A Comparison of Global & Indian Generics M&A Deals and Future Outlook

(Data as of 2007)

Harshawardhan Bal, M.Pharm., Ph.D. Gaithersburg, MD May 2007

I. Generics industry landscape The generics market growth is outpacing growth in the branded products market. Growth in the US, European, and other generic drug markets is forecast to continue during the next five years and beyond. A. Small molecules and generics US generic industry 56 % of prescriptions dispensed (2005-2006) Annual sales Growth trends Facts and figures US$ 22 B (2005-2006); US$ 66 B to US$ 82 B (2009); US$ 100 B (2010) 20.6% (2005); 22.4 % over 2008-2010 4 of top 5 companies by number of prescriptions dispensed are generic companies (2005-2006) 6 of top selling prescription drugs by volume in US were generics (2004) 5 of 10 largest US product launches were generics (2004) > 800 generic applications are in process at US FDA OGD. Teva, the world's largest generic drug company has 144 new product applications awaiting approval at FDA. The brand name drugs covered by these applications have annual US sales of US$ 87 B. B. Biologics (biopharmaceuticals) and biogenerics US biogeneric industry Biologics account for 12% of total pharmaceuticals Annual sales Growth trends US$ 8 B (1996); US$ 30 B (2006); US$ 60 B (2010) CAGR 10% (2005-10) to fuel demand for fermentation, mammalian cell culture and purification facilities for cGMP/clinical grade materials > 150 biopharmaceutical drugs currently marketed, including human insulin, interferons, HGH and Mabs > 370 biologic products (antibodies, gene and stem cell therapies, and vaccines) are currently in clinical trials for > 200 diseases (cancer, Alzheimers, heart disease, multiple sclerosis, AIDS, and arthritis. Drug approvals 30 (2005-06); 2 (1982) Prescription biologics such as Procrit, Epogen, Neupogen , Intron A, Humulin, and Rituxan each generated sales of > US$ 1 B (2005-06) Asian firms are building expression, bioprocessing, formulation, cGMP manufacturing and regulatory capabilities to enter regulated markets; Big Pharma setting up low cost cGMP manufacturing facilities in or outsourcing biomanufacturing to CMOs in Asia

Facts & Figures

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II. Continued growth of generics industry expected over the next 3-5 yrs - Market drivers 20072010 is predicted to be a windfall period for generics with many branded blockbuster products losing exclusivity in major markets. The overall market for generic drugs could continue to grow at double-digit rates through the next 5 years. A. Cost containment by payors in healthcare and prescription drug spending Generic substitution rates range from 56-60% in the US. Significant opportunity for growth in generic utilization still exists. A 1 % increase in generic substitution = US$ 4 B in additional annual savings in the US each year. B. US Medicare prescription drug benefit Medicare Part D (effective 1 January 2006) An aging population and the new drug benefit program are driving the need for affordable prescription drug coverage for millions of senior citizens. C. Patent expirations of major branded drugs LOE for branded drug products (small molecules): US$ 22 B (2006); US$ 27 B (2007); US$ 29 B (2008) LOE for branded drug products (biologics): US$ 10 B (2006-2010) Total sales of drugs losing protection will exceed US$ 100 B by 2010 and US$ 160 B by 2015 D. Growth of biologics and biogenerics as first line of treatment Biologics contribute significantly to cost of prescription drug treatments. Annual cost of the top three biologics: Neupogen - US$ 23,098; Epogen - US$ 10,348; Intron A - US$ 5,850. Average cost in 2003 for a one-day supply of biologic drug (US$ 45); small molecule - brand and generic (US$ 1.66). II. Consolidation of the generics industry - Market drivers The large number of new players, fewer new innovator drugs launches and heightened competition for market share and profitability are driving a wave of consolidation among generics companies. Generic companies are moving away from a pure play model to a diversified model with multiple product offerings. A. Declining new innovator drug launches & decrease in the number of products available to generics Average annual new drug launches: 45 (2004 to 2007); 54 (1999 to 2003) B. Declining growth rates in the pharmaceutical market Projected annual growth rates (global market) 6.5 % (2004-2007); > 10 % (1999 to 2003) Projected annual growth rates (US market): 6 % (2004-2007); 10 % (1999 to 2003 C. Declining prices and margins Prices of generic drugs are expected to decline 7-15% per year forcing generics companies to seek strategies to lower production, sourcing and processing costs D. Combative strategies of branded drug manufacturers against generics Strategies such as evergreening, authorized generics and Rx-to-OTC switching are undercutting the profitability of generic drug manufacturers E. Consolidation among large drug store chains and wholesalers Increased bargaining power of large buyers means that generics companies must differentiate beyond a low cost strategy based on factors such as consistency of product, distribution & logistics capabilities, quality & reliability
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F. Heightened competition in an increasingly low-margin & crowded marketplace Companies need to acquire a robust pipeline, complementary products, technologies and supply-chain capabilities across major global market; Compete with generic giants (Teva, Sandoz, etc.) G. Need to secure global presence and tap emerging and underutilized markets Emerging markets (EE and BRIC countries) offer significant growth opportunities. Comparison of annual growth in demand for generic drugs: Russia (30% - 40%); US (7%). The generic penetration in France, is about 5% compared with > 50% in Germany, although the market size is comparable. III. Consolidation of the generics industry Representative transactions A. Acquisitions by non-Indian companies Deal sizes for non-Indian companies have been in the 100s of million to multi-B dollar range. The sales multiples for generic M&A transactions have varied significantly and depend on the portfolio of the target company; average EV/EBITDA multiples estimated to be > 12x. Parent company (acquirer) Teva Pharmaceuticals (2006) Teva Pharmaceuticals (2003) Sandoz (2002) Sandoz (2005) Barr Pharmaceuticals (2006) Watson Pharmaceuticals (2006) Merck (2007) Actavis (2006) Actavis (2006) Actavis (2005) Actavis (2005) Hospira Inc. (2006) UCB (2006) Stada (2006) Mylan Laboratories (2006) Target company IVAX Pharmaceuticals SICOR Inc. Lek Hexal, Eon Labs Pliva Andrx Corp. Serono Grandix Pharmaceuticals manufacturing plant Abrika Pharmaceuticals Inc. Amide Pharmaceuticals Alpharma Inc. Mayne Pharma Ltd. Schwarz Pharma Hemopharm Matrix Laboratories Transaction multiple (x EV/EBITDA) 26.2x 9.9x 7.2x 11.7x 17x 10x ? 9.5x 9x 10x 17.9x ? 11.5x 20x Deal size US$ 7.4 B US$ 3.4 B US$ 877.8 M US$ 7.5 B US$ 2.3 B US$ 1.9 B US$ 13.9 B Undisclosed amount US$ 110 M US$ 500 M US$ 810 M US$ 2.1 B US$ 5.5 B ? US 735 M

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B. Acquisitions by Indian majors Deal sizes for Indian acquisitions have been in the high million-dollar range, but not typically in the Bdollar range (yet). Average EV/EBITDA multiples estimated to be about or under 12x. Acquirer (year) Ranbaxy (2006) Ranbaxy (2006) Ranbaxy (2004) Dr. Reddys (2006) Matrix Laboratories (2005) Nicholas Piramal (2005) Nicholas Piramal (2006) Dishman Pharmaceuticals & Chemicals Ltd Shashun Chemicals & Drugs (2006) Target Be-Tabs Pharmaceuticals (Pty) Ltd. Terapia RPG (Aventis) Betapharm Docpharma Avecia (UK) and Torcan (Canada) Pfizer factory (Morpeth, UK) Carbogen Amcis (Switzerland) Rhodia Pharma (UK) Transaction multiple (x EV/EBITDA) 7.7x 11.6x 10x 12.5x 13.4x 12.2x 15.5x ? ? Deal size US$ 70 M US$ 324 M US$ 84 M US$ 573 M US$ 263 M US$ 22.7 M US$ 50 M US$ 74.5 M US$ 1.2 M

C. Indian Pharma generics Market drivers and projections for 2007-2010 The market cap of top 10 companies during 2004 worked out to US$ 1.2 B on the BSE. The sales of top ten cos (viz., Ranbaxy, Cipla, Dr. Reddy's, NPIL, Aurobindo Pharma, Lupin, Cadila Healthcare, Sun Pharmaceutical, Wockhardt and Orchid Chemical & Pharmaceutical) went up by 16.9% to US$ 300 M (2003-04) from US$ 260 M (2002-03) and net profit has increased by up to 2 fold in recent times. Net profit figures (2005-06) Net profit Ranbaxy Up 97% - US$ 115 M (2006); US$ 53.4 M (2005) Cipla Up 67% - US$ 120 M Dr Reddy's Up 222 % - US$ 32.6 M Nicholas Piramal Up 82.5% - US$ 8.6 M PE Ratios for top generic Pharma P/E ratio Ranbaxy 22.3 (2004-05) Nicholas Piramal 23.37 Dr. Reddys 17.68 Cipla 25.33 Mylan 12.3 Hospira 26.4 Teva 50.3 Barr Pharmaceuticals -28.9 Watson Pharmaceuticals -5.9
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EPS Rs. 12.92 (2006); 7.01 (2005) Rs. 11.40 Rs. 32.83 (US$ 0.73) Rs. 8.10 US$ 1.61 US$ 1.48 US$ 0.69 (US$ -1.72) (US$ -4.37)

Average P/E of global generics company 17

Drivers for Indias outbound acquisitions Access to facilities and technologies for innovator drug companies: - Manufacturing facilities (high potency bulk drugs, finished dosage forms) - Process development for bulk drugs and finished dosage forms - Readymade distribution channels - Existing IP on patented process development technologies - Early stage R&D on experimental drugs

India accounts for barely 1-1.5% of the global CRAM industry

Moving closer to the customer - Innovator companies weary of offshoring key, patent-sensitive molecules - Early stage R&D (developing & scaling up NCEs) not outsourced due to weak patent protection - Proximity to innovator needed for close collaboration during process development Case in point: - Dishmans acquisition of Carbogen Amcis - NPILs acquisition of Avecia & Torcan Building scale - NPILs CRAM revenues after Avecia & Morpeth acquisitions: US$ 204 M compared to US$ 49 before - Dishmans CRAM revenues after Amcis acquisition: added $100 M - Shasun has got business worth US$72 M from Rhodia Facts and Figures The global pharma outsourcing market is worth US$ 37 B and growing at almost 11%. 50% of the CRAM market is in North America and 10% is in Asia, with the rest in Europe. Indias annual labor costs are at $3,000 a head compared to over $50,000 in Western Europe The Indian Pharma industry, with ~ US$ 4.5 B in domestic sales and ~ US$ 3.8 B in exports, is growing annually at 8-10 %. The Indian biotech industry recorded 36.55 % growth (2004-2005) and is set to touch US$ 5 B in revenues by 2010. Emerging as strong, fully integrated global players with profitable API businesses, and gaining reputation as suppliers of high quality products for regulated markets. (Ranbaxy Pharmaceuticals Inc. received Supplier Award from Wal-Mart for Q1 2005). Strengths in organic synthesis, process engineering and developing quality, cost-effective technologies for drug intermediates and bulk activities, produced in US FDA approved manufacturing plants. Growing compliance with internationally harmonized standards such as GLP, cGMP and GCP, welldefined regulatory framework, and emerging stringent IPR regime based on product not process patent.

Gaps Indian generics need to move up the value chain - Drug intermediates to active ingredients (APIs) - Need to establish credibility with Innovator Pharma - Need to strengthen IP protection
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Market drivers - Negatives - Pricing pressures - Dwindling innovator pipelines/cyclical nature of LOE - Competition in a crowded generics market from large well-established players Projections for 2007-2010 The outlook for Indian Generics/Pharma companies remains strong. As Indian companies become global conglomerates, and as their capabilities in global business increases (as companies like Ranbaxy and Dr. Reddys have demonstrated), their value as providers of critical drug discovery/development services will rise. Indian companies will also increase significantly their potential to become innovators in drug discovery. However, valuation multiples will stabilize and not expected to retain the current high range. The strain of funding for large ticket acquisitions and global integration issues can affect profitability in the medium term.

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Contact Harshawardhan Bal, M.Pharm., PhD harsh.bal@stemcellcapital.com http://www.stemcellcapital.com

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