Sun Pharmaceuticals Industries Ltd

Operational review

Annual consolidated sales were Rs. 39,040 million. International branded generic salesacross 40 markets grew 29% to Rs. 4,883 million, one of our fastest growing businessareas.

2009-10 was an unusual year in that for the time in our listed history there was adecline in sales - 9%. Profit before interest and tax reduced 29% and profit after taxstood at Rs. 13,511 million compared with Rs. 18,177 million in 2008-09.

As we had previously indicated, the primary reason for this shortfall was that Caraco,our 75% US-based subsidiary, stopped manufacturing operations from June 2009, resulting ina sales decline to US$ 22 million compared to US$ 112 million from manufactured productsin the previous full year of operations.

Our ex-US business segments continued to perform well, delivering strong sales andprofit growth, while increasing their market share across geographies. Excluding Caraco,our 2009-10 sales were Rs. 27,978 million with a growth of 3% over the previous year.

Key performance indicators for 2009-10

• Annual consolidated sales for 2009-10 of Rs. 39,040 million, a decline of 9%over the previous year Sales in India were Rs. 19,334 million, down 6%.

• International branded generic sales across 40 markets grew 29% to Rs. 4,883million. This remains one of the fastest growing parts of our business. • Sales atCaraco were down 31% to US$ 234 million.

• We continue to hold reserves in excess of Rs. 77,200 million, earmarked forsuitable acquisition opportunities.

• Our R&D expense was Rs. 2,242 million, taking our cumulative R&D expenseto Rs. 18,073 million.

• Between Sun Pharma and Caraco, 84 ANDAs are approved and 123 await approval bythe USFDA. Fifteen more ANDAs received approval this year.

• Branded generic registrations received crossed 1,500.

• 246 patents were filed so far, of which 81 were received based on the work byour research team

Business overview

Our business can be divided into four segments: Indian branded generics, US generics,international branded generics (ROW) and Active Pharmaceutical Ingredients (API).

Indian Branded Generics continued to be the largest contributor to our revenue, at 45%,followed by US Generics (28%) and International Branded Generics (13%). API salescontributed 14%, a larger number than in the previous years, largely on account of APIsthat would usually be consumed by Caraco but are now available for sale.

Our international business contributed 52% of our total turnover. By the year-end, thetotal ANDA approvals stood at 84 with 123 more filings pending approval with the US FDA.During the year, we invested Rs. 2,242 million in R&D. Our investments in capitalexpenditure were at Rs. 2,956 million, including our Sikkim formulations plant, which wascommissioned during the year under review.

According to the WHO, cardiovascular diseases will be the largest cause of deaths anddisabilities in India by 2020. The number of people with hypertension is expected toincrease to 213.5 million in 2025, from 118.2 million in 2000.

Industry outlook

IMS Health estimates the global pharmaceutical market in 2010 at over US$ 825 billion,expected to grow 4-6%. Emerging markets, which accounted for US$ 84 billion in 2008, areestimated to reach US$ 155-185 billion in 2013, with a CAGR of 13-15% (IMS Health andMorgan Stanley estimates). In 2009, the US generics market was valued by IMS at US$ 31billion. BCC Research estimates the US generics market in 2009 at US$ 34 billion. All thebusiness areas that we are present in offer attractive opportunities, and we are wellpositioned to maximise sales and profit growth that these opportunities offer.

India

The Indian pharmaceutical market continued to register a healthy growth of 18% during2009-10 to Rs. 417 billion (IMS MAT March 2010). While acute care still dominates themarket with over 60% share, chronic care continues to outgrow the acute care segment andgain market share. Prescriptions written by General Practitioners (GPs) account for 40% ofthe overall Rx and are growing at 2%. In contrast, specialist Rx are growing at more than5-6% per annum (Source: Morgan Stanley).

It is anticipated that India’s specialty and super specialty therapies are likelyto account for 45% of the market by 2015 (36% in 2006)

(Source: India Pharma 2015, McKinsey). Socio-economic factors such as risingincomes, increasing affordability of quality health care, steady increase in healthinsurance penetration and a continued rise in chronic diseases will drive the growth ofthe pharmaceutical market in India. IMS forecasts suggest that the Indian pharmaceuticalmarket will continue to register double-digit growth and has high potential to double itssize in five years.

In addition, the government’s emphasis on providing healthcare for the underprivileged with initiatives like the health insurance policy for the poor, the RashtriyaSwasthya Bima Yojana and emphasis on improving the delivery mechanism is expected toresult in better volumes across the industry.

The Indian pharmaceutical industry continues to witness a consolidation, with MNCscontinuing to acquire some Indian companies to benefit from the attractive growth thatthis market offers. On the other end of the scale, some of the regional companies are alsogaining share, albeit from a low base. Together with attractive market opportunities,competitive intensity will increase.

A report published by the International Diabetes Federation projects the number ofdiabetics in the age group 20-79 in 2010 to be around 50.7 million - the highest among allcountries.

(Source: Mint, July 8, 2010)

Companies with capabilities to launch innovative medicines at affordable prices, buildstrong brands, offer high quality medical information to doctors and assist patients tomanage their conditions better, will continue to perform well.

While product patent protection offers newer opportunities to innovator pharmaceuticalcompanies, the Indian pharmaceutical market will continue to be substantially dominated bybranded generics across the foreseeable future.

The US

Total market: At an estimated US$ 300 billion dollars in size (January 2010 MAT), theUS pharmaceutical market remains the world’s largest, though it registered only 6%growth. U.S. market growth in 2010 is expected to be 3-5 %. With US$ 74 billion worthproducts (sales) forecast to go off-patent between 2009 and 2012, the US pharmaceuticalmarket is likely to remain sluggish across the foreseeable future.

Generics market: With an estimated size of US$ 34 billion, the US generics market isone of the largest in the world. In terms of prescription share, generics continued toincrease their share and accounted for 72% at the end of 2009 (from 55% in 2004). Thegrowing preference for generics is also reflected in the increase in generic drugpenetration in the US from 47% in 1999 to 72% in 2009. However, generics still onlyaccount for 17% of total sales by value.

In 2009, the US government implemented policy changes that extended cost-effectivehealthcare coverage and are expected to be pro-generic. More affordable insurance willreduce premium costs and enable more than 31 million previously uninsured Americans toafford healthcare. In addition, the new competitive health insurance market will provideAmericans a wider insurance choice. Greater healthcare accountability is expected to keepthe premia down.

Emerging markets

The estimated size of the pharmaceutical market in emerging markets (excluding USA,Canada, EU, Japan and Australasia) is over US$ 90 billion, registering double-digit growthand accounting for a majority of the global pharmaceutical market growth in 2009. Chinastands out with a size of US$ 32 billion and forecasted growth of 20-23%. All thesemarkets are expected to sustain a double digit-growth across the foreseeable future on theback of a strong economic growth, rising population and an increasing affordability forquality healthcare in these countries. IMS forecasts suggest that the pharmaceuticalmarket in emerging market countries will be US$ 155-185 billion in 2013

(CSFB, Morgan Stanley and IMS data).

Japan: Japan’s stringent quality standards tend to deter global entrants. On theother hand, it is a fast-emerging generic market at US$ 3.5 billion, with genericpenetration at 15% by volume and likely to rise to 30% by volume by 2012 (CSFB Pharmafar marts, March 2010).

Europe: The European market for generics in 2009 was US$ 33 billion (IMS data).Although generic medicines now fulfill over 50% of the demand for medicines in Europe,they still only represent 18% of the total medicine bill.

APIs

India is a significant player in the global active pharmaceutical ingredient (API)market, being one of the world’s largest API manufacturers. It ranks fourth by volumeand thirteenth by value. It is expected to generate sales worth US$ 6 billion in 2010,growing around 19%. A bulk of the API production is exported to Europe

(Source: Pharmabiz). India is also recognised as one the world’s lowest-costproducers of small molecule APIs.

With an increasing pressure on global economies, especially advanced nations, to reducehealthcare costs, India is set to play a significant role in this space.

Snapshot

Domestic revenue: Rs. 18,301 million

Growth: 22% (5 year CAGR leading to 2009-10)

Manufacturing locations: Six

Overview

Sun Pharma is India’s sixth largest branded generics player, with a product basketcomprising 537 formulations and covering chronic therapy segments. Several of our productsare technically complex products with relatively lower competition. We commanded a marketshare of 3.7% in 2009-10.

In 1995, we pioneered a therapy-focused marketing strategy where products fromdifferent therapeutic segments were marketed by separate divisions. Currently we marketproducts through 18 divisions, facilitated by a strong field force of more than 2,500members covering more than 130,000 specialist doctors.

Almost 50% of our brands feature among the top three brands in their specific spaces inIndia. Our top 10 brands contributed 20% to domestic revenues while the top 50 brandscontributed 53% in 2009-10, de-risking our growth from an excessive dependence on ahandful of blockbuster products. Besides, our growth was balanced between establishedproducts launched before 2006 accounting for 67% of our growth, and a continued launch ofdifferentiated products in the therapy areas of our focus.

Therapeutic wise ranking

Top 10 products/product groups

Business realities in 2009-10

• Our domestic business revenues decreased 7% from Rs. 19,597 million in 2008-09to Rs. 18,301 million.

• According to IMS, we were ranked sixth with a 3.7% market share and 18% GR.

• According to AWACS, a market audit firm at the wholesaler level, we ranked fifthwith a 4.3% market share and 15% GR.

• A total of 48 new products were introduced across various divisions. Technicallycomplex products like Exapride (exenatide injection) and Cardivas CR (carvedilol phosphateextended release) that differentiated our product offering were launched during the year,as also Lambin (liposomal amphotericin).

• Major brands like Pantocid, Glucored, Susten, Aztor, Strocit and Gemerregistered double-digit growth in a competitive market, strengthening our topline.

• Pantocid, an antiulcerant along with combinations, emerged as the largestselling product group in India from our portfolio.

• We continued efforts in prescription generation for existing products, andintroduced new products.

• We intensified our focus on building brands based on complex technologies.

• In therapeutic segments, where we are a significant player, we strengthened ourleadership with strong execution and strategies.

• Similarly, in other segments where we are late entrants, we continued to buildour prescription share.

• We enriched doctor relationships and built trust through the scientificpromotions like PG CME meets and symposia where world-class speakers were invited to shareexperiences with Indian doctors, etc.

• We launched the antidiabetic injectable Exapride (Exenatide), a 39 aminoacid-based peptide in a patient-friendly delivery system device. Our product can handlemultiple doses and be reused, reducing the patient’s spend on the repeated purchaseof the device. Octride, the peptide-based treatment for variceal bleeding, became one ofour largest GI products.

• Technically complex drugs like Gliotem (Temozolamide) and Gemtaz (Gemcitabine)helped us differentiate and earn the trust of oncologists. We launched Lambin (Liposomalamphetericin), a targeted treatment for systemic fungal infections in immunocompromisedpatients.

• Our flagship brand Aztor won the prestigious 2009 global award for campaigncreativity for our "Every heart counts for us!" campaign at an award function inNew York.

Snapshot

Revenue: US$ 234 million

Growth: 33% (CAGR over five years ending 2009-10

Manufacturing locations supplying to the US market: 6

ANDAs: 84 approved against 207 filed

Overview

Our presence in the US generic market accounts for around 28% of our total sales, withformulation manufacturing facilities spread across six locations, including several sitesin India. This combination of manufacturing sites with facilities –on mainland US andoffshore – gives us the flexibility to manufacture where it is most economical.

Our product basket comprises a prudent mix of generics and complex or limitedcompetition products. We have the flexibility to manufacture all dosage forms ranging fromtablets to injectables, eye drops and sprays. A large number of products that we make areintegrated into APIs and offer us an effective control on costs.

We introduced products such as Amifostine, Lupreolide, Octreotide and Vecuronium, whichare technically complex, face a lower competitive intensity and offer reasonableprofitability.

Historical performance

Business realities, 2009-10

• Despite the halting of production at Caraco, we reported a good growth ofdistributed products.

• Began to build sales of the first few controlled substance ANDAs from ourCranbury facility.

• Entered the oncology therapeutic segment; launched 10 products; built a strongCNS product range (29 products) and CVS range (13 products).

• Received exclusivity for generic Eloxatin; continued to sell generic

• Protonix at risk (we discontinued sales of both products in the first quarter of2010-11).

Received a settlement fee from Forest Labs and Lundbeck for the Lexapro patent dispute,with likely milestones should our process be used by them.

• Built credibility with customers by continually communicating developments onthe FDA issue with Caraco. Our team convinced customers that the issue was ring-fencedonly around Caraco, even as our other operations for the US remained dependable andcompliant.

The US generic market continues to be demanding, with extensive competition fromequivalently placed companies now extending to products even in the exclusivity period.The FDA has been raising the bar on regulations, and at times there have been significantdelays for generic approvals at the FDA. The FTC has also been keeping a close watch ongeneric-innovator deals as a part of its mandate.

ANDAs approvals in 2009-10 and 2008-09

At Caraco, as required by the USFDA, the team is working closely with cGMP consultantsto identify and implement corrections to comply with FDA requirements. Caraco has takenFDA approval on its work plan, and is now working to put these corrections in place.Caraco has created a partial reserve of US$ 15.9 million to account for losses due toinventory seizure worth US$ 24 million by US FDA. It has drawn up a roadmap fortransferring some products to alternative manufacturing sites and has also begun to marketseveral products from Forest’s Inwood business, as part of an agreement.

Acquisition of Taro

One of the challenges in 2009-10 was the continuing dispute regarding the acquisitionof Taro, which is now pending ruling by Israel’s Supreme Court. However, there werethree clearly positive developments that we are glad about:

• In December 2009, Templeton, which holds a 10% equity stake in Taro, (thethird-largest and largest-minority shareholder) withdrew its appeal/opposition and cameout strongly in favour of the takeover. Templeton had opposed Sun Pharma’sacquisition for about 30 months.

• At Taro’s annual general meeting, the minority shareholders (78% ofminority votes polled) voted against the continued service of the Levitt Board ofDirectors and the election of

Taro's External Director nominees.

• In July 2010, the United States District Court for the Southern District of NewYork dismissed the complaint filed by Taro seeking to block the Tender Offer by Sun’ssubsidiary Alkaloida. The Court rejected Taro’s claims based on allegations that Sunand Alkaloida had failed to make adequate disclosures concerning the offer. The Court alsorejected Taro’s request for discovery, remarking that Taro had not explained anypurpose that discovery would serve. The Court also dismissed Taro’s other claims,including breach of contract and misappropriation of trade secrets, for lack of subjectmatter jurisdiction.

Snapshot

Revenue: Rs. 4,883 million

Contribution to business: 13%

Growth: 43% (5-year CAGR leading to 2009-10) Products: 1,578 products

Overview

Our global footprint now spans 40 pharmaceutical markets across four continents, some1,578 products already registered and nearly 900 products in the regulatory pipeline inthese countries. The emerging markets part of our business grew by over 40% over the lastseven years and we expect the momentum to continue. Our key high-potential markets areRussia, China, Brazil, Mexico, ex-CIS nations and South Africa. Considering the size, thepotential opportunities and to strengthen our competitive capabilities, we establishedmanufacturing operations in Mexico and Brazil. The regulatory filing of products fromthese facilities has commenced.

Regulatory demands are becoming progressively stringent, increasing the cost andtimelines to register the products in a number of emerging markets. In the last few years,some emerging markets amended their regulatory requirements to match those of regulatedmarkets with the need to have detailed plant inspections and local bio-studies. Thesedevelopments have a potential to stagger our new product registrations in these countries.However, we will aim to increase our footprint and augment our product offerings acrossemerging market regions in a phased manner.

Europe: Initiated exports to Europe for the first time in our history; received 11product approvals in Europe up to March 2010. At US$ 33 billion, key generic markets inEurope present an attractive opportunity. We expect to create a meaningful EU presencewith generics, building a line of select hospital products that offer decent returns overthe medium-term.

4 API business overview

Snapshot

Revenue: Rs. 5,491 million

Contribution to business: 14%

Growth: 19% (5-year CAGR leading to 2009-10)

Our backward integration into speciality APIs for key products strengthens our positionagainst competing global pressures. Several of our eight world-class facilities are ISO14001 and ISO 9002-approved. Many of our plants hold approvals from the US FDA as well asregulatory authorities of various developed countries

Our API basket currently comprises 170 products, of which a vast majority are complexAPIs. A large proportion of APIs manufactured are consumed in-house.

We have standalone facilities in Panoli and Ahmednagar for peptides, anti-cancers,steroids and sex hormones. Our Hungary unit manufactures controlled substances from thebasic stages, while the other manufacturing facilities can handle multiple products. OurTennessee plant holds quotas for controlled substance API manufacture in the US. We addmore than 25 API processes annually, enriching our product basket.

In 2009-10, our API business grew 13% from Rs. 4,846 million in 2008-09 to Rs. 5,491million in 2009-10 and registered a 19% CAGR (last five years leading to 2009-10). Our APIrevenues accrue from a global footprint covering 56 countries. In the regulated markets,our business is largely conducted with end-users. For a large number of products likePentoxifylline, Clomipramine and Mesalazine, we are a dominant, if not the leading,international producer.

• Received approvals for eight APIs from various regulatory authorities; this tookthe total regulated market-approved APIs to 89 out of 155 filings made for DMF and CEP

• Enhanced our equipment productivity by reducing process steps, improvingchemistry and optimising manufacturing costs through value engineering

We intend to strengthen our presence in Japan and China, as also in the API hubs ofGermany and Italy.

Research and development

Research and development lies at the heart of our success. Research is undertaken atvarious R&D centres including two state-of-the-art centres, accommodating 600qualified scientists. Over the years, we developed sound capabilities ranging from complexAPIs to formulating complex, technology-intensive products. Our research initiatives offercomplex products to our customers and patients.

Our Baroda research centre develops complex APIs and dosage forms for India, US andEurope. Our Mumbai research centre focuses on the development of differentiated dosageforms and generics for developed markets like the US and Europe. The work at theseresearch centres ensures that we have a robust pipeline to feed all the markets that weoperate in.

Our state-of-the-art research laboratories are equipped with extensive facilities forpharmacokinetics, formulation development, organic synthesis, clinical research andanalytical development.

R&D commitment

Our R&D focus

Our R&D team focuses on creating difficult-to-replicate molecules/ productsinvolving complex technologies at competitive costs. This focus helped grow the basketfrom five products in 1983 to 537 products in India (as on March 31, 2010).

Generic process research: We focus on developing complex APIs entailingmultiple-step chemistry in a cost-effective and environment friendly manner. Our expertisecovers complex products like steroids, anti-cancers, peptides and hormones. This expertisereinforces our backward integrated business model. In 2009-10, our team added 28 APIs.

Generic formulation research: Our formulations research team focused on developingniche and complex finished products, creating a differentiated product pipeline andcapitalising on first-to-file opportunities. In 2009-10, our team launched 48 new productsin India and filed 30 ANDAs in the US taking the total to 207 ANDAs. In all, close to 900dossiers are pending approvals in other regulated and semi-regulated geographies.

Complex delivery systems: Our team developed delivery systems such as metered doseinhalers, osmotic release formulations and nasal sprays, among others. In 2009-10, weintroduced 26 products based on novel delivery platforms.

Intellectual property

We possess a rich patent library. The cumulative filings stood at 246 filings, of which81 were approved. We filed 13 new patent applications in 2009-10.

Regulatory Affairs

Every step in the pharmaceutical value chain – product development, manufactureand marketing – is marked by an adherence to regulatory compliance. The regulatorynorms vary widely across countries and are periodically upgraded to meet increasingquality expectations.

The result is that with competition increasing, it is not merely enough to meetregulatory compliance; it is now imperative to do so with speed and emerge as afirst-mover in a particular product or geography.

Our regulatory compliance is a competitive advantage that has enabled us to establish aglobal footprint across 40 countries. Our regulatory team helps strengthen (throughincreased product filings) and expand (by meeting regulatory requirements of newgeographies) this global presence.

Over the years, our team reduced the time for filing regulatory documents despitegrowing regulatory complexities.

Highlights, 2009-10

• Filed 14 DMFs in the US; received six DMF approvals during the year. We emergedamong the few Indian pharmaceutical companies with the maximum DMF filings in the US– 99 (with 43 approvals) as on March 31, 2010.

• Filed seven Certificate of Suitability with the European Pharmacopoeia (CEP) forstrengthening our European presence; this took the total CEP filings to 28, with 21approvals in all.

• Filed 30 ANDAs for approval with US regulatory authorities; received approvalfor 15 ANDAs; the total tally of ANDAs stood at 207 filed and 84 approved as on March 31,2010.

• Filed dossiers in 40 countries, including Taiwan, Japan, Canada, Australia andChina.

• Received approval for Sumatriptan prefilled injections from UK MHRA, theCompany’s first device approval.

Approvals in 2009-10

In 2009-10, we filed eight DCPs in Europe for complex products and received approvalsfor five. We received our fastest DCP approval (as yet) in only 12 months for Olanzapine.As filing procedures and approvals get increasingly complex, we are working to strengthenour regulatory team.

Quality

Consistent quality is critical in the pharmaceutical sector, especially for companieslike ours that are present in quality-conscious regulated markets.

We focus on high product quality standards, ensured by a

14-member quality management team. The vindication of our quality focus is evident inour manufacturing facilities holding certifications from some of the world’s mostdemanding regulatory bodies.

Halol on the global map

Our Halol unit received GMP approvals in 2009-10 from Canada, Australia, Ukraine,Nigeria, Colombia and Taiwan. This is in addition to its USFDA & UKMHRA approvals.

Intellectual capital

The contribution of our team is critical to our performance. Intellectual capital isthe strongest driver of our growth. Our success is largely derived from our ability toattract the best talent, create opportunities to identify potential and groom our team forleadership positions by providing a congenial environment to perform, lead and grow theorganisation.

We practice a policy of creating tomorrow’s leaders from within the organisation,providing a clear growth path to team members. This process is facilitated through aninstitutionalised promotional system called Career Progression Program (CPP).

A key challenge is protecting and retaining junior level employees operating in theplants and factories. Our team is also replicating its CPP programme across allmanufacturing facilities.

Internal control

Sun Pharma’s defined organizational structure, documented policy guidelines andadequate internal controls ensure efficiency of operations, compliance with internalpolicies, applicable laws and regulations, protection of resources and assets, andaccurate reporting of financial transactions.

Moreover, the Company continuously upgrades these systems in line with the bestavailable practices.

The internal control system is supplemented by extensive internal audits, conducted byindependent firms of Chartered Accountants to cover various operations on a continuousbasis.