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An overview of major risks faced by Indian Pharmaceutical Industries and their mitigants and development of a probability-impact score to quantify the risk faced by Indian Pharma players
Submitted by
Name Sachin Menon Rajesh Bassana Mohit Sethi Soumitra Mukherjee Rajsekhar Company Lupin Ltd. Ranbaxy Laboratories Ltd. Dr. Reddys Lab Ltd Sum Pharma Ltd. Cipla Ltd Phone Number 7737963223 7737964017 7737942707 7737963501 7737963252
Contents
Sectoral Introduction: Companies under study: Methodology: About the companies: Dr. Reddys Laboratories Limited Lupin Limited Sun Pharmaceutical Industries Limited Ranbaxy Laboratories Limited Cipla Limited Risk Profiling: Economy wide risk Company specific risk Industry Risk Quantifying the risks: Conclusion: Appendix-I CIPLA Ltd: Threats, Risks and Concerns Key financial ratios which impacts the company: (CIPLA) Appendix-II LUPIN LIMITED Threats, Risks and Concerns Key financial ratios which impacts the company: (LUPIN) Appendix-III Dr. Reddy Laboratories limited Threats, Risks and Concerns Key financial ratios which impacts the company: (Dr. Reddy) Appendix-IV Sun Pharma Limited Threats, Risks and Concerns Key financial ratios which impacts the company: (Sun Pharma) Indian Pharma Industry 3 3 3 4 4 5 6 6 6 7 7 7 7 9 10 11 11 11 12 13 13 13 16 17 17 17 24 25 25 25 27 Page 2 of 29
Appendix-V Ranbaxy Laboratories Ltd. Threats, Risks and Concerns Key financial ratios which impacts the company: (Ranbaxy)
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Sectoral Introduction:
Indian Pharmaceutical industry is worth USD 21 billion and is growing at an impressive of 9 % CAGR for the past five years. We are the worlds 14th largest Pharma player by value and third largest by volume. India is predominantly a generic market and most of the Indian players have their expertise in generic segment. More than half of the total revenue of Indian Pharma players is through exports
Methodology:
The study aims to identify the major risks associated with the companies under study. These risks are then to be classified into the broad categories of: Economy wide risk Industry risk and Firm specific risk
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An arrangement is also devised to quantify the risks based on their probability of occurrence and impact that each risk will have in case of their occurrence. Though both these attributes are qualitative by assigning a number to both probability and occurrence and then multiplying both the numbers we can devise a quantitative scale as well to measure the risk. Symbolically speaking the arrangement would be similar to a 3x3 matrix as shown in the figure below:
Probable Impact
High Medium High Priority Low Medium Priority
Probability of occurrence
High Medium
High Priority
High Priority
Medium Priority
Low Priority
Low
Medium Priority
Low Priority
Low Priority
The number assigned to the impact on business can be both positive and negative. A positive number signifies that the risk will affect the business adversely and vice versa. By definition risk stands for both deviation of expected outcome that can be both positive as well as negative. The purpose of this study is to analyse the negative impacts only.
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Strong research and development (R&D) capabilities, healthy product pipeline, stable profitability indicators. As seen from the revenue mix figures below, most of the income for the company comes from overseas markets with North
America being the biggest contributor to the revenues. This is also a major point to be kept in mind while analysing company risks
Lupin Limited
Lupin (erstwhile Lupin Chemicals) was founded in 1968, later Lupin Chemicals Limited merged with Lupin Laboratories Limited. Lupin revenues of Rs. 4,527 crore in FY-2010-11 marked a growth of 22% over previous year (Rs. 3,723 crore during FY-2009-10). ICRA has given the rating of AA + for long term and A1+ for short term funds. Growth is supported by large number of product filings across the globe resulting from companys robust R&D team and strong research infrastructure augurs well for the company. The Company has significant market share in key markets in the Cardiovascular (prils and statins), Diabetology, Asthma, Pediatrics, CNS, GI, Anti-Infectives and NSAIDs therapy segments along with global leadership positions in the Anti-TB and Cephalosporins segments. The Company's foray into Advanced Drug Delivery Systems has resulted in the development of platform technologies that are being used to develop value-added generic pharmaceuticals. They have a market presence in 70 countries. For Lupin anti bacterial Suprax is their largest selling brand and contributes about USD 3.50 Billion in revenue. The company has manufacturing facilities spread India & Japan, recently acquired Irom Pharmaceuticals through its Japanese arm. As in case of Dr. Reddys Lab, Lupin also has its major share of revenues from overseas markets.
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Cipla Limited
Cipla was incorporated in the year 1935 by the late Dr Khwaja Abdul Hamied. The company launched its first product in 1937 and has since then expanded to establish multi-locational manufacturing units in India which manufacture more than 1,500 drugs. Cipla revenues of Rs. 6,368 crore in FYIndian Pharma Industry Page 6 of 29
2010-11 marked a growth of 13% over previous year (Rs. 5,657 crore during FY-2009-10). CARE has given the rating of AA A for long term and A1+ for short term funds. Cipla exports to more than 170 countries through joint venture and partnership, thereby reducing its geographical concentration risk.
Risk Profiling:
Pharmaceutical sector is the sector that is least affected by economic downturns and disturbances. Even during the recent difficult times the Pharma industry has been growing at an impressive pace world over.
Industry Risk
As discussed above Pharma industry is a steadily growing industry with strong fundamentals. All of the major Pharma players in the country are cash rich and have huge levels of retained earning year on year. The future prospects of the industry are also bright. But never the less there are certain risks that even this industry faces. The following are the major risks faced by Indian Pharma sector. Regulatory risk The recent regulatory development in India in form of NPPP-2011 could have a detrimental effect on the growth and development of Pharma sector in India. Risk 1 NPPP-2011: National pharmaceutical pricing policy aims to bring 348 medicines under the regime of price control. This price control will be levied on every stage of manufacturing of drug. Implementation of this rule will erode the profits of the Pharma companies to a great extent. Mitigant 1 Indian players will have to focus more on R&D capabilities and development of new drugs. The revenue loss from exiting products can be made up by introduction of new more efficient drugs. Risk 2 Tightening regulatory framework in western markets: International regulators like US FDA has of late have increased their monitoring of plant of Pharma companies that has approval to manufacture drugs for exports. Due to increase health care awareness and implementation of stringent rules in their home countries there has been many cases where Indian manufacturers have Indian Pharma Industry Page 7 of 29
been reprimanded by US FDA. In past six months itself Lupin, Cipla and Ranbaxy have got notices from US FDA for incomplete adherence to manufacturing norms. Sun Pharma and Dr. Reddys lab have got similar notices from UK FDA and drug authorities of Germany. If such notices are repeated then the drug companies may lose the authority to export drugs from their plants. This will have a catastrophic effect on the whole Pharma business as Indian Pharma companies earn majority of their revenues from exports. Mitigant 2 Indian Pharma companies have to immediately invest in their manufacturing process to make it more stringent and ensure complete adherence to international norms. The focus of quality has to be put in place and fresh investment has to be made in machinery enhancement and process control. Also to avoid risk of concentration the Pharma companies should expand to developing markets as well and not just focus on developed markets. In the last 3-4 years the developing markets as well as markets like Africa and Latin America have been growing much faster than developed countries. This opportunity should be tapped and the Indian players should expand their presence in these markets as well. Risk 3 Erosion of margins in generics: Generics as explained above are copy of original drugs that go off patent. Internationally the acceptance of generics have increased due to global recessionary atmosphere as generics are much more economical that the original drugs. This increase in demands has attracted many large global players to generic space. Due to increased competition it is said that the margins in the generic space is set to come down. Such a situation will affect Indian players adversely as India is one of the largest generic makers in the world. Mitigant 3 Leveraging extensive expertise in generic manufacturing to control cost and investment in newer machinery to keep prices under control. Of late Ranbaxy has been up grading its machinery and replacing old machinery with better and efficient lines to remain competitive in generic business space. Other players have to follow the suit to sustain in the generic market. Risk 4 Counterfeiting: It is estimated that 10-12 percent of total medicines available in Indian market are counterfeit. The Pharma companies pose to lose in two ways from this menace. They lose a certain market share to these counterfeit drugs and also the ill effects caused to the patients on account of consumption of these duplicate medicines lead to a huge reputation risk to the original drug manufacturer. This may even cause an irreparable damage to the brand as a whole. Mitigant 4 Working closely with the government to impose stricter laws to deter the practise of counterfeiting. Constantly changing packaging of medicines and making it such that imitation is not easy. Educating end users about the about minute nuances of original drugs by use of print and electronic media. Risk 5 Foreign currency fluctuation risk: As shown above all the major drug manufacturers in India earn majority of their revenues from exports. In such scenario any adverse moment in currency fluctuation will lead to major strain on the profitability of the Pharma players. Also the imports by these companies form only a small percentage of their total exports as a result of which there is no natural hedge for the companies in case of currency fluctuations. Of late there have been heavy depreciation of rupees thereby making exports more profitable but in case of reverse movement the Pharma players tend to incur losses as well.
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Mitigant 5 These companies should avoid open position in forex and should hedge their currency risks well. Also the exchange rate movements should be very closely monitored and a team of experts should be set up to gauge the exchange rates and thus use the fluctuations to ones own benefits. As the components of exports in total sales is very high the cost of setting up such a team of experts will be negligible in front of the potential of risk averseness that can be achieved by such an act. Risk 6 Obsolesce: With Indian markets opening up to larger global players there always exits a risk that with introduction of new efficient drugs the exiting medicines becomes out of favour in no time. Mitigant 6 Focus on R&D: Traditionally Indian players are not known for their R&D prowess when compared to their global counterparts. The global majors in Pharma sector spend about 25 to 30 % of their revenues on R&D. When it comes to Indian players even the top Pharma companies spend about 5-10% of their revenues on R&D. The attention has to be focused on R&D to counter the threat of obsolesce.
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Risk
Impact number 5
Risk Score 4
Mitigant Can be countered with development of new drugs Expansion to new markets and investment in new machinery and stricter norms Focus on R&D and expansion to new markets like Africa and Latin America Stricter punishment for offenders and more investment in packaging to make counterfeiting difficult. Proper hedging
R&D focus
High
0.6
High
2.4
Counterfeiting
0.1
Very High
0.5
0.5
0.2
Medium
High
3
4
1.5
0.8
Conclusion:
The Pharma industry of India has been doing well for the past many years now. The fundamental of the pharmaceutical players in India is found to be strong. To summarise in short it can be said that the major threats on the industry can be avoided by the measures as below: Focus more on research and development Expand to developing markets Focus on cost control
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Mar '10
Mar '09
Mar '08
Mar '07
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Regulatory risks in developed markets, related to patent challenges, product launches and manufacturing facilities/ processes Likelihood of large in-organic investments towards expanding geographic presence and strengthening portfolio of branded drugs may impact financial risk profile R&D investments in novel drug delivery and development yet to realise any substantial returns; New Molecular Entity (NME) pipeline at a very nascent stage Any significant adverse development related to price control in domestic market could impact currently strong profitability profile
Business Risk Profile Strengthening presence in the US market through portfolio of branded products and expanding product pipeline in the U.S. generic market. Lupins presence in the U.S. market is based on a two-pronged strategy (a) building branded formulation business through in-licensing and acquisition of products (b) developing a large scale generics business with presence in niche therapy areas supported by its strengths in backward integration and established relationships with channel partners. Presently, Lupin is among the few Indian pharmaceutical companies to have established a successful branded formulations business in the U.S., representing 13% of its consolidated turnover in 2009-10. Current portfolio consists of four brands namely- Suprax, Antara, AeroChamber Plus and the soon to be launched Allernaze. Suprax, the companys largest selling branded product is yet to face generic competition in the U.S. While the patent on Suprax has already expired, Lupin management does not foresee entry of generics in the short term having successfully filed a citizens petition with the U.S. FDA which requires the regulator to approve the generic form by applying the same standards of evaluation as were applied to Lupin. Furthermore, Lupin has launched line extensions for Suprax with 50% of sales successfully switched to the double-strength tablets, thereby minimising the generic threat to lower-strength tablets. In the future, the company will also launch chewable tablet as well as drop formulations for Suprax. Since generic entry into a product generally starts at the lower strength tablet formulation, Lupins line extensions help limit the impact of the impending competition from generics for Suprax. The launch of Allernaze, initially planned for third quarter of FY 2011, has been delayed due to manufacturing related issues pertaining to scaling and validation. While the product has already received approval from the U.S. FDA, Lupin expects to sort out the manufacturing related issues soon and plans to launch the product shortly. Over the past two years, Lupin has ramped up its sales force in the U.S. from 60 to 170 representatives in light of the addition of Antara and imminent launch of Allernaze. Over the past year, Lupin has strengthened its presence in the U.S. generic market through steady commercialisation of its ANDA pipeline and is currently ranked the 5th largest generic player in the U.S. in term of prescriptions, according to IMS Health (Lupin was ranked 8th in March 2010). Lupins success in the U.S. generic market can be attributed to its strong relationships with channel partners, established track record of on time delivery and strong regulatory compliance in addition to robust product filings. Going forward, the continued commercialisation of the strong product pipeline including oral contraceptives (OC) will be a key growth driver for the company. Having already filed 23 ANDAs in the OC segment and approvals expected to start shortly, Lupin is now well positioned to launch these products in a phased manner starting with four products in October 2011. The next wave of OC products Indian Pharma Industry Page 14 of 29
(12-15) will be launched in the following year. Lupins foray into the OC market presents a lucrative opportunity for the company and will be supported by backward integration with the API being supplied from its Indore facility which was recently inspected by the U.S. FDA and found acceptable. Lupins vertical integration in OCs will help the company remain cost competitive as well as provide flexibility in manufacturing. Strong growth prospects led by Japanese governments pro-generic policies and Lupins strategy to backward integrate its Japanese operation with sourcing from India result in favourable outlook Estimated at around US$ 70-75 billion and with almost 100% insurance coverage, Japan is the second largest pharmaceutical market in the world after US. Despite its size, the generic penetration is presently low (5-6% by value and 12-14% by volume). However, over the past few years, in an attempt to lower healthcare costs, the Japanese Government has introduced various reforms in order to increase the penetration of generic medicines. Despite the evolving opportunity in the generic space, the Japanese market is fairly unique on two accounts - regulatory framework related to approvals is fairly complex resulting in high entry barriers due to stringent regulatory guidelines and Japan specific molecules (number of molecules are developed and sold by Japanese companies only in Japan). This necessitates overseas players to partner with local Japanese players. In this context, Lupin acquired majority stake in Kyowa Pharmaceuticals (Kyowa), the tenth largest generic company in Japan in October 2007. Post the acquisition, Lupin had put in place a five year profit improvement plan for Kyowa with focus on improving gross margins through greater efficiencies in sourcing of APIs. In FY 2010, Kyowa reported consolidated sales of Rs. 534.1 crore representing a growth of 9%, coupled with an improvement in gross margins. Going forward, Lupin plans to launch 3-4 products in the Japanese market by the end of FY 2011. In the first half of FY 2011, Kyowas performance was impacted by the drug price cuts undertaken by the Japanese Government in order to control healthcare expenditure. While the compulsory price cuts are expected to remain a regular feature of the Japanese pharmaceutical market, Lupins ability to backward integrate at Kyowa and new product launches will help support revenue growth and profitability. In order to further expand its presence in the Japanese market and enter into the injectable segment, Lupin is likely to undertake an acquisition in the near term.
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related issues. The business could be negatively impacted if innovator pharmaceutical companies are successful in limiting the use of generics through aggressive legal defense as well as authorized generics deals, development of combination products and over-the-counter switching. In view of the number of patent expiries coming up in the near future, sales of patent expiry drugs in the US as well as in Europe represent significant opportunity for all generics and API manufacturers. However, obtaining 180-days exclusivity is getting increasingly difficult in the US, and the generics market is rapidly becoming commoditized. Foreign exchange fluctuations: Being a global company, the income is exposed to currency rate fluctuations. In 2010-11, the Indian rupee appreciated by approximately 4% vis--vis the US dollar, from 47.44 per US$ for the year ending 31 March 2010 to 45.56 per US$ for the year ending 31 March 2011. Appreciation of the Indian rupee may impact top-line growth for Indian companies with higher exposure to the US dollar. The Company has adopted a conservative hedge strategy to protect receivables and part of its anticipated income. Launch at risk: At times, the Company seeks approval to market generic products before the expiration of patents based on sufficient data that such patents are invalid, unenforceable, or would not be infringed by the Companys products. As a result, the Company is involved in patent litigation, the negative outcome of which could adversely affect the business. In April 2006, the Company launched, and continues to sell fexofenadine, the generic versionof Allegra. This is despite the fact that there is an ongoing litigation with the Company that holds the patents for and sells this branded product. In the European Union, the Company also had generic launches that involve ongoing patent litigation, negative outcome of which could adversely affect the business. In Germany, the Company had a launch at risk of oxycodon. A cost sharing agreement has been entered to with the supplier to reimburse part of the losses resulting from any damage claim by innovator. FCPA and other worldwide anti-bribery laws: The Company is subject to the US Foreign Corrupt Practices Act, the UK Bribery Act and similar worldwide anti-bribery laws, which impose restrictions and may carry substantial penalties. These laws generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business, and require not only accurate books and records, but also sufficient controls, policies and processes to ensure business is conducted without the influence of bribery and corruption. The penalties are substantial, including fines, prosecution, potential debarment from public procurement and reputational damage. The Companys policies mandate strict compliance with these anti-bribery laws. However, given the high level of complexity of these laws, there is a risk that some provisions may be inadvertently breached.
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FINANCIAL RISK MANAGEMENT The Companys activities expose it to a variety of financial risks, including market risk, credit risk and liquidity risk. The Companys primary risk management focus is to minimize potential adverse effects of market risk on its financial performance. The Companys risk management assessment and policies and processes are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor such risks and compliance with the same. Risk assessment and management policies and processes are reviewed regularly to reflect changes in market conditions and the Companys activities. The Board of Directors and the Audit Committee is responsible for overseeing Companys risk assessment and management policies and processes. Reconciliation of the allowance account for credit losses. The details of changes in provision for doubtful debts during the year ended 31 March 2011 and 31 March 2010 are as follows:
The details of changes in provision for doubtful loans and advances to subsidiaries during the year ended 31 March 2011 and 31 March 2010 are as follows:
Credit Risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Companys receivables from customers. Credit risk is managed through credit approvals, establishing credit limits and continuously monitoring the credit worthiness of customers to which the Company grants credit terms in the normal course of business. The Company establishes an allowance for doubtful debts and impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. Trade and other receivables The Companys exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the customer, including the default risk of the industry and country, in which the customer operates, also has an influence on credit risk assessment. Credit risk is managed through credit approvals, establishing credit limits and continuously monitoring the creditworthiness of customers to which the Company grants Indian Pharma Industry Page 19 of 29
credit terms in the normal course of business. As at 31 March 2011 and 31 March 2010 the maximum exposure to credit risk in relation to trade and other receivables is Rs.17,705 and Rs.10,605 respectively (net of allowances). Financial assets that are neither past due nor impaired. None of the Companys cash equivalents, including time deposits with banks, are past due or impaired. Of the total trade receivables, Rs.14,196 as at 31 March 2011 and Rs.8,167 as at 31 March 2010 consists of customers balances which were neither past due nor impaired. Financial assets that are past due but not impaired The Companys credit period for customers generally ranges from 20 180 days. The age analysis of the trade receivables has been considered from the due date of the invoice. The aging of trade receivables that are past due, net of allowance for doubtful receivables, is given below:
Financial assets that is impaired The age analysis of the trade receivables that are impaired is given below:
Loans and advances Loans and advances are predominantly given to subsidiaries for the purpose of working capital and capital expansions; and the Company does not consider any significant exposure to credit risks associated with such financial assets. Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by ensuring, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risk to the Companys reputation. Indian Pharma Industry Page 20 of 29
As at 31 March 2011 and 2010, the Company had unutilized credit limits from banks of Rs.13,089 and Rs.7,850, respectively. As at 31 March 2011, the Company had working capital of Rs.23,456 including cash and cash equivalents of Rs.662 and current investments of Rs.3. As at 31 March 2010, the Company had working capital of Rs.14,604, including cash and cash equivalents of Rs.3,680 and current investments of Rs.3,577. The table below provides details regarding the contractual maturities of significant financial liabilities
The table below provides details regarding the contractual maturities of significant financial liabilities
Financial Guarantees Financial guarantees disclosed in Note 2 of Schedule 20 have been provided as counter corporate guarantees to financial institutions and banks that have extended credits and other financial assistance to the Companys subsidiaries. In this regard, the Company does not foresee any significant credit risk exposure. Market Risk Market risk is the risk of loss of future earnings or fair values or future cash flows that may result from a change in the price of a financial instrument. The value of a financial instrument may change as a result of changes in the interest rates, foreign currency exchange rates and other market changes that affect market risk-sensitive instruments. Market risk is attributable to all market risk-sensitive financial instruments including foreign currency receivables and payables and long-term debt. The Company is exposed to market risk primarily related to foreign exchange rate risk, interest rate risk and the market value of its investments. Thus, the Companys exposure to market risk is a function of investing and borrowing activities and revenue generating and operating activities in foreign currencies. Foreign Exchange Risk Indian Pharma Industry Page 21 of 29
The Companys exchange risk arises from its foreign operations, foreign currency revenues and expenses, (primarily in U.S. dollars, British pound sterling and euros) and foreign currency borrowings (in U.S. dollars and euros). A significant portion of the Companys revenues are in these foreign currencies, while a significant portion of its costs are in Indian rupees. As a result, if the value of the Indian rupee appreciates relative to these foreign currencies, the Companys revenues measured in rupees may decrease. The exchange rate between the Indian rupee and these foreign currencies has changed substantially in recent periods and may continue to fluctuate substantially in the future. Consequently, the Company uses derivative financial instruments, such as foreign exchange forward and option contracts, to mitigate the risk of changes in foreign currency exchange rates in respect of its forecasted cash flows and trade receivables. In respect of the Companys forward, option contracts and non-derivative financial liabilities, a 10% decrease / increase in the respective exchange rates of each of the currencies underlying such contracts would have resulted in an approximately Rs.349 increase / decrease in the Companys hedging reserve and an approximately Rs.1,014 increase / decrease in the Companys net profit as at 31 March 2011. In respect of the Companys forward and option contracts, a 10% decrease / increase in the respective exchange rates of each of the currencies underlying such contracts would have resulted in an approximately Rs.821 increase / decrease in the Companys hedging reserve and an approximately Rs.745 increase / decrease in the Companys net profit as at 31 March 2010. The following table analyses foreign currency risk from financial instruments as at 31 March 2011:
The following table analyzes foreign currency risk from financial instruments as at 31 March 2010:
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For the year ended 31 March 2011 and 2010, every 10% depreciation / appreciation in the exchange rate between the Indian rupee and the respective currencies in the above mentioned financial assets / liabilities would affect the Companys net loss / profit by approximately Rs.839 and Rs.488 respectively. Interest rate risk As at 31 March 2011 and 31 March 2010, the Company had foreign currency loans of Rs.5,758 carrying an interest rate of LIBOR plus 52-80 bps and Rs.4,580 carrying an interest rate of LIBOR plus 40-75 bps respectively. Also as at 31 March 2011 and 31 March 2010 the company had an INR loan of Rs.950 carrying an interest rate of 8.75% and Rs.Nil respectively. Since these are short-term loans, the Company does not consider any significant changes in the interest rates and hence, has not entered into any interest rate swaps to hedge its interest rate risk. For the years ended 31 March 2011 and 2010, every 10 basis points increase or decrease in the interest rate applicable to its short-term loan from banks would affect the Companys net loss / profit by approximately Rs.16 and Rs.2, respectively The Companys investments in time deposits with banks and short-term liquid mutual funds are for short durations, and therefore do not expose the Company to significant interest rates risk. Commodity rate risk Exposure to market risk with respect to commodity prices primarily arises from the Companys purchases and sales of active pharmaceutical ingredients, including the raw material components for such active pharmaceutical ingredients. These are commodity products, whose prices may fluctuate significantly over short periods of time. The prices of the Companys raw materials generally fluctuate in line with commodity cycles, although the prices of raw materials used in the Companys active pharmaceutical ingredients business are generally more volatile. Cost of raw materials forms the largest portion of the Companys operating expenses. Commodity price risk exposure is evaluated and managed through operating procedures and sourcing policies. The Company has historically not entered into any derivative financial instruments or futures contracts to hedge exposure to fluctuations in commodity prices.
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Erosion of margins in generics: Leading patent players like Sun Pharma, stand to lose a lot of possible revenue owing to the growth of generics market and the intensification of competition in the market. With innumerous patents expiring in the next few years, as the ratio shifts in favour of the generics, the effect of this margin erosion will become more and more evident. (http://sunpharma.com/Apipopup.do) However, thanks to its research arm SPARC (Sun Pharma Advanced Research Company), Sun Pharma retains its edge of introducing new patents and APIs every year at encouraging rate and beat the generic market. Counterfeiting: Counterfeiting is a big challenge in India. While official sources put it at ~10% of the total drugs sold in India, other sources claim that it stands at ~20% of the total drugs market in India. Meanwhile, the fake drugs market in India stands at close to $ 8.5 bn a year, mostly exported to Africa and poorer Latin American countries. Refer (www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CGYQtwIwAg&url =http://www.washingtonpost.com/wpdyn/content/article/2010/09/10/AR2010091003435.html&ei=shTXT7PbH83OrQfS7LT8Dw& usg=AFQjCNFVW4Erdv3RRGyONV9DC3-0WgO9-g) Foreign currency fluctuation risk: Transactions denominated in foreign currencies are recorded at the exchange rates that approximate the actual rate prevailing at the date of transaction. Monetary items denominated in foreign currency at the year-end are translated at year end rates. In respect of monetary items which are covered by forward exchange contracts, the difference between the year-end rate and the rate on the date of the contract is recognised as exchange difference and the premium on such forward contracts is recognised over the life of the forward contract. The exchange differences arising on settlement / translation are recognised in the Profit and Loss account. The translation of the financial statements of nonintegral foreign operations is accounted for as under: a) All revenues and expenses are translated at average rate. b) All monetary and non-monetary assets and liabilities are translated at the rate prevailing on the balance sheet. c) Resulting exchange difference is accumulated in Foreign Currency Translation Reserve on Consolidation until the disposal of the net investment in the said non integral foreign operation.
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Obsolesce: With the introduction of new and improved drugs, fast selling and high revenue generating drugs stand the threat of becoming obsolete in no time. Given the said scenario, it is only obvious that constant research and a long line of new products is the only solution to the same. Sun Pharma, while it is not free from such risks completely, is relatively safe, again owing to its advanced research arm.
2.91 0.54 0.79 32.24 32.24 31.43 31.43 24.57 24.56 24.05 248.72 248.72 24.68
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In 2011 (refers to calendar year, January 1 to December 31), international revenues accounted for about 81 per cent of the companys total revenues. In 2007, Ranbaxy entered into currency options to hedge its export receivables for a period of five to seven years. The company has incurred large marked-to-market losses (MTM) on these contracts because of steep depreciation in the Indian rupee against the US dollar in the past. Ranbaxy reported total MTM losses of Rs.10.9 billion in 2008. However, in 2009 and 2010, the company wrote back some of the MTM losses because of favourable movement in the US dollar to Indian rupee exchange rate. With the depreciation of the rupee in 2011, the company reported MTM losses of Rs.11.2 billion. As on December 31, 2011, Ranbaxy had accumulated notional losses on these option contracts of Rs.22 billion. Given the high value and long-term nature of these contracts and uncertainty on USD/INR exchange rate movement, the company continues to be exposed to foreign currency exchange rate risk on the option contracts.
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