M&A in Pharma

Understanding the
Strategy of M&A
in the
Pharmaceutical
Industry
By
Abhishek Ghosh
10 July, 2015

1© 2015 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Agenda
2
• Introduction: Pharmaceutical Industry Scenario
June 2015
3-18
• Introduction: Sun Pharmaceuticals
• Segmentation of the Business and Business Model
• Structure Pre and Post Transaction
• What Strategic Decision led to the Ranbaxy Acquisition?
19-22
• Competitors in India
• Customer Analysis
23-27
• Opportunities in Pharmerging Markets
• Strategy for Expanding in Pharmerging Markets
28-31
• SWOT Analysis
• Long-Term Strategy
• Synergies and Challenged Post the Ranbaxy Acquisition
• Capabilities Post Acquisition

Introduction: Pharmaceutical Industry Scenario
June 2015
• Market Size: US$ 1.2 trillion by 2017 (CAGR: 3-6%)
• Key Growth Drivers: Emerging Markets
Source: pp. 11, “2013-14 SPIL-Director’s Report and Management Discussion and Analysis”, Sun Pharmaceutical Industries Limited, http://www.sunpharma.com/, Accessed on 30 June,
2015
* Detailed explanation in: Jackson Richard et. al, “Global Aging and Future of Emerging Markets” (2011: Centre for Strategic and International Studies and Everest Capital), pp. 2-4
Economic and
Healthcare
Austerity
Measures
* Unfavourable
Demographic Dividend
Lowering of Savings and
Investments due to
Greying Population
Budgetary Pressure due
to Rising Pension and
Healthcare Costs
Double-Digit Growth in Emerging MarketsSingle-Digit Growth in Developed Markets
Economic
Growth
* Favourable
Demographic
Dividend
Increased
Out-of-
Pocket
and
Private
Spending
Increased
Governmental
Healthcare
Funding
Savings
Realized from
the Growing
availability of
Generic Drugs

• Outlook of the Indian Pharmaceutical Sector
• Projected to grow at a CAGR of 11-14% during 2013-17.
• One of the key exporters to the U.S.A and other markets-the highest number of US FDA approved
manufacturing facilities outside U.S.A.
• Indian Pharmaceutical companies received over 150 ANDA (Abbreviated New Drug Applications)
approvals from the U.S FDA during 2013, accounting for ~38% of the total approvals.
Outlook of the Indian Pharmaceutical Industry
Source: pp. 11, “2013-14 SPIL-Director’s Report and Management Discussion and Analysis”, Sun Pharmaceutical Industries Limited, http://www.sunpharma.com/, Accessed on 30 June,
2015
Market Position
13 11
Market Size
US$ 14 bn US$ 22-32 bn
Year
2012 2017

Introduction: Sun Pharmaceuticals
• Sun Pharmaceuticals was started in 1983 in Vapi, India by Dilip Shanghvi with only five products to
treat psychiatric ailments.
• After its historic US$ 4 bn all-stock acquisition ( stock swap ratio : 0.8 : 1) of Ranbaxy in April 2014,
Sun has become, by 2015, the largest chronic prescription company in India and the fifth largest
specialty generic pharma company in the world.
• Market Leader in:
• By 2011, Ranbaxy’s global revenues crossed US$2 billion, the first Indian company to do so.
Psychiatry Neurology Cardiology
Orthopedics Ophthalmology Nephrology
Gastroenterology

Major Acquisitions and Alliances – Sun Pharma and Ranbaxy
1992
Ranbaxy + Eli Lilly & Co.
Joint Venture (India)
1995
Sun Pharma + API Plant
from Knoll Pharma
Acquisition
(Ahmednagar, Maharashtra)
1997
Sun Pharma + Caraco
Pharmaceutical Laboratories,
Acquisition (U.S.A)
2006
Ranbaxy+Unbranded
Generics Business of GSK
Acquisition (Italy and Spain)
2006
Ranbaxy + Be Tabs
Pharmaceuticals, the 5th
largest generics company in
South Africa
Acquisition
2006
Ranbaxy + Terapia, the
largest generic pharma
company in Romania
Acquisition
2010
Sun Pharma Acquires
controlling stake in Taro
Pharmaceuticals
(U.S.A)
2012
Sun Pharma + Dusa and
Generics Segment of URL
Pharmaceuticals
Acquisition (U.S.A)
2015
Sun Pharma + Ranbaxy
Acquisition

Segmentation of the Industry’s Business Lines
Industry Segments
Generics
Specialty
Complex
Branded
Consumer
Medicine
Protected Originals

Segmentation of the Business at Sun
Major Business
Segments
(Sun Pharma)
U.S. Generics
Indian Branded
Generics
International
Branded Generics
(ROW except
U.S.A)
Active
Pharmaceutical
Ingredients (API)
Major Market Categories (By Geography):
• U.S Formulations: 5th largest generics company in US with one of the largest ANDA pipelines
(159 ANDA’s awaiting approval) with 50% contribution to revenue in June, 2015.
• Indian Generics: Leading position in high growth chronic therapies with Indian brand generics
contributing 24% of total sales revenue in June, 2015.

Business Model
1. Plans to in-license products that are already marketed or are in late stage clinical development in key
therapy areas such as CNS disorders, Cardiology, Diabetes and Metabolic disorders, Gastroenterology,
Ophthalmology, Oncology, Pain, Allergy, Asthma, Inflammation and Gynaecology.
2. Strategic interest in in-licensing bio-similar products and new products based on
recombinant/humanized monoclonal antibody technology used in the above therapy areas.
3. Out-licensing product range includes dosage forms for oral, injectable, topical and transdermal
routes developed through non-infringing routes and/or patented routes.
4. Out-licensing sought for specialty generics, super generics, and bulk drugs in therapy areas such as
CVS, CNS, Pain, Cancer, Gynaecology, Allergy, Asthma other respiratory diseases.
5. Focused on expanding in key markets such as Russia and CIS countries, China and South East Asia,
Africa, Brazil and Mexico.
Identify
Promising
New
Molecules
Test them in
Large
Clinical
Trials
Build Strong
Product
Portfolio
Focus on
Niche and
Complex
Molecules to
Garner
Premium to
Peers
Promote
them with an
Extensive
Sales and
Marketing
Presence

Sequence of Metrics Analyzed
Profits
Revenues
Revenue /
Unit
Customer
Analysis
Competitor
AnalysisNo. of
Units Sold
Expenses
Fixed
Variable
Metrics to be Determined
within the Company over
Time and Between
Competitors in the same time
period

Structure Pre-Transaction
RANBAXY
PUBLIC
SHAREHOLDERS
+ CUSTODIANS
63.41%36.9%
SUN PHARMA
PUBLIC
SHAREHOLDERS
PROMOTERS AND
PROMOTER GROUP
36.35% 63.65%
DAIICHI

Structure Post-Transaction
SUN PROMOTER AND
SUN PROMOTER GROUP
SUN PHARMA
(MERGED
ENTITY)
9% 36%55%
DAIICHI
PUBLIC
SHAREHOLDERS
(RANBAXY + SUN)

What Strategic Decision Impacted the Ranbaxy Acquisition?
Problem Definition: What was the impact on-
a. Revenue
b. Costs
c. Operational Efficiencies and Synergies
PAT of Sun Pharma (Standalone) 2010-14
-3000
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
2000
MAR '10 MAR '11 MAR '12 MAR '13 MAR '14
PAT (Rs. in Crore)
PAT

Declining Revenues Post Dusa, URL Acquisitions in U.S.A in 2012
CAGR in Revenue [2012-14] = -(11.02)%
Sun Pharmaceuticals (Standalone)
Net Sales Revenue [2010-2014]
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
1,845.09
3,107.57
4,015.56
2,432.14
2,828.79
Net Sales (Rs. in Crore)

Increasing Costs Since Acquisition in 2012
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
1,845.09
3,107.57
4,015.56
2,432.14
2,828.79
Total Expenses (Rs. in Crore)
Sun Pharmaceuticals (Standalone) Expenses
[2012-14]
CAGR in Expenses [2012-14] = 6.52%

Pricing Pressures Uniform throughout the Pharma Industry
• Government-mandated price controls on 348 essential drugs in May, 2013 impacted prices of both
MNC’s and local firms producing essential drugs.
• A new Act, known as Drugs (Prices Regulation and Control) Act enacted to have effective control
on prices, production, distribution and supply of medicines in India.
• All customer segments are very sensitive to change in price of generics.
• Thus, growth will be fueled only by increasing volumes.

• GlaxoSmithKline (GSK) and Sanofi Aventis were affected the most. Bottom lines of domestic drug
makers such as Cipla and Cadila would also take a hit.
• Least impacted were companies such as Sun Pharma and Lupin.
• Some companies like GSK have created a Developing Countries Unit that caps prices at no more than
25% of the UK price and reinvests 20% of any profits back in the country it covers.
GSK CFO Simon Dingemans says,
“Price reductions [in China] are in many ways very important in driving up the access and take-up of
healthcare coverage. We see very good volume response to that, which shows that the strategy is
working.”
(Bloomberg)
Pricing Pressures Uniform throughout the Pharma Industry

Causes of Price Decline and Fall in PAT at Sun Pharma
• Sun Pharma and Ranbaxy to hive off certain products due to CCI regulation, for the merger to
become effective
• Sun Pharma sold products under the Tamlet brand name and Ranbaxy divested 6 brands, leading to
price erosion.
Ranbaxy Divestments
Eligard
Triolvance
Raciper L
Terlibax
Rosuvas
EZ
Olanex F

• One-time merger expenditure and high cost of integration of Ranbaxy
• Debt reduction strategy to consolidate debt position
• US$ 800 mn debt obligation of Ranbaxy at the time of merger to be serviced by Sun Pharma,
reducing PAT
• Regulatory expenses in the U.S.
• Opportunity cost owing to new-product approval delays and clinical trial delays in the U.S leading
to subdued PAT
• US sales hit
• Pricing pressure from channel consolidation
• Customer Consolidation
• Recalls from the Halol facility, which contributes 25% of consolidated profits
• Currency Headwinds in Russia, Venezuela and other emerging markets
Causes of Price Decline and Fall in PAT at Sun Pharma
Source: Kanungo Soumanty, “Pharma firms to face US approval delays and currency headwinds this quarter too”, DNA, http://www.dnaindia.com/money/report-pharma-firms-to-face-us-
approval-delays-currency-headwinds-this-quarter-too-2092157, Accessed on 4 June, 2015

Competitors in India – Consistently Growing Market Share of Sun
[2000-13]
Source: pp. 26, “Director’s Report”, Sun Pharmaceutical Industries Ltd., http://www.sunpharma.com/investors/annualreports, accessed on 2 July, 2015
Competitor Market Share Growth in India [2000-13]

Customer Analysis: Segmentation of Sources of Revenue
Segmentation into Customer Segments by Geography
Source: IR Presentation June 2015, Sun Pharmaceutical Industries Limited, Accessed on 30 June, 2015

Customer Segment in India: Falling Sales per Representative
• In the largest market (U.S.A), sales have experienced consistent growth of 40.66% CAGR between
2012 and 2015 (INR 137 bn in 2015 including the impact of the Ranbaxy merger, up from INR 98 bn
in 2014) and 438 ANDA’s have been approved in 2015, an increase of 15.05% from 2012.
• In India, sales have increased consistently to INR 67 bn in 2015 (including the effect of the Ranbaxy
merger), from INR 37 bn in 2014.
However, a realignment to the preferred distribution
channel preference of key customer segments may be
required since the Sales per Representative has seen a
sharp decline in 2015

High Price Sensitivity, Opportunity to Differentiate Product
Price Sensitivity of Emerging Markets:
Challenges for Upward Price
Revision
Enablers for Upward Price
Revision
Essential Drug List Revision in
China; Government Cost
Containment Measures in Brazil
and Russia
Increased Healthcare Investment
by the Chinese, Brazilian, Russian
and Indian Governments
Slowdown in Economic Growth in
Brazil and Russia
Rising affluence of patients paying
out-of-pocket for premium
products in China
Attempts at Differentiation of Products:
Company Segment
Pfizer, Sanofi Generics
Novo Nordisk, Roche Specialty
Boehringer Ingelheim, Bayer,
GSK, Teva
Consumer Health
Product differentiation (except for brand equity) is not the most viable strategy in India, which follows process
patents that favour imitators and generics manufacturers, opportunities to increase revenues or introduce cost
competitiveness more viable

Opportunities in Pharmerging Markets: China Leads Spending; Brazil,
India Follow
Source: pp. 8, “2013-14 SPIL-Director’s Report and Management Discussion and Analysis”, Sun Pharmaceutical Industries Limited, http://www.sunpharma.com/, Accessed on
30 June, 2015
Split-Up of Revenue Spending and Contribution to Sales Growth [2012-17] by Customer
Segments for the Pharma Industry
* EU5 countries include Germany, France, Italy, Spain and the U.K

Rise of Generics in Pharmerging Markets (China, India, Brazil)
• As the Pharmerging markets emerge, a global spending shift towards generics is forecasted.
• Pharmaceutical Spending absolute growth in Pharmerging markets would increase from US$ 30 bn in
2012 to US$ 40 in 2017 (estimated) and spending on generics in these markets would increase from
58% in 2012 to 63% in 2017 (estimated).
Pharmerging Economies (Based on the IMS Health Global Market Prognosis)
Classification Based on Income Level, Growth Rate and Pharmaceutical Spend per Person

Drivers for Growth in Generics in Emerging Markets:
Rise of Generics in Pharmerging Markets (China, India, Brazil)
Generics are
most affordable
for govt.
healthcare
programmes and
consumers
Increasing
Incidence of
Chronic
Diseases
Increasing Life
Expectancy and
an Ageing
Global
Population
Patent-
protected brand
volume growth
set to shrink
with patents
expiring
Weaker IP laws
in some
developing
countries

Highest Growth in Generics in Pharmerging Economies
Product Mix in Pharmerging Economies
• Top 8 Mature Markets include U.K, France, Germany, Italy, Spain, Japan, U.S.A and Canada
• LIC : Low Income Countries
• LC $ : Constant Local Currency Dollars, used to smoothen out effects of exchange rate fluctuations
• Pharmerging Economies, based on minimum anticipated added value to the global pharmaceutical market, as enumerated by IMS Health Global Market Prognosis include: Brazil,
Turkey, Russia, China, India, Mexico, South Korea, Venezuela, Poland, Argentina, Vietnam, South Africa, Thailand, Indonesia, Egypt, Pakistan, Ukraine, Algeria, Colombia,
Saudi Arabia and Nigeria

Strategy for Expansion in Generics in Pharmerging Economies
• Between January 2008 and February 2013, India has seen 226 M&A deals in the Pharma Sector, with
81.4% of the deals involving local companies
• Ranbaxy had a large product portfolio, established infrastructure linking its complex supply chain and
excellent stakeholder relationships to boost inorganic growth when acquired.
Integrated
Distributors
Large
Portfolios
Strong
Brand
Equity in
the Local
Market
Efficiencies
of Scale
Attractiveness of Investing in Local Companies in the Target Market

SWOT Analysis of Sun Pharma
• Established brand Market
leader in dermatology
(U.S), specialty chronic
segment and branded
generics (India)
Strengths Weaknesses
ThreatsOpportunities
• Focus on access to generic
products, market presence and
technology
• Differentiation of products by
focusing on complex generics
• Increasing share of branded
specialty drugs
• Achieve critical mass in key
markets
• Branded generics growth will slow
down due to payer pressure to reduce
costs via commoditization
• Improved manufacturing standards
would reduce the brand proposition
of branded generics and unprotected
originals leading to large price cuts
• Consolidation would lead to low
margins and difficult cost structure
for sophisticated MNC’s to replicate
• Karkhadi facility faces restrictions
in approval of its Abbreviated New
Drug Applications [ANDA’s] by the
USFDA due to its non-compliance
with certain current Good
Manufacturing Practices (cGMP)

Leveraging Opportunities and Strengths: Long-Term Strategy at Sun
• Sustainable Revenue and Cash Flow Stream:
• Targeting complex / differentiated products in key markets
• Focus on fast-growing chronic therapies and timely product launches
• Using Investments to Develop Complex Products and Turning Around Underperforming
Acquisitions
• Cost Leadership
• Vertical Integration
• Optimisation of Operational Expenses
• Closer links between the back-end and supply chain

Synergies and Challenges Post the Ranbaxy Acquisition
Synergies
• All-Stock Deal used to leverage
Sun’s huge Market Cap, Cash
preserved for future deals,
CAPEX
• Sun will be in the top spot in 13
Therapy segments, up from 7 in
2014
• Better Over-the-Counter Portfolio
in India
• Better Dermatology Franchise in
India (55% of Ranbaxy Sales)
• Strong presence of Ranbaxy in
India and other Emerging Markets
Challenges
• Regulatory Turnaround needed to
access Ranbaxy’s Product Pipeline
• US$ 500 mn in payments to the US
Department of Justice for
manufacturing violations may
have affected brand equity of
Ranbaxy
• Increased competition in the
Generics Segment (high
dependence on Absorica of
Ranbaxy)
• Lower Sales Growth, Margin,
Returns, which means Pay Back
Period might exceed 6 Years
Source: “Finding a Cure”, Business Today, http://businesstoday.intoday.in/story/sun-pharma-buys-ranbaxy-implications-profits-debt-usfda/1/205241.html, accessed on 1 July, 2015

Capabilities of the Company Post Acquisition
• The tax burden can be alleviated for 8 years following the transaction as the Income Tax Act allows for
the losses of Ranbaxy to be set off the profits of Sun Pharma for the aforementioned period.
• The merged entity will have a highly complementary portfolio of specialty and generics targeting
chronic and acute treatments globally.
• Presence in 55 markets and capabilities across specialty branded products and complex generics.
• In the U.S.A, no. 1 in generic dermatology and no. 3 in the branded dermatology market. Pro-forma
U.S. revenues to be about US$ 2.2 bn with a strong capability in developing complex products.
• In India, Sun Pharma will become the largest pharmaceutical company with over 9% market share.
No. 1 by prescriptions across 13 different classes of specialist doctors in India. Pro forma revenues in
India will be about US$ 1.1 bn.
• Ranbaxy will add to competitive edge in acute care, hospitals and OTC businesses with robust brands.
• 31 amongst top 300 brands and greater distribution reach.
• Foundation for OTC business in India.
• The target is to generate synergy benefits of about US$ 250 mn by the third year- driven by revenue,
procurement, supply chain and other cost synergies.

• ANDA: An Abbreviated New Drug Application is an application that allows the applicant to
manufacture and market the generic drug product to provide a safe, effective, low cost alternative to
more expensive licensed medications.
• API: Active Pharmaceutical Ingredient refers to the active or central ingredient in the drug product
which causes the direct effect on the disease diagnosis, prevention, treatment or cure.
• Branded Generics: A branded generic is a drug that is bioequivalent to the original product, but is
now marketed under another company's brand name.
• Complex Drugs: Drugs with complex active ingredients, formulations routes of delivery or drug-
device combinations.
• Generics: A drug product that is comparable to a brand in dosage form, strength, quality, performance
characteristic and intended use. Instead of a brand name or registered trademark, they carry either the
name of the manufacturer or the nonproprietary name of the drug. Generic products are available once
the patent protections afforded to the original developer have expired. Market competition often leads
to substantially lower prices for both the original brand name product and the generic forms.
• In-Licensing: The business model of acquiring one or more products still in pre-clinical or clinical
development (fairly advanced stages of development) and focusing on its product development and
launch. The skills involved are therefore medical and clinical, rather than relating to discovery.
Glossary

• Specialty Drugs: Drugs that are expensive, have limited access, complicated treatment regimens,
compliance issues, special storage requirements and manufacturer reporting requirements.
• Out-Licensing: The business model of a company that seeks a partner in the development and co-
marketing of its compound from the late-stage clinical trial phase to the product launch phase. This is a
strategic way to continue to generate value from pipeline assets, while sharing the risks and high costs
inherent in any R&D program.
• OTC Drugs: A drug for which prescription is not needed.
• US FDA: The Unites States Food and Drug Administration is responsible for protecting and promoting
public health through the regulation and supervision of food safety, prescription and over-the-counter
pharmaceutical drugs (medications), vaccines, biopharmaceuticals and other similar consumer
products.
Glossary

External Sources
• “2013-14 SPIL-Director’s Report and Management Discussion and Analysis”, Sun Pharmaceutical
Industries Limited, http://www.sunpharma.com/investors/annualreports , Accessed on 30 June, 2015
• “IR Presentation, June 2015”, Sun Pharmaceutical Industries Limited,
http://www.sunpharma.com/investors/annualreports, Accessed on 30 June, 2015
• “Pharmerging Markets- Picking a Pathway to Success”, Q2 IMS Pharmerging white paper 06-2013
(2013), Accessed on 30 June, 2015
• Jackson Richard et. al, “Global Aging and Future of Emerging Markets” (2011: Centre for Strategic
and International Studies and Everest Capital), pp. 2-4
• “Govt. to regulate prices of 652 medicines, prices set to fall”, ET,
http://articles.economictimes.indiatimes.com/2013-05-17/news/39336744_1_essential-drugs-price-
control-indian-pharmaceutical-alliance, Accessed on 30 June, 2015
• Kanungo Soumanty, “Pharma firms to face US approval delays and currency headwinds this quarter
too”, DNA, http://www.dnaindia.com/money/report-pharma-firms-to-face-us-approval-delays-
currency-headwinds-this-quarter-too-2092157, Accessed on 4 June, 2015
• Sharma Kumar, “Finding a Cure”, Business Today, http://businesstoday.intoday.in/story/sun-pharma-
buys-ranbaxy-implications-profits-debt-usfda/1/205241.html, Accessed on 1 July, 2015

Thank you
Presentation by Abhishek Ghosh
Summer Trainee
KPMG, Lodha Excelus
Mumbai

The KPMG name, logo and “cutting through
complexity” are registered trademarks or trademarks
of KPMG International.
© 2015 KPMG, an Indian Partnership and a member
firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights
reserved.

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