profit.ndtv.com/stock/biocon-ltd_biocon/reports

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