Sector Biotech

Pharmaceuticals sector
Inexpensive drugs from India to transform the global

drug industrytrend toward biosimilars
US/European majors procuring cheap drugs in bulk
from India
Antibody biosimilars poised for widespread global use
Signs of shift back from antibody therapeutics to small
molecule drugs
Please read the important disclosures and analyst pp certifications on. 105-108. gl
Analysts
Ryoichi Urushihara
(Japan)
Motoya Kohtani
(Japan)
Karan Ahuja
(Japan)
Saion Mukherjee
(India)
Avinash Ghalke
(India)
21 June 2010
Nomura Securities Co Ltd, Tokyo
Japanese Equity Research
Inexpensive drugs from India to transform the global

pharmaceutical industrytrend toward biosimilars
21 June 2010
Japanese full report:
21 Jun
In this report, partially based on research carried out in India, we make the case that
biosimilar antibody drugs (generic versions of biotherapeutics) will become widespread in
industrialized nations by 2015, for the following two reasons. First, we think conditions are
right for medical authorities in Japan, the US and Europe to start approving biosimilars,
including antibody biosimilars. Second, biosimilars can now be manufactured
inexpensively. Regulatory and technological obstacles to the release of biosimilars are
now diminishing. We think biosimilars will make rapid inroads if guidelines for their
approval are established in Europe, Japan, and the United States. Industrialized nations
are likely to approve inexpensive yet effective biosimilars in order to rein in growth in
healthcare spending caused by the ageing of their societies. Biosimilars of antibody drugs
have already been approved in India. US and European generic drugmakers have been
stepping up partnerships with Indian companies to produce biosimilars, and branded
drugmakers are now following suit. We think inexpensive drugs from India will transform
the contours of the global pharmaceutical industry.
Report no.
10-236
Inexpensive drugs likely to become widespread throughout the world:

Healthcare reforms in the US mean that in all the major industrialized nations, the
state now has overall control of medical insurance. With industrialized economies
growing at less than 2% a year, ways will have to be found to curtail healthcare
spending now that it is partly or wholly the responsibility of the state. The volume of
pharmaceuticals consumed is rising by about 7% a year as the world's population
becomes older. As such, drug prices will have to fall more than 5% a year to prevent
a squeeze on government finances. We therefore think the uptake of inexpensive
drugs will become necessary globally.
Generic versions of antibody drugs: Indian generic drugmakers are attempting to
cut manufacturing costs to the bone via lower personnel costs and streamlined
production processes for drug materials. We estimate that production costs for low
molecular weight drugs are less than 20% of costs in Japan. The Indian authorities
already have approved a biosimilar for Rituxan, an antibody treatment for cancer.
Although it is priced at only a 50% discount to the branded drug, very low production
costs mean that the Rituxan biosimilar appears to command a gross margin of more
than 80%. Antibody treatment with branded drugs costs several million yen per
annum. We think biosimilars will establish themselves rapidly in industrialized nations
as they will help to reduce costs for both patients and governments.
Partnerships between Western and Indian drugmakers: Major drugmakers in
Europe and the US have been pursuing partnerships with Indian generic drugmakers
since 2008 in order to secure supplies of inexpensive pharmaceuticals. Their aim is to
generate stable earnings by supplying inexpensive drugs for the treatment of chronic
conditions on global markets. This has given rise to a well-balanced business model,
with the high-risk, high-return business of developing drugs for unmet medical
needssuch as anticancer drugs and treatments for central nervous system
disorderscomplemented with inexpensive drugs sourced from India.
Indian companies riding the wave of expansion in biosimilar industry: Among
Indian drugmakers, we find Dr Reddys Laboratories [DRRD IN] (Buy; INR1,423.45,
17 June close) to be of the most interest. Dr Reddy's has been expanding its US
operations, as well as supplying active pharmaceutical ingredients (APIs) for generics
and partnering with GlaxoSmithKline [GSK LN] (Neutral; GBp1,215) to market drugs
in emerging economies. Our next recommendation is Jubilant Organosys [JOL IN]
(Buy; INR348.65), which has alliances with Eli Lilly [LLY US] (No rating; $34.39) and
other overseas drug majors under which it provides not only R&D but also
manufacturing support.
(continued over)
Nomura
Analysts
Ryoichi Urushihara
+81-3-5255-1785
ryoichi.urushihara@nomura.com
Motoya Kohtani
+81-3-5255-1640
motoya.kohtani@nomura.com
Karan Ahuja
karan.ahuja@nomura.com
Financial & Economic Research Center
Nomura Securities, Tokyo
Saion Mukherjee
+91-22-4037-4184
saion.mukherjee@nomura.com
Nomura Financial Advisory and Securities
(India)
Avinash Ghalke
+91-22-405-32046
avinash.ghalke@nomura.com
Nomura Structured Finance Services, India
Please read the important

disclosures and analyst
certifications on pp. 105108.
gl
Nomura Japanese Equity Research
continued from front cover
Japanese drugmakers establishing themselves in India: Japanese drugmakers have been slow to adapt
to the global shift toward cheaper drugs. In the context of this report, we therefore focus on Daiichi Sankyo
[4568] (Buy; 1,607, 18 June close), which has acquired Indias Ranbaxy Laboratories [RBXY IN]
(Reduce; INR442.70, 17 June close) with a view to building a presence in emerging markets, and Eisai
[4523] (Buy; 2,982), which has a manufacturing plant in India. In doing so, both are taking steps to curb
production costs. We also highlight JCR Pharmaceuticals [4552] (No rating; 1,264), which has already
released an erythropoietin (EPO) biosimilar in Japan. Nipro [8086] (Neutral; 1,718) too is developing an
EPO biosimilar for the domestic market, and we think both companies bear close monitoring. Also
noteworthy is Fuji Pharma [4554] (No rating; 1,725), for its granulocyte-colony stimulating factor (G-CSF).
Contents
1. Summary: we look for sustained global demand for inexpensive drugs............. 5
2. Indian pharmaceutical industry......................................................................... 20
(1) Dr Reddys Laboratories [DRRD IN] (Buy; INR1,423.45) (Saion Mukherjee) .....................30
(2) Lupin Laboratories [LPC IN] (Buy; INR1,879.90) (Saion Mukherjee) ..................................31
(3) Glenmark Pharmaceuticals [GNP IN] (Buy; INR271.80) (Saion Mukherjee).......................32
(4) Sun Pharmaceutical Industries [SUNP IN] (Neutral; INR1,698.75) (Saion Mukherjee).........................33
(5) GlaxoSmithKline Pharmaceuticals [GLXO IN] (Neutral; INR2,096.70) (Saion Mukherjee) ....................34
(6) Cipla [CIPLA IN] (Reduce; INR334.65) (Saion Mukherjee) .................................................35
(7) Ranbaxy Laboratories [RBXY IN] (Reduce; INR442.70) (Saion Mukherjee) ......................36
(8) Jubilant Organosys [JOL IN] (Buy; INR348.65) (Saion Mukherjee) ....................................37
3. Antibody biosimilars destined to take hold around the world........................... 38

Shimadzu [7701] (Buy) (Motoya Kohtani) .................................................................................71
Nipro [8086] (Neutral) (Motoya Kohtani)...................................................................................73
4. Japan: government promoting generics ........................................................... 75

Kyowa Hakko Kirin [4151] (Buy) (Ryoichi Urushihara)..............................................................85
Eisai [4523] (Buy) (Ryoichi Urushihara) ....................................................................................88
Nichi-Iko Pharmaceutical [4541] (Buy) (Ryoichi Urushihara) ....................................................90
JCR Pharmaceuticals [4552] (No rating) (Motoya Kohtani) ......................................................92
Towa Pharmaceutical [4553] (Buy) (Ryoichi Urushihara) .........................................................94
Fuji Pharma [4554] (No rating) (Ryoichi Urushihara) ................................................................96
Sawai Pharmaceutical [4555] (No rating) (Ryoichi Urushihara) ................................................98
Daiichi Sankyo [4568] (Buy) (Ryoichi Urushihara) ..................................................................100
Companies mentioned in this report

Code/ticker
2269
3101
4151
4502
4503
4506
4507
4508
4514
4519
4523
4528
4530
4534
4535
4536
4540
4541
4552
4553
4554
4555
4568
4569
5201
7701
8086
ARBP IN
BIOS IN
CDH IN
CIPLA IN
DISH IN
DIVI IN
DRRD IN
GLXO IN
GNP IN
JOL IN
JPO IN
LPC IN
NTCPH IN
OPTC IN
OCP IN
PFIZ IN
PIHC IN
PLSL IN
RBXY IN
STR IN
SUNP IN
Company
Meiji Holdings
Toyobo
Kyowa Hakko Kirin
Takeda Pharmaceutical
Astellas Pharma
Dainippon Sumitomo Pharma
Shionogi
Mitsubishi Tanabe Pharma
Aska Pharmaceutical
Chugai Pharmaceutical
Eisai
Ono Pharmaceutical
Hisamitsu Pharmaceutical
Mochida Pharmaceutical
Taisho Pharmaceutical
Santen Pharmaceutical
Tsumura
Nichi-Iko Pharmaceutical
JCR Pharmaceuticals
Towa Pharmaceutical
Fuji Pharma
Sawai Pharmaceutical
Daiichi Sankyo
Kyorin
Asahi Glass
Shimadzu
Nipro
Aurobindo Pharma Limited
Biocon Limited
Cadila Healthcare Ltd.
Cipla Ltd.
Dishman Pharmacuticals & Chemicals Ltd.
Divi's Laboratories Ltd
Dr. Reddy's Laboratories Ltd.
GlaxoSmithKline Pharmaceuticals Ltd.
Glenmark Pharmaceuticals Limited
Jubilant Organosys Limited,
Jupiter Bioscience Limited
Lupin Limited.
Natco Pharma Limited
Opto Circuits India Limited
Orchid Chemicals & Pharmaceuticals Ltd.
Pfizer Limited, India
Piramal Healthcare Limited
Piramal Lifescience
Ranbaxy Laboratories Limited
Strides Arcolab Limited
Sun Pharmaceutical Industries Ltd.
Rating
Buy
Neutral
Buy
Neutral
Neutral
Buy
Neutral
Buy
No rating
Buy
Buy
Neutral
Buy
No rating
Neutral
Neutral
Buy
Buy
No rating
Buy
No rating
No rating
Buy
Buy
Buy
Buy
Neutral
No rating
No rating
No rating
Reduce
No rating
No rating
Buy
Neutral
Buy
Buy
No rating
Buy
No rating
No rating
No rating
No rating
No rating
No rating
Reduce
No rating
Neutral
Share price
3,705
159
847
3,895
3,015
709
1,690
1,319
643
1,633
2,982
3,610
3,335
848
1,749
2,989
2,666
3,330
1,264
5,860
1,725
8,290
1,607
1,255
936
708
1,718
INR851.55
INR310.65
INR630.20
INR334.65
INR205.60
INR770.05
INR1,423.45
INR2,096.70
INR271.80
INR348.65
INR83.30
INR1,879.90
INR168.35
INR228.05
INR154.55
INR1,101.05
INR488.55
INR137.80
INR442.70
INR389.45
INR1,698.75
Ticker
SVLS IN
TRP IN
WANB IN
WPL IN
ZTL IN
ABT US
ALXN US
AGN US
AMGN US
ARQL US
BAX US
BIIB US
BMY US
CPD US
ELN US
LLY US
ENDP US
FRX US
GENZ US
GILD US
HSP US
JNJ US
MRK US
MYL US
PDLI US
PFE US
REGN US
SIAL US
TEVA US
WPI US
AZN LN
GSK LN
NOVN VX
ROG VX
LONN VX
BAS GR
BAYN GY
BIM FP
SAN FP
SAZ GY
UCB BB
YM CN
GEN DC
NOVOB DC
NZYMB DC
068270 KS
068875 KS
Company
Suven Life Sciences Limited
Torrent Pharmaceuticals Limited
Wanbury Limited
Wockhardt Limited
Zenotech Laboratories Ltd.
Abbott Laboratories
Alexion Pharmaceuticals, Inc.
Allergan Inc.
Amgen Inc.
ArQule Inc.
Baxter International Inc.
Biogen Idec Inc.
Bristol-Myers Squibb Company
Caraco Pharmaceutical Laboratories, Ltd.
Elan Corporation, plc,
Eli Lilly & Co.
Endo Pharmaceuticals Holdings
Forest Laboratories Inc.
Genzyme Corporation
Gilead Sciences, Inc.
Hospira, Inc.
Johnson & Johnson
Merck & Co. Inc.
Mylan
PDL BioPharma, Inc.
Pfizer
Regeneron Pharmaceuticals, Inc.
Sigma-Aldrich Corporation
Teva Pharmaceutical Industries
Watson Pharmaceuticals Inc.
AstraZeneca PLC
GlaxoSmithKline plc
Novartis AG
Roche
Lonza Group Ltd.
BASF
Bayer AG
bioMerieux sa
Sanofi-Aventis
Stada Arzneimittel AG
UCB S.A.
YM Biosciemces
Genmab A/S
Novo Nordisk A/S
Novozymes A/S
Celltrion
LG Life Sceineces Ltd
Rating Share price

No rating
INR31.35
No rating
INR557.20
No rating
INR77.35
No rating
INR136.20
No rating
INR113.80
No rating
US$48.63
No rating
US$54.22
No rating
US$61.45
No rating
US$55.44
No rating
US$5.22
No rating
US$42.58
No rating
US$49.01
No rating
US$25.86
No rating
US$4.43
No rating
US$4.95
No rating
US$34.39
No rating
US$21.89
No rating
US$27.30
No rating
US$51.43
No rating
US$35.97
No rating
US$56.18
No rating
US$59.18
No rating
US$35.86
No rating
US$18.36
No rating
US$5.62
No rating
US$15.47
No rating
US$26.55
No rating
US$53.38
No rating
US$54.22
No rating
US$44.26
Reduce
GBp3,082
Neutral
GBp1,215
Buy
CHF54.40
Neutral
CHF158.90
No rating
CHF77.40
Neutral
46.64
Neutral
48.665
No rating
83.90
Neutral
51.11
No rating
29.60
Neutral
26.96
No rating
C$1.27
No rating
DKK51.30
Reduce DKK488.70
No rating DKK688.50
No rating KRW21,200
No rating KRW22,250
Note: Share prices as of 18 June close for Japanese stocks, 17 June close for other stocks.
Source: Nomura
1. Summary: we look for sustained global demand for

inexpensive drugs
(1) Conclusion: antibody therapeutic biosimilars likely to find a global
market
India-based generic
drug makers are lowcost producers
We recently visited 21 companies 1, including Indian generic drug makers, to gauge the current
status of the generic drug market. We toured manufacturing plants of four makers: Aurobindo,
Eisai, Ranbaxy, and Strides Arcolab. We discovered the main focus of Indian generic drug
makers is expanding scale merits as much as possible to reduce manufacturing costs, thereby
facilitating the supply of a wide range of low-cost drugs.
Commercialization of
antibody therapeutic
biosimilars
Typically, a generic drug refers to the generic version of a small molecule drug that has a
molecular weight below 300. Indian generic makers have started expanding into generic
biologicals (biosimilars). Biologicals are pharmaceuticals that use biological substances as the
active ingredient and products like growth hormone and anemia treatment EPO. They are
typically classified as either protein drugs, which have a molecular weight of 10,00030,000,
or antibody therapeutics, which have a molecular weight of 150,000 (Exhibit 1-1). Biosimilars
is the term for generic versions of biopharmaceuticals. Unlike small molecule drugs that are
chemically synthesized, biosimilars are produced through fermentation and thus are not
completely identical to the original drug. Instead, they are mostly similar, which is why the term
biosimilar was coined. Dr. Reddys Laboratories currently markets a biosimilar of antibody
therapeutic Rituxan (cancer treatment) under the trade name Reditux. Sold at half the price of
brand drugs, the branded drug maker lowered its price as well. Conventional stock market
wisdom is that antibody therapeutic biosimilars will not be commercialized, but we believe
several will be marketed in Europe and the US by 2015 (see Chapter 2). Moreover, we expect
the pricing to be significantly lower than for the original drugs.
Consultations ongoing
prior to establishment of
guidelines
Investors belief that it would be difficult to commercialize antibody therapeutic biosimilars is

based on two factors: (1) regulatory guidelines do not currently exist and (2) manufacturing
costs are high. First, regulatory authorities in Japan, Europe, and the US have not yet
announced approval guidelines for antibody therapeutic biosimilars. Accordingly, market
watchers do not think generic makers are willing to commit substantial resources to
development without knowing the requirements. Our research, however, suggests generic
companies have not been idly sitting on the sidelines waiting for the regulatory authorities, but
instead are engaging them in ongoing consultations prior to the establishment of guidelines. In
effect, the regulatory authorities are formulating guidelines with input from the generic drug
companies.
The 21 companies we visited are Alkem Laboratories, Aurobindo Pharma [ARBP IN], Biocon [BIOS
IN], Cadila Healthcare [CDH IN], Dr. Reddys Laboratories [DRRD IN], Eisai Pharmaceuticals India
Private, GlaxoSmithKline Pharmaceuticals [GLXO IN], Glenmark Pharmaceuticals [GNP IN], GVK
Biosciences Private, Intas Biopharmaceuticals, Jubilant Organosys [JOL IN], Jupiter Bioscience [JPO
IN], Lupin [LPC IN], Matrix Laboratories, Natco Pharma [NTCPH IN], Opto Circuits India [OPTC IN],
Ranbaxy Laboratories [RBXY IN], Strides Arcolab [STR IN], Sun Pharmaceutical Industries [SUNP
IN], Torrent Pharmaceuticals [TRP IN], and Wanbury [WANB IN].
1-1. Drug categories including biologicals

Category
(1) Small molecule drug
Molecular weight
Formulation
Administration
Example drugs
Manufacturing
Clinical trials
Europe
Japan
US
100300
Tablet, capsule, liquid formulation
Oral, injection
Blopress
Antihypertensives
Lipitor
Cholesterol-lowering drug
Aricept
Alzheimers disease
Chemical synthesis/partial fermentation
Simple comparison
Proof of bioequivalence
(1) Sm all m olecule drug

(chemical synthesis)
Biological drugs
(2) Protein drug
(3) Antibody therapeutic
10,00030,000
About 150,000
Liquid formulation, freeze-dried
Injection
Insulin
Antidiabetes drugs
Remicade
Antirheumatism drug
Growth hormone
Dwarfism treatment
Rituxan
Anticancer
EPO preparation
Anemia drug
Avastin
Anticancer
Fermentation/partial chemical synthesis
Fermentation
Similar to those required for new drugs
Development guidelines for individual products
Development guidelines for individual products (more stringent than Europe?)
Simple review?
Complete data similar to new drugs?
(3) Antibody drug

(fermentation)
(2) Protein drug

(fermentation)
Source: Nomura
Manufacturing costs can Second, it is becoming increasingly possible to reduce manufacturing costs. Biosimilars are
be reduced
produced through fermentation using E. coli, yeast, and mammalian cells. Consequently,
manufacturing costs are exceptionally high because initial investments, including fermentation
tanks, can exceed 10bn. However, technological advances have led to significant
improvements in production, with yields of the target substance having risen from 20mg/liter in
the 1980s, to 5g/liter more recently. We estimate the current manufacturing cost for a biosimilar
at several thousand yen per gram. This is significantly lower than the cost of branded antibody
therapeutics, and we therefore see ample scope for low-cost biosimilars.
Business climate is
conducive to suppliers
and users
The generic drug market has not expanded merely on the back of greater supply, but has also
benefited from increasing demand. The business model for generic drug makers differs from
that of branded drug makers, which aggressively conduct marketing activities to sell their
drugs. We think the environment is positive for growth of biosimilars as demand is there for
suppliers as well as users.
Inexpensive drugs are in demand throughout the world. Developed markets need them to
Universal health
insurance spurs demand contain rising healthcare expenditures while emerging markets require them to support the
health of their citizens amid economic expansion. Following the US healthcare reform, all
major developed markets now have health insurance managed by government. Since medical
expenditures are a major component of the national budget, increases in healthcare spending
need to be kept in line with economic growth. Against the backdrop of developed countries
increasingly facing difficulties in financing their high healthcare expenditures, low-cost
biosimilars would be welcomed to replace expensive antibody therapeutics, annual costs for
which can run several million yen per patient. Our review of data related to JCR
Pharmaceuticals [4552] EPO biosimilar (epoietin alpha BS Injection JCR), a treatment for
anemia, suggests the Ministry of Health, Labour and Welfare (MHLW) is inclined to approve
biosimilars. Approval of a generic drug typically requires proof of bioequivalence, but approval
was granted in the case of epoietin alpha BS Injection JCR based on proving equivalent
efficacy. In fact the approval process appears to have been surprisingly easy.
Antibody therapeutic
biosimilars would help
hold back rising
pharmaceutical
expenditures
According to biopharmaceutical manufacturer Lonza Group [LONN VX], biologicals going off
patent in 200815 have a global market value of US$59bn while generic drug maker Teva
[TEVA US] estimates patent expiries in 201620 are worth another US$23bn. Combined, this
represents a potential market for biosimilars by 2020 of around US$80bn. Major patent
expiries begin from 2012 and we estimate the potential market for biosimilars will increase by
around US$10bn each year from that point. We further assume biosimilars will capture about
50% of that market potential, thereby reducing global pharmaceutical expenditures of 50trn
by 500bn. The US market accounts for about 80% of biological sales, and we therefore
expect biosimilars to reduce US pharmaceutical expenditures of 30trn by about 400bn,
representing an annual reduction of 1.3% on pharmaceutical spending. Various measures to
cut pharmaceutical costs were adopted as part of the US healthcare reform and we think
these will slow pharmaceutical market growth to 5%. Commercialization of biosimilars could
further contribute to reducing pharmaceutical expenditures.
Major US and European pharmaceutical manufacturers began forming alliances with Indian
Indian companies key

suppliers
generic drug makers from 2008. Initially, the alliances centered on the supply of bulk for small
molecule drugs and consignment manufacturing, but more recent partnerships have targeted
biosimilars. India is already a source of low-cost drugs, and tapping the Indian generic drug
makers to become global suppliers of low-cost drugs for chronic diseases could provide the
branded drug makers with a stable profit stream. Branded drug companies, meanwhile, have
been turning their attention to high-risk, high-return drugs that address unmet medical needs
like oncology and central nervous system (CNS) diseases. Stable profits generated by the
drugs for chronic diseases could be used to fund development of new drugs, thereby creating
a well-balanced business model (Exhibit 1-2).
1-2. Changing business structure of major US and European pharmaceutical manufacturers
Return
Return
high-risk , high-return
Unmet
medical
needs
Previous
model
Lo w-risk , lo w-return
medium-ris k, medium-return
Combining
results in
rebalancing
Suppo rts R &D
Cheap
drugs
Cas h f lo w s o urc e
Risk
Risk
Source: Nomura
Investment points for

key Indian companies
Our top pick among Indian generic makers is Dr. Reddys Laboratories. In addition to
expanding its US business, the company is a generic drug bulk supplier and is expanding into
emerging markets through an alliance with GlaxoSmithKline [GSK LN]. Next, we like Jubilant
Organosys, which has formed partnerships with major branded drug makers like Eli Lilly [LLY
US] and is providing both R&D and manufacturing support.
Investment points for

key Japanese
companies
Japanese companies are late in adapting to the structural changes in the global market.
Standouts are Daiichi Sankyo [4568], which acquired Ranbaxy Laboratories and is
expanding into emerging markets, and Eisai, which is taking advantage of Vizaqs Indian plant
to sharply lower manufacturing costs of Alzheimers disease treatment Aricept. In the
biosimilar field, JCR Pharmaceuticals has already commercialized an EPO (anemia drug)
biosimilar while Nipro [8086] is on track to become the second company to do so. EPO is an
essential drug for dialysis patients, who are increasing in number by 10,000 every year, and
there is a strong need for cheaper alternatives. Mochida Pharmaceutical [4534] and Fuji
Pharma [4554] are jointly developing a granulocyte-colony stimulating factor (G-CSF)
biosimilar for the treatment of neutropenia while Shimadzu [7701] is developing analysis
equipment for biosimilar sugar chains.
(2) Aging population drives up healthcare expenditures and

pharmaceutical costs
Aging population is
driving up healthcare
expenditures
Use of pharmaceuticals is expanding on the back of demographic trendsie, the aging

populations and higher incidence of disease among the elderlyand will likely drive up
pharmaceutical costs. The rise is not limited to pharmaceutical costs but also applies to total
healthcare expenditures, which include medical procedures. We used Japan as a model,
because it is at the vanguard of these demographic trends, and analyzed factors that boosted
healthcare expenditures in the past (Exhibit 1-3). We concluded that the increase in the
number of elderly over the age of 65 was the single greatest factor boosting healthcare
expenditures. Japans government has attempted to lower healthcare expenditures per capita
through periodic medical fee revisions, but total healthcare expenditures have continued to
rise as the impact of the growing population exceeded savings from healthcare cost
containment policies. In the past 15 years, the elderly population has increased at an annual
rate of 3.7%. The growth rate will decline to 2.8% during 200510, 1.2% for 201015, and
0.3% for 201520, according to the National Institute of Population and Social Security
Researchs Future Population Projections for Japan. If government policies to cut healthcare
expenditures for the elderly were maintained at 200005 levels, expenditures would not stop
increasing until 201015.
1-3. Healthcare expenditures for elderly linked to population growth: analysis of growth factors
CY
9095
9500
0005
0510E
1015E
1520E
National healthcare expenditures

Total
Per capita
Population
4.00
1.70
0.97
-
3.68
1.48
0.83
-
0.31
0.22
0.14
-0.30
-0.40
-0.60
Healthcare expenditures for elderly

Total
Per capita
Population
5.80
3.87
2.21
-
1.60
0.05
-0.92
-
4.14
3.81
3.17
2.80
1.20
0.30
(%)
GDP
Social
security costs
1.96
0.26
-0.04
-
6.51
3.83
2.36
-
Note: Data from 2005 are compiled from National Institute of Population and Social Security Researchs Future Population Projections
for Japan (December 2006).
Source: Nomura
Major developed
countries advancing
healthcare cost
containment policies
The incidence of disease rises with age, and thus it is easy to imagine rising healthcare cost
per capita. In analyzing Japanese demographic trends, we confirmed that longer life spans
translated into higher per capita healthcare costs (Exhibit 1-4). Although Japan is the leader in
the aging population, the trend will become increasingly pronounced next in Europe and then
the US. Accordingly, Europe and the US will likely next experience sharply expanding
healthcare expenditures. Even France and Spain, which have had relatively lax policies on
healthcare expenditures compared to other European countries, enacted full-scale costcontainment initiatives from May 2010. The US just passed healthcare reform and will have to
aggressively implement cost-cutting measures. It is generally believed that the goal of social
security is to promote and maintain the health of the citizenry. However, maintaining health of
the elderly would drive up healthcare costs, thereby impeding economic expansion, and
ultimately proving counter-productive. We expect to see an increased focus on curbing
pharmaceutical costs.
1-4. Healthcare costs rose sharply in line with increase in life span
Healthcare costs
Increased
costs
Advancement of aging
Age
Source: Nomura, based on data from Professor Ogawa et al at Nihon University
(3) Inexpensive drugs needed for all fields

Zero growth for
pharmaceutical markets
in developed countries
Given the structural changes underway worldwide, we see little prospect of growth for
pharmaceutical markets in developed countries. The major countries have universal health
insurance systems similar to Japans and therefore a large portion of the cost for
pharmaceuticals is borne by national coffers. Substantial economic growth is unlikely in the
developed countries, and thus healthcare cost-containment measures will probably be
necessary. Consequently, pharmaceutical expendituresa subset of overall healthcare
expendituresare unlikely to expand, and we expect net zero growth in developed countries.
Pharmaceutical prices
need to decline
Aging populations are boosting the volume of drug use in developed countries, but the size of
pharmaceutical markets is being regulated because of strained national finances. It is
therefore essential to bring down unit drug costs. We conclude that downward pressure on
unit prices for drugs will continue so long as this demographic trend persists.
Changing structure of
drug use (1): expanding
market for drugs that
address unmet medical
needs
A natural result of aging populations will likely be an increase in patients suffering from cancer,
CNS diseases like Alzheimers disease, and immune disorders like rheumatoid arthritis.
However, given that there are few truly effective treatments for these diseases at present,
there is substantial potential demand. In the case of Alzheimers disease, assuming it
manifests at age 65, treatment would likely continue for 10 years at most. If a more effective
treatment emerged, priority would be on concurrent use with existing drugs to improve efficacy.
We expect the market for drugs addressing unmet medical needs to continue expanding.
Changing structure of
drug use (2): generic
drugs will likely be firstchoice treatment for
chronic diseases
In contrast, existing treatments for chronic diseases like hypertension, hyperlipidemia, and
diabetes are already highly effective. Therefore, the market need is not for new drugs but
rather cheaper ones. Assuming diabetes manifests at age 40, pharmaceutical treatment would
likely continue for 35 years based on Japans life expectancy. In addition, patients of chronic
diseases often suffer from additional circulatory diseaseseg, about half of hyperlipidemia
patients also have hypertension. The need for cheaper drugs is substantial given the high
volume of demand and the long period of treatment. Caduet, a pill that combines amlodin
(hypertension drug) and atorvastatin (hyperlipidemia treatment), was marketed domestically in
July 2009 targeting patients that suffer from both diseases.
Market share rules are

changing
We assume pharmaceuticals will overall be nearly a zero-sum market, but expect sales for drugs
targeting unmet medical needs to expand while sales of chronic disease treatments contract. It
would be difficult to restrict expansion in pharmaceutical volume usage, leading to a drop in unit
prices. Accordingly, we think generics will become the drug of first choice. In fact, US
prescriptions for cholesterol-lowering drug Lipitor have continued to decline prior to the patent
expiry and there has been a similar trend for diabetes drug Actos. Even if a new drug for chronic
diseases is commercialized, it has to compete with generic versions of similar drugs. Accordingly,
new drug sales are unlikely to expand on the scale at which they did in the past.
1-5. Market for drugs treating unmet medical needs likely to expand while generics likely to become drug of choice for chronic
diseases
Current
Others
Marke t s ize not expected to grow
Others
Hypertensives
Antidiabetics
Cho lestero l-lo wering
drugs
Future
Generics
Anticancer agents
Immune disease
treatments
CNS drugs
Generic drugs
Source: Nomura
Inexpensive drugs
widely used even in
emerging markets
Low-cost drugs in developed markets are crucial to maintaining health in emerging markets.
Makers that supply low-cost drugs to emerging markets are contributing to their economic
expansion as the health and well being of workers in emerging markets is crucial to the
continued economic success. This is similar to Japan during its economic expansion in the
1960s and 1970s. As the economy expands, per capita GDP rises and so does healthcare
expenditures per capita (Exhibits 1-6, 1-7). The use of generic drugs could lead to a shift to
the same brand drugs used in Europe and the US.
10
1-6. Expanding pharmaceuticals in emerging markets
Em erging m ark ets w ill outgrow deve lope d marke ts

"Annual pharmaceutical sales in emerging markets is expected to reach $400bn by 2020,
equivalent to current sales in the US and the five major European markets combined."
Eur 5
$162.3bn
Turkey: $52bn
Eur 5
$123bn
Korea: $66bn
Emerging
markets
US
$276bn
Mexico: $60bn
Russia: $38bn
US
$364.18bn
Assuming
2% grow th
per year
Brazil: $60bn
$55bn
India:
$40bn
China: $82bn
2006
2020 (see note)
(CY)
Note: Extrapolations from 2006 to 2020 based on IMS projection and % of 2006 sales.
Source: IMS MIDAS 2006 sales data, Total Pharmaceutical Market
1-7. Healthcare expenditures rise in tandem with economic growth
Per capita healthcare expenditures ($)

8,000
US
7,000
4,000
Germany
France
UK
3,000
Spain
Italy
Japan
2,000
Mexico
1,000
Brazil
Russia
Turkey
China
India
0
0
10,000
20,000
30,000
40,000
50,000
Per capita GDP ($)
Source: Nomura
(4) US/European branded drug makers change business model

Turning point from 2008
At their 2008 annual meetings, Pfizer [PFE US] and Merck [MRK US] both announced plans
to expand into the generic drug business, including biosimilars, marking a substantial change
in their business models. Thereafter, US and European branded drug makers formed alliances
with Indian generic drug makers, in an effort to develop a business structure that supports lowcost drugs. The flurry of major patent expiries in the 2000s that depressed earnings prompted
the business model change. The branded drug makers attempted to sustain profit growth
11
through external measures such as M&A but were unable to offset the negative impact of
successive major patent expiries.
The US and European pharmaceutical manufacturers new business model centered on a
Overall risk-return
balance of branded drug necessary shift from the previous medium-risk, medium-return model to one focused on high
makers has not changed risk and high return that targeted drugs to treat unmet medical needs. The strategy was
unsuccessful because of repeated delays to new drug approvals. As a result, the branded
drug makers needed a business that could generate stable cash flow. Supplying low-cost
drugs to emerging markets and the generic drug business became the necessary stable cash
cow businesses. The low-risk, low-return generic drug business generated stable cash flow to
fund R&D for the high-risk, high-return new drug business. The combination of the low-risk,
low-return stable businesses and high-risk, high-return new drugs businesses resulted in a net
overall medium-risk, medium-return model, basically unchanged from before (Exhibit 1-2).
Even now, US and European pharmaceutical majors are aggressively forming partnerships
with Indian generic drug makers (Exhibit 1-8).
1-8. Alliances between Indian makers and US/European branded drug majors
Main company
GSK India
Sanofi Aventis
Pfizer India
Abbott
Mylan
Teva
Partner company
Type
Details
Dr. Reddys
Daiichi Sankyo
Eisai
Astellas
Shantha Biotechnics
Glenmark
Aurobindo
Johnson & Johnson
Zydus Cadila
Biocon
Forest
Natco
Bayer
Taisho
Pfizer
Kowa
Aventis
Lundbeck
Lonza
UCB
Abbott
Hospira
Partnership
Partnership
Partnership
Partnership
Acquisition
Partnership
Partnership
Sale
Partnership
Partnership
Partnership
Partnership
Acquisition
Acquisition
Acquisition
Partnership
Partnership
Partnership
Partnership
Partnership
Partnership
Sale
Development and marketing of specific drugs in emerging markets

Joint marketing of hypertensive Olmesartan
Production, distribution, marketing of antiulcer drug Parit
Exclusive rights to antifungal Maycamine in Indian market
Vaccine business
Development and marketing of chronic pain treatment
Licensing out of solid dosage business
Four healthcare products
Marketing of 24 Abbott products in 15 emerging markets
Biologicals
Development, distribution, and marketing of hypertensive Bystolic
Global supply of copaxone
Bayers French generic drug business
Japanese generic drug maker
Pfizers Italian generic drug business
Joint venture with Kowa Shinyaku
Marketing copaxone in North America
Developing copaxone in Europe
Development, production, and marketing of biologicals
Joint marketing of ProAirRHFA inhalant in US
Licensing of TriCor
Global rights to G-CSF biosimilar
Source: Nomura
(5) Indian generic drug makers targeting biosimilars

Supplying drugs to
US/European
pharmaceutical
manufacturers
Indian generic drug makers market branded generics domestically and standard generics in
Europe and the US. Branded drug makers have formed alliances with Indian generic drug
makers on the back of the performance of their US/European businesses. The branded
pharmaceutical majors are changing their business model by having Indian makers produce
and supply drugs globally. Indian generic makers have ramped up production to generate
scale merits, thereby providing cheaper drugs. One line in Aurobindos state-of-the-art plant
can produce 700mn tablets monthly (8.4bn annually). If the plant site were fully utilized,
annual production would reach 126bn tablets. In comparison, Japanese major generic drug
maker Sawai Pharmaceutical [4555] produced a total of only 4.2bn tablets in 10/3 and its
medium-term business plan calls for boosting this to 6bn by 12/3.
12
Indian manufacturing
costs are one-seventh
those of Japan
Given the limited disclosure by companies, we estimated the Indian generic drug makers
manufacturing costs by using publicly available information. In Japan, we used Towa
Pharmaceutical [4553] and Sawai Pharmaceuticals Schedule of Cost of Goods
Manufactured. We base our figures for Indian generic makers on feedback from management
interviews. We concluded that manufacturing costs of Indian generic drug makers were oneseventh those of Japanese makers. Specifically, wages were one-tenth, material costs were
one-fifth, and business expenses were one-twentieth. Materials represent the largest cost
factor and there appears to be scope for additional reductions by the Indian makers. The cost
of receptacles is significantly higher in Japan. For example, glass vials used for injectable
drugs in Japan are much more expensive owing to higher domestic standards. Tablet
packaging is also much cheaper in India, as Japanese tablets use a backing comprised of
several aluminum sheet layers compared to only a single layer in India. This accounts for only
a few yen but substantially bolsters the profit margins of Indian generic drug makers. Our
initial impression following company interviews was that the Indian makers manufacturing
costs were one-fifth those of the Japanese generic drug makers, but our estimates suggests
these are even lower. We based our sales estimates for Indian makers on the drug price
listing (Current Index of Medical Specialties) and sales were about one-tenth those of the
Japanese counterparts.
1-9. Indian makers manufacturing costs are substantially lower
Sales
Cost of manufacturing
Labor expenses
Raw material costs
Other expenses
Gross profits
Towa
Pharmaceutical
100.0
50.0
11.5
29.0
10.0
50.0
Japanese companies
Sawai
Pharmaceutical
100.0
60.0
8.4
37.2
14.4
40.0
Average
Indian
companies
Change
100.0
55.0
10.0
33.1
12.2
45.0
10.0
8.2
1.0
6.6
0.6
1.8
%
90
85
90
80
95
96
Source: Nomura
Entry into biosimilar

market
The drugs referenced above are small molecule drugs with molecular weights of around 300,
but Indian generic drug makers have expanded their efforts to include follow-on biologics or
biosimilars. There are two categories of biosimilars: protein drugs with molecular weights of
around 10,00030,000 and antibody therapeutics with a molecular weight of around 150,000.
The Indian generic makers are targeting both categories. We cover details in chapter 2, but
the European regulatory authorities have released review guidelines for biosimilars and
already approved a protein drug biosimilar. No antibody therapeutic biosimilar has been
approved yet. In India, Dr. Reddys Laboratories launched a biosimilar of anticancer agent
Rituxan under the name of Reditux in April 2007 and posted 2009 sales of INR199mn
(US$4mn, +29% y-y). Although not a biosimilar, Biocons BIOMAb EGFR (generic name:
nimotuzumab) was marketed from July 2006. BIOMAb EGFR was originally discovered by YM
Biosciences [YM CN] and is already commercialized in Cuba for the treatment of head and
neck cancer. Daiichi Sankyo is currently conducting domestic Phase 2 clinical trials.
Indian generic makers

have superior business
model
The business model adopted by Indian generic makers, with its focus on establishing a value
chain, is superior to that of its Japanese counterparts. The biggest difference is that Indian
generic makers have a vertically integrated business model and manufacture their own
pharmaceutical bulk. In contrast, Japanese makers are geared for small-lot diversified
production and are unable to manufacture pharmaceutical bulk in-house. We think Indian
generic drug makers are far better positioned to reduce manufacturing costs on the back of
13
scale merits. Indian generic makers also stand out for their success in concurrently operating
domestic and overseas (Europe and the US) businesses.
1-10. Japanese generic makers: unable to apply vertically integrated business model
Type
Branded drug
Company origin Japan/US/Europe

Region
Japan/US/Europe
R&D
Bulk production
Formulation
Marketing
Generics
India
India
Japan
Overseas
Japan
x
Overseas
x
x
x
x
Source: Nomura
Expansion into branded

drug business would be
difficult
Indian generic drug makers are advancing into development of brand drugs, but we are
skeptical of their prospects of successfully making the shift to innovators because (1) they lack
sufficient financial clout and (2) the commercial value of drug candidates is limited. We think
the issue of finances could be resolved eventually but not in the near future, given that it costs
at least about 50bn (US$500mn) to develop a brand name drug. The annual R&D budget for
most major generic drug makers stands at about 10bn (US$100mn), making it exceedingly
difficult to develop a drug in the US (the worlds biggest market). Moreover, even if
development were successful, marketing costs in the US and Europe would likely run at least
20bn (US$200mn). Japanese branded drug makers started marketing new drugs in the US
from the late 1990s and formed marketing alliances with US partners to minimize sales
promotion costs. Despite this, they ran deficits of around 10bn for the first several years. A
loss of this level would wipe out all term profits of the Indian generic drug makers. We
conclude it will be some time before return on invested capital will improve sufficiently. As for
the commercial value of branded drug candidates, the main problem we see is that the
candidates have the same mechanism of action as drugs from 10 years ago, making
differentiation difficult. In India and Europe, many of the generic drug makers are developing
diabetes drugs like peroxisome proliferator-activated receptor (PPAR) inhibitors, for which
there are concerns over potential liver damage, and dipeptidyl peptidase-4 (DPP-4) inhibitors,
for which large-scale clinical trials are required because circulatory-related side effects have
been confirmed. The Food and Drug Administration (FDA) issued stringent review guidelines
for diabetes drugs in December 2008 that required additional Phase 3 clinical trials even for
Takeda Pharmaceuticals [4502] SYR-322, which had demonstrated exceedingly high safety
results in animal studies. Considering global trends, we think the production of generic drugs
for US and European companies will be a successful business model for the Indian generic
drug makers, but are skeptical regarding the profit potential of them marketing branded drugs
in India and Europe.
14
1-11. Drug pipelines of Indian generic drug companies

Company
Glenmark
Molecule name
Crofelemer (inlicensed)
GRC 3886 (oglemilast)
GRC 8200 (melogliptin)
GRC 4039 (revamilat)
GRC 10693
GRC 500
GRC 15300
GBR 600
GRC 6211
Zydus Cadila
Biocon
Dr Reddy's
Ranbaxy
Lupin
Piramal
Lifesciences
ZYH1
ZYO1
ZYI1
ZYH2
ZYH7
ZYT1
ZYD1
Oral insulin
Anti-CD6
Targeted immunoconjugates
Anti-CD20
Peptide hybrid
Anti-EGFR
Biosimilar MAbs
Insulin analogs - lispro, aspart
Rh-insulin, glargine
GCSF, EPO
Reditux
DRF 2593 (balaglitazone)
DRL 17822
Several compounds
P. falciparum combination
LLL 2011 (amigra)
LL 4218 (desoside-P)
LL 3858 (sudoterb)
LL 3348 (sesoris)
Unspecified
Unspecified
P276 - CDKs
P276 - gemcitabine combination
P276 - tadiation combination
P1446 - CDKs
NPB-001-05-Bcr-Abl
NPS31807 - TNF alpha
P979 - TNF alpha
P1736-non-PPAR gamma
P1201 - Lilly
P2202 - Lilly
NPH30907
Indication
Antidiarrhoeal
Asthma, COPD
Diabetes mellitus (Type II)
Rheumatoid arthritis, MS inhibitor
Neuropathic pain, osteoarthritis
MS, inflammatory diseases
Osteoarthritic pain, neuropathic pain, and skin disorders
Antiplatelet, adjunct to PCI/acute coronary syndrome
Osteoarthritic pain, neuropathic pain, and urinary
incontinence
Dyslipidemia
Obesity, diabetes
Pain
Diabetes
Dyslipidemia
Dyslipidemia
Dyslipidemia
Diabetes
Oncology/inflammation/autoimmune
Oncology
Oncology
Diabetes
Oncology
Oncology/immunology
Diabetes
Diabetes
Oncology
Non-Hodkins lymphoma
Metabolic disorders (partnership with Rheoscience)
Metabolic disorders/CVS (partnership with Argenta)
Respiratory disorders (dyslipidemia and atherosclerosis)
Malaria
Antimigraine, herbal
Antipsoriasis
Anti-TB
Antipsoriasis, herbal
Type II diabetes
Rheumatoid arthritis
Head & neck cancer, multiple myeloma
Pancreatic cancer
Head & neck cancer
Unspecified
Chronic myeloid leukemia
Rheumatoid arthritis and psoriasis
Inflammation
Diabetes and metabolic disorders
Dermaphytotypes
Target
CTFR inhibitor
PDE IV inhibitor
DPP IV inhibitor
PDE IV
CB-2
VLA-2 antagonist
TRPV3 antagonist
Von Willebrand factor
Clinical trial phase

Phase 3
Phase 2
Phase 2
Phase 1
Phase 1
Phase 1
Preclinical
Preclinical
TRPV 1 antagonist
Phase 1
PPAR alpha:gamma
CB-1 antagonist
Multi-modal
PPAR alpha:gamma
PPAR alpha
Undisclosed
GLP-1
Monoclonal antibody
-
Phase 3
Phase 1
Phase 2
Phase 1
Phase 1
Phase 1
Phase 1
Phase 2
Phase 3
Discovery
Preclinical
Discovery
Market
Preclinical
Preclinical
Market
Market
Market
Phase 3
Phase 1
Phase 1
Phase 3
Phase 3
Phase 2
Phase 2
Phase 2
Preclinical
Preclinical
Phase 2
Phase 1
Phase 1
Phase 1
Phase 2
Phase 2
Preclinical
Phase 1
Phase 1
Phase 1
Phase 2
Source: Nomura
(6) Japanese generic drug makers limited to domestic market

Government FY12 target Japanese regulatory authorities, keen to reduce pharmaceutical costs, have been promoting
of 30% generic drug
use of cheaper generic drugs. The MHLW has set a generic drug ratio (volume basis) target of
ratio seems unrealistic
30% by FY12, which would require a 1.5-fold increase in the market from the 2009 ratio of
20%, or annual average growth of 14%. This would translate into additional sales of more than
20bn and would largely be dependent on sharp increases in production by the three generic
drug majors. These three companies control a market share of about 50%, and thus achieving
the government target based solely on increased sales by them would require nearly a
doubling in production. However, production capacity is limited to 1.5x current levels, thereby
putting the government target for all purposes beyond reach. If production were boosted on
par with the current maximum capacity, we estimate that it would result in a generic drug ratio
15
of 25%. The government is likely to revise its generic drug ratio target to 25% in the near
future, citing the aforementioned points.
April 2010 incentives to
dispensing pharmacies
is proving effective
New incentives were adopted to further promote the use of generic drugs. Under the previous
system, pharmacies were awarded a 40 incentive for each prescription that included at least
one generic drug. To be eligible for the generic drug dispensing premium, pharmacies had to
maintain a generic dispensing ratio of 30% or higher on a prescription basis. Effective from
April 2010, the eligibility requirement for the generic drug-dispensing premium was changed to
a three-tier system based on the volume of drugs dispensed rather than the number of
prescriptions. When the generic drug dispensing ratio exceeds 20%, 25%, and 30%, the
respective premium is 60, 130, and 170. The generic drug makers sales growth in April
and May substantially exceeded the industry average, suggesting that government stimulatory
measures were successful.
Japanese generic
makers almost
completely dependent
on domestic market
Japanese generic makers rely almost completely on the domestic market, in contrast to Indian
generic drug makers, which have successfully expanded abroad. The low diffusion rate of
generic drugs in Japan was one factor responsible for the significantly weaker profit bases of
generic drug makers relative to their Indian counterparts, and a factor that prevented them
from expanding overseas. We are optimistic on the growth prospects of the domestic generic
drug makers but expect cash flow to be primarily channeled into investment to boost
production capacity.
Overseas competitors
continue to enter
domestic market
In contrast, overseas companies have successively expanded into the Japan market (Exhibit
1-12), although sales have fallen short of initial expectations in most cases. One reason for
the limited success of foreign generic drug makers in Japan is the difficulty in competing with
the exceedingly high quality of Japanese products. This same high quality is likely responsible
for Japanese generic drug makers low profitability. We think a much more attractive business
model would be the generic drug bulk business, which commonly maintains operating margins
of around 30%.
1-12. New entrants to Japanese generic drug market: foreign and nonpharmaceutical companies
Date
2006
2007
Company
Jan
Novartis (Switzerland)
Sandoz (Germany)
Nippon Hexal
Mar
Hospira (US)
Taiyo Yakuhin
Apr
Orchid Chemicals &

Pharmaceuticals (India)
Apr
Zydus (India)
Oct
Lupin (India)
Feb
Mylan (US)
2008
Torrent (India)
Apr
Ranbaxy (India)
Jan
Teva (Israel)
Apr
Actavis (Iceland)
2009
GlaxoSmithKline (UK)
Dec
Pfizer (US)
2010
Partner company
Jan
PharmaForce (US)
May
Sanofi Aventis (France)
Details
Sandoz parent company, Novartis, acquired Hexal. Marketed Japans
first generic recombinant biopharmaceutical in Sep 2009; aims to
launch more than 10 new generic drugs annually
Established Japanese corporation and partnered with Taiyo Yakuhin to
develop injectable generics
Established Japanese corporation
Nippon Universal Pharmaceutical

Zydus established Japanese corporation in Sep 2006
(renamed Zydus Pharma Japan in
and acquired Nippon Universal Pharmaceutical in April 2007
June 2010)
Kyowa Pharmaceutical Industry
Lupin acquired Kyowa Pharmaceutical Industry
Mylan acquired Mercks generic drug business, including operations in
Merck
Japan
Established Japanese corporation (stopped operation Apr 2008)
Daiichi Sankyo acquired Ranbaxy, making it a subsidiary; collaborating
Daiichi Sankyo (acquirer)
in development
Established joint venture (Teva established Japanese corporation in
Kowa
2005), sales start from 2010
Aska Pharmaceutical
Established joint venture
Concluded comprehensive alliance for biosimilars; GSK became JCR
JCR Pharmaceuticals
Pharmaceuticals top shareholder from Mar 2010
Inaugurated Japanese corporation specialty organization, sales
targeted from 2011
Daiichi Sankyo subsidiary, Luitpold Pharmaceuticals, acquired
Daiichi Sankyo
injectable generic maker PharmaForce (Ohio)
Established joint venture, joint development of biosimilars
Source: Nomura
16
We think generic drugs will eventually replace long-term listed drugs. Policies to expand the
Focus on long-term
listed drugs
domestic generic drug market have focused on boosting demand instead of supply. Currently,
the preferred cheaper alternative of physicians and patients is long-term listed drugs instead of
generics. Sanofi-Aventis [SAN
FP] recently announced an alliance with Nichi-Iko
Pharmaceutical [4541] that not only expands the generic drug business but also transfers
marketing of long-term listed drugs in Japan. The government focus over the near to medium
term will likely remain on promoting use of generic drugs; however, over the longer term, we
expect the emphasis to shift to reducing long-term listed drug prices. Accordingly, we think longterm listed drugs will be the key to generic drug makers continued sustainability. When we
queried top management of generic drug companies as to whether branded drug makers would
be more likely to transfer marketing of long-term listed drugs to domestic or foreign generic drug
makers, most replied that domestic drug makers would be the preferred distributor. We think
branded drug makers are likely to increasingly transfer production and marketing of low-price,
long-term listed drugs.
1-13. Reorganization of long-term listed drug business
Major
pharma
Medium-tier
pharma
GE
Branded drug
Long-term listed drug

GE
Major
pharma
Medium-tier
pharma
GE
subsidiary
Note: GE = generic drugs

Source: Nomura
Global suppliers of
generic drug bulk
The high level of quality required for drugs in Japan makes it unlikely that generic drugs
manufactured by Indian companies will make substantial inroads in Japan. On the flip side, if
high-quality drugs could be made very inexpensively, they could easily be sold worldwide. This
combination of high quality and low cost applied to biosimilars could mark the path of sharp
growth for the Japanese generic drug makers. Mass production and supply of the worlds
highest-quality biosimilar bulk to Europe and the US would be an attractive business model for
any Japanese drug maker. We think a promising business model would be for European/US
biosimilars to be introduced to Japan, with Japanese generic drug makers being in charge of
production.
(7) A return to small molecule drug business model over the long term
Development of small
molecule drugs is
gathering momentum
again
Major Japanese companies are focusing on the development of antibody drugs, but their
European and US counterparts have been changing their areas of development with a view to
business expansion beyond antibody therapeutics. A typical example of this can be found in
the 2007 annual report of Genentech (acquired by Roche [ROG VX] in 2009). The CEO at the
time, Arthur D. Levinson, PhD, said that the company was developing small molecule drugs as
17
its development approach to anticancer agents. Even those companies that have specialized
in antibody drugs had set their sights on developing small molecule drugs, which suppress the
communications system involved in cell growth. Antibody drugs are effective but cannot be
made more inexpensively than small molecule drugs with lower costs, and moreover cannot
be formulated as oral drugs. We think development of small molecule drugs, which can easily
be made inexpensively and as oral formulations, will gain momentum as it becomes clearer
how the drugs work inside organisms.
The shift from receptor
to intracellular action
Previously, small molecule drugs targeted receptors serving as barriers between the cell
interior and exterior. It was easy to get results with these drugs by opening and closing the
receptors, which serve as barriers, and since the receptors are located on the cell surface, it
was easy to find new receptors that could be targeted by drug development. It is now easy to
detect small amounts of proteins, making it possible to target drug development efforts on
cells internal communication systems, which represent the downstream function in cell growth.
Specifically, Novartiss [NOVN VX] Affinitor is a new type of anti-cancer agent. The drug
impedes the action of mTOR, which has a central role in cell growth, and is highly effective in
renal cancer, for which there was previously a lack of effective treatments. Another drug we
would highlight in this context is ArQules [ARQL US] ARQ 197 (c-MET inhibitor), which is
currently in the development stage. Daiichi Sankyo has signed a joint development agreement
with ArQule for overseas markets, while Kyowa Hakko Kirin [4151] is in charge of
development in Japan.
1-14. Development of small molecule anticancer agents attacking from within the cell is proceeding apace
EGF
II
III
IV
II
Active sites to date
EGF
III
IV
1. Receptors
2. Receptor-type tyrosine kinase
RAS
PI3K
Phosproylation cascade
Nonreceptor type
tyrosine kinase
p11
p85
P
STAT
P
AKT
P
P
(1) PI3K pathway
GTP
GDP
kinase
kinase
RAS
Grb2
P
SRC
RAF
Nonreceptor type
tyrosine kinase
MEK
P
P
(2) MAPK pathway

MAP
mTO
P
P
SOS
P
P
Phosproylation cascade
Receptor-type
tyrosine kinase
Active sites from now on

3. Nonreceptor type
tyrosine kinase
Cell grow th, infiltration, transfe r, and apoptosis prevention

Source: Nomura
Turning to a business
model that looks ahead
Now that drug development previously at the research lab stage has reached the market,
companies need business strategies to take them beyond antibody therapeutics. We think
there will be more examples of strategies where conditions previously treated with antibody
drugs are covered by small molecules that are cheaper but have the same results. Although
the examples below are not of changes from antibody drugs to oral ones, they do show shifts
from injected drugs to oral drugs. For multiple sclerosis, we think the oral Gilenia will take over
from injected interferon beta as the main treatment. Aside from requiring injections, interferon
18
beta also costs several million yen per year. Gilenia, however, can be taken orally without
significant disruption to daily life and it costs only some tens of thousands of yen. The new
drug is still in the approval process in the US, but on 10 June an FDA advisory panel
recommended approval, making it likely that the drug could reach the US market by end-2010.
It is unusual for companies to shift their focus from one antibody drug to another antibody drug,
as with the switch from Remicade (antirheumatic) to Simponi (antirheumatic) in the strategy
adopted by Johnson & Johnson [JNJ US].
Turning our attention to the different models in advanced countries and emerging countries,
we think small molecule drugs will rapidly expand in advanced countries while antibody
biosimilars become more widespread. In emerging countries, meanwhile, generics are likely to
be used increasingly for currently mainstream receptor-type small molecule drugs, while in
antibody therapeutics, biosimilars become more widespread and the original branded drug
market shows no growth. Longer term, we think intracellular small molecule drugs will
penetrate the market as branded drugs in tandem with the development of emerging
economies. However, the companies supplying these drugs are likely to be European and US
branded drug manufacturers, rather than their Indian or Chinese counterparts.
1-15. A return to small molecule drugs over the long term
Sales
(2) Antibody therapeutics

(1) Small molecule drugs
(Receptor-type)
(3) Small molecule drugs

(intracellular-type)
10
Sales
15
20
Sales
Advanced countries
(CY)
25
Emerging countries
(3)
Branded drugs (3)
(2)
Biosimilars (2)'
(1)
Generics (1)'
10
15
20
25
(CY)
10
15
20
25 (CY)
Source: Nomura
19
2. Indian pharmaceutical industry

Indian pharmaceutical
industry is in transitional
phase currently
The Indian pharmaceutical industry is currently going through a transitional phase in which it is
being transformed from a supplier of inexpensive generic drugs globally into a hub for adding
immense value to new drug R&D. Our analysis broadly highlights two key factors that have
modified the rules of the game for the Indian pharmaceutical industry. These factors are:
Intellectual property rights
Evolving business models
(1) Intellectual property rights in India

Process patents
weakened intellectual
property rights in India
The Indian Patents Act of 1970 made pharmaceutical product innovations unpatentable in
India and granted patents to production processes. This allowed Indian drug companies to
reverse engineer molecules to produce generic versions of patented drugs. While this
weakened intellectual property right (IPR) protection in the country, the Indian pharmaceutical
industry flourished and rapidly increased its global footprint.
Patents (Amendment) Act, 2005
Patent law amended to

align with WTOs TRIPS
Agreement
The Indian Patents Act of 1970 was amended in 2005 in order to align Indian IPRs with the
WTOs TRIPS Agreement and product patents were reintroduced. The major changes
included the following:
Retrospective effect of the patent regime: The patent regime was introduced with
retrospect effect from 1995, ie, any new drugs patented after 1995 would receive protection.
However, generic entry was made possible for drugs for which patent applications had been
filed but patents had not yet been granted over 19952005. Furthermore, companies
manufacturing these drugs were allowed to continue their manufacture even after the
granting of the patent, with a reasonable royalty payment to the patentee.
Minor innovations made not patentable: More importantly, according to the Indian Patents
Act, patentability scope is limited because minor innovations are not patentable. Minor
innovations are defined under the following categories: salts, esthers, ethers, polymorphs,
metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations,
and other derivatives of known substances. Unless they differ significantly in properties with
regard to efficiency, these products will not be granted patents.
Pre-grant opposition and post-grant opposition: India has a distinct pre-grant and postgrant opposition process in place primarily to empower the patent office, reduce the
incidence of patent litigation, and discourage evergreening and filing of minor innovations.
According to the act, pre-grant oppositions have to be initiated within six months of
publication of the patent application. A post-grant opposition has to be initiated within a year
of the date of publication of the patent grant.
We believe that in India, the scope of patentability definition is a bigger hurdle, rather than
regulatory support or the interests of big pharmaceutical companies, in realizing the potential
of patented drugs. In fact, a majority of the pre-grant and post-grant oppositions for
pharmaceutical products fall in the category of secondary/minor innovations. Note that unlike
revocation proceedings, pre-grant opposition filings are relatively inexpensive and take place
with the patent office. In addition, any party/person can file a pre-grant opposition.
20
Pre-grant opposition
Pre-grant oppositions
have been filed by
Indian companies,
multinational companies,
and NGOs
Some of the pre-grant opposition filers among Indian companies include Ranbaxy, Cipla
[CIPLA IN], USV, and Torrent Pharmaceuticals. Furthermore, various patient groups and
nongovernmental organizations (NGOs) have also been among pre-grant opposition filers,
primarily in the categories of HIV- and oncology-related drugs. Some instances of pre-grant
oppositions include: (1) AstraZenecas [AZN LN] patent application for omeprazole and one
of its enantiomers was rejected following a pre-grant application by Torrent Pharmaceuticals;
(2) Novartiss application for an invention pertaining to crystalline ascomycin derivatives was
rejected (opposition filed by Ranbaxy) because there was no inventive step in preparing the
crystalline form from the amorphous form; and (3) in Boehringer Ingelheims application for
powder medicament for inhalation, comprising tiotropium salt and salmeterol xinafoate, the
controller general of patents, designs, and trademarks (controller) rejected opposition grounds
of combination without any synergistic effects. However, the controller rejected the patent
application on the grounds of no enhancement in efficiency compared with earlier known
inhalable powder formulations containing the same active ingredients. The opposition was
filed by Cipla.
Companies have
increased their R&D
spending
Indias 2005 Patents (Amendment) Act was a game-changer in an industry that had prospered
under protection provided by the erstwhile Patent Act. Post-2005, Indian companies were
compelled to rethink, realign, and remodel their businesses in order to compete in the new
regulatory framework. One direct effect of the new law was an increase in R&D spending by the
Indian generic drug companies, which increased from a paltry average of about 2% of sales in
the 1990s to almost 7% in 2010. Although this increase may not seem large enough at first
glance, it underlines a clear shift in the overall strategy of Indian pharmaceutical companies as
they learned that innovation was the way forward. Many companies, such as Piramal
Healthcare [PIHC IN] and Sun Pharma, separated their R&D from their generics divisions in
order to create a clear bifurcation between the two businesses. This dual strategy model was
perhaps the first step in the transformation process that the Indian pharmaceutical industry is
currently undergoing.
(2) Evolving business models

Domestic market focus
Domestic market offers
big opportunity
The Indian pharmaceutical market is pegged at roughly $8bn, having grown at more than 10% a
year over the last decade. The domestic market is likely to grow at 1214% a year for next few
years on account of three main factors. The first is increased healthcare spending by the
government. Currently, the Indian governments spending on healthcare is around 3.5% of its
overall spending, compared with roughly 10% in other emerging markets. The second is higher
penetration of health insurance. Currently, healthcare insurance accounts for about 5% of
national healthcare spending. The third factor likely to propel market growth is greater
awareness among the Indian population of quality healthcare and an increase in income levels
for the population in general. With rapid growth seen in the domestic market, Indian companies
such Cipla, Mankind, and Alkem and multinational companies such as Glaxo, Abbott
Laboratories [ABT US], Pfizer, etc have developed clear domestic strategies and established
themselves as leading players in this space.
Competition from
multinational companies
Indian companies benefitted from the 1970 change in the patent law that did not recognize
product patents. They established themselves as dominant players in absence of the
multinational companies. Following the change in the patent law in 2005, multinationals have
come back, but domestic companies continue to dominate because of (1) low pricing of drugs,
with affordability key for the Indian population, (2) wider distribution reach compared with the
global players, and (3) the introduction of new products in the market. With an eye to catering
to every segment of the market, multinational players that stayed in the country following the
21
patent law change in 1970 have been more successful in capturing growth in the domestic
drug market. These players are now looking at introducing products from their parent pipelines
in the domestic market. GlaxoSmithKline is among the global leaders in the vaccine segment,
with nearly a 33% share in emerging markets. It has one of the widest ranges of vaccines in
its pipeline among the big pharmaceutical companies in India. It has introduced vaccines like
Rotarix and Cervarix in the domestic market and expects to launch two more vaccines
(Synflorix and Infanrix Hexa) and three oncology products in India over the next 1218 months.
Acquisition of Indian
companies at high
premiums
Various multinationals have also paid high premiums to acquire leading Indian companies in
order to get a taste of the domestic market growth. While the acquisition of Ranbaxy at an
EV/sales ratio of 3.7x (or $4.6bn) by Daiichi Sankyo was a harbinger of the future, the recent
acquisition of Piramal Healthcares domestic business for a premium EV/sales ratio of more than
8.2x ($3.7bn) only underlines the importance of being present in the growing Indian drug market.
Targeting bottom of
pyramid
The saturation of urban markets has led companies in India to focus on deriving growth from
the rural segment of the market. We estimate that the size of the Indian market will more than
to $20bn by 2015 and that the size of the rural market will increase to around 44% of the total.
We project that almost half of total growth until 2015 will come from the rural market,
compared with 30% from metropolitan areas and 25% from Class I geographies. The
government is also aiming to improve healthcare services for the rural masses and public
spending is likely to quadruple from $1.5bn to $6bn.
The strategies that companies adopt for urban and rural markets can be very different. While
Companies need to
adopt different strategies the former relies on competitors aiming to capture fragments of specialty segments, the latter
focuses on aggressive price cutting, promoting healthcare awareness, and deploying a large
for rural markets
sales force. Companies like Mankind Pharma have been able to establish extensive rural
networks and have aggressively promoted low-cost medicine in these areas, thereby inducing
competitors to cut their prices as well. Some multinationals have forayed into the rural market
as well. Novartis and Sanofi-Aventis are mentoring doctors and educating patients in rural
areas in an attempt to capitalize on the rural growth story. Sanofi-Aventis also plans to launch
drugs commonly used as antiinfectivrs, cough and cold medications, and pain management
drugs. These drugs would be sourced from leading contract manufacturing companies in the
country and would lead to the lowering of drug prices, thereby making them more affordable
for the rural population of India.
Cutthroat competition
from Chinese APIs
During the eighties and early nineties, active pharmaceutical ingredients (APIs) were the
bastion of Indian pharmaceutical companies. However, stiff competition over the years from
Chinese imports has resulted in a significant price decline, thereby making API production
unattractive. Most Indian companies that we have talked to view the API market as a
lukewarm opportunity and they currently produce APIs primarily for internal consumption and
backward integration. The exceptions to this rule are companies that produce niche APIs,
such as Wanbury and Jubilant Organosys. These companies enter the market only for those
APIs where they can be market leaders around the world. Wanbury has a 30% share in the
world market for metformin while Jubilant maintains market leadership in carbamazepine,
oxcarbamazepine, and lamotrigine.
Cost of production has

bottomed out
As per Eisai India, the production of Aricept (donepezil) involves the use of a unique API that
other generic makers cannot use. In order to source this API, the company had to invest a
significant amount of time in training a local vendor so as to increase the quality of the API and
bring it up to the mark. The company projects that by sourcing this unique API from the local
vendor, they will able to cut production costs by almost 50%. However, according to some
leading Indian companies, the average cost of producing one generic pill is not going fall
drastically below INR0.5 (1) (Exhibit 2-1).
22
2-1. Domestic market business models
Little or no product differentiation
Low pricing strategy
Indian companies
Focus on small cities & rural markets
Large sales forces
Low entry barriers

Domestic market
Product differentiation
Branded drugs w ith an India-centric pricing strategy
Multinationals
Focus on large cities and mass market products
Inlicensed products from parent; low R&D spending
Acquisitions of domestic companies

Source: Nomura
Regulated and semiregulated market focus

Protective patent laws
helped establish firm
foundation
As noted, the passage of the Indian Patents Act of 1970 resulted in the end of product patents
because it recognized only process patents. Indian pharmaceutical companies could therefore
legally produce patented drugs through reverse engineering and sell inexpensive copies of
these leading branded drugs in India. Over the next few years, Indian companies championed
process engineering and started exporting inexpensive drugs to unregulated markets (for
example, Ranbaxys Nigerian JV in 1977, Malaysian JV in 1983, and Thai JV in 1987). By the
end of the 1980s, India had become a leading bulk drug exporter in the international market.
Hatch-Waxman Act
provided further growth
impetus
Indian pharmaceutical companies made large forays into the US market after the passing of
the Hatch-Waxman Act of 1984. The act allowed generics companies to apply for Abbreviated
New Drug Applications (ANDAs) by simply proving bioequivalence and without having to carry
out clinical trials. By filing ANDAs and First-to-Files, these companies challenged the existing
patent of the innovator through the Para IV clause of the act. This clause allowed companies
to challenge the innovators patent by claiming that the patent was invalid or that it would not
be infringed by the generic drug. If the challenge was successful, the generics company was
provided with 180 days of exclusive marketing rights to the drug and this often resulted in
immense profitability as the generic drug was marketed at a 1020% discount to the branded
drug.
23
Moving up value chain
In the 1980s, Indian companies started at the low end of the value chain by producing bulk
drugs and vanilla generics and exporting them to the US and other international markets. By
the 1990s, the production strategy eventually shifted to finished formulations and branded
generics as the companies created front-end marketing presences in regulated markets and
leveraged their production capabilities back in India.
The generics companies also set up their own subsidiaries in foreign markets and some large
Aggressive expansion
through acquisitions and Indian companies actively pursued inorganic growth through the acquisition of smaller generics
increase in production
companies and API manufacturers in regulated markets. The pursuit of economies of scale gave
capacity
the companies the opportunity to enter new markets by growing their businesses. The
companies also invested heavily in creating world class production facilities in India as the total
number of US FDA-approved manufacturing plants increased from one in 1988 to 125 in 2010,
the largest number of plants outside the US. Seeing this rapid increase in the number of
approved manufacturing plants, the US FDA also set up offices in India (in New Delhi and
Mumbai).
Germany strategy did
not work effectively
The interest of Indian pharmaceutical companies in Germany was perhaps triggered by

Ranbaxys acquisition of Bayers [BAYN GY] generics business (Basics) back in 2000. When
Germany revamped its Reference Pricing Policy 2004, Indian drugmakers sensed another
huge opportunity for generics and adopted an aggressive expansion strategy in the market.
Between 2005 and 2008, Indian companies such as Dr Reddys, Torrent Pharmaceuticals,
Wockhardt [WPL IN], etc, acquired six companies in total. However, the acquisitions did not
reap the intended rewards because drug prices fell owing to tender-based pricing systems
and other government policies. Currently, Germany remains an unattractive market for Indian
pharmaceutical companies, much like the Netherlands and the UK. Most Indian companies
have stated that the remaining profitable markets of the EU are France, Italy, and Spain.
However, recent austerity measures proposed by the governments in these countries may
play spoil-sport for the Indian companies.
Exploiting opportunities
globally
Other markets, such as Brazil, Mexico, South Africa, the CIS, and Eastern Europe, have also
provided instrumental growth opportunities for Indian companies. Demand for generics in
these semiregulated markets has led to the establishment of manufacturing facilities,
marketing capabilities, and distribution networks by Indian companies in these territories
(Exhibit 2-2).
Examples of companies in regulated and semiregulated markets are Ranbaxy, Lupin, Dr
Reddys, Sun Pharma, Zydus Cadila, Torrent Pharmaceuticals, etc.
2-2. International market business model
ANDAs, FTFs, and Para IV challenges

Branded and vanilla generics, bulk drugs
Regulated &
semiregulated markets
Front-end marketing capabilities

Acquisitions and partnerships
Source: Nomura
24
Collaborative strategies
Major drugmakers are
becoming more cost
effective
The innovators among drugmakers are witnessing a decline in R&D productivity and facing
stiff hurdles in terms of sustaining earnings growth because some of the key products in their
portfolios face patent expiration. Lower success in drug development implies that sales lost
from patent expiry will not be replenished by new product launches. In an effort to control
costs and improve productivity, the innovators are looking at options to outsource drug
discovery and development. Some Indian companies have offered to collaborate with
innovator drugmakers, rather than file patent litigations against them.
Capitalizing on Indias
soft skills strengths
The Indian contract research industry is worth less than $500mn, implying less than a 2%
share of the pharmaceutical R&D outsourcing market. India presents advantages with respect
to cost, patient population, skill sets, and the like. As per an industry estimate, by outsourcing
R&D to India, the innovator pharmaceutical companies could save up to 60% of overall R&D
expenses. These savings can be realized across all stages of the drug discovery process,
from research biology to clinical development. However, our estimates indicate that the largest
savings can be achieved in the area of research chemistry and clinical development.
Striking deals and

gaining credibility
globally
Indian contract research companies are gaining traction and have established credibility, as
evidenced by various deals struck by Indian companies with major pharmaceutical makers.
Jubilant Organosys currently has partnerships with Eli Lilly, AstraZeneca, and Endo
Pharmaceuticals Holdings [ENDP US] to work on collaborative research. Meanwhile,
Biocon has opened a dedicated R&D center in Bengaluru for Bristol-Myers Squibb [BMY
US] as per a deal struck by the two companies. The R&D center employs 400 scientists who
are dedicated exclusively to carrying out clinical studies. In 2007, GVK Biosciences struck a
deal with Wyeth (now Pfizer) and opened a dedicated contract research center for the
American company. The involvement of Indian companies is now not limited to a fee-based
model as it has evolved into a collaborative model for drug discovery.
Drug discovery through

different model:
collaboration with global
majors
Collaboration is not restricted to research services but also extends to manufacturing services.
It includes supply of APIs, intermediates, and finished dosage forms. We expect outsourcing
penetration to increase, in the cases of both APIs/intermediates and formulations, as the drug
majors focus on drug discovery and sales and marketing. We believe that the outsourcing
industry can record growth of 1015% per annum over the next five years, with the potential
for outsourcing penetration to double during the period. We see more deals and partnerships
being struck in the near future as the innovator companies look at tapping into Indias
outsourcing strengths.
Drug discovery through

different model:
bifurcation and
outlicensing discoveries
Another strategy that has become popular within the collaborative framework is that of Indian
generics companies creating separate entities for branded and generic drugs. This strategy
helps create a clear distinction between the two businesses because the mindsets required to
run the two can be very different. The branded drug arm usually works on discovering new
chemical entities (NCEs) and carrying out clinical trials up till Phase 1. Because of limited
financial capabilities, the companies aim to partner with innovator drugmakers and outlicense
the molecule for upfront fees, royalty fees, and various milestone payments upon successfully
bringing the new molecules to Phase 1. The innovator drug company usually retains the
marketing rights for the regulated markets while the Indian company gets the marketing and
distribution rights for emerging markets (Exhibit 2-3).
Mutually beneficial
partnerships
A recent example of this model is a Glenmark-Sanofi-Aventis deal signed in May 2010,

whereby Glenmark outlicensed the development and commercialization rights of its painkiller
molecule GRC 15300 to Sanofi-Aventis for an upfront payment of $20mn and milestone
payments that could reach a total of $325mn. Other leading companies in this space include
Jubilant Organosys, Piramal Healthcare, Divi's Laboratories [DIVI IN], Dishman
Pharmaceuticals & Chemicals [DISH IN], Suven Life Sciences [SVLS IN], etc.
25
2-3. Collaborative strategy business model
Contract manufacturing
Collaborative drug discovery research
Collaborative strategy
Initial stage clinical trials
Outlicensing partnerships; upfront fees and royalties
Source: Nomura
2-4. Drug pipelines of Indian generic drug companies

Company
Glenmark
Molecule name
Crofelemer (inlicensed)
GRC 3886 (oglemilast)
GRC 8200 (melogliptin)
GRC 4039 (revamilat)
GRC 10693
GRC 500
GRC 15300
GBR 600
GRC 6211
Zydus Cadila
Biocon
Dr Reddy's
Ranbaxy
Lupin
Piramal
Lifesciences
ZYH1
ZYO1
ZYI1
ZYH2
ZYH7
ZYT1
ZYD1
Oral insulin
Anti-CD6
Targeted immunoconjugates
Anti-CD20
Peptide hybrid
Anti-EGFR
Biosimilar MAbs
Insulin analogs - lispro, aspart
Rh-insulin, glargine
GCSF, EPO
Reditux
DRF 2593 (balaglitazone)
DRL 17822
Several compounds
P. falciparum combination
LLL 2011 (amigra)
LL 4218 (desoside-P)
LL 3858 (sudoterb)
LL 3348 (sesoris)
Unspecified
Unspecified
P276 - CDKs
P276 - gemcitabine combination
P276 - tadiation combination
P1446 - CDKs
NPB-001-05-Bcr-Abl
NPS31807 - TNF alpha
P979 - TNF alpha
P1736-non-PPAR gamma
P1201 - Lilly
P2202 - Lilly
NPH30907
Indication
Antidiarrhoeal
Asthma, COPD
Diabetes mellitus (Type II)
Rheumatoid arthritis, MS inhibitor
Neuropathic pain, osteoarthritis
MS, inflammatory diseases
Osteoarthritic pain, neuropathic pain, and skin disorders
Antiplatelet, adjunct to PCI/acute coronary syndrome
Osteoarthritic pain, neuropathic pain, and urinary
incontinence
Dyslipidemia
Obesity, diabetes
Pain
Diabetes
Dyslipidemia
Dyslipidemia
Dyslipidemia
Diabetes
Oncology/inflammation/autoimmune
Oncology
Oncology
Diabetes
Oncology
Oncology/immunology
Diabetes
Diabetes
Oncology
Non-Hodkins lymphoma
Metabolic disorders (partnership with Rheoscience)
Metabolic disorders/CVS (partnership with Argenta)
Respiratory disorders (dyslipidemia and atherosclerosis)
Malaria
Antimigraine, herbal
Antipsoriasis
Anti-TB
Antipsoriasis, herbal
Type II diabetes
Rheumatoid arthritis
Head & neck cancer, multiple myeloma
Pancreatic cancer
Head & neck cancer
Unspecified
Chronic myeloid leukemia
Rheumatoid arthritis and psoriasis
Inflammation
Dermaphytotypes
Target
CTFR inhibitor
PDE IV inhibitor
DPP IV inhibitor
PDE IV
CB-2
VLA-2 antagonist
TRPV3 antagonist
Von Willebrand factor
Clinical trial phase

Phase 3
Phase 2
Phase 2
Phase 1
Phase 1
Phase 1
Preclinical
Preclinical
TRPV 1 antagonist
Phase 1
PPAR alpha:gamma
CB-1 antagonist
Multi-modal
PPAR alpha:gamma
PPAR alpha
Undisclosed
GLP-1
Monoclonal antibody
-
Phase 3
Phase 1
Phase 2
Phase 1
Phase 1
Phase 1
Phase 1
Phase 2
Phase 3
Discovery
Preclinical
Discovery
Market
Preclinical
Preclinical
Market
Market
Market
Phase 3
Phase 1
Phase 1
Phase 3
Phase 3
Phase 2
Phase 2
Phase 2
Preclinical
Preclinical
Phase 2
Phase 1
Phase 1
Phase 1
Phase 2
Phase 2
Preclinical
Phase 1
Phase 1
Phase 1
Phase 2
Source: Nomura, based on company data
26
Productivity analysis
We analyzed the value-added generated over the last seven to 10 years by three Indian
companies, namely, Aurobindo, Ranbaxy, and Torrent Pharmaceuticals. The following details
were observed:
Aurobindo invested heavily in increasing capacity in 03/3, as its gross block increased almost
3x that year, from INR2.21bn to INR6.60bn. The increase in capacity was done mainly at
manufacturing plants in China and India. The company is now poised to meet future production
demands following the increase in its capacity.
Ranbaxy increased its gross block by 33% in 04/12 and as well as in 05/12 in order to
meeting growing demand in the domestic market and abroad. Because of this increase in
production capacity, plant productivity for the same period fell by more than half. Of the three
companies analyzed, we think that Ranbaxy is best positioned to increase its capacity
utilization in the next few years, thereby increasing its overall plant productivity.
Torrent Pharmaceuticals gross block stood at INR6.81bn at the end of 09/3 and the
company is currently investing heavily to double its capacity in the next two to three years by
setting up new facilities in Gujarat and Sikkim. We see the significant capital expenditure
creating sufficient production capacity for the next three to five years (Exhibit 2-5).
2-5. Productivity analysis of three Indian generic drug companies
Labor equipment ratio (INRmn/person)

4.5
Increase in
capacity utilization
4.0
Aurobindo
Torrent
Ranbaxy
3.5
3.0
Increase in
FY05
2.5
Productivity of labor
2.0
FY04
1.5
FY01
Capacity expansion
FY0709
1.0
FY0203
0.5
FY0709
0.0
0.0
0.5
1.0
1.5
2.0
2.5
Plant productivity (x)

27
2-6. Installed production capacities as of 31 March 2009

Amount
Aurobindo
Tablets & capsules
Injectables
Syrups
Cipla
Bulk drugs
Tablets & capsules
Liquids
Creams
Aerosols/inhalation
Injections/sterile
Zydus Cadila
Tablets
Capsules
Injections
Dry powder injections
Dry syrups & powders
Bulk drugs
Sun Pharma
Formulations
Bulk drugs
Dr Reddy's
Formulations
APIs
Generics
Biotechnology
Amount
(mn)
(mn)
(mn)
9,954.9
86.0
47.8
(t)
(mn)
(kl)
(t)
(mn)
(kl)
1,866.1
16,662.4
1,346.4
861.3
96.0
1,168.0
(mn)
(mn)
(kl)
(kg)
(t)
(t)
7,840.0
790.0
513.0
200.0
5,800.0
639.0
(mn)
(kl)
7,221.4
1,061.2
(mn)
(t)
(mn)
(g)
3,440*
6,941.0
9,200.0
13,852.0
Ranbaxy
Tablets
Capsules
Dry syrups/powders (bottles)
Ampoules
Vials
Torrent
Tablets
Capsules
Injections/vials
Suspensions/liquids (l)
Bulk drugs
Glenmark
Liquid orals
Lotions & externals
Ointments & creams
Solids & powders
Tablets & capsules
Lupin
Bulk drugs
Tablets & capsules
Liquids
Creams
Aerosols/inhalation
Injections
Injection vials
(mn)
(mn)
(mn)
(mn)
(mn)
9,601.6
2,862.0
43.8
48.0
35.0
(mn)
(mn)
(mn)
(mn)
(kg)
9,400.0
480.0
26.0
1.0
18,000.0
(kl)
(kl)
(t)
(t)
(mn)
8,166.7
626.3
1,087.5
113.0
1,180.8
(t)
(mn)
(kl)
(t)
(mn)
(kl)
(mn)
4,677.4
16,662.4
3,225.0
312.0
3.6
42.0
12.0
Note: * = single-shift basis

2-7. Leading Indian drug companies around the world
Russ ia
1,996
1,093
US
23,760
19,843
UK
7,623
2,475
9,854
Ge rmany
France
Romania
2,760
5,168
4,424
2,056
India
15,943
Japan
23,471
13,865
Brazil
2,605
2,503
South
Africa
3,683
919
Note: Numbers show FY09 sales in INRmn.

28
2-8. Comparison of drug prices: generics in India versus the branded drugs in Japan and the US
Branded drug
Diovan (80mg)
Actos (30mg)
Aricept (10mg)
Lipitor (10mg)
Plavix (75mg)
Seroquel (100mg)
Crestor (5mg)
Zyprexa (10mg)
Singulair (5mg)
Abilify (5mg)
Chemical name
Valsartan
Pioglitazone
Donepezil
Atorvastatin
Clopidogrel bisulfate
Quetiapine fumarate
Rosuvastatin
Olanzapine
Montelukast
Aripiprazole
Indian
company
Lupin
Ranbaxy
Eisai (India)
Dr Reddys
Cipla
Torrent
Glenmark
Alkem
Dr Reddys
Torrent
Indian price
13.5
15.6
32.8
14.6
13.3
8.2
11.3
9.6
19.1
6.3
Japanese price
Price
comparison
with India
x
125.3
9.3
158.0
10.1
764.0
23.3
128.0
8.8
275.8
20.8
165.6
20.2
148.1
13.1
476.9
49.9
186.7
9.8
179.3*
28.3
US price
264.5
706.6
737.2
269.9
482.3
480.8
390.9
1,393.3
390.0
1,413.4
Price
comparison
with India
x
19.6
45.3
22.5
18.5
36.4
58.7
34.6
145.8
20.4
222.9
Note: (1) Prices converted at approximate exchange rates of $1/91.20 and INR1/1.95. (2) * = Abilifys Japanese price is for 6mg dose.
Source: Nomura, based on MHLW data for Japanese drug prices, CIMS data for Indian drug prices, and: www.drugstore.com data for
US drug prices
29
(1) Dr Reddys Laboratories [DRRD IN] (Buy; INR1,423.45)
(Saion Mukherjee)
2-9. Dr Reddys Laboratories: sales breakdown and key data
Other
6%
India
21%
One-offs
6%
Market capitalization: $4.9bn

Free float: 75%
Russia & CIS

19%
Europe
20%
North America
(ex one-offs)
28%
10/3 sales: $1.5bn

10/3 D/E: 6.3%
History
Dr Reddys was established in 1984 and is now the second-largest generic drug company in
India in terms of sales. It is an integrated company focusing on API supply, global generics, and
proprietary products. It has an overseas focus on the US, Germany, India, and Russia. Its EU
operations began in 1999 while its US operations were established in 2001.
Investment argument
(1) It is the best investment candidate to benefit from the US generics opportunity.
(2) Its domestic business is back on track with growth reviving in 10/3. The focus has returned
to new product introductions and there is a distinct possibility of the companys biologics
pipeline unlocking over the next two years.
(3) The company is now focusing on profitability and cost control. It has adopted a
collaborative approach in marketing its products in emerging markets by partnering with
GlaxoSmithKline.
2-10. Dr. Reddys: financial data

FY:
08
Income statement
Net sales
50,006
Operating expenses
47,665
Cost of sales
24,598
SG&A expenses
15,247
R&D expenses
3,533
Amortization
1,588
Writedowns
3,101
Other operating expenses
-402
Operating income
2,341
Finance costs & other income
218
Forex losses/(gains)
-739
Equity in losses of affiliates
2
Pretax profits
2,864
Tax
-972
M inority interests
-10
Profits after tax
3,846
EBITDA
8,804
Cash flow statement
Pretax profits
2,864
Depreciation
3,362
Tax paid
-1,532
Chg in working capital
-2,675
Other
4,509
Cash flow from operations (a)
6,528
Capital expenditure
-6,716
Chg in other
-2,651
Cash flow from investing (b)
-9,367
Free cash flow (a+b)
-2,839
Equity raised/(repaid) and change in M I
15
Debt raised/(repaid)
-6,015
Dividends (incl tax)
-737
Other financing activities
-1,128
Cash flow from financing (c)
-7,865
Net chg in cash (a+b+c)
-10,704
(INRmn, except where noted)

09
10
11E
12E
69,441
72,275
32,941
19,517
4,037
1,503
14,023
254
-2,834
552
634
24
-3,996
1,172
0
-5,168
15,003
70,282
68,269
33,937
21,026
3,793
1,479
8,603
-569
2,013
-69
72
48
2,058
985
0
1,073
14,922
82,090
65,456
38,444
22,032
4,248
1,300
0
-569
16,635
-324
0
48
17,006
3,231
0
13,775
21,284
93,597
74,185
44,212
24,484
4,758
1,300
0
-569
19,411
-957
0
48
20,416
3,879
0
16,537
24,518
-3,996
3,814
-2,791
-8,267
15,745
4,505
-8,224
4,752
-3,472
1,033
5
-662
-738
-1,132
-2,527
-1,494
2,058
4,306
-985
2,686
8,534
16,599
-4,200
513
-3,687
12,912
0
-3,501
-1,232
-799
-5,532
7,380
17,006
4,650
-3,231
-4,078
-324
14,023
-5,000
916
-4,084
9,939
0
-4,135
-1,232
-592
-5,959
3,980
20,416
5,107
-3,879
-3,280
-957
17,407
-5,000
1,262
-3,738
13,669
0
-5,740
-1,232
-305
-7,277
6,391
FY:
Balance sheet
Current assets
Investments
Associates
Net fixed assets
Other noncurrent assets
Total assets
Current liabilities
Total debt
Other liabilities
Total liabilities
Share capital
Reserves & surplus
Shareholders' funds
M inorities
Total equity & liabilities
Key ratios
EPS (INR)
EPS growth (%)
Operating margin (%)
Operating profit growth (%)
ROE (%)
Net debt/equity (%)
Valuations
P/E (x)
P/CE (x)
P/B (x)
EV/net sales (x)
EV/core EBITDA (x)
08
09
10
11E
12E
33,988
0
237
50,518
891
85,634
11,752
12,698
13,834
38,284
841
46,509
47,350
0
85,634
39,010
0
262
43,061
1,459
83,792
14,092
10,132
17,523
41,747
842
41,203
42,045
0
83,792
44,258
0
262
34,352
1,459
80,331
14,291
5,997
18,157
38,445
842
41,044
41,886
0
80,331
52,912
0
262
34,703
1,459
89,336
14,888
257
19,762
34,907
842
53,587
54,429
0
89,336
63,455
0
262
34,596
1,459
99,772
15,759
248
14,031
30,038
842
68,892
69,734
0
99,772
22.8
-62.8
4.7
-79.9
8.6
24.3
-30.6
NA
-4.1
NA
-11.6
33.0
6.4
NA
2.9
NA
2.6
6.3
81.7
1,183.8
20.3
726.4
28.6
-10.0
98.0
20.0
20.7
16.7
26.6
-25.2
61.9
23.1
5.0
5.0
28.3
NA
18.8
5.7
3.6
16.8
221.7
17.0
5.7
3.4
16.1
17.3
12.9
4.4
2.8
10.9
14.4
11.0
3.4
2.4
9.0
Note: FY ends in March.

Source: Company data, Nomura estimates
30
(2) Lupin Laboratories [LPC IN] (Buy; INR1,879.90)
(Saion Mukherjee)
2-11. Lupin: sales breakdown and key data
Other
10%
APIs
16%
India
28%
Free float: 55%

10/3 sales: $1bn
US
35%
Japan
11%
10/3 D/E: 38.4%
History
The company started business in 1968, while its first formulation plant was commissioned in
1980. Over the years, it has strengthened its intermediates and API business and built a
strong formulations business. The company enjoys leadership positions in the anti-TB and
cephalosporins segments. Its products reach 70 countries. It is one of the fastest-growing top
10 generics players in US and Japan, a top-five player in India, and a top-six in South Africa.
Investment argument
(1) Its US generics portfolio has achieved annual sales of $220mn in only four years.
(2) Its US specialty branded portfolio has good momentum with a recent spate of
acquisitions/inlicensed products.
(3) It has growth potential in India, led by new launches in chronic therapy areas.
(4) It is the seventh-largest generic player in Japan, where generic penetration is low, at 17%
compared with 60% in Western markets.
2-12. Lupin: financial data

FY:
Income statement
Gross sales
Patent-related revenues from Servier
Other operating income
Excise duty
Net sales
Operating expenses
M aterials
Other expenditure
R&D expenses
Core EBITDA
Other income
Interest
Depreciation
Pretax profits
Tax
Profits after tax
M inority interests & prior-period items
Net profits
Cash flow statement
Pretax profits
Depreciation
Tax paid
Other
Capital expenditure
Chg in investments & other
Equity raised/(repaid)
Other

08
09
10
11E
12E
27,730
1,127
518
666
28,709
22,417
11,638
9,233
1,546
6,291
132
374
647
5,402
1,318
4,084
2
4,083
38,238
0
537
479
38,296
31,016
16,043
12,655
2,318
7,279
160
499
880
6,060
983
5,077
62
5,015
47,678
0
1,247
273
48,652
38,869
19,694
15,604
3,571
9,783
198
385
1,239
8,357
1,360
6,997
180
6,818
57,045
0
1,238
323
57,960
45,046
22,464
18,297
4,285
12,914
116
424
1,711
10,894
1,773
9,121
220
8,902
63,485
0
1,365
374
64,476
50,988
25,452
20,608
4,928
13,488
220
424
1,931
11,353
1,848
9,506
243
9,262
5,402
647
-1,090
-2,589
214
2,585
-5,065
147
-4,918
-2,333
26
1,626
-477
55
1,230
-1,103
6,060
880
-1,068
-1,739
562
4,695
-4,953
-143
-5,096
-401
54
-246
-983
-388
-1,563
-1,964
8,357
1,194
-1,172
-815
554
8,118
-7,284
198
-7,086
1,032
3,363
-1,363
-1,235
-447
318
1,351
10,894
1,442
-1,537
-2,697
308
8,410
-5,000
116
-4,884
3,526
0
0
-1,678
-604
-2,282
1,244
11,353
1,597
-1,640
-1,854
204
9,660
-3,000
220
-2,780
6,880
0
0
-2,191
-644
-2,835
4,045
FY:
Balance sheet
Current assets
Investments
Net fixed assets
Total assets
Current liabilities
Total debt
Other liabilities
Total liabilities
Share capital
Reserves & surplus
Shareholders' funds
M inorities
Key ratios
EPS (INR)
EPS growth (%)
Core EBITDA margin (%)
Core EBITDA growth (%)
ROE (%)
Net debt/equity (%)
Valuations
P/E (x)
P/CE (x)
P/B (x)
EV/net sales (x)
EV/core EBITDA (x)
08
09
10
11E
12E
20,441
58
11,125
1,872
33,497
6,019
12,029
2,558
20,606
821
11,976
12,797
95
33,497
23,478
216
14,252
3,174
41,119
11,504
12,233
2,992
26,728
828
13,420
14,248
143
41,119
27,006
216
20,342
3,174
50,737
13,234
10,870
3,623
27,726
888
21,863
22,751
260
50,737
32,664
216
23,900
3,174
59,953
14,950
10,870
4,372
30,192
888
28,574
29,461
300
59,953
39,743
216
25,303
3,174
68,436
16,130
10,870
4,668
31,668
888
35,556
36,444
324
68,436
46.0
32.3
22.7
43.3
37.9
43.8
56.5
22.9
19.0
15.7
37.1
56.8
76.8
35.9
20.5
34.4
36.9
38.4
100.3
30.6
22.6
32.0
34.1
25.4
104.4
4.1
21.2
4.4
28.1
8.9
40.2
34.7
12.8
6.1
27.0
32.7
27.8
11.5
4.5
23.7
24.1
20.4
7.2
3.6
17.7
18.4
15.5
5.6
3.0
13.3
17.7
14.7
4.5
2.6
12.4
Note FY ends in March.

31
(3) Glenmark Pharmaceuticals [GNP IN] (Buy; INR271.80)
(Saion Mukherjee)
2-13. Glenmark: sales breakdown and key data
Rest of w orld
16%
APIs
11%
Europe
7%
India
30%
Free float: 55%

10/3 sales: $529mn
US
29%
Latin America
7%
10/3 D/E: 77.2%
Glenmark Pharmaceuticals was established in 1977, started its export business in 1980, and
History
commenced R&D in 1984. API manufacturing started in 2001. The companys first outlicensing
deal was struck in 2004 and its commercial front end in the US was established in 2005. The
company is present in branded generics markets across emerging economies including India.
Its subsidiary, Glenmark Generics, has a robust US generics business and supplies APIs to
regulated and semiregulated countries. Glenmark has a presence in over 80 countries.
Investment argument
(1) Its strategy is to aggressively develop niche/difficult-to-make products for the US market.
(2) It has an expanded emerging market presence.
(3) It is one of the most successful R&D entities in terms of generating returns, with a focus on
generating outlicensing deals.
2-14. Glenmark: financial data

FY:
Income statement
Sales
% y-y
Operating expenses
Cost of sales
Selling & operating expenses
R&D expenses
Operating profits (core
EBITDA)
Other income
Exchange gains/(losses)
Depreciation
EBIT
Net interest expenses
Extraordinary expenses
Pretax profits
Tax (current + deferred)
Profits after tax
Minority interests
Net profits
Cash flow statement
Pretax profits
Depreciation
Tax paid
Other operating activities
Capital expenditure
Chg in investments
Other investing activities
08
09
10E
11E
12E
20,092
61
43
12,087
6,758
4,571
758
21,160
5
297
16,610
8,751
6,977
883
24,544
16
340
18,264
9,703
6,981
1,580
29,116
19
408
21,882
11,749
8,241
1,893
34,136
17
485
25,494
13,752
9,523
2,219
8,048
4,847
6,620
7,642
9,127
90
325
717
7,747
632
0
7,115
794
6,321
-0
6,321
91
1,352
1,027
5,263
1,405
1,170
2,689
754
1,935
18
1,917
400
-470
1,437
5,114
1,592
0
3,522
415
3,107
0
3,107
400
0
1,685
6,357
1,377
0
4,980
847
4,133
0
4,133
400
0
1,899
7,627
1,152
0
6,476
1,101
5,375
0
5,375
7,115
891
-452
-4,253
0
3,301
-5,344
-1
0
-5,345
-2,044
2,108
542
-201
103
2,553
509
2,689
667
-1,251
-3,772
0
-1,667
-9,227
7
0
-9,220
-10,886
289
11,034
0
-254
11,069
183
3,522
1,437
-415
-951
0
3,592
-2,000
0
0
-2,000
1,592
4,136
-4,000
-117
0
18
1,611
4,980
1,685
-847
-2,642
0
3,176
-1,500
0
0
-1,500
1,676
0
-1,500
-182
0
-1,682
-5
6,476
1,899
-1,101
-2,761
0
4,513
-1,500
0
0
-1,500
3,013
0
-1,500
-242
0
-1,742
1,271
FY:
08
09
10E
11E
12E
Balance sheet
Cash
Current assets
Investments
Net fixed assets
Total assets
Current liabilities
Total debt
Other liabilities
Total liabilities
Share capital
Shareholders' funds
Minorities
1,565
16,510
188
12,557
29,256
3,207
9,909
946
14,062
249
15,179
15
29,256
715
20,791
181
21,117
42,089
4,563
20,943
569
26,076
251
15,982
32
42,089
2,326
23,865
181
21,680
45,726
5,139
16,943
569
22,652
269
23,042
32
45,726
2,320
27,281
181
21,495
48,957
5,979
15,443
569
21,992
269
26,934
32
48,957
3,591
32,128
181
21,096
53,405
6,867
13,943
569
21,379
269
31,994
32
53,405
Key ratios
EPS (INR)
EPS growth (%)
ROE (%)
Net debt/equity (%)
25.0
103.9
40.1
87.9
56.1
55.0
7.6
-69.7
22.9
-39.8
12.3
126.6
11.5
52.2
27.0
36.6
15.9
63.4
15.3
33.0
26.2
15.4
16.5
48.7
19.9
30.0
26.7
19.4
18.2
32.4
10.4
9.3
4.3
3.7
9.2
34.2
22.3
4.1
4.1
17.7
22.5
14.4
3.0
3.4
12.8
16.9
11.3
2.6
2.8
10.9
13.0
9.0
2.2
2.3
8.8
Valuations
P/E (x)
P/CE (x)
P/B (x)
EV/net sales (x)
EV/core EBITDA (x)

32
(4) Sun Pharmaceutical Industries [SUNP IN] (Neutral; INR1,698.75)
(Saion Mukherjee)
2-15. Sun Pharma: sales breakdown and key data
Export
formulations
42%
Domestic
formulations
44%

Free float: 40%
10/3 sales: $868mn
Domestic APIs
3%
Export APIs
11%
10/3 D/E: net cash
History
Sun Pharma started in 1983 with five products to treat psychiatric ailments. Over time, it
launched products for numerous therapeutic areas, especially in the chronic segment. Its first
API facility was built in 1995. By 2000, the company had carried out eight acquisitions, each
adding new therapeutic areas to its portfolio. The recently demerged R&D entity works on
projects covering new molecules and novel drug delivery systems.
Investment argument
(1) The US FDA had banned products from the Caraco Pharmaceutical Laboratories [CPD
US] facility, but we expect a resolution by 11/3.
(2) The domestic business is fundamentally strong, but growth is slowing on a large base, so
more uniform growth is on the horizon.
(3) The base business EBITDA margin trend remains unclear after significant volatility over
past quarters.
(4) We believe that the downside is limited given a recent correction on the Protonix setback
and strong growth guidance by management (1820% for 11/3).
2-16. Sun Pharma: financial data

FY:
Income statement
Net sales
Operating expenses
Materials
Personnel
Other
R&D
EBITDA)
Other income
Depreciation
Interest expenses
Pretax profits
Profits after tax
Minority interests
Net profits
Cash flow statement
Pretax profits
Depreciation
Tax paid
Capital expenditure
Chg in investments
08

09
10
11E
12E
32,909
17,398
7,222
2,331
5,120
2,725
41,833
23,194
8,556
3,401
8,138
3,099
40,194
26,566
10,978
3,741
9,375
2,472
47,911
31,758
12,403
4,490
11,899
2,966
56,807
38,661
14,637
5,388
15,225
3,411
15,511
18,640
13,628
16,153
18,146
1,539
969
88
15,994
485
15,509
695
14,814
2,144
1,233
59
19,492
712
18,780
603
18,177
2,179
1,533
125
14,149
679
13,470
-41
13,511
2,400
1,664
125
16,764
1,173
15,591
120
15,470
3,000
1,794
125
19,227
1,346
17,881
32
17,848
15,994
969
-1,822
-9,338
-753
5,050
-1,995
-4,997
932
-6,060
-1,011
-14
-27
-18
720
661
-349
19,492
1,233
-1,690
31
2,585
21,651
-5,900
-9,740
797
-14,844
6,807
0
351
-2,422
-596
-2,667
4,140
14,149
1,533
-679
-3,966
-1,244
9,793
-2,000
0
1,369
-631
9,163
0
0
-3,332
-84
-3,416
5,747
16,764
1,664
-1,173
-1,167
-1,817
14,269
-2,000
0
1,943
-57
14,212
0
0
-3,335
-245
-3,580
10,632
19,227
1,794
-1,346
-4,830
-2,521
12,324
-2,000
0
2,647
647
12,970
0
0
-3,335
-158
-3,493
9,478
FY:
Balance sheet
Current assets
Investments
Net fixed assets
Total assets
Current liabilities
Total debt
Other liabilities
Total liabilities
Share capital
Shareholders' funds
Minorities
Key ratios
EPS (INR)
EPS growth (%)
ROE (%)
Net debt/equity (%)
Valuations
P/E (x)
P/CE (x)
P/B (x)
EV/net sales (x)
EV/core EBITDA (x)
08
09
10
11E
12E
39,372
7,560
11,040
1,729
59,701
3,722
1,436
2,743
7,901
1,036
49,915
1,886
59,701
42,683
18,595
16,196
5,160
82,635
3,767
1,789
4,659
10,215
1,036
70,449
1,970
82,635
52,268
18,595
16,663
5,160
92,687
3,640
1,789
4,662
10,091
1,036
80,626
1,970
92,687
65,078
18,595
17,000
5,160
105,833
4,651
1,789
4,662
11,102
1,036
92,761
1,970
105,833
80,847
18,595
17,206
5,160
121,808
6,112
1,789
4,662
12,563
1,036
107,274
1,970
121,808
71.6
88.9
44.8
130.7
38.2
-21.9
87.8
22.7
42.6
20.2
30.2
-21.2
65.3
-25.7
33.4
-26.9
17.9
-25.6
74.7
14.5
32.4
18.5
17.8
-33.7
86.2
15.4
30.7
12.3
17.8
-38.0
23.7
22.3
7.0
10.3
21.9
19.3
18.1
5.0
8.0
18.0
26.0
23.3
4.4
8.2
24.3
22.7
20.5
3.8
6.7
19.8
19.7
17.9
3.3
5.5
17.1

33
(5) GlaxoSmithKline Pharmaceuticals [GLXO IN] (Neutral; INR2,096.70)
(Saion Mukherjee)
2-17. GlaxoSmithKline Pharmaceuticals: sales breakdown and key data
Iodex
4%
Pharmaceuticals
81%

Exports
4%
Free float: 50%
Biddle Saw yer

2%
09/12 sales: $406mn
Vaccines
9%
09/12 D/E: net cash
Source Nomura, based on company data
History
GlaxoSmithKlines association with India dates back to 1924. Its portfolio includes prescription
medicines and vaccines and it leads in several therapeutic segments, like dermatology,
antihelmentics, hormones, and antiinfectives. With increasing opportunities in India, GSK India
is aligning itself with the parent in areas such as clinical trials, clinical data management, etc.
Investment argument
(1) It is the third-largest formulations operator in India, with 5% of a highly fragmented market.
(2) The Indian pharmaceutical market recorded a CAGR of 10% over 200008 and we expect
that growth rate to be sustained over the next 10 years.
(3) The company is well positioned to address the penetration-driven growth of the Indian drug
market, boasting a strong brand franchise and well-entrenched sales force.
(4) The introduction of product patents puts it at an advantage compared with its Indian peers,
with pipeline support from the parent.
2-18. GlaxoSmithKline Pharmaceuticals: financial data

FY:
Income statement
Net sales
% y-y
Operating expenses
M aterials
Operating & other expenses
Operating profits (core EBITDA)
Other income
Depreciation
Pretax profits
Adjusted net profits
% y-y
Exceptional items (net of tax)
Net profits
Cash flow statement
Pretax, preexceptional profits
Depreciation
Tax paid
Other
Capital expenditure
Chg in investments
08
09
10E

11E
16,934
5
99
10,976
6,558
4,419
6,056
1,117
163
7,010
2,381
4,629
13
1,282
5,911
19,078
13
102
12,298
7,022
5,276
6,882
894
164
7,612
2,607
5,005
8
74
5,079
21,755
14
117
13,935
8,009
5,926
7,937
1,277
169
9,045
2,985
6,060
21
0
6,060
24,829
14
135
15,931
9,143
6,788
9,034
1,471
183
10,322
3,406
6,916
14
0
6,916
7,010
163
-2,476
-325
-1,253
3,119
-200
6,170
2,497
8,467
11,586
0
-1
-3,568
0
-3,569
8,017
7,612
164
-2,758
1,138
-964
5,191
-184
5,811
921
6,547
11,739
0
-2
-3,964
0
-3,966
7,772
9,045
169
-2,985
-181
-1,230
4,819
-500
0
1,230
730
5,549
0
0
-2,973
0
-2,973
2,576
10,322
183
-3,406
-17
-1,424
5,658
-500
0
1,424
924
6,582
0
0
-3,332
0
-3,332
3,250
FY:
Balance sheet
Cash
Current assets
Investments
Net fixed assets
Total assets
Current liabilities
Total debt
Other liabilities
Total liabilities
Share capital
Shareholders' funds
M inorities
Key ratios
EPS (INR)
EPS growth (%)
Adjusted EPS (INR)
Adjusted EPS growth (%)
ROE (%)
Net debt/equity (%)
Valuations
P/E (x)
P/E (x) (adj for exceptional items)
P/CE (x) (adj for exceptional items)
P/B (x)
Yield (%)
EV/net sales (x)
EV/core EBITDA (x)
08
09
10E
11E
9,567
4,950
7,295
1,004
22,816
2,757
56
4,247
7,061
847
15,755
0
22,816
17,339
4,488
1,485
1,142
24,454
3,172
54
3,366
6,592
847
17,861
0
24,453
19,915
5,013
1,485
1,472
27,885
3,517
54
3,725
7,295
847
20,590
0
27,885
23,165
5,527
1,485
1,789
31,966
4,014
54
4,179
8,247
847
23,719
1
31,967
69.8
8.0
54.6
13.0
35.8
7.4
40.0
-106.7
60.0
-14.1
59.1
8.1
36.1
13.6
30.2
-105.1
71.5
19.3
71.5
21.1
36.5
15.3
31.5
-103.7
81.6
14.1
81.6
14.1
36.4
13.8
31.2
-103.7
29.8
38.0
36.7
11.2
1.9
9.4
26.3
34.6
35.1
34.0
9.8
1.4
8.2
22.8
29.0
29.0
28.2
8.5
1.6
7.1
19.5
25.4
25.4
24.8
7.4
1.9
6.1
16.8
Note: FY ends in December.

34
(6) Cipla [CIPLA IN] (Reduce; INR334.65)
(Saion Mukherjee)
2-19. Cipla: sales breakdown and key data
Americas
13%
Middle East
6%
Europe
9%
Free float: 65%
India
47%
10/3 sales: $1.15bn
Australia
5%
Africa
20%
10/3 D/E: net cash
History
Ciplas journey began in 1937. Over the years, it has emerged as the largest domestic player
with a market share of 5.4%. Its research division was set up in 1952. US FDA approval for its
bulk manufacturing was received in 1985. In 1998, it became one of the few companies to
offer all three components of retroviral combination therapy. In 2000, it became the first
company outside the US and Europe to launch CFC-free inhalers.
Investment argument
(1) Cipla has a partnership-based model, with no front-end presence outside India. The model
does not support any meaningful expansion in profitability (ROE) over the long term.
(2) Managements sale growth guidance of 810% in 11/3 is not inspiring.
(3) The increasing capital intensity of the company is a concern; it recently raised INR6.8bn
through a qualified institutional placement (QIP).
2-20. Cipla: financial data

FY:
Income statement
Net sales
% y-y
Operating expenses
Raw materials
Other
EBITDA)
Other income
EBITDA
Depreciation
EBIT
Interest paid
Pretax profits
Profits after tax
Minority interests
Net profits
% y-y
Wtd-avg shares out (mn)
Fully diluted shares (mn)
Dividends paid
Balance sheet
Cash
Current assets
Investments
Associates
Net fixed assets
Total assets
Current liabilities
Total debt
Other liabilities
Total liabilities
Share capital
Shareholders' funds
Minorities
08

09
10
11E
12E
42,158
18
-33,697
-20,544
-11,013
52,343
24
-39,937
-23,474
-13,749
56,322
8
-42,083
-24,818
-14,199
62,912
12
-47,029
-27,562
-16,001
71,143
13
-52,930
-30,975
-18,039
8,461
12,406
14,238
15,884
18,213
1,339
9,800
-1,307
8,493
-113
8,380
-1,369
7,010
0
7,010
7,010
5
777
777
-1,555
-1,402
11,004
-1,706
9,298
-329
8,955
-1,245
7,710
0
7,710
7,723
10
777
777
-1,555
1,192
15,430
-1,888
13,542
-237
13,305
-2,485
10,820
0
10,820
10,820
40
790
790
-1,606
851
16,735
-2,414
14,320
-1
14,319
-2,434
11,885
0
11,885
11,885
10
803
803
-1,606
1,117
19,330
-2,685
16,645
-1
16,643
-2,497
14,147
0
14,147
14,147
19
803
803
-1,606
797
33,960
935
0
18,945
3,486
57,326
12,286
5,805
1,683
19,774
1,555
37,552
0
57,326
534
41,348
801
0
23,588
2,831
68,568
13,898
9,402
1,790
25,090
1,555
43,478
0
68,568
3,572
43,466
801
0
27,950
2,831
75,047
13,751
28
2,089
15,868
1,606
59,179
0
75,047
6,919
50,814
801
0
31,536
2,831
85,981
14,385
28
2,382
16,795
1,606
69,185
0
85,981
14,166
62,844
801
0
32,851
2,831
99,326
15,161
28
2,683
17,872
1,606
81,453
0
99,326
FY:
Cash flow statement
Pretax profits
Depreciation
Tax paid
Cash flow from operations
(a)
Capital expenditure
Chg in investments
Chg in associates
Chg in minorities
08
09
10
11E
12E
8,380
1,307
-1,058
-5,967
120
8,955
1,706
-1,303
-5,832
-44
13,305
1,888
-2,177
713
0
14,319
2,414
-2,141
-3,366
0
16,643
2,685
-2,196
-4,007
0
2,782
3,484
13,730
11,226
13,126
-5,620
243
0
0
-5,377
-2,595
0
0
4,570
-1,819
-674
2,077
-518
-6,247
134
0
0
-6,113
-2,629
0
0
3,597
-1,819
588
2,366
-263
-6,250
0
0
0
-6,250
7,480
6,760
0
-9,375
-1,828
0
-4,442
3,038
-6,000
0
0
0
-6,000
5,226
0
0
0
-1,879
0
-1,879
3,348
-4,000
0
0
0
-4,000
9,126
0
0
0
-1,879
0
-1,879
7,247
Key ratios
EPS (INR)
EPS growth (%)
EBITDA margin (%)
EBITDA growth (%)
ROE (%)
ROCE (%)
Net debt/equity (%)
9.0
5.0
20.6
23.2
6.7
20.1
21.3
13.3
9.9
10.2
24.7
21.0
12.3
19.1
18.6
20.4
13.7
37.8
26.3
27.4
40.2
21.1
23.4
-6.0
14.8
8.1
26.2
26.6
8.5
18.5
21.6
-10.0
17.6
19.0
26.5
27.2
15.5
18.8
21.4
-17.4
Valuations
P/E (x)
P/CE (x)
P/B (x)
Yield (%)
EV/net sales (x)
EV/core EBITDA (x)
37.7
31.8
7.1
0.6
6.6
32.9
34.2
28.0
6.1
0.6
5.4
22.7
24.8
21.1
4.5
0.6
4.8
18.9
23.0
19.1
4.0
0.6
4.2
16.8
19.3
16.2
3.4
0.6
3.6
14.2

35
(7) Ranbaxy Laboratories [RBXY IN] (Reduce; INR442.70)
(Saion Mukherjee)
2-21. Ranbaxy: sales breakdown and key data
India & Middle East

26%
North America
28%

Free float: 40%
09/12 sales: $1.56bn
Latin America
5%
09/12 D/E: net cash
EU, CIS & Africa

34%
Asia-Pacific
7%
History
Ranbaxy was established in 1961 and went public in 1973. Its first US patent received
approval in 1990. It acquired Ohm Labs, a manufacturing facility in the US, in 1995. Ranbaxy
has a presence in 23 of the top 25 pharmaceutical markets of the world and serves customers
in over 125 countries.
Investment argument
(1) Growth in emerging markets has revived; launches from Daiichi Sankyo's portfolio and
initiatives through Project Viraat in India should assist further growth.
(2) Lipitor is the key exclusivity opportunity over the next two years.
(3) Progress has been made toward addressing the manufacturing issues raised by the FDA.
Over time, we believe that Dewas and later Poanta Sahib may be cleared.
(4) However, the outcome of the DOJ investigation and validity assessment is critical, because
it may impact exclusivity upside for Ranbaxy.
2-22. Ranbaxy: financial data

FY:
07

08
09
10E
11E
Income statement
Gross sales
Excise duty
Net sales
Operating expenses
Materials
Manufacturing costs
Personnel expenses
SG&A expenses
R&D expenses
Core EBITDA
Other income
EBITDA
Interest
Depreciation
Amortization
Extraordinary income/(exp)
Pretax profits
Tax
Profits after tax
66,927
1,330
2,013
447
69,822
60,675
27,217
3,353
8,918
16,907
4,280
9,147
1,362
3,071
13,581
1,412
1,752
431
0
9,985
2,119
7,745
72,954
1,799
-3,362
540
70,852
68,482
30,335
4,853
9,670
19,311
4,314
2,370
2,706
-7,494
-2,418
2,055
2,232
593
-7,702
-15,000
-5,650
-9,513
73,441
2,676
1,931
147
77,901
68,846
29,003
3,766
12,659
18,543
4,875
9,056
2,935
1,493
13,484
710
2,110
566
0
10,098
6,991
2,965
87,621
4,952
3,195
164
95,604
72,557
30,749
3,716
13,925
18,805
5,363
23,047
1,500
1,298
25,845
584
2,562
659
0
22,040
6,687
15,353
101,730
3,257
0
192
104,795
83,088
36,148
4,422
15,317
21,303
5,899
21,707
1,500
0
23,207
6,113
2,784
659
0
13,652
4,503
9,149
Cash flow statement

Pretax profits
Depreciation
Tax paid
Capital expenditure
Chg in investments
9,985
2,183
-1,411
573
-1,098
10,232
-8,406
-227
225
-8,408
1,824
92
4,333
-3,642
-1,176
-392
1,433
-15,000
2,825
-1,360
-2,370
14,385
-1,520
-2,695
-5,212
-9,939
-17,846
-19,366
35,944
-4,503
-2,620
-2,055
26,766
7,400
10,098
2,676
-2,427
272
-12,240
-1,621
-4,144
-237
5,033
652
-969
13
-4,460
-6
-770
-5,223
-6,192
22,040
3,221
-6,687
1,180
-1,520
18,235
-4,500
0
1,200
-3,300
14,935
0
-0
0
-584
-584
14,350
13,652
3,443
-4,503
-7,895
4,913
9,609
-3,000
0
1,200
-1,800
7,809
0
-19,571
0
-6,113
-25,684
-17,875
FY:
07
08
09
10E
11E
Balance sheet
Current assets
Investments
Net fixed assets
Total assets
Current liabilities
Total debt
Other liabilities
Total liabilities
Share capital
Reserves & surplus
Shareholders' funds
Minorities
44,760
2,403
45,619
92,782
21,327
41,416
1,446
64,189
1,865
26,157
28,022
571
92,782
66,922
5,432
49,607
121,961
47,438
43,114
-12,229
78,323
2,102
40,861
42,962
675
121,961
60,086
5,407
51,136
116,629
41,112
36,295
-4,744
72,664
2,102
41,330
43,432
533
116,629
74,638
5,407
52,415
132,460
42,494
35,391
-4,744
73,142
2,102
56,683
58,786
533
132,460
67,441
5,407
51,972
124,821
45,277
15,820
-4,744
56,353
2,102
65,832
67,934
533
124,821
Key ratios
EPS (INR)
EPS growth (%)
ROE (%)
Net debt/equity (%)
18.2
51.8
13.7
3.6
28.8
132.2
-22.3
NA
3.2
-74.1
-26.8
44.6
7.0
NA
12.3
282.2
6.9
55.0
36.0
417.8
26.3
154.5
30.0
14.7
21.5
-40.4
21.3
-5.8
14.4
10.2
24.1
6.7
3.2
24.5
NA
4.3
2.9
86.9
63.0
4.3
2.7
23.3
12.2
3.2
2.0
8.5
20.4
2.7
1.8
8.9
Valuations
P/E (x)
P/B (x)
EV/net sales (x)
EV/core EBITDA (x)
Note: FY ends in December.

36
(8) Jubilant Organosys [JOL IN] (Buy; INR348.65)
(Saion Mukherjee)
2-23. Jubilant Organosys: sales breakdown and key data
Nutrition Healthcare
6%
0.2%
Life science chemicals

19%
Free float: 50%

CRAMS
63%
Dosage form
5%
10/3 sales: $805mn
Specialty pharmaceuticals
7%
10/3 D/E: 119%
History
Incorporated in 1978, the company was primarily a manufacturer of industrial chemicals. In the
mid-1990s, it began with contract research and manufacturing services (CRAMS) for pyridine
and pyridine derivatives. The companys strength in pyridine chemistry formed the basis of its
further forward integration into APIs and formulations. The company has expanded its
pharmaceutical business mainly through acquisitions. It provides end-to-end services such as
early-stage discovery services, chemical synthesis, and clinical services under one roof.
Investment argument
(1) Successful business transformation

(2) Strengths: diversification, scale, and vertical integration
(3) Well seeded for growth opportunities
(4) Robust growth outlook
2-24. Jubilant Organosys: financial data

FY:
Income statement
Net sales
% y-y
Operating expenses
Raw materials
Other
Operating profits
Other income
EBITDA
Depreciation
EBIT
Interest paid
Pretax profits
Profits after tax
M inority interests
Net profits
% y-y
Wtd-avg shares out (mn)
Fully diluted shares (mn)
Dividends paid
Balance sheet
Cash
Current assets
Investments
Associates
Net fixed assets
Total assets
Current liabilities
Total debt
Other liabilities
Total liabilities
Share capital
Shareholders' funds
M inorities
08
09

10E
11E
12E
24,889
38
-20,382
-9,863
0
4,507
1,430
5,937
-1,039
4,898
-337
4,561
-573
3,988
16
4,005
4,005
76
144
179
-219
35,180
41
-28,471
-13,502
0
6,709
-1,040
5,669
-1,632
4,036
-1,070
2,966
-267
2,699
133
2,832
2,832
-29
148
171
-223
38,059
8
-30,508
-14,821
0
7,551
269
7,820
-1,241
6,579
-1,504
5,075
-992
4,083
-43
4,040
4,040
43
148
171
-235
44,334
16
-35,529
-17,333
0
8,805
400
9,205
-1,312
7,893
-2,272
5,621
-1,124
4,496
0
4,496
4,496
11
148
171
-246
52,213
18
-41,379
-20,415
0
10,834
400
11,234
-1,390
9,843
-2,983
6,860
-1,372
5,488
0
5,488
5,488
22
148
171
-259
5,238
17,398
456
0
23,971
16
41,842
6,679
21,085
1,302
29,066
147
12,562
214
41,842
3,817
19,672
2,714
0
42,481
3
64,870
11,943
38,781
1,151
51,875
148
12,675
320
64,870
5,386
22,080
2,714
0
43,740
3
68,537
12,556
38,070
1,151
51,777
148
16,441
320
68,537
4,325
23,265
2,714
0
45,428
3
71,409
13,560
35,730
1,151
50,441
148
20,649
320
71,409
858
22,479
2,714
0
47,037
3
72,233
14,888
30,040
1,151
46,079
148
25,835
320
72,233
FY:
Cash flow statement
Pretax profits
Depreciation
Tax paid
Capital expenditure
Chg in investments
Chg in associates
Chg in minorities
Key ratios
Adjusted EPS (INR)
Adjusted EPS growth (%)
EBITDA growth (%)
EBITDA margin (%)
ROE (%)
ROCE (%)
Net debt/equity (%)
Valuations
P/E (x)
P/CE (x)
P/B (x)
Yield (%)
EV/net sales (x)
EV/EBITDA (x)
08
09
10E
11E
12E
4,561
1,039
-917
-1,539
24
3,169
-10,778
-418
0
0
-11,195
-8,026
594
56
4,558
-210
0
4,999
-3,027
2,966
1,632
-564
1,736
13
5,784
-21,708
-2,257
0
0
-23,965
-18,181
-112
239
17,697
-259
0
17,564
-617
5,075
1,241
-992
-226
0
5,098
-2,500
0
0
0
-2,500
2,598
0
-43
-711
-274
0
-1,029
1,569
5,621
1,312
-1,124
-1,242
0
4,567
-3,000
0
0
0
-3,000
1,567
0
0
-2,340
-288
0
-2,628
-1,061
6,860
1,390
-1,372
-1,353
0
5,526
-3,000
0
0
0
-3,000
2,526
0
0
-5,690
-302
0
-5,992
-3,467
27.8
74.7
57.5
23.9
36.4
15.7
124.0
19.2
-31.0
-4.5
16.1
22.0
9.2
269.1
27.4
42.6
38.0
20.5
27.2
12.1
195.0
30.5
11.3
17.7
20.8
23.8
13.9
149.8
37.2
22.1
22.0
21.5
23.3
17.1
111.6
12.5
9.9
3.9
0.4
2.5
10.7
18.1
11.5
4.0
0.4
2.3
14.6
12.7
9.7
3.1
0.5
2.1
10.3
11.4
8.8
2.4
0.5
1.8
8.6
9.4
7.5
2.0
0.5
1.5
6.8

37
3. Antibody biosimilars destined to take hold around the

world
(1) Summary: global spread of biosimilars only a matter of time
We expect antibody biosimilars to become common around the world. At this juncture,
Need for antibody

biosimilars in every
country
however, various factors are stymieing the spread of antibody biosimilars. Not only are there
no official guidelines in Japan, the US, and Europe governing antibody biosimilars, but we also
regard the barriers to entering this market as inordinately high given the need for large-scale
clinical trials, massive capital expenditure, and specialized expertise in cell culture technology.
On the other hand, we think a global epidemic of unmet economic needsin the form of
ballooning medical costs and deteriorating national financeswill provide strong impetus for
companies to enter the biosimilar market. From a medium- to long-term perspective, we
consider the emergence of biosimilars as very likely. In Japan and the US, we expect generic
drug makers, along with branded drug makers mulling entry into the generic drug market, to
begin ramping up development of biosimilar products.
3-1. Three categories of biosimilars: two types of protein plus antibodies
Degree of difficulty
in manufacturing
Small
Large
Bios im ilars
Proteins
Non-glycosylated proteins
Ins ulin
Composed of 51 amino acids
and has a molecular w eight of
5,808Da. Stored in the body as
a hexamer (see diagram at
left). Produced using bacteria
such as E. coli. Modified
versions called insulin analogs
are currently mainstream,
available in both rapid-acting
and extended-release
formulations.
G-CSF (granulocyte-colony
stimulating factor)
18,8000Da. Produced using
bacteria such as E. coli.
Differs from the natural human
G-CSF in only one respect,
having one few er amino acid.
In the human body, the protein
has sugar chains attached
Antibody drugs
Glycosylated proteins
Sugar
Protein
Erythropoie tin
34,000Da. Sugar chains are
normally attached in four
locations. For this reason, EPO
cannot be produced in E. coli and
other bacteria, and is instead
produced using CHO cells.
Epoetin alfa, the main product on
the market, also differs slightly in
sugar chain structure from
human erythropoietin
Antibody drugs
Molecular w eight is around
150,000Da. Sugar chains are
normally attached in tw o locations.
For this reason, antibody drugs
cannot be produced in E. coli and
other bacteria, and are instead
produced using CHO cells. Structure
features tw o heavy chain/light chain
pairs.
Source: Nomura, based on wikipedia.org and Goodman & Gilmans Pharmacological Basis of Therapeutics, from Brunton, et al.
38
Of the three categories,

antibody biosimilars are
attracting the most
attention
Biosimilars fall into three broad categories. The first are non-glycosylated proteins with no
sugar chain (where several sugars bind to an amino acid). Examples include insulin and the
leukopenia treatment G-CSF. From a manufacturers perspective, the lure of this type of
biosimilar is that production facilities need not be very large, as dosages are small and the
absence of sugars means such proteins can be produced in E. coli.
The second are glycosylated proteins (ie, those featuring sugar chains). Typical of such
proteins is the anemia treatment erythropoietin (EPO, an example of erythropoiesisstimulating agents, or ESAs). The manufacturing process for glycosylated proteins is much
more complex, as the presence of sugars means that animal cells such as Chinese hamster
ovary (CHO) cells must be used as the culture medium. However, as dosages are small in the
category as well, production facilities need not be very large.
The third category of biosimilars is that of recombinant human monoclonal antibody
biosimilars. Although many such biosimilars are already being developed by branded drug
makers, this type is the most expensive to produce.
Currently, the worlds leaders in the field are for the most part producing biosimilars of proteins,
such as G-CSF and EPO. However, many have plans to tackle the costlier option of antibody
biosimilars. In this chapter, our focus is on biosimilars of antibody drugs. (For reference, we note
that the majority of insulin products on the market are insulin analogs. Not only will such products
lose patent protection in 2013, but also the added complexity of the need for advanced delivery
systems means that few companies are now developing insulin analogs. An exception is the
Indian company Biocon, which we will discuss in more detail later.)
Two main challenges:

manufacturing and
approval
As we see it, biosimilars pose two main challenges, in the areas of manufacturing and
approval. With regard to the former, manufacturing methods for biosimilars differ significantly
from those used to produce conventional tablets and injections, in that they involve cultivation
processes using live cells, as well as complex purification procedures. In comparison with
conventional tablet manufacturing, quality control for biosimilars requires high-level analytical
techniques. The high cost of active ingredients and facilities presents an additional hurdle for
manufacturers. From an approval perspective, the absence of official US guidelines is a
significant impediment. We attribute the lack of progress in developing biosimilars in large part
to authorities failure thus far to produce standards for proving equivalence with branded drugs,
as well as general guidelines for approval. Moreover, poor visibility from a development cost
standpoint is having an impact on setting prices for biosimilars.
39
3-2. Manufacturing and approval are the two main challenges for biosimilar industry
Ke y phrase s
Integrated platforms
Disposable
manufacturing equipment
Inexpensive purification
technologies
Standards for
bioequivalency
Production of guidelines
Prompt debate on pricesetting
State-of-the-art analytical
techniques
Manufacturing
Approval
Challe nges involve d in biosimilar m anufacturing

Need for manufacturing know -how
(1) Technical alliances require d
Manufacturing costs are high
(2) Costs m us t come dow n
Challenge s involved in bios im ilar approval

Guidelines do not exist
(3) Mus t be de vis ed w ithin the next few years
Clinical study requirements on par w ith those for branded drugs
(4) Re quirem ents should be eas ed in some res pe cts
Source: Nomura
Biosimilar antibodies to
make their appearance
in developed countries
from 2012
In Exhibit 3-3, we list the antibody drugs awarded FDA approval thus far. One such drug,
Orthoclone OKT3, has already lost patent protection; however, as it is a murine (mouse)
monoclonal antibody, this drug has severe side effects and accordingly is not being used at
present. We estimate that the drugs closest to going off-patent, and with the largest sales
figures, are the rheumatoid arthritis treatments Remicade and Enbrel, the malignant
lymphoma treatment Rituxan, and the breast cancer treatment Herceptin, all of which were
given FDA approval in 199798. Enbrel goes off-patent in 2012, Rituxan loses patent
protection outside the US in 2013, Remicade goes off-patent in 2014, and Herceptins patents
expire in 201519. For this reason, we expect 201215 to be a period of worldwide growth in
biosimilar antibodies.
40
3-3. List of antibody drugs approved thus far in the US

Generic name
Company seeking
approval
Muromonab-CD3
Abciximab
Rituximab
Daclizumab
Palivizumab
Infliximab
Trastuzumab
Etanercept
Basiliximab
Gemtuzumab ozogamicin
Alemtuzumab
Ibritumomab tiuxetan
Adalimumab
Alefacept
Omalizumab
Tositumomab-I131
Efalizumab
Cetuximab
Bevacizumab
Natalizumab
Abatacept
Ranibizumab
Panitumumab
Ecolizumab
Rilonacept
Certolizumab pegol
Romiplostim
Golimumab
Canakinumab
Ustekinumab
Ofatumumab
Ortho Biotech (JNJ)

Centocor (JNJ)/Lilly
Biogen/Idec/Genentech
PDL/Roche
MedImmune
Centocor (JNJ)
Genentech
Immunex (Amgen)
Novartis
Wyeth
ILEX/Millenium
Biogen/Idec
CAT, Abbott
Biogen
Genentech
Corixa
Genentech
ImClone/BMS
Genentech
Biogen/Elan
BMS
Genentech/Novartis
Amgen
Alexion Pharma
Regeneron
UCB/Schwartz
Amgen
Centocor (JNJ)
Novartis
Ortho Biotech (JNJ)
Genmab, GSK
Product name
Orthoclone OKT3
ReoPro
Rituxan
Zenapax
Synagis
Remicade
Herceptin
Enbrel
Simulect
Mylotarg
Campath-1H
Zevalin
Humira
Amevive
Xolair
Bexxar
Raptiva
Erbitux
Avastin
Tysabri
Orencia
Lucentis
Vectibix
Soliris
Arcalyst
Cimzia
Nplate
Simponi
Ilaris
Stelara
Arzerra
Date of US
approval
(yy/m/d)
86/6/19
94/12/22
97/11/26
97/12/20
98/6/19
98/8/24
98/9/25
98/11/2
98/12/5
00/5/17
01/5/7
02/2/19
02/12/31
03/1/30
03/6/20
03/6/27
03/10/27
04/2/12
04/2/26
04/11/23
05/12/23
06/6/30
06/9/27
07/3/16
08/2/27
08/4/22
08/8/22
09/4/24
09/6/17
09/9/25
09/10/26
Target
Cell line
T-cell receptor CD3

Platelet GPIIb/IIIa receptor
B-cell receptor CD20
IL-2R
A-antigen (RSV)
TNF-
HER2/Neu
TNF-
IL-2R
CD33
B-cell and T-cell receptor CD52
TNF-
CD2
IgE
CD11a
EGFR
VEGF
41/47
CD80/CD86
VEGF-A
EGFR
Complement C5
IL-1
TNF-
TPO-R
TNF-
IL-1
IL12/23
CD20
Hybridoma
E. coli
CHO
NS0
NS0
SPII/0
CHO
CHO
SPII/0
NS0
CHO
CHO
CHO
CHO
CHO
Mammalian
CHO
SPII/0
CHO
NS0
CHO
E. coli
CHO
NS0
CHO
E. coli
E. coli
SPII/0
SPII/0
SPII/0
NS0?
Source: Nomura, based on European Public Assessment Report (EPAR) documents submitted to European Medicines Agency (EMEA),
and Biologic License Application (BLA) documents submitted to US FDA
Japan: we think drug

companies should be
wasting no time in
embarking on biosimilar
development
The worlds leading pharmaceutical companies began laying down the foundations for
biosimilar development in 200809, forming tie-ups with Indian companies and acquiring other
manufacturers overseas. In Japan, however, the general consensus is that biosimilars will not
take off. Thus, with a few exceptions like JCR Pharmaceuticals, few companies appear to
have much appetite for entering the biosimilar market. However, we think Japanese drug
companies should be wasting no time in embarking on biosimilar development, for the three
reasons outlined below.
Reason (1): gross

margin on biosimilars is
around 8090%
The first such reason is that biosimilars are extremely lucrative: we estimate the gross margin
on biosimilars at around 8090%. There are two reasons for this. First, considerable advances
have been made over the past 10 years in cultivation techniques. The advent of integrated
CHO platforms for cell line development has made antibody manufacturing much easier. At
the same time, techniques have been developed for the development of high-producing CHO
cell lines, capable of generating antibodies and proteins in large volumes. Second, advances
in manufacturing have seen a shift from stainless steel reactors to disposable bioprocess bags,
which contribute not just to reining in initial facility investment but also to curbing running costs.
Furthermore, many of the technical hurdles involved in biosimilar manufacturing can be
overcome via the external procurement of master cell banks (MCBs), the in-licensing of
cultivation technologies, and outsourced production.
41
Reason (2): road to

approval already clear,
even if no guidelines
exist as yet
Our second reason for urging Japanese drug companies to waste no time in embarking on
biosimilar development is that, based on the basic guidelines governing biosimilars in Japan
and Europe, we think it is essentially possible to map out the road to approval. Because of the
absence of official guidelines in Japan, the US, and Europe for biosimilar antibodies, even
Indian companies that led the way in producing biosimilar proteins are for the most part
reticent to enter the antibody field. In Japan and Europe, however, we think a biosimilar drug
system is sufficiently well established for the basic guidelines to enable companies to map out
a road to approval. Gaining approval for biosimilars requires complex analysis and large-scale
clinical trials, but these barriers are not insurmountable, judging by the supporting documents
for the three products thus far approved in Japan and Europe.
Reason (3): inexpensive

biosimilars of costly
antibody drugs will
inevitably take hold in
Japan, too; only two
years left for
development
Our third and final reason is that we think inexpensive biosimilars will be quicker to penetrate
the market than has been the case with costly antibody drugs. Both hormone and protein
preparations are comparatively inexpensive in Japan, and as such we do not expect uptake to
be particularly rapid for biosimilars, prices for which are about 70% of the original branded
drugs. For the patient, there are few advantages in selecting biosimilars, whichwhile
bioequivalentare lacking in brand power and yet differ little in price. As things stand, we
would therefore expect the spread of biosimilars to be limited at best. However, the antibody
drugs used in certain therapeutic categoriesparticularly in cancer treatmentcarry
extremely high prices, and in these areas even a 30% discount would hold appeal for patients.
With the major antibody drugs poised to start losing patent protection from 2012, only two
years remain to develop biosimilars ready for launch. We think Japanese companies have no
time to spare.
Implications for
Japanese companies
As Japanese companies are ahead of the curve in this respect, we would highlight JCR
Pharmaceuticals, which has signed a license agreement with GlaxoSmithKline under which
the latter has the rights outside Japan to develop and commercialize JCR Pharmaceuticals
biosimilar EPO, and Nipro, which has its own biosimilar EPO. Among companies other than
drug makers, we also anticipate benefits for Shimadzu, which markets analyzers sufficiently
sophisticated for antibodies in all stages, whether development, production, or clinical trials.
India: presence in global

generics market set to
become greater than
that in tablets
Indian companies high profile on the global generics market is common knowledge. We
attribute their strong presence on the market to (1) vertically integrated operations, whereby
everything from the active pharmaceutical ingredient (API) to the final product is manufactured
in-house, for a very low cost, (2) an aggressive approach to building overseas operations,
including businesses in the US and Europe, and emerging markets, and (3) an abundance of
world-class biochemical researchers. As shown in Exhibit 3-21, Indias leading biosimilar
companies already have agreements to supply biosimilars to pharmaceutical giants around
the world. In this respect, they are a step ahead of counterparts in Japan, the US, and
Western Europe, as well as those in China, Korea, and Eastern Europe. If Indian companies
could just conquer their issues with product quality, we think their presence in the global
generics market could become greater than that in tablets.
We are focusing in particular on Biocon (has the lengthiest track record among Indian
companies in culture production), Dr. Reddys (already marketing a biosimilar version of the
antibody rituximab in India), and the unlisted Intas Pharmaceuticals (boasts a cutting-edge
manufacturing unit with EU-GMP certification). Otherwise, we are monitoring Zydus Cadila,
which has a biosimilar G-CSF product on the market, and Lupin, which has declared its
intention to manufacture biosimilars.
42
(2) Manufacturing: we estimate gross margin of over 80% on

biosimilars
Higher margins on
biosimilars than
generally expected
In this section, we look in detail at the production process for biosimilars and the costs
involved. Although much specialized technology is required to manufacture biosimilars,
licensing in of technology can significantly reduce the time required for development. People
tend to view biosimilars as generic drugs with very high manufacturing costs, because of the
need for approval trials and for special equipment and materials. Nevertheless, production
costs have fallen substantially owing to the progress in recent years in developing platforms
for the cultivation stage of antibody drug manufacturing, with production volumes improving
markedly as cultivation technology has advanced. The cost of culture medium is roughly the
same as water, meanwhile, and the use of disposable plastic bags with a capacity of several
thousand liters can significantly reduce equipment costs. Thus, we think the challenges of
biosimilar manufacturing technology can be overcome, with a gross margin of 90% possible
owing to the productivity improvements and introduction of disposable equipment in recent
years.
Biosimilar manufacturing involves living cells, unlike the manufacturing of generic tablets and
Major obstacles in
biosimilar manufacturing injectable drugs, and the manufacturing process therefore needs to be as similar as possible to
process
that of the branded product. The maker of the branded products does not disclose the details of
its manufacturing method, the composition of the optimal culture medium, the vector for the
embedded genes, or the structural distribution of the sugar chain. The hardest part of achieving
a stable production system is fine adjustment of the cell culture mediums composition.
Also some advantages
over branded product
Nevertheless, it should be possible to make antibody drug biosimilars with superior quality to
the branded product. The first antibody drugs and their production methods were developed at
the start of the 1990s. Technology has subsequently made large progress, enabling analysis
of impurities that branded drugmakers did not even detect, and far more precise structural
analysis. Although the manufacturing of biosimilars is challenging, better productivity and
superior quality to the original branded product should be possible.
Outline of antibody drug

manufacturing
Biosimilars are manufactured in essentially the same way as the branded antibody drug.
Exhibit 3-4 shows the manufacturing process for the branded product. The three stages of the
antibody drug manufacturing process are cell cultivation, removal of the active component
from the cells, and refining of the active component. Production volume can be increased at
the cultivation stage by gradually expanding the cultivation of antibody-producing cells. At the
second stage, the antibody drug is isolated from all the other cell-related substances in a
simple process. In the final stage, all impurities are removed via column chromatography to
result in a finished product that matches the standards of all national authorities.
43
3-4. Antibody drug manufacturing stages

Antibody drug manufacturing
Cell cultivation
Flask
Refining of active com pone nt
Wave bio reacto r
UF/DF filter system: virus

remo val and final refining
(made by P all)
SUB /SUS (dispo sable pro ducts made by

Thermo Fisher Scientific)
Cultivatio n in large plastic bags with maximum
capacity o f 2,000l
CEX/AEX io n-exchange chro mato graphy

system: AEX (anio n) co lumn remo ves DNA and
cell pro tein, while CEX (catio n) co lumn remo ves
agglutinated antibo dies and pro tein A (Capto Q
made by GE Healthcare)
Rem oval of active com ponent from ce lls
Co ntinuo us centrifuge fo r
remo ving unwanted cell
parts (made by Alfa Laval)
Stainless steel bio reacto r
Depth filter to impro ve

remo val o f impurities and
cell fragments (made by
M illipo re)
P ro tein A chro mato graphy system: the first

refining stage fo r many antibo dy drugs,
bo o sting antibo dy pro ductio n via yield o f at
least 95%; can be used 200x, but the mo st
expensive equipment at co st o f aro und 100mn
(Pro Sep-vA made by M illipo re)
Source: Nomura, based on company website data
(1) Cell cultivation stage:

embedding of antibody
genes in cells, followed
by their cultivation
The cell cultivation stage involves first establishing an MCB, and then discovering the optimal
composition of the culture medium. Antibody manufacturing starts with the embedding of
antibody production genes in the host cells. As shown in Exhibit 3-3, the most popular types of
host cell are CHO cells, NS0 cells, and SPII/0 cells (the last two both being mouse myeloma
cells). The cloned cells containing the antibody-producing genes are then screened, and the
cells that produce the largest volume of antibody are used to establish the MCB. The cells
obtained from the MCB are then cultivated in a flask or other small container. Plastic bags are
then used for cultivation on a scale of several tens of liters, before moving up to disposable
bags with a capacity of several thousand liters. At a scale of 10,000l, a stainless steel
bioreactor is used, as in the past. The cell cultivation stage usually takes 23 weeks,
depending upon the cells involved and the production scale.
Point (1): selection of

similar cells to branded
product, usually CHO
cells
In basic terms, the cell line should be the same as used for the original branded product. Exhibit
3-3 shows the 31 antibody drugs approved in the US, of which 13 use CHO cells, five use SPII/0
cells and 56 use NS0 cells. The advantages of CHO cells are stable gene expression owing to
the absence of retroviruses within the genome, and a stable sugar chain structure compared to
human embryonic kidney (HEK) 293 and other cells. Their disadvantage used to be much lower
antibody productivity per liter than E. coli or HEK 293 cells. This factor once made the
development of new cultivation technology, such as by using transgenic mice or Pichia pastoris
(a type of yeast), look likely for annual production measured in tonnes. Nevertheless, the
productivity of CHO cells rose from 0.020.05g/L in 1985, to 0.52.0g/L in 1995 and 3.05.0g/L
in 2005. The use of CHO cells thus looks likely to continue (Exhibit 3-5).
44
3-5. Improvement over time in g/L antibody yield for different cell types
Productivity [g/L]
15
CHO
Hansenula
Saccharomyces
E.coli
Pichia pastoris
10
0
1984
94
04
(CY)
Note: CHO = Chinese hamster ovary, Hansenula = a type of yeast, Saccharomyces = a type of yeast, Pichia
pastoris = a type of yeast.
Source: Werner, R.G. (September 2005), The Development and Production of Biopharmaceuticals:
Technological and Economic Success Factors, BioProcess International 3 (9), S6-S15
Point (2): cell lines and

DNA embedding are
intellectual property
minefield
Based on our interviews with the representatives of numerous Indian enterprises, many
intellectual property rights are involved with DNA embedding and the selection of highly
productive cells to set up an MCB. This seems to make it difficult to establish cell lines without
infringing upon the patent rights of rival companies. The manufacturing approval process for
antibody drugs always involves a DNA analysis of the MCB, making it necessary to check
carefully for patent infringement even when licensing in technology.
Intellectual property
example: highly
productive cell selection
technology using
Lonzas glutamine
synthetase vector
A famous patent example is that of Celltech (acquired in 1996 by Lonza Biologics) with regard
to its US patent 5,122,464 concerning genetic vectors including glutamine synthetase (an
enzyme that produces the amino acid glutamine). This technology covers genetic vectors for
manufacturing antibodies, and the genetic code for glutamine synthetase. Only cells that can
stably express glutamine synthetase can survive in a culture medium that is free of glutamine.
Cell colonies expressing glutamine synthetase also produce antibodies, enabling the selection
of cells with a high volume of antibody production. Glutamine synthetase also breaks down
harmful metabolites including lactic acid and ammonia, and thus looks promising in terms of
selection methods and productivity boosting. CHO-K1 cells containing glutamine synthetase
have become the standard, but the use of this vector is a patent right infringement.
Point (3): optimal culture The culture medium composition has a major impact on productivity. Commercial preparations
medium composition
are used in the culture medium in the early stages of cell cultivation, but their high cost means
has major impact on
that makers prepare their own culture medium when cultivation is scaled up. Based on our
productivity
interviews with representatives from many companies, numerous compounds are included in the
culture medium and its composition is another matter of accumulated expertise. The most
expertise is required to finely adjust daily production. The productivity of the cells provided by the
MCB also changes according to slight variations in pH and carbon dioxide concentration. In
some cases, the sugar chain structure can change. Stable production of antibody drug
biosimilars therefore requires careful adjustment of the culture medium. Determining the optimal
composition of the culture medium appears to be a very time-consuming job, and is thus the
area that requires the most technological collaboration and licensing in.
45
Even after adjusting

cultivation conditions,
highly stable and
reproducible sugar chain
distribution still required
We think the most difficult part of antibody drug manufacturing involves achieving a highly stable
and reproducible sugar chain distribution, while adjusting the cultivation conditions with the aim
of raising productivity. Antibody sugar chains join in two places. Antibody structure is highly
flexible, and minor variation in the sugar chain structure can significantly change the antibodys
structure and bioactivity. A stable sugar chain distribution is required because changes can
significantly influence the antibody drugs effect. Nevertheless, there are no firm rules for
achieving a stable sugar chain distribution, and makers thus need to spend time adjusting the
cultivation conditions to ensure high productivity and a stable and reproducible sugar chain
structure.
Low cost of culture

medium
We estimate that the cost of the culture medium itself is very low, at just a few yen per
kilogram. Cell cultivation media contain a range of nutrients. For example, CHO Medium sold
by Sigma-Aldrich contains HEPES (buffer solution), sodium bicarbonate, a range of amino
acids and vitamins, genetically modified human insulin, traces of rare elements, surfactant,
and other organic compounds. We surmise that makers purchase the compounds required for
the expanded cultivation stage in bulk.
Faster to buy in MCBs

and cultivation
conditions from Indian
and European
companies
The low-cost solution is to license in technology from companies that have built up expertise in
cell cultivation. Many Indian and European companies have established their own MCBs and
cultivation conditions, with many Indian companies in particular selling generic protein and
antibody drugs. Numerous Indian companies already sell protein drug biosimilars, such as
listed companies Dr. Reddys Laboratories and Biocon. It would be efficient in terms of both
cost and time to buy an MCB from an Indian company, and then acquire the cultivation
conditions and other requirements via technological collaboration.
Point (4): very large cost In recent years, makers of antibody drugs have reduced their production costs by switching
savings via use of
rapidly to the use of disposable containers that are used only once. These containers were
disposable bags
adopted in the US and Europe from around the start of 2000, and have been adopted in Japan
by Kyowa Hakko Kirin at the new A building of its Takasaki plant, which was completed in March
2010. In the past, makers used stainless steel tanks (even in the early stages) with a scale of
several hundreds to several thousands of liters. In recent years, however, large plastic bags are
becoming the standard when expanding cultivation up to 2,0003,000l. We estimate high
running costs with the 2,0003,000l capacity plastic bags costing 100,000 each, but not having
to ensure the cleanliness of the steel tanks means that personnel and other costs fall
substantially.
Estimation of substantial
capex reduction via use
of disposable bags
Exhibit 3-6 compares the capital investment requirements when using stainless steel cultivation
tanks and when using disposable plastic bags. The stainless steel tanks in themselves are
expensive, at US$70,000150,000, and we estimate total capital investment of US$8.35mn for a
2,000l facility, since their installation costs are also high (plumbing, certification). In comparison,
the capital investment required when using disposable plastic bags is only around US$290,000,
since a frame to support the bag is all that is required. We thus estimate a savings of at least
US$8mn. On top of this is the cost of the bags, which ranges from several tens of thousands of
yen up to 100,000.
46
3-6. Capex comparison between stainless steel cultivation tanks and disposable cultivation bags
Capital cost when using stainless steel cultivation tanks
Price
Qty Description
$
4
100L buffer hold tank, portable
70,000
4
300L buffer hold tank, portable
105,000
2
400L buffer hold tank, fixed
100,000
4
120,000
2
150,000
1
500L buffer prep vessel, agitator, vent filter
90,000
1.5
1.5
4
4
4
4
Total
$
420,000
630,000
800,000
1,920,000
1,200,000
360,000
Lange factor
105,000
420,000
1
2

CIP skid
125,000
350,000
4
3
500,000
2,100,000
8,350,000
Capital cost when using disposable plastic bags

Qty Description
8
2000L fixed bag holders w/ load cells
20 500L portable bag holders
35 100L drums w/ trolleys
Subtotal additions
Total equipment savings
Price
$
20,000
3,000
300
Lange factor
1.3
1.3
1
Total
$
200,000
75,000
10,500
285,500
8,064,500
Note: (1) Capital costs are estimated from equipment cost using the Lange factor, which is an empirical
multiplier that accounts for the cost of installing the equipment. (2) Total cost = equipment cost x Lange
factor x quantity.
Source: Nomura, based on Barnoon, B.I., Bader, B., (November 2, 2008), Lifecycle Cost Analysis for
Single-Use Systems, BioPharm International Supplements
Use of disposable
incubation packs
reduces running costs
The use of disposable incubation packs reduces not only initial costs, but also running costs.
Exhibit 3-7 shows a simulation that compares facilities for the manufacture of 75kg annually
using two methods: stainless steel tanks only, and a hybrid process that uses some
disposable incubation packs. The amount of inputs (particularly consumables) used is larger
for hybrid facilities, but depreciation on facilities is lower, as are cleaning costs and power and
water costs; thus, total annual running costs are brought down some 16% from the US$768/g
of the stainless steel tank method, to US$647/g.
3-7. Annual manufacturing costs using stainless steel tanks only vs hybrid process
Stainless steel tanks only
As % of total
Inputs
Consumables
Labor
Quality control/assurance
Waste disposal
Utilities
Equipment-dependent
Other
Annual manufacturing costs
Annual general expenses
Annual total expenses
Annual production (kg)
Cost/g ($/g)
$mn
Hybrid process (stainless steel

tanks plus disposable packs)
As % of total
$mn
30
15.7
43
18.7
10
15
2
10
32
1
100
5.2
7.9
1
5.2
16.8
0.5
52.4
5.2
57.6
75
768
12
18
2
5
18
1
100
5.2
7.9
1
2
7.9
0.5
43.2
5.2
48.5
75
647
Source: Pais-Chanfrau, J., Zorrilla, K., Chico, E., The Impact of Disposables on Project Economics in a New
Antibody Plant: A Case Study, BioPharm International , 1 December 2009.
47
(2) Removal of cell

material: rough
separation before
purification process
The next process after incubation is the removal of cell material. First, cell materials such as
DNA, chemical compounds, protein, and fat are roughly removed. Large impurities such as
cell membranes are removed using a disc stack centrifuge, into which liquid can be fed
continuously, and then the solution is passed through a depth filter (a special filter that catches
materials on the inside of a membrane). Lastly, large contaminants are removed from the
antibodies using microfiltration with a pore size of 1 micron or smaller. The filtered solution
then passes on to the purification process. The process thus far is relatively easy if the
necessary equipment is purchased, and is also highly flexible, being similar to processes used
for animal cells as well as E. coli and other bacteria. It does not represent a bottleneck in the
production of biosimilar drugs.
(3) Purification process: The final process in antibody pharmaceutical manufacture is purification. The cell removal
removal of contaminants process removes large particles from the suspension, but purification removes substances
of 1 micron and smaller other than antibodies with particles sized smaller than 1 micron, including proteins and DNA
fragments. Normally, the first step would be to use precision elution to separate the antibodies
in a chromatography column with protein A binding. The second step is to achieve the quality
required for the final products using low-pH viral inactivation, the separation of protein and
DNA other than the antibodies using anion exchange chromatography, and the removal of the
protein A from the liquid from the column used in step one using cation chromatography.
Purification the biggest
bottleneck
Purification is the most costly and time-consuming bottleneck in antibody drug manufacturing
now that that the gram per liter values of the incubation process have improved significantly.
As protein A selectively binds with antibodies, it is used in almost all purification processes.
However, there are multiple issues to overcome in this process, including that protein A is
mixed with the drug and the antibodies tend to coagulate. Cost is the biggest problem, with a
column costing several hundred million yen only able to be used about 200 times if the
antibody concentration is 1-5g/L. Ways in which costs can be lowered include substituting the
use of protein A with an ion column, or using Novozymess [NZYMB DC] new Dual Affinity
one-time use disposable columns.
Humira the only

antibody drug for which
protein A not used
Exhibit 3-8 lists the purification processes used for the main antibody drugs. Except for
Orthoclone, the first antibody drug to be released, a protein A chromatography column is used
for almost all other antibody drugs. We also note, however, that Humira is the only major
antibody drug for which protein A is not used. Humira is purified using both cation exchange
chromatography and anion exchange chromatography. Productivity should be extremely good
for Humira given the antibody concentration of 6g/L, with the annual production target at 1
tonne and each batch producing 40kg. This proves that large amounts of an antibody drug can
be produced without using protein A. We therefore think a range of new columns will be
developed as substitutes for the use of protein A.
48
3-8. Purification process for major antibody drugs

Product
name
Orthoclone
OKT3
Rituxan
Generic name
Date approved
(yy/m/d)
Purification process
Muromonab-CD3
86/6/19
Ammonium sulfate precipitation, AEX chromatography
Rituximab
97/11/26
Remicade
Infliximab
98/8/24
Herceptin
Enbrel
Humira
Xolair
Erbitux
Avastin
Tysabri
Vectibix
Trastuzumab
Etanercept
Adalimumab
Omalizumab
Cetuximab
Bevacizumab
Natalizumab
Panitumumab
98/9/25
98/11/2
02/12/31
03/6/20
04/2/12
04/2/26
04/11/23
06/9/27
Protein A Chromatography, UF/DF, AEX, Q Sepharose, nanofiltration

Protein A Sepharose, UF, CEX, S/D (TNBP/Polysorbate 80), viral inactivation,
virus filtration, primary AEX, secondary AEX, UF
Protein A, incubation at low pH, CEX, AEX and HIC
Protein A, UF, AEX, Ceramic hydroxyapatite, UF/DF
Fractogel S (CEX), Q Sepharose, Phenyl Sepharose, low-pH viral inactivation
Protein A, CEX (SP Sepharose), AEX (Q Sepharose), UF/DF
POROS Protein A capture, Q Sepharose, viral filtration, S Sepharose, UF/DF
Protein A, AEX (Q Sepharose FF), CEX (CM Sepharose FF), UF/DF
Protein A Sepharose, AEX, HIC, UF/DF, nanofiltration
Protein A, low-pH viral inactivation, polishing chromatography steps, UF/DF
Note: (1) AEX = anion exchange chromatography. (2) CEX = cation exchange chromatography. (3) UF/DF = ultrafiltration/diafiltration.
Source: Nomura, based on Gottschalk, U. Process Scale Purification of Antibodies pgs 39-44, European Medicines Agency application
materials
Early antibody drugs

contained high levels of
impurities
Antibody drugs contain impurities even after the purification process. The main impurities are
host cell DNA, protein from host cells, and coagulated antibodies. Only the amount of host-cell
DNA has been disclosed under the FDAs 1997 guidelines, with the allowable amount at 100
picograms (pg) per dose (the World Health Organization (WHO) standard is 10pg). We
estimate the amount of protein from host cells at 100ppm or less, and coagulated antibodies
at 5% or less. In addition, antibodies with slightly different sugar chains can affect antibody
activity itself, and thus quality assurance is critical. These constitute several percent of
antibodies, and fucose-lacking antibodies and antibodies with large amounts of mannose have
a particularly big impact on antibody-dependent cellular cytotoxicity (ADCC).
3-9. Nomura estimates for allowable levels of impurities in antibody drugs

Antibody drug impurity list
Coagulated antibodies
Protein from host cells
DNA from host cells
Sugar chain (galactose-lacking G0 types)
Sugar chain (fucose-lacking)
Sugar chain (sialic acid addition)
Sugar chain (high mannose)
Sugar chain (no sugar chain)
Impact and concerns

Decline in potency of antibodies
Immune reaction
Inclusion of cancer DNA
Impacts CDC but not ADCC
Major impact on ADCC
Impacts ADCC
Estimated
allowable level
05%
100ng/mg or less
10100pg/dose
1040%
213%
02%
310%
03%
Source: Nomura, based on CMC Biotech Working Group A-Mab: a Case Study in Bioprocess
Development Ver. 2.1, 30 October 2009
Leading-edge analytical
technologies enable
evaluation of production
processes using
impurities
Of the drugs with patents expiring around 2015, many were developed, and production
processes engineered, in the early 1990s. At that time, revolutionary new protein analysis
technologies such as liquid chromatography coupled with mass spectroscopy (LC/MS) did not
exist. The above concentrations of impurities are within the margin for error of LC/MS (protein
analysis) and capillary electrophoresis with mass spectrometry (CE/MS; a type of DNA
analysis), and analysis using these technologies provides hints regarding the host cell,
expression system, and incubation conditions of early antibody drugs. Developing biosimilar
drugs therefore requires analytical technologies similar to those required for the development
of branded drugs.
49
3-10. Monoclonal antibodies and analysis methodology for their sugar chains
MALDI-TOF
Mass spectrometry used
to analyze sugar chains
of individual antibodies
Sialic acid analysis

Analysis of sialic acid
isolated using HPLC
Fab
PNGase F used to isolate sugar chains
Isolated sugar
chains
Fab
Fluorescent
marker
Fc
Monoclonal antibody sugar chains
Asn, the 297th amino acid of the Fc component, is
comprised of tw o units of sugar chains and antibodies,
so there are tw o sugar chains. Erbitux is an exception
in that is has a sugar chain in the Fab component also
Sugar chain analysis using mass spectography,

anion chromatography, amide HPLC
Source: Nomura, based on Luger data
Establishment of high
concentration 10g/L
production capacity to
push cost down in 10
years
As outlined in Exhibit 3-4, antibody production concentrations have improved from 0.02
0.05g/L, to 3.0-5.0g/L over the past 20 years. We expect further improvement in the
productivity of incubation processes to push this up to a consistently achievable 10g/L over
the next 10 years. Productivity of 10g/L would significantly reduce costs. Exhibit 3-11 shows
production concentrations and costs for antibody drugs. We note that costs are somewhat
high as the data is from 2004. From this data, we can estimate that the cost per gram will
decline to less than US$100 if antibody concentrations reach 10g/L. Given antibody drug
prices of US$5,00010,000/g, the gross margin on branded antibody drugs before
depreciation would be in excess of 90%. Naturally, R&D expenditure is large for branded
drugs, and in view of cumulative costs, we estimate that it would take around two years to
recover initial investment.
3-11. Production concentrations (g/L) for antibody drugs and costs

Annual production
kg/year
250
250
Titer
g/L
1
0.1
Bioreactor size
kL
20
310
Cost/g
$/g
260
1,500
Cost/year
$mn/year
65
375
Source: Nomura, based on Werner, R.G., Economic aspects of commercial manufacture of

biopharmaceuticals, Journal of Biotechnology, 2004, 113, 171-182
Gross margins on
biosimilars could reach
over 80% or 90%
depending on prices in
national markets
50
Gross margins are just over 90% on antibody drugs, but prices are lower for biosimilars and
thus margins would also be somewhat narrower. The price at launch of biosimilars such as Dr.
Reddys Reditux (biosimilar of Rituxan) and Biocons Erypro Safe (biosimilar of EPO) were
2040% lower than the branded versions, and JCR Pharmaceuticals Epoetin Alpha BS
Injection JCR is discounted by some 20%. Even assuming a price discount of around 30%,
improvements in the efficiency of production processes should mean a gross margin of over
80% feasible for biosimilars.
3-12. Antibody drug cost structure analysis by GE Healthcare

Modeling assumptions: industry best practice
Plant capacity utilization
Production costs
Antibody concentration
Cost per gram
Annual production target
Process production efficiency
Process period
Number of times protein A used
Cost item
80100%
15% of sales
5g/L
$100
1,000kg/year
7080%
10 days for incubation process
Two days for purification process
300 times
Note
Fixed costs
Depreciation
Insurance, tax, maintenance
Personnel costs
Variable costs
Incubation process
Purification process
Royalties, etc
% of total cost
72
Assuming useful life of 20 years for building,

10 years for equipment
Tax expenses lower in Indian SEZ
Personnel costs for production processes
MCB classified as R&D spending, so not
included; assumes relatively expensive
incubation medium
Consumables such as injection fluid, buffer,
chromatogram, filters
IP royalties on usage of cell bank, licensing of
optimal incubation conditions
20
20
32
28
6
22
Up to several %
Source: Nomura, based on GE Healthcare, Darby, N., Trends in Biological Manufacturing; How will our
industry change in the next 10 years?, 2008 ASME conference presentation
(3) Approval: pathway to approval of antibody drugs in sight, even if

there are no guidelines in Japan, Europe, or the US
Pathways to approval of The authorities in Japan, Europe, and the US have not issued guidelines for approval of
biosimilars based on
biosimilar antibody drugs. Many companies are waiting for the announcement of guidelines,
existing systems in each and we think a policy framework is in sight. The latest guidelines in Europe have been added
country
to the existing guidelines regarding a number of branded biologic drugs. We therefore think it
is possible to imagine what the guidelines for protein-based biologics will look like before they
are announced. In addition, as it is possible to develop biosimilar antibody drugs in
consultation with the FDA and EMEA, we think the pathway to biosimilar approval is clear.
As noted in European biologics approval application guidelines, biologics are approved even if
they differ slightly from branded drugs, so long as there are no differences in terms of safety
and efficacy. This is the main focus point. The biggest risks we see at present are demands for
large-scale clinical trials in the US and whether post-launch survey results obtained in
emerging markets will be approved in the US as safety data.
51
3-13. Overview of biosimilar guidelines and changes in manufacturing processes of major antibody drugs in Japan, Europe,
and the US
US
mA b submissio n
Guidance (1996)
Several bio similar bills

submitted (200709)
Co mparability Guideline (1996)

Basis fo r view o f bio similars
and guidelines enabling
antibo dy drug makers to switch to
simpler manufacturing pro cesses
Pro po sed guidelines fo r

bio similars? (2010)
US healthcare refo rm bill (M arch 2010)

One-year exclusive sales perio d fo r
first-appro ved bio similar, exclusive sales
perio d o f 12 years fo r branded drugs, etc
Europe, ICH
ICH Q6B (1999)
Valuatio n items required fo r appro val
o f antibo dy drugs; sugar chains and
higher o rder structures o f pro teins
are the hardest items to evaluate
ICH Q5E (2004)

Clearly states that even if there are
internatio nal guidelines and differences
in terms o f changes in antibo dy
drug manufacturing metho ds, as lo ng as
they have no majo r impact o n quality,
they will be regarded as equivalent
Similar B io lo gical
M edicinal P ro ducts (2005)
Euro pe's well-kno wn guidelines,
guidelines fo r particular bio lo gic
drugs drawn up
Specific Guideline M o no clo nal

Antibo dies (2010)
No t yet generally anno unced,
due to be anno unced in 2010
Japan
Guidelines fo r ensuring quality, safety, and
efficacy o f bio lo gic fo llo w-o n drugs (2009)
Similar to Euro pean guidelines, ICH standards
ado pted in the main; ho wever, many detailed items
and so mewhat stricter than Euro pean guidelines
(cy)
90
95
00
05
10
15
Source: Nomura, based on guidelines in each country and the US Patient Protection and Affordable Care Act of 2010
Biosimilars involve
changes in manufacturer
and in production
methods
Current biosimilar guidelines are based on guidelines concerning changes in production

methods of branded biologics. Manufacturers of branded biologics were obliged to
substantially alter production methods as production was scaled up from the clinical trial to the
post-launch stage. In some cases, there were major changes in master cell lines, culture
mediums, culture conditions, and manufacturing methods. It was also possible that clinical
trials would become necessary, as changes in biologic manufacturing conditions could result
in major changes in sugar chain distribution and production volume. However, guidelines were
established that stated clinical trials would not be necessary if it could be proven that a drug
conformed to a given set of standards before and after the changes. The current guidelines
only concern changes in manufacturing processes in the company that developed the biologic
drug. However, if one thinks of biosimilars as the product of major changes in production
methods in tandem with a change in manufacturer, then there are no major disparities with
existing guidelines.
Start of biosimilar
manufacturing: FDAs
1996 guidelines with
regard to changes in
antibody drug production
methods
The origin of biosimilar manufacturing dates back to April 1996, when the FDA released its
Guidance Concerning Demonstration of Comparability of Human Biological Products, a set of
guidelines regarding the equivalence of biologic drugs. Because analytical techniques were
not yet sufficiently developed at the time, it was not possible to determine what the active
components of the first biologics were, and numerous ingredients that were thought to be
effective were used. However, it was possible that new clinical trials would become necessary
when production was scaled up from small-scale production when clinical trials were under
way to large-scale production post-approval. However, the FDA had already indicated in 1994
that, depending on ex-vivo testing, animal trials, and data quality, it might not require clinical
trials to demonstrate equivalence following changes in manufacturing methods. These
guidelines stated that new clinical trials would not be needed so long as equivalence could be
shown via a combination of scientific analytical testing, biological testing, pharmacokinetic
52
research, pharmacodynamics studies, toxicity trials using animals, and clinical trials (clinical
pharmacology, safety, and efficacy).
Biosimilar guidelines
suggested by ICH Q5E
In 2004, international standard ICH Q5E, Comparability of Biotechnological/Biological

Products Subject to Changes in their Manufacturing Process, was released based on the
view that guidance with regard to changes in manufacturing processes of branded biologics in
each country should be unified. In contrast to US guidance, the standards included detailed
equivalency standards. The standards stated clearly that even if changes in pharmacological
properties can be detected after manufacturing processes are revised, the before and after
versions will be regarded as equivalent, so long as it can be proven from data, research
papers, and manufacturers experience that safety and efficacy remain unchanged. This is the
key point, and we think it indicates what kind of biosimilar guidelines will be drawn up later.
The standards also demand the disclosure of production data records in order to verify the
stability of parameters that impact safety and efficacy as well as long-term safety analysis,
items not contained in the US FDA guidance.
Example of change in
antibody drug
manufacturing method:
Remicade
Centocor of the US has disclosed details about the development of Remicade. In Phase 2 and
3 clinical trials, before an application was submitted, the company switched to a highly
productive cell line, changed the purification process, and scaled up production. It also
changed the structure of the culture medium at that time. With each change, the company
carried out checks, including of sugar chains, to determine whether there had been any
changes in the antibody. Prior to the drugs approval, only facilities in the Dutch town of Leiden
had obtained manufacturing approval, but in 2001 manufacturing approval was also obtained
in Pennsylvania, and in order to expand facilities in Leiden, applications were submitted for
approval of a large number of BLA supplements (ie, approval of changes in the manufacturing
process). The company says that seven applications via comparability protocols, which show
that an antibody drug is still the same even if the production method has changed, were made
after the drug was launched.
Europes biosimilar
guidelines: approval
possible despite
changes, given no
impact on safety and
efficacy
Europe instituted guidelines on biosimilars, the Guideline on Similar Biological Medicinal

Products, in October 2005, ahead of other regions. The guidelines state that verification based
on the aforementioned comparability protocols is required in biosimilars such as antibodies
and proteins, in contrast to generic drugs formulated using ordinary compounds, because
many variations are possible, including in sugar chain profiles (eg, differing sugar chain
abnormality distribution). Specific guidance for products such as human growth hormone, GCSF, EPO, and insulin was also included in the standards. Similar guidelines, entitled
Guideline on Similar Biological Medicinal Products Containing Biotechnology-derived Proteins
as Active Substance: Quality Issues, were announced in June 2006. The guidelines suggested
that approval was possible even if there were slight differences in the distribution of impurities
and in post-translation modifications (chemical modifications after proteins are translated from
DNA) of sugar chains and the like, so long as there was no impact on safety and efficacy.
In Japan, the MHLW announced a policy on 4 March 2009 for the securing of quality, safety,
Japans biosimilar
guidelines: ICH
and efficacy of biotech follow-on products. The framework is broadly similar to the European
standards adopted in the guidelines, and, as noted above, the ministry adopted ICH standards, referring to ICH Q5E in
main
assessment of equivalence and similarity. However, the Japanese guidelines touch on more
details than the European ones and are somewhat more demanding. For example, they state
that it is desirable that the same host cell as in the branded product be used in development,
that the impact on safety should be verifiedas it is impossible to avoid major differences with
branded products in terms of impurities arising from culturing and purification processesand
that toxicity tests should be conducted not just with single doses but also with repeat doses.
53
Lack of guidelines in US
holding back biosimilar
development
The lack of biosimilar guidelines and the murky approval process in the US is hindering
biosimilar development worldwide. Biosimilars of comparatively simple biologic drugs such as
insulin, hyaluronidase, menotropins (Humegon), and human growth hormone have already
been approved in the US. Examples include Omnitrope (human growth hormone) and Hylenex
(hyaluronidase). However, biosimilars of complex biologic drugs such as antibody drugs and
EPOs require the same BLA as branded drugs, and this is holding biosimilar development
back.
Section on biosimilars in
US healthcare reform
bill: proposed guidelines
due to be announced in
October 2011
The US healthcare reform bill enacted on 28 March boosted the number of people covered by
health insurance in the US by around 30mn and substantially improved access to healthcare
services, including bringing in a 50% discount on drugs supplied via Medicare Part D. Section
7002 of the legislation supports the early introduction of biosimilars to balance the resulting
substantial increase in costs. The section has four key points: (1) the exclusive sales period
for branded biologics will be 12 years from the approval date; (2) for certain biologics, the first
biosimilar to be approved will have an exclusive sales period of one year; (3) filing for approval
of biosimilars will not be possible through the fourth year from the date of approval of branded
biologics; and (4) the US Department of Health and Human Services (HHS) will submit an
exposure draft regarding guidance for biosimilars to Congress by 1 October 2010, and
following a 30-day public consultation period, will submit a recommended draft on 15 January
2012.
One-year exclusive
sales period in US looks
very attractive
Considering the aforementioned cost structure of biosimilars, the one-year exclusive sales
period for first-approved biosimilars in the US looks very attractive. Even though no guidelines
have been drawn up yet, we think companies worldwide that aim to enter the US biosimilar
market are already receiving unofficial biosimilar development advice from the FDA. In
addition, we think acquisitions and tie-ups between major generic drug makers and major
brand manufacturers and companies that already have manufacturing capacity in their culture
tanks will accelerate from now on.
US guidelines focus
from Indian companies
viewpoint (1): will higher
standards than in
Europe and Japan be
demanded?
According to the legislation, the HHS is due to submit US biosimilar guidelines to Congress on
1 October 2010. The main focus point is on the kind of items likely to be included. According to
our research, the biggest risk worrying Indian companies is that if large-scale phase 3 clinical
trials (involving several thousand test subjects) are required, it will entail large development
costs exceeding tens of billions of yen. Thus, the biosimilar market will be dominated by, in
effect, major generic drug makers and brand drug manufacturers that have entered generics.
In the US healthcare reform legislation, interchangeability is defined to mean that the follow-on
US guidelines focus
from Indian companies biologic product may be substituted for the branded product without the intervention of the
viewpoint (2): will
health care provider who prescribed the branded product. The focus as regards the guidelines
substitution be possible?
is on whether total substitution will be possible. Indian companies are expecting to enter the
market and are hoping for automatic substitution. In European countries such as France and
Spain, however, the law prohibits automatic substitution of antibody drugs with biosimilars.
Thus, we think it will also be difficult in the US and Japan. If substitution is not possible,
marketing teams will be required, as with branded drugs, and marketing independently will be
very difficult.
US guidelines focus
from Indian companies
viewpoint (3): possible to
use safety data from
post-launch surveys in
emerging markets?
54
As we note in the next chapter, Indian companies are already selling biosimilars in emerging
markets, including India. A third worry for Indian companies as regards the US guidelines is
whether they will be able to use safety data from post-launch research obtained in emerging
markets in their filings for approval in the US. Many companies think it will be difficult to use
such data in US filings.
Actual biosimilar
approval process: taking
example of EPO, which
is close to being an
antibody
Exhibit 3-14 shows biosimilars on sale in Europe. Biosimilars currently on sale are all protein
formulations, not antibody drugs. Among them, human growth hormone Somatropin and
leukopenia treatment G-CSF, unlike antibody drugs, do not have sugar chains and therefore
can be manufactured using E. coli and S. cerevisiae. This means it is not as difficult to prove
equivalency as it is with proteins modified with sugar chains and antibody drugs. At present,
EPO, which has sugar chains, is a reference for approval of antibody drugs.
3-14. Key European biosimilars

Generic name
Marketing name
Omnitrope
Valtropin
Binocrit
Epoetin alfa
Epoetin alfa HEXAL
Abseamed
Retacrit
Epoetin zeta
Silapo
Biograstim
Filgrastim Ratiopharm
Ratiograstim
Filgrastim (G-CSF)
Tevagrastim
Filgrastim Hexal
Zarzio
Somatropin
Manufacturer
Cell
Sandoz GmbH
BioPartners GmbH
E. coli
S. cerevisiae
Rentschler Biotechnologie
GmbH
CHO
Norbitec GmbH
CHO
SICOR Biotech UAB
E. coli
Sandoz GmbH
E. coli
Source: Nomura
Comparison of filing
materials for European
biosimilar EPO drugs:
main difference with
branded drug is sugar
chains
Five EPO biosimilars are on sale in Europe. Rentschler Biotechnologie of Germany makes
Nonclinical research:
focus points are higher
order structure of
proteins and analysis of
sugar chain distribution
Nonclinical trials mainly consist of protein analysis, sugar chain analysis, and animal testing.
three Epoetin alfa while Norbitec, also of Germany, manufactures two Epoetin zeta
preparations. As these are effectively two products, there are only two sets of filing materials.
Exhibit 3-15 shows the content and results of tests and clinical trials included in the filing
materials for both products.
European authorities look especially closely at sugar chain distribution and the higher order
structure of proteins (analysis of three-dimensional structure). First, and importantly, the
authorities recommend that leading-edge analytical technology is used. For example, Norbitec
won plaudits from the EMEA for using a nuclear magnetic resonance (NMR) spectrometer for
advanced 3D structural analysis of its products. Second, they pay particular attention to sugar
chain distribution test results, as there are many differences with branded products. When
there are such differences, it is necessary to make a detailed investigation of how sugar chain
distribution differs and what impact this has on safety and efficacy. In toxicity tests using
animals, particular attention is paid to whether neutralizing antibodies are produced, as this
can lead to harmful effects.
Clinical trials: some AUC Clinical trials include pharmacokinetics and pharmacodynamics (PK/PD) studies, phase 1
and Cmax differences
safety trials, and phase 3 trials involving several hundred to several thousand people testing
are allowed if efficacy is for renal anemia and renal anemia in chemotherapy treatment for cancer. It appears that in
the same
PK/PD studies, the unofficial standard is that plasma AUC (area under the curve, ie, the area
under the curve in a plot of drug concentration in plasma over time) and Cmax (the highest
plasma concentration level) should be within 80125% of that found in branded drugs. As in
the case of Norbitec products, if Cmax is 70143%, even under extremely lax standards, the
drug is approved if phase 3 trials demonstrate clear equivalency. This is quite different from
traditional generic drug compounds.
55
3-15. Comparison of filing materials for European EPO biosimilars

Manufacturer
Method of analysis
Nonclinical trials
Peptide mapping (M ALDI-TOF qualitative and
quantitative analysis)
Analysis results
Differences compared with branded drug
Amino acid sequence 99% the same
Disulphide bond analysis, sugar chain analysis of

active materials, sialo sugar chain analysis
Equivalent
High mannose-6-phosphate (HM 6P) glycan detected in Asn-27. As HM 6P

is detected by lysosomal hydrolase, etc, and does not combine with
mannose-6-receptor, analysis suggests that it does not impact living tissue
Sugar chain analysis, sialic acid analysis
Equivalent
M ore sialic acid than in Eprex/Erypo, and fewer small particles that cannot
be detected with the naked eye, or with silicone oil, than in branded drug
Duplication in human erythroleukemic cell line
Same dose response as in standard

substance
Rentschler
Biotechnologie 13-week toxicity test using dogs
GmbH
(Abseamed,
Clinical trials
Binocrit, Epoetin
alfa Hexal)
PK/PD studies: five PK, three PD studies conducted,
intravenous and subcutaneous injections studied
Phase 3 trials: 479 renal anemia patients, 28-week
study, primary end point change in hemoglobin
concentration
Phase 3 trials: 114 patients suffering from anemia due
to chemotherapy treatm ent for cancer, 12-week trial,
primary end point proportion of patients that saw
2.0g/dl or higher increase in hemoglobin concentration
in 5th12th week
Phase 1 trials: five trials, total of 690 people treated,
tested for harmful effects and anti-Epoetin antibodies
Nonclinical trials
Peptide mapping (qualitative and quantitative analysis)
Disulphide bond analysis, sugar chain analysis of
active materials, sialo sugar chain analysis, glycan
structure analysis using NM R
PD tests: in vitro tests, in vivo tests using mice
PK tests: three-month toxicity trials using rats and
dogs
Norbitec GmbH
(Retacrit, Silapo) Clinical trials
PK/PD studies: two PK, no PD studies conducted,
intravenous and subcutaneous injections studied
Impossible to reach conclusion due to small number, but it is considered

Anti-Epoetin antibodies detected in two that potential immunological adjuvants (leachables from the rubber
or three subjects
stopper of the prefilled syringe) have been excluded from the final product
and that antigenicity risk is sufficiently reduced
AUC and Cmax within 80125% of
branded drug, no anti-Epoetin
antibodies
Hemoglobin spread to branded drug

0.5g/dl
There were too few patients in the subcutaneous injection trial, but PK/PD
and other tests suggest that differences in terms of efficacy are unlikely
62% saw significant increase in

hemoglobin concentration, exceeding
standard figure of 30%
No difference compared with branded
drug in terms of immunogenicity
Equivalent
Equivalent
Equivalent
Anti-Epoetin antibodies confirmed in
four rats and in eight out of 16 dogs
O-glycan chain ratio slightly higher than in branded drug (Epoetin alfa), but
proportion of sugar chains suspected of being harm ful, such as sialic acid
and N-glycoyl neuraminic acid lower than in branded drug
The absolute rate of antibody formation was rather high, but this does not
necessarily indicate a high antigenicity in humans since human epoetin is
a foreign protein for animals. There was a marked difference in
antigenicity relative to the branded drug, although antibodies were nonneutralising
AUC 80125% of branded drug, Cmax

70143% of branded drug
Dose slightly higher than with branded
Phase 3 trials: 922 renal anemia patients receiving
drug in last four weeks, but not
dialysis, 24-week study, primary end point change in significant statistically, no difference
hemoglobin concentration and per-kilo dosage in last from branded drug in terms of harm ful
four weeks of trial
effects, no cases of PRCA despite
presence of anti-Epoetin antibodies
Phase 3 trials: 261 patients suffering anemia due to
Hemoglobin concentration and dose
chemotherapy for cancer, 12-week uncontrolled safety same as branded drug, no anti-Epoetin study
antibodies
Source: Nomura, based on European Public Assessment Report (EPAR) documents submitted to European Medicines Agency (EMEA),
for Abseamed and Retacrit.
56
3-16. Production of anti-EPO antibodies in Johnson & Johnsons Eprex (no of cases of PRCA)
(number of cases of antibody positivity)
100
80
60
40
20
0
98
98
99
00
01
02
03 (CY)
Source: Nomura, based on Chugai Pharmaceuticals Bio successor drugs/biosimilar trends
Safety: main focus is on

antigenicity of anti-EPO
antibodies
The main focal point in terms of safety is the production of anti-EPO antibodies that attack
EPO prescribed to patients. In a small number of cases, patients prescribed EPO have
developed pure red cell aplasia (PRCA) as a result of the production of EPO neutralizing
antibodies. Exhibit 3-16 shows the number of cases of PRCA owing to the appearance of antiEPO antibodies in cases where Eprex, which is marketed by Johnson & Johnson, is
prescribed. Johnson & Johnson is the best-known example of a change in manufacturing base
having an unexpected impact on a products antigenicity. The number of cases of antibody
positivity rose sharply from 1998, when the company changed its production process. For this
reason, the antigenicity of anti-EPO antibodies in connection with the use of EPO is the safety
issue to which European authorities are paying the closest attention. The evaluation of data
supplied by Rentschler Biotechnologie in connection with its drug filing goes into detail about
antibody genicity and its causes.
Cause assumed to be
leachables from rubber
stoppers of prefilled
syringes
Many manufacturers of branded drugs stress the dangers of biosimilars, pointing out that
changes in the process used to manufacture Eprex alone were enough to have a major impact
on antigenicity. In fact, the EMEA, in light of the increase in the number of cases of PRCA, has
banned subcutaneous injections of Eprex, at one time, as the number of cases of PRCA has
been especially large with the formulation. However, as the EMEA noted in its filing evaluation
(EPAR), the conclusion is that Eprexs EPO antigenicity was most probably caused by
leachables from the rubber stoppers of prefilled syringes. In 2003, coated rubber stoppers
were introduced and the number of cases of PRAC fell sharply. As a result, subcutaneous
injection was reinstated as an administration method. This is mentioned in the EPAR
assessment of the biosimilar submitted by Rentschler Biotechnologie.
57
3-17. Sugar chain distribution of gene recombinant EPO Epoetin alfa and recombinant serum EPO
Fluorescence
hsEPO-99
hsEPO-2000
Epoetin
alfa
50
55
Epoetin
beta
50
55
Minutes
Note: (1) Vertical scale shows fluorescence, horizontal scale minutes. Anion-exchange liquid
chromatograms. The higher the negative charge (ie, many sugar chains), the slower the drug is released.
(2) Graph A (top left) is a sugar chain chromatogram of EPO obtained from serum from a patient suffering
from aplastic anemia. (3) Graph B (top right) shows sugar chain distribution of EPO obtained from the
patient one year later. It proves that the distribution is safe. (4) Graph C (bottom left) shows sugar chain
distribution of Epoetin alfa, which is currently being marketed, while Graph D (bottom right) shows sugar
chain distribution of Epoetin beta, which is also on sale.
Source: Nomura, based on Skibeli, V., et al. Sugar profiling proves that human serum erythropoietin
differs from recombinant human erythropoietin Blood 2001, 98(13), pp.36263634
Is Epoetin alfa the first

biosimilar?
If formulations are to be treated as biosimilars merely because of changes in sugar chain

distribution, then we think gene recombinant EPO Epoetin alfa can be considered as the first
biosimilar. An article in the December 2001 edition of the well-known specialist publication
Blood noted that a comparison of human serum EPO and Epoetin alfa showed that there are
major differences in terms of sugar chain distribution.
Exhibit 3-17 shows normal phase liquid chromatograms of human serum EPO and Epoetin
alfa where the N-glycan is fluorescently-labeled with 2-aminobenzamide. Graph A (top left) is a
sugar chain chromatogram of EPO obtained from serum from a patient suffering from aplastic
anemia. Graph B (top right) shows sugar chain distribution of EPO obtained from the patient
one year later. This indicates that the distribution is stable in the human body. Graph C
(bottom left) shows sugar chain distribution of gene recombinant EPO, and indicates a sugar
chain distribution that is completely different from that in the human serum chromatogram. As
CHO cells do not have glycosylates such as sialyl alpha 2-6 transferase, which does exist in
human cells, it is no surprise that sugar chain distribution is different. Epoetin alfa has no
safety issues and its effectiveness has been confirmed, and thus it has been approved. We
think that if Epoetin alfa with a different sugar chain is approvable, there is no inherent reason
why a biosimilar could not be approved.
58
JCR Pharmaceuticals
filing materials for
biosimilar EPO
JCR Pharmaceuticals Epoetin alfa BS Injection JCR, the second biosimilar to be approved in
Japan, went on sale in May 2010. Exhibit 3-18 shows details of the companys filing materials.
Comparing the formulation with the two European products, rats and apes were used in
toxicity testing. In addition to single dose toxicity and multiple dose toxicity tests, nonclinical
safety trials, including carcinogenicity tests, were conducted. Nonclinical trials were conducted
according to standards applied to new drug development. In clinical trials, the MHLW pointed
out that in phase 1 trials, AUC and Cmax did not meet the guideline standards. However,
evidence of equivalence was obtained in phase 2 and 3 trials. This was given precedence and
the formulation was approved.
3-18. JCR Pharmaceuticals filing materials for biosimilar EPO

Manufacturer
Method of analysis
Nonclinical trials
Peptide mapping
Analysis results
Amino acid sequence the same
Circular dichroism spectroscopy, disulphide bond

analysis, sugar chain analysis of active materials,
Equivalent? (standards undisclosed)
sialo sugar chain analysis, western blot,
isoelectric focusing
Combination affinity in relation to HuEPO
receptors, effect of promoting increase in red
blood cells in rats
Single dose toxicity in rats and apes, multi-dose
toxicity, genetic toxicity, carcinogenicity tests, etc
JCR
Pharmaceuticals Clinical trials
Phase 1: 24 examples of safety tests, clinical
pharmacological testing of intravenous and
subcutaneous administration
Phase 2/3 trials: 329 renal anemia patients
administered drug over 24 weeks, disparity in
terms of change in Hb concentration within +/0.5g/dl
Long-term use trial: 143 examples over 52-week
administration
Differences compared with branded drug

Although differences with the branded drug were
confirmed via isoelectric focusing and sialo sugar
chain profiling, there are no differences in terms of
activity, while in clinical trials no differences were
found in PD and maintenance of concentration tests
Equivalent
Equivalent
Equivalent
Cmax and AUC do not meet some of the guideline

standards in relation to the branded drug, but as
equivalence was demonstrated in phase 2 and 3
clinical trials, it was concluded that this had no
impact on efficacy and safety
In terms of efficacy, Hb concentration

change at 0.05g/dl within stipulated range,
as regards safety, no side effects of 5% or
higher, no anti-Epoetin antibodies
Equivalent to branded drug in terms of
efficacy and safety, no anti-Epoetin
antibodies
Source: Nomura, based on 11 November 2009 test report
Conclusion: overview of
approval pathways for
biosimilars
Exhibit 3-19 shows an overview of pathways to approval of biosimilars. In nonclinical trials,

manufacturers need to disclose details of sugar chain and higher order structures using
leading-edge analytical technologies following both Japanese and European guidelines. They
also need to show scientifically that differences between biosimilars and branded products in
terms of sugar chain distribution have no impact on safety. These two points are of the highest
importance in nonclinical trials. In nonclinical toxicity and efficacy trials, manufacturers have to
demonstrate equivalence, and they need to take special care with autoimmune antibody
production in relation to antibody drugs. In clinical trials, determining that biosimilars are as
safe and effective as branded products in phase 3 trials is more important than differences in
Cmax and AUC in PK/PD trials. We think thisie, determining that biosimilars are as safe and
as effective as branded productsis a hurdle that can be overcome, even in the US where
there are no guidelines, if manufacturers carefully develop products taking advice from the
authorities (given that unofficial standards are needed, including with regard to the primary
end point of phase 3 trials).
59
3-19. Pathways to biosimilar approval in various countries: key points that are looked at more than filing materials
M o st impo rtant po int is t e s t ing

f o r impa c t o n s a f e t y, de t a ile d
s uga r c ha in a na lys is ,
and higher o rder structure
analysis using le a ding- e dge
a na lyt ic al t e c hno lo gie s !
Manufacturing
process
S ho w e quiv a le nc e v ia a nim a l t e s t ing ,

and altho ugh antibo dy pro ductio n will
o f co urse o ccur in animals,
be careful with regard to
neutralizing antibo dies!
No nclinical trials:
special characteristics
analysis
Clinical pharmaco lo gical
tests to pro ve that
antibo dies are the same
as in branded drug
In co ntrast with traditio nal

generics, pro v ing s a f e t y a nd
e quiv a le nc e is m o re
impo rt a nt t ha n dif f e re nc e s
wit h t he bra nde d drug s ho wn
v ia P K/ P D t e s t ing!
Clinical trials
Pharmaco dynamics (PD) and
pharmaco kinetics (PK),
phase 1trial with several
hundred peo ple to phase 3
trials with several tho usand
No nclinical trials:
to xicity testing
Pro ving efficacy via in
vitro and animal testing
Approval
Source: Nomura
(4) Global market for biosimilars: Indias frontrunners hold key in

forthcoming period of stiff competition
Combined sales of
US$59bn for
biopharmaceuticals
losing patent protection
in 200815
According to Lonza, combined global sales for the biopharmaceuticals (including protein
preparations and antibody drugs) losing patent protection in 200815 add up to around
US$59bn. The first catalyst for change in this figure should come in 2012, when the
rheumatoid arthritis and Crohns disease treatment Enbrel (generic name: etanercept) goes
off-patent. We gather that patent expirations are forthcoming for some other blockbuster drugs,
including Remicade (also a rheumatoid arthritis treatment) in 2013 and Rituxan (malignant
lymphoma treatment) and Herceptin (primarily a breast cancer treatment) in 2015. As
presentations
by
Teva
Pharmaceutical
Industries
suggest
that
the
market
for
biopharmaceuticals going off patent in 201620 amounts to US$23bn, biosimilar makers have
a business opportunity worth more than US$80bn in the years through 2020. Industry leaders
worldwide are gearing up already to mount a concerted assault in 201215, when we see the
global market for antibody biosimilars blossoming.
60
3-20. Lonza estimates concerning potential global market for biosimilars and number of biologics scheduled to go off-patent
20
59
($bn)
Worldw ide sales of biologics

by pate nt expiration year
9
17
8
1
2
1
08
09
10
11
12
13
14
15
16
45
of w hich,
0
monoclonal antibodies
13
No. of molecules
Total (CY)
Source: Nomura, based on Lonzas IR Presentation data
Worlds biosimilar
manufacturers: Teva
Teva views the biosimilar market as important to its long-term growth prospects, in view of which
it acquired Sicor in 2004 and CoGenesys in 2008. Sicor already manufactures and sells a
filgrastim biosimilar in Europe (Exhibit 3-14), while at the time of its acquisition CoGenesys had
the capacity to manufacture both G-CSF and human growth hormone. In January 2009, Teva
went on to form a joint venture with Lonza, the worlds leading custom manufacturer of biologics,
with a view to attaining the top spot in the global market for biosimilars.
Worlds biosimilar
manufacturers: Mylan
With the goal of strengthening its profile on the biosimilar market, Mylan [MYL US] forged a
development and sales alliance in June 2009 with Indian company Biocon. The two companies
will share development and certain other costs related to bringing products to market. As part of
this collaboration, Mylan will have exclusive commercialization rights in the US, Canada, Japan,
Europe, Australia, and New Zealand through a profit sharing arrangement with Biocon. Mylan will
have co-exclusive commercialization rights with Biocon in all other markets around the world.
Worlds biosimilar
manufacturers: Sandoz
Sandoz is the undisputed No. 1 global name for generics, with more than 20 years in the
business
already.
The
company
has
wealth
of
experience
in
manufacturing
biopharmaceuticals using industrial-scale fermentation: it has been manufacturing interferon

alpha for research use since 1980 and began producing human growth hormone in 1987.
Timed to coincide with the loss of patent protection in Europe for leading protein preparations,
Sandoz launched the biosimilars Omnitrope (a synthetic form of human growth hormone) and
Binocrit (an EPO preparation) in 2006 and 2007, respectively. In June 2006, Sandoz went on
to release its recombinant human growth hormone Somatropin (marketed as Somatropin BS
SC injection 5mg / 10mg [Sandoz]) in Japanthe first-ever biosimilar to be approved and
launched on the Japanese market. With a strong track record also in antibody drugs, Sandoz
warrants attention as the biosimilar manufacturer with the most experience.
Worlds biosimilar
manufacturers: Stada
and Hospira
German company Stada Arzneimittel [SAZ GY] has teamed up with venture capital investors
to set up Bioceuticals Arzneimittel, in which it holds a 16% stake. Bioceuticals in turn holds a
67% share in Norbitec GmbH (Exhibit 3-14), manufacturer of Epoetin zeta. Stada holds the
distribution rights for Epoetin zeta in Germany and some Eastern European countries, with US
61
major Hospira [HSP US] awarded the rights for all other European nations. Hospira has the
exclusive distribution rights for Epoetin zeta in the US and Canada, where it is currently
preparing to seek regulatory approval.
3-21. Competitive landscape in global biosimilar market
Koreas leading b iosimilar maker,

mo stly f ro m d omest ic sales of a
b iosimilar human g ro wth ho rmo ne.
Has a sustained release human growt h
ho rmo ne (SR-hGH) in develo pment
alo ng wit h Bio partners. Also has
ant ibo dy b iosimilars in t he pip eline.
Launched a G-CSF bio similar in

India in 2004. Fo rmed a tie-up
with Apo tex in M ay 2008.
Develo ping bio similars in

partnership with Indias Intas
Bio pharmaceuticals.
Indias leading bio similar co mpany.

M arkets bio similar insulin in India, alo ng
with several bio similar pro teins.
Established a bio similar

develo pment and sales
alliance in 2009.
Established a bio similar

develo pment JV in 2009.
P lans to seek US appro val fo r

rituximab bio similar in 201314.
Filgrastim bio similar already
appro ved in US and Euro pe.
A cquired Sico r in 2004 .
A cquired Co genesys in 2008.
M ore than 2 0 years experience in

manuf acturing p ro teins using indust rial-scale
f erment atio n.
Alread y is manufact uring and selling two
b iosimilars in Europ e.
P lanning 2011launch o f
bio similars to leading
antibo dy drugs such as
infliximab and trastuzumab.
Formed an alliance in 2 00 9 wit h Indias lead ing

b iosimilar maker Bio con, wit h a view to sharing
b iosimilar develo pment and invest ment co sts.
M ylan will have exclusive co mmercializat ion right s
in t he US, Euro pe, and Japan, and co-exclusive
co mmercializat ion right s in ot her markets.
Launched erythro po ietin

bio similar in Japan in M ay
2010.
Co mmercializatio n
rights o utside
Japan (2009)
The o nly comp any currently marketing

ant ibo dy b iosimilars.
M arket s a rit uximab b iosimilar in India, and a
f ilgrastim b iosimilar in India and ot her markets
includ ing Lat in America.
Two more prod ucts are due f or launch soo n.
Bio similar sales alliance?

(2009)
In a sales alliance with
Bioceut icals.
Hold s the dist rib utio n rig hts f or
Ep oet in zeta in most Europ ean
count ries and is p rep aring to seek
reg ulato ry app ro val in the US.
Has a capit al alliance wit h Indian

co mpany Zeno tech, which it
mad e into sub sidiary in 20 07.
Ho lds a 16%stake in Bio ceuticals, which

in t urn ho lds a 6 7%share in Norbit ec.
Ho lds d istribut ion right s fo r Epo etin zet a in
Germany and so me East ern Euro pean co untries.
St art ed p rep arat ory work in 20 09 Q1t o
d evelop bio similars o f mo noclo nal antib od ies.
A nno unces a fo ray into bio similars

in December 2008.
A cquired Glyco Fi in 2004
A cquired Insmed in 2009.
Disco ntinued develo pment o f M K2578 in M ay 2010.
P lans to enter bio similar

market with drugs
develo ped in ho use.
Lo o king to develo p
bio similar o f A mgen drug.
M arkets G-CSF and

interfero n bio similars in
India.
Acquired Eden Bio design

in January 2010.
Source: Nomura
Worlds biosimilar
manufacturers: Merck
In December 2008, US company Merck became the first major pharmaceutical company to
announce a foray into biosimilars. The company had MK-2578 (a PEGylated EPO biosimilar
candidate) in development with a view to seeking approval in 2012, but revealed in May 2010
that development was being discontinued. Merck has also been actively buying up biotech
companies. It acquired GlycoFi in 2004, thereby gaining access to a library of yeast strains
engineered to perform specific human glycosylation. Merck acquired Insmeds biosimilar
portfolio in 2009, from which it currently has MK-4312 (a filgrastim biosimilar) and MK-6302 (a
pegfilgrastim biosimilar) in development.
(5) Indian companies biosimilar products

Overview of Indian
companies outlook for
biosimilars: promising
business opportunity
In this section, we summarize Indian companies perceptions of the biosimilar market. First,
we were able to confirm that the companies see biosimilars as an exceptionally attractive
market. Some companies said that although the business requires large spending to construct
facilities and acquire technologies, they can keep operating costs in check by procuring raw
materials domestically. Some even report a gross margin of over 90%. Given the high gross
62
margin on finished products, they are not much in favor of a business model geared toward
exporting cell culture technology, such as to Japanese companies.
Second, we learned that most companies plan to enter the markets of leading countries by
building on their sales experience in emerging markets. After collecting data on product safety
by scrutinizing sales in emerging markets where there are few regulations on pharmaceuticals,
the companies aim to obtain approval to sell their products in other markets. All the companies
look to partner with major drug makers to move into the markets of leading economies. This is
because of the high cost of clinical trials in those countries and also because of the need for
an extensive sales network that rivals that of competing name-brand drugs.
Third, we found that prices for biosimilars are set generally at around 70% of that for the original
drug. For small molecule compounds, it is often the case in India that more than 50 companies
compete in the market for one product. Entry to the market for biosimilars is much tougher in
comparison, limiting the number of competitors to just several companies. The companies have
set relatively high prices even though India is one of the most price-sensitive markets.
Fourth, Indian companies are most interested in the direction of US guidelines for biosimilars.
An especially large number of companies are holding off on investments owing to the lack of
clarity on the guidelines. The companies appear eager to invest aggressively should the
framework of the guidelines become clear. There are, however, some companies that are
going ahead with development despite the lack of a concrete set of guidelines, while
maintaining active communication with the FDA.
Summary: biosimilar
development projects
stimulating alliances
between Indian
companies and US,
European partners
As shown in Exhibit 3-19, many US and European companies have been contracting with
Indian companies to sell biosimilars since around 200809. They include the partnerships
between Mylan and Biocon, GSK and Dr. Reddys, Apotex and Intas, and the acquisition of
Shantha Biotechnics by Sanofi-Aventis.
US and European majors appear to have recognized the potential of biosimilars in around
2008. Their attention was drawn to India for its low costs, a large human resources pool of
well-trained bioscientists, and the growing local pharmaceuticals manufacturing industry. We
think the decision by US and European majors to partner with Indian companies in the
biosimilar segment that demands a high level of product quality control provides evidence that
Indian corporate understanding of the importance of product quality and intellectual property
has evolved to resemble that of US companies. While we believe it will take some time for
biosimilars to penetrate the Japanese market, we expect the Japanese companies that
aggressively forge alliances with Indian partners to pursue drug development ahead of their
peers could see big payoffs in 510 years. We also think Japanese companies would not be
that late in embarking on such endeavors, because it was only in 2009 that US and European
companies saw the potential of biosimilars and clearly committed their resources.
Indian biosimilar maker

Biocon
Biocon is Indias leading biopharmaceutical company. It was established in 1978 as a

manufacturer of enzymes. From its founding, the company has manufactured products using its
cell cultivation technologies. It began making cholesterol-reducing statins in 1996. Biocon
became the first company in Asia to develop human insulin on a Pichia pastoris expression
system in 2003, then became the leading insulin manufacturer in Asia with the market release of
Insurgen in 2004. The company makes two types of biosimilarsinsulins and proteins. We
estimate Biocons share of Indias human insulin market at 1015%, ranking it third after Novo
Nordisk [NOVOB DC] and Eli Lilly. In addition to the biopharmaceuticals business, Biocon
undertakes custom research through its subsidiary Syngene and clinical research through its
subsidiary Clinigene. The biopharmaceuticals segment, including APIs like statins and
immunosuppressants, accounts for 62% of Biocons sales.
63
3-22. Selection of biosimilars available in India

Generic name
Erythropoetin
Filgrastim
Rituximab
Interferon alpha-2b
Insulin
Insulin Glargine
Marketing name
Erypro/Erypro Safe
Ceriton
Epofer
Zyrop
Erykine
Relipoetin
Grafeel
Nugraf
Neukine
Neupeg (PEGylated)
Pegex (PEGylated)
Religrast
Nufil
Reditux
Reliferon
Intalfa
Shanferon
Insugen
Wosulin
Basalog
Manufacturer
Biocon
Ranbaxy
Emcure
Zydus Cadila
Intas Pharma
Reliance Life Sciences
Dr. Reddys
Zenotech
Intas Pharma
Emcure (Gennova)
Biocon
Dr. Reddys
Intas Pharma
Shanta Biotech
Biocon
Wockhardt
Biocon
Source: Nomura
Biocon also develops

new drugs
Biocon is also one of the few Indian companies that develops new drugs. The companys oral
insulin product (IN-105) is undergoing Phase 3 clinical testing in India. In a double-blind
clinical trial lasting six months, the drug is being tested on type 2 diabetes patients who are
unable to regulate blood sugar levels with metformin. Biocons oral insulin is also slated to
begin Phase 1 clinical testing in the US. Furthermore, the company is developing the human
monoclonal antibody BVX-20 that binds to CD20 and is involved in other R&D efforts. As for
drugs developed under license for the Indian market, Biocon has introduced nimotuzumab, an
anti-EGFR monoclonal antibody originally made by the Cuban company YM BioSciences
(Daiichi Sankyo is currently developing the drug for the Japanese market). Biocon has a plant
for supplying nimotuzumab.
Biocons biosimilar
strategy: concentrating
on insulin products but
also considering
antibodies
The companys mainstay biosimilar is human insulin. We think the size of the market for
insulin products for which patents are due to expire over the next 10 years is around the same
as the market for antibody drugs with patents scheduled to expire. In addition, the bio-insulin
market has few competitors, suggesting to us that it holds good potential. However, the
government sets prices for insulin products alone in India, with price discounts for generics
restricted to 1012% of original drug prices. This provides little incentive for patients to switch
to biosimilars. As such, Biocon expects that it will be limited to expanding its market share only
gradually in this segment. The company is interested in manufacturing antibody drugs as well
because it is engaged in R&D involving cell cultivation using CHO and NS0 cell lines. Although
Biocon is concerned about the lack of clarity regarding US biosimilar guidelines, it has said
that it can prepare to apply for approval for its drugs in the US, despite the absence of
concrete guidelines, because it can seek advice from the FDA.

Dr. Reddys
Dr. Reddys is a major generic drug manufacturer in India. It was one of the first companies in
India to begin developing biosimilars. The company released its first biosimilar product Grastim
(human growth hormone) in 2003, and in 2007 brought India its first antibody biosimilar, called
Reditux (generic name: rituximab). Dr. Reddys began selling Reditux priced at around 60% of
the brand name drug Rituxan, but the maker of the original drug then lowered its price. Prices
have been cut further such that Dr. Reddys biosimilar Reditux now sells for around the same
price as the original drug. It has been reported that the number of patients taking the drug has
64
reached some 10x the previous level as a result of the sharp price cuts. The company says it
has a roughly 50% share of the Indian market for rituximab, with Roche controlling the other half.
Dr. Reddys is targeting the Russian market, where the patent is due to run out in 2012, and also
the Peruvian market, but has no plans to make inroads elsewhere. Annual sales contributions
from Reditux and Grastim amount to only some US$810mn at this time.
Dr. Reddys strategy:
preparing to invest
aggressively in
biosimilars
The company said it expects biosimilars to begin making an impact on companywide sales
from around 201215, and has indicated plans to channel resources to developing biosimilars
for antibody drugs for which patents are due to expire during that period. As Dr. Reddys has
many monoclonal antibodies in its development pipeline, the release of its second biosimilar
antibody drug for the local market appears close at hand. The companys cell culture capacity
is around 4,000l/day, but it has plans to install four more tanks to boost capacity by an
additional 5,000l.

Intas Pharmaceuticals
Intas Pharmaceuticals is an unlisted generic drug maker. It was established in 1976 and has
expanded its operations since 1990 to extend its reach to the markets of Southeast Asia,
Africa, and Europe. After releasing its first biosimilar product Neukine (filgrastim) in 2004, the
company brought to market Erykine (EPO) in 2005 and Neupeg (pegfilgrastim) in 2007. Intas
Pharmaceuticals also manufactures hormones and related drugs. In January 2009, the
company announced plans to invest INR1.6bn to construct a specialized antibody drug
production plant with cell culture capacity of 5,000l/day. Initial plans called for marketing
Neukine (filgrastim) in Europe under a partnership with Australias Kwizda Pharma, but in the
end Apotex won the sales rights for North America and Europe. Intas Pharmaceuticals has
also announced a plan to codevelop pegfilgrastim with Apotex.
Other Indian biosimilar

makers
Other biosimilar manufacturers in India include: Shantha Biotechnics, which was acquired by
Sanofi-Aventis; Zenotech [ZTL IN], for which Ranbaxy and Daiichi Sankyo have initiated a
takeover bid; industry major Zydus Cadila; and Reliance Life Sciences, the biotechnology arm
of the Reliance conglomerate. We think India has many other companies with biosimilar
operations that could be included in the top 20, such as unlisted Micro Labs.
(6) Japanese market: only generic antibody drugs; technology

acquisition and pricing at 50% or less will be key
Japanese biosimilar
market unlikely to take
off without substantial
change in health
ministry thinking
Unless Japans MHLW revises its thinking on quality and its price strategy for all generics, we
do not think biosimilars are likely to take off in the Japanese market. European and US
companies are looking to tie up with Indian companies in order to supply biosimilar drugs to
their own national markets. However, it is likely that Japan will be unable to import final
pharmaceutical biosimilar products from India, given the high quality required by the Japanese
health ministry compared with global standards for the concentration of impurities, for example,
which make it difficult for even regular tablets to be supplied from India to Japan. Moreover, if
biosimilar prices are set at around 7080% of branded drugs (ie, the same level as regular
generics), we think they are unlikely to penetrate the market. As things stand, at a time when
low molecular weight generics are failing to take off, medical practitioners or patients are
unlikely to find much advantage in using biosimilarswhich are beset by doubts over their
safetyfor 70% of the regular price. The desirable outcome would be for the authorities to
heed the high gross margins offered by biosimilars, and put in place a bold pricing formula that
would see biosimilars priced at 50% or less of the original branded drugs. One exception we
would cite is anticancer antibody biosimilars, which are likely to be launched from 2015. Since
anticancer antibody drugs are very expensive in general, we think patients will select them
eagerly.
Meanwhile, exports offer For Japanese companies that have already started to develop biosimilars, however, overseas
substantial potential
exports offer substantial potential. Since Japanese companies outdo their Indian counterparts
65
in terms of their strict adherence both to quality and intellectual property rights, they are likely
to make good partners for major overseas drug manufacturers looking to develop biosimilars.
Among Japanese generic drug makers, we are focusing on JCR Pharmaceuticals, which has
already signed a sales agreement with GSK for a biosimilar EPO, and Nipro, which is currently
developing a biosimilar EPO. A key issue will be the market entry of major branded
pharmaceutical manufacturers. In particular, we need to pay attention to developments at
Chugai Pharmaceutical [4519] and Kyowa Hakko Kirin, which have cell cultivation facilities
and over 20 years of experience.
3-23. Overview of Japanese companies biosimilar strategies

Scenario 2: set up MCB in house or import
technology from overseas?
Acquire
technology?
Buy MCB
from
overseas?
(12 years)
Im por t
dr ug?
Production
(<One year)
Cell
Scenario 1: individual final drug imported

from India and elsew here
Outsourced
production?
(<One year)
D rug
pro duc t io n
(One year)
C linic a l
t ria ls
Lic ens in
Keep existing
pricing
for mula?
Sales
(12 years)
Develop
MCB
in-house?
(23 years)
Expor t
ove rse as?
Develop
in house?
(23 years)
Scenario 3: set up bioreactor in house!
Acquire culture technology or develop in house?
Pr icing 50%
or le ss to
ensure
mark et take s off?
Scenario 4: no bioreactor in house!

Rely completely on outsourced
production by contract manufacturers?
Source: Nomura
Impact on other aspects

besides drugs: growth in
analytical equipment
demand, rise of
biopharma contract
manufacturing
We also need to consider the impact on other aspects besides drugs manufacturing.
Manufacturers of analytical equipment and consumables are likely to be the first beneficiaries of
the global spread of antibody therapeutics and biosimilars. As discussed earlier, analysis of
antibody and protein therapeutics is extremely complex, and as such we expect to see growth in
demand for high-end analytical equipment such as ultra high-speed chromatographs, mass
spectrometers, and sugar chain analysis kits. Demand for the mainstay equipment of Shimadzu,
Japans largest analytical equipment manufacturer, is likely to be the most important driver.
The second group of beneficiaries we need to take into account are contract manufacturing
organizations. Toyobo Biogenics and the bio segment of Asahi Glass [5201]the only
companies in Japan with several thousand liters of bioreactor capacityhave the potential for
rapid growth in earnings as a result of supplying more biosimilars to other generic drug
manufacturers. Food manufacturers dealing in yeast and other medical companies might also
enter the biosimilar market, but we think they are likely to see a limited impact given the high
technological barriers to entry.
66
Japanese companies
biosimilar strategy
scenarios: four options
In Exhibit 3-23, we outlined Japanese companies biosimilar strategy scenarios. As we shall

discuss later, we do not think protein therapeutic biosimilars will make major inroads on the
Japanese market; however, we expect antibody drug biosimilars, which are due to go off-patent
from 2012, to penetrate the Japanese market over the medium to long term as the high prices of
antibody drugs are likely to mean greater advantages for patients. In broad terms, there are four
key strategic pathways for manufacturers entering the biosimilar field. The first option is for
manufacturers to source the final products (freeze-dried antibody or protein drugs) from India
and elsewhere overseas. Under the second option, those manufacturing in Japan must decide
whether to establish the MCB in house or purchase the facilities from overseas. Third, for those
investing in a bioreactor, there is the option of either acquiring culture technology from elsewhere
or developing the technology in house. The fourth and final option is to rely entirely on
outsourced production by contract manufacturers.
Under the first scenario, manufacturers would opt to import the final products as freeze-dried
(1) Importing final
products from overseas preparations from India. In our view, this option is unfeasible. First of all, the Japanese health
is fraught with difficulties ministrys purity requirements for protein and antibody therapeutics are so high that colossal
investment would be needed to ensure that the imported drugs complied with Japanese
standards. As a result, we think Indian companies will focus their sales efforts on territories
other than Japan. Second, if antigenicity is confirmed in patients using antibody or protein
therapeutics, resulting in fatalities, investigating the cause is likely to prove difficult if the
production facilities are located overseas. In our view, the Japanese health ministry is hoping
that biosimilars will be produced in Japan.
(2) Cells: MCB
preferably purchased
from overseas
The second scenario involves purchasing the MCB from overseas. As we showed in Exhibit 323, development of an MCB in house would entail a development period of 23 years. Years
ago, it used to take four years or more to establish an MCB, but now in-house development of
an MCB is possible in 23 years thanks to advances in biotechnology in recent years,
including, for example, the technology to insert vectors into specific areas of genes, as well as
large pools of human resources and consultancies with expertise in bioproduction. Another
possible strategy is for Japanese companies to sign technology contracts with pioneer
companies in India and other countries, and purchase MCB equipment from them. In this case,
the Japanese companies would also gain access to cultivation techniques, and thus would
most likely be able to get up and running within a year. We think companies joining the market
later on would probably opt to sign technology contracts. However, stringent checks would be
necessary to guard against infringement of intellectual property rights in the DNA analysis, and
in vector and clone selection methods.
(3) Production: start

culture production by
signing technology
acquisition agreements
with Indian companies
Two types of production are possible, either in-house or outsourced production by contract
manufacturers. In-house production entails a company bringing on stream a bioreactor and
purification line itself through a capital investment of several billion yen. Companies electing to
produce in house need to choose whether to then optimize culture processes themselves or
acquire the necessary technology from other companies. Since cultivation of CHO cells and
optimization of production volume are the areas that most require expertise and experience,
developing everything in house is likely to take at least 23 years. Conversely, signing a
technology acquisition contract with Indian or other overseas companies would make it possible
to obtain culture production expertise in a relatively short span of time. Thus, we think technology
acquisition contracts with overseas companies are probably the most effective way forward in
cell cultivation technology.
67
(4) Only protein

therapeutics rely on
outsourced production;
in-house production
facilities are essential for
antibody therapeutics
The fourth scenario is the option of outsourcing production to contract manufacturers, which
does not require a massive investment. However, this is an option that can only be selected
for protein therapeutic biosimilars, and would under current conditions be difficult to adopt for
antibody therapeutics. Protein therapeutics, such as EPO, involve smaller dosages than
antibody therapeutics. As a result, it is possible to mass produce in bioreactors (or plastic
disposable bags) in units of several hundred liters. With antibody therapeutics, meanwhile,
which are due to go off patent from 2012, antibodies are required in units of several tons per
year, making necessary large stainless bioreactors with several thousand liters capacity or
more. Currently, apart from original branded drug makers, Asahi Glass and Toyobo [3101] are
the only Japanese companies with large bioreactors. Since stable supply is a prerequisite for
antibody therapy biosimilars, both companies would probably struggle at the moment unless
they were to invest in expanding their cultivation capacity.
3-24. Biopharmaceutical industry contract manufacturing organizations (CMOs): global production share in 2006 and capacity
in 2008
Dio synth (US)
5%
A bgenix
(US,
acquired by A mgen)
6%
DSM
(Netherlands)
8%
Celltrio n
(Ko rea)
13%
Sando z
(Germany)
3%
2006
C M O total
pro duc t io n v o lume
3 7 2 ,0 0 0 l
2008
B o ehringer
Ingelheim
(Germany)
49%
Lo nza
(Switzerland)
16%
Source: Werner, R.G., The Development and Production of

Biopharmaceuticals: Technological and Economic Success
Factors, Bioprocess International September 2005 3(9) S6-S15
Balance of power within

global
biopharmaceutical
contract manufacturing
market
Sales
Production
volume
bn
Boehringer Ingelheim
(Germany)
72.3
205,000
Lonza (Switzerland)
64.9
267,000
Sandoz (Germany)
21.0
86,000
DSM (Netherlands)
27.0
3,500
Diosynth (US)
Unknown
74,000
Celltrion (Korea)
Unknown
50,000
8.6
12,000
Toyobo Biologics
<1
4,000
Asahi Glass
2.0
3,000
Avecia (UK)
Japanese companies
Source: MHLW Biopharmaceutical report November 2009
In Exhibit 3-24, we show global production shares of CMOs in the biopharmaceutical field (as
of 2006) together with capacity at drug contract manufacturers in 2008. By our estimate,
Boehringer Ingelheim and Lonza still account for just over half of global production volume in
2010, but recently Asian companies have been advancing noticeably. Koreas Celltrion
[068270 KS] currently has 50,000l of cell culture production capacity and is handling
worldwide supply of Orencia, the rheumatoid arthritis drug made by Bristol-Myers Squibb
single-handedly. Celltrions capacity is expected to expand, to eventually reach 90,000l. Indias
Reliance Life Sciences, Biocon, and Intas Pharmaceuticals had each set up several thousand
liters of cell culture production capacity by end-2009.
Japans
biopharmaceutical
contract manufacturing
industry is lagging well
behind
In Japan, there are currently just two biopharmaceutical manufacturing contractors with culture
tanks of several thousand liters: Toyobo Biogenerics and Asahi Glass. Both lag behind their
overseas counterparts in terms of the size of their facilities. Toyobo Biogenerics acquired
protein production vector technology STAR from Crucell in 2008 in a bid to up its capacity to
4,000L in 2011. Using the STAR technology will enable the manufacturer to produce highexpression (i.e. high-yield) clones in an average of around three months. Nikkan Kogyo
Shimbun reported in October 2009 that Toyobo Biogenerics had already won several orders to
develop biopharmaceuticals on a contract basis. Asahi Glass has teamed up with DSM
Biologics of the Netherlands, and in addition to its existing fission yeast-based production
method, is extending its repertoire to include biopharmaceuticals using animal cells.
68
Biosimilar prices: at 70
80% of original branded
prices biosimilars, are
unlikely to take off
The price of Sandoz 10mg Somatropin biosimilar (via subcutaneous injection) is 64,674, or
74% of the price of the original drug Norditropin S Injection 10mg (87,668). Similarly, JCR
Pharmaceuticals Epoetin Alfa BS 1500 syringe JCR is priced at 1,491, or 77% of the original
branded drug Espo injection fluid 1500 (1,937). Based on the 30% of the costs paid by the
patient, it will be possible to save 7,000 per unit with Somatropin, and around 42,000 a year
with EPO, based on 3,000IU/three times a week. These figures represent major savings, but
we think market penetration of biosimilars will be limited in Japan given the concerns over the
safety of biosimilars, which represent an unknown quantity for Japanese patients, not to
mention the strength of the original drug brands.
JCR Pharmaceuticals erythropoetin biosimilar sales target for FY10 is to achieve around 5%
market share on a volume basis. The company expects to achieve an eventual volume-based
market share of 1520%. Thus, even JCR Pharmaceuticals is not expecting to replace the
majority of the erythropoetin market.
3-25. Annual costs of antibody therapeutics: advanced colorectal cancer mFOLFOX6 + Avastin treatment method
Two days treatment repeated every two weeks as a single course
Day 1
L-OHP 85mg/m2,
assuming 1.5m2 body surface area
2 hours intravenously
108,426
()
Day 2
5-FU
Dexamethasone 8mg
Levofolinate 200mg/m2,
5-FU
Avastin 5mg/kg
2,400mg/m2, assuming 1.5m2
5-HT3 receptor antagonist 3mg,
assuming 1.5m2 body surface area 400mg/m2
1-hour intravenously
body surface area
oral
rapid infusion
5,991
149,877
27,672
1,182
5,910
Total
299,058
Maximum annual treatment cost
7,775,508
L-OHP maximum annual cost
2,819,076
Avastin maximum annual cost
3,896,802
Note: Assuming body surface area of 1.5mA2, body weight 60kg, two-weekly course repeated 26 times.
Source: Nomura
Antibody therapeutic
biosimilars are
advantageous for
patients in the same way
as anticancer generics
We think takeup of antibody biosimilars is likely to increase to some extent, owing to the
substantial advantages they offer medical practitioners and patients in view of the high prices
of branded antibody therapeutics. As an example of the annual costs of antibody therapeutics,
in Exhibit 3-25 we show the annual costs for advanced colorectal cancer therapy mFOLFOX6
+ Avastin. The costs of Avastin alone are around 4mn a year. If biosimilars were sold at 70%
of the original branded drug prices, this would mean annual savings of 350,000, assuming
the patient covers 30% of the total drug costs. Despite some lingering concerns over the
safety of biosimilars compared with the original branded drugs, we think this cost reduction
would be attractive to low- and middle-income groups. Middle- to upper-income groups,
however, might opt for the original branded drug on safety grounds. For this reason, with
biosimilar prices set at 70% of the original branded drug price, we do not think antibody
biosimilars are likely to garner more than 20% market share.
To increase takeup,
prices need to be 50%
or less of branded drug
prices, and leaf should
be taken out of Indias
book
As we noted earlier, biosimilars, which do not need such a high level of R&D expenditure as
original branded drugs, are a highly profitable business with limited costs. As a result, even
with prices set at 50% or lower than the branded price, it should be possible to generate
sufficient profits. If the authorities decided to lower the price of biosimilars to 50% or lower, the
portion paid by the patient would also be considerably lower. As a result of Dr. Reddys selling
Reditux, a biosimilar version of antibody drug rituximab, at 50% of the price of the original
drug, the number of patients treated with the biosimilar increased 10-fold, according to the
company. Japanese patients do not enjoy as high a degree of price elasticity as India, but we
69
think the Japanese authorities should consider the Indian way of promoting uptake of generics,
under which bold pricing formulas are offset with volume growth.
Company focus: JCR
Pharmaceuticals
In the biosimilar context, the company most in the spotlight is JCR Pharmaceuticals. The
company was the first to launch a biosimilar version of EPO on the Japanese market, and for
FY10 targets a 5% volume share of the domestic EPO drug market. Signing overseas sales
contracts with fellow biosimilar company GSK offers even greater potential than Japan, where
biosimilars are not likely to see substantial uptake. JCR Pharmaceuticals has ample
experience in culture production, and given that it conforms to Japanese antibody therapeutic
quality standards, we would surmise that its products are of the highest quality in the world
among existing biosimilar companies. Besides EPO, the company plans to develop biosimilars
for rare conditions. JCR Pharmaceuticals has gotten a head start over other companies, as it
has cultivation expertise and bioreactor facilities already in place, making it the prime
candidate to manufacture antibody therapy biosimilars in Japan. We await further
developments with interest.
Company focus: Nipro
The second most important EPO biosimilar company in Japan is Nipro. On 21 November 2006,
Nipro announced that it will outsource production of biosimilars to Toyobo. In April 2010, Nipro
announced preclinical trials, and Phase 2/3 trials are scheduled to start during FY10. With a
view to starting commercial production in three years time, Nipro has earmarked up to 10bn
for R&D expenditure.
Hemodialysis equipment major Nipro has an extensive sales network of dialysis centers and
hospital dialysis departments. We do not believe any other company will be able to beat Nipro
on its sales network once sales of biosimilars get under way. Toyobo will most likely offset
Nipros lack of experience in cultivation production. That said, we think Nipro will face 23
years of negative cash flow, owing to the vast funds it will need not only to invest in biosimilars
over the next few years, but also to set up anticancer treatment production facilities, and for
capital expenditure at overseas medical equipment plants.
Benefits for nondrug

makers: Shimadzu
While analysis of low-molecular-weight compounds only takes a few minutes with a gas
chromatograph, analyzing antibody and protein therapeutic drugs takes a whole week at a
time. A great deal of time is needed for quality control analysis in manufacturing processes as
well; for example, amino acid sequence analysis using chromatography equipment and 3D
structural analysis of proteins using analyzers and nuclear magnetic resonance (NMR), not to
mention the chromatography equipment and special consumables needed for sugar chain
analysis. The rise of the biopharmaceutical industry in the past 10 years has resulted directly
in growth in the analyzing equipment industry. We think this trend will gather momentum from
now on.
Shimadzu is the third largest chromatograph company in the world, and chromatographs
(which form part of its measuring instrument business) are its mainstay product. Bio and
pharmaceutical products generate around 30% of sales at the measuring instrument business
but 4050% of profits at the segment. In recent years, the company launched a very
competitive ultra high-speed chromatograph, and has also been active launching new
analyzers for bio applications and adapting analyzers for therapeutic applications. We
anticipate strong growth at the company on the back of expansion of the biopharmaceutical
field.
70
Shimadzu [7701] (Buy)

Consolidated
08/3
09/3
10/3
11/3E
Co's
12/3E
13/3E
Sales
mn
% y-y
289,971
10.5
272,833
-5.9
238,255
-12.7
256,000
7.4
250,000
4.9
270,000
5.5
284,000
5.2
(Motoya Kohtani)
Operating profits
mn
% y-y
27,597
9.2
19,613
-28.9
10,294
-47.5
17,500
70.0
14,000
36.0
20,000
14.3
21,000
5.0
Recurring profits
mn
% y-y
23,864
2.8
17,731
-25.7
9,816
-44.6
16,700
70.1
12,500
27.3
19,800
18.6
20,800
5.1
Net profits
mn
% y-y
13,724
2.6
8,536
-37.8
6,130
-28.2
10,900
77.8
8,000
30.5
12,500
14.7
13,100
4.8
EPS
46.5
28.9
20.8
36.9
27.1
42.4
44.4
Company data, Nomura estimates except where noted
Longer-term increase in
weighting of mainstay
product sales to
bio/pharma industry
Shimadzu is Japans largest manufacturer of scientific analysis equipment. Analytical and

measuring instruments are the companys main business segment, accounting for 85% of
10/3 operating profits before eliminations. The segments most profitable products are general
analysis systems, which include chromatographs. The bio/pharmaceuticals and CRO
industries account for 30% of Shimadzus analytical and measuring instrument sales. Given
their more complex structures than low-molecular-weight compounds, protein-based drugs
and antibody drugs require lengthy analysis periods not only in R&D but also in quality
assurance and control. We believe this will encourage the pharmaceuticals industry to
introduce high-ticket, leading-edge analytical equipment. We look for the companys weighting
of analytical and measuring instrument sales to the pharmaceuticals industry to rise in FY10
supported by the new Nexera system launched in FY09 and by proactive business alliances.
We think leading-edge products, with their high margins, are likely to be the main driver of
profits at Shimadzu.
Ultra high-speed Nexera Launched in 2009, the ultra high-speed Nexera chromatograph has superior specs to rival
chromatograph has
products. Enabling ultra high-pressure liquid chromatography at 130MPa, the highest level in
superior specs to rival
the industry, the Nexera can also accommodate analysis at regular pressures. Rival products
products
need to have their auto sampler bulbs replaced after around 5,000 uses when performing
analysis at ultra-high pressures, but the Nexera offers durability up to 10,000 uses. In addition,
Shimadzus auto samplers have been praised for producing less cross contamination (when a
substance from a previous sample is identified in the next sample) than rival products, with
many customers buying the auto samplers as individual items. Taking into account these
attributes, Shimadzus products are highly competitive. Assuming strong growth in demand for
Nexera, we estimate that sales at the analytical and measuring equipment segment will
increase 8% y-y in 11/3, to 144.5bn.
Tie-ups and
codevelopment lead to
recent unveiling of two
mass spectrometers
Recently, Shimadzus tie-ups and joint development activities have led to the unveiling of two
mass spectrometers with unique features. On 21 May, the company unveiled a mass
spectrometer for infection analysis codeveloped with bioMrieux [BIM FP], a major French
manufacturer of microbiological testing equipment. Costs for the new product are half that for
previous testing methods. Having obtained EC approval in Europe, Shimadzu targets sales of
30 units in FY10. Meanwhile, on 2 June, it unveiled the MALDI-TOF mass spectrometer
capable of identifying more than 1mn proteins, which was developed together with Germanys
CovalX.
Business expansion on
back of increased global
bio/pharma investment
Shimadzus orders appear to be rising at a rate of 50% y-y on a local currency basis in 2010 H1.
Orders for general analysis systems from the CRO industry have been especially notable. We
project that operating profits will rise at an average annual rate of 10% in 11/313/3 on greater
adoption of the companys characteristic new products and its proactive business partnerships.
71
3-26. Shimadzu [7701]: consolidated financial data
Income statement
Sales
COGS
Gross profits
SG&A expenses
Personnel
R&D
Other
Operating profits
Recurring profits
Extraordinary gains
Extraordinary losses
Pretax profits
Taxes, etc
Net profits
Depreciation
R&D expenses
Capex
Shares out (mn)
EPS ()
DPS ()
BPS ()
% y-y
Sales
COGS
Gross profits
SG&A expenses
Operating profits
Recurring profits
Net profits
As % of sales
COGS
Gross profits
SG&A expenses
Operating profits
Recurring profits
Net profits
Effective tax rate (%)
08/3
09/3
10/3
289,971
177,378
112,593
84,995
33,200
8,795
43,000
27,597
23,864
266
501
23,629
5,753
13,724
6,300
8,795
12,400
295.2
46.5
9.0
509.2
272,833
167,861
104,972
85,358
33,200
9,135
43,023
19,613
17,731
1,489
3,999
15,221
5,200
8,536
8,500
13,000
9,000
295.2
28.9
9.0
497.8
10.5
11.5
9.0
8.9
9.2
2.8
2.6
61.2
38.8
29.3
9.5
8.2
4.7
24.3
(mn, except where noted)

11/3E
11/3E
Cos
12/3E
13/3E
256,000
158,500
97,500
80,000
32,600
8,800
38,600
17,500
16,700
0
0
16,700
5,800
10,900
8,500
13,000
8,800
295.1
36.9
8.0
551.8
270,000
165,000
105,000
85,000
35,200
9,500
40,300
20,000
19,800
0
0
19,800
7,300
12,500
8,700
14,000
10,000
295.1
42.4
10.0
585.2
284,000
174,000
110,000
89,000
36,700
10,200
42,100
21,000
20,800
0
0
20,800
7,700
13,100
9,000
15,000
11,000
295.1
44.4
12.0
618.6
250,000
14,000
12,500
8,000
8,500
13,000
8,800
27.1
7.0
-
11.5
9.8
14.3
-1.5
312.1
318.2
309.0
7.4
4.8
12.0
4.2
70.0
70.1
77.8
5.5
4.1
7.7
6.3
14.3
18.6
14.7
5.2
5.5
4.8
4.7
5.0
5.1
4.8
4.9
36.0
27.3
30.5
61.1
38.9
31.8
7.1
6.7
4.2
38.0
61.9
38.1
31.3
6.8
6.5
4.3
34.7
61.1
38.9
31.5
7.4
7.3
4.6
36.9
61.3
38.7
31.3
7.4
7.3
4.6
37.0
5.6
5.0
3.2
-
Q1
Q2
Q3
Q4
H1
238,255
151,204
87,050
76,756
30,500
8,391
37,865
10,294
9,816
79
307
9,588
3,444
6,130
8,300
12,400
8,600
295.1
20.8
7.0
518.3
50,400
31,200
19,200
16,800
8,100
2,200
6,500
2,400
2,300
0
0
2,300
900
1,400
67,200
40,700
26,500
20,600
8,400
2,600
9,600
5,900
5,600
0
0
5,600
2,100
3,500
58,100
36,000
22,100
19,200
8,100
2,200
8,900
2,900
2,800
0
0
2,800
1,000
1,800
80,800
51,100
29,700
23,400
7,900
1,800
13,700
6,300
6,000
0
0
6,000
2,200
3,800
117,600
71,900
45,700
37,400
16,500
4,800
16,100
8,300
7,900
0
0
7,900
3,000
4,900
3,200
3,800
3,300
2,700
7,000
295.1
4.7
295.1
11.9
295.1
6.1
295.1
12.9
295.1
16.6
-5.9
-5.4
-6.8
0.4
-28.9
-25.7
-37.8
-12.7
-9.9
-17.1
-10.1
-47.5
-44.6
-28.2
11.7
13.7
8.7
-7.5
-
11.4
7.0
18.8
4.0
136.1
149.1
308.9
9.5
6.7
14.2
4.8
183.8
199.1
237.1
1.3
-1.7
7.1
14.3
-13.2
-16.8
-19.4
61.5
38.5
31.3
7.2
6.5
3.1
34.2
63.5
36.5
32.2
4.3
4.1
2.6
35.9
61.9
38.1
33.3
4.8
4.6
2.8
39.1
60.6
39.4
30.7
8.8
8.3
5.2
37.5
62.0
38.0
33.0
5.0
4.8
3.1
35.7
63.2
36.8
29.0
7.8
7.4
4.7
36.7
Full
72
Nipro [8086] (Neutral)

Consolidated
08/3
09/3
10/3
11/3E
Co's
12/3E
13/3E
Sales
mn
% y-y
172,113
-6.6
175,944
2.2
177,829
1.1
204,400
14.9
206,000
15.8
221,000
8.1
237,200
7.3
(Motoya Kohtani)
Operating profits
mn
% y-y
13,677
4.8
14,775
8.0
18,094
22.5
17,000
-6.0
17,200
-4.9
17,000
0.0
18,000
5.9
Recurring profits
mn
% y-y
9,669
-14.8
9,890
2.3
14,908
50.7
14,900
-0.1
15,300
2.6
14,600
-2.0
15,300
4.8
Net profits
mn
% y-y
4,454
-47.9
4,530
1.7
7,252
60.1
7,600
4.8
7,900
8.9
7,400
-2.6
7,800
5.4
EPS
70.2
71.4
114.4
108.1
124.6
105.2
110.9
Developing biosimilar
EPO with Toyobo
In November 2006, Nipro signed a comprehensive contract to outsource production of bulk

drugs used in recombinant EPO formulations. Nipro has been quick to focus on biosimilars
the biggest area of weakness for Japans generic drug companies. Nipro tied up with Toyobo
Biologics as it has no cultivation facilities of its own. Preclinical trials are scheduled to start
before end-2010, and the company looks to launch products in 2013. Nipro aims to become
one of the top three suppliers of biosimilar EPO formulations.
Sales synergies with

dialysis
By our estimates, 62% of Nipros 11/3 sales will derive from its medical equipment segment,
which covers dialyzers and injection/infusion products. The company has a wide range of
diabetes products, covering not only dialyzers but also dialysis machines, blood lines, and
needles, as well as heparin prefilled syringes. Nipros sales network covers all hospitals that
offer dialysis. We see major sales synergies if the company can add EPO to its lineup.
Generic sales selling

extremely well
The companys generic drug business is doing particularly well at the moment, both in terms
of sales of its own drugs and contracts to manufacture drugs for third parties. April 2010 NHI
dispensing fee revisions changed the system for points awarded to pharmacies to promote the
use of generic drugs, from one based on the number of prescriptions to one based on the
volume of drugs prescribed. As a result, dispensing pharmacies across Japan have continued
to order large volumes of generics, and demand has remained strong enough to ensure no
stocks of old product. Outsourced manufacturing contracts have also remained firm.
Pill manufacturing costs

comparable with Indian
companies
Our research with Indian manufacturers reveals that manufacturing costs for mass-produced
products are around 1/pill. Currently, Indian companies do not use Chinese bulks (APIs)
owing to doubts over their quality. However, even if they were to use low-cost Chinese APIs,
we would not expect any substantial improvement in per-pill costs. Costs for mass-produced
products at Nipro are 12/pill, and increased use of low-cost imported APIs should enable
Nipro to achieve drug manufacturing costs comparable to Indian rivals. We think the company
will see growth in outsourced drug manufacturing contracts over the longer term.
Free cash flow positive

even further off, but we
like strategic investment
in biosimilars
Nipro is considering building two dialyzer production lines, adding production capacity
overseas, and building a new oncology drug plant. The full-fledged entry into the biosimilar
market is also likely to hike R&D costs. Free cash flow has been negative since 07/3. We had
expected this to turn positive in two years time, but such a development could now be further
off. That said, we applaud its investment in biosimilars, as we expect them to carry higher
margins than other products.
73
3-27. Nipro [8086]: consolidated financial data
Income statement
Sales
COGS
Gross profits
SG&A expenses
Transportation
Personnel
Other
Operating profits
Recurring profits
Extraordinary gains
Pretax profits
Tax, etc
Net profits
Depreciation
Cash flow
Capex
Shares out (FY-average, mn)
EPS ()
Fully diluted EPS ()
CFPS ()
BPS ()
% y-y
Sales
COGS
Gross profits
SG&A expenses
Operating profits
Recurring profits
Pretax profits
Net profits
As % of sales
COGS
Gross profits
SG&A expenses
Operating profits
Recurring profits
Pretax profits
Net profits

11/3E
Cos
07/3
08/3
09/3
10/3
11/3E
12/3E
13/3E
184,362
132,142
52,220
39,167
10,953
25,271
13,053
11,355
13,660
8,240
16,775
8,219
8,555
172,113
123,109
49,004
35,327
3,952
8,975
24,754
13,677
9,669
2,371
2,174
8,260
3,805
4,454
175,944
124,395
51,549
36,774
4,319
9,610
25,464
14,775
9,890
1,663
1,000
9,379
4,800
4,530
177,829
126,144
51,685
33,591
3,775
8,851
23,040
18,094
14,908
986
2,024
13,870
6,367
7,252
204,400
146,400
58,000
41,000
4,200
10,000
26,700
17,000
14,900
0
700
14,200
6,600
7,600
221,000
160,000
61,000
44,000
4,400
11,000
28,700
17,000
14,600
0
700
13,900
6,500
7,400
237,200
173,200
64,000
46,000
4,600
11,400
30,300
18,000
15,300
0
700
14,600
6,800
7,800
12,469
21,024
23,093
63.5
134.7
329.6
1,979
15,500
19,954
25,500
63.5
70.2
314.4
1,883
17,655
22,185
32,430
63.4
71.4
349.8
1,498
18,420
25,672
14,257
63.4
114.4
114.1
404.8
1,802
22,500
30,100
30,000
63.4
119.8
108.1
474.6
1,895
24,300
31,700
27,000
63.4
116.7
105.2
499.8
1,953
25,800
33,600
27,000
63.4
123.0
110.9
529.8
2,018
-10.9
-11.9
-8.1
-12.0
5.9
-7.1
85.2
89.6
-6.6
-6.8
-6.2
-9.8
4.8
-14.8
-50.8
-47.9
2.2
1.0
5.2
4.1
8.0
2.3
13.5
1.7
1.1
1.4
0.3
-8.7
22.5
50.7
47.9
60.1
14.9
16.0
12.2
22.1
-6.0
-0.1
2.4
4.8
8.1
9.3
5.2
7.3
0.0
-2.0
-2.1
-2.6
7.3
8.3
4.9
4.5
5.9
4.8
5.0
5.4
15.8
16.2
14.9
25.6
-4.9
2.6
5.3
8.9
71.7
28.3
21.2
7.1
6.2
9.1
4.6
49.0
71.5
28.5
20.5
7.9
5.6
4.8
2.6
46.1
70.7
29.3
20.9
8.4
5.6
5.3
2.6
51.2
70.9
29.1
18.9
10.2
8.4
7.8
4.1
45.9
71.6
28.4
20.1
8.3
7.3
6.9
3.7
46.5
72.4
27.6
19.9
7.7
6.6
6.3
3.3
46.8
73.0
27.0
19.4
7.6
6.5
6.2
3.3
46.6
71.2
28.8
20.5
8.3
7.4
7.1
3.8
45.9
206,000
146,600
59,400
42,200
17,200
15,300
0
700
14,600
6,700
7,900
124.6
74
4. Japan: government promoting generics

(1) Generics market continuing to grow
Market still growing
The generics market is the only segment of the prescription drug market that is likely to grow.
The government has bolstered efforts to reduce drug costs as a means of controlling
healthcare costs, which have been steadily rising. The benefits of lowering drug costs via cuts
in drug prices have been diminishing, however. We think new measures are needed and that
there is an urgent need to make effective use of low-cost generics. While costing less than
branded drugs, generic drugs have the same effect and consequently contribute to lower
healthcare costs. Generics account for 20.2% of Japans prescription drug market, by
prescribed volume (MHLW data, as of September 2009). The MHLW wants to increase this
figure to 30%, and at this stage the generics market continues to grow.
Roughly 500bn market
Japans generic drug market is small, at about 460bn as of FY08 (based on the total sales of
members of the Japan Generic Medicines Association), or less than 8% in value terms of the
total prescription drug market (around 6trn).
More than 60% of US

and European markets
by volume
This is in stark contrast to the US, UK, and Germany, where generics account for nearly 60%
of the total prescription drug market by volume. Generics are widely used in the US; about 80
90% of prescriptions start being filled with generics immediately after drugs go off-patent.
Exhibit 4-1 shows 2008 market shares of generic drugs.
4-1. Generics have a low market share in Japan
(%)
69
70
64
61
By value
60
58
50
40
47
30
20
24
22
27
16
13
10
Long-listed
drugs
40
Long-listed drugs
By volume
18
7
0
US
UK
Germany
France
Japan
Note: 2008 data from the Generic Pharmaceutical Association, European Generic Medicines Association,
and the Japan Generic Medicines Association.
Source: Nomura
Immediate effect from

new April 2010
incentives to dispense
generics
New incentives to prescribe generics have been introduced. Previously the incentive was only
40 per prescription, awarded when generics accounted for 30% or more of the total number
of prescriptions filled in the prior three months. Starting in April, incentives apply based on the
proportion of generics used by volume: 60 if the proportion is 20% or more, 130 if it is 25%
or more, and 170 if it is 30% or more. Generic drugmakers sales in April and May were well
above the industry average, indicating that government policy has stimulated demand for
generics.
75
4-2. Changes in policies to promote generics

CY
Government action/policy
84
Committee on drug industry policies
90
93
94
Committee on small and midsize drug

companies
Committee on drug market for the 21st
century
Generic names allowed to be put on
prescriptions
95
Annual listing of generic drug prices
96
Revision of initial listing price of generics
97
Consideration given to listing generic names

of long-listed drugs
02
03
04
First proposals for generic drug industry policies

Conditions established for effective use of generics
Reduced costs for patients using low-cost generics
Demand
For new generics: annual instead of biennial
Supply
Demand
To promote use of generics
90% of innovator
drugs price
80% of innovator
drugs price
Supply
Demand
Demand
Demand
Points for information on generics
Additional reimbursement of 100 per prescription
Demand
Increase in elderlys share of drug costs
From 0% to 10%
Demand
Increase in employees share of drug costs

National and public hospitals/clinics become
independent administrative agencies
From 20% to 30%

Increased awareness of business management issues
and drug costs
Sales approval rather than manufacturing approval
(outsourcing of drug production)
Substitutes can be dispensed if certain conditions are
met
Demand
Acceleration in shift to case-mix payment

Growing use of generics at DPC-subject
Expansion of hospitals/clinics subject to DPC
hospitals/clinics
Generic drug prices listed twice a year
Approval of new generics in July and November
Dispensing of substitutes as a rule (incentive of only
Change in format of prescriptions
40)
Incentives of 60 if proportion of generics used is 20%
Substantial increases in incentives to
or more, 130 if it is 25% or more, and 170 if it is 30%
dispense generics
or more
06
Change in format of prescriptions

Introduction of DPC to chronic-care units
10
Regarding new drug development, globalization, and

mass-market drugs
Introduction of diagnosis procedure

combination (DPC)
Points for promoting generics use
MHLW notice
Revision of pharmaceutical laws
08
Impact on supply
Volume share
Initial listed price
or demand
(%)
National and public hospitals/clinics encouraged to use

generics
Healthcare cost reductions translate to health
providers profits
Additional reimbursement of 20 per prescription
05
07
Details
10.8
(CY00)
12.2
70% of innovator
drugs price
16.6
Supply
17.1
Demand
Demand
Demand
Supply
17.2
Demand
17.6
Demand
20.2
(Sep 09)
Demand
16.8
16.9
Source: Nomura
Demand for generics

stimulated
Past policies to promote generics demonstrate that the market for generics resulted from
demand growth rather than supply expansion (Exhibit 4-2). Until 2002, the government tried to
promote generics by ensuring they met quality standards and by approving generics more
frequently. Generics accounted for only 10% of the market by volume, though. After the
government shifted to a focus on demand in 2002, the share of generics increased from 12.2%
in 2002 to 16.6% in 2003 (from 2002 an additional reimbursement of 20 was awarded for
prescriptions including at least one generic, with a further 100 awarded for providing an
explanation of the generics merits). The figures show that these measures taken in 2002
effectively stimulated demand. The MHLW has continued to focus on stimulating demand for
generics while keeping track of generic drug companies production capacity. Incentives adopted
in 2010 for pharmacies to dispense generics have had an impact so far.
Publics recognition of
generics also changing
The public has become more aware of generics partly because of TV advertising. The economic
downturn and the publics sensitivity to drug costs make it likely that low-cost generics will
become increasingly common. Take Daiichi Sankyos Mevalotin (for treating high cholesterol).
Generic versions, which became available in FY03, apparently have a 30% market share, higher
than the market average of 20% partly because the drug must be taken daily. In prefectures with
low average incomes and older populations, generics have more than 50% of the market. We
76
think the figures show very well that people are sensitive to drug costs. With demand for low-cost
drugs likely to increase, we think generics will increasingly catch on.
Succession of generic
versions of major
branded drugs
As major branded drugs go off-patent, we are seeing a succession of generic drug launches.
In July of 2008, a banner year for generics, generic versions of Norvasc/Amlodin, the most
widely used antihypertensive by volume (in Japan as well as elsewhere), came out. The
generics took 20% of the market in the first fiscal year. Generics are likely to come out for
Eisais [4523] Pariet (anti-ulcer drug) in 2010, Takedas Actos (diabetes drug) in 2011, and
Banyu Pharmaceuticals Nu-Lotan (antihypertensive) in 2012. These generics, for chronic
conditions, are likely to attract demand. The substance patent for Lipitor (high cholesterol
treatment), expires in 2011, however it will be no easy matter to bring generic versions to
market because the drug has nine crystalline forms, making it difficult to prove bioequivalence.
4-3. Generic versions of major branded drugs to come to market

FY
Company
Drug name
Generic name
09
Daiichi Sankyo
AstraZeneca
Shionogi
Mitsubishi Tanabe Pharma
Kyorin
Cravit
Casodex
Flomax
Anplag
Pentasa
levofloxacin
bicalutamide
cefcapene pivoxil
sarpogrelate
mesalazin
10
Eisai
Otsuka Pharmaceutical
Pfizer
Sanofi Aventis
Meiji Seika Kaisha
Pariet
Mucosta
Xalatan
Amaryl
Luvox
rabeprazole
rebamipide
latanoprost
glimepiride
fluvoxamine
11
Astellas Pharma
Takeda Pharmaceutical
Astellas Pharma
Takeda Pharmaceutical/Eisai
Lipitor
Actos
Prograf
Benet/Actonel
atorvastatin
pioglitazone
tacrolimus
risedronate
12
Banyu Pharmaceutical
GlaxoSmithKline
Kyowa Hakko Kirin
Astellas Pharma
Astellas Pharma
Nu-Lotan
Paxil
Allelock
Myslee
Seroquel
losartan
paroxetine
olopatadine
zolpidem
quetiapine
10/3 sales
bn
38.0
36.0
26.0
21.0
18.0
139.0
58.0
40.0
26.0
25.0
9.0
158.0
95.0
51.0
31.0
17.0
194.0
44.0
44.0
25.0
28.0
23.0
164.0
Source: Nomura
(2) Generic drug companies likely to attract markets attention again

Investor regard for
generics likely to
improve
Investor regard for generic stocks is likely to improve. We think generics currently have
greater growth potential than when the shares of generic drugmakers last did well. The
government has instituted policies to heavily promote generics, and generic drug companies
have expanded capacity to keep up with growing demand. The public is increasingly aware of
generics, and pharmacies are better equipped than before to dispense generics. With fewer
factors holding back their spread, generics are likely to become much more widespread
starting in 2010. We think the conditions are in place for the generics market to grow and
expect generic drug companies earnings and share prices to benefit.
77
4-4. Stocks likely to rise along with earnings
(%)
80
2010: increased incentives to dispense generics
60
40
20
Premium
0
-20
Discount
-40
(bn)
300
250
2006: change in format of prescriptions

(bn)
70
-60
-80
2002: incentives to dispense generics first introduced
-100
60
01/1002/10 03/9 04/9 05/8 06/8 07/7 08/7 09/6 10/6 (yy/m)
50
200
40
Sales (lhs)
150
30
Operating profits (rhs)

100
20
50
10
0
00
02
04
06
08
10E
12E
0
14E (FY)
Source: Nomura
Earnings to rise also
Generic drug stocks did very well starting in 2003, with help from an increase in the publics
share of healthcare costs (from 20% to 30%) from April 2003. Also, when national and public
hospitals became independent administrative agencies in 2004, they made greater use of lowcost generics in pursuit of management stability. Earnings growth at generic drugmakers,
however, did not keep up with stock prices, whose rise was bolstered by high expectations. In
addition, generic drug stocks declined starting in mid-2004 partly because branded drug
manufacturers increased their overseas profits. Now, with the government actively trying to
promote generics and the economic conditions in place for greater use of generics, we think
generic drug companies profits will steadily grow and investor regard for related stocks is
likely to improve.
Strong profit growth

potential
We expect generic drug companies profit growth to accelerate starting in FY10. Demand for
generics should increase partly because of greater incentives for pharmacies to dispense
generics. In turn, greater demand should lead to lower manufacturing costs. Industry leaders
Nichi-Iko Pharmaceutical and Sawai Pharmaceutical have invested in plant and equipment,
and their plant utilization is set to rise (Exhibit 4-5). A value-added analysis suggests that
profitability is likely to rise sharply when plant utilization increases. Towa Pharmaceuticals
09/3 H1 results demonstrate this. We had expected manufacturing costs to rise 1% because
of the April 2008 drug price revisions. Owing to a rise in plant utilization, however, the gross
margin rose from 47.7% in AprJun to 48.7% in JulSep (versus 47.6% in 08/3). We expect to
see more of this.
78
4-5. Value-added productivity likely to rise
Labor productivity (mn/person)

40
35
Saw ai Pharmaceutical
30
25
20
15
Fuji Pharma
10
5
Tow a Pharmaceutical
0
0
0.5
1.0
1.5
2.0
2.5
3.0
Capital productivity (x)
Source: Nomura
79

4-6. Valuations
Code
Company
Rating
Share
price
(18 Jun)
4502 Takeda Pharmaceutical

4503 Astellas Pharma
4568 Daiichi Sankyo
4523 Eisai
Average of 4 majors
4519 Chugai Pharmaceutical
4508 Mitsubishi Tanabe Pharma
4507 Shionogi
4535 Taisho Pharmaceutical
4151 Kyowa Hakko Kirin
4528 Ono Pharmaceutical
4530 Hisamitsu Pharmaceutical
4506 Dainippon Sumitomo Pharma
4536 Santen Pharmaceutical
4540 Tsumura
4569 Kyorin
Average of 11 midsize companies
Average of 15 companies
4555 Sawai Pharmaceutical
4541 Nichi-Iko Pharmaceutical
4553 Towa Pharmaceutical
4552 JCR Pharmaceuticals
4554 Fuji Pharma
Average of 5 generic drug makers
Average of 20 companies
Ticker
Company
Neutral
Neutral
Buy
Buy
Buy
Buy
Neutral
Neutral
Buy
Neutral
Buy
Buy
Neutral
Buy
Buy
No rating
Buy
Buy
No rating
No rating
Rating
3,895
3,015
1,607
2,982
2,877
1,633
1,319
1,690
1,749
847
3,610
3,335
709
2,989
2,666
1,255
1,515
2,079
8,290
3,330
5,860
1,264
1,725
3,357
2,104
Share
price
(17 Jun)
SUNP IN Sun Pharma

CIPLA IN Cipla
DRRD IN Dr. Reddy's laboratories
RBXY IN Ranbaxy Laboratories
GLXO IN GlaxoSmithKline Pharmaceuticals
LPC IN Lupin
GNP IN Glenmark
JOL IN Jubilant Organosys
Average of 8 Indian generic drug makers
Neutral
Reduce
Buy
Reduce
Neutral
Buy
Buy
Buy
INR
1,698.8
334.7
1,423.5
442.7
2,096.7
1,879.9
271.8
348.7
690.6
Target
price
4,200
3,250
2,100
4,300
2,200
1,600
1,900
1,600
1,400
4,400
4,200
1,150
3,300
3,600
1,800
3,400
5,900
Target
price
INR
1,694
264
1,709
389
2,132
2,087
320
448
-
Market
cap
(18 Jun)
bn
3,075.7
1,410.9
1,139.4
884.4
6,510.4
914.0
740.5
593.4
525.5
488.3
436.3
317.4
282.1
260.1
188.7
94.1
4,840.3
11,350.7
130.2
109.0
100.6
37.1
22.2
362.0
11,712.7
Market
cap
(17 Jun)
INR bn
351.8
268.7
240.3
186.1
177.6
167.2
73.3
55.4
1,520.5
Shares
out
mn
789.7
468.0
709.0
296.6
2,263
559.7
561.4
351.1
300.5
576.5
120.8
95.2
397.9
87.0
70.8
74.9
3,196
5,459
15.7
32.7
17.2
29.3
12.9
108
5,567
Shares
out
mn
207.1
802.9
168.9
420.4
84.7
88.9
269.8
158.8
2,202
BPS
Latest
quarter
2,687
2,279
1,216
1,460
1,981
795
1,195
1,020
1,817
941
3,701
1,501
865
1,614
1,175
1,404
1,197
1,522
2,818
610
2,443
701
1,323
1,840
1,528
P/B
Dividends
Dividend
yield
(18 Jun)
FY10
FY10
FY10E
FY11E
FY14E
FY10E
FY11E
FY14E
x
1.45
1.32
1.32
2.04
1.45
2.06
1.10
1.66
0.96
0.90
0.98
2.22
0.82
1.85
2.27
0.89
1.27
1.37
2.94
5.46
2.40
1.80
1.30
1.82
1.38
180.0
125.0
60.0
150.0
127.1
34.0
28.0
40.0
27.0
20.0
180.0
70.0
18.0
80.0
52.0
35.0
36.7
74.2
80.0
30.0
60.0
12.0
26.0
36.7
73.5
%
4.62
4.15
3.73
5.03
4.42
2.08
2.12
2.37
1.54
2.36
4.99
2.10
2.54
2.68
1.95
2.79
2.42
3.57
0.97
0.90
1.02
0.95
1.51
1.09
3.49
273.6
207.7
89.5
229.9
196.6
86.0
70.9
113.5
82.1
39.9
206.9
240.0
11.1
190.4
174.4
117.7
83.1
130.1
389.8
154.0
346.0
28.4
153.1
184.6
131.2
287.6
216.3
103.7
250.9
210.4
91.5
80.5
135.9
81.1
48.6
225.3
272.3
20.4
203.3
198.5
132.5
93.7
142.1
497.4
195.5
376.3
34.2
166.3
220.9
143.6
311.6
228.1
157.1
307.1
245.4
121.3
101.2
198.6
80.0
65.0
214.3
329.4
121.8
216.2
255.2
152.5
128.3
176.8
790.3
313.5
658.2
80.0
271.2
369.2
180.5
x
14.2
14.5
18.0
13.0
14.6
19.0
18.6
14.9
21.3
21.2
17.4
13.9
64.0
15.7
15.3
10.7
18.2
16.0
21.3
21.6
16.9
44.5
11.3
18.2
16.0
x
13.5
13.9
15.5
11.9
13.7
17.8
16.4
12.4
21.6
17.4
16.0
12.2
34.8
14.7
13.4
9.5
16.2
14.6
16.7
17.0
15.6
37.0
10.4
15.2
14.6
x
12.5
13.2
10.2
9.7
11.7
13.5
13.0
8.5
21.9
13.0
16.8
10.1
5.8
13.8
10.4
8.2
11.8
11.8
10.5
10.6
8.9
15.8
6.4
9.1
11.7
EPS
Dividends Dividend
yield
P/E
BPS
P/B
EPS
Latest
quarter
INR
378.0
73.5
223.7
98.3
210.9
288.8
87.3
137.8
138.7
(17 Jun)
FY10
FY10
FY10E
FY11E
FY14E
FY10E
FY11E
x
4.49
4.55
6.36
4.50
9.94
6.51
3.11
2.53
4.98
INR
13.75
2.00
11.25
0.00
30.00
13.50
0.40
2.00
4.78
%
0.81
0.60
0.79
0.00
1.43
0.72
0.15
0.57
0.69
INR
65.2
13.5
6.4
7.0
59.1
76.8
11.5
27.4
21.7
INR
74.7
14.8
81.7
36.5
71.5
100.3
15.3
30.5
36.5
INR
x
26.0
24.8
222.4
62.9
35.5
24.5
23.6
12.7
31.9
x
22.7
22.6
17.4
12.1
29.3
18.7
17.7
11.4
18.9
EPS growth
P/E
FY0912 FY0914
%
-17.2
-6.2
25.6
25.9
-4.6
-1.9
16.8
11.1
3.5
24.4
-6.7
10.4
-3.6
-1.9
11.3
6.5
5.8
-0.7
70.4
-2.7
16.8
-3.9
9.9
15.9
-0.2
%
-3.7
-2.9
21.5
16.7
1.9
3.1
13.4
11.5
2.1
16.4
-4.5
9.2
18.2
0.3
10.9
5.6
7.9
4.2
45.3
4.4
19.4
9.5
12.9
16.9
4.6
EPS growth
FY14E
x
FY0912 FY0914
%
%
-
Source: Nomura
80
(3) Generic drug makers adopting different business strategies

Nichi-Iko
Pharmaceutical taking
over branded
drugmakers long-listed
drugs
Nichi-Iko Pharmaceutical is actively expanding its business in the hospital market. It previously
focused mainly on private practices, but has taken advantage of new drug development to
develop a presence in the hospital market. It has recently stepped up efforts to expand its
hospital business by acquiring long-listed drugs from branded drug makers. The sales
partnership with Sanofi-Aventis is part of this strategy. Nichi-Iko mainly sells products through
wholesalers, and it is supplying an increasing volume of the injectable drugs widely used in
the hospital market. We believe the company is well managed, as indicated by the early
achievement of the goals set in its medium-term business plan.
Injectable generic drugs tend to make faster inroads into the market than their oral counterparts.
At hospitals using the DPC system, the use of low-priced drugs allows them to utilize the spread
with reimbursement prices as a business resource. Additionally, for patients, it is not easy to tell
whether the drug being used is a generic. A majority of injectable drugs are drip infusions in
which the injectable drug is dissolved in an amino acid or glucose solution. The color of the
infusion bag gives patients some indication of the infusion maker, but the maker of the drug
dissolved therein is rarely questioned. By contrast, differences in the blister pack color and drug
shape make it easy to discern the replacement of oral branded drugs with generics. Additionally,
from the medical institutions perspective, forecasting demand is easier for injectable drugs
because they will be administered to hospitalized patients. Bulk procurement enables the
hospitals to secure discounts, which is beneficial for profits.
Towa Pharmaceutical has high sales to private practices. Medical care and management are
Towa Pharmaceutical
has high presence in
integrated at many private practices, and they have historically used a large amount of generic
sales to private practices drugs because they offer high drug price margins (difference between the NHI reimbursement
price and the purchase price paid by the medical institution). Consequently, discount sales
became the norm. In 2000, however, Towa adopted a sales strategy emphasizing profitability,
and its profitability has since risen. Over the past 10 years, Towa has maintained higher prices
than competitors as a result of limiting discount sales.
Although its main customers are private practices, Towa is also focusing on sales to
dispensing pharmacies. It plans to increase delivery staff supplying pharmacies as its top line
expands. It has about 420 medical representatives to conduct sales to pharmacies, and
intends to increase delivery personnel from 50 currently to 100.
We expect the construction and startup of the Yamagata plant to increase depreciation and
adversely affect the COGS ratio in 12/3 and 13/3. However, we expect profit growth
momentum to strengthen again from 14/3 on a decline in deprecation. We think the company
could approach an operating profit level of 10bn in 11/3, achieving profits on par with a small
branded drugmaker. We expect profits to exceed 10bn in 12/3 and beyond.
Fuji Pharma earns
stable earnings in niche
markets
Fuji Pharma is a generic drugmaker focusing on injectable drugs and hormone preparations. It
operates in niche markets like gynecology and faces limited competition from other generic
drugmakers. The company also focuses on contrast agents, and because contrast agents are
used to diagnose cancer, it is considering entering the market for cancer-related generic drugs.
It is developing a biosimilar for granulocyte colony-stimulating factor, a leucopenia treatment.
Additionally, in the field of gynecology, the company conducts sales of new drugs as well as
generic drugs. External data suggest that sales of the dysmenorrheal drug Lunabell reached
1.1bn in 2009.
Sawai Pharmaceutical
has lower depreciation
costs than rivals
Sawai Pharmaceutical historically adopted a business strategy similar to Towa Pharmaceutical,
81
but it switched 10 years ago to a sales structure targeting hospitals through wholesalers.
Moreover, a change in president two years ago substantially improved investor confidence in
the companys earnings. Its medium-term business plan targets 100bn in sales by 14/3.
Among generic drugmakers, this sales target is second only to Nichi-Ikos 12/11 target of
133bn.
Sawai Pharmaceutical was the first of the three major generic makers to complete its capex
plans, resulting in lower depreciation. If it can expand sales amid growing generic drug demand,
we believe profit margins could rise quickly on higher plant utilization. It appears that generic
drug sales continue to grow as a result of the government measures adopted in April 2010 to
further promote generic drugs, and we anticipate strong earnings growth from AprJun.
During interviews in 2009, the company said it was not actively considering biosimilars on
account of high development costs. However, because the company is now more profitable
than at that time, we think it is again considering entering the biosimilar market.
(4) Long-listed drugs to encroach on generic drug market over very

long term
Concentration of market
share among top
makers
We believe generic drugmakers will converge into groups led by Towa Pharmaceutical, Sawai
Pharmaceutical, and Nichi-Iko Pharmaceutical, the reason being that generic drugmakers with
less than 10bn in sales will be unable to generate cash flow and afford new capex. We also
do not expect profits to increase owing to higher R&D for developing new generic drugs and
higher costs for post-marketing surveillance. Consequently, we believe small and mid-sized
generic drugmakers could possibly become sales partners with major generic drugmakers
with over 20bn in sales. In short, we think smaller makers will seek to reduce business risk
by using the business infrastructure of the majors. We think they could sell the generic drugs
of major generic drugmakers and be commissioned to manufacture and market drugs as part
of efforts to reduce fixed costs.
Price reductions for

long-listed drugs
While seeking to expand sales of generic drugs, the government has also indicated that it will
accelerate reductions in long-listed drug prices. The government adopted a new NHI drug
pricing scheme when revising drug prices in April 2010. It seeks to maintain prices for new
drugs while expanding the scope of price revisions for long-listed drugs. The new pricing
scheme is provisional, but we expect it to be retained.
Genericization of longlisted drugs
In a long-term horizon of 2025 years, we think long-listed drugs could possibly erode the
market share of generic drugs as a result of prices reaching parity. Long-listed drugs and
generic drugs have the same active ingredients. The crucial difference is the accumulation of
large amounts of data for long-listed drugs, including about safety, efficacy, and side effects
when used with other drugs. Should these drugs end up being supplied at low prices after
gradual reductions, we believe they would penetrate the market more than generic drugs with
the same active ingredients. In the short term, we expect sales of low-priced generic drugs to
expand rapidly. Over the long term, however, we think reduced-price long-listed drugs will
effectively be equivalent to generic drugs (Exhibit 4-7).
82
4-7. Genericization of long-term listed drugs
Market share
Branded drug: Herbesser
Generic drugs
NHI drug price
Herbesser
Branded drug
Release of many
low -priced generics
Generic drugs
Many generics
released
Herbesser
Generic price
reductions
Lo w-priced generics
survive and expand
Generics increase
market share
Herbesser
Lo ng-listed drug
prices reduced
Herbesser
Sharp reduction in longlisted drug prices
Long-listed drugs
increase market share
Herbesser
Source: Nomura
Change in business
structure required
As a result, we believe branded drugmakers need to change their business structures over the
long term to facilitate low-priced sales of long-listed drugs. Should branded drugmakers decide
not to alter their earnings structures, we believe one option for generic drugmakers is to acquire
branded drugmakers long-listed drugs and continue selling them. One good example is the
business partnership between Sanofi-Aventis and Nichi-Iko Pharmaceutical. Sanofi-Aventis has
contracted with Nichi-Iko Pharmaceutical to handle sales of its long-listed drugs in Japan.
Based on the above, we believe generic drugmakers strategies for sustaining and expanding
their businesses could change in the following three ways.
Strategy (1): acquire

low-selling long-listed
drugs
The first option is to acquire the long-listed drugs of branded drug makers. In view of the
abundance of drug information concerning long-listed drugs, we think continued price
reductions could result in long-listed drugs encroaching on the generic drug market. However,
83
because the profitability of branded drugmakers would then decrease, we think they may
choose to sell long-listed drugs with low sales to generic drugmakers. For generic drugmakers,
drugs generating several hundred million yen in annual sales would be a major product
compared with generic drugs. We thus envision acquisitions of long-listed drugs when the
potential returns on investment so warrant. Nichi-Iko Pharmaceutical has a history of actively
acquiring long-listed drugs, and it will now handle the long-listed drugs of Sanofi-Aventis.
Strategy (2): become
subsidiary of branded
drugmaker
A second option is to become a subsidiary of a branded drugmaker. Should a branded

drugmaker retain their long-listed drug business despite lower profitability, we believe they
would need a sales structure enabling low-priced sales of long-listed drugs. We believe one
possibility is having a generic drugmaker as a subsidiary to which long-listed drugs could be
transferred. The branded drugmaker could sell its long-listed drugs via the generic drug
subsidiary with its lower cost structure. Kyorin [4569] (holding company) has already built a
business structure close to this. It acquired generic drug maker Toyo Pharmar (currently
Kyorin Rimedio) in 2005. In the future, we believe holding company subsidiary Kyorin
Pharmaceutical will handle the new drug business while long-listed drugs with substantially
reduced prices will be transferred to Kyorin Rimedio. Kyorin Rimedio has a low-cost structure
in terms of personnel and other costs, and should it handle both long-listed drugs and generic
drugs, we think it could gain advantages over the generic drugs of other companies given the
abundance of drug information on the long-listed drugs. We believe branded drugmakers
could mitigate the high risk of their branded drug businesses through low-riskbut also lowreturngeneric drug businesses.
Strategy (3): supply drug As noted earlier in this report, we expect to see biosimilars of antibody drugs in advanced
companies around the
countries during the next few years. We believe we could also see generic drugmakers
world with biosimilar raw supplying companies around the world with biosimilar raw materials. The quality requirements
materials
for drugs in Japan are the strictest in the world. Consequently, we believe a framework for
mass-producing the worlds highest quality of biosimilar raw materials in Japan and supplying
the European and US markets could become a desirable business model. It appears the
Ministry of Health, Labour and Welfare is strongly inclined to have the biosimilars that are sold
in Japan produced in Japan. That being the case, we think another possible model is that
biosimilars from Europe and the US could be introduced to Japan and production could be
handled by a Japanese generic drugmaker.
84
(5) Company comments

Kyowa Hakko Kirin [4151] (Buy)
Consolidated
08/3
09/3
09/12
10/12E
Co's
11/12E
12/12E
Sales
mn
% y-y
392,119
10.7
460,183
17.4
309,111
402,000
400,000
411,500
2.4
417,500
1.5
(Ryoichi Urushihara)
Operating profits
mn
% y-y
39,390
28.3
45,387
15.2
28,243
38,000
36,000
45,000
18.4
55,000
22.2
Recurring profits
mn
% y-y
37,996
23.0
46,412
22.1
29,479
38,810
37,500
45,000
15.9
55,000
22.2
Net profits
mn
% y-y
23,477
84.9
11,726
-50.1
8,797
22,700
20,000
27,700
22.0
33,300
20.2
EPS
59.0
20.4
15.4
39.9
34.7
48.6
58.5
Potelligent technology is
the company's greatest
defining feature
Potelligent technology raises the efficacy of antibody drugs by increasing antibody-dependent

cellular cytotoxicity (ADCC) activity. The technology, which also makes it possible to lower
antibody drug manufacturing costs, has been licensed out to pharmaceutical companies
worldwide. The technology eliminates the fucose in the sugar chain in antibody drugs. Other
companies have similar technologies, but Potelligent is the simplest and the most able to raise
the efficacy of antibody drugs. The latest patent for Potelligent technology (US patent no.
7214775) lasts until 2030 at the latest.
KW-0761 is the first

litmus test
The Potelligent-based drug that is closest to launch is KW-0761, which is currently in Phase 2
trials in Japan. The company plans to file for approval in 2011 H1 and expects a launch in
2012. Phase 2a trials in the US started in November 2009 and patient enrolment appears to
be proceeding faster than the company expected.
ARQ-197: promising
cancer treatment
ARQ-197 (c-MET inhibitor) is also noteworthy as an anticancer agent. Overseas, the licenseholder has completed Phase 2 trials in non-small cell lung cancer. Domestic trials conducted
by Kyowa Hakko Kirin in Japan have apparently shown good results not only for non-small cell
lung cancer but also for pancreatic cancer. ARQ-197 has shown in-vitro efficacy in
combination with the anticancer treatments Nexavar and Sutent, and is coming under the
spotlight as a non-receptor tyrosine kinase.
Estimated
manufacturing costs of
antibody drugs
The Takasaki plant has state-of-the-art production facilities for antibody drugs, with culture
tanks of 10t for the A line and 5t for the B line. It produces antibody APIs for clinical trials and
can produce several different types. In terms of antibody drug manufacturing costs, we
estimate the cost of using a 10t tank one time at 300mn, with the principal costs being
50mn for the cell cultivation medium, 50mn for depreciation, 20mn for filters and other
equipment, and 20mn related to the Protein A column, on top of which there are personnel
and heating and lighting expenses. Adding in drug formulation costs of several hundreds of
millions of yen, we put manufacturing costs at around 1.0bn. We estimate sales per 10t tank
used once at 12.5bn. With fed-batch antibody drug production volume of 5g/l, a 10t tank
could produce 50kg of antibodies. We assume an end-price for antibody drugs of 500/mg, a
recovery rate of 50%, and a success rate of 99%.
85
4-8. Kyowa Hakko Kirin [4151]: consolidated financial data

Pharmaceuticals
Coniel
Itrizole
Allelock
Celtect
Depakene
Adriacin/Farmorubicin
Durotep patch
Nauzelin
Inovan/Pre Dopa
Neu-up/Gran
5-FU
Navelbine
Patanol
Topina
Asacol
KW-6002
Nesp/Espo
Regpara
Coversyl
Permax
Exports, licensing fees
Other
Biochemicals
Chemicals
Food
Other
Eliminations/companywide
Sales
(bn)
06/3
07/3
08/3
09/3
09/12
10/12E
11/12E
12/12E
13/12E
14/12E
149.5
28.1
21.5
19.9
5.4
10.2
9.5
13.5
6.6
4.9
4.6
3.3
2.3
131.5
26.3
138.4
25.4
210.4
23.1
158.3
18.3
207.0
19.2
215.2
18.8
219.5
18.4
220.9
18.0
222.3
17.6
21.0
4.8
10.2
8.6
14.1
6.5
4.3
4.5
3.3
2.8
2.1
23.3
4.1
10.5
8.7
13.9
6.1
4.1
4.4
3.4
3.1
4.3
0.1
25.0
3.6
10.7
7.4
17.3
2.3
8.8
4.9
24.5
2.7
11.4
4.4
24.1
2.4
11.8
5.2
23.7
2.1
12.2
5.2
23.3
2.1
12.6
5.2
22.9
2.1
13.0
5.2
5.5
3.7
17.6
3.6
3.1
6.6
0.9
0.0
0.0
43.7
4.6
5.0
3.8
2.7
13.8
2.9
2.2
3.0
1.2
0.0
0.0
39.6
5.5
3.7
29.1
17.2
88.5
89.2
42.5
68.7
-39.1
460.2
15.1
13.2
69.8
52.3
0.0
49.5
-20.7
309.1
4.9
3.1
14.4
2.8
3.2
9.5
1.6
1.5
0.0
48.7
8.2
4.3
1.8
22.0
18.8
84.0
123.0
0.0
10.0
-20.4
402.0
4.1
2.8
13.8
2.8
3.3
10.8
1.8
3.3
0.0
48.2
9.8
4.5
2.4
26.0
19.3
83.6
123.1
0.0
10.0
-20.4
411.5
3.7
2.4
14.2
2.8
3.3
14.0
1.9
5.1
0.0
45.0
10.4
4.3
2.4
28.0
20.4
85.2
123.2
0.0
10.0
-20.4
417.5
3.7
2.4
14.6
2.8
3.3
17.2
1.9
5.1
0.0
41.8
10.4
4.1
2.4
30.0
20.0
86.8
123.2
0.0
10.0
-20.4
420.5
3.7
2.4
15.0
2.8
3.3
20.4
1.9
5.1
0.0
38.6
9.7
3.9
2.4
32.0
20.3
88.4
123.2
0.0
10.0
-20.4
423.5
0.0
10.6
9.1
57.4
85.8
42.4
55.4
-37.2
353.4
12.8
10.2
67.1
98.6
42.6
48.5
-34.1
354.3
16.3
9.7
86.8
108.0
43.3
49.0
-33.4
392.1
86
4-8. Kyowa Hakko Kirin [4151]: consolidated financial data (continued)

Income statement
Sales
COGS
Gross profits
SG&A expenses
R&D expenses
Personnel expenses
Sales promotion expenses
Other
Amortization of goodwill
Operating profits
Nonoperating income
Nonoperating expenses
Recurring profits
Extraordinary gains
Pretax profits
Tax
Net profits
Capex
Depreciation
Shares out (mn)
EPS ()
Cash EPS ()
% y-y
Sales
COGS
Gross profits
SG&A expenses
R&D expenses
Personnel expenses
Other
Operating profits
Recurring profits
Pretax profits
Net profits
As % of sales
Gross profits
SG&A expenses
R&D expenses
Personnel expenses
Other
Operating profits
Recurring profits
Pretax profits
Net profits
(bn, except where noted)
06/3
07/3
08/3
09/3
09/12
10/12E
11/12E
12/12E
13/12E
14/12E
353.4
226.5
127.0
101.4
32.3
26.7
8.2
34.3
354.3
222.9
131.4
100.7
33.3
25.7
8.5
33.2
392.1
247.2
144.9
105.5
33.5
26.8
8.7
36.5
25.5
6.3
3.6
28.2
2.4
5.7
24.9
8.6
16.3
10.5
9.7
422.9
38.5
61.4
30.7
3.8
3.6
30.9
0.8
8.2
23.5
10.9
12.7
14.3
10.0
405.3
31.3
56.0
39.4
4.9
6.3
38.0
8.0
7.2
38.8
15.2
23.5
14.7
14.3
398.0
59.0
94.9
460.2
259.9
200.3
154.9
48.1
37.1
11.3
48.7
9.7
45.4
5.9
4.8
46.4
6.1
21.6
30.9
19.2
11.7
18.4
18.7
573.9
20.4
69.9
309.1
169.4
139.7
111.5
34.8
27.2
9.0
33.5
7.0
28.2
4.0
2.8
29.5
0.0
8.9
20.6
11.8
8.8
27.3
14.0
569.5
15.4
52.4
402.0
223.9
178.1
140.1
46.3
32.0
12.0
40.8
9.1
38.0
4.5
3.7
38.8
0.0
0.6
38.2
15.5
22.7
20.0
18.0
569.6
39.9
87.5
411.5
226.0
185.5
140.5
49.6
30.0
12.0
39.3
9.6
45.0
5.2
5.2
45.0
0.0
0.0
45.0
17.3
27.7
18.0
16.0
569.6
48.6
93.6
417.5
227.5
190.0
135.0
45.2
28.0
12.0
39.5
10.3
55.0
5.2
5.2
55.0
0.0
0.0
55.0
21.7
33.3
16.0
14.0
569.6
58.5
101.2
420.5
227.5
193.0
135.0
47.2
26.0
12.0
39.5
10.3
58.0
5.2
5.2
58.0
0.0
0.0
58.0
22.8
35.2
14.0
12.0
569.6
61.9
101.0
423.5
228.0
195.5
134.5
49.2
24.0
12.0
39.5
9.8
61.0
5.2
5.2
61.0
0.0
0.0
61.0
24.0
37.0
14.0
12.0
569.6
65.0
103.3
-1.5
-0.2
-3.9
2.9
12.4
-2.1
16.7
-3.7
-23.8
-12.8
-16.8
-9.2
0.2
-1.6
3.5
-0.7
3.0
-3.6
3.5
-3.0
20.2
9.5
-5.4
-22.0
10.7
10.9
10.3
4.8
0.5
4.3
2.7
10.0
28.3
23.0
65.0
84.9
17.4
5.1
38.2
46.8
43.7
38.3
29.7
33.4
15.2
22.1
-20.3
-50.1
2.4
1.0
4.2
0.2
7.2
-6.3
0.0
-3.7
18.6
16.1
17.8
22.1
1.5
0.7
2.4
-3.9
-8.9
-6.7
0.0
0.5
22.2
22.2
22.2
20.2
0.7
0.0
1.6
0.0
4.4
-7.1
0.0
0.0
5.5
5.5
5.5
5.7
0.7
0.2
1.3
-0.4
4.2
-7.7
0.0
0.0
5.2
5.2
5.2
5.1
35.9
28.7
9.1
7.6
2.3
9.7
7.2
8.0
7.0
4.6
34.6
37.1
28.4
9.4
7.3
2.4
9.4
8.7
8.7
6.6
3.6
46.2
37.0
26.9
8.5
6.8
2.2
9.3
10.0
9.7
9.9
6.0
39.1
43.5
33.7
10.5
8.1
2.5
10.6
9.9
10.1
6.7
2.5
62.1
45.2
36.1
11.3
8.8
2.9
10.8
9.1
9.5
6.7
2.8
57.4
44.3
34.9
11.5
8.0
3.0
10.1
9.4
9.7
9.5
5.7
40.6
45.1
34.1
12.1
7.3
2.9
9.5
10.9
10.9
10.9
6.7
38.4
45.5
32.3
10.8
6.7
2.9
9.5
13.2
13.2
13.2
8.0
39.4
45.9
32.1
11.2
6.2
2.9
9.4
13.8
13.8
13.8
8.4
39.3
46.2
31.7
11.6
5.7
2.8
9.3
14.4
14.4
14.4
8.7
39.3
87
Eisai [4523] (Buy)

Consolidated
08/3
09/3
10/3
11/3E
Co's
12/3E
13/3E
Sales
mn
% y-y
734,286
8.9
781,743
6.5
803,152
2.7
807,000
0.5
810,000
0.9
777,000
-3.7
774,000
-0.4
Operating profits
mn
% y-y
17,749
-83.1
91,808
417.3
86,406
-5.9
110,000
27.3
105,000
21.5
115,000
4.5
128,000
11.3
Recurring profits
mn
% y-y
18,850
-82.9
82,583
338.1
79,690
-3.5
106,000
33.0
98,500
23.6
114,000
7.5
128,000
12.3
Net profits
mn
% y-y
-17,012
-124.1
47,678
-380.3
40,338
-15.4
65,500
62.4
65,000
61.1
71,500
9.2
80,500
12.6
EPS
-59.8
167.3
141.6
229.9
219.2
250.9
282.5
Producing Aricept in
India
The US patent on Eisais anti-Alzheimer's agent Aricept expires in November 2010. The
company is planning to take the following two steps to avert a decline in earnings as a result
of the drug going off-patent. First of all, the company plans to sell 5mg and 10mg sizes of
Aricept at low prices, in order to stave off competition from generic drugmakers. Second, it
plans to mitigate the impact of generics by switching to a 23mg size. In readiness for the first
of these steps, Eisai intends to move production of Aricept from Japan to Vizaq in India, in
order to trim production costs as far as possible. We estimate that Aricept generates a gross
margin of 95%, which means that if production costs can be halved through the deployment of
Indian production facilities, it should be possible to discount prices by 70%, given that sales
promotion costs paid to Pfizer will also drop out of the equation.
Moving into the Middle

East, Africa, and Russia
Armed with low-priced drugs, Eisai is looking to move increasingly into emerging countries. Its
plan is to supply Vizaq-produced Aricept worldwide. The company intends to move into Russia,
which has strong links with India, while also expanding business in the Middle East, South
Africa, and northern Africa.
Pariet/Aciphex also to
be produced in India
By using the Vizaq plant, the company is looking to lower production costs on two products:
Aricept and anti-vertigo drug Merislon. Once Eisai has succeeded in lowering the production
costs for Merislon by shortening manufacturing processes, it will then move onto
Pariet/Aciphex (anti-ulcer agent) as the third drug in its cost-cutting program. Since the US
patent for Aciphex expires in 2013, the aim is to immediately start taking steps toward
achieving lower prices. To that end, Eisai will also adapt the drug for the OTC market.
E7389 is the ultimate

off-patent-proof drug
Since E7389 (breast cancer treatment) was given fast-track status by the US Food and Drug
Administration (FDA), it has been attracting growing interest on the stock market. The drug is
made from a substance harvested from marine sponge, and has a complex structural formula.
Initially chemical synthesis of the drug was thought to be impossible, but this has now been
achieved through around 70 manufacturing processes. Synthesis of the drug from the starting
material to final product apparently takes around one year. Owing to the complexity of the
structure and the length of the manufacturing process, even once the drug has gone off-patent,
Indian generic drug manufacturers are not likely to be able to produce the drug profitably. We
thus regard as the ultimate off-patent-proof drug.
88
4-9. Eisai [4523]: consolidated financial data

07/3
Sales
Ethical pharmaceuticals
633.3
Aricept
252.9
E2012
Zonegran
4.9
Methycobal
31.5
Myonal
8.2
Pariet/Aciphex
174.4
Selbex
19.3
Glucagon G Novo
4.1
Nitorol-R
3.9
Fragmin
7.7
E5564
Iomeron
8.3
Glakay
7.4
Actonel
7.6
Humira
T-614
Ligand's products
1.2
Gliadel Wafer
Dacogen
Aloxi
Aquavan
E7389
Asia (ex Aricept, Aciphex)
12.5
Lyrica promotion revenues
Other pharmaceuticals
109.6
OTC drugs
19.6
Other
21.2
Total sales
674.1
Income statement
Sales
674.1
COGS
109.3
Goodwill amortization
Gross profits
564.8
SG&A expenses
459.5
R&D
108.3
IPR&D/goodwill amortization
0.0
Personnel
72.2
Advertising/sales promotion
230.6
Other
48.4
Operating profits
105.3
Recurring profits
110.5
Pretax profits
110.3
Corporate tax, etc
39.7
Net profits
70.6
Shares out (mn)
284.9
EPS ()
247.9
Cash EPS ()
341.9
% y-y
Sales
12.1
COGS
4.6
Gross profits
13.7
SG&A expenses
14.6
R&D
16.1
Operating profits
10.0
Recurring profits
10.4
Pretax profits
14.8
Net profits
11.4
As % of sales
Gross profits
83.8
SG&A expenses
68.2
R&D
16.1
Operating profits
15.6
Recurring profits
16.4
Pretax profits
16.4
Net profits
10.5
36.0

08/3
09/3
10/3
11/3E
12/3E
13/3E
14/3E
15/3E
691.8
290.9
742.1
303.7
0.0
6.1
31.3
7.7
158.9
16.0
3.7
3.0
10.9
762.9
322.4
0.0
6.5
31.4
7.5
147.7
14.2
3.6
2.6
13.6
766.8
311.4
0.0
6.8
28.3
7.1
136.1
12.1
3.6
2.2
15.6
7.9
6.4
8.2
7.1
5.4
9.3
2.9
7.0
4.9
10.8
6.6
5.9
3.9
11.6
12.8
6.1
7.0
4.2
15.1
36.5
6.8
3.1
15.5
38.3
3.1
13.9
18.2
17.8
111.6
20.1
22.4
734.3
108.9
19.0
20.6
781.7
119.7
20.2
20.1
803.2
7.0
2.2
19.6
41.2
11.8
1.8
16.8
2.0
107.0
19.5
20.0
807.0
736.6
235.0
0.0
7.6
26.9
6.7
130.0
10.4
3.6
1.8
7.2
6.0
5.0
3.2
12.1
17.4
1.0
7.4
2.6
26.8
46.6
16.4
16.2
20.8
7.0
107.0
19.0
22.0
777.0
729.9
195.0
0.0
8.4
25.5
6.3
123.2
8.9
3.6
1.5
17.6
8.0
4.3
2.5
12.7
20.6
2.6
7.8
3.0
34.0
50.2
21.3
30.6
24.8
13.5
95.0
19.0
24.0
774.0
712.2
166.9
0.0
9.2
24.2
5.9
100.3
7.6
3.6
1.3
18.8
10.0
3.7
2.1
13.4
23.6
3.8
8.0
3.4
22.1
52.0
25.6
40.6
30.8
18.0
95.0
19.0
20.0
751.0
703.9
146.7
18.0
10.0
23.1
5.6
73.5
7.2
3.6
1.3
19.8
12.0
3.7
2.1
14.1
26.7
4.2
7.8
3.2
8.0
53.8
29.4
47.8
40.8
21.0
87.0
19.0
20.0
743.0
734.3
113.3
5.5
615.5
597.7
137.8
87.6
77.1
241.9
53.3
17.7
18.9
17.7
34.7
-17.0
284.9
-59.8
388.4
781.7
134.0
18.5
629.3
537.5
146.1
9.8
80.5
240.1
61.0
91.8
82.6
70.5
22.8
47.7
284.91
167.3
439
803.2
142.7
18.0
642.4
556.0
145.8
33.3
83.4
234.0
59.5
86.4
79.7
74.3
33.9
40.3
284.92
141.6
493.3
807.0
151.0
18.0
638.0
528.0
147.0
10.0
88.0
217.0
66.0
110.0
106.0
106.0
40.5
65.5
284.94
229.9
486.1
777.0
161.0
18.0
598.0
483.0
152.0
10.0
88.0
163.0
70.0
115.0
114.0
114.0
42.5
71.5
284.94
250.9
496.6
774.0
165.0
18.0
591.0
463.0
156.0
10.0
88.0
135.0
74.0
128.0
128.0
128.0
47.5
80.5
284.94
282.5
517.7
751.0
164.0
18.0
569.0
435.0
158.0
10.0
88.0
105.0
74.0
134.0
133.0
133.0
50.0
83.0
284.94
291.3
522.9
743.0
164.0
18.0
561.0
418.0
162.0
10.0
88.0
84.0
74.0
143.0
141.0
141.0
53.5
87.5
284.94
307.1
538.7
8.9
3.7
9.0
30.1
27.2
-83.1
-82.9
-84.0
-124.1
6.5
18.2
2.2
-10.1
6.0
417.3
338.1
299.3
-380.3
2.7
6.6
2.1
3.4
-0.2
-5.9
-3.5
5.4
-15.4
0.5
5.8
-0.7
-5.0
0.8
27.3
33.0
42.7
62.4
-3.7
6.6
-6.3
-8.5
3.4
4.5
7.5
7.5
9.2
-0.4
2.5
-1.2
-4.1
2.6
11.3
12.3
12.3
12.6
-3.0
-0.6
-3.7
-6.0
1.3
4.7
3.9
3.9
3.1
-1.1
0.0
-1.4
-3.9
2.5
6.7
6.0
6.0
5.4
83.8
81.4
18.8
2.4
2.6
2.4
-2.3
196.4
80.5
68.8
18.7
11.7
10.6
9.0
6.1
32.4
80.0
69.2
18.2
10.8
9.9
9.2
5.0
45.7
79.1
65.4
18.2
13.6
13.1
13.1
8.1
38.2
77.0
62.2
19.6
14.8
14.7
14.7
9.2
37.3
76.4
59.8
20.2
16.5
16.5
16.5
10.4
37.1
75.8
57.9
21.0
17.8
17.7
17.7
11.1
37.6
75.5
56.3
21.8
19.2
19.0
19.0
11.8
37.9
5.7
31.7
8.0
175.9
18.2
3.9
3.4
8.5
89
Nichi-Iko Pharmaceutical [4541] (Buy)

Consolidated
07/11
08/11
09/11
10/11E
Co's
11/11E
12/11E
Sales
mn
32,328
42,841
54,806
64,220
63,500
72,100
79,900
% y-y
10.5
32.5
27.9
17.2
15.9
12.3
10.8
Operating profits
mn
% y-y
4,169
13.1
5,175
24.1
6,246
20.7
8,220
31.6
6,600
5.7
9,950
21.0
11,880
19.4
Recurring profits
mn
% y-y
4,474
28.9
5,442
21.6
6,121
12.5
8,190
33.8
6,500
6.2
9,950
21.5
11,880
19.4
Net profits
mn
% y-y
2,617
8.8
3,442
31.5
3,762
9.3
4,750
26.3
3,800
1.0
6,030
26.9
7,190
19.2
EPS
85.8
111.8
122.0
154.0
121.8
195.5
233.1
Business tie-up with

Sanofi-Aventis
In May 2010, Nichi-Iko Pharmaceutical and Sanofi-Aventis announced that they had signed an
agreement to form a new joint venture called Sanofi-Aventis Nichi-Iko, and that Sanofi-Aventis
would acquire a 4.66% equity stake in Nichi-Iko Pharmaceutical for 4.4bn. The JV will take
over the long-listed drugs marketed by Sanofi-Aventis in Japan, starting with Amoban (antiinsomnia agent). Nichi-Iko Pharmaceutical is supporting Sanofi-Aventis' reorganization of its
business structure in Japan, and we think both companies stand to benefit from the tie-up.
Expanding lineup of
long-listed drugs
Nichi-Iko Pharmaceutical has a history of expanding sales in the hospital market and boosting
earnings by taking over the long-listed drugs of branded drugmakers. Depending on the
manufacturer, some long-listed drugs generate several hundred million yen in annual sales
but no profit. Even these long-listed drugs generate higher margins than generics from the
perspective of generic drug manufacturers, however. Nichi-Iko Pharmaceutical has expanded
its business to the point of taking over marketing of long-listed drugs that generate several
billion yen in annual sales, but its latest tie-up will be a step further as the JV will market
Amoban, a drug that generated sales of 5.1bn in FY09.
Strong partner company

in Daito Pharmaceutical
Nichi-Iko Pharmaceuticals medium-term business plan calls for final-year (12/11) sales of
133bn, which would be unattainable through in-house production alone. Value-added
analysis suggests that if the company relies solely on in-house production it cannot generate
much more than 100bn in sales, just above the 11/11 target of 95bn. The company aims to
reach its medium-term sales target by outsourcing some production. Nichi-Iko Pharmaceutical
says it will achieve its quota for drug supplies with the aid of collaborative partners such as
Daito Pharmaceutical. We view the companys medium-term sales target as ambitious, but
think there is sound reasoning behind it.
Eyeing entry into US

market
The company aims to expand its business overseas through bulk exports. It aims to first show
that its high-quality pharmaceutical bulk materials will be widely adopted on global drug
markets. We expect Sanofi-Aventis to provide some support to the company's overseas
expansion drive, which could lead to the development of new businesses.
90
4-10. Nichi-Iko Pharmaceutical [4541]: consolidated financial data

Income statement
Sales
COGS
Gross profits
SG&A expenses
Personnel expenses
R&D expenses
Sales promotion
Other
Operating profits
Recurring profits
Pretax profits
Tax, etc
Net profits
Depreciation
Capex
Shares out (mn)
EPS ()
Cash EPS ()
% y-y
Sales
COGS
Gross profits
SG&A expenses
Personnel expenses
R&D expenses
Sales promotion
Other
Operating profits
Recurring profits
Net profits
As % of sales
Gross profits
SG&A expenses
Personnel expenses
R&D expenses
Sales promotion
Other
Operating profits
Recurring profits
Net profits
07/11
08/11
09/11
10/11E
11/11E
12/11E
13/11E
14/11E
32,328
16,737
15,592
11,423
3,303
1,356
3,708
3,055
4,169
4,474
4,009
1,392
2,617
798
1,665
30.7
85.8
111.4
42,841
22,757
20,084
14,908
4,007
1,606
4,801
4,494
5,175
5,442
5,006
1,564
3,442
1,146
4,053
30.8
111.8
148.9
54,806
30,034
24,772
18,525
4,466
1,885
7,051
5,123
6,246
6,122
5,466
1,704
3,763
1,787
5,984
30.9
121.9
179.8
64,220
35,710
28,510
20,280
4,320
2,600
8,340
5,040
8,220
8,190
7,570
2,820
4,750
2,900
4,510
30.8
154.0
248.0
72,100
39,680
32,420
22,470
4,520
2,800
9,730
5,440
9,950
9,950
9,950
3,920
6,030
2,900
1,500
30.8
195.5
289.5
79,900
43,480
36,420
24,540
4,720
3,200
10,800
5,840
11,880
11,880
11,880
4,690
7,190
2,500
2,000
30.8
233.1
314.1
88,000
47,780
40,220
26,620
4,920
3,600
11,880
6,240
13,600
13,600
13,600
5,370
8,230
2,100
2,000
30.8
266.8
334.9
96,900
52,480
44,420
28,420
5,120
3,600
13,080
6,640
16,000
16,000
16,000
6,330
9,670
2,100
2,000
30.8
313.5
381.6
10.5
8.1
13.2
13.3
7.9
17.8
14.3
16.3
13.1
28.8
8.8
32.5
36.0
28.8
30.5
21.3
18.4
29.5
47.1
24.1
21.7
31.5
27.9
32.0
23.3
24.3
11.5
17.4
46.9
14.0
20.7
12.5
9.3
17.2
18.9
15.1
9.5
-3.3
37.9
18.3
-1.6
31.6
33.8
26.2
12.3
11.1
13.7
10.8
4.6
7.7
16.7
7.9
21.0
21.5
26.9
10.8
9.6
12.3
9.2
4.4
14.3
11.0
7.4
19.4
19.4
19.2
10.1
9.9
10.4
8.5
4.2
12.5
10.0
6.8
14.5
14.5
14.5
10.1
9.8
10.4
6.8
4.1
0.0
10.1
6.4
17.6
17.6
17.5
48.2
35.3
10.2
4.2
11.5
9.5
12.9
13.8
8.1
34.7
46.9
34.8
9.4
3.7
11.2
10.5
12.1
12.7
8.0
31.2
45.2
33.8
8.1
3.4
12.9
9.3
11.4
11.2
6.9
31.2
44.4
31.6
6.7
4.0
13.0
7.8
12.8
12.8
7.4
37.3
45.0
31.2
6.3
3.9
13.5
7.5
13.8
13.8
8.4
39.4
45.6
30.7
5.9
4.0
13.5
7.3
14.9
14.9
9.0
39.5
45.7
30.3
5.6
4.1
13.5
7.1
15.5
15.5
9.4
39.5
45.8
29.3
5.3
3.7
13.5
6.9
16.5
16.5
10.0
39.6
91
JCR Pharmaceuticals [4552] (No rating)

Consolidated
08/3
09/3
10/3
11/3E
Co's
12/3E
13/3E
Sales
mn
% y-y
11,872
39.0
12,083
1.8
14,387
19.1
15,330
6.6
14,400
0.1
16,280
6.2
17,700
8.7
Operating profits
mn
% y-y
282
546
93.6
2,008
267.8
1,700
-15.3
1,320
-34.3
2,180
28.2
2,500
14.7
(Motoya Kohtani)
Recurring profits
mn
% y-y
695
642
-7.6
1,861
189.9
1,700
-8.7
1,320
-29.1
2,030
19.4
2,350
15.8
Net profits
mn
% y-y
400
540
35.0
1,303
141.3
1,100
-15.6
830
-36.3
1,320
20.0
1,530
15.9
EPS
14.7
20.1
50.8
33.9
25.9
40.7
47.2
Company responsible
for only second
biosimilar to debut on
Japanese market
In May 2010 JCR Pharmaceuticals launched only the second biosimilar to debut in Japan:
Epoetin Alfa BS Inj. JCR for the treatment of renal anemia. In December 2009, the company
inked an overseas sales and development agreement with GlaxoSmithKline, under which the
latter received global development and commercialization rights to JCR Pharmaceuticals
erythropoietin biosimilar as well as projects still in development. We regard JCR
pharmaceuticals as a pioneer among Japanese drugmakers in the development of biosimilars.
We look for 11/3 earnings to be propelled by (1) the start to sales of biosimilar products
(generic versions of biopharmaceuticals); and (2) increased demand for bulk paclitaxel
(generic anticancer drug). We look for biosimilars, which have a marked economic benefit for
the patient, to be the main growth driver in 12/3 and beyond.
Our forecast of 1.7bn in

11/3 operating profits
exceeds company
guidance
In 11/3, we see operating profits falling 15% y-y to 1.7bn, on a 7% increase in sales to
15.3bn. Our estimates for both sales and operating profits exceed company guidance, by
about 900mn and 400mn, respectively. The disparity is mainly due to our differing views on
the speed with which generic anticancer drugs will penetrate the market. Since 07/3, JCR
Pharmaceuticals has been supplying bulk paclitaxel to other generic drugmakers. As one
course of treatment with an anticancer drug is very costly (at several tens of thousands of yen),
switching to the generic equivalent has much economic benefit for the patient. The companies
supplied by JCR Pharmaceuticals are moreover leading manufacturers of anticancer generics,
and in 10/3 the others business within the pharmaceuticals segment saw sales rise by an
impressive 54% y-y. We anticipate continued growth in demand for inexpensive anticancer
agents. Thus although the company's 11/3 forecast for the pharmaceuticals segment's
"others" business calls for sales to decline 20% y-y to 2.29bn, we project a 12% increase in
sales, to 3.2bn.
Our outlook for 12/3

onward sees companys
erythropoietin biosimilar
taking 5% share of
market by 13/3
Our 11/3 sales projection for Epoetin Alfa BS Inj. JCR, the erythropoietin biosimilar launched in
May 2010, is on par with the company's at 1.63bn. On a volume basis, we estimate a market
share of about 2.3% currently. The product is only the second biosimilar to debut on the
Japanese market. For the branded drug Epogen, 1,500 IUs (international units) administered
three times weekly cost around 6,070 per week, and even switching to Nesp, which need
only be administered once a week, leaves the weekly average cost at 6,0007,000. In the
case of JCR Pharmaceuticals' erythropoietin biosimilar, 1,500 IUs administered three times
weekly costs about 5,800 per week, and as such its use in place of the branded drug has
considerable economic benefits for the patient. Taking into account the possibility of the
branded drug being offered at a discount, we project moderate growth in market share for
Epoetin Alfa BS Inj. JCR, to roughly 5% in 13/3.
Upside exists, in that

overseas sales via GSK
are not yet discounted in
our estimates
The greatest unknown is the extent of sales generated by GlaxoSmithKline under its
agreement concerning overseas sales of JCR Pharmaceuticals biosimilars. The company has
yet to announce which regions will be targeted under this agreement, and when. Even if GSK
makes use of the safety data that supported JCR Pharmaceuticals' filing for domestic approval,
it is highly likely that Phase 3 studies will still be required. As such, our estimates do not factor
in any contribution to earnings before 13/3. We plan to research developments on overseas
markets with a view to estimating the potential contribution.
92
4-11. JCR Pharmaceuticals [4552]: consolidated financial data
Sales by segment
Pharmaceuticals
Endocrinological & Gastrointestinal
Metabolic & Cardiovascular
Revenue from licenses
Erythropoietin
Other
Medical devices & laboratory equipment
Income statement
Sales
COGS
Gross profits
SG&A expenses
Commissioned sales
R&D expenses
Other
Operating profits
Recurring profits
Extraordinary gains
Pretax profits
Tax, etc
Net profits
%y-y
Sales
COGS
Gross profits
SG&A expenses
Operating profits
Recurring profits
Net profits
As % of sales
COGS
Gross profits
SG&A expenses
Operating profits
Recurring profits
Net profits
Depreciation
Capex
R&D expenses (total)
Shares out (FY-average, mn)
EPS ()
DPS ()
BPS ()
07/3
08/3
09/3
10/3
11/3E
12/3E
13/3E
11/3E
Co's
8,004
5,821
1,067
730
11,272
7,727
1,369
907
11,727
8,050
1,079
750
14,009
8,500
1,155
1,500
385
541
1,269
600
1,848
355
2,854
378
14,930
8,500
900
700
1,630
3,200
400
15,880
8,500
800
500
2,480
3,600
400
17,300
8,300
600
1,000
3,400
4,000
400
14,020
8,480
920
700
1,630
2,290
380
8,545
2,818
5,726
5,890
11,872
3,825
8,047
7,765
2,162
5,603
282
695
3
261
437
37
400
14,387
4,142
10,245
8,237
2,144
2,326
3,767
2,008
1,861
14
292
1,584
281
1,303
15,330
5,030
10,300
8,600
0
2,200
6,400
1,700
1,700
0
0
1,700
600
1,100
16,280
5,200
11,080
8,900
0
2,300
6,600
2,180
2,030
0
0
2,030
710
1,320
17,700
5,900
11,800
9,300
0
2,400
6,900
2,500
2,350
0
0
2,350
820
1,530
14,400
1,620
4,270
-164
-215
44
441
-612
1,139
-1,751
12,083
3,556
8,527
7,981
2,047
2,804
3,130
546
642
0
80
562
22
540
11.7
-2.2
20.1
22.6
368.6
2,971.4
5,371.9
38.9
35.7
40.5
31.8
-272.0
-423.3
-122.8
1.8
-7.0
6.0
2.8
93.6
-7.6
35.0
19.1
16.5
20.1
3.2
267.8
189.9
141.3
6.6
21.4
0.5
4.4
-15.3
-8.7
-15.6
6.2
3.4
7.6
3.5
28.2
19.4
20.0
8.7
13.5
6.5
4.5
14.7
15.8
15.9
0.1
33.0
67.0
68.9
-1.9
-2.5
-20.5
439
313
2,099
27.4
-63.9
10.0
626.4
32.2
67.8
65.4
2.4
5.9
3.4
435
863
2,776
27.1
14.7
10.0
623.2
29.4
70.6
66.1
4.5
5.3
4.5
597
874
2,804
26.9
20.1
10.0
635.2
28.8
71.2
57.3
14.0
12.9
9.1
663
2,354
2,326
25.7
50.8
15.0
700.8
32.8
67.2
56.1
11.1
11.1
7.2
900
2,300
2,200
32.4
33.9
12.0
658.8
31.9
68.1
54.7
13.4
12.5
8.1
850
1,500
2,300
32.4
40.7
12.0
687.5
33.3
66.7
52.5
14.1
13.3
8.6
800
1,500
2,400
32.4
47.2
12.0
722.7
2,200
1,320
1,320
830
-34.3
-29.1
-36.3
9.2
9.2
5.8
890
2,250
2,200
25.9
12.0
93
Towa Pharmaceutical [4553] (Buy)

Consolidated
08/3
09/3
10/3
11/3E
Co's
12/3E
13/3E
Sales
mn
31,495
35,966
39,044
43,000
43,200
48,200
53,100
% y-y
7.7
14.2
8.6
10.1
10.6
12.1
10.2
Operating profits
mn
% y-y
5,286
19.7
6,408
21.2
7,745
20.9
9,750
25.9
8,900
14.9
10,610
8.8
12,220
15.2
Recurring profits
mn
% y-y
5,147
5.3
6,683
29.8
7,430
11.2
9,750
31.2
8,800
18.4
10,610
8.8
12,220
15.2
Net profits
mn
% y-y
2,693
3.6
3,777
40.3
4,602
21.8
5,940
29.1
5,300
15.2
6,460
8.8
7,430
15.0
EPS
156.9
220.0
268.1
346.0
308.6
376.3
432.8
Expecting steady profit

growth
Towa Pharmaceutical has historically taken the lead among generic drug manufacturers in
adopting a low-price strategy. However, it halted its low-price sales policy in 200005, and
adopted a strategy of maintaining high drug prices. Not taking a low-price approach means
that its market penetration is lower than rivals, so the company's share price tends to rise
more slowly when there are prospects of market growth. However, quarterly earnings
fluctuations are the smallest among the three majors, and we look for stable earnings growth
at Towa Pharmaceutical.
Lower COGS on higher

We look for further declines in COGS as generic versions of major drugs such as Lipitor
(cholesterol-lowering drug) and Actos (anti-diabetes agent) debut. Even taking into
consideration the negative impact on the COGS-to-sales ratio from NHI drug price revisions in
April 2010, we forecast an improvement in the gross margin from 51.9% in 10/3 to 53.5% in
11/3. The company looks increasingly likely to reach operating profits of 10bn in 11/3, the
same level as for small-brand pharmaceutical manufacturers.
Near-term cost increase

mainly attributable to
more delivery staff
Towa Pharmaceutical plans to increase the number of delivery staff for sales to dispensing
pharmacies in line with top-line growth. The company has around 420 medical representatives
that market products to pharmacies, and it plans to increase delivery staff numbers from the
current 50 to 100. On an annualized basis, we forecast a cost increase of some 200mn, but
think the company can easily absorb this with increased sales. Towa Pharmaceutical is a
generic drug manufacturer whose main customers are physicians, but it has also been
focusing on marketing activities to dispensing pharmacies.
Expecting temporary
slowdown in mediumterm earnings on higher
depreciation
We expect profit growth to slow in 12/3 because of higher depreciation costs. Towa
Pharmaceutical is building a new plant in Yamagata, which is scheduled to become operational
from end-March 2012 at a total cost of 20bn. This is likely to result in depreciation costs of
1.7bn in 12/3 and 3.7bn in 13/3. Although this will reduce nominal profit growth in 12/3 and
13/3, we expect cash flow to grow by an average of 15% a year over the next five years.
94
4-12. Towa Pharmaceutical [4553]: consolidated financial data

Income statement
Sales
COGS
Gross profits
SG&A expenses
Personnel expenses
R&D expenses
Sales promotion
Other
Operating profits
Nonoperating income
Nonoperating expenses
Recurring profits
Extraordinary gains
Pretax profits
Tax, etc
Net profits
Capex
Depreciation
Number of shares ('000)
EPS ()
Cash EPS ()
% y-y
Sales
COGS
Gross profits
SG&A expenses
Personnel expenses
R&D expenses
Advertising expenses
Other
Operating profits
Recurring profits
Pretax profits
Net profits
As % of sales
Gross profits
SG&A expenses
Personnel expenses
R&D expenses
Other
Operating profits
Recurring profits
Pretax profits
Net profits
08/3
09/3
10/3
11/3E
12/3E
13/3E
14/3E
15/3E
31,495
16,519
14,976
9,691
4,296
1,693
793
2,908
5,286
352
491
5,147
48
619
4,576
1,883
2,693
1,993
1,453
1,716.8
156.9
241.5
35,967
18,346
17,621
11,213
5,551
2,320
776
2,566
6,408
326
51
6,683
308
746
6,244
2,467
3,777
3,443
1,817
1,716.8
220.0
325.9
39,044
18,794
20,250
12,505
5,890
2,566
813
3,236
7,745
206
521
7,430
5
97
7,334
2,732
4,602
8,000
2,200
1,716.7
268.1
396.2
43,000
20,010
22,990
13,240
6,000
3,000
840
3,400
9,750
0
0
9,750
0
0
9,750
3,810
5,940
9,600
2,000
1,716.7
346.0
462.5
48,200
24,110
24,090
13,480
6,000
3,100
880
3,500
10,610
0
0
10,610
0
0
10,610
4,150
6,460
10,600
3,700
1,716.7
376.3
591.8
53,100
26,960
26,140
13,920
6,200
3,200
920
3,600
12,220
0
0
12,220
0
0
12,220
4,790
7,430
3,600
5,700
1,716.7
432.8
764.8
57,300
25,650
31,650
14,360
6,400
3,300
960
3,700
17,290
0
0
17,290
0
0
17,290
6,820
10,470
2,000
4,700
1,716.7
609.9
883.7
61,800
28,340
33,460
14,800
6,600
3,400
1,000
3,800
18,660
0
0
18,660
0
0
18,660
7,360
11,300
2,000
4,000
1,716.7
658.2
891.2
7.7
6.0
9.7
5.0
8.4
-12.3
22.4
8.3
19.7
5.3
4.9
3.6
14.2
11.1
17.7
15.7
29.2
37.0
-2.2
-11.7
21.2
29.8
36.5
40.3
8.6
2.4
14.9
11.5
6.1
10.6
4.8
26.1
20.9
11.2
17.5
21.8
10.1
6.5
13.5
5.9
1.9
16.9
3.3
5.1
25.9
31.2
32.9
29.1
12.1
20.5
4.8
1.8
0.0
3.3
4.8
2.9
8.8
8.8
8.8
8.8
10.2
11.8
8.5
3.3
3.3
3.2
4.5
2.9
15.2
15.2
15.2
15.0
7.9
-4.9
21.1
3.2
3.2
3.1
4.3
2.8
41.5
41.5
41.5
40.9
7.9
10.5
5.7
3.1
3.1
3.0
4.2
2.7
7.9
7.9
7.9
7.9
47.6
30.8
13.6
5.4
2.5
9.2
16.8
16.3
14.5
8.5
41.1
49.0
31.2
15.4
6.5
2.2
7.1
17.8
18.6
17.4
10.5
39.5
51.9
32.0
15.1
6.6
2.1
8.3
19.8
19.0
18.8
11.8
37.3
53.5
30.8
14.0
7.0
2.0
7.9
22.7
22.7
22.7
13.8
39.1
50.0
28.0
12.4
6.4
1.8
7.3
22.0
22.0
22.0
13.4
39.1
49.2
26.2
11.7
6.0
1.7
6.8
23.0
23.0
23.0
14.0
39.2
55.2
25.1
11.2
5.8
1.7
6.5
30.2
30.2
30.2
18.3
39.4
54.1
23.9
10.7
5.5
1.6
6.1
30.2
30.2
30.2
18.3
39.4
95
Fuji Pharma [4554] (No rating)

Parent
06/9
07/9
08/9
09/9
10/9E
Co's
11/9E
12/9E
Sales
mn
11,240
13,250
14,937
17,198
20,080
19,100
20,940
22,620
% y-y
17.9
12.7
15.1
16.8
11.1
4.3
8.0
Operating profits
mn
% y-y
1,532
2,103
37.3
2,066
-1.8
2,462
19.2
3,270
32.8
2,725
10.7
3,560
8.9
4,200
18.0
Recurring profits
mn
% y-y
1,556
2,129
36.8
2,086
-2.0
2,477
18.7
3,270
32.0
2,740
10.6
3,560
8.9
4,200
18.0
Net profits
mn
% y-y
915
1,193
30.4
1,251
4.9
1,525
21.9
1,970
29.2
1,680
10.2
2,140
8.6
2,520
17.8
EPS
73.8
92.7
97.3
118.6
153.1
130.5
166.3
195.8
Contrast agents are

mainstay products
Fuji Pharmas key products are urinary tract and angiographic agent Oypalomin (generic
version of Iopamiron), and Iopaque (generic version of Omnipaque). Sales of these two drugs
rose 16% y-y to 5.22bn in 09/9. Fuji Pharma is the leading company in the sector in terms of
generic contrast agents. As contrast agents are used in cancer treatments, it is also looking to
expand into generic anti-cancer drugs.
Development of G-CSF
biosimilars
In the area of anticancer generics, Fuji Pharma is developing biosimilar versions of the
leucopenia treatment G-CSF (granulocyte-colony stimulating factor). To this end, the company
formed a joint development agreement with Mochida Pharmaceutical in February 2010 and is
currently preparing for phase 2 and 3 clinical trials.
Expansion centering on Fuji Pharma supplies drugs for the prevention and treatment of illnesses affecting women,
Lunabel, a gynecological including ovulatory disorder treatments and infertility treatments used to induce ovulation for
drug
the purpose of in vitro fertilization. As the declining birth rate means limited scope for
expansion within the gynecological field, Fuji Pharma plans to expand its new drug business
via Lunabel, a dysmenhorrea treatment. Sales of the drug in 2009 totaled 1.1bn, according to
data from Crecon Research & Consulting, and the company's Toyama plant has enough
capacity to meet demand for the drug even if sales reach 10bn.
96
4-13. Fuji Pharma [4554]: parent financial data

Income statement
Sales
Oypalomin
Alyprost
Iopaque
HMG Fuji Pharma
Glucagon FS injection
Buserecure
Sol-Melcort injection
Folyrmon-P injection
Dexart injection
Hicort injection
Lunabel
Other
COGS
Gross profits
SG&A expenses
Personnel expenses
R&D expenses
Other
Operating profits
Recurring profits
Pretax profits
Tax, etc
Net profits
Number of shares (mn)
EPS ()
% y-y
Sales
COGS
Gross profits
SG&A expenses
Personnel expenses
R&D expenses
Other
Operating profits
Recurring profits
Pretax profits
Net profits
As % of sales
Gross profits
SG&A expenses
Personnel expenses
R&D expenses
Other
Operating profits
Recurring profits
Pretax profits
Net profits
07/9
08/9
09/9
10/9E
11/9E
12/9E
13/9E
14/9E
13,251
4,027
862
819
861
368
273
317
338
261
200
4,925
7,297
5,954
3,851
1,616
687
1,548
2,103
2,129
1,989
795
1,194
12.87
92.7
14,938
4,600
900
940
600
400
300
300
250
300
200
250
5,898
8,468
6,469
4,403
1,908
626
1,869
2,066
2,087
2,030
778
1,252
12.87
97.3
17,199
5,520
950
1,120
600
400
300
300
250
350
200
980
6,229
9,403
7,795
5,333
2,103
919
2,311
2,462
2,478
2,469
943
1,526
12.87
118.6
20,080
6,200
1,000
1,210
600
400
300
300
250
350
200
1,460
7,810
11,060
9,020
5,740
1,950
990
2,800
3,270
3,270
3,250
1,280
1,970
12.87
153.1
20,940
7,440
1,000
1,450
600
400
300
300
250
350
200
1,940
6,710
11,800
9,140
5,600
2,100
1,200
2,300
3,560
3,560
3,560
1,420
2,140
12.87
166.3
22,620
8,930
1,000
1,750
600
400
300
300
250
350
200
2,420
6,120
12,720
9,900
5,700
2,100
1,200
2,400
4,200
4,200
4,200
1,680
2,520
12.87
195.8
24,380
10,720
1,000
2,100
600
400
300
300
250
350
200
2,900
5,260
13,690
10,690
5,700
2,100
1,200
2,400
4,990
4,990
4,990
2,000
2,990
12.87
232.3
26,230
12,860
1,000
2,510
600
400
300
300
250
350
200
3,380
4,080
14,710
11,520
5,700
2,100
1,200
2,400
5,820
5,820
5,820
2,330
3,490
12.87
271.2
17.9
13.8
23.4
16.9
15.4
14.2
19.9
37.2
36.8
36.7
30.3
12.7
16.1
8.7
14.3
18.1
-8.9
20.8
-1.8
-2.0
2.1
19.8
15.1
11.0
20.5
21.1
10.2
46.9
23.6
19.2
18.7
21.6
21.9
16.8
17.6
15.7
7.6
-7.3
7.7
21.2
32.8
32.0
31.6
29.1
4.3
6.7
1.3
-2.4
7.7
21.2
-17.9
8.9
8.9
9.5
8.6
8.0
7.8
8.3
1.8
0.0
0.0
4.3
18.0
18.0
18.0
17.8
7.8
7.6
8.0
0.0
0.0
0.0
0.0
18.8
18.8
18.8
18.7
7.6
7.5
7.8
0.0
0.0
0.0
0.0
16.6
16.6
16.6
16.7
44.9
29.1
12.2
5.2
11.7
15.9
16.1
15.0
9.0
40.0
43.3
29.5
12.8
4.2
12.5
13.8
14.0
13.6
8.4
38.3
45.3
31.0
12.2
5.3
13.4
14.3
14.4
14.4
8.9
38.2
44.9
28.6
9.7
4.9
13.9
16.3
16.3
16.2
9.8
39.4
43.6
26.7
10.0
5.7
11.0
17.0
17.0
17.0
10.2
39.9
43.8
25.2
9.3
5.3
10.6
18.6
18.6
18.6
11.1
40.0
43.8
23.4
8.6
4.9
9.8
20.5
20.5
20.5
12.3
40.1
43.9
21.7
8.0
4.6
9.1
22.2
22.2
22.2
13.3
40.0
97
Sawai Pharmaceutical [4555] (No rating)

Consolidated
08/3
09/3
10/3
11/3E
Co's
12/3E
13/3E
Sales
mn
37,631
44,284
50,069
57,600
62,000
66,300
75,000
% y-y
9.7
17.7
13.1
15.0
23.8
15.1
13.1
Operating profits
mn
% y-y
4,048
-13.7
4,668
15.3
8,518
82.5
10,200
19.7
10,000
17.4
13,000
27.5
15,800
21.5
Recurring profits
mn
% y-y
3,413
-21.2
4,479
31.2
8,406
87.7
10,200
21.3
9,800
16.6
13,000
27.5
15,800
21.5
Net profits
mn
% y-y
1,739
-23.0
2,439
40.3
4,982
104.3
6,120
22.8
5,800
16.4
7,810
27.6
9,490
21.5
EPS
110.7
155.3
317.3
389.8
369.4
497.4
604.4
Earnings stabilization
Sawai Pharmaceutical previously pursued the same business strategies as Towa

Pharmaceutical, but 10 years ago positioned itself as a generic drug maker with a new sales
structure targeting hospitals via pharmaceutical wholesalers. The company's earnings have
become considerably more stable since the change of president two years ago. The mediumterm business plan calls for sales of 100bn by 14/3, below Nichi-Iko Pharmaceutical's 12/11
forecast of 133bn.
Ongoing profit growth
Sawai Pharmaceutical has low depreciation costs as a result of its capex finishing earlier that
at the other two major generic drug makers. Sales growth resulting from stronger generic
demand would lead to a sharp improvement in margins as plant utilization rates increase.
Sales of generics continue to grow as a result of the April 2010 government measures to
promote such drugs, and we look for a robust earnings expansion from the AprJun quarter
onward.
Entry into the anticancer drug market
The company is currently focusing on the anti-cancer drug irinotecan (original drug brand
names: Campto, Topotecin). Generic drug makers do not usually focus on immunosuppressant
and anti-cancer drugs. This is because such drugs are not covered by a compensation system
for drug side effects, meaning that the drug companies themselves could become liable. Only
companies with ample financial resources are entering the market, where Sawai Pharmaceutical
is aggressively expanding its generic drug business.
Possible entry into

biosimilar market?
In interviews during 2009, Sawai Pharmaceuticals said that it was not ready to make specific
plans for a move into the biosimilar market, in view of the heavy R&D costs required. However,
the company's profitability has improved, and we think it is reconsidering a possible market
entry.
98
4-14. Sawai Pharmaceutical [4555]: consolidated financial data

Income statement
Sales
COGS
Gross profits
SG&A expenses
Personnel expenses
R&D expenses
Other
Operating profits
Recurring profits
Pretax profits
Tax, etc
Net profits
Capex
Depreciation
Share buybacks
No of shares ('000)
Shares out (mn)
EPS ()
Cash EPS ()
% y-y
Sales
COGS
Gross profits
SG&A expenses
Personnel expenses
R&D expenses
Other
Operating profits
Recurring profits
Pretax profits
Net profits
As % of sales
Gross profits
SG&A expenses
Personnel expenses
R&D expenses
Other
Operating profits
Recurring profits
Pretax profits
Net profits
07/3
08/3
09/3
10/3
11/3E
12/3E
13/3E
14/3E
15/3E
34,317
17,357
16,960
12,267
3,137
3,085
1,276
4,769
4,693
4,331
4,166
1,907
2,260
9,719
1,964
0
0
15.7
157.7
269.0
37,631
20,130
17,501
13,453
3,600
3,221
689
5,943
4,048
3,413
3,129
1,390
1,739
6,286
2,575
0
0
15.7
110.7
274.7
44,284
25,156
19,128
14,461
5,944
3,409
857
4,251
4,668
4,479
4,320
1,881
2,439
5,792
3,165
0
0
15.7
155.3
356.9
50,069
26,275
23,794
15,725
6,461
3,593
800
4,871
8,518
8,406
8,372
3,390
4,982
1,500
2,000
0
0
15.7
317.3
444.7
57,600
31,100
26,500
16,300
6,600
4,400
900
4,400
10,200
10,200
10,200
4,080
6,120
1,500
1,800
0
0
15.7
389.8
504.4
66,300
35,810
30,490
17,490
6,700
4,800
1,000
4,990
13,000
13,000
13,000
5,190
7,810
1,500
1,700
0
0
15.7
497.4
605.7
75,000
40,500
34,500
18,700
6,800
5,200
1,100
5,600
15,800
15,800
15,800
6,310
9,490
1,500
1,600
0
0
15.7
604.4
706.3
82,500
44,540
37,960
19,900
6,900
5,600
1,200
6,200
18,060
18,060
18,060
7,210
10,850
1,500
1,600
0
0
15.7
691.0
792.9
90,800
49,030
41,770
21,100
7,000
6,000
1,300
6,800
20,670
20,670
20,670
8,260
12,410
1,500
1,600
0
0
15.7
790.3
892.2
28.9
30.8
27.0
35.5
22.0
37.7
81.2
34.9
9.2
7.2
-17.4
-24.9
9.7
16.0
3.2
9.7
14.7
4.4
-46.0
24.6
-13.7
-21.2
-24.9
-23.1
17.7
25.0
9.3
7.5
65.1
5.8
24.4
-28.5
15.3
31.2
38.1
40.3
13.1
4.4
24.4
8.7
8.7
5.4
-6.7
14.6
82.5
87.7
93.8
104.3
15.0
18.4
11.4
3.7
2.2
22.5
12.5
-9.7
19.7
21.3
21.8
22.8
15.1
15.1
15.1
7.3
1.5
9.1
11.1
13.4
27.5
27.5
27.5
27.6
13.1
13.1
13.2
6.9
1.5
8.3
10.0
12.2
21.5
21.5
21.5
21.5
10.0
10.0
10.0
6.4
1.5
7.7
9.1
10.7
14.3
14.3
14.3
14.3
10.1
10.1
10.0
6.0
1.4
7.1
8.3
9.7
14.5
14.5
14.5
14.4
49.4
35.7
9.1
9.0
3.7
13.9
13.7
12.6
12.1
6.6
45.8
46.5
35.7
9.6
8.6
1.8
15.8
10.8
9.1
8.3
4.6
44.4
43.2
32.7
13.4
7.7
1.9
9.6
10.5
10.1
9.8
5.5
43.5
47.5
31.4
12.9
7.2
1.6
9.7
17.0
16.8
16.7
10.0
40.5
46.0
28.3
11.5
7.6
1.6
7.6
17.7
17.7
17.7
10.6
40.0
46.0
26.4
10.1
7.2
1.5
7.5
19.6
19.6
19.6
11.8
39.9
46.0
24.9
9.1
6.9
1.5
7.5
21.1
21.1
21.1
12.7
39.9
46.0
24.1
8.4
6.8
1.5
7.5
21.9
21.9
21.9
13.2
39.9
46.0
23.2
7.7
6.6
1.4
7.5
22.8
22.8
22.8
13.7
40.0
99
Daiichi Sankyo [4568] (Buy)

Consolidated
08/3
09/3
10/3
11/3E
Co's
12/3E
13/3E
Sales
mn
% y-y
880,120
-5.3
842,147
-4.3
952,105
13.1
970,000
1.9
980,000
2.9
994,000
2.5
104,200
-89.5
Operating profits
mn
% y-y
156,827
15.0
88,323
-43.7
95,509
8.1
94,000
-1.6
90,000
-5.8
113,000
20.2
129,000
14.2
Recurring profits
mn
% y-y
169,058
11.2
54,621
-67.7
103,114
88.8
98,000
-5.0
85,000
-17.6
117,000
19.4
133,000
13.7
Net profits
mn
% y-y
97,660
24.3
-335,800
-443.8
41,852
-112.5
63,000
50.5
45,000
7.5
73,000
15.9
83,000
13.7
EPS
135.4
-477.0
59.5
89.5
63.5
103.7
117.9
Adopting a global
business model
Daiichi Sankyo is similar to Eisai in that it is sensitive to changes in the pharmaceuticals

industry and quick to reorganize its business structure when necessary. The purchase of
Ranbaxy has given it a low-cost pharmaceutical manufacturing system and enabled it to
expand operations in emerging markets. Daiichi Sankyo has outlined a clearer strategy for
anti-cancer drugs than Takeda Pharmaceutical and Astellas Pharma [4503], acquiring
licensing rights for the small molecule drug ARQ-197. However, the company's strategy for
operations further downstream is less clear, compared with US and European companies
something we regard as a cause for concern.
Yet to reap the benefits

of the Ranbaxy
acquisition
During our visit to Ranbaxys plant, we had the impression that manufacturing issues there
would not easily be resolved. However, based on an analysis of value-added, we see potential
for sharp profit growth, should sales pick up. Daiichi Sankyo appears to be considering plant
construction in the US, along with possible acquisitions, in the event that Ranbaxys problems
prove difficult to fix. That said, we see progress in terms of joint-commercialization, with
Daiichi Sankyo working alongside Ranbaxy to cultivate emerging markets. Examples of this
include the sale of olmesartan (an antihypertensive drug) in Africa and Mexico, and prasugrel
(an antithrombotic drug) in India.
ARQ197, a promising
cancer treatment
Our focus is on the Daiichi Sankyos strategies for anti-cancer drugs. The company holds
overseas joint-development and marketing rights for the c-MET inhibitor ARQ197, a new type
of cancer treatment acting on the intracellular signaling pathways in cancer cells. It also has
licensed in AKIP, ArQule's tyrosine kinase inhibitor discovery platform. In antibody therapeutics,
Daiichi Sankyo is developing the anti-EGF receptor antibody nimotuzumab (DE-766). In
comparison with drugs of the same class already on the marketnamely, Erbitux and
Vectibixthe drug has been shown to have a lower incidence of skin reactions.
Launch of memantine
will widen choice of
Alzheimer's treatments
We are also focusing on memantine (marketed in the US as Namenda), for which Daiichi
Sankyo filed a domestic NDA in February. At present, only one Alzheimer's disease treatment
is available in JapanAricept by Eisai. In the US, however, the administration of memantine
with Aricept has shown positive results on Alzheimer's patients. With Ono Pharmaceutical
[4528] also filing an NDA in February, for Rivastach, the choice of Alzheimers treatments is
about to expand. We expect this increase in treatment options to add impetus to the market,
leading to growth in sales of anti-Alzheimer's agents. We look for domestic sales of
memantine to peak at 50bn.
100
4-15. Daiichi Sankyo [4568]: consolidated financial data

Pharmaceuticals
(1) Cardiovascular
Benicar/Olmetec
Calblock
Artist
Sunrythm
Efient (CS-747)
DU-176b
Mevalotin/Pravachol
WelChol
Livalo
Venofer
Kremezin
Hanp
Fastic
(2) Infections, etc (note1)
Cravit/Levaquin
Domestic (Cravit)
Loxonin
Mobic
Zyrtec
Urief
Evista
AMG162: denosunmab
(3) Cancer, etc (note2)
Omnipaque
Topotecin injections
SUN Y7017
Other pharmaceuticals
Ranbaxy
Healthcare
Other business
Total sales
(bn)
07/3
08/3
09/3
10/3
11/3E
12/3E
13/3E
14/3E
15/3E
789.2
363.3
160.3
8.8
19.3
11.7
790.5
376.1
195.5
10.2
21.1
12.1
791.5
401.0
211.1
12.1
21.9
11.6
0.0
908.4
433.5
237.0
13.7
23.3
11.5
0.7
927.7
450.4
258.8
14.1
22.9
11.2
8.6
954.1
481.8
278.4
13.7
23.3
11.2
26.2
93.6
23.2
5.1
37.7
12.2
9.2
5.4
159.9
104.0
46.7
30.9
10.7
12.0
2.3
73.3
22.7
5.5
31.1
12.4
9.8
5.2
168.6
108.6
47.4
33.6
10.2
10.8
5.4
5.2
36.9
31.5
5.4
37.4
31.2
6.2
60.9
24.4
6.1
31.9
12.8
9.2
5.5
173.7
97.7
43.0
38.7
8.4
9.3
7.9
11.7
0.0
35.1
28.9
6.2
52.5
27.4
7.4
32.1
13.4
9.4
5.1
162.1
79.5
43.6
46.9
7.7
9.6
9.1
9.3
0.0
33.5
27.3
6.2
43.1
28.4
7.8
27.6
13.8
9.0
5.1
143.6
57.9
34.8
48.9
7.3
9.2
11.5
8.8
0.0
30.4
24.6
5.8
229.1
208.4
47.9
92.4
929.5
50.3
39.3
880.1
181.7
38.6
47.2
3.4
842.1
132.7
146.6
43.7
0.0
952.1
139.3
164.0
41.7
0.0
970.0
39.3
30.0
8.2
23.2
14.2
8.6
5.5
127.0
35.7
31.3
50.9
6.9
8.8
13.9
8.8
2.0
27.6
22.2
5.4
4.5
139.3
174.0
39.7
0.0
994.0
1,004.9
517.7
294.8
13.3
23.7
11.2
43.8
10.0
34.0
28.4
8.6
21.2
14.6
8.2
5.9
125.6
31.3
28.1
50.1
6.5
8.4
15.5
8.8
3.0
27.8
20.0
5.0
10.5
139.3
184.0
37.7
0.0
1,042.0
1,034.6
532.7
310.1
12.9
24.1
11.2
68.4
17.2
31.1
27.0
9.0
19.6
15.0
7.8
6.3
130.5
28.5
25.3
49.3
6.1
8.0
17.1
8.8
5.0
27.3
18.1
4.6
12.5
139.3
194.0
35.7
0.0
1,070.0
1,055.4
549.5
341.3
12.5
24.5
11.2
53.2
19.2
31.1
27.5
8.6
17.6
15.4
8.2
6.7
125.2
24.5
21.3
48.5
5.7
7.6
16.3
8.8
7.0
26.9
16.2
4.3
14.5
139.3
198.0
33.7
0.0
1,089.0
101
4-15. Daiichi Sankyo [4568]: consolidated financial data (continued)

Income statement
Sales
COGS
Gross profits
SG&A expenses
R&D expenses
Personnel expenses
Advertising, sales promotion
Goodwill amortization
Other
Operating profits
Recurring profits
Pretax profits
Corporation tax, etc
Net profits
Shares out (mn)
EPS ()
Cash EPS ()
% y-y
Sales
COGS
Gross profits
SG&A expenses
R&D expenses
Personnel expenses
Other
Operating profits
Recurring profits
Pretax profits
Net profits
As % of sales
Gross profits
SG&A expenses
R&D expenses
Personnel expenses
Other
Operating profits
Recurring profits
Pretax profits
Net profits
07/3
08/3
09/3
10/3
11/3E
12/3E
13/3E
14/3E
15/3E
929.5
265.2
664.3
528.0
170.7
111.7
100.7
880.1
234.6
645.5
488.7
163.5
91.5
109.1
145.0
136.3
152.1
126.9
48.4
78.5
728.99
107.8
162.5
124.7
156.8
169.1
166.9
69.2
97.7
718.97
135.4
189.7
842.1
214.4
627.7
539.4
184.5
101.7
109.8
10.2
133.2
88.3
54.6
-308.8
27.0
-335.8
703.94
-474.1
156.6
952.1
278.0
674.1
578.6
196.8
122.5
105.7
6.0
147.6
95.5
103.1
97.4
55.5
41.9
703.93
59.5
133.2
970.0
290.0
680.0
586.0
210.0
122.0
102.0
6.0
146.0
94.0
98.0
98.0
35.0
63.0
703.93
89.5
166.9
994.0
294.0
700.0
587.0
215.0
120.0
100.0
6.0
146.0
113.0
117.0
117.0
44.0
73.0
703.93
103.7
180.4
1,042.0
307.0
735.0
606.0
214.0
124.0
110.0
6.0
152.0
129.0
133.0
133.0
50.0
83.0
703.93
117.9
194.6
1,070.0
292.0
778.0
606.0
212.0
128.0
106.0
6.0
154.0
172.0
176.0
176.0
67.0
109.0
703.93
154.8
231.6
1,089.0
294.0
795.0
619.0
216.0
132.0
108.0
6.0
157.0
176.0
180.0
180.0
69.4
110.6
703.93
157.1
220.3
0.4
-8.8
4.6
9.9
7.5
7.9
34.8
1.0
-11.9
-4.8
-7.3
-10.4
-5.3
-11.5
-2.8
-7.4
-4.2
-18.1
8.3
-14.0
15.0
11.2
31.5
24.3
-4.3
-8.6
-2.8
10.4
12.9
11.2
0.7
6.8
-43.7
-67.7
-285.1
-443.8
13.1
29.7
7.4
7.3
6.7
20.4
-3.7
10.8
8.1
88.8
-131.5
-112.5
1.9
4.3
0.9
1.3
6.7
-0.4
-3.5
-1.1
-1.6
-5.0
0.6
50.5
2.5
1.4
2.9
0.2
2.4
-1.6
-2.0
0.0
20.2
19.4
19.4
15.9
4.8
4.4
5.0
3.2
-0.5
3.3
10.0
4.1
14.2
13.7
13.7
13.7
2.7
-4.9
5.9
0.0
-0.9
3.2
-3.6
1.3
33.3
32.3
32.3
31.3
1.8
0.7
2.2
2.1
1.9
3.1
1.9
1.9
2.3
2.3
2.3
1.5
71.5
56.8
18.4
12.0
10.8
15.6
14.7
16.4
13.7
8.5
38.1
73.3
55.5
18.6
10.4
12.4
14.2
17.8
19.2
19.0
11.1
41.5
74.5
64.1
21.9
12.1
13.0
15.8
10.5
6.5
-36.7
-39.9
-8.7
70.8
60.8
20.7
12.9
11.1
15.5
10.0
10.8
10.2
4.4
57.0
70.1
60.4
21.6
12.6
10.5
15.1
9.7
10.1
10.1
6.5
35.7
70.4
59.1
21.6
12.1
10.1
14.7
11.4
11.8
11.8
7.3
37.6
70.5
58.2
20.5
11.9
10.6
14.6
12.4
12.8
12.8
8.0
37.6
72.7
56.6
19.8
12.0
9.9
14.4
16.1
16.4
16.4
10.2
38.1
73.0
56.8
19.8
12.1
9.9
14.4
16.2
16.5
16.5
10.2
38.6
102
103
104
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105
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107
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Pharmaceuticals sector

Inexpensive drugs from India to transform the global

Inexpensive drugs from India to transform the global

Inexpensive drugs likely to become widespread throughout the world:

Please read the important

Nomura Japanese Equity Research

continued from front cover

3. Antibody biosimilars destined to take hold around the world........................... 38

4. Japan: government promoting generics ........................................................... 75

Nomura Japanese Equity Research

Nomura Japanese Equity Research

Companies mentioned in this report

Rating Share price

Nomura Japanese Equity Research

1. Summary: we look for sustained global demand for

Investors belief that it would be difficult to commercialize antibody therapeutic biosimilars is

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1-1. Drug categories including biologicals

(1) Small molecule drug

(1) Sm all m olecule drug

(3) Antibody drug

(2) Protein drug

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Indian companies key

1-2. Changing business structure of major US and European pharmaceutical manufacturers

Suppo rts R &D

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Investment points for

Investment points for

(2) Aging population drives up healthcare expenditures and

Use of pharmaceuticals is expanding on the back of demographic trendsie, the aging

National healthcare expenditures

Healthcare expenditures for elderly

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(3) Inexpensive drugs needed for all fields

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Market share rules are

Marke t s ize not expected to grow

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1-6. Expanding pharmaceuticals in emerging markets

Em erging m ark ets w ill outgrow deve lope d marke ts

2020 (see note)

1-7. Healthcare expenditures rise in tandem with economic growth

Per capita healthcare expenditures ($)

(4) US/European branded drug makers change business model

Nomura Japanese Equity Research

Development and marketing of specific drugs in emerging markets

(5) Indian generic drug makers targeting biosimilars

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1-9. Indian makers manufacturing costs are substantially lower

Entry into biosimilar

Indian generic makers

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Company origin Japan/US/Europe

Expansion into branded

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1-11. Drug pipelines of Indian generic drug companies

Clinical trial phase

(6) Japanese generic drug makers limited to domestic market

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Orchid Chemicals &

Sanofi Aventis (France)

Nippon Universal Pharmaceutical