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CADILA HEALTHCARE Pankaj Patel

Midas Touch
CMD

Smart acquisitions propel 18-fold growth

Cover Feature B u s i n e s s I n d i a u November 29–December 12, 2010

CADILA HEALTHCARE

Midas
Touch Pankaj Patel
CMD

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B u s i n e s s I n d i a u November 29–December 12, 2010
Cadila Healthcare
has grown almost
18-fold in 15 years
through smart
acquisitions and
time-honoured
management
practices
undreds of young execu-
tives, who like to use a
pen drive as a convenient
way to transfer docu-
ments digitally, are likely to receive
a rather frosty welcome at the corpo-
rate head office of Cadila Healthcare
in Ahmedabad. The reason: the top
management of the drug industry
leader believes that the risk of com-
puter viruses invading their comput-
er networks through a pen drive far
outweighs the perceived benefits of
the ubiquitous device.
They prefer to give away a cd in-
stead, although it usually means that
less than 1 per cent of its 700 mb space
would be used. At first sight, this ap-
pears rather wasteful, because most
cds in the market can be written upon
only once. But it also illustrates suit-
ably the company’s policy of adopt-
ing common practices, only if they
photographs by: palashranjan bhaumick
Sharvil: generation next
appear truly beneficial and not merely
because everyone else is doing it.
Cadila Healthcare, under the stew-
ardship 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 Reddy’s 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 baker’s dozen
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Cover Feature
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 Alpharma’s 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 ac-
quired 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
Cover Feature
Acquisition trail
Nayak: bang
on target
1995 Indo Pharmaceutical Works
Ltd – first acquisition by the group. Indo-
Pharma was later renamed Indon.
2000 Recon Healthcare – a strategic
move that boosted the company’s
strength in the southern India market.
2001 German Remedies – enabled
the Zydus group to gain leadership
in women’s 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
B u s i n e s s
markets, and acquired the rights to
Aten, a popular medicine for blood
pressure and heart disease, which
made Cadila a leader in the cardio-
vascular 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 Laborato-
ries (of Hyderabad) sold a majority
stake to the US generics leader Mylan
Laboratories, and Piramal Healthcare
divested its entire domestic (medici-
nal) formulations business to Abbott
Inc, Cadila formed manufacturing
alliances with Abbott, Hospira (also
of the US) and joint ventures with
Nycomed and bsv. Incidentally, Hos-
pira 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 Indrava-
dan 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 equi-
tably. 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 Raman-
bhai’s son Pankaj Patel is chairman and
managing director of Cadila Health-
care. After the bifurcation, there was
a lot of confusion among the general
public, which was unable to differenti-
ate between the two companies. Hence,
the Patel family decided to adopt the
name ‘Zydus group’, (derived from the
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I n d i a u November 29–December 12, 2010
Share price movement
1000
(`)
800 779.35
600
400
267.6
200
December 2008-November 2010
Greek God, Zeus) and Cadila Health-
care became a part of the group. Subse-
quently, all its subsidiaries in India and
abroad, such as Zydus Animal Health
and Zydus Wellness (also a listed en-
tity in India) operated under the group
identity of Zydus.
In the course of the split, Cad-
mach, once a sister concern of the
original Cadila (which manufac-
tured pharmaceutical machinery)
and a separate entity that produced
injection syringes, needles and other
consumables were hived off com-
pletely 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 Pharmaceuti-
cals has remained a small, privately
held company, Cadila Healthcare un-
der 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-emi-
nent 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 long-
term targets. Thus, within a year of the
1995 split, Pankaj Patel was already try-
ing 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.
B u s i n e s s I n d i a u November 29–December 12, 2010
When that had been achieved, the
next step was already in sight – to
maintain a cagr (compounded annu-
al 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 inves-
tors, with bonus issues in FY07 (ratio
1:1) and FY10 (1:2).
Now, as FY10 sales reached a fig-
ure of `3,686 crore, the buzz in the
company is about the ‘Healthy Bil-
lion’ initiative, to post a billion dol-
lars in sales by the end of FY11, a des-
tination 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 com-
pany like to keep, there will probably
be little celebration and chest thump-
ing in public – just a reaffirmation to
focus on the next landmark a few years
into the future. Patel and his 12-mem-
ber 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 en-
gaged in a sort of contest against Lupin
Impressive growth
2005-06 2006-07 2007-08 2008-09 2009-10
Financials
Gross sales 1507.8
Total income from operations 1484.5
EBIDT 287.7
EBIT 209.8
PBT 176.8
Net profit before exceptional
items (net of tax) 162.4
Net profit 152.4
EPS (`) 8.09
R&D spend
Revenue 79.7
Capital 37.0
Total R&D spend 116.7
Cover Feature
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 ade-
quate measures to look after the inter-
ests of its key executives – a tradition
that began under the earlier genera-
tion. As a result, Patel got a crucial
advantage during the 18-month divi-
sion process: a lion’s share of the 400-
odd executives, a majority of whom
opted to join his team rather than
that of Rajiv Mody.
Many were promoted or given other
Parekh: in favour of debt incentives to join the team and, at one
point, they had six people with the
Ltd, which also has the same revenue designation general manager, finance!
target for the next five years. Similar piquant situations developed
While the broad contours of the at other levels as well. “To accommo-
company’s route to a $3 billion sales date all of them, we had to create nine
target are already being chalked out, special business units,” says P.R. Joshi,
mostly in the form of notes that Patel president, group hr and corporate
likes to jot down from time to time, communications, and a 30-year vet-
the really detailed planning will be- eran of the company. Other senior ex-
gin only in the final quarter of FY11. ecutives who joined under the earlier
Another reason is the stringent re- management include Ganesh Nayak,
view process that the executive board chief operating officer (coo), and S.G.
undertakes every three months. Belapure, president, manufacturing
“Throughout the Healthy Billion and formulations.
campaign, we have been tracking our “Even now, we have a well-estab-
progress along 70 different points,” lished system of spotting promising
says Sharvil Patel, deputy managing employees, and putting them through
director, and Pankaj Patel’s son. He the Zydus Talent Management Pro-
joined the company about four years gramme, after which the exceptional
ago after completing his graduation ones can be fast-tracked to positions of
in chemical and pharmaceutical greater responsibility,” says Joshi.
Equally significant is the com-
((`` cro
crore) pany’s emphasis on research. A team
of more than 1,000 scientists drive
5-year
CAGR (%) the Zydus research and development
programme, which can be segment-
1874.7 2363.8 2917.1 3614.2 22.60 ed into four distinct units. The first
1828.8 2322.9 2927.5 3686.8 23.60 is the Zydus Research Centre, where
352.1 458.2 605.8 808.6 27.20 almost 400 scientists are totally
269.8 391.3 494.0 674.7 31.60 focussed on nce (new chemical en-
273.9 323.4 369.8 603.9 34.50 tity) work intended to discover new
medicines, for which Cadila can own
210.2 263.3 323.4 509.2 31.30 the primary patents.
233.8 257.6 303.1 505.1 33.30 Next is the Pharmaceutical Tech-
12.41 13.67 14.8 24.6.7 31.10 nology Centre (ptc), which con-
centrates on developing new dos-
134.4 133.6 156.4 166.0 17.70 age forms for generic medicines, for
26.9 26.8 31.3 41.5 which there is great demand in west-
161.3 160.4 187.7 207.5 14.40 ern countries. This department is also
responsible for putting together all
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Cover Feature B u s i n e s s I n d i a u November 29–December 12, 2010

quantities, reduce production costs

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 com-
pany can market its generic drugs in
those countries. Till date, the com-
pany 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, ap-
provals 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 phar-
maceutical ingredients) research cen-
tre, where over 150 scientists devote
their energy towards designing better
technologies to make drugs in bulk
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 fu-
ture. That several multinationals like
Sanofi, gsk and msd (Merck, Sharpe
and Dohme) are striving hard to cap-
ture a share of the global vaccine pie
indicates that Cadila’s planners have
got their eyes firmly on the ball.
While the research divisions are
focussed on their assigned tasks, the
manufacturing facilities that the Belapure: in charge of production
company has put together, have con-
tributed substantially to their suc- somewhere else). Besides, there are
cess, both in India and abroad. These two separate plants for the produc-
consist of six production plants for tion of injectable anti-cancer drugs
finished dosage forms (also known for supply to Hospira and bsv (both
as formulations) located in Moraiya, Cadila’s joint venture partners).
Sikkim, Baddi, Goa (two) and Brazil. A recent addition to the Cadila fold
Of these, the Moraiya facility, near is a plant that manufactures apis for
Ahmedabad, is US fda-approved and exclusive supply to Zydus Nycomed,
much of the formulations for export a joint venture formed as far back
come out of there. as 1998. The plant, located in Navi
Mumbai, was earlier manufacturing
Nycomed tie-up drug intermediates but was recently
For the domestic market, the me- expanded to enable the production
dicinal formulations are also manu- of apis. It is expected to start api
factured in Sikkim, Baddi (Himachal production next month, beginning
Pradesh) and Goa. In addition, there with pantoprazole (for gastric disor-
are fda-approved plants in Anklesh- ders), lornoxicam (a pain killer) and
war and Dabhasa (both in Gujarat) for urapidil (for blood pressure).
production of apis (drugs produced Nycomed is a privately owned
and sold in bulk quantities, and the global pharmaceutical company with
later turned into tablets, capsules, etc, a differentiated portfolio focussed

Wellness quotient substitute and Everyuth, a demand for health-enhancing and having no trans-fats or
beauty product. The business products. This is why Sugar- hydrogenated fats.

T hough Cadila Healthcare

was basically a pharma-
ceutical company at its incep-
tion, its management realised
somewhere along the way that
consumer health products,
cosmetic items and nutritional
products would grow rapidly
over many years into the fu-
ture. This gave rise to a series
of ‘wellness’ products such as
Nutralite (a form of low calo-
rie butter), Sugar-Free (a sugar
grew steadily in size, until Zy-
dus 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 in-
come than the earlier gen-
eration, and this generates a
Free and its related products –
Sugar-Free D’lite (a soft drink)
and TeaLite have
All this has helped Zydus
Wellness to post a sales rev-
enue of `268 crore (net profit:
captured an 80 per `45.27 crore) in FY10 – up
cent market share in from a mere `31 crore in FY06.
the country. The management claims that
Similarly, Nu- it would become a `500 crore
tralite has got wide- company in the next 3-4 years.
spread consumer ac- It has a market capitalisation
ceptance amongst of `2,150 crore, with Zydus
health conscious families as group, the promoters, and
a healthier alternative to but- Pankaj Patel’s family holding
ter, being cholesterol-free about 72 per cent. u

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B u s i n e s s I n d i a u November 29–December 12, 2010
Inside an api manufacturing plant; (below) dry powder inhaler
on branded medicines in digestive,
respiratory and inflammatory diseas-
es, 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 associ-
ates 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, Ny-
comed plans to further strengthen its
own position in key Asian markets.
Headquartered in Zurich, Switzer-
land, the company generated total
sales of £3.2 billion in 2009 and an
adjusted ebidta of £1.1 billion.
“This milestone marks a new be-
ginning 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 be-
come a global hub of excellence with
its high standards of quality, preci-
sion in manufacturing and customer
service. The expansion of operations
adds newer dimensions to this part-
nership 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 of-
ficer, adding that most of this would
come through internal accruals, and
perhaps some debt. As of 30 Septem-
ber, the long-term debt on the com-
pany’s 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 ser-
vicing equity,” Parekh
explains. A considerable
part of this budget also
goes towards the prepara-
tion of regulatory docu-
mentation for various
products.
Global imprint
This strong research and manufactur-
ing base has helped Cadila capture
a sizeable share of the market both
within India and globally. The com-
pany derives as much as 39 per cent
of its revenues (about `1,400 crore)
through exports of both drug formu-
lations and apis, with significant op-
erations 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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Cover Feature
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 cap-
tured a 2.65 per cent share of the ge-
neric market in France with the help
of over 90 medicines. In
2009-10 alone, 14 prod-
ucts were launched and
as many as eight were
‘day-one’ launches –
they entered the mar-
ket on the first day after
the patent protection
of the original drug
expired. This is sig-
nificant 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 sig-
nificant 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
Cover Feature
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 Cadila’s recent agree-
ment 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 agree-
ment 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 Cadila’s
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 state-
of-the-art manufacturing facilities in
India. While the deal allows Zydus
Cadila to leverage its robust regulatory
pipeline, innovative developmental ca-
pabilities and manufacturing strengths,
it strengthens Abbott’s global position,
enabling it to further accelerate its
CIRCLE OF LIFE
Shareholding pattern
Promoter and promoter
group 74.79%
Non institutions
7.69%
Institutions
17.52%
B u s i n e s s
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 glo-
balisation 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 rev-
enues of `1,700 crore in FY10. The
key here is a position of leadership
in medicines for heart disease, diges-
tive disorders, women’s health and
breathing-related ailments. This is
very much in keeping with the ob-
servation 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 coun-
try. 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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I n d i a u November 29–December 12, 2010
The investing community has also
taken note of the company’s consis-
tent 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 indus-
try,” notes Elara Securities about the
company’s performance in the quarter
just gone by. The Elara report also says
that with the addition of 400 sales
people and 20 new (product) launch-
es, the company has achieved 19 per
cent year-on-year growth in the sec-
ond quarter of FY11 and 18 per cent in
the first half of FY11. As per the man-
agement, focus on cardiovascular and
respiratory segments is leading growth
in domestic formulations. However, it
believes that the company’s sustain-
able 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 re-
peat its success in generic medicines
in the brave new world of biotech-
nology-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.
u SUMIT GHOSHAL