June 2nd, 2009

The Ranbaxy - Daiichi Sankyo Deal: Where Do They Go Now?

Mr. Kurosawa, the head of pharma at Romura Fund, was stunned by the announcement of Daiichi Sankyo (DIS) of 5th January 2009. DIS announced its plan to record a non-cash valuation loss of 359.5 billion on its shares in Ranbaxy in its fiscal third-quarter to reflect more than 50% decline in the market value of these securities versus the purchase price. (Annexure 1 provides the full announcement). This valuation loss of $ 3.86 billion was much more than what Mr. Kurosawa had anticipated. The Romura Fund is invested in both Ranbaxy and DIS. Therefore, Mr. Kurosawa has been keenly tracking both the companies. Immediately, post acquisition announcement on 11th June 2008, the question that has been in his mind was if DIS over paid for Ranbaxy. As the reality sunk in, this question is now replaced by more operational issue of how DIS and Ranbaxy are going to take advantage of each other to create value for their shareholders. Mr. Kurosawa is to make a report for the top management of the Fund. He has collected details of global, Indian and Japanese pharma industries, and profiles of DIS and Ranbaxy. (Annexures 2 to 6) Details of the deal 1. The How and When On the 11th of June, 2008, Ranbaxy Laboratories announced that a binding Share Purchase and Share Subscription Agreement was entered into between DIS, Ranbaxy and the Singh family (the promoters of Ranbaxy), pursuant to which, DIS will acquire the entire holding of the Singh family in the Company at Rs 737 per share. DIS was to further seek to acquire majority of shares of Ranbaxy at the same price. This valued Ranbaxy, as per news paper reports, on a post-closing basis at a whopping $ 8.5 billion. The negotiated price of Rs 737 represented a premium of 31.4% over the market price of Ranbaxy on the day of the announcement.1 Additionally, DIS acquired shares issued by Ranbaxy on preferential basis, and also through an open offer (to comply with regulatory requirements). Further, 23,834,333 warrants were allotted to DIS with each warrant representing 1 share that could be converted at Rs 737 per share at any time between 6 to 18 months from the date of allotment. In this respect, Rs 73.70 per warrant was to be paid by DIS.

1. Daiichi snaps up Ranbaxy, Economic Times 12th June 2008 This case has been prepared by Chitra Khatri, Amit Tambade, Gautam Jain, Shreyash Shah (JBIMS, Batch of 2009) along with Prof. Shuaib M Fakih. It is based on published sources and has been prepared as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

1
Electronic copy available at: http://ssrn.com/abstract=1415972

When the deal closed in November 2008, DIS had acquired 63.92% of the equity share capital of Ranbaxy as shown in Exhibit 1 below: Exhibit 1 Acquisition of share by DIS Date of Acquisition October 15 October 20 October 20 Particulars Acquisition of Shares under Open Offer Allotment of Shares on Preferential basis Acquisition of Shares from the Singh family Acquisition of Shares from the Singh family Total
Source: Ranbaxy Annual Report 2008, Page 39

Number of Shares 92,519,126 46,258,063 81,913,234 48,020,900 268,711,323

November 7

2. Valuation In the absence of any forecasted cash flow, Mr. Kurosawa decided to use comparables as the method of evaluation. Annexure 7 provides all relevant information for generic companies (Sr. no 1 to 7) as well for the global branded companies (Sr. no 8 to 10). The summarized results are presented in Exhibit 2 (page 3). Different multiples gave completely different results. Based on EV/EBIDTA, Ranbaxy at 17.34 - was already at the higher end of generic companies. Merck Co had higher EV/EBIDTA as compared to Ranbaxy by 18%. Ranbaxy also had the highest EV/Total Assets multiple (1.94) amongst the generic companies. Glaxos multiple was 23% higher. The EV/Sales multiple was more reassuring, for Mr. Kurosawa. As compared to TEVA and Mylan, Ranbaxy appeared substantially under priced. Therefore price of Rs 737 paid by DIS appeared justified.

2
Electronic copy available at: http://ssrn.com/abstract=1415972

Exhibit 2 Summary of Multiples Company 1 2 3 4 5 6 7 8 9 10 TEVA Merck KGaA STADA Aezneimittel AG BARR Mylan Watson Ranbaxy Pfizer Glaxo Merck Co EV/EBITDA 16.51 17.43 10.91 12.94 14.04 7.26 17.34 12.37 9.70 20.47 EV/Sales 4.20 2.78 2.01 3.14 4.33 1.48 2.61 3.36 3.24 4.72 EV/Total Assets 1.69 1.31 1.21 1.65 1.61 1.06 1.94 1.41 2.38 2.36

3. Benefits to DIS The acquisition will pave the way for creating a new and complementary hybrid business model that provides sustainable growth by diversification that spans the full spectrum of pharma busniess. Growth: While DIS grew at 4.7% in 2007 to $ 7.12 billion, Ranbaxy grew at over 10% to $1.6 billion. This reflects the story of the innovator and the generic companies. While the world pharma industry grew at 6%, the generics segment is growing at 11%. The pursuit of a dual business segment strategy will help DIS to improve its growth rate substantially. Jointly, the two companies will rank 15th in the global pharmaceutical market, whereas independently Ranbaxy stood at 50th and DIS at 22nd. Reach: DIS would be able to extend its reach to 56 countries (especially emerging markets) from 21 countries where they currently operate. DIS therefore gets the frontend infrastructure. The combined business will have a significant position in India, Eastern Europe and Asia and one of the largest presence in Africa. In some of the countries, like Mexico, Russia, DIS has so far not operated. Cost Savings in Manufacturing, Sales and R&D: The most important benefit will be the low-cost manufacturing infrastructure and supply chain strengths of Ranbaxy. DIS will be able to bring in efficiency in its operations by sourcing APIs and finished dosage products from Ranbaxys 9 manufacturing plants in India and many more in

other countries. Mr. Kurosawa did a quick back of the envelope calculations. One of the products DIS makes is Ofloxacin. Its sales in 2007 were 108.7 billion. The average cost of goods sold for DIS is about 30%. Mr. Kurosawa believes that by sourcing it from Ranbaxy, DIS will at least save 6.52 billion. Capitalising the savings at 6% cost of capital, and based on 373 million share capital of Ranbaxy in 2007, the cost saving by outsourcing just one product will be Rs 146 per share. Additionally, there will be cost savings for conducting clinical trials and collaborating on research and sales across the world. R&D to speed up new development: The cost competitive R&D facilities of Ranbaxy would be looked forth by DIS to not only reduce some of its R&D expenses, but also use competencies of Ranbaxy scientists to hasten new product development. DIS also gets Zenotech's (where Ranbaxy has substantial equity stake) expertise in the areas of biologics, oncology and specialty injectables.

4. Benefits to Ranbaxy Ranbaxy aims to derive a lot of potential benefits by merging with DIS. The immediate benefit for Ranbaxy is cash infusion of Rs 34 billion via fresh issue of shares to DIS. This can be used to free up its debt. The acquisition allows Ranbaxy to "significantly transform itself" from being a generic player to becoming a much stronger player with innovation, research and development and a far larger pipeline to leverage globally. It gains smoother access to and a strong foothold in the Japanese drug market (which is the second largest market in the world). Ranbaxy also gains access to DIS' research and development expertise to advance its branded drugs business. Moreover, it sees opportunities to strengthen its API business by working with DIS as a supply partner.

5. Scenario development post deal Pfizer & Ranbaxy settlement on LIPITOR: One week after the DIS announcement, Ranbaxy announced that it had entered into an agreement with Pfizer Inc. to settle most of the patent litigation worldwide involving Pfizers cholesterol fighting drug Lipitor (generic name Atorvastatin). Lipitor is the world's largest selling drug with worldwide sales in 2007 of $ 12.7 billion. Under the terms of the agreement, Ranbaxy will delay the start of its 180 days exclusivity period for a generic version of Lipitor, until November 2011. While the settlement avoided further legal cost for Ranbaxy in fighting against Pfizer, if it had won the case, Ranbaxy could have introduced generic version as early as March 2010. After the announcement of the agreement, Ranbaxy shares declined by 7.7% as against market decline of 2.2%.

In 2008, Ranbaxy had settled with AstraZeneca on its $ 7 billion heartburn drug Nexium, GSK on its $ 985 million migraine medicine Imitrex and its anti-herpes drug Valtrex with sales of $ 1.3 billion.2 FDA Issued Warning Letters to Ranbaxy: The Food and Drug Administration (FDA) issued two Warning Letters to Ranbaxy Laboratories and an Import Alert for generic drugs produced by Ranbaxy's Dewas and Paonta Sahib plants in India on 16th September 2008. Import Alert, under which U.S. officials could detain at the U.S. border, any API and finished drugs manufactured at these Ranbaxy facilities. The Warning Letters identified the agency's concerns about deviations from U.S. current Good Manufacturing Practice (cGMP) requirements at Ranbaxy's manufacturing facilities in Dewas and Paonta Sahib (including the Batamandi unit), in India. The points covered in the warning letters were: Measures taken to control cross-contamination appeared inadequate ; Inadequate batch production, control records, failure investigations and sterile processing operations; Absence of Assurance Responsible individuals to determine if the firm was taking necessary steps under cGMP; and Inaccurate written records of the cleaning and use of major equipment

Ranbaxy after this announcement agreed to cooperate and work with FDA to improve the suggested inadequacies in these two plants. Analysts estimate the loss of business to Ranbaxy as a result of blocking the sale of 30 generic medicines to be at $ 40 million. The news saw Ranbaxy scrip end the day down 6.6% on BSE 2. Post the deal, there were doubts raised, since there has been no recent example of a generic company being integrated into an innovator company. Some also highlighted the possibilities of cultural clashes innovator companies have always seen themselves as superior to generic companies. Besides, the Japanese culture of consensus-building and team playing could be new for promoter-run company. Mr. Kurosawa, after collecting all the information, sat down to prepare the report to the management of the fund.

2. Ranbaxy & Pfizer settle Lipitor lawsuit, Mint, 19th June 2008

Annexure 1 DAIICHI SANKYO Records Valuation Loss, Goodwill Write-down, on Investment in Ranbaxy Laboratories
Tokyo, January 5, 2009 - Daiichi Sankyo Company Limited today announced that it plans to record a valuation loss and one-time write-down of goodwill on its investment in Group subsidiary Ranbaxy Laboratories Limited for the fiscal third-quarter ended December 31, 2008. On a non-consolidated basis, Daiichi Sankyo plans to record a non-cash valuation loss of 359.5 billion yen on its shares in Ranbaxy in its fiscal third-quarter to reflect a more than 50% decline in the market value of these securities versus the purchase price. On a consolidated basis, Daiichi Sankyo estimates a non-cash loss of 354.0 billion yen related to the write-down of goodwill associated with its investment in Ranbaxy in line with the valuation loss on Ranbaxy shares accounted for on a non-consolidated basis. Daiichi Sankyo sees no impact on its forecasts for non-consolidated net sales, operating income or ordinary income for the fiscal third-quarter as a result of these anticipated extraordinary losses. The Company also sees no impact on cash flow. However, these items will have a significant negative impact on the Companys consolidated financial results forecasts for net income for the nine-month period ended December 31, 2008 and for fiscal year 2008 ending March 31, 2009. Daiichi Sankyo remains committed to a year-on-year increase in its shareholder dividend for fiscal year 2008, in step with the Companys current dividend policy.

Background
Daiichi Sankyo has based its estimates for the one-time write-down of goodwill on its investment in Ranbaxy to fully reflect the impact of the current unprecedented turmoil in global equities markets. The Company has taken this step to meet the strictest accounting standards to ensure it remains on the firmest financial footing. A further review of valuations at the end of the current fiscal year in March 2009 and the finalization at that time of allocations under Purchase Price Allocation (PPA) rules prescribed by the Accounting Standards for Business Combinations may result in a change to the amount of the valuation loss. Daiichi Sankyo considers its investment in Ranbaxy as essential in ensuring sustainable business growth and fully realizing the Groups long-term business strategy. Daiichi Sankyo remains absolutely committed to pursuing its unique hybrid model dedicated to the needs of patients in developed and emerging markets. Those needs encompass innovative new medicines and established off-patent products. Daiichi Sankyo and Ranbaxy initiated full-fledged cooperation following the appointment on December 19, 2008 of a new Board of Directors at Ranbaxy that includes Daiichi Sankyo CEO Takashi Shoda and Senior Executive Officer Tsutomu Une. Daiichi Sankyo is currently reviewing the impact of the consolidation of Ranbaxys financial results (including the anticipated extraordinary losses outlined above) on the Groups financial forecasts following its change of status to Group subsidiary. The Company plans to report consolidated financial results that fully reflect Ranbaxys contribution when it reports results for the third quarter of fiscal year 2008.

Annexure 2 The Global Pharmaceutical Industry The global pharma industry is valued at $ 700 billion (2007). With about 46 percent share, the United States remains the largest individual market worldwide. Japan, with $ 70 billion market, is the second largest market. In European Union, Germany is the largest market valued at $ 31 billion. There have been two major changes taking place in the global pharma industry, viz: 1. Growth of Generics:

Rising costs and an ageing population have been contributing to a wider use of generics instead of branded products. The generics market remains a major growth area in the global healthcare market. This growth has been partly driven by costcontainment in several national healthcare sectors, with governments seeking to promote the use of generic products over higher-priced originator products. The global generic pharmaceuticals market was about $ 70 billion in 2007, with market growth noticeably higher than that of the overall pharmaceutical market. The US is the largest generics market in the world. Hatch-Waxman Act standardized U.S. procedure for recognition of generics drugs. An applicant files an Abbreviated New Drug Application (ANDA) with Food & Drug Administration (FDA) and seeks to demonstrate therapeutic equivalence to a specified, previously approved reference listed drug. When ANDA is approved, FDA adds the drug to its Approved Drug Product list (also known as the Orange Book). The FDA also offers a 180 day exclusivity period to generic manufacturers in specific cases such as when a generic manufacturer argues that a patent is invalid or is not violated in the generic production of a drug. The exclusive period of 180 days which allows one manufacturer to sell generic product acts as a reward for the generic manufacturer who is willing to risk liability in court and the cost of patent litigation with the original / branded manufacturer. All these changes have had a major impact on the popularity of generic drugs. As per Harris Interactive, in just over 2 years, the percentage of Americans who would choose generic prescription drugs over brand names has increased from 68% to 81%. And more consumers now purchase their prescriptions in discount stores like Wal-Mart and Sam's Club 17% in December, 2008, up from 13% in October, 2006. Other than the US, Germany and the UK also have large generic markets. France, Italy, Spain and Japan currently have small but fast-growing generic markets. 2. Changing Business Model

Apart from higher growth of generics, the other change in the global pharma industry is in the business models followed by large pharma companies. For a long time, the pharma industry has been dominated by large innovator companies, using R&D to develop block buster drugs. To strengthen R&D pipeline, the companies endeavored to grow bigger through M&A. For example, Astra merged with Zeneca to

form AstraZeneca, Glaxo Wellcome and SmithKlineBeecham merged to form GlaxoSmithKline, Novartis was created through merger of Ciba-Geigy and Sandoz, merger of Rhone-Poulenc and Hoechst AG resulted in Aventis, and Pfizer merged with Warner Lambert. Many factors are responsible for these changes. Declining research productivity coupled with rising R&D costs, falling revenues of block buster drugs due to patent expiry (block buster drugs worth $ 90 billion will be going off patent by 2011) and the concerns by various governments of the rising health care bill are all forcing innovator companies to look for new business models. The PWC report, Pharma 2020: The Vision Which Path Will You Take? puts the predicament of innovator companies very well. The current pharmaceutical industry business model is both economically unsustainable and operationally incapable of acting quickly enough to produce the type of innovative treatments that will be demanded by global markets. Pharmaceutical companies are facing a dearth of new compounds in the pipeline, poor share value performance, rising sales and marketing expenditures, increased legal and regulatory constraints and tarnished reputations. The report highlights the core challenge as lack of innovation. The industry is investing twice as much in R&D as it was a decade ago to produce two-fifths of new medicines it then produced. It is simply an unsustainable business model. Even generics companies are realising the importance of scale. Teva, the worlds largest generic company, has acquired Barr - an American rival for $ 7.5 billion. Barr and Mylan, another big American generics firm, have been busy acquiring smaller firms. Actavis, a once obsucure Icelandic generic outfit, has swallowed over two dozens rivals in the past decade to become a global force. Generics business is attracting the global companies. In June 2008, Japans Daiichi Sankyo bought Ranbaxy for $ 4.6 billion. In July 2008, GSK said it would enter the generics market through a joint venture with Aspen, a South African firm. In March 2009, Pfizer entered into an agreement with Aurobindo Pharama to market off patent drugs. The products expand Pfizers growing generics portfolio and are versions of drugs originally made by companies other than Pfizer. Different companies are, therefore, devising different strategies to meet this challenge: Continuing the block buster model, but looking for block busters in bio tech instead of conventional chemistry-based products; Keeping faith in chemistry-based block busters, but reducing R&D costs by outsourcing or starting their own R&D in low cost countries like India or China; A hybrid model where branded products and generics coexist.

It will be interesting to see how different companies would be using these strategies to continue their profitable growth.

Annexure 3 The Indian Pharmaceutial Industry The size of the Indian pharma industry was in the range of $ 17 billion in 2007 08. Nearly 60% is the domestic market, while exports constitute 40%. It has been witnessing phenomenal growth in recent years, driven by rising consumption levels in the country and strong demand from export markets. In world rankings, the Indian pharma market stood fourth in terms of volume and 14th in terms of value in 2005 and, as per a study by McKinsey, expected to be ranked among the top 10 largest pharmaceutical markets worldwide by 2015.

Exhibit 3 - Evolving Policy Scenario

Policy Impact
Indian Pharmaceutical Industry

India becomes product patent compliant, 1st Jan, 2005 MNCs ready to launch patented product for India Explores IP intensive R&D and manufacturing offshoring opportunities

Indian Patent Act 1970

Recognizes only process patents

Signing of TRIPS agreement

begins Indias transition to WTO mandate of product patent regime By 2005.

Drug Price Control Exodus of innovative

Pharma companies

Indian Pharmaceutical Policy 2002 reduces number of drugs under price control

Increased focus on drug discovery and development

MNCs scale up Investment Outsourcing & alliance trend increases

Impetus of import
substitution and increased domestic production

Increased export to regulated

market

Throes of Change Take off Watershed 1970 1995 2005

Adapted from IBEF Study, Ernst & Young

The Indian pharma industry has evolved over a period of time as shown in Exhibit 3 above. Till 1970, the industry was dominated by global pharma companies, and Indian companies played an insignificant role. In 1970, Indian Patent Act was passed. This act recognized only the process patent and not the product patent. Implication for global innovative pharma companies was that if they wanted to introduce new product, they could not patent the product, but they could patent their process of manufacturing the product. This was a boon to Indian pharma companies. Good chemistry knowledge of Indians came handy and Indian companies became known for their reverse engineering capabilities. Thus they developed their capabilities for manufacturing low cost APIs, which global companies were selling at extremely high prices. In next 25 years, companies like Ranbaxy, Dr. Reddy, Cipla etc became names to reckon with. Since this Act adversely affected global innovative companies, India no more remained on their radar.

In 2005, India amended the patent act, to recognize the product patent too. While there are implementation issues concerning the new law, India is now playing an important role in the strategies of global innovative companies. Indian companies too are working on different business models to thrive in this new environment. Demand from the exports market has been growing rapidly owing to the capability of Indian players to produce cost-effective drugs. Indian Pharama companies have developed Good Manufacturing Practices (GMP) compliant facilities for the production of different dosage forms. They export bulk drugs and formulations to more than 65 countries globally. Exports to Japan at $ 180 million in 2007-08 constituted less than 3% of Indias pharma exports. Japan imports nearly $ 10 billion worth of pharma products.

Access to European markets through acquisition To acess European generics market, Indian companies have taken the route of acquisition. Acquisitions provide players with readymarket access (Rsoads into complex regional distributuin channels) in addition to approval for marketing drugs, which otherwise would take 2-3 years. Major examples have been Dr. Reddys acquisition of Betapharm, Germany for $ 570 million in February 2006; Ranbaxys acquisition of Terapia, Romania for $ 327 million in March 2006, and acquisition of Negma, France by Wockhardt in May 2007 for $ 265 million 3. Therapeutic Segments: In India, 70% of the total formulations sold are for acute illness (short duration) and remaining for chronic illness (prolonged duration). This is true for most developing countries in contrast to developed countries chronic ailments dominate.

3. Crisil Research Pharmaceutical Update: January 2008, Page 7

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Exhibit 4 Therapeutic segmentation of Indian Pharma industry

Among the acute therapies, anti-infective is the major contributing segment accounting for 18% of the total pharma sales market in India. The gastro and cardiac are other two segments contributing 11% each. Growth Drivers Major growth drivers of Indian pharma industry are: Strong IPR regime both process and product patents recognized; Growth of generics market in the US and EU due to: o o desire of these governments to control health costs, and end of patent protection period for many blockbusters

Capital and operating cost advantage, with talented manpower and excellent process development skills; and Increasing domestic demand due to growing percentage of population accessing health care system

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Annexure 4 The Japanese Pharmaceutical Market Brief History The Japanese pharmaceutical industry took off in the true sense post the World War II. Many manufacturing plants and R & D facilities were set up during this period. The industry achieved rapid growth since the Universal Health Insurance (UHI) system was introduced in 1961. However, the industry growth has slowed down since the 1980s. In particular, the market for prescription drugs has shown very low growth over the last decade. Exhibit 5 clearly shows the slow growth in the industry. The sales have grown meagerly from 7000 billion in 2003 to just above 8000 billion in 2007, - a CAGR of less than 4%. Exhibit 5 Growth in Japanese pharma industry

Generics took birth in Japan in 1967 when the former Ministry of Health and Welfare (MHW) developed the basic policy for new drug approval. This policy opened the door for the generic drug industry in Japan. This industry experienced growth only since the early 90s when the government began taking steps to promote the use of lower-priced generics for reducing drug cost. Major Players There are approximately 1000 pharmaceutical companies in Japan including OTC drugs manufacturers. About 40% of these manufacture and market prescription drugs. Exhibit 6 below classifies the major players of Japanese pharmaceutical industry:

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Exhibit 6 Major players in Japanese pharma industry Type Branded Drug Companies with presence in the US and Europe Branded Drug Companies with no presence in the US and Europe Generic Drug Companies No. Of Companies 4 Main Players Takeda Pharmaceutical Company Astellas Pharma Inc. Daiichi Sankyo Eisai Shionogi Tanabe Seiyaku Taiyo Pharmaceutical Ind. Towa Pharmaceutical Sawai Pharmaceutical Nichi-iko Pharmaceutical

250

98

Some of the Japanese pharma companies have gone for research capability in their international acquisitions, with Takeda buying the US biotech company Millennium Pharma and Eisai agreeing to buy MGI Pharma Increasing Demand for Generics: The average age of Japanese population is on a rise, and so is the health care cost. As a result, the government is promoting the use of generic drugs and cautiously reforming the reimbursement system. A survey, conducted by McKinsey, showed that though the propensity to consume generics drugs by Japanese is very high (indicated by 97% of respondents being aware of generic drugs and 85% of respondents being ready to consume them), the actual consumption of such drugs is very low due to: Japanese patients very rarely question a doctors treatment regime Lack of financial incentives for the doctors to prescribe generics Most importantly, doctors tend to distrust the quality of generics

The share of the generics market is expected to increase thanks to the governments steps to encourage the use of generics. Recently, the government introduced various incentives for prescribing and dispensing generics as well as measures to allow generic substitution. Some of these include 20 to doctors for generic prescribing per prescription and 120 to pharmacists for generic dispensing. At present, the four generic drug companies (Taiyo Pharmaceutical Ind., Towa Pharmaceutical, Sawai Pharmaceutical, and Nichi-iko Pharmaceutical) have annual sales of over 20 billion. An analysis of pharma sales during 2003-07 shows that generics have grown at a rate much higher than the overall pharma market growth rate (during the same period) in Japan. The Exhibit 7 below shows that the generics market in Japan have grown from about 210 billion in 2003 to about 280 billion, a CAGR of about 7.5% which is almost double the CAGR of the overall pharma market in Japan during the same period. The second graph in the Exhibit 7 shows the increase in market share of generics. The generics market share in terms of sales has increased from about 3% to 3.5% of total sales in the last 5 years. The increase of generics market share during the same period in terms of volume has been from 11.7% to 12.5% of total volume.

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Exhibit 7 - Increasing demand of Generics Therapeutic Segments: The Japanese pharma market is currently being dominated by cardiovascular drugs in terms of sales. The Exhibit below depicts the share of various key franchises as a percent of total sales in 2007. It is clear from Exhibit 8 that cardiovascular drugs share in total sales was more than 3 times the share of CNS drugs (which has the second highest share of total sales). However during 2002-06 growth in sales of Oncology, Diabetes and CNS drugs has been much higher than that of Cardiovascular drugs. Oncology drugs have experienced the highest CAGR of 10.8%, followed by diabetes drugs at 8.5% and CNS at 7.7%. Cardiovascular growth has been 3.8%. Exhibit 8 - Therapeutic Segmentation of Japanese pharma industry

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Annexure 5 Daiichi Sankyo Company, Limited In 2005, Sankyo Co. Ltd and Daiichi Pharmaceutical announced the merger of two of the largest Japanese pharma giants to form Daiichi Sankyo Co. Ltd. (DIS). Although DIS came into existence only recently, its roots lie in the vast heritage of both its proponent enterprises. The company gains from the 106 year old history of Sankyo Co. Ltd. (1899) and the 90 year old heritage of Daiichi Pharmaceutical Co. Ltd (1915). Current Business of the Company: DIS's goal is to establish itself as a "Japan-Based Global Pharma Innovator". The following excerpt from one of its annual reports elaborates the ideology behind each and every word of the above goal

Japan-Based This phrase means simply that the DAIICHI SANKYO Group originated in Japan. While we are currently ranked third among pharmaceutical manufacturers in Japan, our global presence still needs to be expanded. The word Japan-Based will be meaningless until the DAIICHI SANKYO Group realizes its full potential and achieves recognition in the global market as well as in Japan. To reach this level, we will need to achieve corporate growth in excess of the annual 5-6% predicted for the world market for pharmaceutical products.... Given the size of the global market, we anticipate that the overseas operations of the DAIICHI SANKYO Group will overtake its domestic operations in terms of business scale in the near future. Based on our existing products and key products in the development pipeline, we estimate that overseas sales will account for approximately 50% of total sales by fiscal 2010. Our goal is to raise the contribution to at least 60% by fiscal 2015 by implementing three key policies. First, we must expand our operations in other countries. Second, we must ensure that products in the development pipeline are brought to market effectively. Third, we must attract external resources. Our priority markets are Japan, North America and Europe, where we are already active. In addition to the big three markets, however, we will also work to develop our business operations in markets that offer growth potential, especially China and South America. Pharma Innovator This term describes our vision for DAIICHI SANKYO as a company that is customer-focused, able to identify unmet medical needs of people throughout the world, and clearly has the means to meet those needs through the continuous supply of innovative pharmaceutical products. There are many potential benefits from the creation of innovative pharmaceutical products, including the creation of totally new therapies, the improvement of existing therapies, the facilitation of drug administration, the alleviation of side effects, the improvement of patients quality of life, and the reduction of health costs. DAIICHI SANKYO will give priority to projects targeting unmet medical needs in areas that offer excellent opportunities for growth and profit and are in keeping with our goal of raising our global presence. We will focus mainly on new drugs that can be classified as first-in-class and best-in-class. The aim is to build drug development pipelines that will be lead to the development Global

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of new products with the potential to rank among the best three products in the world for the treatment of specific diseases. Our current priority with regard to R&D pipelines is to commercialize a new product with global market potential to succeed the hypertension drug Olmesartan as quickly as possible. We will accelerate development and commercialization of distinctive new products that match health needs and can be clearly differentiated from competing products as best-in-class. Candidates include the anti-platelet agent Prasugrel (CS-747), and the orally administered anti-Xa drug DU-176b.
DIS manufactures prescription drugs, including treatments for cardiovascular, bone and joints, and infectious diseases. Its products are sold through medical representatives located worldwide. The company also makes OTC products as well as veterinary products and assorted chemicals. The Company has about 2,300 overseas medical representatives in 33 locations, mainly in Europe and the United States and is also aiming for growth through its own development and sales, mainly in the United States. For this it is planning to expand the overseas development and sales bases. DISs products are used not only in Japan but in many other parts of the world including Asia, Europe and the USA. In order to cater to global needs all over the world and have them reflected in its global pharmaceutical operations, the company is highly active in promoting information exchange in a number of areas including research and development, supply chain management and marketing. Research and Development: As a developer of new drugs, DIS is determined to contribute to treating diseases by giving the world innovative medicines. This perhaps lays down the rationale behind the operations of the R&D department at DIS. DIS has its main R&D activities in Japan, though it has opened centers in other parts of the world. The number of R&D employees in various part of the world are: Japan China Germany UK USA 2200 35 100 30 260

Currently, the company has decided to focus on four main areas for pursuing R&D activities. These are Thrombiosis Diabetes Cancer and Autoimmune diseases/Rheumatoid Arthritis.

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Exhibit 9 - Consolidated Segment Information Geographic & Product Segment Net Sales Japan North America Europe Other Operating Income Japan North America Europe Other 880.1 598.1 178.0 78.0 26.1 156.8 107.1 37.6 10.7 2.5 Major Products Olmesartan Levofloxacin Pravastatin Loxonin Omnipaque Venofer Welchol Sales in 2007 195.6 108.7 76.5 33.6 31.2 31.1 22.7

Source: Annual Report 2007 & Conference Call in May 2009

As shown in the Exhibit 9 above, two third of sales and operating income of DIS came from Japan. In the international market, the US was the largest market. In terms of products, Olmesartan Anti hypertensive drug is the largest selling product of DIS. Moreover it is also the fastest growing. Levofloxacin Synthetic antibacterial agent is the second largest product. However, it has been on a declining phase.

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Annexure 6 Ranbaxy Laboratories Limited Ranbaxy was founded in 1937 and derived its name from that of its founders - Ranjit Singh and Gurbax Singh. It started out as the Indian distributor of vitamins and anti tuberculosis drugs for a Japanese pharmaceutical company. After the Second World War, Ranbaxy continued its role as a distributor and ventured in manufacturing drugs by setting up its first plant in 1961. Ranbaxys first real breakthrough came in 1969 with Calmpose, a copy of Roche patented Valium tranquillizer. By 1971, Ranbaxy had extended its strong position in anti infectives in the Indian market and expanded manufacturing capacity to keep pace with sales. Ranbaxys growth was fuelled by two major developments in the Indian pharmaceutical industry. The first one was introduction of the Process Patent Act in 1970, which required Indian companies to recognize international process patents. The Act did not recognise product patent. In 1978 Ranbaxy became the first Indian company to develop a novel process for the manufacture of the antibiotic doxycyclin. It also gained worldwide recognition after it developed a non patent infringing process for the antibiotic cefaclor. This was remarkable, as the molecule was complex and Eli Lilly, the product originator, had protected it with twenty two process patents. The second legislation was the Price Control Act which impacted Ranbaxys strategy. By capping the drug prices in India, the government made the profits and growth prospects limited. This prompted Ranbaxy to look at export markets to realize its growth targets. During the years 1986 to 1996 exports grew at an annual growth rate of 34%. Major markets contributing to the growth were China, the UK, Italy, Russia, Ukraine and the USA. Due to the changing business conditions, it had become essential in 1993 to change the strategy of the company in order to tap rising opportunities. The senior management team of Ranbaxy underwent a strategic planning exercise called Vision 2003. Ranbaxy aimed at to achieve two milestones by 2003: $ 1 billion in revenues and the development of one new therapeutic chemical molecule. The mission statement To become an international, research based pharmaceutical company was posed with many challenges at all levels of the company. The company had to redefine its product offerings and the markets it served. In structuring the foreign ventures, Ranbaxy focused on the entire value chain to maximize margins. It became a truly international player in the sense it not only collaborated with different companies world over but also set up its manufacturing plant. In February 2004 Ranbaxy crossed a $ 1 billion mark in its turnover. The other focus in line with Vision 2003 was the development of one new therapeutic chemical molecule. Given the nature of Ranbaxy this aim was considered to be too ambitious a plan.

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In 2003, again a strategic planning revival took place with a new plan in place called Vision 2012: Aspire to be a $ 5 billion company by 2012 Become a top 5 global generics pharma company Significant income from the proprietary products

The Company has decided to focus on therapeutic areas to meet its Vision 2012: Infectious Diseases (Anti-bacterials and Anti-fungals), Urology [Benign Prostatic Hyperplasia (BPH)and Urinary Incontinence], Metabolic Diseases (Type 2 Diabetes, Hyperlipidemia) and Inflammatory / Respiratory diseases (Asthma, Chronic Pulmonary Obstructive Disease and Rheumatoid Arthritis).

These choices allow Ranbaxy to enter large markets with significant unattended medical needs and to build on its research strengths. In 2008, Ranbaxy achieved a consolidated sale of $ 1.7 billion. Its geographic and therapeutic sales break up is shown in exhibit 10 below: Exhibit 10: Geographic and Therapeutic sales of Ranbaxy in 2008 Region North America EU India Asia (Excl India) Russia & Ukraine Africa & Latin America % 27 20 18 6 7 12 Major Therapy Anti infectives Cardiovasculars Gastrointestinals Musculoskeletal Central Vervous System Respiratory % 37 16 NA 8 6 6

In 2008, Ranbaxy achieved a growth of 4% on its top line. Emerging markets like Russia, Ukraine, Brazil and India led the growth. Among the developed markets, Canada and Japan outperformed. In terms of therapy focus, anti-infectives were the largest revenue generator for the company. Gastrointestinals third largest segment had growth of 56% in 2008. The top 20 products of Ranbaxy in 2008 were Simvastatin, AmoxiClav Potassium, Isotretinoin, Amoxycillin & Combinations, Ketorolac Tromethamine, Omeprazole & Combinations, Cefuroxime Axetil, Cephalexin, Loratadine & Combinations, Clarithromycin, Ginseng + Vitamins, Diclofenac & Combinations, Ranitidine, Cefaclor, Cefpodoxime Proxetil, Efavirenz, Atorvastatin & Combinations, Fenofibrate, and Ofloxacin & Combinations.

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Annexure 7 Data for other Pharma companies

S. No 1 2 Company TEVA (USD) Merck KGaA (EURO) STADA Aezneimittel AG( EURO) BARR (USD) Mylan(USD) Watson Ranbaxy (Rs.) PFIZER (USD) Glaxo (GBP) Merck Co (USD) Share Price 47.13 85.29 No of shares 768.00 217.38 Mkt Cap 36,195.84 18,540.34 Cash + Eqvilent Debt Sales Revenue 9,408.00 7,057.10 EBITDA 2,395.00 1,124.00 EBDITA Margins 25.46% 15.93% PAT 1,952.00 3,520.00 Total Assets 23,412.00 14,922.00

2,875.00 3,347.00 991.90 1,046.60

3 4 5 6 7 8 9

43.31 51.96 21.00 26.98 403.93 22.95 12.05

58.72 110.78 248.41 103.66 373.07

2,543.21

83.80

614.40 2,100.00

1,570.50 2,500.58 1,586.90 2,496.65 66,621.23 48,418.00 22,716.00

289.50 607.00 489.07 509.22 10,020.61 13,130.00 7,593.00 USD 5,578.50

18.43% 24.27% 30.82% 20.40% 15.04% 27.12% 33.43%

105.10 128.40 217.50 141.03 5,859.22 8,144.00 5,310.00

2,619.40 4,761.30 4,253.90 3,472.03 89,604.81 115,268.00 31,003.00

5,756.13 551.00 5,216.61

1,426.60 1,651.60 899.41

2,796.75 216.40 150,694.17

4,122.30 23,093.40 26,092.00 7,314.00

6,761.00 155,164.95 5,524.00 GBP 66,564.20

5,007.00 7,071.00

10

50.77

2,172.50 110,297.83

8,230.80 3,915.80

24,197.70

23.05%

3,275.40

48,350.70

All figures are in million (except share price). The share price is average of Jan and Feb 2008 when DISRanbaxy were negotiating

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Glossary

API: Active Pharmaceutical Ingredient. Or bulk active, is the substance in a drug that is pharmaceutically active. FDF (Finished Dosage Form): A dosage form of a drug is traditionally composed of two things: The API, which is the drug itself; and An excipient, which is the substance of the tablet, or the liquid the API is suspended in, or other material that is pharmaceutically inert. Blockbuster drug: A blockbuster drug is a drug generating more than $1 billion of revenue for its owner each year Generics: A generic drug (generic drugs, short: generics) is a drug which is produced and distributed without patent protection. 180-day exclusivity period: Some generic manufacturers make Paragraph IV application. They argue that patent is invalid or is not violated in the generic production of a drug. Big pharma company will almost always sue for patent infringement within 45 days of Para IV filing, and that delays FDA decision on generic application for 30 months (or until litigation is resolved earlier). For generic companies, litigation costs are considerable. If generic company succeeds, it gets 180-day exclusivity. It has been estimated that the first generic manufacturer gets 94% of branded product price. With 2 manufacturers, the price they get is 52%. Post exclusivity period, price goes to 26%.

* * *

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