Financial Statement Analysis

of Pharmaceutical Sector

Submitted to: Submitted by:

Prof. Mishu Tripathi Name of the student: Shadwal Naik
Assistant Professor-Finance Roll no: M2022037
TIMSR Batch: 2020-22
 INTRODUCTION TO PHARMA SECTOR

India is home to around 1.3 billion people or to put it differently, 1/7th of the world’s
population. While this is a demographic advantage in many cases, the onus lies on the
healthcare industry to maintain the health of the people. Government data says that India’s
domestic pharma market turnover reached Rs 1.4 lakh crores, which is equivalent to $ 20.03
billion in 2019. This is a 9.8% jump from Rs 1.29 lakh crores (US$ 18.12 billion) in 2018.
Healthcare industry in our country is available in both private and public spaces.
In 1969, Indian pharmaceuticals had a 5% share in the domestic market and global pharma
had a 95% share. By 2020, Indian pharma has almost 85% share. The Ministry of Health &
Family Welfare regulates the industry in our country. Given our population, our
government’s focus on the sector, both financially and administratively becomes extremely
important.
Evolution of the Pharma Industry
One of the initial developments in the industry was the introduction of the patent bill. The
patent bill was first introduced in 1970. The bill helped the Indian medicine industry to be
less reliant on the U.S. intellectual property laws. While this may have eased production and
manufacturing domestically for a few years, India’s entry into WTO in 1995 brought in many
changes: price control, trade restrictions, to name a few. It became more expensive for
homegrown companies to manufacture a drug that is patented in another country.
Many thought this could write off the Indian pharma industry completely but there were a
couple of factors that helped the industry to stay afloat.
At this point, during the late 1990s and early 2000s, the Indian pharmaceutical industry was
just reprocessing drug patterns developed in the other countries. However, later into the
decade, our investment into homegrown R&D infrastructure started to pick up.
India’s institutionalised norms, standards and practices for an R&D wing aided the industry’s
growth to bring it to where it is today. The Indian pharma industry can produce quality drugs
at a cheap cost because of the R&D backup.
Other than R&D, lower cost of labour as compared to other countries, availability of
management and technical personnel and local equipment’s availability for manufacturing
drugs has helped us to manufacture drugs at a very low cost.
Other significant developments were the expansion of the National List of Essential
Medicines. The NLEM brought more than 10% of the medical industry under price control
by the middle of 2016. A series of price cuts on antibiotics, antidiabetics, cancer and blood
pressure drugs followed this development. Also, with the National Pharmaceutical Pricing
Policy Act 2012 (NPPP), the government had started the practice of specifying a ceiling price
for some drugs.
Role of U.S. FDA
More than 25% of Indian pharma exports are to the U.S. The U.S. Food and Drugs
Administration is responsible for maintaining public health in their country. India accounts
for around 30% of the generic drug supply to the U.S. Therefore, any drug being sold in the
U.S. warrants scrutiny and site reinspections for the Indian companies by the FDA.
This is why you must be hearing news on U.S. FDA inspections on many of the sites of our
companies. As our pharma export volumes to the U.S. are significant, the FDA inspection on
the R&D labs and sites is a norm that follows. Indian R&D provided a stable support system
to the industry, helping it to adapt to changing market conditions.

Performance of the Sector Over the Years

In the last 10 years, the BSE Healthcare Index has grown at a CAGR of 12% per annum and
the Nifty Pharma returned around 10.94% per annum in the past nine years. Nifty’s
performance during the same time frame is 12.28% per annum and Sensex 12.72% per
annum. Recently with the spread of the coronavirus, pharmaceutical sector and mutual funds
that invest in the pharmaceutical sector have performed better than its peers. BSE Healthcare
has returned 47.23% so far this year and Nifty Pharma has returned 44.83%. With the
expectation of a vaccine and all the efforts by the industry in curbing the spread of the virus,
investor confidence and the demand for pharmaceutical securities seems to have risen.
In equity funds, the pharma category has returned around 51% since the start of this year,
according to Value Research. This is the highest among all subcategories under equity funds.
Growth Drivers and Opportunities of the Industry
R&D Infrastructure: An Indian pharmaceutical company spends anywhere between 2-10% of
its revenue on R&D. Strong research and development activities helps the industry to move
forward in combating any unforeseen circumstances or any ongoing ones. India’s R&D
infrastructure is lauded by many because of the cost-effectiveness, upcoming biotech
industry, government initiatives, upcoming biotech industry and more.

U.S. FDA Compliance: A prominent growth driver is that we have one of the highest number
of FDA compliant plants outside of the U.S. This speaks volumes about our medical
infrastructure.
Low-Cost Production: Labour and production are way cheaper in India than many other
countries. Hence, we are able to produce drugs and vaccines at a much lower cost. A FICCI
report states that the cost of manufacturing formulations in India is at least 30 to 40% lower
than most other foreign destinations.
Huge Workforce: The supply of local medical talent into the industry is larger than most
other countries. With one of the youngest populations in the world and many of the
youngsters picking up the medical profession, the country sees a huge influx of aspiring
medical students joining the industry. This is an essential growth opportunity If the
government can tap onto this resource with strong academic infrastructure. If medical
education can be regulated better, with more professors and increased medical seats, this
huge workforce can be tapped.
Health Insurance: Most of the medical expenses in India are largely funded out of the pocket.
This means that most of it is paid by the citizens and very less is covered by health insurance.
Health insurance is critical to the growth of this industry and thus is a budding opportunity
for the industry.
Medical Technology: Upscaling medical technology also provides us with a growth
opportunity. Government research conducted three years ago valued the medical devices
industry $5.2 billion in 2017. Robust medical technology is one of the main pillars as it plays
an important role in the delivery of healthcare services.
Self-reliance: India still depends a lot on foreign countries for the import of key raw materials
in APIs and intermediates. With the current situation at hand, the industry has a great
opportunity at hand to reduce its reliance on imports and explore domestic sourcing locations.
Digital and technology: Usage of new digital technologies and advanced analytics can
upscale the industry’s growth. Manufacturing, R&D, quality, sales, supply chain, pharmacy
and many other sectors where usage of technology can be a significant growth driver.
Challenges Faced By The Industry
Newer diseases: The year 2020 has placed enough evidence on the table in this regard. The
novel coronavirus has shaken the entire globe by its roots. As of October 22, 2020, and
roughly 6-8 months into the first incidence of the vaccine, we are still awaiting a definitive
cure. This is an example of one of the challenges this industry faces: to constantly update
infrastructure and R&D to combat new diseases and develop a cure for existing chronic
diseases. Nevertheless, the markets have reacted positively in the hope of a vaccine and
pharma is one of the only sectors which performed better than other sectors during March and
April.
Curbing Costs: Everything gets expensive with the time. Rising costs and inflation also leads
to rising medical costs. Making health accessible and affordable for all is a great task. The
government has already initiated efforts in that direction with the Ayushmann Bharat
initiative. However, considering that inflation is a dynamic metric, curbing medical costs will
remain an ongoing challenge.
Medical infrastructure: This includes hospitals, medical colleges and education, medicines,
pharmacies, small medical centres, labs, vaccines, machines that are used in procedures, the
manufacturing infrastructure for medicines and everything that keeps the industry in place.
Maintaining the quality of infrastructure and expanding it to all urban and rural areas is also a
challenge to the company.
Foreign regulations: Many companies receive a lot of their revenues from medical exports.
The regulations and compliance norms of foreign countries is a challenge that Indian pharma
companies have to face. Trade restrictions, exports and import regulations, customs and taxes
and many other caveats that come when international trade comes into the picture.
FDI
Foreign direct investment in the industry is permitted 100% in greenfield pharma under
automatic route. Up to 74% is allowed in brownfield pharma under automatic route,
thereafter government route. Between April 2000 and June 2019, India received FDI worth
almost $16.2 billion in the industry.
Vaccine Situation in India
A couple of companies have the WHO approval to manufacture the covid vaccine. An
example of such an attempt is the tie-up between the University of Oxford and Serum
Institute of India (SII) to mass-produce the AstraZeneca vaccine. While there has been no
development as the vaccine is not out yet, few vaccines in India are progressing in their trials.
Conclusion
Government sources say that expenditure on medicines in India will grow at least 9 to 12% in
the next five years or say, making India one of the top 10 countries in terms of medical
spending. That places a lot of responsibility on all the stakeholders; private pharma
companies, the government, regulators and international cooperation to maintain the general
health of the public. The future of the industry depends on the medical infrastructure’s ability
to develop a formidable fight against chronic diseases and any other challenges that the
industry is faced with.

TOP 5 PHARMA COMPANIES BASIS- MARKET CAPITALIZATION

(₹ crores) (LARGE CAP)
SUN PHARMACEUTICALS 1,89,344
INDUSTRIES LIMITED
DIVI’S LABORATORIES LIMITED 1,38,297
DR. REDDY’S LABORATORIES 81,525
LIMITED
CIPLA LIMITED 75,894
APOLLO HOSPITALS ENTERPRISE 72,071
LIMITED

SOURCE- Top Pharma Companies in India | Top Pharma Companies by Market Cap | List
of Top Pharmaceuticals Stocks in India 2021 (moneyworks4me.com)

TOP 5 COMPANIES INTRODUTION IN BRIEF

 SUN PHARMACEUTICALS INDUSTRIES LIMITED
Founded: 1983
Owner: Dilip Shanghvi
Headquarter: Goregaon, Mumbai
Revenue: $4.7 billion
Sun Pharmaceutical Industries' revenue was $4.7 billion in 2020. It is the leading
multinational pharmaceutical company in India. It was established in the year 1983. It was
founded by Mr. Dilip Shanghvi & he is also the MD of Sun Pharmaceuticals. The company
started offering products to treat psychiatric ailments. Now, the company also offers
formulations in various therapeutic, gastroenterology, and diabetology.
Sun Pharmaceutical Industries is the largest pharmaceutical company in India based on
overall revenue. It is the fourth largest global specialty generic pharmaceutical company in
the world. It also sells Carbamazepine, Etodolac, and Clorazepate as well as anti-cancer,
steroids, peptides, sex hormones, and controlled substances. It's subsidiaries includes
Ranbaxy Laboratories, Sun Petrochemical Pvt. Ltd, Sun Ophthalmic Inc, Alkaloida Chemical
Company Zrt, Chattem Chemicals Inc. This pharmacy business sells affordable medicines in
over 150 countries across 6 continents.

DIVI’S LABORATORIES LIMITED

Founded: 1990
Owner: Murali Divi
Headquarter: Hyderabad
Revenue: $780 million
Divi’s Laboratories Limited is an Indian multinational pharmaceutical company based in
Hyderabad, India. Divi's Laboratories was founded in 1990. Divi's Laboratories Ltd.
manufactures active pharmaceutical ingredients (APIs) and intermediates. This
pharmaceutical company in India is engaged in the manufacture of leading generic
compounds Nutraceutical ingredients and custom synthesis of APIs and intermediates for
global innovator companies. Divi’s Laboratories is one of the largest API companies in the
world, with $780 million revenue in 2020 and exporting to more than 95 countries.

DR. REDDY’S LABORATORIES LIMITED

Founded: 1984
Owner: Dr. Kallam Anji Reddy
Headquarter: Hyderabad
Revenue: $2.4 billion
Dr. Reddy's Laboratories was founded by Anji Reddy in 1984. It is an Indian multinational
pharmaceutical company. It is known for manufacturing wide range of pharmaceuticals in
India and overseas. They have over 190 medications, 60 active pharmaceutical ingredients for
drug manufacturers, diagnostics kits, critical care, and biotechnology products. It is India's
fifth-largest company of pharmaceuticals and has a revenue of US$2.4 billion in 2020. It's
notable products include Canagliflozin. Ramipril, Ibuprofen, Naproxen, Atorvastatin,
Nizatidine, Naproxen Sodium, etc.

CIPLA LIMITED
Founded: 1935
Owner: Yusuf Hamied
Headquarter: Mumbai
Revenue: $2.5 billion
Cipla is an Indian multinational pharmaceutical and biotechnology company, which has it's
headquartered in Mumbai and was established in 1935 by Khwaja Abdul Hamied. Yusuf
Hamied is the nonexecutive chairman of cipla. It is India's fourth-largest pharma company
based on overall revenue. This pharmaceutical company in India focuses to develop
medicines to treat respiratory, cardiovascular diseases, arthritis, diabetes, weight control,
depression, and many more.
Cipla has a revenue of $2.5 billion in 2020 and has more than 22,036 employees. The
subsidiaries of Cipla are Invagen Pharmaceuticals. They are the largest manufacturer of
antiretroviral drugs.

APOLLO HOSPITALS ENTERPRISE LIMITED

Apollo Hospitals Enterprise Limited is an Indian multinational hospital chain headquartered
in Chennai, Tamil Nadu, India. It was founded by Prathap C. Reddy in 1983 as the first
corporate healthcare provider in India. Several of the Apollo's hospitals have been among the
first in India to receive international healthcare accreditation by the America-based Joint
Commission International (JCI) as well as 13 NABH National Accreditation Board for
Hospitals & Healthcare Providers hospitals. In addition to providing hospitals, Apollo has
developed services in telemedicine, after starting a pilot project in 2000 at Aragonda, Prathap
Reddy's home village. Apollo signed an MoU with Health Education England in April 2017
to provide many doctors to fill vacancies in the English National Health Service.

COMPARATIVE ANALYSIS FOR 2 YEARS

SUN PHARMACEUTICALS INDUSTRIES LIMITED
 The company’s current liabilities during FY20 down at Rs 157 billion
as compared to Rs 173 billion in FY19, thereby witnessing a decrease
of -9.4%.
 Long-term debt stood at Rs 20 billion as compared to Rs 15 billion
during FY19, a growth of 33.3%.
 Current assets rose 2% and stood at Rs 317 billion, while fixed assets
rose 5% and stood at Rs 243 billion in FY20.
 Overall, the total assets and liabilities for FY20 stood at Rs 683 billion
as against Rs 647 billion during FY19, thereby witnessing a growth of
6%.

COMMON SIZE ANALYSIS

 As of June 2021, promoter pledging in SUN PHARMA stands at 6.36%.

 For the year ended March 2021, SUN PHARMA has declared dividend of Rs 7.50 per
share.

 Over the last one year, SUN PHARMA share price has moved up from Rs 512.3 to Rs
784.3, registering a Gain of Rs 272.0 or around 53.1%.

 Meanwhile, the S&P BSE HEALTHCARE Index is trading at Rs 26,760.0 (up 0.0%).
Over the last one year it has moved up from 18,734.2 to 26,760.0, a gain of 8,026
points (up 42.8%).

 As of June 2021, company promoters held 26.73% stake in DR. REDDYS LAB, with
no shares having been pledged.
 For the year ended March 2021, DR. REDDYS LAB has declared dividend of Rs
25.00 per share.
 Over the last one year, DR. REDDYS LAB share price has moved up from Rs 4,323.2
to Rs 4,901.0, registering a Gain of Rs 577.9 or around 13.4%.
 Meanwhile, the S&P BSE HEALTHCARE Index is trading at Rs 26,760.0 (up 0.0%).
Over the last one year it has moved up from 18,734.2 to 26,760.0, a gain of 8,026
points (up 42.8%).

 As of June 2021, company promoters held 51.95% stake in DIVIS

LABORATORIES, with no shares having been pledged.
 For the year ended March 2021, DIVIS LABORATORIES has declared dividend of
Rs 20.00 per share.
 Over the last one year, DIVIS LABORATORIES share price has moved up from Rs
3,226.5 to Rs 5,201.0, registering a Gain of Rs 1,974.6 or around 61.2%.
  Meanwhile, the S&P BSE HEALTHCARE Index is trading at Rs 26,760.0 (up 0.0%).
Over the last one year it has moved up from 18,734.2 to 26,760.0, a gain of 8,026
points (up 42.8%).
 As of June 2021, company promoters held 36.72% stake in CIPLA, with no shares
having been pledged.
 For the year ended March 2021, CIPLA has declared dividend of Rs 5.00 per share.
 Over the last one year, CIPLA share price has moved up from Rs 724.7 to Rs 951.0,
registering a Gain of Rs 226.3 or around 31.2%.
 Meanwhile, the S&P BSE HEALTHCARE Index is trading at Rs 26,760.0 (up 0.0%).
Over the last one year it has moved up from 18,734.2 to 26,760.0, a gain of 8,026
points (up 42.8%).

RATIO ANALYSIS

SUN PHARMACEUTICALS INDUSTRIES LIMITED

Solvency Ratios
Current Ratio: The company's current ratio improved and stood at 1.8x during FY19, from
1.6x during FY18. The current ratio measures the company's ability to pay short-term and
long-term obligations.

Interest Coverage Ratio: The company's interest coverage ratio improved and stood at 10.0x
during FY19, from 9.6x during FY18. The interest coverage ratio of a company states how
easily a company can pay its interest expense on outstanding debt. A higher ratio is
preferable.

Profitability Ratios
Return on Equity (ROE): The ROE for the company improved and stood at 7.8% during
FY19, from 6.7% during FY19. The ROE measures the ability of a firm to generate profits
from its shareholders capital in the company.

Return on Capital Employed (ROCE): The ROCE for the company improved and stood at
10.2% during FY19, from 10.0% during FY18. The ROCE measures the ability of a firm to
generate profits from its total capital (shareholder capital plus debt capital) employed in the
company.

Return on Assets (ROA): The ROA of the company improved and stood at 5.8% during
FY19, from 4.8% during FY18. The ROA measures how efficiently the company uses its
assets to generate earnings.
 No. of Mths Year Ending 12 Mar-18* 12 Mar-19*
Current ratio x 1.6 1.8
Debtors’ Days Days 108 112
Interest coverage x 9.6 10.0
Debt to equity ratio x 0.0 0.0
Return on assets % 4.8 5.8
Return on equity % 6.7 7.8
Return on capital employed % 10.0 10.2

DIVI’S LABORATORIES LIMITED

Solvency Ratios
Current Ratio: The company's current ratio deteriorated and stood at 5.5x during FY19, from
6.9x during FY18. The current ratio measures the company's ability to pay short-term and
long-term obligations.

Interest Coverage Ratio: The company's interest coverage ratio deteriorated and stood at
531.0x during FY19, from 926.8x during FY18. The interest coverage ratio of a company
states how easily a company can pay its interest expense on outstanding debt. A higher ratio
is preferable.

Profitability Ratios
Return on Equity (ROE): The ROE for the company improved and stood at 19.5% during
FY19, from 14.8% during FY19. The ROE measures the ability of a firm to generate profits
from its shareholders capital in the company.

Return on Capital Employed (ROCE): The ROCE for the company improved and stood at
26.7% during FY19, from 20.8% during FY18. The ROCE measures the ability of a firm to
generate profits from its total capital (shareholder capital plus debt capital) employed in the
company.

Return on Assets (ROA): The ROA of the company improved and stood at 16.9% during
FY19, from 12.9% during FY18. The ROA measures how efficiently the company uses its
assets to generate earnings.

No. of Mths Year Ending 12 Mar-18* 12 Mar-19*

Current ratio x 6.9 5.5
 Debtors’ Days Days 95 86
Interest coverage x 926.8 531.0
Debt to equity ratio x 0.0 0.0
Return on assets % 12.9 16.9
Return on equity % 14.8 19.5
Return on capital employed % 20.8 26.7

DR. REDDY’S LABORATORIES LIMITED

CIPLA LIMITED
Solvency Ratios
Current Ratio: The company's current ratio improved and stood at 3.3x during FY19, from
2.8x during FY18. The current ratio measures the company's ability to pay short-term and
long-term obligations.

Interest Coverage Ratio: The company's interest coverage ratio deteriorated and stood at
13.3x during FY19, from 16.3x during FY18. The interest coverage ratio of a company states
how easily a company can pay its interest expense on outstanding debt. A higher ratio is
preferable.

Profitability Ratios
Return on Equity (ROE): The ROE for the company declined and down at 9.9% during
FY19, from 10.0% during FY19. The ROE measures the ability of a firm to generate profits
from its shareholders capital in the company.

Return on Capital Employed (ROCE): The ROCE for the company improved and stood at
11.8% during FY19, from 10.0% during FY18. The ROCE measures the ability of a firm to
generate profits from its total capital (shareholder capital plus debt capital) employed in the
company.

Return on Assets (ROA): The ROA of the company improved and stood at 6.9% during
FY19, from 6.7% during FY18. The ROA measures how efficiently the company uses its
assets to generate earnings.

No. of Mths Year Ending 12 Mar-18* 12 Mar-19*

 Current ratio x 2.8 3.3
Debtors’ Days Days 77 95
Interest coverage x 16.3 13.3
Debt to equity ratio x 0.3 0.3
Return on assets % 6.7 6.9
Return on equity % 10.0 9.9
Return on capital employed % 10.0 11.8

APOLLO HOSPITALS ENTERPRISE LIMITED

Solvency Ratios
Current Ratio: The company's current ratio deteriorated and stood at 1.2x during FY19, from
1.4x during FY18. The current ratio measures the company's ability to pay short-term and
long-term obligations.

Interest Coverage Ratio: The company's interest coverage ratio improved and stood at 2.1x
during FY19, from 1.6x during FY18. The interest coverage ratio of a company states how
easily a company can pay its interest expense on outstanding debt. A higher ratio is
preferable.

Profitability Ratios
Return on Equity (ROE): The ROE for the company improved and stood at 6.0% during
FY19, from 1.8% during FY19. The ROE measures the ability of a firm to generate profits
from its shareholders capital in the company.

Return on Capital Employed (ROCE): The ROCE for the company improved and stood at
11.1% during FY19, from 7.6% during FY18. The ROCE measures the ability of a firm to
generate profits from its total capital (shareholder capital plus debt capital) employed in the
company.

Return on Assets (ROA): The ROA of the company improved and stood at 5.7% during
FY19, from 4.1% during FY18. The ROA measures how efficiently the company uses its
assets to generate earnings.
 No. of Mths Year Ending 12 Mar-18* 12 Mar-19*
Current ratio x 1.4 1.2
Debtors’ Days Days 37 39
Interest coverage x 1.6 2.1
Debt to equity ratio x 0.9 0.9
Return on assets % 4.1 5.7
Return on equity % 1.8 6.0
Return on capital employed % 7.6 11.1

Cash Flow Analysis for 1 year

SUN PHARMA's cash flow from operating activities (CFO) during FY20 stood at Rs 66
billion, an improvement of 198.4% on a YoY basis.
Cash flow from investing activities (CFI) during FY20 stood at Rs -26 billion, an
improvement of 280.0% on a YoY basis.
Cash flow from financial activities (CFF) during FY20 stood at Rs -57 billion on a YoY
basis.
Overall, net cash flows for the company during FY20 stood at Rs -14 billion from the Rs -8
billion net cash flows seen during FY19.

DU-PONT ANALYSIS
 Conclusion

1) The financial health plays a significant role in the successful management of a

company.
2) The analysis practically reveals that gross profit ratio, operating ratio, return on
equity capital, and earnings per share, have significant effect on the net profit
ratio of the selected pharmaceutical companies during the study period.
3) Profitability of the selected pharmaceutical companies is satisfactory.
4) The above study consists of various financial parameters which are generally
used while studying about a company.
5) The different financial parameters are ratio analysis, comparative statement,
common size statement, Cash flow analysis and Du-Pont Analysis.
6) All the parameters helped to understand where the company stands in the
market.