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May 30, 2010 2010 December 12,

midas Touch
Smart acquisitions propel 18-fold growth

cadila healThcare

pankaj patel cmd

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Midas Touch
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Pankaj Patel cMd

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Cadila Healthcare has grown almost 18-fold in 15 years through smart acquisitions and time-honoured management practices

Sharvil: generation next

undreds of young executives, who like to use a pen drive as a convenient way to transfer documents digitally, are likely to receive a rather frosty welcome at the corporate head office of Cadila Healthcare in ahmedabad. The reason: the top management of the drug industry leader believes that the risk of computer viruses invading their computer networks through a pen drive far outweighs the perceived benefits of the ubiquitous device. They prefer to give away a cd instead, although it usually means that less than 1 per cent of its 700 mb space would be used. at first sight, this appears rather wasteful, because most cds in the market can be written upon only once. But it also illustrates suitably the companys policy of adopting common practices, only if they
PHoToGRaPHs By: palashranjan bhaumick

appear truly beneficial and not merely because everyone else is doing it. Cadila Healthcare, under the stewardship of chairman and managing director Pankaj R. Patel, has also used this approach to make a string of acquisitions over the past 15 years, enabling the company to grow to its present size of nearly `3,700 crore from a sales turnover of just about `200 crore in 1995. in the past few years, several of its peers made big ticket acquisitions, mostly in europe: dr Reddys bought the German company Betapharm; Ranbaxy acquired Terapia, based in Romania; and Wockhardt added Pinewood (from ireland) and negma (France) to its fold; paying between $100 million (`450 crore) and $300 million (`1,350 crore) each. Cadila Healthcare, on the other hand, carefully chose a bakers dozen
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of smaller targets and paid relatively modest amounts for them. in 2003, for example, it took over alpharma, which had sales of 4.5 million, in a deal worth 5.5 million. in 2009, Cadila sold alpharmas patented medicines division for 7 million, even as the other segments remained under its control. no surprise, therefore that, while the other companies had a tough time managing their overseas acquisitions and sometimes found the newly acquired assets a drag on their balance sheets, Cadila was able to integrate its new assets with considerable ease. Cadila focussed from the start on a strategic fit assets that would give them an entry into new geographical areas or strengthen their market share in certain therapeutic areas. Thus, it bought Recon Healthcare in 2000 to boost its presence in south india

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acQuisiTioN TRaiL

Nayak: bang on target

1995 indo Pharmaceutical Works

Ltd first acquisition by the group. IndoPharma was later renamed Indon. move that boosted the companys strength in the southern India market.

2000 Recon healthcare a strategic 2001 German Remedies enabled

markets, and acquired the rights to aten, a popular medicine for blood pressure and heart disease, which made Cadila a leader in the cardiovascular disorders market in india. Later, in 2007-08, it bought nippon universal for an entry into Japan, and other small companies in spain, italy and south africa to register a presence in those countries. Likewise, while Ranbaxy became a subsidiary of the Japanese company daiichi in 2008, Matrix Laboratories (of Hyderabad) sold a majority stake to the us generics leader Mylan Laboratories, and Piramal Healthcare divested its entire domestic (medicinal) formulations business to abbott inc, Cadila formed manufacturing alliances with abbott, Hospira (also of the us) and joint ventures with nycomed and bsv. incidentally, Hospira has also acquired the promising and lucrative injectable antibiotics business from orchid Chemicals (of Hyderabad) earlier this year. New beginning The story begins in June 1995 when the original Cadila, founded in 1952 by Ramanbhai Patel and indravadan Mody, was restructured into two separate companies. These were Cadila Healthcare, to be managed by Ramanbhai Patel, and Cadila Pharmaceuticals, which went to his erstwhile partner indravadan Mody. Before the split, the company had a sales turnover of `400 crore, of which an equal share was allocated to each fragment; also, the various products in their portfolio had to be divided equitably. This complicated process began in February 1994 and was completed on 31 May 1995. after heading the truncated company in its initial years, Ramanbhai passed away in 2001. at present, the promoter group of Cadila Pharmaceuticals comprises Rajiv Mody, the son of indravadan Mody, and his family, while Ramanbhais son Pankaj Patel is chairman and managing director of Cadila Healthcare. after the bifurcation, there was a lot of confusion among the general public, which was unable to differentiate between the two companies. Hence, the Patel family decided to adopt the name Zydus group, (derived from the
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the Zydus group to gain leadership in womens health, breathing-related ailments and cancer

2001 aten an extremely popular brand of atenolol, used for the treatment of high blood pressure and heart disease. This catapulted Zydus Cadila to the top spot in the cardiovascular drug segment. 2002 Banyan chemicals a company with a US fda approved manufacturing plant, capable of producing apis. 2003 alpharma France sas first overseas acquisition of the group. 2006 carnation Nutra-analogue Foods Ltd manufactured Nutralite, the best-selling brand of margarine a cornerstone of Zydus Wellness today. 2007 Nippon universal Pharmaceuticals enabled the company to enter the year-old generics market in Japan. The company was later renamed Zydus Japan. 2007 Quimica e Farmaceutica Nikko do Brasil Ltda (Nikko, for short) now Zydus Brazilian arm. 2008 Laboratorios combix, Spain, simayla Pharmaceuticals, S. Africa (70 per cent stake), and Etna Biotech, Italy. 2009 simayla acquired remaining 30 per cent, making it a wholly-owned subsidiary

Greek God, Zeus) and Cadila Healthcare became a part of the group. subsequently, all its subsidiaries in india and abroad, such as Zydus animal Health and Zydus Wellness (also a listed entity in india) operated under the group identity of Zydus. in the course of the split, Cadmach, once a sister concern of the original Cadila (which manufactured pharmaceutical machinery) and a separate entity that produced injection syringes, needles and other consumables were hived off completely from the group. Though we still work closely with Cadmach, and our promoters hold a stake in the company in their personal capacity, Cadmach never became a part of the Zydus group, says a senior executive of Cadila Healthcare. in the intervening years, while the Rajiv Mody-run Cadila Pharmaceuticals has remained a small, privately held company, Cadila Healthcare under Pankaj Patel has blossomed into an industry giant. not only has it become the fifth largest player in the `45,000 crore indian pharmaceutical market, but also occupies a pre-eminent position in the global generic (off-patent) drugs scenario. This has happened because of a number of reasons, the most important of these being the strong commitment of the top management towards longterm targets. Thus, within a year of the 1995 split, Pankaj Patel was already trying to rally his people around a sales of revenue target of `1,000 crore to be achieved in Fy01. Many company executives at that time thought the goal was too ambitious, but Patel was not to be deterred.

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sciences from sunderland university, uK, and a stint of research at John Hopkins university, us. soon after, he took charge of the Healthy Billion campaign and introduced a number of initiatives that assured success in their endeavour. Besides, the company takes adequate measures to look after the interests of its key executives a tradition that began under the earlier generation. as a result, Patel got a crucial advantage during the 18-month division process: a lions share of the 400odd executives, a majority of whom opted to join his team rather than that of Rajiv Mody. Many were promoted or given other incentives to join the team and, at one point, they had six people with the designation general manager, finance! similar piquant situations developed at other levels as well. To accommodate all of them, we had to create nine special business units, says P.R. Joshi, president, group hr and corporate communications, and a 30-year veteran of the company. other senior executives who joined under the earlier management include Ganesh nayak, chief operating officer (coo), and s.G. Belapure, president, manufacturing and formulations. even now, we have a well-established system of spotting promising employees, and putting them through the Zydus Talent Management Programme, after which the exceptional ones can be fast-tracked to positions of greater responsibility, says Joshi. equally significant is the companys emphasis on research. a team of more than 1,000 scientists drive the Zydus research and development programme, which can be segmented into four distinct units. The first is the Zydus Research Centre, where almost 400 scientists are totally focussed on nce (new chemical entity) work intended to discover new medicines, for which Cadila can own the primary patents. next is the Pharmaceutical Technology Centre (ptc), which concentrates on developing new dosage forms for generic medicines, for which there is great demand in western countries. This department is also responsible for putting together all

When that had been achieved, the next step was already in sight to maintain a cagr (compounded annual growth rate) of nearly 25 per cent. in the past five years, too, they have managed to record a compounded growth of 22.6 per cent in their sales revenue, having gone from `1,507 crore in Fy06 to `2,927 crore in Fy09. during this time, their net profit has soared from 152.4 crore in Fy06 to `505.1 crore in Fy10. as their profits zoomed, the management willingly shared the rewards with their investors, with bonus issues in Fy07 (ratio 1:1) and Fy10 (1:2). now, as Fy10 sales reached a figure of `3,686 crore, the buzz in the company is about the Healthy Billion initiative, to post a billion dollars in sales by the end of Fy11, a destination that everyone in the higher echelons considers to be well within their reach. Healthy billion But, in keeping with the low profile that both Patel himself and his company like to keep, there will probably be little celebration and chest thumping in public just a reaffirmation to focus on the next landmark a few years into the future. Patel and his 12-member executive board have already got their eyes trained on sales of $3 billion (`13,500 crore) in the next five years by 2015-16. They also expect to be able to market a new patented medicine of their own by 2020. Thus, Cadila is engaged in a sort of contest against Lupin

Parekh: in favour of debt

Ltd, which also has the same revenue target for the next five years. While the broad contours of the companys route to a $3 billion sales target are already being chalked out, mostly in the form of notes that Patel likes to jot down from time to time, the really detailed planning will begin only in the final quarter of Fy11. another reason is the stringent review process that the executive board undertakes every three months. Throughout the Healthy Billion campaign, we have been tracking our progress along 70 different points, says sharvil Patel, deputy managing director, and Pankaj Patels son. He joined the company about four years ago after completing his graduation in chemical and pharmaceutical
(` cro (` crore)

Impressive growth
2005-06 2006-07 2007-08 2008-09 2009-10

5-year CAGR (%)

Financials Gross sales Total income from operations EBIDT EBIT PBT Net profit before exceptional items (net of tax) Net profit EPS (`) R&D spend Revenue Capital Total R&D spend

1507.8 1484.5 287.7 209.8 176.8 162.4 152.4 8.09 79.7 37.0 116.7

1874.7 1828.8 352.1 269.8 273.9 210.2 233.8 12.41 134.4 26.9 161.3

2363.8 2322.9 458.2 391.3 323.4 263.3 257.6 13.67 133.6 26.8 160.4

2917.1 3614.2 2927.5 3686.8 605.8 808.6 494.0 674.7 369.8 603.9 323.4 303.1 14.8 156.4 31.3 187.7 509.2 505.1 24.6.7 166.0 41.5 207.5

22.60 23.60 27.20 31.60 34.50 31.30 33.30 31.10 17.70 14.40

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Joshi: managing the people

the necessary materials for the anda (abbreviated new drug applications) that every company has to file with drug regulatory authorities in the us, uK, and elsewhere, before the company can market its generic drugs in those countries. Till date, the company has filed 106 andas, of which 54 have been approved by the us fda and a nearly equal number are under review. apart from the us fda, approvals for its products have also come from mhra (uK), mcc (south africa), World Health organisation, anvisa (Brazil), bfad (the Philippines), nda (uganda) and many others. The third is the api (active pharmaceutical ingredients) research centre, where over 150 scientists devote their energy towards designing better technologies to make drugs in bulk

quantities, reduce production costs and times, and improve the yields of various raw materials. Last, but not the least important, is the Vaccine Technology Centre, which is directed towards the highly complex processes involved in producing vaccines. Like many other industry experts, Cadila has also realised that vaccines are the money spinners of the future. That several multinationals like sanofi, gsk and msd (Merck, sharpe and dohme) are striving hard to capture a share of the global vaccine pie indicates that Cadilas planners have got their eyes firmly on the ball. While the research divisions are focussed on their assigned tasks, the manufacturing facilities that the company has put together, have contributed substantially to their success, both in india and abroad. These consist of six production plants for finished dosage forms (also known as formulations) located in Moraiya, sikkim, Baddi, Goa (two) and Brazil. of these, the Moraiya facility, near ahmedabad, is us fda-approved and much of the formulations for export come out of there. Nycomed tie-up For the domestic market, the medicinal formulations are also manufactured in sikkim, Baddi (Himachal Pradesh) and Goa. in addition, there are fda-approved plants in ankleshwar and dabhasa (both in Gujarat) for production of apis (drugs produced and sold in bulk quantities, and the later turned into tablets, capsules, etc,

Belapure: in charge of production

somewhere else). Besides, there are two separate plants for the production of injectable anti-cancer drugs for supply to Hospira and bsv (both Cadilas joint venture partners). a recent addition to the Cadila fold is a plant that manufactures apis for exclusive supply to Zydus nycomed, a joint venture formed as far back as 1998. The plant, located in navi Mumbai, was earlier manufacturing drug intermediates but was recently expanded to enable the production of apis. it is expected to start api production next month, beginning with pantoprazole (for gastric disorders), lornoxicam (a pain killer) and urapidil (for blood pressure). nycomed is a privately owned global pharmaceutical company with a differentiated portfolio focussed
and having no trans-fats or hydrogenated fats. All this has helped Zydus Wellness to post a sales revenue of `268 crore (net profit: `45.27 crore) in FY10 up from a mere `31 crore in FY06. The management claims that it would become a `500 crore company in the next 3-4 years. It has a market capitalisation of `2,150 crore, with Zydus group, the promoters, and Pankaj Patels family holding about 72 per cent. u

Wellness quotient

hough Cadila Healthcare was basically a pharmaceutical company at its inception, its management realised somewhere along the way that consumer health products, cosmetic items and nutritional products would grow rapidly over many years into the future. This gave rise to a series of wellness products such as Nutralite (a form of low calorie butter), Sugar-Free (a sugar

substitute and Everyuth, a beauty product. The business grew steadily in size, until Zydus Wellness was hived off into a separate company, publicly held and listed on the stock exchanges. All three product groups cater to the rising middle class in the country, who have a higher disposable income than the earlier generation, and this generates a

demand for health-enhancing products. This is why SugarFree and its related products Sugar-Free Dlite (a soft drink) and TeaLite have captured an 80 per cent market share in the country. Similarly, Nutralite has got widespread consumer acceptance amongst health conscious families as a healthier alternative to butter, being cholesterol-free

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Inside an api manufacturing plant; (below) dry powder inhaler

on branded medicines in digestive, respiratory and inflammatory diseases, pain and osteoporosis (a form of erosion of the bones). an extensive range of otc products (medicines that can be sold without a prescription) completes the portfolio. nycomed employs 12,000 associates worldwide, and its products are available in more than 100 countries. it has strong platforms in europe and in fast-growing markets such as Russia/cis and Latin america. While the us and Japan are commercialised through best-in-class partners, nycomed plans to further strengthen its own position in key asian markets. Headquartered in Zurich, switzerland, the company generated total sales of 3.2 billion in 2009 and an adjusted ebidta of 1.1 billion. This milestone marks a new beginning in the partnership that has been evolving and growing from strength to strength over the years, Patel had said, while speaking on the occasion. Zydus nycomed has become a global hub of excellence with its high standards of quality, precision in manufacturing and customer service. The expansion of operations adds newer dimensions to this partnership and opens up new paths to excellence and growth. Capacity expansion is taking place at other locations as well. The budget for expansion of our facilities in Fy10 was about `300 crore and it would be slightly higher in the current year,

says nitin Parekh, chief financial officer, adding that most of this would come through internal accruals, and perhaps some debt. as of 30 september, the long-term debt on the companys books is about `1,100 crore, which works out to a debt-equity ratio of 0.45:1, though Parekh says they are happy even with a 1:1 ratio. some debt is good for the company, because the cost of servicing debt is usually a little less than the cost of servicing equity, Parekh explains. a considerable part of this budget also goes towards the preparation of regulatory documentation for various products. Global imprint This strong research and manufacturing base has helped Cadila capture a sizeable share of the market both within india and globally. The company derives as much as 39 per cent of its revenues (about `1,400 crore) through exports of both drug formulations and apis, with significant operations in the us, europe, Japan, Latin america, asia-Pacific and africa. What is more, export revenues have grown at a cagr of nearly 70 per cent over the past five years from `197.6 crore in Fy06 to `1,400 crore in Fy10. of this, about 29 per cent comes from generic medicine sales in western countries, obtained through its subsidiaries in
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the us, France, spain and Japan. in the us, Cadila is placed in the top 20 companies, mainly because 14 of its 35 products in that market enjoy a market share of over 20 per cent and 8-10 new products are added each year. Likewise, the company has captured a 2.65 per cent share of the generic market in France with the help of over 90 medicines. in 2009-10 alone, 14 products were launched and as many as eight were day-one launches they entered the market on the first day after the patent protection of the original drug expired. This is significant because once the patent protection of a drug expires, any company in the world is allowed to produce and sell it, and the first company to actually do so invariably wins a sizeable share of the market. Though its entry in spain and Japan are relatively recent, both of them through the acquisition of Laboratorios Combix in spain and nippon universal Pharmaceutical in Japan, it has already made significant inroads into these countries. This is because these companies have well-established brands of generic medicines. in Japan, where the first generics came into the market in 2006, after the government changed its rules to allow them, Cadila has

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High technology in action

notched up sales of `31.6 crore in Fy10, just two years after its debut. an important milestone in this regard was Cadilas recent agreement with abbott inc, according to which abbott will license 24 branded generics of Zydus in 15 key emerging markets, where abbott has a strong and growing presence. The agreement also includes an option for an additional 40 products to be included over the term of the collaboration. This means that abbott will have these drugs manufactured at Cadilas internationally approved production plants and sell them in the emerging markets under the abbott brand. The products will be manufactured by Zydus Cadila for abbott at its stateof-the-art manufacturing facilities in india. While the deal allows Zydus Cadila to leverage its robust regulatory pipeline, innovative developmental capabilities and manufacturing strengths, it strengthens abbotts global position, enabling it to further accelerate its

emerging markets growth. Going forward, we shall seek a partnership with a multinational company, maybe one of the 10-11 major players in europe, says sharvil Patel, adding that their efforts at globalisation would reach a peak from 2015 onwards. Investors delight alongside its forays on the global stage, Cadila has created a dominant position for itself in the domestic market as well, which fetched revenues of `1,700 crore in Fy10. The key here is a position of leadership in medicines for heart disease, digestive disorders, womens health and breathing-related ailments. This is very much in keeping with the observation of numerous health experts about the spread of lifestyle disorders (diabetes, high blood pressure, heart diseases and cancer) among indians in recent years. in-licensing arrangements with Bayer schering Pharma, Boehringer ingelheim, nycomed, Baxter and Genzyme inc have helped cement its position, and so has the sales force of 4,400 one of the largest in the country. interestingly, this army is being expanded by about 2.5 per cent every quarter. even then, we have a long way to go, says coo Ganesh nayak, since company representatives have managed to get in touch with about 120,000-130,000 prescribing doctors, while the total number of allopathic doctors in india is about 400,000.
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CIRCLE OF LIFE
Shareholding pattern Promoter and promoter group 74.79% Non institutions

7.69%

Institutions

17.52%

The investing community has also taken note of the companys consistent record. in one of its latest research reports issued just last month, equity broking house angel Broking said, Cadila reported net sales of `1,106 crore (for the July-september quarter), up 21.2 per cent year-on-year, and ahead of our estimates of `1,067 crore, driven by the domestic formulation, us and Brazil formulation business. its domestic formulations business continues to outperform the industry, notes elara securities about the companys performance in the quarter just gone by. The elara report also says that with the addition of 400 sales people and 20 new (product) launches, the company has achieved 19 per cent year-on-year growth in the second quarter of Fy11 and 18 per cent in the first half of Fy11. as per the management, focus on cardiovascular and respiratory segments is leading growth in domestic formulations. However, it believes that the companys sustainable growth will be maintained at 15 per cent for Fy11-13. as the company matures further, it is getting ready to become a truly research-based company with its own patented medicine, and also repeat its success in generic medicines in the brave new world of biotechnology-based medicines. no one would be surprised if they achieve their target of growing to three times in current size in the next five years without too much difficulty.
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