BOOK RUNNING LEAD MANAGERS

Transcription

1 Placement Document Not for Circulation Serial Number: [ ] September 28, 2010 STRIDES ARCOLAB LIMITED (Incorporated in the Republic of India with limited liability with corporate identity number L24230MH1990PLC under the Companies Act, 1956) Strides Arcolab Limited ( Strides or the Company ) is issuing 10,742,533 equity shares of face value of Rs. 10 each (the Equity Shares ) at a price of Rs per Equity Share, including a premium of Rs per Equity Share, aggregating Rs. 4, million (the Issue ). ISSUE IN RELIANCE UPON CHAPTER VIII OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2009, AS AMENDED (THE SEBI REGULATIONS ) THIS ISSUE AND THE DISTRIBUTION OF THIS PLACEMENT DOCUMENT IS IN RELIANCE UPON CHAPTER VIII OF THE SEBI REGULATIONS. THIS PLACEMENT DOCUMENT IS PERSONAL TO EACH PROSPECTIVE INVESTOR AND DOES NOT CONSTITUTE AN OFFER OR INVITATION OR SOLICITATION OF AN OFFER TO THE PUBLIC OR TO ANY OTHER PERSON OR CLASS OF INVESTORS WITHIN OR OUTSIDE INDIA. Invitations, offers and sales of Equity Shares shall only be made pursuant to this Placement Document, the Application Form and the Confirmation of Allocation Note. For further information, see Issue Procedure on page 128. The distribution of this Placement Document or the disclosure of its contents without the prior consent of the Company to any person, other than Qualified Institutional Buyers ( QIBs ), as defined in the SEBI Regulations, and persons retained by QIBs to advise them with respect to their purchase of the Equity Shares, is unauthorised and prohibited. Each prospective investor, by accepting delivery of this Placement Document, agrees to observe the foregoing restrictions and to make no copies of this Placement Document or any documents referred to in this Placement Document. This Placement Document has not been reviewed by the Securities and Exchange Board of India (the SEBI ), the Reserve Bank of India (the RBI ), the Bombay Stock Exchange Limited (the BSE ), the National Stock Exchange of India Limited (the NSE ) or any other regulatory or listing authority and is intended only for use by QIBs. This Placement Document has not been and will not be registered as a prospectus with the Registrar of Companies in India, and will not be circulated or distributed to the public in India or any other jurisdiction and will not constitute a public offer in India or any other jurisdiction. The placement of Equity Shares proposed to be made pursuant to this Placement Document is meant solely for QIBs on a private placement basis and is not an offer to the public or to any other class of investors. Investments in equity shares involve a degree of risk and prospective investors should not invest any funds in this Issue unless they are prepared to take the risk of losing all or part of their investment. Prospective investors are advised to read Risk Factors beginning on page 33 carefully before taking an investment decision in this Issue. Each prospective investor is advised to consult its advisors about the particular consequences to it of an investment in the Equity Shares being issued pursuant to this Placement Document. The information on the Company s website or any website directly or indirectly linked to the Company s website does not form part of this Placement Document and prospective investors should not rely on such information contained in, or available through, such websites. Our outstanding Equity Shares are listed on the BSE and the NSE. The closing price of the outstanding Equity Shares on the BSE and the NSE on September 21, 2010 was Rs per Equity Share and Rs per Equity Share, respectively. Applications shall be made for the listing and trading of the Equity Shares offered through the Preminary Placement Document and the Placement Document on the BSE and the NSE (collectively, the Stock Exchanges ). The Stock Exchanges assume no responsibility for the correctness of any statements made, opinions expressed or reports contained herein. Admission of the Equity Shares to trading on the Stock Exchanges should not be taken as an indication of the merits of the Company or the Equity Shares. YOU ARE NOT AUTHORIZED TO AND MAY NOT (1) DELIVER THIS PLACEMENT DOCUMENT TO ANY OTHER PERSON; OR (2) REPRODUCE THIS PLACEMENT DOCUMENT IN ANY MANNER WHATSOEVER. ANY DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORIZED. FAILURE TO COMPLY WITH THIS INSTRUCTION MAY RESULT IN A VIOLATION OF THE SEBI REGULATIONS OR OTHER APPLICABLE LAWS OF INDIA AND OTHER JURISDICTIONS. A copy of this Placement Document has been delivered to the Stock Exchanges. A copy of this Placement Document will be filed with the Stock Exchanges and also be delivered to SEBI for record purposes. THIS PLACEMENT DOCUMENT HAS BEEN PREPARED BY THE COMPANY SOLELY FOR PROVIDING INFORMATION IN CONNECTION WITH THE PROPOSED ISSUE OF THE EQUITY SHARES DESCRIBED IN THIS PLACEMENT DOCUMENT. The Equity Shares have not been and will not be registered under the U.S. Securities Act of 1933, as amended ( U.S. Securities Act ), and may not be offered or sold within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act and applicable state securities laws. Accordingly, the Equity Shares are being offered and sold outside the United States in offshore transactions in reliance on Regulation S under the U.S. Securities Act ( Regulation S ). For further information, please see Transfer Restrictions on page 145 of this Placement Document and Distribution and Solicitation Restrictions on page 139 of this Placement Document. This Placement Document is dated September 28, BOOK RUNNING LEAD MANAGERS IDFC Capital Limited Naman Chambers C-32, G Block Bandra-Kurla Complex Bandra (East) Mumbai , India Tel : (91 22) Fax : (91 22) Daiwa Capital Markets India Private Limited 10 th Floor, 3 North Avenue Maker Maxity, Bandra Kurla Complex Bandra (East) Mumbai , India Tel: (91 22) Fax: (91 22) Kotak Mahindra Capital Company Limited 1st Floor, Bakhtawar 229, Nariman Point Mumbai , India Tel: (91 22) Fax: (91 22) RBS Equities (India) Limited 83/84, Sakhar Bhawan Behind Oberoi Towers 230, Nariman Point Mumbai , India Tel : (91 22) Fax : (91 22)

2 TABLE OF CONTENTS NOTICE TO INVESTORS... 3 REPRESENTATIONS BY INVESTORS... 5 OFFSHORE DERIVATIVE INSTRUMENTS...10 DISCLAIMER CLAUSE OF THE STOCK EXCHANGES...11 PRESENTATION OF FINANCIAL AND OTHER INFORMATION...12 INDUSTRY AND MARKET DATA...13 FORWARD-LOOKING STATEMENTS...14 ENFORCEMENT OF CIVIL LIABILITIES...16 EXCHANGE RATES...17 CERTAIN DEFINITIONS AND ABBREVIATIONS...18 SUMMARY OF BUSINESS...22 SUMMARY OF THE ISSUE...27 SELECTED FINANCIAL INFORMATION OF THE COMPANY...28 RISK FACTORS...33 USE OF PROCEEDS...56 CAPITALISATION...57 MARKET PRICE INFORMATION AND OTHER INFORMATION CONCERNING THE EQUITY SHARES...58 DIVIDEND POLICY...61 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...62 INDUSTRY OVERVIEW...84 OUR BUSINESS...98 REGULATION AND POLICIES BOARD OF DIRECTORS AND SENIOR MANAGEMENT PRINCIPAL SHAREHOLDERS ISSUE PROCEDURE PLACEMENT DISTRIBUTION AND SOLICITATION RESTRICTIONS TRANSFER RESTRICTIONS THE SECURITIES MARKET OF INDIA DESCRIPTION OF THE SHARES TAXATION LEGAL PROCEEDINGS GENERAL INFORMATION FINANCIAL STATEMENTS... F-1 DECLARATION...173

3 NOTICE TO INVESTORS The Company has furnished and accepts full responsibility for the information contained in this Placement Document and to the best of its knowledge and belief, having made all reasonable enquiries, confirms that this Placement Document contains all information with respect to the Company and the Equity Shares, which is material in the context of this Issue. The statements contained in this Placement Document relating to the Company and the Equity Shares are, in all material respects, true and accurate and not misleading, the opinions and intentions expressed in this Placement Document with regard to the Company and the Equity Shares are honestly held, have been reached after considering all relevant circumstances, are based on information presently available to the Company and are based on reasonable assumptions. There are no other facts in relation to the Company and the Equity Shares, the omission of which would, in the context of the Issue, make any statement in this Placement Document misleading in any material respect. Further, all reasonable enquiries have been made by the Company to ascertain such facts and to verify the accuracy of all such information and statements. The Book Running Lead Managers have not separately verified the information contained in this Placement Document (financial, legal or otherwise). Accordingly, neither the Book Running Lead Managers nor any of their respective members, employees, counsel, officers, directors, representatives, agents or affiliates make any express or implied representation, warranty or undertaking, and no responsibility or liability is accepted, by the Book Running Lead Managers, as to the accuracy or completeness of the information contained in this Placement Document or any other information supplied in connection with the issue of Equity Shares or their distribution. Each person receiving this Placement Document acknowledges that such person has neither relied on the Book Running Lead Managers nor on any person affiliated with the Book Running Lead Managers in connection with its investigation of the accuracy of such information or its investment decision, and each such person must rely on its own examination of the Company and the merits and risks involved in investing in the Equity Shares issued pursuant to the Issue. No person is authorised to give any information or to make any representation not contained in this Placement Document and any information or representation not so contained must not be relied upon as having been authorised by or on behalf of the Company or the Book Running Lead Managers. The delivery of this Placement Document at any time does not imply that the information contained in it is correct as at any time subsequent to its date. The Equity Shares have not been approved, disapproved or recommended by any regulatory authority in any jurisdiction. No authority has passed on or endorsed the merits of this Issue or the accuracy or adequacy of this Placement Document. The distribution of this Placement Document and the issue of the Equity Shares in certain jurisdictions may be restricted by law. As such, this Placement Document does not constitute, and may not be used for or in connection with, an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation. In particular, no action has been taken by the Company and the Book Running Lead Managers which would permit an issue of the Equity Shares or distribution of this Placement Document in any jurisdiction, other than India, where action for that purpose is required. Accordingly, the Equity Shares may not be offered or sold, directly or indirectly, and neither this Placement Document nor any other Issue-related materials in connection with the Equity Shares may be distributed or published in or from any country or jurisdiction, except under circumstances that will result in compliance with any applicable rules and regulations of any such country or jurisdiction. Please see, Placement on page 137. In making an investment decision, investors must rely on their own examination of the Company and the terms of this Issue, including the merits and risks involved. Investors should not construe the contents of this Placement Document as legal, tax, accounting or investment advice. Investors should consult their own counsel and advisors as to business, legal, tax, accounting and related matters concerning this Issue. In addition, neither the Company nor the Book Running Lead Managers makes any representation to any offeree or purchaser of the Equity Shares regarding the legality of an investment in the Equity Shares by such offeree or purchaser under applicable legal, investment or similar laws or regulations. Each purchaser of the Equity Shares in this Issue is deemed to have acknowledged, represented and agreed that it is eligible 3

4 to invest in India and in the Company under Indian law, including Chapter VIII of the SEBI Regulations and is not prohibited by SEBI or any other regulatory authority from buying, selling or dealing in securities. Each purchaser of Equity Shares in the Issue also acknowledges that it has been afforded an opportunity to request from the Company and review information relating to the Company and the Equity Shares. This Placement Document contains summaries of certain terms of certain documents, which summaries are qualified in their entirety by the terms and conditions of such documents. The information on the Company s website, or on the website of the Book Running Lead Managers, does not constitute or form part of this Placement Document. Prospective investors should not rely on the information contained in, or available through such websites. 4

5 REPRESENTATIONS BY INVESTORS All references to you or your in this section is to the prospective investors in the Issue. By Bidding for and subscribing to any Equity Shares under the Issue, you are deemed to have represented and warranted to us and the Book Running Lead Managers, and acknowledged and agreed as follows: you are a QIB as defined in Regulation 2(1)(zd) of the SEBI Regulations, have a valid and existing registration under applicable laws in India and undertake to acquire, hold, manage or dispose of any Equity Shares that are Allotted to you for the purposes of your business in accordance with Chapter VIII of the SEBI Regulations; if you are Allotted Equity Shares pursuant to the Issue, you shall not, for a period of one year from the date of Allotment (hereinafter defined), sell the Equity Shares so acquired, except on the Stock Exchanges; you are aware that the Equity Shares have not been and will not be registered under the Companies Act, the SEBI Regulations or under any other law in force in India. The Preliminary Placement Document and this Placement Document has not been reviewed by the SEBI, the RBI, the Stock Exchanges or any other regulatory or listing authority and is intended only for use by QIBs. Further, the Preliminary Placement Document and this Placement Document has not been verified or affirmed by the SEBI or the Stock Exchanges and will not be filed or registered with the Registrar of Companies. The Placement Document has been filed with the Stock Exchanges for record purposes only and has been displayed on the websites of the Company and the Stock Exchanges; you are permitted to subscribe to the Equity Shares under the laws of all relevant jurisdictions and that you have all necessary capacity and have obtained all necessary consents and authorities to enable you to commit to this participation in the Issue and to perform your obligations in relation thereto (including, without limitation, in the case of any person on whose behalf you are acting, all necessary consents and authorities to agree to the terms set out or referred to in this Placement Document) and complied with all the necessary formalities and will honour such obligations; neither the Company nor any Book Running Lead Manager is making any recommendations to you, or advising you regarding the suitability of any transactions they may enter into in connection with the Issue, and that participation in the Issue is on the basis that you are not and will not be a client of the Book Running Lead Managers and that the Book Running Lead Managers have no duties or responsibilities to you for providing the protection afforded to their clients or customers or for providing advice in relation to the Issue and is in no way acting in a fiduciary capacity; all statements other than statements of historical fact included in this Placement Document, including, without limitation, those regarding the Company s financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives relating to the Company s business), are forward-looking statements. Such forwardlooking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company s present and future business strategies and environment in which the Company will operate in the future. You should not place undue reliance on forward-looking statements, which speak only as at the date of Placement Document. The Company assumes no responsibility to update any of the forwardlooking statements contained in this Placement Document; you are aware and understand that the Equity Shares are being offered only to QIBs and are not being offered to the general public and the Allotment of the same shall be on a discretionary basis; 5

6 you have made, or been deemed to have made, as applicable, the representations and warranties as set forth under the section titled Transfer Restrictions on page 145; you have been provided a serially numbered copy of this Placement Document and Placement Document and have read them in their entirety; that in making your investment decision, (i) you have relied on your own examination of the Company and the terms of the Issue, including the merits and risks involved, (ii) you have made your own assessment of the Company, the Equity Shares and the terms of the Issue based on such information as is publicly available, (iii) you have consulted your own independent advisors or otherwise (including tax advisors) have satisfied yourself concerning without limitation, the effects of local laws and taxation matters, (iv) you have relied solely on the information contained in this Placement Document and no other disclosure or representation by the Company or any other party and (v) you have received all information that you believe is necessary or appropriate in order to make an investment decision in respect of the Company and the Equity Shares; none of the Book Running Lead Managers has provided you with any tax advice or otherwise made any representations regarding the tax consequences of the Equity Shares (including but not limited to the Issue and the use of the proceeds from the Equity Shares). You will obtain your own independent tax advice from a reputable service provider and will not rely on the Book Running Lead Managers when evaluating the tax consequences in relation to the Equity Shares (including but not limited to the Issue and the use of the proceeds from the Equity Shares). You waive and agree not to assert any claim against any of the Book Running Lead Managers with respect to the tax aspects of the Equity Shares or as a result of any tax audits by tax authorities, wherever situated; you have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the investment in the Equity Shares and you and any accounts for which you are subscribing the Equity Shares (i) are each able to bear the economic risk of the investment in the Equity Shares, (ii) will not look to the Company and/or any of the Book Running Lead Managers for all or part of any such loss or losses that may be suffered, (iii) are able to sustain a complete loss on the investment in the Equity Shares, (iv) have no need for liquidity with respect to the investment in the Equity Shares, and (v) have no reason to anticipate any change in your or their circumstances, financial or otherwise, which may cause or require any sale or distribution by you or them of all or any part of the Equity Shares; that where you are acquiring the Equity Shares for one or more managed accounts, you represent and warrant that you are authorized in writing, by each such managed account to acquire the Equity Shares for each managed account and to make (and you hereby make) the representations, warranties, acknowledgements and agreements herein for and on behalf of each such account, reading the reference to you to include such accounts; you are not a Promoter (as defined in the SEBI Regulations) and are not a person related to the Promoters, either directly or indirectly and your Bid does not directly or indirectly represent the Promoters or promoter group or person related to the Promoters; you have no rights under a shareholders agreement or voting agreement with the Promoters or persons related to the Promoters, no veto rights or right to appoint any nominee director on the Board of Directors other than the rights acquired, if any, in the capacity of a lender not holding any Equity Shares which shall not be deemed to be a person related to the Promoters; you have no right to withdraw your Bid after the Bid Closing Date; you are eligible to Bid and hold Equity Shares so Allotted and together with any Equity Shares held by you prior to the Issue. You further confirm that your holding upon the issue of the Equity 6

7 Shares shall not exceed the level permissible as per any applicable law; the Bids submitted by you would not eventually result in triggering a tender offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended (the Takeover Code ); to the best of your knowledge and belief together with other QIBs in the Issue that belong to the same group or are under common control as you, the Allotment under the Issue to you shall not exceed 50% of the Issue. For the purposes of this representation: a. the expression belongs to the same group shall by interpreted by applying the concept of companies under the same group as provided in sub-section (11) of Section 372 of the Companies Act; and b. control shall have the same meaning as is assigned to it by clause (c) of Regulation 2 of the Takeover Code; you are aware that if you are Allotted more than 5% of the Equity Shares in this Issue, the Company shall be required to disclose your name and the number of Equity Shares Allotted to you on the website of the SEBI and you consent to such disclosure being made by the Company; you shall not undertake any trade in the Equity Shares credited to your Depository Participant account until such time that the final listing and trading approvals for the Equity Shares under this Issue are issued by the Stock Exchanges; you are aware that applications have been made to the Stock Exchanges for in-principle approvals for listing and admission of the Equity Shares to trading on the Stock Exchanges for listed securities and that the applications for the final listing and trading approvals will be made only after the Allotment, and there can be no assurance that such final approvals will be obtained on time or at all; you are aware and understand that the Book Running Lead Managers will have entered into a placement agreement with the Company whereby the Book Running Lead Managers have, subject to the satisfaction of certain conditions set out therein, undertaken to use their reasonable endeavours to seek to procure subscription for the Equity Shares; the contents of this Placement Document are exclusively the responsibility of the Company and none of the Book Running Lead Managers nor any person acting on their behalf has or shall have any liability for any information, representation or statement contained in this Placement Document or any information previously published by or on behalf of the Company and will not be liable for your decision to participate in the Issue based on any information, representation or statement contained in this Placement Document or otherwise. By accepting a participation in this Issue, you agree to the same and confirm that you have neither received nor relied on any other information, representation, warranty or statement made by or on behalf of the Book Running Lead Managers or the Company or any other person and that none of the Book Running Lead Managers nor the Company nor any other person will be liable for your decision to participate in the Issue based on any other information, representation, warranty or statement that you may have obtained or received; that the only information you are entitled to rely on, and on which you have relied in committing yourself to acquire the Equity Shares is contained in this Placement Document, such information being all that you deem necessary to make an investment decision in respect of the Equity Shares and that you have neither received nor relied on any other information given or representations, warranties or statements made by any of the Book Running Lead Managers (including any view, statement, opinion or representation expressed in any research published or distributed by any of 7

8 the Book Running Lead Managers or their respective affiliates or any view, statement, opinion or representation expressed by any staff (including research staff) of any of the Book Running Lead Managers or their respective affiliates) or the Company and none of the Book Running Lead Managers will be liable for your decision to accept an invitation to participate in the Issue based on any other information, representation, warranty statement or opinion; you agree to indemnify and hold the Company and the Book Running Lead Managers harmless from any and all costs, claims, liabilities and expenses (including legal fees and expenses) arising out of or in connection with any breach of the representations, warranties, acknowledgements and agreements in this section. You agree that the indemnity set forth in this paragraph shall survive the resale of the Equity Shares Allotted under this Issue by or on behalf of the managed accounts; you understand that none of the Book Running Lead Managers have any obligation to purchase or acquire all or any part of the Equity Shares purchased by you in the Issue or to support any losses, directly or indirectly sustained or incurred by you for any reason whatsoever in connection with the Issue, including non-performance by the Company of any of its respective obligations or any breach of any representations or warranties by the Company, whether to you or otherwise; that you are eligible to invest in India under applicable law, including the Foreign Exchange Management (Transfer or Issue of Security by Person Resident Outside India) Regulations, 2000, as amended from time to time, and have not been prohibited by the SEBI or any other regulatory authority, statutory authority or otherwise, from buying, selling or dealing in securities; any dispute arising in connection with the Issue will be governed and construed in accordance with the laws of the Republic of India, and the courts in Bengaluru, India shall have the exclusive jurisdiction to settle any disputes which may arise out of or in connection with this Placement Document; that you are a sophisticated investor who is seeking to purchase the Equity Shares for your own investment and not with a view to distribution. In particular, you acknowledge that (i) an investment in the Equity Shares involves a high degree of risk and that the Equity Shares are, therefore, a speculative investment, (ii) you have sufficient knowledge, sophistication and experience in financial and business matters so as to be capable of evaluating the merits and risk of the purchase of the Equity Shares, and (iii) you are experienced in investing in private placement transactions of securities of companies in a similar stage of development and in similar jurisdictions and have such knowledge and experience in financial, business and investments matters that you are capable of evaluating the merits and risks of your investment in the Equity Shares; you confirm that either (i) you have not participated in or attended any investor meetings or presentations by the Company or its agents with regard to the Company or this Issue ( Company Presentations ); or (ii) if you have participated in or attended any Company Presentations; (a) you understand and acknowledge that the Book Running Lead Managers may not have the knowledge of the statements that the Company or its agents may have made at such Company Presentations and are therefore unable to determine whether the information provided to you at such Company Presentation may have included any material misstatements or omissions, and, accordingly you acknowledge that the Book Running Lead Managers have advised you not to rely in any way on any such information that was provided to you at such Company Presentations, and (b) confirm that, to the best of your knowledge, you have not been provided any material information that was not publicly available; you understand that the Equity Shares have not been and will not be registered under the U.S. Securities Act or with any securities regulatory authority of any state of the United States and accordingly, may not be offered or sold within the United States, except in reliance on an exemption from the registration requirements of the U.S. Securities Act; 8

9 you are, at the time the Equity Shares are purchased pursuant to Regulation S, located outside the United States (within the meaning of Regulation S) and you are not an affiliate of the Company or a person acting on behalf of such an affiliate; you are purchasing the Equity Shares in an offshore transaction meeting the requirements of Rule 903 or 904 of Regulation S; that each of the representations, warranties, acknowledgements and agreements set out above shall continue to be true and accurate at all times up to and including the Allotment of the Equity Shares in the Issue; and that the Company, the Book Running Lead Managers, their respective affiliates and others will rely on the truth and accuracy of the foregoing representations, warranties, acknowledgements and agreements which are given to the Book Running Lead Managers on their own behalf and on behalf of the Company and are irrevocable. 9

10 OFFSHORE DERIVATIVE INSTRUMENTS Subject to compliance with all applicable Indian laws, rules, regulations, guidelines and approvals in terms of Regulation 15A(1) of the SEBI (Foreign Institutional Investors) Regulations, 1995, as amended, an FII may issue or otherwise deal in offshore derivative instruments such as participatory notes, equity-linked notes or any other similar instruments against underlying securities (all such offshore derivative instruments are referred to herein as P-Notes ) listed or proposed to be listed on any stock exchange in India only in favour of those entities which are regulated by foreign regulatory authorities in the countries of their incorporation or establishment subject to compliance with know your client requirements. An FII shall also that no further issue or transfer of any instrument referred to above is made to any person other than such entities regulated by appropriate foreign regulatory authorities. P-Notes have not been and are not being offered or sold pursuant to this Placement Document. This Placement Document does not contain any information concerning P-Notes, including, without limitation, any information regarding any risk factors relating thereto. Any P-Notes that may be issued are not securities of the Company and do not constitute any obligation of, claims on or interests in the Company. The Company has not participated in any offer of any P-Notes, or in the establishment of the terms of any P-Notes, or in the preparation of any disclosure related to any P- Notes. Any P-Notes that may be offered are issued by, and are the sole obligations of, third parties that are unrelated to the Company. The Company does not make any recommendation as to any investment in P- Notes and does not accept any responsibility whatsoever in connection with the P-Notes. Any P-Notes that may be issued are not securities of the Book Running Lead Managers and do not constitute any obligations or claims on the Book Running Lead Managers. FII affiliates of the Book Running Lead Managers may purchase, to the extent permissible under law, Equity Shares in the Issue, and may issue P-Notes in respect thereof. Prospective investors interested in purchasing any P-Notes have the responsibility to obtain adequate disclosures as to the issuer(s) of such P-Notes and the terms and conditions of any such P-Notes. Neither SEBI nor any other regulatory authority has reviewed or approved any P-Notes or any disclosure related thereto. Prospective investors are urged to consult with their own financial, legal, accounting and tax advisors regarding any contemplated investment in P-Notes, including whether P-Notes are issued in compliance with applicable laws and regulations. 10

11 DISCLAIMER CLAUSE OF THE STOCK EXCHANGES As required, a copy of this Placement Document has been submitted to the Stock Exchanges. The Stock Exchanges do not in any manner: 1. warrant, certify or endorse the correctness or completeness of any of the contents of the Preminary Placement Document and this Placement Document; 2. warrant that the Equity Shares will be listed or will continue to be listed on the Stock Exchanges; or 3. take any responsibility for the financial or other soundness of the Company, its Promoter, its management or any scheme or project of the Company; and it should not for any reason be deemed or construed to mean that the Preliminary Placement Document and this Placement Document has been cleared or approved by the Stock Exchanges. Every person who desires to apply for or otherwise acquire any Equity Shares may do so pursuant to an independent inquiry, investigation and analysis and shall not have any claim against the Stock Exchanges whatsoever by reason of any loss which may be suffered by such person consequent to or in connection with such subscription/acquisition whether by reason of anything stated or omitted to be stated herein or for any other reason whatsoever. 11

12 PRESENTATION OF FINANCIAL AND OTHER INFORMATION In this Placement Document, unless the context otherwise indicates or implies, references to you, offeree, purchaser, subscriber, recipient, investors and potential investor are to the prospective investors in this Issue, references to Strides, the Company, our Company or the Issuer are to Strides Arcolab Limited and references to us, we or our are to Strides Arcolab Limited together with its subsidiaries, joint ventures and associate companies, if any. In this Placement Document, references to USD or US$ and U.S. Dollars are to the legal currency of the United States, references to Euro are to the official currency of the European Union and references to Rs. or INR or Rupees are to the legal currency of the Republic of India. All references herein to the U.S. or the United States are to the United States of America and its territories and possessions and all references to India are to the Republic of India and its territories and possessions. All references herein to the Government are to Central Government of India and all references to the government are to Government of India, central or state, as applicable. The Company publishes its financial statements in Rupees. The financial statements included herein have been prepared in accordance with Indian GAAP and the Companies Act. Unless otherwise indicated, all financial data in this Placement Document are derived from the financial statements prepared in accordance with Indian GAAP. Indian GAAP differs in certain significant respects from International Financial Reporting Standards ( IFRS ) and U.S. GAAP. The Company does not provide a reconciliation of its financial statements to IFRS or U.S. GAAP financial statements. Unless otherwise stated, references in this Placement Document to a particular year are to the calendar year ended on December 31 and to a particular Fiscal or financial year are to the financial year of the Company ending on December 31 of a particular year. Any discrepancies in the tables included herein between the amounts listed and the totals thereof are due to rounding off. 12

13 INDUSTRY AND MARKET DATA Information regarding market position, growth rates and other industry data pertaining to businesses of the Company contained in this Placement Document consists of estimates based on data reports compiled by government bodies, professional organizations and analysts, data from other external sources and knowledge of the markets in which the Company competes. The statistical information included in this Placement Document relating to the various sectors in which the Company operates has been reproduced from various trade, industry and government publications and websites. This data is subject to change and cannot be verified with complete certainty due to limits on the availability and reliability of the raw data and other limitations and uncertainties inherent in any statistical survey. In many cases, there is no readily available external information (whether from trade or industry associations, government bodies or other organizations) to validate market-related analysis and estimates, so the Company has relied on internally developed estimates. Neither the Company nor any of the Book Running Lead Managers has independently verified this data and neither the Company nor any of the Book Running Lead Managers makes any representation regarding the accuracy of such data. Similarly, while the Company believes that its internal estimates are reasonable, such estimates have not been verified by any independent sources, and neither the Company nor the Book Running Lead Managers can assure potential investors as to their accuracy. 13

14 FORWARD-LOOKING STATEMENTS Certain statements contained in this Placement Document that are not statements of historical fact constitute forward-looking statements. Investors can generally identify forward-looking statements by terminology such as aim, anticipate, believe, continue, could, estimate, expect, intend, may, objective, plan, potential, project, pursue, shall, should, will, would, or other words or phrases of similar import. All statements regarding the Company s expected financial condition and results of operations and business plans, including potential acquisitions, and prospects are forwardlooking statements. These forward-looking statements include statements as to the Company s business strategy, revenue and profitability, planned projects and other matters discussed in this Placement Document that are not historical facts. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the Company s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements or other projections. All forward-looking statements are subject to risks, uncertainties and assumptions about the Company that could cause actual results to differ materially from those contemplated by the relevant statement. Important factors that could cause actual results, performance or achievements to differ materially include, among others: our ability to receive approval for new manufacturing facilities in which we have invested; our ability to comply with regulations prescribed by Governments and other regulatory agencies; the results of United States FDA audit processes; the success of our marketing arrangements with our partners for the sale and distribution of our products; our ability to commercialise our product filings; our ability to successfully identify and conclude joint ventures or manage the integration of new and existing joint venture business, or the ability of any such business to perform according to our expectations; the performance of our subsidiaries; our ability to sustain or expand our specialised sterile products business; and other factors discussed in this Placement Document including under Risk Factors on page 33. Additional factors that could cause actual results, performance or achievements to differ materially include, but are not limited, to those discussed under the Risk Factors, Management s Discussion and Analysis of Financial Condition and Results of Operations of Company, Industry Overview and Our Business on pages 33, 62, 84 and 98 respectively, of this Placement Document. The forward-looking statements contained in this Placement Document are based on the beliefs of management, as well as the assumptions made by and information currently available to management. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable at this time, it cannot assure investors that such expectations will prove to be correct. Given these uncertainties, investors are cautioned not to place undue reliance on such forward-looking statements. If any of these risks and uncertainties materialize, or if any of the Company s underlying assumptions prove to be incorrect, the Company s actual results of operations or financial condition could differ materially from that described herein as anticipated, believed, estimated or expected. All subsequent 14

15 written and oral forward-looking statements attributable to the Company are expressly qualified in their entirety by reference to these cautionary statements. 15

16 ENFORCEMENT OF CIVIL LIABILITIES The Company is a limited liability company incorporated under the laws of India. Not all the Directors and key managerial personnel are residents of India. A substantial portion of the assets of the Company are located in India. As a result, it may be difficult for investors to affect service of process upon the Company or such persons outside India or to enforce judgments obtained against such parties outside India. India is not a party to any international treaty in relation to the recognition or enforcement of foreign judgments. Recognition and enforcement of foreign judgments and execution of a foreign judgment is provided for under Sections 13 and 44A respectively of the Code of Civil Procedure, 1908 (the Civil Procedure Code ) on a statutory basis. Section 13 of the Civil Procedure Code provide that a foreign judgment shall be conclusive regarding any matter directly adjudicated upon except: (i) where the judgment has not been pronounced by a court of competent jurisdiction; (ii) where the judgment has not been given on the merits of the case; (iii) where it appears on the face of the proceedings that the judgment is founded on an incorrect view of international law or a refusal to recognize the law of India in cases in which such law is applicable; (iv) where the proceedings in which the judgment was obtained were opposed to natural justice; (v) where the judgment has been obtained by fraud, or (vi) where the judgment sustains a claim founded on a breach of any law in force in India. Foreign judgments may be enforced by proceedings in execution in certain cases. Section 44A of the Civil Procedure Code provides that where a foreign judgment has been rendered by a superior court within the meaning of that section in any country or territory outside India which the Government has by notification declared to be in a reciprocating territory, it may be enforced in India by proceedings in execution as if the judgment had been rendered by the relevant court in India. However, Section 44A of the Civil Procedure Code is applicable only to monetary decrees not being in the nature of any amounts payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalties and does not include arbitration awards. Furthermore, the execution of the foreign decree under Section 44A of the Civil Procedure Code is also subject to the exceptions under Section 13 of the Civil Procedure Code, as mentioned in the previous paragraph. Each of the United Kingdom, Singapore and Hong Kong has been declared by the Government to be a reciprocating territory for the purposes of Section 44A of the Civil Procedure Code but the United States has not been so declared. A judgment of a court in a jurisdiction which is not a reciprocating territory may be enforced only by a fresh suit upon the judgment and not by proceedings in execution. The suit must be filed in India within three years from the date of the judgment in the same manner as any other suit filed to enforce a civil liability in India. It is unlikely that a court in India would award damages on the same basis as a foreign court if an action is brought in India. Furthermore, it is unlikely that an Indian court would enforce foreign judgments if it viewed the amount of damages awarded as excessive or inconsistent with public policy. Further, any judgment or award denominated in a foreign currency would be converted into Rupees on the date of such judgment or award and not on the date of payment. A party seeking to enforce a foreign judgment in India is required to obtain approval from the RBI to repatriate outside India any amount recovered pursuant to the execution of such a judgment. 16

17 EXCHANGE RATES Fluctuations in the exchange rate between the Rupee and the U.S. Dollar will affect the U.S. Dollar equivalent of the Rupee price of the Equity Shares on the Stock Exchanges. These fluctuations will also affect the conversion into U.S. Dollars of any cash dividends paid in Rupees on the Equity Shares. The following table sets forth, for the periods indicated, information with respect to the exchange rate between the Rupee and the U.S. Dollar (in Rupees per U.S. Dollar) based on the reference rate released by the RBI. On an average annual basis, the Rupee consistently declined against the U.S. Dollar from 1980 until In early July 1991, the Government adjusted the Rupee downward by an aggregate of approximately 20% against the U.S. Dollar as part of an economic package designed to overcome an external payment crisis. In 1994, the Rupee was permitted to float freely for the first time. The exchange rate as at September 21, 2010 was Rs = U.S. Dollar No representation is made that the Rupee amounts actually represent such U.S. dollar amounts or could have been or could be converted into U.S. Dollars at the rates indicated, any other rate or at all. Exchange Rate Rs. Per U.S. Dollar Period End Average High Low Year ended December 31, Year ended December 31, Year ended December 31, Month Ended: March 31, April 30, May 31, June 30, July 31, August 31, Source: No representation is made that the Rupee amounts actually represent such U.S. Dollar amounts or could have been or could be converted into U.S. Dollars at the rates indicated, or at all. 17

18 CERTAIN DEFINITIONS AND ABBREVIATIONS The Company has prepared this Placement Document using certain definitions and abbreviations which you should consider when reading the information contained herein. Capitalised terms used in this Placement Document shall have the meaning set forth below, unless specified otherwise or the context indicates or requires otherwise, and references to any statue or regulations or policies shall include amendments thereto, from time to time. Company Related Terms Term Company or or the Company or the Issuer We or us or our Articles/ Articles of Association Statutory Auditors Board of Directors/ Board Directors Equity Shares Financial Statements Description Strides Arcolab Limited, a public limited company incorporated under the Companies Act and having its registered office at 201, Devavrata, sector 17, Vashi, Navi Mumbai, , India. Unless the context otherwise requires, Strides Arcolab Limited and its Subsidiaries. The articles of association of the Company. The statutory auditors of the Company, Deloitte Haskins & Sells, Chartered Accountants, registration no S, with their offices at Deloitte Centre, Anchorage II, 100/2, Richmond Road, Bengaluru The board of directors of the Company or any duly constituted committee thereof. Directors of the Company, unless otherwise specified. Equity shares of the Company of face value of Rs.10 each. The audited consolidated financial statements of the Company as of and for the years ended December 31, 2007, 2008 and 2009 prepared in accordance with Indian GAAP. The memorandum of association of the Company. Memorandum/ Memorandum of Association Promoters The promoters of the Company, being: Mr. Arun Kumar and Mr. Keerthapati R. Ravishankar. Promoter Group The persons and entities constituting our promoter group pursuant to Regulation Registrar of Companies or the RoC Subsidiaries Issue Related Terms 2(1)(zb) of the SEBI Regulations. Registrar of Companies, Mumbai, State of Maharashtra. The subsidiaries of the Company, whether incorporated in India or outside, namely, Agila Specialties Private Limited, Arcolab Limited SA, Ascent Pharma Pty Limited, Ascent Pharmaceuticals Limited, Ascent Pharmahealth Asia (B) SDN BHD), Ascent Pharmahealth Asia (Hong Kong) Limited, Ascent Pharmahealth Asia (Malaysia) SDN BHD, Ascent Pharmahealth Asia Pte Limited, Ascent Pharmahealth Limited, Beltapharm SpA, Co-Pharma Limited, Drug Houses of Australia (Asia) Pte Limited, Farma Plus AS, Linkace Limited, Onco Laboratories Limited, Onco Therapies Limited, Pharma Strides Canada Corporation, Pharmasave Australia Pty Limited, Plus Farma ehf, Starsmore Limited, Strides Africa Limited, Strides Arcolab International Limited, Strides Arcolab Polska Sp.Z.o.o, Strides Arcolab UK Limited, Strides Australia Pty Limited, Strides CIS Limited, Strides Inc, Strides Pharma (Cyprus) Limited, Strides Pharmaceuticals (Holdings) Limited, Strides Pharmaceuticals (Mauritius) Limited, Strides SA Pharmaceuticals Pty Ltd, Strides Specialties (Holdings) Cyprus Limited, Strides Specialties (Holdings) Limited, Strides Specialty (Cyprus) Limited, Strides Technology & Research Private Limited and Strides Vital Nigeria Limited. Term Allocated, Allocation Allotees Allotment/ Allotted Description The allocation of Equity Shares, in consultation with the Book Running Lead Managers, following the determination of the Issue Price to QIBs on the basis of Application Forms submitted by them in compliance with Chapter VIII of the SEBI Regulations. Persons to whom Equity Shares are Allotted pursuant to the Issue. Unless the context otherwise requires, the issue and allotment of Equity Shares pursuant to the Issue. 18

19 Term Bid Cum Application Form Bid Closing Date Bid Opening Date Bid Bidding Period Book Running Lead Managers/BRLMs CAN / Confirmation of Allocation Note Cut-off Price Escrow Account Escrow Bank Floor Price Issue Issue Price Issue Size Listing Agreement Pay-in Date Placement Agreement Placement Document Preliminary Placement Document QIBs or Qualified Institutional Buyers QIP Sanctions Description The form pursuant to which a QIB shall submit a bid in the Issue. September 28, 2010 i.e. the date on which our Company (or the Book Running Lead Managers on behalf of our Company) shall cease acceptance of Application Forms. September 23, 2010 i.e. the date on which our Company (or the Book Running Lead Managers on behalf of our Company) shall commence acceptance of Application Forms. An indication of interest by a QIB, including all revisions and modifications of interest, as provided in the Application Form, to subscribe for Equity Shares in the Issue. The period between the Bid Opening Date and Bid Closing Date, inclusive of both dates, during which QIBs can submit their Bids. Book Running Lead Managers to the Issue, being IDFC Capital Limited, RBS Equities (India) Limited, Daiwa Capital Markets India Private Limited and Kotak Mahindra Capital Company Limited. Note or advice or intimation to not more than 49 QIBs confirming the Allocation of Equity Shares to such QIBs after discovery of the Issue Price and to pay the entire Issue Price for all the Equity Shares allocated to such QIBs. The Issue Price of the Equity Shares which shall be finalised by us in consultation with the Book Running Lead Managers. The account, titled Escrow Account- Strides Arcolab Limited opened with the Escrow Bank, subject to the terms of the escrow agreement. The Royal Bank of Scotland N.V., Bengaluru. The price of Rs which has been calculated in accordance with Chapter VIII of the SEBI Regulations and below which the Equity Shares shall not be Allotted. The offer and issuance of 10,742,533 Equity Shares to QIBs, pursuant to Chapter VIII of the SEBI Regulations. Rs per Equity Share, which shall be equal to or more than the Floor Price. The issue of 10,742,533 Equity Shares aggregating Rs. 4,550 million. The agreement entered into between the Company and each Stock Exchange in relation to listing of the Equity Shares on the Stock Exchange. The last date specified in the CAN for payment of subscription money in relation to the Issue. The placement agreement dated September 22, 2010 entered into between the Company and the BRLMs. This placement document to be issued in accordance with Chapter VIII of the SEBI Regulations. The preliminary placement document for the Issue issued in accordance with Chapter VIII of the SEBI Regulations dated September 23, Qualified institutional buyers as defined in Regulation 2(1) (zd) of the SEBI Regulations. Qualified Institutions Placement under chapter VIII of the SEBI Regulations. Any sanctions administered or enforced by the U.S. Department of Treasury's Office of Foreign Assets Control, the United Nations Security Council, the European Union, Her Majesty's Treasury, or other relevant sanctions authority. Industry related terms Term Description ANDAs Abbreviated New Drug Applications. ANVISA Agencia Nacional de Vigilancia Sanitaria. API Active Pharmaceutical Ingredients. BE Bio-equivalence. BP British Pharmacopoeia. CDSCO Central Drugs Standard Control Organisation. CVD Cardiovascular disease. DBT Department of Biotechnology. DCA Drugs and Cosmetics Act, DCGI Drug Controller General of India. DMF Drug Master Files. DPCO Drug (Prices Control) Order, DTAB Drug Technical Advisory Board. 19

20 Term Description ECA Essential Commodities Act, EOU Export Oriented Unit. GATT General Agreement on Tariffs and Trade. GEAC Genetic Engineering Approval Committee. GMP Good manufacturing practices, as defined by the WHO. GPO Group Purchasing Organisation. HAS Health Science Authority, Singapore. HUF Hindu Undivided Family. ICH International Conference on Harmonisation. ICMR Indian Council of Medical Research. IDA International Dispensary Association. IEC Institutional ethics committee. IP Indian Pharmacopoeia. MCC Medicines Control Council, South Africa. MHRA Medicines and Healthcare Products Regulatory Agency, U.K. MNC Multinational Corporation. NCE New chemical entity. NDDS New Drug Delivery System. NPPA National Pharmaceutical Pricing Authority. ORG Operations Research Group. OTC Over the counter. PCB Pollution Control Board. PIC Pharmaceutical Inspection Convention, Germany. RDNA Recombinant Deoxyribonucleic Acid. SAFE Signatures and Authentication for Everyone. SEZ Special Economic Zone. TGA Therapeutic Goods Administration, Australia. TRIPS Trade-Related Aspects of Intellectual Property Rights. UNDP United Nations Development Program. UNICEF United Nations International Children s Education Fund. U.S. FDA United States Food and Drug Administration. USP United States Pharmacopoeia. WHO World Health Organisation. WTO World Trade Organisation. Conventional and General Terms/ Abbreviations Term AGM AS BSE CAGR CESTAT CDSL Civil Procedure Code Companies Act Depositories Act Depository Depository Participant DIPP EBITDA EGM EPS FCCB FDI FEMA Description Annual General Meeting. Accounting Standards issued by the Institute of Chartered Accountants of India. The Bombay Stock Exchange Limited. Compounded Annual Growth Rate. Custom Excise and Service Tax Appellate Tribunal. Central Depository Services (India) Limited. The Code of Civil Procedure, 1908, as amended. The Companies Act, 1956, as amended. The Depositories Act, 1996, as amended. A depository registered with SEBI under the SEBI (Depositories and Participant) Regulations, 1996, as amended. A depository participant as defined under the Depositories Act. The Indian Department of Industrial Policy and Promotion Ministry of Commerce and Industry, GoI. Earnings Before Interest, Tax, Depreciation and Amortisation. Extra-Ordinary General Meeting. Earnings Per Share. Foreign Currency Convertible Bonds Foreign direct investment. The Foreign Exchange Management Act, 1999, as amended, and the regulations issued 20

21 Term Description thereunder. FII Foreign Institutional Investor (as defined under the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995, as amended) registered with SEBI. financial year / Fiscal / FY Unless stated otherwise, period of 12 months ended December 31 of that particular year. FIPB Foreign Investment Promotion Board. GAAP Generally Accepted Accounting Principles. GDP Gross Domestic Product. HUF Hindu Undivided Family. ICAI Institute of Chartered Accountants of India. IFRS International Financial Reporting Standards of the International Accounting Standards Board. Indian GAAP Generally Accepted Accounting Principles in India. IT Information Technology. IT Act The Income Tax Act, 1961, as amended. JV Joint Venture. LIBOR London Interbank Offered Rate. MAT Minimum Alternate Tax. MoU Memorandum of Understanding. Mutual Fund / MF A mutual fund registered with SEBI under the SEBI (Mutual Funds) Regulations, NRI Non Resident Indian. NSDL National Securities Depository Limited. NSE The National Stock Exchange of India Limited. p.a. Per annum. PAN Permanent Account Number. PAT Profit After Tax. PBT Profit Before Tax. RBI Reserve Bank of India. Regulation S Regulation S under the U.S. Securities Act. Rs. / Rupees / INR Indian Rupees. SEBI Securities and Exchange Board of India. SEBI Act The Securities and Exchange Board of India Act, 1992, as amended from time to time. SEBI Regulations Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended. U.S. Securities Act The U.S. Securities Act, 1933, as amended. SENSEX The index of a basket of 30 constituent stocks traded on BSE representing a sample of large, liquid and representative companies. SFO Securities and Futures Ordinance SICA Sick Industrial Companies (Special Provisions) Act, State Government Stock Exchanges STT Takeover Code USD or US$ and U.S. Dollars Government of a State of the Republic of India. BSE and NSE. Securities Transaction Tax. Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations 1997, as amended. The lawful currency for the time being of the United States of America. 21

22 SUMMARY OF BUSINESS Overview We are a pharmaceuticals company engaged in the manufacturing of a wide range of pharmaceutical products, including branded generics and specialised sterile products. We believe we are a leading manufacturer of soft gelatin capsules and steriles. We are primarily involved in two businesses, the pharmaceutical business and the specialised sterile products business. The pharmaceutical business is further divided into two product lines, manufacturing and branded generics. Our pharmaceutical business offers a wide range of products across several major therapeutic categories, including anti-biotics, oncology, anti-bacterials and HIV/AIDS and malaria drugs. As part of our specialised sterile products business, we develop and manufacture sterile products across many therapeutic areas and formats for various multi-national pharmaceutical companies. We believe that we have one of the largest lyophilisation (freeze-drying) capacities in the world. We operate 14 manufacturing facilities across six locations in India, Singapore, Nigeria, Poland, Brazil and Italy. In addition to twelve manufacturing facilities owned by us, we have entered into an agreement in February 2010 with Aspen Global Incorporated, Cellofarm LTDA and Starsmore Limited for the acquisition of two manufacturing facilities for a consideration of approximately US$ million, which we currently operate. Pursuant to this agreement, the Company will also have rights over Campos' products and intellectual properties. Many of these facilities have been approved by foreign regulatory authorities, including the United States FDA, MHRA and MCA in the United Kingdom, TGA in Australia, ANVISA in Brazil and Health Canada in Canada. To enhance our future growth and market position, we have made and will continue to make significant investments in research and development. We also have a dedicated research and development facility, Strides Technology and Research ( STAR ), located in Bengalaru, India, which commenced operations in March 2005 and currently employs approximately 350 scientists. As of August 31, 2010, we or our partners have filed 133 ANDAs in the United States and 22 filings in Europe. We have also received 48 ANDA approvals from United States FDA, purchased 32 marketing authorisations in Europe and currently have approximately 760 product registrations globally. We have marketing presence across 75 countries. Our marketing operations are conducted directly as well as through a number of joint ventures and partnerships. We have partnered with leading global pharmaceutical and generic companies such as Pfizer, GSK, Aspen, Akorn, Teva, Novartis, Apotex, Martindale, Sagent, ICN, Actavis and Sandoz in various jurisdictions, including South Africa, Australia, Europe and the United States. For example, in January 2010, we entered into a marketing arrangement with Pfizer to develop, manufacture and sell off-patent sterile injectables and oral products in the United States. We believe Pfizer s ability to market will extend the reach of our products and enable our business to grow in the developed markets in which Pfizer has a significant presence. In April 2010, we extended our agreement with Pfizer to market up to 38 generic oncology products for markets in Australia, Canada, the European Union, Japan, Korea and New Zealand. See Description of Our Business Specialised Sterile Products Business Strategic Partners on page 102. For the fiscal year 2009 and six months ended June 30, 2010, our total income was Rs. 13, million and Rs. 8, million, respectively and our net profit after tax and allocation of minority interest was Rs. 1, million and Rs million, respectively. Our Strengths Diverse Product Portfolio with a Focus on Specialised Sterile Products We offer a diverse range of products across several major therapeutic categories, including anti-biotics, anti-bacterials, HIV/AIDS and malarial drugs. Our product range covers most dosage forms including tablets and capsules, semi-solids, liquids and injectables. We plan to continue our focus on the development 22

23 of specialised sterile products, an area that we believe has high barriers to entry because of long product gestation periods and complex manufacturing processes, and offers relatively higher margins than other pharmaceutical product lines. We have diversified our product portfolio through organic growth as well as through acquisitions of manufacturing facilities, brands and their related intellectual properties. We believe that the diversity of our portfolio benefits our customers by providing them with a single source for a substantial number of their pharmaceutical requirements. According to data from the New England Journal of Medicine, as of December 31, 2009, specialised sterile injectables accounted for 73 of 157 drugs on the U.S. FDA shortage list. Further, we believe that a diversified product portfolio diminishes the risk associated with the dependence on any particular product. Our diverse range of products also allows us to achieve sales and distribution synergies and economies of scale. Strong Research & Development and Regulatory Capabilities We have directed our development efforts toward innovative technologies designed to expand our product portfolio, particularly in specialised sterile products. We have a dedicated research and development facility, STAR, which currently employs approximately 350 scientists. We believe that our R&D facility is capable of developing a wide range of pharmaceuticals and specialised sterile products and maintaining a product pipeline. During the fiscal year 2009 and the period ended August 31, 2010, we received 7 and 17 ANDA product approvals and completed 51 and 8 new ANDA filings, respectively. Our total expenditure for R&D activities relating to continuing operations, including product development costs, was Rs million for the fiscal year End-to-End Business Model We believe that our capabilities and experience span across several major business verticals in the pharmaceutical and specialised sterile products business. We believe we have been able to identify growth opportunities in niche areas and evaluate and develop products proactively in anticipation of demand. Our end-to-end capabilities comprise a strong research and development team that delivered 22 new formulations in 2009, manufacturing facilities that produce a wide variety of dosage forms in a diverse range of therapies and a marketing presence across 75 countries. We also have experienced workforce across business divisions, such as research and development, regulatory affairs for obtaining product approvals, supply chain management and sales and marketing. Further, a significant majority of our products are manufactured in India. We believe that this fact, coupled with the process efficiencies which we have developed, contributes to our production cost advantage over those of our competitors which manufacture their products in high cost developed markets. We are committed towards further integrating our business to allow us to better leverage our infrastructure and resources, as well as maintain our competitiveness. Modern Manufacturing Facilities We operate 14 manufacturing facilities across six locations in India, Singapore, Nigeria, Poland, Brazil and Italy. In addition to twelve manufacturing facilities owned by us, we have entered into an agreement in February 2010 with Aspen Global Incorporated, Cellofarm LTDA and Starsmore Limited for the acquisition of two manufacturing facilities for a consideration of approximately US$ million, which we currently operate. Pursuant to this agreement, the Company will also have rights over Campos' products and intellectual properties. Further, our major manufacturing facilities have been approved by foreign regulatory authorities including the United States FDA, MHRA and MCA in the United Kingdom, TGA in Australia, ANVISA in Brazil and Health Canada in Canada. Our products require an understanding of sophisticated technical processes and quality assurance methods to be able to maintain sterility. We believe our manufacturing facilities are capable of large scale commercial production of generics, products requiring specialised environmental conditions and formulation products in various dosage forms, enabling us to position ourselves as suppliers of choice for pharmaceutical companies seeking to leverage our technical expertise and low cost manufacturing advantages. We plan to leverage our manufacturing experience and have invested in the expansion of our existing facilities and the construction of new 23

24 manufacturing facilities. Our new facilities have increased our overall injectable liquids capacity to 103 million dose units per annum from 11 million single dose units per annum and our overall lyophilisation capacity to 56 million single dose units per annum from 10 million single dose units per annum. See Our Business- Manufacturing Facilities and Approvals on page 105. Significant Marketing Reach We have entered into strategic partnerships with Pfizer and GSK and other pharmaceutical companies in developed and emerging markets to strengthen our sales and marketing presence. We have identified strategic partners in diverse markets for their knowledge of the market and their regulatory, distribution and marketing capabilities. Our partners management skills in each of these areas complement our strengths in research, development and manufacturing. Marketing partnerships specifically allow us to obtain rapid market coverage for our new products and also allow us to utilise our significant production capacities. Experienced Management Team Our qualified and experienced management team provides us with a key competitive advantage. We have been able to attract and retain senior and middle-management executives from top tier organizations as well as retain key executives from companies that we have acquired. We believe that the pharmaceuticals domain knowledge and operating experience of our senior and middle-management provides us with a significant competitive advantage as we seek to expand in our existing markets and enter new geographic markets. Our Strategy Continued Focus on Specialised Sterile Products We believe that our continued focus on research and development will allow us to increase our products portfolio. Going forward, we believe that a significant portion of our revenues will be attributable to specialised sterile products. We plan to target products that are currently in demand in the United States due to supply constraints, as well as United States-patented products whose patents are set to expire by We believe that specialised sterile products command higher profit margins due to the relative difficulty of manufacturing such products. We have focused our R&D efforts on specialised sterile products and have filed 99 ANDAs for specialised sterile products since January 1, 2006, out of which 29 have been approved. In addition, we have incurred significant capital expenditure to develop our manufacturing capabilities in specialised sterile products. We believe that due to higher R&D costs and lesser competition, we will derive higher margins for specialised sterile products compared to pharmaceutical products. Maximise Reach through Partnerships We focus primarily on pharmaceutical development and manufacturing while entering into marketing partnerships with global pharmaceutical companies for product distribution. We supply products to these companies through revenue and profit sharing agreements, supply agreements or joint ventures while retaining ownership of the intellectual property associated with these products. In January 2010, we entered into a marketing partnership for the United States with Pfizer, wherein Pfizer will commercialise off-patent sterile injectable and oral oncology and other products supplied by us. In April 2010, we extended our agreement with Pfizer to market up to 38 generic oncology products for markets in Australia, Canada, the European Union, Japan, Korea and New Zealand. We also have a licensing and supply agreement with GSK through our subsidiary Onco Therapies Limited ( OTL ). Under this partnership, OTL will license intellectual property and supply finished dosage form pharmaceuticals to GSK. We also partner with nongovernmental organisations such as the Clinton Foundation, as well as other reputable institutions. We believe our broad portfolio of products will allow us to continue to service the needs of our non-profit and public sector customers. Going forward, we plan to continue to seek partnership opportunities across all sectors for our new products. 24

25 We also market our products through licensing partnerships with global pharmaceutical companies. These products are licensed at a later stage of development in order to yield high profit margins. We plan to continue such late-stage licensing in order to increase our sales and profit margins. Receive Regulatory Approvals to Expand Our Manufacturing Capacity We intend to apply for additional approvals from the United States FDA and from various other regulatory authorities for our manufacturing facilities and products to enable us to sell more of our products in these markets. We believe that upon the receipt of United States FDA approvals for all of our manufacturing plants, our effective manufacturing capacity for developed markets will increase significantly. We would then focus our research and development efforts towards large molecules to help us grow our partnership with global pharmaceutical companies and improve our profit margins. Increase Presence in Both Developed and Emerging Markets Although we continue to focus on expanding sales of our products globally, we are especially committed to applying and receiving regulatory approvals for our products to be sold in the United States and Europe, which are high growth markets for our products. As of August 31, 2010, we or our partners have filed 133 ANDAs in the United States and 22 filings in Europe. We have also received 48 ANDA approvals from United States FDA, purchased 32 marketing authorisations in Europe and currently have approximately 760 product registrations globally. We also believe that because our exports to emerging markets represent a small market share in the relevant markets, there are significant growth opportunities in many of these markets. We believe that demand for our products in these markets will continue to grow in line with changes in health care standards, insurance penetration and increased government spending on health care. We have established strategic partnerships with leading global pharmaceutical companies in emerging markets and have experience in the product registration process in many of these jurisdictions. We intend to further expand our marketing network, particularly in the United States and Europe. We intend to use the expertise and distribution network of our partners to help expand sales of our existing products in these countries in order to increase our market share. We believe that our expansion will be made easier through our brand value in branded generics. In jurisdictions where we currently have no partners or have not entered into agency arrangements, we continue to seek suitable new partners to distribute our products. Leverage Existing Cost Advantage We have recently completed significant expansion of our manufacturing facilities in India. Our existing Indian facilities are in low-cost locations as compared to facilities in North America or Europe. By focusing on operating costs, we aim to ensure that we continue to improve our operating margins. We also intend to continue to invest in operational infrastructure, including human resources, which we believe will allow us to increase our sales volumes and lower our manufacturing costs as a result of economies of scale. Growth through Acquisitions Our strategy to provide a broad range of products requires a wide array of technologies and capabilities. The rapid pace of technological development in the pharmaceuticals industry, specialised expertise required in different areas of medicine and the process of bringing a product from development to market, makes it difficult for us to extend our portfolio organically. Therefore, in addition to organic growth through our research and development efforts, historically we have relied, and will continue to rely, on acquisitions and partnerships to provide access to new technologies both in areas served by our existing businesses as well as in new businesses. We believe that the specialised sterile products sector, in particular, is undergoing consolidation due to a scarcity of assets. Our acquisition and partnership strategy is based on one or more of the following criteria: businesses or assets that complement our current portfolio of products or assist in growing our existing operations; 25

26 businesses that enhance our sales and distribution network; and businesses that benefit us in reducing costs or realising synergies. 26

27 SUMMARY OF THE ISSUE The following is a general summary of the terms of the Issue. This summary should be read in conjunction with, and is qualified in its entirety by, more detailed information appearing elsewhere in this Placement Document, including under Issue Procedure and Description of the Shares. Issuer Issue Size Strides Arcolab Limited. 10,742,533 Equity Shares aggregating Rs. 4,550 million. A minimum of 10% of the Issue Size i.e. at least 1,074,254 Equity Shares shall be available for Allocation to Mutual Funds only, and up to 10,742,533 Equity Shares shall be available for Allocation to all QIBs, including Mutual Funds. Face Value Issue Price Floor Price Eligible Investors Equity Shares issued and outstanding immediately prior to the Issue Equity Shares issued and outstanding immediately after the Issue Listing Lock-up Transferability Restriction Use of Proceeds Risk Factors Closing Date Ranking Security Codes for the Equity Shares In case of under-subscription in the portion available for Allocation only to Mutual Funds, such portion or part thereof may be Allotted to other QIBs. Rs. 10 per Equity Share. Rs per Equity Share. Rs per Equity Share. QIBs as defined in Regulation 2(1)(zd) of the SEBI Regulations and not excluded pursuant to Regulation 86(1)(b) of the SEBI Regulations, to whom the Preliminary Placement Document, the Placement Document and the Application Form is circulated and who are eligible to bid and participate in the Issue. The list of QIBs to whom the Preliminary Placement Document, the Placement Document and Application Form is delivered shall be determined by the Book Running Lead Managers, at its sole discretion. 46,921,138 Equity Shares. After Allotment but before conversion of the FCCBs, 57,663,671 Equity Shares. After Allotment and conversion of the FCCBs, around 64,718,116 Equity Shares, assuming all FCCBs are converted. The Company has made applications to each of the Stock Exchanges to obtain inprinciple approvals for the listing of the Equity Shares under clause 24(a) of the Listing Agreement. Please see Placement- Lock-up on page 137 for a description of restrictions on the Company, the Promoters and Agnus Holdings Private Limited and Chayadeep Properties Private Limited, each a member of the Promoter Group in relation to Equity Shares. The Equity Shares being Allotted pursuant to this Issue shall not be sold for a period of one year from the date of Allotment, except on the Stock Exchanges. The net proceeds of the Issue, after deduction of fees, commissions and expenses in relation to the Issue, are expected to total approximately Rs. 4, million. Please see Use of Proceeds on page 56. Please see Risk Factors on page 33 for a discussion of factors that you should consider before deciding whether to buy the Equity Shares. The Allotment of the Equity Shares offered pursuant to this Issue is expected to be made on or about October 1, The Equity Shares being issued pursuant to the Issue shall be subject to the provisions of the Memorandum and Articles of Association and shall rank pari passu in all respects with the existing Equity Shares including rights in respect of dividends. The shareholders will be entitled to participate in dividends and other corporate benefits, if any, declared by the Company after the Closing Date, in compliance with the Companies Act. The shareholders may attend and vote in shareholders meetings in accordance with the provisions of the Companies Act. Please see the Description of the Shares on page 156. ISIN INE939A01011 BSE Code NSE Code STAR 27

28 SELECTED FINANCIAL INFORMATION OF THE COMPANY CONSOLIDATED BALANCE SHEET As at Dec 31, 2009 As at Dec 31, 2008 Rupees in Millions As at Dec 31, 2007 I. SOURCES OF FUNDS 1. Shareholders' funds a) Share capital b) Monies pending allotment c) Employees stock options outstanding account d) Reserves & Surplus 7, , , , , , Minority Interest 2, , Loan funds a) Secured loans 7, , , b) Unsecured loans 6, , , , , , Deferred tax liability (Net) Total 25, , , II. APPLICATION OF FUNDS 1. Fixed Assets a) Gross block 10, , , Less : Accumulated Depreciation 2, , , Net block 8, , , b) Capital work-in-progress & advances , , , , , Goodwill (on consolidation) 10, , , Investments 3, , Deferred Tax Asset (Net) Current assets, loans and advances a) Inventories 2, , , b) Sundry debtors 4, , , c) Unbilled revenues d) Cash & bank balances , e) Loans and advances 1, , , , , , Less: Current liabilities & Provisions a) Current liabilities 5, , , b) Provisions 1, , , , Net current assets 2, , , Miscellaneous expenditure (To the extent not written off or adjusted) Total 25, , ,

29 CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended Dec 31, 2009 Rupees in millions For the year ended Dec 31, 2007 For the year ended Dec 31, 2008 I. INCOME 1. Sales & services 13, , , Other income , , , , , II. EXPENDITURE 1. Materials consumed 7, , , Increase/(Decrease) in stock (265.29) (356.29) (617.40) 3. Personnel cost 1, , , Operating and other expenses 2, , , Finance charges , , , III. PROFIT BEFORE DEPRECIATION, AMORTISATION & 1, , INCOME TAX 6. Depreciation Amortisation of miscellaneous expenditure IV. PROFIT BEFORE TAX AND EXCEPTIONAL ITEMS , Exceptional Items Profit on sale of plant Plant shut down cost & Impairment in Investments - - (539.85) Impairment in Investments - (1,655.94) Exchange fluctuation (loss) / gain (net) (669.90) - Profit on FCCB buyback Interest reversal on FCCB buyback (Increase) / Decrease in fair value of options embedded in FCCB's (41.12) V. PROFIT BEFORE TAX 1, , (345.69) Less :Provision for tax : - Current Deferred (Net) (60.71) (23.50) (67.39) - Fringe benefit tax MAT Credit entitlement (9.50) (14.00) Prior year taxes VI. PROFIT / (LOSS) AFTER TAX BEFORE SHARE OF 1, , (516.54) ASSOCIATE AND ALLOCATION TO MINORITY INTEREST Profit / (Loss) from Continuing operations 1, (350.38) Less Tax expense , (518.25) Profit / (Loss) from Discontinued operations Less Tax expense VI. PROFIT / (LOSS) AFTER TAX BEFORE SHARE OF 1, , (516.54) ASSOCIATE AND ALLOCATION TO MINORITY INTEREST Less: Share of Profit / (Loss) allocated to Minority Interest (38.78) (15.27) Add: Share of Profit in Associate (net) PROFIT AFTER MINORITY INTEREST AND SHARE FROM 1, , (501.21) ASSOCIATE Balance brought forward Consolidation adjustment (547.28) (66.67) VII. PROFIT AVAILABLE FOR APPROPRIATIONS 1, VIII. APPROPRIATIONS Proposed Dividend on Equity shares Dividend paid in subsidiaries

30 For the year ended Dec 31, 2009 For the year ended Dec 31, 2008 For the year ended Dec 31, 2007 Tax on dividends Dividend on Preference shares Tax on Preference dividends Transfer to General Reserve Transfer to General Reserve in subsidiaries Balance carried forward to balance sheet 1, Total 1, IX. Earnings / (Loss) per share (Face value of Rs.10 each) - Basic (in Rs.) (15.57) - Diluted (in Rs.) (15.57) 30

31 CONSOLIDATED CASH FLOW STATEMENT A. Cash flow from Operating Activities Net Profit / (Loss) before tax For the year ended Dec 31, 2009 Rupees in Millions For the For the year year ended ended Dec 31, 2007 Dec 31, , , (345.69) Adjustments for: Add: Depreciation and amortization Compensation under ESOP Scheme Bad debts written off and Provision for doubtful debts Unbilled debtors written off Loss on sale of assets Impairment / Obsolescence in assets Interest on borrowings Impairment in investments - 1, Unrealised Exchange (Gain) / Loss (293.20) Less: Profit on FCCB buy back Interest reversal on FCCB Buyback Changes in fair value of embedded derivatives in FCCB's (41.12) Profit on sale of investments (Net) 2, Profit on sale of assets (Net) Interest received Operating profit before working capital changes 1, , Changes in working capital (Increase)/Decrease in Trade and other receivables (1,589.36) (287.84) (82.03) (Increase)/Decrease in Inventories (795.19) (611.22) (570.57) Increase/(Decrease) in Trade and other payables 1, , (Increase)/Decrease in Margin money (13.36) (16.13) Net change in working capital (1,130.17) (67.32) Cash generated from operations , , Direct taxes paid (88.13) (97.95) (50.69) Net cash from Operating Activities [A] , B. Cash flow from Investing Activities Purchase of fixed assets / CWIP (1,310.59) (3,028.38) (2,512.73) Sale of fixed assets Subsidy received on investment Purchase of investments (419.85) (4,034.76) (4,728.43) Sale / redemption of investments , , Dividend / Interest received Net cash used in Investing Activities (1,476.44) (2,189.28) (5,913.93) [B] C. Cash flow from Financing Activities Proceeds from issue of share capital / Share warrants Buyback of FCCB (705.64) - 6, Proceeds from long term borrowings 2, , Repayment of long term borrowings (414.85) (499.32) (244.38) Proceeds from short term borrowings (Net) (59.12) Dividends paid - (6.89) (81.79) Tax paid on equity and preference dividend (4.75) - (49.60) Interest paid on borrowings (658.96) (609.20) (674.69) Net cash generated from Financing Activities [C] , Net Increase / (Decrease) in Cash and Cash Equivalents [A+B+C] (876.73) 1,

32 Cash and cash equivalents at the beginning of the year , Effect of exchange differences on restatement of foreign currency cash (2.99) and cash equivalents Exchange Reserve on account of consolidation - - (282.56) Consolidation adjustment (457.26) Cash and cash equivalents at the end of the year ,

33 RISK FACTORS An investment in equity shares involves a high degree of risk. You should carefully consider all the information in this Placement Document, including the risks and uncertainties described below and under Forward-Looking Statements, before making an investment in our Equity Shares. If the following risks actually occur, our business, results of operations and financial condition could suffer, and the price of the Equity Shares and the value of your investment in the Equity Shares could decline. Additional risks not described below or not currently known to us or that we currently deem immaterial may also adversely affect the market price of our Equity Shares. Risks Related to Our Business We have invested in new manufacturing facilities that may or may not be approved, which may delay or prevent us from growing our product offerings and approved manufacturing capacities. We have made significant capital investments in new manufacturing facilities in India and Poland that have not yet been approved by the United States FDA. While in the past we received United States FDA approval for three existing facilities in Bengalaru, we may not be successful in securing such approval for our new manufacturing facilities on a timely basis or at all. Delays in, or our inability to, receive ANDA approvals, or further inspection of our facilities and products by the United States FDA or other applicable regulatory authorities, may delay the growth of our product offerings and approved manufacturing capacities, which could adversely affect our results of operations and prospects. If we fail to comply with regulations prescribed by Governments and other regulatory agencies, our business and operations may be adversely affected. We operate in a highly regulated industry and our operations are subject to extensive Governmental regulations. Regulatory authorities in many of the markets to which we export our products must approve a product before we can market it in those countries, whether or not the same product is approved in India or other jurisdictions. Governmental regulations have become increasingly stringent, and we may become subject to more rigorous regulation by such authorities in the future. Penalties for our non-compliance with such regulations could be severe, including revocation or suspension of our business license and imposition of fines and criminal sanctions. Any domestic or foreign Governmental law or regulation imposed in the future could have an adverse effect on our business. Such restrictions may limit our flexibility in launching new products and operating our business. Both before and after a product s commercial release, we have ongoing duties to regulatory authorities, such as the United States FDA. Regulatory agencies may at any time reassess our manufacturing facilities or the safety and efficacy of our products based on newly developed scientific knowledge or other factors. Such reassessments could result in the amendment or withdrawal of existing approvals to market our products, which in turn could result in a loss of revenue. In addition, Governments throughout the world heavily regulate the marketing of our products. Most countries also place restrictions on the manner and scope of permissible marketing to physicians, pharmacies and other health care professionals. Such regulations may limit our ability to derive revenue from a product. Moreover, if we fail to comply fully with such regulations, we could be subject to civil or criminal actions. Further, regulatory requirements are still evolving in many emerging markets where we sell or manufacture our products. In these markets, regulatory requirements and the policies may at times be unclear or inconsistent. Consequently, there is increased risk that we may inadvertently fail to comply with such regulations, which could lead to Government enforced shutdowns and other sanctions, as well as the withholding or delay in receipt of regulatory approvals for our new products. 33

34 Our facilities and products are subject to a United States FDA auditing process, and if we receive a Warning Letter or sanctions as a result of such an audit, our ability to manufacture our products may be adversely affected. Our manufacturing facilities and products are subject to audit by the United States FDA, and any of our facilities or products may be the subject of a Warning Letter or sanctions, which could result in the withholding of product approval or facility shut-down. As part of its auditing process, a United States FDA field investigator may issue a Form 483 letter (Notice of Inspectional Observations) after an on-site inspection. If we receive a Form 483 letter, we must respond in a prompt manner to avoid receiving a subsequent United States FDA Warning Letter. As part of the Warning Letter process, we may be required, among other actions, to hire a third-party consultant to assist in the resolution of the findings, which could interrupt our manufacturing process and increase expense. We cannot assure you that we will not receive any Warning Letters at any of our facilities. If we receive a Warning Letter from the United States FDA or are subject to further sanctions, our ability to manufacture our products may be interrupted or prevented, which could have an adverse effect on our business, goodwill, financial condition and results of operations. Our success is dependent on our marketing arrangements with our partners for the sale and distribution of our products. We export our products to approximately 75 countries worldwide. For the fiscal year 2009, we derived approximately 88.0% of our total revenue from exports from, and sales outside, India. Our marketing operations outside India are conducted directly as well through a number of joint ventures and partnerships. We have entered into marketing partnerships with leading global pharmaceutical and generic companies such as Pfizer, GSK, Aspen and Sandoz in various jurisdictions, including South Africa, Australia, Europe and the United States, many of which are critical to our business. Generally, our marketing partnerships agreements provide that either party may terminate such arrangements by giving a written notice. Additionally, some of these agreements may be terminated by the relevant counter party for other reasons, such as in the event certain milestones are not attained, the relevant counter party determines that the marketing of the product is no longer economically viable or the relevant counter party believes that either the product may infringe on an intellectual property right of a third party or we have breached the terms of the marketing agreement. We retain some of our partners on a non-exclusive basis, and as a result these partners may engage in other competing businesses. We also compete for partners with other leading pharmaceutical companies that may have more visibility, greater brand recognition and financial resources, and a broader product portfolio than we do. If our competitors provide greater incentives to our partners, our partners may choose to promote the products of our competitors instead of our products. Our dependence on marketing partnerships to market some of our products may subject us to a number of risks, including: not being able to control the amount and timing of resources that our partners may devote to the marketing of our products; violation by our partners of the anti-corruption laws of the United States or other countries. actions by our partners to market our products outside their designated territory, possibly in violation of the exclusive distribution rights of other distributors; financial difficulties; and significant changes in a partner s business strategy that may adversely affect its willingness or ability to fulfill its obligations under any arrangement. 34

35 Because we rely significantly on our marketing partners for sales outside India, any disruption, including our failure to renew or maintain our existing marketing agreements or enter into new marketing agreements, could adversely affect our financial condition and results of operations. In addition, some of our marketing agreements contain provisions requiring us to assist in manufacturing or selling products covered by such marketing agreements in the event the counter party terminates such marketing agreement. As a result of ongoing consolidation in the global generics market, it is likely that in future, a significant percentage of our revenues will be attributable to a smaller number of marketing agreements and the termination of any such marketing agreement could have an adverse effect on our revenues and profitability. Changes in health care policy and regulations may have an adverse effect on us. Rising costs for health care have been the subject of considerable public debate in India, the United States and other countries in which we market our products. As part of an effort to contain health care costs, governments and private insurers have sought to reduce the costs of prescription drugs. These efforts may reduce the profitability of drug sales in developed country markets and the level of research and development undertaken by pharmaceutical companies servicing those markets. If our ability to freely set prices for our products is restricted by the regulation of Indian or foreign governments, health care legislation or pressure from third party payers, our profits may be reduced. If our product filings do not result in products that we are able to commercialise, it could have an adverse effect our results of operations. Our future results of operations depend to a significant degree on our ability to anticipate demand for specific products, successfully file and commercialise additional pharmaceutical products. The development and commercialisation process is both time consuming and costly, and involves a high degree of business risk. In order to develop a commercially viable product, we must demonstrate through extensive pre-clinical and human clinical trials that such product is safe and effective for use in humans. Our products currently under development, if and when fully developed and tested, may not perform as we expect, necessary regulatory approvals may not be obtained in a timely manner, if at all, and we may not be able to successfully and profitably produce and market such products. Furthermore, even if we are successful in developing a new product, that product may become subject to litigation by third parties claiming our product infringes on their patents or may be seized in transit by regulatory authorities for alleged infringement of intellectual property or may be otherwise unsuccessful in the market place due to the introduction of superior products by competitors. Moreover, it may take an extended period of time for our new products to gain market acceptance, if at all. To develop our product pipeline, we commit substantial time, efforts, funds and other resources for research and development, both through our own dedicated resources and our collaborations with third parties. Our investments in new product launches and research and development for future products could result in higher costs without a proportionate increase in revenues. If we fail to successfully identify and conclude joint ventures or manage the integration of new and existing joint venture businesses, or if any such business performs below our expectations, our financial condition and results of operations may be adversely affected. We have entered into several joint ventures for developing our businesses. For additional information regarding our joint ventures, see Our Business. While we intend to continue to enter into other joint ventures in the future as part of our business strategy, we may not be able to identify or conclude appropriate or viable joint ventures in a timely manner or at all. Further, our joint ventures may not necessarily contribute to our profitability and may divert management attention or require us to assume a high level of debt or contingent liabilities. In addition, if any of our joint ventures does not continue successfully and is subsequently wound up, our financial condition and results of operation may be adversely affected. 35

36 We may encounter problems relating to the operations of our ventures with other entities. We operate a significant number of our businesses through joint ventures. To the extent there are disagreements between us and the other joint venture partners regarding the business and operations of our joint ventures, we cannot assure you that we will be able to resolve them in a manner that will be in our best interests. In addition, our partners in our joint ventures may: be unable or unwilling to fulfill their obligations, whether of a financial nature or otherwise; have economic or business interests or goals that are inconsistent with ours; take actions contrary to our instructions or requests or contrary to our policies and objectives; take actions that are not acceptable to regulatory authorities; have financial difficulties; or have disputes with us. The occurrence of any of these risks could result in termination of the joint venture relationship and sale or purchase of equity interests of one or more shareholders in our joint ventures, including us, which consequently could have an adverse effect on our business, prospects, financial condition and results of operations. We rely in part on our subsidiaries to generate earnings, and any decline in the earnings of our subsidiaries or their ability to pay dividends to us could adversely affect our results of operations. We undertake a significant number of operations through our subsidiaries. In addition, a significant portion of our assets are held by, and a significant part of our earnings and cash flows is attributable to, our subsidiaries. We cannot assure you that our subsidiaries will generate sufficient earnings and cash flows to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends. If we are unable to receive dividend payments from our subsidiaries, our financial condition could be adversely affected. In some of our agreements, we have extended and in the future will extend corporate guarantees for the performance of contractual obligations of our subsidiaries, including payment obligations. If our subsidiaries are unable to meet their payment obligations, our corporate guarantees may be invoked, which may have an adverse effect on our financial condition. If we cannot successfully sustain or expand our recent entry into the specialised sterile products business, our financial condition and results of operations may be adversely affected. We are a recent entrant to the specialised sterile products business. The specialised sterile products business is a rapidly developing field featuring many new competitors, making it more difficult for us to predict future competitive trends. A significant portion of our recent and ongoing research and development efforts have been directed towards the specialised sterile products business. As of August 31, 2010, we or our partners have filed 99 ANDAs with the United States FDA for specialised sterile products and received 29 ANDA approvals for specialised sterile products. If we are unable to sustain or expand our business in this area, our financial condition and results of operations may be adversely affected. If we cannot respond effectively to competition, our financial condition and results of operations may be adversely affected. Our pharmaceutical products and specialised sterile products face intense competition from products developed by other companies in India and overseas, including major pharmaceutical companies. Some of our competitors, especially major pharmaceutical companies, are increasing their capacity and targeting the 36

37 same products as us and have both greater experience in obtaining international regulatory approvals and greater financial resources, research and development expertise and marketing capabilities than we do. In developed markets, the costs involved in expanding our business may be higher than expected and we may face significant competition in these regions. Furthermore, developed markets such as the United States and Europe have experienced significant decreases in recent years in the prices of generic formulations and branded products, as well as strong competition among local and international entities. Continued price erosion could adversely affect our sales revenue and profits in these developed markets. As a result of these and other changes in the business environment, we cannot assure you that our business model will continue to be successful. In addition, pharmaceutical products are commodity products and their prices can fluctuate sharply over short periods of time due to changes in demand, the price of raw materials and manufacturing efficiencies. Price competition among suppliers both in India and abroad is intense, with increasing competition from pharmaceutical companies in China and elsewhere that often price their products at lower rates than us. We compete with some of our customers in the formulations business, which could affect such customers willingness to purchase our products. Increased competition could have an adverse effect on our financial condition and results of operations. The nature of development and approval procedures in our pharmaceutical business may cause us to lack adequate information about our competitors activities. The development of a pharmaceutical product involves significant development and approval periods before a product may be commercialised, often lasting three to five years. During these periods, our competitors may be developing similar products of which we are unaware that could compete directly or indirectly with our products in development. Because of these extensive periods of internal development and regulatory approval required before a product may be commercialised, we may invest resources in developing products that will face competition of which we are currently unaware. Such unforeseen competition may hinder our ability to effectively plan the timing and order of our product development, which could have an adverse impact on our financial condition and results of operations. Our statements regarding Local Market Value may not be representative of our future results. Local market value ( LMV ) is provided as a reference for assessing the overall market value for a particular type of pharmaceutical product, either patented or generic, in the United States, for a particular period. As of August 31, 2010, we had filed 99 product applications for specialised sterile products with the United States FDA of which 29 applications have already been approved, representing approximately $6.2 billion in U.S. sales for the twelve months ended December 31, 2009 for the brand name versions of these products, according to IMS Health data. Although LMV allows for the assessment of value of an entire market for a particular type of pharmaceutical product, it cannot, however, be considered an estimate of performance for a particular pharmaceutical product, on account of its inability to predict the future success of an individual pharmaceutical product that is either currently under development or commercialized. It should not be considered as an indicator of future sales of any of our pharmaceutical products or the expected performance of such products in the future. Extrapolation of performance for a particular product from LMVs for such types of products, is an inappropriate use of LMV data. There can be no assurance that our approved pharmaceutical products will be successfully commercialized, or that our current filings will be approved. Investors are cautioned against placing undue reliance on this information. Changes in technology may render our current technologies obsolete or require us to make substantial capital investments. Our industry rapidly changes due to technological advances and scientific discoveries. These changes result in the frequent introduction of new products and significant price competition. If our pharmaceutical technologies, such as our branded generics, formulations and drug delivery systems become obsolete, and we are unable to effectively introduce new products, our business and results of operations could be adversely affected. 37

38 Although we strive to keep our technology, facilities and machinery current with the latest international standards, the technologies, facilities and machinery we currently employ may become obsolete. The cost of implementing new technologies and upgrading our manufacturing facilities could be significant and could adversely affect our financial condition and results of operations. Exchange rate fluctuations may adversely affect our results of operations as our export sales and sales outside India and a portion of our expenditures are denominated in foreign currencies. Our financial statements are prepared in Indian rupees. However, our export sales, sales outside India and a portion of our expenditures are denominated in foreign currencies, mostly the U.S. dollar. While we hedge a portion of the resulting net foreign exchange position through the use of forward exchange contracts, we are still affected by fluctuations in exchange rates among the U.S. dollar, Indian rupee and other currencies. Exchange rate fluctuations could affect the amount of income and expenditure we recognise or our ability to service our debt obligations. We also face exchange rate risks to the extent that our debt repayments are denominated in foreign currencies. In addition, the policies of the Reserve Bank of India ( RBI ) may also change from time to time, which may limit our ability to effectively hedge our foreign currency exposures and may have an adverse effect on our results of operations. Further, our future capital expenditures, including any imported equipment and machinery, may be denominated in foreign currencies. Consequently, a decline in the value of the Indian rupee against such other currencies could increase the Indian rupee cost of servicing our debt or making such capital expenditures. The exchange rate between the Indian rupee and the U.S. dollar has varied substantially in recent years and may continue to fluctuate significantly in the future. We have historically derived a substantial portion of our revenues from emerging markets. In the fiscal year 2009, we derived a significant percentage of our revenue from emerging markets. For example, we derived 12.0% and 15.0% of our revenues from India and Africa, respectively. We have identified exports as a major focus for our future growth. Some of these emerging markets, particularly Africa, have experienced political and economic upheavals and civil disturbances in the past and we cannot assure you that any such events in future will not affect our business and results of operations or that we will be able to receive prompt payments from clients in these countries. In most of the emerging markets in which we market our products, we typically do not obtain letters of credit or any similar documents to support the collection of our receivables and we also extend longer credit terms to our buyers, sometimes for up to 180 days or longer. These factors may result in increases in the amount of receivables and short-term borrowings. We cannot be certain that we will successfully collect all outstanding receivables, maintain adequate working capital for our operations or enforce collections. Any failure to do so may adversely affect our business, financial condition and results of operations. Our efforts at integrating acquired businesses may not yield timely or effective results, which may adversely affect our financial condition and results of operations. Our growth strategy involves the acquisition of new technologies, businesses, products and services and the creation of strategic partnerships in areas in which we do not currently operate. These acquisitions require that our management develop expertise in new areas, manage new business relationships and attract new types of customers. Furthermore, acquisitions require significant attention from our management, and the diversion of our management s attention and resources could have an adverse effect on our ability to manage our business. We may also experience difficulties in integrating acquisitions into our existing business and operations. Future acquisitions may also expose us to potential risks, including risks associated with the integration of new operations, services and personnel, unforeseen or hidden liabilities, the diversion of resources from our 38

39 existing businesses and technologies, our inability to generate sufficient revenue to offset the costs of acquisitions, and potential loss of, or harm to, relationships with employees or customers, any of which could significantly disrupt our ability to manage our business and adversely affect our business, financial condition and results of operations. The rapid pace of technological development in the pharmaceuticals industry and the specialised expertise required in it makes it difficult for any single company to develop a broad portfolio of products. In addition to growth through our research and development efforts, we have historically relied, and may continue to rely, upon investments and acquisitions to provide us access to new technologies both in areas served by our existing businesses as well as in new areas. However, we cannot be certain that any anticipated synergies will materialize as a result of any acquisition or reach expected levels within expected timeframes. If any of our understandings or assumptions proves to be incorrect, our return on investment and expected growth resulting from any acquisition may not materialize and could affect our business, financial condition and results of operations. We have entered into an agreement to acquire two manufacturing facilities and related intellectual property in Campos, Brazil, which we currently operate. If we are unable to satisfy any conditions precedent of the agreement, we may be unable to complete the acquisition. We have entered into an agreement in February 2010 with Aspen Global Incorporated, Cellofarm LTDA and Starsmore Limited for the acquisition of two manufacturing facilities for a consideration of approximately US$ million, which we currently operate. Pursuant to this agreement, the Company will also have rights over Campos' products and intellectual properties. As of June 30, 2010, we have paid US$ million of the total purchase price and pursuant to the terms of the agreement, we currently operate the two manufacturing facilities. The completion of the acquisition is subject to receipt of regulatory approval, among other conditions precedent. If we are unable to satisfy any conditions precedent of the agreement, we may be unable to complete the acquisition, which would adversely affect our financial condition and results of operations. Changes in domestic distribution practices could affect our results of operations. We currently supply our products in India through stockists, hospitals, and other institutions and our marketing efforts focus on building relationships with the medical fraternity. Any regulatory changes or disruption to these marketing modes, or disagreements with trade associations or unions, could adversely affect our results of operations. We are susceptible to product liability claims that may not be covered by insurance. Such claims, if successful, could require us to pay substantial sums. We face the risk of loss resulting from, and the adverse publicity associated with, product liability lawsuits. Any product liability lawsuit could be costly and time-consuming to defend and pay damages. Even unsuccessful product liability claims would likely require us to spend money on litigation, divert management s time and attention, adversely affect our goodwill and impair the marketability of our products. If any product liability claim sustained against us were not to be covered by insurance or were to exceed our policy limits, our business and results of operation could be adversely affected. Further, we may not have taken insurance or may not have vendor extension covers from our strategic partners insurance policies in the countries where we export. In addition, product liability coverage for pharmaceutical companies is becoming more expensive. As we further expand our sales internationally and increase our exposure to these risks in many countries, we may be unable to maintain sufficient product liability insurance coverage on commercially reasonable terms, or at all. If we suffer a large uninsured loss or if we suffer an insured loss that significantly exceeds our insurance coverage, our financial condition and results of operations may be adversely affected. 39

40 Our business and assets could suffer damage from claims, fire, natural calamities, misappropriation or other causes, resulting in losses, which may not be fully compensated by insurance. While we believe that we maintain insurance coverage in amounts consistent with industry norms, our insurance policies do not cover all risks and are subject to exclusions and deductibles. If any or all of our facilities are damaged in whole or in part or we are subject to litigation or claims or our operations are interrupted for a sustained period, we cannot assure you that our insurance policies will be adequate to cover the losses that may be incurred as a result of such interruption or the costs of repairing or replacing the damaged facilities. If we suffer a large uninsured loss or if any insured loss suffered by us significantly exceeds our insurance coverage, our business, financial condition and results of operations may be adversely affected. The lack of product warranties and product liability assurances from some of our suppliers or any voluntary recall by us of our products as a result of defective materials supplied to us could adversely affect our financial condition and results of operations. Any defect in our products could require us to undertake voluntary product recalls. We may be required to expend considerable resources in correcting any defect and our goodwill and demand for our products could be adversely affected. We have not acquired any insurance policy specifically for voluntary recall of products. A defect in our products that arises from inputs supplied by external suppliers may or may not be covered by warranties. An unusual number or amount of warranty claims against a supplier could adversely affect us as we depend on a limited number of suppliers for our materials. Any product defects could have an adverse effect on our business, financial condition and results of operations. The availability of spurious drugs, such as drugs passed off by others as our products, could adversely affect our goodwill and results of operations. Entities in India and abroad could pass off their own products as ours, including spurious or pirated products. For example, certain entities could imitate our brand name, packaging materials or attempt to create look-alike products. As a result, our market share could be reduced due to replacement of demand for our products and decreases in our goodwill and the market registration of our products. The proliferation of unauthorised copies of our products, and the time and attention lost to defending claims and complaints about spurious products, could decrease our revenue and have an adverse effect on our goodwill, financial condition and results of operations. We rely extensively on our systems including information technology systems, products processing and quality assurance systems and their failure could adversely affect our manufacturing operations. We rely extensively on the capacity and reliability of the information technology systems, products processing and quality assurance systems supporting our operations. To date, we have not experienced a major disruption in our manufacturing operations due to failure of such systems, but we cannot assure you that we will not encounter such a disruption, and any such disruption may adversely affect our business and results of operations. If we fail to accurately project demand for our products, we may encounter problems of inadequate supply or oversupply, which would adversely affect our financial condition and results of operations, as well as damage our goodwill and brand. We project demand for our products based on rolling projections from our distributors and marketing partners, our understanding of anticipated hospital procurement spending and distributor inventory levels. If we overestimate demand, we may purchase more raw materials and manufacture more products than required. If we underestimate demand, we may manufacture less quantities of products than required, which could result in the loss of business. If we under-stock one or more of our products, we may not be able to obtain additional units in a timely manner, which could also adversely affect our goodwill and results of operations. In addition, if our products do not achieve widespread consumer acceptance or our customers change their procurement preferences, we may be required to take significant inventory markdowns, or may not be able to sell the products at all, which would affect our results of operations. 40

41 Litigation or adverse business events against any of our marketing partners may affect our goodwill in international markets. Our marketing partners may pursue actions over which we have little control and that could harm the goodwill and sales of our products in foreign markets. Our inability to identify local distributors, failure to meet regulatory requirements, competition from local and multinational pharmaceutical companies, and many factors beyond our control, could also affect our ability to pursue our growth strategy in international markets. If growth in these markets does not materialise as we anticipate, our financial condition and results of operations may be adversely affected. Certain terms in our customer agreements may be onerous and commercially restrictive. A number of our product development customer agreements contain covenants that may be onerous and commercially restrictive. For instance, some of our agreements for product development grant our counterparty a most-favoured customer status or provide for dispute settlement in a foreign jurisdiction under foreign law. Additionally, certain contracts impose ongoing reporting requirements such as the reporting of material communications with regulatory agencies, which are onerous and subject to multiple interpretations. If we violate any of these covenants, we may cause an event of default, which may result in breach of contract, claims against us or termination of the contracts. We are involved in various legal proceedings in which we may not prevail and which may adversely affect our financial condition. We are parties to various legal proceedings that arose in the ordinary course of our business, which are pending at different levels of adjudication before various courts and tribunals. We cannot assure you that these legal proceedings will be decided in our favour. Further, we cannot assure you that the provisions we have made for litigation will be sufficient. Such litigation could divert management time and attention, and consume financial resources in their defense or prosecution. In addition, should any new developments arise such as changes in Indian law or rulings against us by the regulators, appellate courts or tribunals, we may need to make provisions in our financial statements, which could increase our expenses and our current liabilities. KV Pharmaceuticals ( KV ) has filed a claim against us before the International Chamber of Commerce alleging breach of a License and Supply Agreement dated May 5, 2005 for licensing of certain pharmaceutical products for sale in the United States and Canada. KV is seeking damages in the amount of US$ 43,500,000.00, plus interest, costs and expenses. If we fail to successfully defend this or other legal claims, or if our current provisions prove to be inadequate, our financial condition and results of operations could be adversely affected. See Legal Proceedings. We have significant contractual obligations until the fiscal year Pursuant to the terms of our agreement to acquire a 100.0% equity interest in Onco Laboratories Limited ( OLL ), we are required to complete the acquisition of OLL on or before December 31, 2010, for a consideration of US$ million. In addition, we have entered into an agreement in February 2010 with Aspen Global Incorporated, Cellofarm LTDA and Starsmore Limited for the acquisition of two manufacturing facilities for a consideration of approximately US$ million, with an amount of US$ million outstanding. Pursuant to this agreement, the Company will also have rights over Campos' products and intellectual properties. The completion of the acquisition is subject to receipt of regulatory approval, among other conditions precedent. We also hold outstanding FCCBs with face value of US$ million, due in June 2012, which if unconverted would entail an outflow of approximately US$ million upon maturity, which may be subject to any price adjustment according to the terms of the FCCBs. During the year ended December 31, 2005, we had issued 491,606 cumulative redeemable preference shares of Rs. 1,000 each to KV Pharmaceuticals, United States. The cumulative redeemable preference shares carry a dividend of 6.0% (Rs per preference share) per annum. The preference 41

42 shares are redeemable at par along with accrued unpaid dividends on or before December 31, If any of these preference shares are not redeemed on or before December 31, 2012, the redemption price subsequently shall contain an increasing default premium of 10.0% if redemption occurs in the year 2013 and an additional 10.0%, per each year thereafter in which the shares are redeemed. If we are unable to service these and other payment obligations, our financial condition and results of operations may be adversely affected. See Management s Discussion and Analysis of Financial Condition and Results of Operation Contractual Obligations on page 80. We carry a sizeable amount of goodwill on our books and any potential impairment in future could adversely affect our financial condition and results of operation. As of June 30, 2010, we recorded an amount of Rs. 13, million as Goodwill on Consolidation in our books. Any adverse change in operating conditions in our business, including the operating conditions of our subsidiaries, could result in an impairment of this goodwill and as a result adversely affect our financial condition and results of operation. If third parties on which we rely for clinical trials do not perform their obligations as contractually required or as we expect, we may not be able to obtain regulatory approval for or commercialise our products. We depend on independent clinical investigators, contract research organizations and other third-party service providers to conduct clinical trials and pre-clinical investigations of our new products and expect to continue to do so. We rely on such parties for successful execution of our clinical trials, but we do not control many aspects of their activities. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. If third parties fail to carry out their obligations, product development, approval and commercialisation could be delayed or prevented or an enforcement action could be brought against us. Our reliance on these third parties does not relieve us of our responsibility to comply with the regulations and standards of the United States FDA and other regulatory authorities related to good clinical practices. In particular, these third party manufacturers and service providers must comply with current good manufacturing practices and their failure to do so could result in warning or deficiency letters from regulatory authorities, which could interfere with or disrupt their ability to complete our studies on time, thereby affecting our product approval process or even forcing a withdrawal of our product. Third parties also may not complete activities on schedule or may not conduct our studies in accordance with applicable trials plans and protocols. In addition, the requirements of clinical data to support new product approvals are generally increasing, which has led to increased costs. If we are unable to carry on timely clinical trials, it may delay our product timelines, thereby adversely affecting our business and results of operations. Reduction, delay or interruption in supply of raw materials and equipment to manufacture our products and an inability to develop alternative sources for such supply may adversely affect our manufacturing operations and related product sales. We manufacture all of our products at manufacturing facilities located in India, Singapore, Nigeria, Poland, Brazil and Italy. We purchase the raw materials and equipment used in manufacturing these products from a number of suppliers, located across various countries. While in the past we have been able to obtain adequate supplies of such raw materials and equipment, we cannot assure you that we will be able to continue to obtain adequate supplies of such items in the future. Further, our third-party suppliers must comply with the regulations and standards of the United States FDA and other regulatory authorities, including current good manufacturing practices in the manufacture of our products as well as specified intellectual property requirements. Failure to comply with these regulatory requirements, or the receipt by these third-party suppliers of warning or deficiency letters from regulators could interfere with or disrupt our supply of key products, which could lead to the imposition of penalties by our customers and a loss of goodwill and business. A reduction or interruption in the supply of raw materials and equipment, and an 42

43 inability to develop alternative sources for the supply of such raw materials or equipment, could have an adverse effect on our ability to manufacture our products in a timely or cost effective manner, and consequently may affect our financial condition and results of operations. In addition, we do not have any long-term pricing guarantees with our raw material suppliers. We cannot assure you that the price of raw materials will not increase in the future. A failure to achieve corresponding sales price increases in a timely manner or sales price erosion without a corresponding reduction in raw material costs could have an adverse effect on our financial condition and results of operations. Our operations could be disrupted if there are interruptions or stoppages at our manufacturing facilities or the transportation systems we use. We use our owned manufacturing facilities and third-party manufacturing facilities for a portion of our production. Moreover, some of our products are manufactured (and permitted to be manufactured) at only one facility. These facilities are subject to operating risks, such as the breakdown or failure of equipment, obsolescence, labour disputes, strikes, lock-outs continued availability of services of external contractors, earthquakes, floods and other natural disasters, industrial accidents and the need to comply with the directives of relevant Government authorities. The occurrence of any of these risks could significantly affect our operating results. In addition, the third-party manufacturing facilities are not owned by us, and the workers at these facilities are not our own employees. If these third-party manufacturing facilities cease to be available at costs acceptable to us or we experience problems with, or interruptions in, such services, and we are not able to find other facilities to provide similar manufacturing capacity on comparable terms and on a timely basis, our operations would be disrupted and our financial condition and results of operations could be adversely affected. Moreover, liability for payment of compensation and retirement benefits for workers employed at third-party facilities might fall on us should the contractor default on its obligation, which could have an adverse effect on our financial condition and results of operations. We also depend on the smooth supply and transportation of our products from our plants to our customers located globally, the logistics of which are subject to various uncertainties and risks. Disruptions to transportation services because of weather-related problems, strikes, lock-outs, terrorist attacks, inadequacies in the road or rail infrastructure and port facilities, or other events could impair our ability to supply products to our customers. Although we have not encountered any significant disruptions in such logistics to date, we cannot assure you that such disruptions will not occur in the future. Our operations are subject to environmental, employee, health and safety laws and regulations. Our operations are subject to various national and state environmental laws and regulations relating to environmental protection in the various locations in India and internationally where we operate. For example, the discharge or emission of chemicals, dust or other pollutants into the air, soil or water that exceed permitted levels and cause damage to others may give rise to liabilities to the Government and third parties, and may result in our incurring costs to remedy any such discharge or emissions. Environmental laws and regulations have become increasingly stringent, and it is possible that they will become significantly more stringent in the future. We cannot assure you that compliance with such environmental laws and regulations will not result in a curtailment of production or a material increase in the costs of production or otherwise have an adverse effect on our financial condition and results of operations. Stricter laws and regulations, or stricter interpretation of existing laws and regulations may impose new liabilities on us or result in the need for additional compliance requirements and additional investment in environmental protection equipment, either of which could adversely affect our business, financial condition or prospects. We are also subject to laws and regulations governing relationships with employees in such areas as minimum wage and maximum working hours, overtime, working conditions, hiring and termination of employees, contract labour and work permits. Furthermore, the success of our business is contingent upon, among other things, receipt of all required licenses, permits and authorisations, including local land use 43

44 permits, manufacturing permits, building and zoning permits and environmental, health and safety permits. Changes or concessions required by regulatory authorities could also involve significant costs and delay or prevent completion of the construction or opening of a facility or could result in the loss of an existing license. If we are unable to comply with the conditions of our licenses and approvals, our licenses or approvals may be cancelled, adversely affecting our financial position and results of operations. We have entered and may continue to enter into a significant number of related party transactions. We have entered and will continue to enter into a significant number of related party transactions with our Promoters, subsidiaries, joint ventures, associates, key management personnel and enterprises having common key management personnel with us. Related party transactions entered into by us during the fiscal year 2010 have been disclosed in our audited financial statements in Financial Statements Related Party Transactions. While we believe that all our related party transactions have been conducted on an arm s length basis, we cannot assure you that we could not have achieved more favorable terms had such transactions been entered into with unrelated parties. In addition, we may enter into significant levels of related party transactions in the future. We cannot assure you that such transactions, individually or in the aggregate, will not have an adverse effect on our financial condition and results of operations, including because of potential conflicts of interest or otherwise. If we are unable to renew expired licenses and approvals, procure new licenses and approvals or otherwise comply with various regulatory requirements, our financial condition and results of operations could be adversely affected. We require certain licenses, approvals, registrations and permissions for operating our business, some of which may have expired and for which we may have either made or are in the process of making an application for obtaining the approval or its renewal. For more information, see Government and Other Approvals. If we fail to obtain any of these approvals or licenses, or renewals thereof, in a timely manner or at all, our financial condition and results of operations could be adversely affected. Our revenues and profits may vary significantly from previous periods and historical results should not be considered as accurate indicators of future results. Such variations may result from a combination of factors, including, among others, the following: Expiry of patents: If our research and development and production efforts are not timed such that we have the necessary pipeline of products when corresponding patents expire, our operating results could suffer. Our ability to control our fixed and variable costs: If increased or variable costs fluctuate, our profitability and results of operations may be adversely affected. Changes in our product or geographic mix: If we change our product mix or our geographic mix, our operating results may fluctuate. Changes in treatment protocols: Medical practitioners may change their current approach to treatment based on new scientific evidence or the introduction of newer and more effective or patient-friendly treatment regimes, which may result in reduced demand for our products and affect our profitability Our management team and other key personnel, particularly in the area of research and development, are critical to our continued success and the loss of any such personnel could adversely affect our business. Our success significantly depends upon the continued service of our management team and other key personnel, including Mr. Arun Kumar, our Managing Director, and our research and development team. These executives possess technical and business capabilities that are difficult to replace. If we lose the services of any of these executives for any reason, we may be unable to replace them in a timely manner or at all, which may affect our ability to continue to manage and expand our business. We cannot assure you that any contingency plans which we may implement to replace these executives will be successful. 44

45 Further, the members of our management team and other key personnel are employed pursuant to customary employment agreements, which may not provide adequate incentive for them to remain with us or adequately protect us in the event of their departure or otherwise. If we lose the services of any of the management team members or key personnel, we may be unable to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could adversely affect our business operations. We do not maintain key man life insurance for the members of our management team or other key personnel. Furthermore, as we expect to continue to expand our operations and develop new products, we will need to continue to attract and retain experienced management and key research and development personnel. If we are not able to attract and retain qualified personnel, our results of operations may be adversely affected. If we are unable to patent new products and protect our proprietary information, or if we inadvertently infringe on the patents of others, our business may be adversely affected. We rely on a combination of patents, trademarks, trade secrets, non-disclosure agreements and noncompetition agreements to protect our proprietary intellectual property. We hold 2 patents covering our products and various aspects of our products, and have 5 patent applications pending. We also have 373 registered trademarks and 95 trademark applications pending. As of August 31, 2010, we have also received 48 ANDA approvals from the United States FDA. Due to the different regulatory bodies and varying requirements in the United States, Europe and India, we may be unable to obtain intellectual property protection in those jurisdictions for certain aspects of our products or technologies. While we intend to defend against any threats to our intellectual property, we cannot assure you that our patents, trade secrets, or other agreements will adequately protect our intellectual property. Our patent rights may not prevent our competitors from developing, using or commercialising products that are functionally equivalent or similar to our products. The process of seeking patent protection can be lengthy and expensive, our patent applications may fail to result in patents being issued, and our existing and future patents may be insufficient to provide us with meaningful protection or a commercial advantage. We cannot assure you that our pending patent applications will result in patents and that patents issued to or licensed by us in the past or in the future will not be challenged or circumvented by competitors or that such patents will be found to be valid or sufficiently broad to protect our technology or to provide us with any competitive advantage. We may be required to negotiate licenses for patents from third parties to conduct our business, and we cannot assure you that the required licenses would be available on reasonable terms, or at all. We also operate in an industry characterized by extensive patent litigation, including frivolous litigation by competitors to delay grant of patent. Patent litigation can result in significant damages being awarded and injunctions that could prevent the manufacture and sale of certain products or require us to pay significant royalties in order to continue to manufacture or sell such products. While it is not possible to predict the outcome of patent litigation, we believe any adverse result against us as a result of such litigation could include an injunction preventing us from selling our products or payment of significant damages or royalty, which would affect our ability to sell current or future products or prohibit us from enforcing our patent and proprietary rights against others. The occurrence of any of these risks could have an adverse effect on our business, financial condition and results of operations. We also rely on non-disclosure agreements and non-competition agreements with certain employees, consultants and other parties to protect trade secrets and other proprietary rights that belong to us. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that third parties will not otherwise gain access to our trade secrets or proprietary knowledge. Patent laws allowing innovator companies to extend their patents could delay the introduction of generic products and adversely affect our business. In many countries, patent holders have the option of extending the terms of their patents. The U.S. Patent and Trademark Office allows companies to extend the terms of their patents to make up for the time lost while awaiting United States FDA approval. The United States FDA also allows for exclusivity to be 45

46 extended if special studies are done in identified populations, such as pediatric studies. Companies are also known to make additional patents publicly known close to patent expiry of a molecule, which effectively extends the patent life and delays competition, a practice called submarining. The extension of patent terms or the extension of exclusivity in the marketplace by this or other means may delay our introduction of generic products. If a company introduced, authorised or assisted another company to bring an authorised generic to the market, then the appeal of a product for which we intend to file a patent challenge may be reduced. If there is a change in policies related to tax, duties or other such levies applicable to us, it may affect our results of operations. New or revised accounting policies or policies related to tax, duties or other such levies promulgated from time to time by relevant tax authorities may adversely affect our results of operations. We cannot assure you as to what action the current or future Governments will implement regarding tax incentives or excise duty benefits. Moreover, any Government policies restricting the allotment of land in areas where we intend to establish facilities could adversely affect our plans to expand our manufacturing facilities. We may not be able to comply with the obligations and stipulations that would allow us to avail ourselves of such benefits or concessions, and consequently we may lose such benefits and concessions. Conditions and restrictions imposed on us by the agreements governing our indebtedness could adversely affect our ability to conduct our business. Many of our financing agreements include conditions and restrictive covenants that require us to obtain consents from the respective lenders prior to carrying out certain activities and entering into certain transactions. Specifically, in some of our financing agreements, we must seek, and may be unable to obtain, lenders consents to amend our Memorandum and Articles of Association, incur additional debt, issue additional equity securities, change our capital structure and change our management structure. Any failure to service our indebtedness, comply with a requirement to obtain a consent or satisfy any other condition or covenant could lead to a termination of one or more of our financing agreements, default and acceleration of amounts due under the facilities governed by such agreements and cross-default under certain of our other financing agreements, any of which may adversely affect our ability to conduct our business and may have an adverse effect on our financial condition and results of operations. If we decide to incur more debt, our interest payment obligations will increase and we may become subject to additional conditions from lenders. In addition, we could be subject to additional restrictions in operating our business. We cannot assure you that we will be able to raise additional financing. A failure in the future to obtain sufficient financing could result in a lack of cash flow to meet our operating requirements and, therefore, could have an adverse effect on our business, results of operations and financial condition. We have historically had significant financial indebtedness and may continue to have significant indebtedness and debt service obligations in the future. We have substantial indebtedness, incurred primarily for the purpose of funding the expansion of our manufacturing plants. As of June 30, 2010, we had total secured and unsecured loans of Rs. 16, million, which represents a debt-to-equity ratio of 2 to 1. Our leverage levels in the future may continue at these levels or increase. Our degree of leverage could have significant consequences for our future operations, such as rendering us more vulnerable to downturns in our business, limiting our ability to obtain additional funds for our expansion or the purchase of additional assets and limiting our ability to refinance existing indebtedness on terms favourable to us. In addition, our degree of leverage renders us more vulnerable to increases in interest rates. We also hold outstanding FCCBs with face value of US$ million, due in June 2012, which if unconverted would entail an outflow of approximately US$ million upon maturity, subject to any price adjustment according to the terms of the FCCBs. We receive licensing fees under certain of our license agreements in a single instance at the beginning of a contractual period, which must be considered when evaluating our financial statements. 46

47 We receive licensing fees under certain of our license agreements in a single instance at the beginning of a contractual period. When examining our financial statements, such fees must be regarded as cash flows pertaining to an entire year, and should be evaluated accordingly. We may not maintain our historical dividend payment record in the future. While we have paid dividends in the past, we cannot assure you as to whether we will pay dividends in the future and, if so, the level of such future dividends. Our declaration, payment and amount of any future dividends is subject to the discretion of the Board, and will depend upon, among other factors, our earnings, financial position, cash requirements and availability of profits, as well as the provisions of relevant laws in India from time to time. Our agreement with Zenith Pharmaceuticals Limited, one of our significant investors, subjects us to certain onerous conditions. As of August 27, 2010, Zenith Pharmaceuticals Limited ( ZPL ) beneficially held 8,284,115 Equity Shares, or 17.7% of our paid-up Equity Share capital. Under the Subscription Agreement dated December 11, 1997 (and the supplemental agreements thereto dated December 4, 1998 and October 21, 2000, respectively) we entered into with ZPL and the Shareholders Agreement dated December 11, 1997 (and the supplemental agreement dated January 22, 2002) entered into between Mr. Arun Kumar Pillai, Mr. K. R. Ravishankar, Mr. Mohan Kumar Pillai, Mr. N. K. K. Pillai, Mr. Padma Kumar Pillai and Arcolab (India) Private Limited and ZPL, the following terms, among others, apply: Proportionate representation of ZPL on the Board of Directors, with a minimum of three directors on the Board of Directors; If ZPL holds at least 7.5% of the Equity Shares, there are certain actions, such as any change in our equity capital structure or any investment in excess of Rs. 200,000, which we would be unable to undertake unless the consent/ affirmative vote is given by at least one ZPL-nominated director; During the term of these agreements, in the event of any issue of our Equity Shares, ZPL will be given an opportunity to maintain its shareholding level in us; and Restriction on transfer of Promoters securities. Any future issuance of Equity Shares by us may dilute your shareholding and adversely affect the trading price of the Equity Shares. Any future issuance of Equity Shares by us, such as a primary offering or pursuant to a preferential allotment, may dilute your shareholding in us, adversely affect the trading price of our Equity Shares and could affect our ability to raise capital through an issuance of our securities. In addition, any perception by investors that such issuances or sales might occur could also affect the trading price of our Equity Shares. Additionally, the disposal of Equity Shares by any of our significant shareholders or our promoters, any future issuance of Equity Shares by us or the perception that such issuances or sales may occur may significantly affect the trading price of the Equity Shares. We cannot assure you that we will not issue Equity Shares or that such shareholders will not dispose of, pledge or encumber their Equity Shares in the future. We have contingent liabilities and our financial condition and profitability could be adversely affected if any of these contingent liabilities materialise. Our consolidated contingent liabilities as of December 31, 2009 were as follows: income tax demands totalling Rs million that we have disputed; and 47

48 appeal pending against the order of the Commissioner of Central Excise disallowing transfer of credit of Rs million. If any of these contingent liabilities materialise, our profitability may be adversely affected. Risk Related to Investments in Indian Companies We are subject to regulatory, economic and political uncertainties in India. In the early 1990s, India experienced significant inflation, low growth in gross domestic product and shortages of foreign currency reserves. The Government of India provided significant tax incentives and relaxed certain regulatory restrictions in order to encourage foreign investment in specified industries of the economy. We cannot assure you that liberalisation policies will continue. Furthermore, the rate of economic liberalisation could change, and specific laws and policies affecting technology companies, foreign investment, currency exchange rates and other matters affecting investment in our Equity Shares could also change. Since 1996, the Government of India has changed six times and the current Indian Government is a coalition of many parties. Various factors, including a collapse of the present coalition Government due to the withdrawal of support of coalition members, could trigger significant changes in India s economic liberalisation and deregulation policies, disrupt business and economic conditions in India generally and our business in particular. Our financial performance and the market price of our shares may be adversely affected by changes in inflation, exchange rates and controls, interest rates, Government of India policies, social stability or other political, economic or diplomatic developments affecting India in the future. Financial instability in Indian financial markets could adversely affect our results of operations and financial condition. The Indian financial market and the Indian economy are influenced by economic and market conditions in other countries, particularly in Asian emerging market countries. Financial turmoil in Asia, the U.S., Europe and elsewhere in the world in recent years has affected the Indian economy. Although economic conditions are different in each country, investors reactions to developments in one country can have adverse effects on the securities of companies in other countries, including India. A loss in investor confidence in the financial systems of other markets may increase volatility in Indian financial markets and, indirectly, in the Indian economy in general. Financial disruption anywhere in the world may have an adverse impact on the Indian economy. Any downgrading of India s debt rating by an international rating agency could have a negative impact on our business. Any adverse revisions to India s credit ratings for domestic and international debt by international rating agencies may adversely impact our ability to raise additional external financing, and the interest rates and other commercial terms at which such additional financing is available. This could have an adverse effect on our business and future financial performance, our ability to obtain financing for capital expenditures and the trading price of the Equity Shares. If inflation or the price of oil were to rise in India, we may not be able to increase the selling price of our products in order to pass costs on to our clients and our profits might decline. India has experienced high inflation rates in recent years. The rate of inflation might rise in the future and we may not be able to increase the selling prices of our products in order to pass costs on to our customers and consequently our profits may decline. In addition, if the price of oil were to increase, our cost of raw materials and distribution may increase. We may not be able to pass these costs on to our customers by increasing the prices of our products, which could adversely affect our financial condition and results of operations. Natural calamities could have a negative effect on the Indian economy and cause our business to suffer. 48

49 India has experienced natural calamities such as earthquakes, a tsunami, floods and drought in the past few years. The extent and severity of these natural disasters determines their effect on the Indian economy. For example, as a result of drought conditions in the country during fiscal year 2003, the agricultural sector recorded negative growth for that period. The erratic progress of the monsoon in 2004 affected sowing operations for certain crops. Further prolonged spells of below normal rainfall or other natural calamities could have a negative effect on the Indian economy, adversely affecting our business and the price of our Equity Shares. Regional hostilities, terrorist attacks and other acts of violence or war involving India, the United States and other countries could adversely affect the financial markets, result in a loss of business confidence and adversely affect our business, prospects, financial condition and results of operations. There has been an increase in the frequency and scale of terrorism in India and globally. Some parts of India have also experienced communal disturbances and riots during recent years. If such events recur, our operational and marketing activities may be adversely affected, resulting in a decline in our income. The South Asian region has from time to time experienced instances of civil unrest and hostilities among neighboring countries, including those between India and Pakistan. The hostilities between India and Pakistan are particularly threatening because both India and Pakistan are nuclear powers. Hostilities and tensions may occur in the future and on a wider scale. Also, there have been military hostilities and continuing civil unrest and instability in Iraq, Afghanistan and other countries in the Indian sub-continent. Events of this nature in the future, as well as social and civil unrest within other countries in Asia, could influence the Indian economy and could have an adverse effect on the market for securities of Indian companies, including our Equity Shares. Terrorist attacks as well as other acts of violence or war, including those involving India, the United States or other countries, may adversely affect Indian and worldwide financial markets. These acts may also result in a loss of business confidence and have other consequences that could adversely affect our business, prospects, financial condition and results of operations. Increased volatility in the financial markets can have an adverse impact on the economies of India and other countries, including leading to an economic recession. You may not be able to enforce a judgment of a foreign court against us or our management. We are incorporated under the laws of India. The majority of our Directors and executive officers are residents of India and a majority of our assets are located in India. India is not a party to any international treaty in relation to the recognition or enforcement of foreign judgments; however, Section 44A of the Civil Procedure Code provides for execution of decrees passed by courts in reciprocating territories, such territories having been declared by the Government by notification in the Indian Official Gazette. However, Section 44A of the Code of Civil Procedure, 1908 is applicable only to decrees or judgments under which sums of money are payable, not being of the nature of a sum payable in respect of taxes, other charges of a similar nature or in respect of a fine or other penalties. If a decree is passed by a court of a nonreciprocating country, then that foreign judgment if conclusive under Section 13 of the Civil Procedure Code can only be enforced by filing a suit upon that judgment. Section 13 of the Civil Procedure Code governs the recognition and enforcement of foreign judgments. Section 13 lists certain exceptions where foreign judgment cannot be held to be conclusive. This provision provides that foreign judgments shall be conclusive regarding any matter directly adjudicated upon except where: the judgment has not been pronounced by a court of competent jurisdiction; the judgment has not been given on the merits of the case; it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognize the law of India in cases where such law is applicable; the proceedings in which the judgment was obtained were opposed to natural justice; 49

50 the judgment has been obtained by fraud; or the judgment sustains a claim founded on a breach of any law in force in India. The suit must be brought in India within three years from the date of the judgment in the same manner as any other suit filed to enforce a civil liability in India. Generally, there are considerable delays in the disposal of suits by Indian courts. It is unlikely that a court in India would award damages on the same basis as a foreign court if an action is brought in India. Furthermore, it is unlikely that an Indian court would enforce foreign judgments if it viewed the amount of damages awarded as excessive or inconsistent with Indian practice. A party seeking to enforce a foreign judgment in India is required to obtain prior approval of the Reserve Bank of India to repatriate any amount recovered and any such amount may be subject to income tax in accordance with applicable laws and regulations. See Enforcement of Civil Liabilities. Significant differences exist between Indian GAAP and other accounting principles, such as IFRS, which may be material to investors assessment of our financial condition and results of operations. Our failure to successfully convert to IFRS by January 2012 could have an adverse effect on our stock price. Our financial statements, including the audited financial statements and Selected Financial Information included in this Placement Document are prepared in accordance with Indian GAAP. We have not attempted to explain in a quantitative manner the impact of the International Financial Reporting Standards, or IFRS, on the financial data included in this Placement Document, nor do we provide a reconciliation of our financial statements to those of IFRS. IFRS differs in significant respects from Indian GAAP. Accordingly, the degree to which the Indian GAAP financial statements included in this Placement Document will provide meaningful information is entirely dependent on the reader s level of familiarity with Indian accounting practices. Any reliance by persons not familiar with Indian accounting practices on the financial disclosures presented in this Placement Document should accordingly be limited. In making an investment decision, investors must rely upon their own examination of us, the terms of this Issue and the financial information contained in this Placement Document. The Institute of Chartered Accountants of India, the accounting body that regulates the accounting firms in India, has announced a road map for the conversion to IFRS pursuant to which all public companies in India, including us, will be required to prepare their annual and interim financial statements under IFRS. Because there is significant lack of clarity on the details of the conversion to and preparation of financial statements under IFRS and there is not yet a significant body of established practice on which to draw in forming judgments regarding its implementation and application, we have not determined with any degree of certainty the impact that the preparation of financial statements under IFRS will have on our financial reporting. We cannot assure you that our financial condition, results of operations, cash flows or changes in shareholders' equity will not appear materially different under IFRS than under Indian GAAP. As we transition to IFRS reporting, we may encounter difficulties in the ongoing process of implementing and enhancing our management information systems. Moreover, there is increasing competition for the small number of IFRS-experienced accounting personnel available as more Indian companies begin to prepare IFRS financial statements. We cannot assure you that the preparation of financial statements under IFRS will not adversely affect our reported results of operations or financial condition and any failure to successfully convert to IFRS by January 2012 could have an adverse effect on our stock price. Our business and activities are regulated by the Competition Act, The Indian Parliament has enacted the Competition Act, 2002, as amended (the Act ) for the purpose of preventing practices having an adverse effect on competition under the auspices of the Competition Commission of India, which (save for certain provisions) has come into force. Under the Act, any arrangement, understanding or action, whether formal or informal, which causes or is likely to cause an appreciable adverse effect on competition is void and attracts substantial penalties. Any agreement, among others, which directly or indirectly determines purchase or sale prices, limits or controls production, shares the market by way of geographical area or market or number of customers in the market is presumed to 50

51 have an appreciable adverse effect on competition. If we were to be penalised under the Competition Act, 2002, or financial condition and results of operations could be adversely affected. We cannot guarantee the accuracy of certain market and industry data contained in this Placement Document. Certain statistical data relating to the Indian economy and the Indian infrastructure development industry, real estate industry and power industry have been extracted from reports prepared by independent third parties. Neither the Joint Global Coordinators and Book Running Lead Managers nor any of their respective affiliates and advisors nor we or any of our affiliates and advisors have independently verified the accuracy of the data derived from such reports. In addition, we have compiled certain data used in this Placement Document internally. We make no representation as to the accuracy of such data and you should not place undue reliance on such data as a basis for making an investment in our Equity Shares. Rights of shareholders under Indian law may be more limited than under the laws of other jurisdictions. The Companies Act and related regulations, our Articles of Association and the Equity Listing Agreements govern our corporate affairs. Legal principles relating to these matters and the validity of corporate procedures, directors' fiduciary duties and liabilities, and shareholders' rights may differ from those that would apply to a company in another jurisdiction. Shareholders' rights under Indian law may not be as extensive as shareholders' rights under the laws of other countries or jurisdictions. Investors may have more difficulty in asserting their rights as a shareholder than as a shareholder of a corporation in another jurisdiction. There may be less information available on companies trading in the Indian securities markets than in securities markets in developed countries. There is a difference between the level of regulation and monitoring of the Indian securities markets and the activities of investors, brokers and other participants and those of markets in the European Union, the United States and certain other economies. The Securities and Exchange Board of India, the Indian stock market regulator, has issued regulations and guidelines on disclosure requirements, insider trading and other matters. There may, however, be less publicly available information about Indian companies than is made available by public companies in certain other economies. Consequently, an investment in an Indian company may be riskier than an investment in a European or U.S. company if investors assume that Indian markets are subject to the same level of regulation and make available the same level of information as more developed markets. The ability of Indian companies to acquire companies located outside India depends on the approval of the RBI. Foreign exchange laws in India presently permit Indian companies to acquire or invest in foreign companies without any prior Governmental approval if the transaction amount does not exceed 400% of the net worth of the Indian company as on the date of its most recent audited balance sheet. Acquisitions in excess of the 400% net worth threshold require prior RBI approval. The requirement to obtain approvals for acquisitions of companies located outside India in the future from the RBI may restrict our international growth, which could adversely affect our business and financial prospects. Current Indian Government policy allows 100% foreign ownership of Indian companies in the pharmaceutical sector. However, the Indian Government may change this policy in the future, and restrict the shareholding of foreign investors. If such change restricted our ability to issue and foreign investors ability to hold shares above a specified limit, we may be restricted in our ability to raise additional funding through equity issuances in the future. 51

52 A third party could be prevented from acquiring control of us because of the takeover regulations under Indian law. Indian takeover regulations contain certain provisions that may delay, deter or prevent a future takeover or change in control of us. These provisions may discourage or prevent a third party from attempting to take control of us, even if a change in control would result in the purchase of the Equity Shares at a premium to the market price or would otherwise be beneficial to the holders of the Equity Shares. For more information, see Indian Securities Market Takeover Code. The ability of Indian companies to raise foreign capital may be constrained by Indian law. As an Indian company, we are subject to exchange controls that regulate borrowing in foreign currencies. Such regulatory restrictions limit our financing sources for our projects under development and hence could constrain our ability to obtain financing on competitive terms and refinance existing indebtedness. In addition, we cannot assure you that the required approvals will be granted to us without onerous conditions, or at all. Limitations on foreign debt may have an adverse effect on our business growth, financial condition and results of operations. Risks Related to the Equity Shares and Our Trading Market There is no guarantee that the Equity Shares will be listed on the BSE and the NSE, in a timely manner or at all, and any trading closures at the BSE and the NSE may adversely affect the trading price of our Equity Shares or a shareholder s ability to transfer its Equity Shares. In accordance with Indian law and practice, permission for listing of the Equity Shares will not be granted until after the Equity Shares offered in this Issue have been issued and allotted. Approval will require all other relevant documents authorizing the issuing of the Equity Shares to be submitted. There could be a failure or delay in listing the Equity Shares on the BSE and the NSE. Any failure or delay in obtaining the approval would restrict your ability to dispose of your Equity Shares. The regulation and monitoring of Indian securities markets and the activities of investors, brokers and other participants differ, in some cases significantly, from those in Europe and the U.S. The BSE and the NSE have in the past experienced problems, including temporary exchange closures, broker defaults, settlements delays and strikes by brokerage firm employees, which, if continuing or recurring, could affect the market price and liquidity of the securities of Indian companies, including the Equity Shares, in both domestic and international markets. A closure of, or trading stoppage on, either of the BSE and the NSE could adversely affect the trading price of the Equity Shares or a shareholder s ability to transfer its Equity Shares. Historical trading prices, therefore, may not be indicative of the prices at which the Equity Shares will trade in the future. You may be subject to Indian taxes arising out of capital gains on the sale of the Equity Shares. Under current Indian tax laws and regulations, capital gains arising from the sale of shares in an Indian company are generally taxable in India. Any gain realized on the sale of listed equity shares on a stock exchange held for more than 12 months will not be subject to capital gains tax in India if the Securities Transaction Tax ( STT ) has been paid on the transaction. The STT will be levied on and collected by a domestic stock exchange on which the Equity Shares are sold. Any gain realized on the sale of the Equity Shares held for more than 12 months to an Indian resident, which are sold other than on a recognized stock exchange and as a result of which no STT has been paid, will be subject to capital gains tax in India. Further, any gain realized on the sale of listed equity shares held for a period of 12 months or less will be subject to capital gains tax in India. For more information, see Taxation. Capital gains arising from the sale of the Equity Shares will be exempt from tax in India in cases where such exemption is provided under the tax treaty between India and the country of which the seller is a resident. Generally, Indian tax treaties, including those with the United States, do not limit India s ability to impose tax on capital gains. As a result, residents of countries such as the United States may be liable for 52

53 tax in India, as well as in their own jurisdictions on gain upon a sale of the Equity Shares. Investors are advised to consult their own tax advisers and to consider carefully the potential tax consequences of an investment in the Equity Shares under the laws of India or any other applicable jurisdiction. The ability to sell the Equity Shares to a resident of India may be subject to certain pricing restrictions. A person resident outside India (including a non-resident Indian) is generally permitted to transfer by way of sale the shares held by him to any other person resident in India without the prior approval of the RBI or the Foreign Investment Promotion Board (the FIPB ). However, it should be noted that the price at which the aforesaid transfer takes place must comply with the pricing guidelines prescribed by the RBI in its Circular dated May 4, The guidelines stipulate that where the shares of an Indian company are traded on a stock exchange the price of shares transferred by way of sale shall not be less than the price at which a preferential allotment of shares can be made under the guidelines prescribed by SEBI, as applicable, provided that the same is determined for such duration as specified therein, preceding the relevant date, which shall be the date of purchase or sale of shares. Volatile conditions in the Indian securities market may affect the price or liquidity of the Equity Shares. The Indian securities markets are smaller and can be more volatile than securities markets in moredeveloped economies. The Indian Stock Exchanges have in the past experienced substantial fluctuations in the prices of listed securities and the price of our shares has been volatile. For example, our stock price on the BSE ranged from a low of Rs to a high of Rs in the fiscal year As on September 3, 2010, the closing price of the Equity Shares on the BSE and the NSE was Rs and Rs , respectively. In addition, the bodies governing Indian stock exchanges have from time to time imposed restrictions on trading in certain securities, limitations on price movements and margin requirements. Further, from time to time, disputes have occurred between listed companies and stock exchanges and other regulatory bodies, which in some cases may have had an adverse effect on market sentiment. Similar problems could occur in the future and, if they do, they could affect the market price and liquidity of the Equity Shares. An investor will not be able to sell any of the Equity Shares subscribed in this Issue other than on a recognized Indian stock exchange for a period of 12 months from the date of this Issue of the Equity Shares. Pursuant to SEBI Regulations, for a period of 12 months from the date of this Issue, investors subscribing to the Equity Shares in this Issue may only sell their Equity Shares on the NSE or the BSE and may not enter into any off-market trading in respect of these Equity Shares. We cannot assure you that these restrictions will not have an impact on the price or liquidity of the Equity Shares. Economic developments and volatility in securities markets in the global market, including emerging markets, may cause the price of the Equity Shares to decline The global financial crisis and economic downturn that occurred in 2008 or similar financial crisis in the future may adversely affect our business, financial condition, results of operations and prospects in a number of ways, including: decreased demand for our products; delayed completion of facilities development; Government actions to control the rate of economic recovery and curb inflation by raising interest rates; statutory-liquidity ratio of financial institutions or by other fiscal or monetary policies; financing and other sources of liquidity may not be available on reasonable terms or at all; and fall in price of the Equity Shares. 53

54 These risks may be increased in the event of any prolonged economic downturn or financial crisis. The Indian economy and its securities markets are influenced by economic developments and volatility in securities markets in other countries. Investors reactions to developments in one country may have adverse effects on the market price of securities of companies located in other countries, including India. For instance, the economic downturn globally has adversely affected market prices in the world s securities markets, including the Indian securities markets. Negative economic developments, such as rising fiscal or trade deficits, or a default on sovereign debt, in other emerging market countries may affect investor confidence and cause increased volatility in Indian securities markets and indirectly affect the Indian economy in general. In addition, the markets bearing emerging market risks, such as risks relating to India, are, to varying degrees, influenced by economic and securities market conditions in other emerging market countries. Although economic conditions differ in each country, investors reactions to developments in one country may affect securities of issuers in other countries, including India. Accordingly, the price and liquidity of the Equity Shares may be subject to significant fluctuations, which may not necessarily be directly or indirectly related to our financial performance. There are restrictions on daily movements in the price of the Equity Shares, which may adversely affect a shareholder s ability to sell, or the price at which it can sell, the Equity Shares at a particular point in time. We are subject to a daily circuit breaker imposed by all stock exchanges in India, which does not allow transactions beyond specified increases or decreases in the price of the Equity Shares. This circuit breaker operates independently of the index/based market/wide circuit breakers generally imposed by SEBI on Indian stock exchanges. The percentage limit on our circuit breakers is set by the stock exchanges based on the historical volatility in the price and trading volume of our shares. The stock exchanges do not inform us of the percentage limit of the circuit breaker in effect from time to time and may change it without our knowledge. This circuit breaker limits the upward and downward movements in the price of the Equity Shares. As a result of this circuit breaker, there is no assurance regarding your ability to sell, or the price at which you can sell, the Equity Shares at any particular point in time. The Equity Shares are subject to transfer restrictions. The Equity Shares are being offered in reliance on an exemption from registration under the Securities Act. Therefore, the Equity Shares may be transferred or resold only in a transaction registered under or exempt from the registration requirements of the Securities Act and in compliance with any other applicable securities laws. See Transfer Restrictions. You may be restricted in your ability to exercise pre-emptive rights under Indian law and be diluted in your ownership position. Under the Companies Act, 1956, a company incorporated in India must offer holders of its equity shares pre-emptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentages before the issuance of any new equity shares, unless the pre-emptive rights have been waived by adoption of a special resolution by holders of three-fourths of the equity shares which would be affected, unless the company has obtained Government approval to issue without such rights. If the law of the jurisdiction you are in does not permit you to exercise your pre-emptive rights without us filing an offering document or registration statement with the applicable authority of such jurisdiction, you will be unable to exercise your pre-emptive rights unless we make such a filing. To the extent that you are unable to exercise pre-emptive rights granted in respect of the Equity Shares, your proportional interest in us may be reduced. The proceeds raised in this Issue are subject to discretion of the management as well as to market and credit risks, pending utilisation. 54

55 Although we intend to use the net proceeds received from the Issue in accordance with the Use of Proceeds section in this Placement Document, such use is subject to the discretion of our management. Pending utilisation for the purposes described in the Use of Proceeds section in this Placement Document, we intend to temporarily invest funds in instruments that we deem to be creditworthy, including money market mutual funds and deposits with banks. Factors such as interest rates, exchange rates and the creditworthiness of the counterparties, among others, may have an adverse effect on these investments which may result in our inability to use the proceeds raised in this Issue in the manner indicated. 55

56 USE OF PROCEEDS The total proceeds of the Issue will be Rs. 4, million. After deducting the Issue expenses of approximately Rs million, the net proceeds of the Issue will be approximately Rs. 4, million. Purpose of Issue The Company proposes to raise funds through the Issue to part finance overseas acquisitions directly or indirectly, repayment and prepayment of debt, investments and other uses, including capital expenditure, as permitted by applicable rules and regulations. In accordance with the policies approved by the Board and as permissible under applicable laws and government policies, the management of the Company will have flexibility in deploying the proceeds received by the Company from the Issue. Pending utilisation for the purposes described above, the Company intends to temporarily invest funds in creditworthy instruments, including money market mutual funds and deposits with banks. Such investments would be in accordance with the investment policies as approved by the Board from time to time. The Company has agreed with the Book Running Lead Managers in the Placement Agreement that it will not use or make available the proceeds from the Issue to lend, contribute or otherwise make available such proceeds to any Subsidiary, joint venture or other Person to (i) fund, directly or indirectly, the activities of, or business with, or to otherwise benefit, any country, government, territory, person, vessel or entity currently subject to any Sanctions; or (ii) in a manner that would otherwise cause any person (including, without limitation, any of the BRLMs or any investor in the Issue) to violate any Sanctions. 56

57 CAPITALISATION The Company s authorised share capital is Rs. 1, million divided into 89,750,000 Equity Shares and 620,000 6% cumulative redeemable preference shares of Rs. 1,000 each as of June 30, As of August 27, 2010 the Company s issued, subscribed and paid-up capital totaled Rs. 960,817,380 divided into 46,921,138 paid-up Equity Shares and 491,606 6% cumulative redeemable preference shares of Rs. 1,000 each. The following table sets forth the Company s capitalization and total debt as of June 30, 2010 on the basis of unaudited condensed consolidated financial statements and as adjusted to give effect to the Issue. This table should be read in conjunction with the Financial Statements and the related notes, Management Discussion and Analysis of Financial Condition and Results of Operations on page 62 and other financial information contained in the section on Financial Statements on page F- 1. (In Rs. Million) As at June 30, 2010 (Unaudited) As adjusted for the Issue Shareholders Funds Share Capital Equity Share Capital (a) Preference Share Capital Share application money pending allotment (b) Employee Stock Options Outstanding (c) Reserve and Surplus 7, , Total shareholders funds 8, , Minority Interest 2, , Loan Funds Secured loans 11, , Unsecured loans 5, , Total debts 16, , Deferred Tax Liability Total Capitalization 27, , (a) The following Equity Shares have been allotted subsequent to June 30, 2010: (1) Allotment of 100,500 Equity Shares on August 2, 2010 under the Strides Arcolab ESOP 2008 Scheme at an issue price of Rs (2) Allotment of 49,500 Equity Shares on August 6, 2010 under the Strides Arcolab ESOP 2008 Scheme at an issue price of Rs (3) Allotment of 12,000 Equity Shares on August 24, 2010 under the Strides Arcolab ESOP 2008 Scheme at an issue price of Rs (4) Allotment of 3,220,000 Equity Shares on August 26, 2010 upon conversion of warrants at an issue price of Rs (b) The share application money pending allotment is nil as on August 31, 2010 on account of conversion of warrants subsequent to June 30, (c) Employee Stock Options outstanding as of August 31, 2010 is Rs Million Except as stated above, there has been no material change in the capital of the Company since June 30,

58 MARKET PRICE INFORMATION AND OTHER INFORMATION CONCERNING THE EQUITY SHARES Our Company s Equity Shares are listed and traded on the Stock Exchanges. The Equity Shares have been listed on the BSE and the NSE since June 8, 2004 and February 2, 2000, respectively. The tables set forth below provide certain stock market data for the BSE and the NSE and is for the periods that indicate the high and low prices of the Equity Shares and also the volume of trading activity. 1. The high, low and average market prices of our Equity Shares during the preceding three Financial Years: BSE Year ending March 31 Date of high 2010 March 19, May 6, June 6, 2007 (Source: NSE Year ending March 31 Date of high 2010 March 19, May 6, June 6, 2007 (Source: High (Rs.) Volume on date of high (No. of Equity Shares) Date of low ,814 April 1, ,752 March 9, ,194 March 17, 2008 High (Rs.) Volume on date of high (No. of Equity Shares) Date of low ,510,734 March 9, ,909 March 9, ,052 March 17, 2008 Low (Rs.) Volume on date of low (No. of Equity Shares) , , , Low (Rs.) Volume on date of low (No. of Equity Shares) , , , Average price Average price 2. Monthly high and low prices of our Equity Shares for the six months preceding the date of filing of this Placement Document. BSE Month Date of high High (Rs. ) Volume on date of high (No. of Equity Shares) Date of low Low (Rs.) Volume on date of low (No. of Equity Shares) August, August 6, ,157 August , , 2010 July, 2010 July ,527 July , June, 2010 Jun e ,367 June , Average (Rs.) 58

59 Month Date of high High (Rs. ) Volume on date of high (No. of Equity Shares) Date of low Low (Rs.) Volume on date of low (No. of Equity Shares) May, 2010 May ,672 May , April, 2010 April ,176 April , March, March ,814 March , (Source: NSE Month Date of high High (Rs.) Volume on date of high (No. of Equity Shares) Date of low Low (Rs.) Volume on date of low (No. of Equity Shares) Average (Rs.) Average price during the month August, August 6, ,107 August 31, , July, 2010 July ,797 July , June, 2010 June ,916 June , May, 2010 May ,431 May , April, 2010 April ,240,545 April , March, 2010 February, 2010 (Source: March ,510,734 March , February ,744,745 February , Market Price on the first working day following the Board Meeting approving the Qualified Institutions Placement on June 28, 2010, and after the approval of the members on July 23, 2010: BSE Date Open High Low Close Traded volume (No. of shares) Turnover (Rs. In millions) June 29, , July 26, , NSE Date Open High Low Close Traded volume (No. of shares) Turnover (Rs. In millions) June 29, , July 26, , The following tables set forth the details of the volume of business transacted during the last six months on the BSE and the NSE. Month BSE (Rs. in million) NSE (Rs. in million) August, ,

60 June, , , May, , , April, , , March, , , February, , , (Source: and 60

61 DIVIDEND POLICY Under the Companies Act, an Indian company pays dividends upon a recommendation by its board of directors and approval by a majority of the shareholders at an AGM, who have the right to decrease but not to increase the amount of the dividend recommended by the board of directors. Under the Companies Act, dividends may be paid out of profits of a company in the year in which the dividend is declared or out of the undistributed profits or reserves of previous financial years or out of both. Additionally, the Articles grant discretion to the Board to declare and pay interim dividends to the members. Under the Companies Act, dividends can only be paid in cash to shareholders listed on the register of shareholders or those persons whose names are entered as beneficial owner in the record of the depositary on the date specified as the record date or book closure date. The declaration and payment of dividends may be recommended by the Board of Directors and approved by the shareholders of the Company, at their discretion, and, if so declared, will depend on a number of factors, including but not limited to the Company s profits, capital requirements and overall financial condition. Under the current Indian tax laws, dividends are not subject to income tax in India in the hands of the recipient. However, a company is liable to pay a dividend distribution tax currently at the rate of 15% (plus surcharge at 10% and education cess on dividend distribution tax and surcharge at the rate of 3%) on the total amount distributed as dividend. The effective rate of dividend distribution tax is approximately 17%. Please see Taxation on page 162. The following table details the dividend paid by the Company on the Equity Shares for Fiscal No dividend was paid by the company during Fiscal 2008 and 2007: Fiscal 2009 Face Value of Equity Share (Rs.) Interim Dividend per Equity Share (Rs.) N.A. Final Dividend per Equity Share (Rs.) 1.50 Total Dividend on Equity Shares (in Rs. million) Dividend per Equity Share (Rs.) 1.50 Dividend Rate (%) 15 Dividend Distribution Tax for equity shares (in Rs. million)

62 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations together with our audited consolidated financial statements as of and for the fiscal years ended December 31, 2009, 2008 and 2007, and our unaudited consolidated financial statements as of and for the six months ended June 30, 2010 and 2009, including the notes thereto and reports thereon, each included in this Placement Document. You should also read the sections titled Risk Factors and Forward Looking Statements included in this Placement Document which discuss a number of factors and contingencies that could affect our financial conditions and results of operations. Our consolidated financial statements included in this Placement Document are prepared in accordance with Indian GAAP, which differs in certain material respects from IFRS. Our fiscal year ends on December 31 of each year. Accordingly, all references to a particular fiscal year are to the 12 months ended December 31 of that year. Overview We are a pharmaceuticals company engaged in the manufacturing of a wide range of pharmaceutical products, including branded generics and specialised sterile products. We believe we are a leading manufacturer of soft gelatin capsules and steriles. We are primarily involved in two businesses, the pharmaceutical business and the specialised sterile products business. The pharmaceutical business is further divided into two product lines, manufacturing and branded generics. Our pharmaceutical business offers a wide range of products across several major therapeutic categories, including anti-biotics, oncology, anti-bacterials and HIV/AIDS and malaria drugs. As part of our specialised sterile products business, we develop and manufacture sterile products across many therapeutic areas and formats for various multi-national pharmaceutical companies. We believe that we have one of the largest lyophilisation (freeze-drying) capacities in the world. We operate 14 manufacturing facilities across six locations in India, Singapore, Nigeria, Poland, Brazil and Italy. In addition to twelve manufacturing facilities owned by us, we have entered into an agreement in February 2010 with Aspen Global Incorporated, Cellofarm LTDA and Starsmore Limited for the acquisition of two manufacturing facilities for a consideration of approximately US$ million, which we currently operate. Pursuant to this agreement, the Company will also have rights over Campos' products and intellectual properties. Many of these facilities have been approved by foreign regulatory authorities, including the United States FDA, MHRA and MCA in the United Kingdom, TGA in Australia, ANVISA in Brazil and Health Canada in Canada. To enhance our future growth and market position, we have made and will continue to make significant investments in research and development. We also have a dedicated research and development facility, Strides Technology and Research ( STAR ), located in Bengalaru, India, which commenced operations in March 2005 and currently employs approximately 350 scientists. As of August 31, 2010, we or our partners have filed 133 ANDAs in the United States and 22 filings in Europe. We have also received 48 ANDA approvals from United States FDA, purchased 32 marketing authorisations in Europe and currently have approximately 760 product registrations globally. We have marketing presence across 75 countries. Our marketing operations are conducted directly as well as through a number of joint ventures and partnerships. We have partnered with leading global pharmaceutical and generic companies such as Pfizer, GSK, Aspen, Akorn, Teva, Novartis, Apotex, Martindale, Sagent, ICN, Actavis and Sandoz in various jurisdictions, including South Africa, Australia, Europe and the United States. For example, in January 2010, we entered into a marketing arrangement with Pfizer to develop, manufacture and sell off-patent sterile injectables and oral products in the United States. We believe Pfizer s ability to market will extend the reach of our products and enable our business to grow in the developed markets in which Pfizer has a significant presence. In April 2010, we extended our 62

63 agreement with Pfizer to market up to 38 generic oncology products for markets in Australia, Canada, the European Union, Japan, Korea and New Zealand. See Description of Our Business Specialised Sterile Products Business Strategic Partners. For the fiscal year 2009 and six months ended June 30, 2010, our total income was Rs. 13, million and Rs. 8, million, respectively and our net profit after tax and allocation of minority interest was Rs. 1, million and Rs million, respectively. Recent Developments Pending Acquisitions We have entered into agreements to acquire a 100.0% equity interest in two of our 50:50 joint ventures, Onco Therapies Limited ( OTL ) and Onco Laboratories Limited ( OLL ), from our joint venture partner, the Aspen Group for a consideration of US$ 37.3 million and US$ 80.0 million, respectively. As of June 30, 2010 we have paid US$ million for acquiring the shareholding in OTL. However, we are yet to complete the transfer of share ownership in OTL. We are required to complete the acquisition of OLL before December 31, 2010 and have not yet made any payments for the acquisition. We operate 14 manufacturing facilities across six locations in India, Singapore, Nigeria, Poland, Brazil and Italy. In addition to twelve manufacturing facilities owned by us, we have entered into an agreement in February 2010 with Aspen Global Incorporated, Cellofarm LTDA and Starsmore Limited for the acquisition of two manufacturing facilities for a consideration of approximately US$ million, which we currently operate. Pursuant to this agreement, the Company will also have rights over Campos' products and intellectual properties. As of June 30, 2010, we have paid US$ million of the total purchase price and pursuant to the terms of the agreement, we currently operate the two manufacturing facilities. The completion of the acquisition is subject to receipt of regulatory approval, among other conditions precedent. Scheme of Arrangement On April 13, 2009, our shareholders approved a scheme of arrangement ( Scheme of Arrangement ), under which four subsidiaries, Global Remedies Limited, Quantum Remedies Private Limited, Grandix Pharmaceuticals Limited and Grandix Laboratories Limited were merged with and into our Company, with effect from January 1, Pursuant to the Scheme of Arrangement, certain assets and liabilities of the Company were fair valued resulting in an upside of Rs. 6, million and adjustment of expenses of Rs. 4, million in reserve for business restructure and hence, the adjusted amount was not charged to the profit and loss account for the fiscal year For further details of our Scheme of Arrangement, see Schedule Q of our consolidated financial statements. Principal Factors Affecting our Results of Operations The significant factors affecting us are discussed below and in the Risk Factors section. Pharmaceutical Research and Development Our business depends to a significant degree on our ability to successfully conduct research and development with respect to our products. This process is both time consuming and costly, and involves a high degree of business risk. To develop our product pipeline, we commit substantial time, funds and other resources, both through our own dedicated resources and our collaborations with third parties. In addition, our research staff is critical to the success of our research and development efforts. Our investments in research and development for future products could result in higher costs without a proportionate increase in revenues. In addition, we must adapt to rapid changes in our industry due to technological advances and scientific discoveries. If our pharmaceutical products become obsolete, and we are unable to effectively introduce 63

64 new products, our business and results of operations could be adversely affected. Although we strive to keep our technology, facilities and machinery current with the latest international standards, the technologies, facilities and machinery we currently employ may become obsolete. The cost of implementing new technologies, upgrading our manufacturing facilities and retaining our research staff could be significant and could adversely affect our profitability. Quality of Manufacturing Facilities and Production Capacities Our business relies significantly on the quality of our manufacturing processes and facilities. In order to maximise our profits, we must maintain an appropriate standard of quality in our facilities equipment and processes. Attaining and maintaining this level of quality requires considerable expense and planning. If we are unable to achieve and preserve the necessary level of quality in our manufacturing processes and facilities in the future, our financial condition and results of operation may be adversely affected. In the past, our profits have been affected as a result of limits to our ability to install sufficient production capacities which have received approvals and certifications from regulatory authorities. In order to achieve our competitiveness in the future, we must install sufficient production capacities for the manufacturing of our products and obtain regulatory certifications. Marketing Partnership Agreements Our marketing operations outside India are conducted directly as well as through a number of joint ventures and partnerships. We have entered into marketing partnerships with leading global pharmaceutical and generic companies such as Pfizer, GSK, Aspen and Sandoz in various jurisdictions, including South Africa, Australia, Europe and the United States. Generally, our marketing partnerships agreements provide that either party may terminate such arrangements by providing written notice. Additionally, some of these agreements may be terminated by the relevant counter parties in the event that the product is not deemed commercially desirable or technically feasible. Because we rely on our marketing partners for sales outside India, any disruption, including our failure to renew our existing marketing agreements or enter into new marketing agreements, could adversely affect our financial condition and results of operations. Regulatory, Environment and Approval Processes The pharmaceutical industry in India and in the jurisdictions in which we operate is subject to stringent regulation. Our products are subject to regulation by numerous Indian and foreign regulatory agencies, including the U.S. FDA and similar agencies in other jurisdictions. Each of these agencies requires us to comply with laws and regulations governing the development, testing, manufacturing, labelling, marketing and distribution of our products. We are also subject to various environmental laws and regulations both within and outside India. Our operations often involve the use of substances regulated under such environmental laws, primarily those used in manufacturing and sterilisation processes. We are also subject to other laws and regulations which are applicable to manufacturers in general and if there is any change in these laws and regulations, our results of operations may be adversely affected. We have made significant investments in manufacturing facilities in India, Poland and Brazil that are yet to be approved by the U.S. FDA. If we experience delays in obtaining such approvals or are unable to obtain such approvals at all, the growth of our product offerings and approved manufacturing capacities may be delayed or prevented, which would adversely affect our results of operations. Our manufacturing facilities and products are subject to audit by the U.S. FDA, and such audits could result in the withholding of product approval or facility shut-down. If we are sanctioned by the U.S. FDA, our ability to manufacture our products may be interrupted or prevented, which could have an adverse effect on our business, goodwill, financial condition and results of operations. Price Trends 64

65 Since we have a diversified range of products in a number of therapeutic categories and have presence in several countries, our price risk is significantly spread across various products, therapeutic categories and geographic markets, which helps insulate us from price fluctuations. No single product accounted for more than 5.0% of our total income for the fiscal year 2009 or the six months ended June 30, Prices of most of our products have remained stable over the last few years. Our strategy is to focus on specialised sterile products, which have relatively higher profit margins than our pharmaceutical products. We also believe we are one of the most competitive manufacturers of branded generics in the developing markets and an important source of branded generics for our customers in the developed markets. We manufacture anti-retroviral, anti-tuberculosis and anti-malarial drugs as well as a supplier to programmes funded by global organisations such as the Clinton Foundation. We plan to maintain our competitive edge in these categories through continuous research, process improvements, marketing efforts, advantageous strategic partnerships and cost reductions. Pricing Controls and Pressures In certain jurisdictions in which we operate, the government has the ability to apply pricing controls that could apply to certain of our products. For example, in India, under the Drugs Prices Control Order ( DPCO ), the Indian Government has the authority to designate a pharmaceutical product as a specific product and to fix the maximum selling price. The pricing of a number of our products are subject to price controls. In the past few years, there have been significant changes in the prices of select products, as well as amendments in India to the list of products under price control, which has adversely affected the pricing of our products. Due to rising healthcare costs, there have been and may continue to be proposals by legislators and regulators to keep these costs down in the jurisdictions in which we operate. Certain proposals in the United States, if passed, could impose limitations on the prices we will be able to charge for our products, or the amounts of reimbursement available for our products from governmental agencies or third-parties. These limitations could have an adverse effect on our business and results of operations. In addition, if insurance companies do not provide coverage or provide limited coverage for use of our products by patients, it may reduce our sales and force us to reduce prices of some of our products, which will have an adverse affect on our business and results of operations. Competition Our pharmaceutical products and specialised sterile products face intense competition from products developed by other companies in India and overseas, including major pharmaceutical companies. Some of our competitors are increasing their capacity and targeting the same product categories as us and have greater experience in obtaining international regulatory approvals and greater financial resources, research and development expertise and marketing capabilities than we do. Furthermore, following India s adoption of the new patent regime in 2005, more multinational corporations are likely to enter the Indian markets, and if we are unable to compete with them effectively, our results of operations may be adversely affected. Other competitive factors relevant to our business include drug efficacy, performance, technology and quality, brand, breadth of product lines, product services, customer support, price and reimbursement approval from healthcare insurance providers. Fluctuations in Currency Rates Changes in currency exchange rates influence our results of operations. Although we prepare and report our consolidated financial statements in Rupees, significant portions of our income and expenditure are denominated in currencies other than Rupees, most significantly the U.S. Dollar, Euro and British Pound. We also hedge a portion of our foreign currency exposure through the use of forward exchange contracts and derivatives. Any adverse foreign exchange rate movement of the U.S. Dollar, Euro or British Pound against the Rupee could affect our profitability. 65

66 General Economic and Business Conditions The global credit markets and financial services industry have experienced a period of upheaval characterised by the bankruptcy, failure, collapse or sale of various financial institutions, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, uncertainty about economic stability and an unprecedented level of intervention by governments and monetary authorities. Such events may have an adverse effect on our ability to borrow or raise additional funds in the capital markets and potentially to draw on our existing revolving credit facilities or otherwise. Similarly, our customers and suppliers may experience financial difficulties or be unable to borrow money to fund their operations which may adversely affect their ability to purchase our products, or to pay for our products they do purchase on a timely basis. Taxes The statutory corporate income tax rate in India is currently 30.0%. This tax rate is presently subject to a 7.5% surcharge. The amount of tax and surcharge payable is further subject to a 3.0% education cess. Other Factors A number of other factors have affected and are likely to continue to affect our results of operations, financial conditions and cash flows including: demand for our products in both developed and emerging markets; our ability to manage our growth strategy and expansion plans, including our ability to grow our exports and finance our expansion plans; our ability to grow and manage our distribution networks in India and overseas; our ability to find ways to operate more efficiently, including lowering our manufacturing and marketing costs and interest and tax expenses; and our ability to source raw material in required quantity and at competitive prices. Significant Accounting Policies Basis for Preparation of Financial Statements Our financial statements are prepared under the historical cost convention on an accrual basis except for certain financial and other assets and liabilities which are measured on fair value basis as permitted by the Accounting Standards or according to the Scheme of Arrangement approved by the High Courts in India. Revenue Revenue from our export sales is recognised on the basis of the shipping bills for exports. Revenue from domestic sales is recognised based on the passage of title to goods which generally coincides with despatch. Sales include excise duty and are stated net of discounts, other taxes and sales returns. Revenue from development services: in respect of contracts which require development on an end-to-end basis, revenue is recognised based on the percentage of completion method, and our technical estimates of the current stage of development; and in respect of other development contracts, revenue is recognised on the basis of the performance milestones provided in the contract. Licensing revenues are recognised based on terms of the contract. Revenue from contract manufacturing is recognised based on the services rendered in accordance with the terms of the contract. Export incentives 66

67 are accounted on an accrual basis and include estimated realisable values and benefits from special import licenses and benefits under Duty Entitlement Pass Book schemes, wherever applicable. Dividend income is recognised whenever the right to receive dividends is established. Other income is recognised when such income accrues to us. Fixed Assets Fixed assets and intangibles, other than in-house product development costs, are recorded at their acquisition cost and subsequent improvements thereto, except in the case of assets, which are recorded at fair value according to the Scheme of Arrangement approved by the Honourable High Courts of Judicature. Cost includes related pre-operative project expenditure and interest on borrowings attributable to the funds borrowed in respect of qualifying assets, for the period up to completion of construction or when the assets are ready to be put to use, as applicable. In-house product development costs are capitalised in accordance with the section entitled Research and Development Expenditure below. Impairment of Assets As of each balance sheet date, the carrying amount of fixed assets is tested for impairment. An impairment loss is recognised when the carrying amount of an asset exceeds its recoverable amount. Recoverable amount is determined: in the case of an individual asset, at the higher of the net selling price and value in use; and in the case of cash-generating units, at the higher of the unit s net selling price and the value in use. Value in use is determined as the present value of estimated future cash flows from the continuing use of an asset and from its disposal at the end of its useful life. Depreciation Depreciation is provided under the straight-line method based on the following useful lives: Nature of asset Building Plant and Machinery Furniture and Fixtures Office Equipment Motor Vehicles Software Licenses Registration and Brands Useful life (range) 4 to 65 years 3 to 25 years 5 to 16 years 5 to 12 years 5 to 12 years 5 years Not exceeding 10 years Individual assets that cost less than Rs. 5,000 are depreciated in full during the year of purchase. With respect to assets carried at fair value as permitted under the scheme, depreciation and amortisation is recorded under the straight line method over the balance useful life of the respective assets. Inventories Inventories comprise raw materials, consumables, packing materials, work in process and finished goods. These are valued at the lower of cost and net realisable value. Cost is determined as follows: Type of good Raw materials, packing materials and consumables Work in process Finished Goods Determination of cost method On weighted average basis At material cost and an appropriate share of production overheads At material cost and an appropriate share of production overheads and excise duty, wherever applicable 67

68 Employee Benefits Contributions to defined contribution schemes are charged to revenue on an accrual basis. Leave balances standing to the credit to the employees that are expected to be availed in the short-term are provided for on a full cost basis. Liability for unavailed leave considered to be long-term is carried based on an actuarial valuation. Liability for gratuity in respective of employees in entities within India is funded and are accounted based on actuarial valuation under the projected unit credit method carried out as at the end of the fiscal year. The obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of plan assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the plan. Short-term employee benefits such as medical benefits and leave travel are accrued based on the terms of employment on a time proportion basis. In respect of foreign subsidiaries, liabilities with respect to employee benefits are accrued based on the laws applicable in those countries. Research and Development Expenditure Development expenses incurred on specific and identified in-house developed products are capitalised from the date on which we are able to demonstrate technical feasibility and probable future economic benefits in respect of the products. The amount capitalised comprises expenditure that can be directly attributed, or allocated on a reasonable and consistent basis, to creating, producing and making the asset ready for its intended use. Other research and development expenses are charged to the profit and loss account. Fixed assets acquired for Research and Development activities are capitalised and depreciated in accordance with our policy according to the sections entitled Fixed Assets and Depreciation above. Foreign Currency Transactions Transactions denominated in foreign currency are recorded at the exchange rates prevailing on the date of the transaction. Monetary items denominated in foreign currencies at year end are translated at the exchange rate prevailing on the date of the balance sheet. Exchange differences on settlement or restatement are adjusted in the profit and loss account. Investments Current investments are carried at the lower of cost and fair market value. A provision is made to recognise any decline in the carrying value. Long-term investments are valued at cost less any impairment considered to be other than temporary, except for investments which are: Leases designated as hedged items for changes in the spot rate of the foreign currency underlying in the investment; such investments are carried at fair values by restating the underlying foreign currency at the closing spot rates; and recorded at fair value as per the Scheme of Arrangement approved by the Honourable High Courts of Judicature. Lease arrangements, where the risks and rewards incident to ownership of an asset substantially vest with the lessor, are classified as operating leases and the lease rentals thereon are charged to the profit and loss account on accrual basis. Assets acquired under finance lease arrangements are recognised as an asset and a liability is setup at the inception of the lease, at an amount equal to the lower of the fair value of leased assets or the present value of the future minimum lease payments. Financial Assets, Financial Liabilities, Financial Instruments, Derivatives and Hedge Accounting 68

69 We classify our financial assets into the following categories: financial instruments at fair value through profit and loss, loans and receivables, held to maturity investments and available for sale financial assets. Our financial assets mainly include cash and bank balances, sundry debtors, loans and advances and derivative financial instruments with a positive fair value. Our financial liabilities mainly comprise secured and unsecured loans, sundry creditors, accrued expenses and derivative financial instruments with a negative fair value. Financial assets and liabilities are recognised on the balance sheet when we become a party to the contractual provisions of the instrument. Financial assets are derecognised when all of risks and rewards of the ownership have been transferred. The transfer of risks and rewards is evaluated by comparing the exposure, before and after the transfer, with the variability in the amounts and timing of the net cash flows of the transferred assets. Financial liabilities held for trading and liabilities designated at fair value, are carried at fair value through profit and loss. Available for sale financial assets (not covered under other Accounting Standards) are carried at fair value, with changes in fair value being recognised in equity, unless they are designated in a fair value hedge relationship, where such changes are recognised in the profit and loss account. Loans and receivables, considered not to be in the nature of short-term receivables, are discounted to their present value. Shortterm receivables with no stated interest rates are measured at original invoice amount, if the effect of discounting is immaterial. Non-interest-bearing deposits, meeting the criteria of financial asset, are discounted to their present value. Other financial liabilities are carried at amortised cost using the effective interest method. We measure short-term payables with no stated rate of interest at their original invoice amount, if the effect of discounting is immaterial. Financial liabilities derecognised when extinguished. Determining fair value: Where the classification of a financial instrument requires it to be stated at fair value, fair value is determined with reference to a quoted market price for that instrument or by using a valuation model. Where the fair value is calculated using financial markets pricing models, the methodology is to calculate the expected cash flows under the terms of each specific contract and then discount these values back to a present value. Derivative financial instruments: We are exposed to foreign currency fluctuations on foreign currency assets and liabilities. We limit the effects of foreign exchange rate fluctuations by following established risk management policies including the use of derivatives. We enter into forward exchange financial instruments where the counterparty is a bank. Changes in fair values of these financial instruments that do not qualify as a cash flow hedge accounting are adjusted in the profit and loss account. Hedge accounting: Some financial instruments and derivatives are used to hedge interest rate, exchange rate, commodity and equity exposures and exposures to certain indices. Where derivatives are held for risk management purposes and when transactions meet the criteria specified in Accounting Standard 30, we apply fair-value hedge accounting or cash-flow hedge accounting or hedging of a net investment in a foreign operation as appropriate to the risks being hedged. Fair-value hedge accounting: Changes in the fair value of financial instruments and derivatives that qualify for and are designated as fair-value hedges are recorded in the profit and loss account, together with changes in the fair value attributable to the risk being hedged in the hedged asset or liability. If the hedged relationship no longer meets the criteria for hedge accounting, it is discontinued. Hedges of net investments: Hedges of net investments in foreign operations, including monetary items that are accounted for as part of net investment are accounted as follows: the effective portion of the gain or loss on the hedging instrument is recognised in shareholders equity and the ineffective portion recognised in the profit and loss account. The cumulative gain or loss previously recognised in equity is recognised in the profit and loss account on the disposal/partial disposal of the foreign operation. Hedges of net investments may include non-derivative liabilities as well as derivative financial instruments although for a non-derivative financial liability only the foreign exchange risk is designated as the hedged risk. 69

70 Employee Stock Option Schemes Employee stock options are accounted in accordance with the guidelines stipulated by SEBI. The difference between the market price of the shares underlying the options granted on the date of grant of option and the option price is expensed under Personnel Cost. Income Tax Income tax comprises the current tax provision and the net change in the deferred tax asset or liability during the year. Deferred tax assets and liabilities are recognised for the future tax consequences arising out of temporary differences between the carrying values of the assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applicable on the date of the balance sheet. Deferred tax assets are recognised and carried forward to the extent that there is at least a reasonable certainty that sufficient future taxable income will be available against which such deferred tax asset can be realised. The effect on deferred tax assets and liabilities resulting from change in tax rates is recognised in the income statement in the period of enactment of the change. Division Reporting Revenue and expenses have been identified to divisions on the basis of the nature of their relationship to the business and operating activities of the division. Revenue and expenses, which relate to us as a whole and are not allocable to divisions on a reasonable basis, have been included under Unallocable income/expenses. Inter-division sales are made at prevailing market prices. Use of Estimates The preparation of our financial statements requires our management to make estimates and assumptions considered in the reported amounts of assets and liabilities, including contingent liabilities, as of the date of the financial statements and the reported income and expenses during the reporting periods. Examples of such estimates include the useful life of fixed assets, including intangible assets, provision for doubtful debts or advances, provision for employee benefits, allowances for slow moving or non-moving inventory, provision for tax, estimates of the percentage of work completed under contracts for development services and sale of dossiers. We believe that the estimates used in the preparation of the financial statements are prudent and reasonable. However, future results may vary from these estimates. Provisions and Contingencies A provision is recognised when we have a present legal or constructive obligation as a result of a past event and it is probable that an outflow of resources will be required to settle this obligation, in respect of which a reliable estimate can be made. Provisions, excluding retirement benefits, are not discounted to their present value and are determined based on a best estimate required to settle the obligation. Contingent liabilities are not recognised but are disclosed in the notes to financial statements. Geographical Information During the fiscal year ended December 31, 2009, we operated in only one business segment, pharmaceuticals. However, we do classify our financial results in five geographic area. The table below sets forth revenues derived from third-party customers across our geographic areas for the fiscal years 2009 and 2008: (Rupees in Million) Geographic Area Revenue from third-party customers for the fiscal year 2009 Revenue from third-party customers for the fiscal year 2008 % % North America, Europe and 5, % 4, % 70

71 (Rupees in Million) Geographic Area Revenue from third-party customers for the fiscal year 2009 Revenue from third-party customers for the fiscal year 2008 % % Australia Africa 1, % 2, % India 1, % % South and Central America 1, % 1, % Rest of the World 2, % 1, % Total 13, % 10, % Our segment assets based on their geographic area for the fiscal years 2009 and 2008 are as set forth in the table below: (Rupees in Million) Geographic Area Carrying amount of Segment Assets Additions to Fixed Assets Carrying amount of Segment Assets Additions to Fixed Assets At Dec 31, 2009 At Dec 31, 2008 North America, Europe and 6, , Australia Africa 1, , India 9, , , South and Central America Rest of the World Total 18, , , , Note: Additions to fixed assets disclosed above do not include assets on the date of acquisition in respect of new subsidiaries that have been consolidated during the year. Results of Operations The following table sets forth selected financial data from our audited financial statements and our unaudited financial statements, the components of which are also expressed as a percentage of total income for the periods indicated: (Rs. in million) For the fiscal year For the six months ended June 30, 2010 June 30, 2009 (Audited) (Unaudited) % of (Rs. in % of Total (Rs. in % of (Rs. in % of Total (Rs. in Total million) Income million) Total million) Income million) Income Income % of Total Income Income: Sales and services 13, % 10, % 7, % 8, % 5, % Other income % 3, % 1, % % % Total Income 13, % 13, % 8, % 8, % 6, % Expenditure: Materials consumed Increase / (Decrease) in stock 7, % 5, % 4, % 3, % 3, % (265.29) (2.0%) (356.29) (2.6%) (617.40) (7. 2%) (319.51) (3.7%) (162.60) 2.7% Personnel cost 1, % 1, % 1, % 1, % % Operating and 2, % 2, % 2, % 1, % 1, % other expenses Finance charges % % % % % Total 11, % 10, % 8, % 7, % 5, % Expenditure* Profit before depreciation, amortisation & income tax 1, % 3, % % 1, % % Depreciation % % % % % Amortisation of % % 71

72 miscellaneous expenditure Exceptional Items: Profit on sale of plant Plant shutdown cost & Impairment in Investments Impairment in Investment Exchange loss / (gain) on FCCBs, ECBs & Forward exchange contracts, etc. (net) Profit on FCCB buyback Interest reversal on FCCB buyback Changes in fair value options embedded in FCCB s (Rs. in million) For the fiscal year For the six months ended June 30, 2010 June 30, 2009 (Audited) (Unaudited) % of (Rs. in % of Total (Rs. in % of (Rs. in % of Total (Rs. in Total million) Income million) Total million) Income million) Income Income % of Total Income % % (539.85) (6.2%) - - (1,655.94) (12.0 %) % (669.90) (4.9%) (35.57) (0.4%) (148.38) (2.5%) % % % % (41.12) (0.3%) % - - (108.81) (1.3%) % Profit before tax 1, % 1, % (345.69) (4.0%) 1, % % Provision for tax: Current tax % % % % % Deferred (net) (60.71) (0.5%) (23.50) (0.2%) (67.39) (0.8%) % Fringe benefit tax % % MAT credit (9.50) (0.1%) (14.00) (0.1%) % - - (84.10) 1.4% entitlement Prior year taxes % Less: Share of % (38.78) (0.3%) (15.27) (0.2%) % % Profit / (Loss) Allocated to Minority Interest Add: Share of Profit in Associate (Net) Net profit 1, % 1, % (501.21) (5.8%) % % *Excludes depreciation, expenses classified as exceptional and expenses charged to reserve for business restructure. For details, see Financial Statements. Income Our total income comprises income from sales and services and other income. Sales and Services: Our income from sales and services primarily consists of income from the sale of our products less excise duty, if applicable, development income, which is income received as a result of developing products pursuant to development contracts entered into with third parties and our joint ventures, licensing income, which is received as a result of licensing agreements with various partners, income from contract manufacturing services and income from the sale of product dossiers. 72

73 Other Income: Our other income comprises net gains as a result of exchange rate fluctuations, miscellaneous income such as rental income from other parties and reimbursements of costs, net profit on the sale of investments and net profit on the sale of assets such as machinery and interest received. Expenditure Our total expenditure comprises the cost of materials consumed, net increase or decrease in stock, personnel costs, operating and other expenses and finance charges. Materials Consumed: Our materials consumed expense consists of the costs of raw materials and packing materials, as adjusted for stock levels. Personnel Cost: Our personnel cost comprises salaries, wages, bonus and allowances to our employees, contributions to provident and other welfare funds and staff welfare expenses such as food and transport costs. Operating and Other Expenses: Our operating and other expenses primarily comprise the cost of power, fuel and water, consumables, freight and forwarding expenses incurred in relation to the shipment of our products, rent paid on our various manufacturing, research and administrative facilities, insurance costs, travelling and conveyances expenses, advertisement and selling expenses incurred for the promotion of our products, commissions paid to strategic partners and sales agents on sales of our products, legal and professional fees paid to our accountants, legal counsel and consultants, net losses as a result of exchange rate fluctuations, provisions for doubtful debts and other expenses such as software development, security and printing and stationery expenses. Finance Charges: Our finances charges comprise bank charges and commissions incurred as a result of new or existing credit facilities, interest paid on working capital loans and other facilities as well as interest paid on fixed loans and foreign currency convertible bonds ( FCCBs ). Depreciation: See - Significant Accounting Policies. Exceptional Items We have recorded a number of exceptional items during the last three fiscal years and the six months ended June 30, 2010 and June 30, The most significant items are discussed in further detail below. Plant Shutdown Cost and Impairment in Investments: We incurred plant shutdown costs in respect of our soft gelatine manufacturing facility in the United States upon closing this plant in 2007 and impairment of our investment in our wholly owned subsidiary Arcolab SA, aggregating Rs million for the fiscal year Impairment in Investments: In September 2008, we entered into an agreement with our then-joint venture partner, Aspen Pharmacare Holdings Limited ( Aspen ), pursuant to which Aspen had a call option and we had a put option for our entire 49.0% shareholding in Lakerose Limited ( Lakerose ), the final consideration of which would be based on a multiple of the actual EBITDA of Lakerose for a special period. During this period, we were not eligible for any share in the profits or dividends of Lakerose and based on an estimate of the earnings expected to be achieved during the specified period, we recognised an impairment loss of U.S.$ million (Rs. 1, million). Net exchange loss or gain on FCCBs, External Commercial Borrowings (ECBs) and other forward exchange contracts: : Forward exchange contracts are mark to market and the FCCBs and ECBs are restated at closing rate which have substantially contributed to net exchange gains of Rs million in 2009 and losses of Rs million in Profit on FCCB buyback: We had a profit on FCCB buyback of Rs million for the fiscal year 2009, due to our purchase of our outstanding FCCBs issued in 2005 and 2007 at a discount. 73

74 Changes in the fair value of options embedded within FCCBs: We had a gain in the fair value of options embedded within our FCCBs of Rs million for the fiscal year 2008, due to movements in the prices of our Equity Shares during the fiscal period. Inclusion of Unaudited Financial Statements Our audited consolidated financial statements consolidate the results of operations and financial condition of a number of subsidiaries and associates whose financial statements for the same periods are not audited. The following table provides the aggregate amounts of the line items specified below for such entities (entities whose financial statements as of and for the year ended December 31, 2009 were not audited. (Rs. in million) Particulars As of/for the year ended December 31, 2009 Loans 1, Fixed Assets 1, Current Assets 1, Current Liabilities and Provisions Income 1, Expenditure 1, Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009 Our results of operations for the six months ended June 30, 2010 were particularly affected by the following factors: increase in number of customer contracts; increase in licensing revenue/development income; and change in revenue-mix and increase in income from specialities business, which generally provides higher profit margins. Income: Our total income increased by 43.6% to Rs. 8, million for the six months ended June 30, 2010 from Rs. 6, million for the six months ended June 30, Our income from sales of products increased by 11.9% to Rs. 6, million for the six months ended June 30, 2010 from Rs. 5, million for the six months ended June 30, This increase was primarily due to the increase in sales of our specialised sterile products which we consider to be our higher margin products. Our income from sales of products was 71.1% of our total income for the six months ended June 30, 2010 as compared to 91.3% of our total income for the six months ended June 30, Our development income increased to Rs. 2, million for the six months ended June 30, 2010 from Rs million for the six months ended June 30, 2009, as a result of licensing income derived from the arrangement with Pfizer. Our development income was 24.4% of our total income for the six months ended June 30, 2010 as compared to 7.1% of our total income for the six months ended June 30, Other Income: Our other income increased to Rs million for the six months ended June 30, 2010 from Rs million for the six months ended June 30, This increase was primarily due to one time settlement of Rs million received from one of the customers on account of premature termination of contract. Expenditure: Our total expenditure increased by 27.9% to Rs. 7, million for the six months ended June 30, 2010 from Rs. 5, million for the six months ended June 30, Materials Consumed: Our materials cost constituted 55.0% of our total expenditure for the six months ended June 30, 2010 as compared to 59.4% of our total expenditure for the six months ended June 30, Our materials consumption cost increased by 18.4% to Rs. 3, million for the six months 74

75 ended June 30, 2010 from Rs. 3, million for the six months ended June 30, This increase was primarily due to as a result of increased production volumes, particularly our specialised sterile products, which entail higher packaging costs. Personnel Cost: Our personnel cost was 15.02% of our total expenditure for the six months ended June 30, 2010 as compared to 15.2% of our total expenditure for the six months ended June 30, Our personnel cost increased by 26.8% to Rs. 1, million for the six months ended June 30, 2010 as compared to Rs million for the six months ended June 30, This increase was due to as a result of an increase in the number of employees and annual pay revisions and bonus payments to employees. Operating Expenses: Our operating expenses were 25.7% of our total expenditure for the six months ended June 30, 2010 as compared to 21.6% of our total expenditure for the six months ended June 30, Our operating expenses increased by 52.1% to Rs. 1, million for the six months ended June 30, 2010 from Rs. 1, million for the six months ended June 30, This increase was primarily as a result of increase in operating activities and capitalisation of manufacturing facilities. Finance Charges: Finance charges were 8.8% of our total expenditure for the six months ended June 30, 2010 as compared to 6.8% of our total expenditure for the six months ended June 30, Finance charges incurred increased by 66.1% to Rs million for the six months ended June 30, 2010 from Rs million for the six months ended June 30, 2009 as a result of increase in level of borrowings on account of part payment of consideration for acquisitions and capital expenditure incurred for manufacturing facilities. Depreciation: Our depreciation expense increased by 52.0% to Rs million for the six months ended June 30, 2010 from Rs million for the six months ended June 30, 2009, as a result increase in capitalisation of new manufacturing facility in Bengaluru. Provision for Tax: Our provision for taxes increased to Rs million for the six months ended June 30, 2010 from Rs million for the six months ended June 30, 2009, primarily as a result of increase in the rate of minimum alternate tax and tax paid on licensing income derived from Pfizer. Our effective tax rate for the six months ended June 30, 2010 was 14.6% as compared to 12.1% for the six months ended June 30, Profit after Tax and allocation of minority interest : Our profit increased by 60.3% to Rs million for the six months ended June 30, 2010 from Rs million for the six months ended June 30, Fiscal Year 2009 Compared to Fiscal Year 2008 Our results of operations for the fiscal year 2009 were particularly affected by the following factors: acquisition of equity interest in Ascent and consolidation of its results of operations; our Scheme of Arrangement, for details see - Recent Developments ; the increase in sales of our relatively higher margin specialised sterile products; and the increase in material costs on account of higher production volumes. Income: Our total income decreased by 3.6% to Rs. 13, million for the fiscal year 2009 from Rs. 13, million for the fiscal year Our income from sales of products increased by 24.6% to Rs. 11, million for the fiscal year 2009 from Rs. 9, million for the fiscal year This increase was primarily due to the increase in sales of our specialised sterile products. Our income from sales of products was 90.1% of our total income for the fiscal year 2009 as compared to 69.7% of our total income for the fiscal year Our development income increased by 30.0% to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008, as a result of the growth of our development business, particularly for specialised sterile products, and an increase in the number of customers. Our development income was 75

76 5.4% of our total income for the fiscal year 2009 as compared to 4.02% of our total income for the fiscal year Our licensing income was Rs million for the fiscal year 2009 as compared to nil for the fiscal year The licensing income was primarily attributable to our licensing arrangement with Pfizer. Our licensing income was 0.02% of our total income for the fiscal year Other Income: Our other income decreased to Rs million for the fiscal year 2009 from Rs. 3, million for the fiscal year This decrease was primarily due to no income received from the sale of investments for the fiscal year 2009 compared to Rs. 2, million for the fiscal year 2008, no exchange rate fluctuation gains for the fiscal year 2009 compared to Rs million of foreign exchange gains for the fiscal year 2008 on account of less favourable movements in global exchange rates, particularly involving the U.S. Dollar, and was partially offset by an increase in miscellaneous income to Rs million for the fiscal year 2009 from Rs million for the fiscal year Expenditure: Our total expenditure increased by 15.3% to Rs. 11, million for the fiscal year 2009 from Rs. 10, million for the fiscal year Materials Consumed: Our cost of materials consumed constituted 60.9% of our total expenditure for the fiscal year 2009 as compared to 54.0% of our total expenditure for the fiscal year Our materials cost increased by 30.0% to Rs. 7, million for the fiscal year 2009 from Rs. 5, million for the fiscal year This increase was primarily due to an increase in purchases of raw materials by 30.4% to Rs. 7, million for the fiscal year 2009 from Rs. 5, million for the fiscal year 2008, as a result of increased production volumes, particularly our specialised sterile products, which entail higher packaging costs, partially offset by greater economies of scale on account of our increased requirements. Personnel Cost: Our personnel cost was 15.1% of our total expenditure for the fiscal year 2009 as compared to 17.4% of our total expenditure for the fiscal year Our personnel cost increased by 0.4% to Rs. 1, million for the fiscal year 2009 as compared to Rs. 1, million for the fiscal year This increase was due to an increase in salaries, wages and allowances paid by 6.0% to Rs. 1, million for the fiscal year 2009 from Rs. 1, million for the fiscal year 2008, as a result of an increase in the number of employees for the fiscal year 2008 due to increased manpower requirements and the consolidation of Ascent for the whole of fiscal year 2009 as compared to half of the fiscal year 2008, and was substantially offset by a decrease in contributions to provident funds and other funds by 32.3% to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008, and a decrease in staff welfare expenses by 37.7% to Rs million for the fiscal year 2009 from Rs million for the fiscal year Operating Expenses: Our operating expenses were 19.8% of our total expenditure for the fiscal year 2009 as compared to 23.8% of our total expenditure for the fiscal year Our operating expenses decreased by 4.3% to Rs. 2, million for the fiscal year 2009 from Rs. 2, million for the fiscal year This decrease was primarily as a result of a decrease in power, fuel and water expenses by 20.2% to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008, a decrease in other expenses by 17.3% to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008, on account of a decrease in commission paid out on sales by 15.3% to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008 due to fewer sales made by our sales agents and licensing partners. The decrease in operating expenses for the fiscal year 2009 as compared to the fiscal year 2008 was partially offset by an increase in advertisement and selling expenses by 17.7% to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008 on account of increased marketing efforts, particularly in India and North America, an increase in rent paid by 22.1% to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008 due to a full year s rent being paid for Ascent in the fiscal year 2009, and renting of additional office space in India, an increase in legal and professional fees incurred by 14.0% to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008, an increase in travelling and conveyance expenses by 13.1% to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008 and an increase in 76

77 exchange fluctuation losses (net) to Rs million for the fiscal year 2009 as compared to nil for the fiscal year 2008 on account of unfavourable movements in exchange rates. Finance Charges: Finance charges were 6.4% of our total expenditure for the fiscal year 2009 as compared to 8.2% of our total expenditure for the fiscal year Finance charges incurred decreased by 10.4% to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008 primarily as a result of a decrease in interest expense incurred on fixed loans and foreign currency convertible bonds by 15.1% to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008 and a decrease in interest expenses incurred on working capital and other facilities by 7.6% to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008, as a result of repayment of amounts outstanding under a portion of such facilities and repurchase of certain number of foreign currency capital bonds. Depreciation: Our depreciation expense increased by 23.3% to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008, as a result of the capitalisation of new assets in Bengaluru, India, and to a lesser extent, in Warsaw, Poland. Provision for Tax: Our provision for taxes increased to Rs million for the fiscal year 2009 from Rs million for the fiscal year 2008, primarily as a result of an increase in the provision for current tax to Rs million for the fiscal year 2009 from Rs million for the fiscal year Our effective tax rate for the fiscal year 2009 was 15.3% as compared to 9.4% for the fiscal year Profit after Tax and allocation of minority interest: Our profit increased by 1.6% to Rs. 1, million for the fiscal year 2009 from Rs. 1, million for the fiscal year Fiscal Year 2008 Compared to Fiscal Year 2007 Our results of operations for the fiscal year 2008 were particularly affected by the following factors: consolidation of Ascent and its sales of branded generics for half of the fiscal year 2008; our agreement with our former joint venture partner Aspen to forfeit our right to the profit of Lakerose for a specified period; and increased expenses incurred on account of an increase in materials consumed. Income: Our total income increased by 59.3% to Rs. 13, million for the fiscal year 2008 from Rs. 8, million for the fiscal year Our income from sales of products increased by 39.6% to Rs. 9, million for the fiscal year 2008 from Rs. 6, million for the fiscal year This increase was primarily due to our consolidation of Ascent and its sales in branded generics into our financial statements for half of the fiscal year 2008 and growing sales of higher margin specialised sterile products. Our income from sales of products was 69.7% of our total income for the fiscal year 2008 as compared to 79.6% of our total income for the fiscal year Our development income increased by 57.4% to Rs million for the fiscal year 2008 from Rs million for the fiscal year 2007, as a result of the growth of our development business, particularly for specialised sterile products, and a greater number of customers. Our development income was 2.3% of our total income for the fiscal year 2008 as compared to 2.3% of our total income for the fiscal year Our income from the sale of product dossiers increased to Rs million for the fiscal year 2008 from Rs million for the fiscal year Our sale of product dossiers entailed the sale of certain intellectual property to our then joint venture OLL, in which we owned 50.0% of the shareholding. We sold 32 product dossiers to OLL. Our sale of product dossiers was 1.3% of our total income for the fiscal year

78 Other Income: Our other income increased to Rs. 3, million for the fiscal year 2008 from Rs. 1, million for the fiscal year This increase was primarily due to an increase in the profits received from the sale of investments to Rs. 2, million for the fiscal year 2008 as compared to Rs million for the fiscal year The sale of investments for the fiscal year 2008 entailed the sale of an entity formerly known as Strides Singapore Private Limited, a Singaporean entity. The sale of investments during the fiscal year 2007 relates to our ceding controlling stake in our Latin American operations to our joint venture partner Aspen. Other contributing factors to our increase in other income from the fiscal year 2007 to the fiscal year 2008 was an increase in exchange rate fluctuation gains to Rs million for the fiscal year 2008 from Rs million, on account of favourable exchange rate fluctuations, particularly with respect to the U.S. Dollar, and an increase in miscellaneous income to Rs million for the fiscal year 2008 from Rs million for the fiscal year Expenditure: Our total expenditure increased by 28.2% to Rs. 10, million for the fiscal year 2008 from Rs. 8, million for the fiscal year Materials Consumed: Our materials consumption was 54.0% of our total expenditure for the fiscal year 2008 as compared to 52.1% of our total expenditure for the fiscal year Our materials cost increased by 33.0% to Rs. 5, million for the fiscal year 2008 from Rs. 4, million for the fiscal year This increase was primarily due to an increase in purchases of raw materials by 35.5% to Rs. 5, million for the fiscal year 2008 from Rs. 4, million for the fiscal year 2007, on account of increased production volumes, particularly specialised sterile products which require higher packaging costs. Personnel Cost: Our personnel cost was 17.4% of our total expenditure for the fiscal year 2008 as compared to 20.1% of our total expenditure for the fiscal year Our personnel cost increased by 10.7% to Rs. 1, million for the fiscal year 2008 as compared to Rs. 1, million for the fiscal year This increase was due to an increase by 16.1% of salaries, wages and allowances to Rs. 1, million for the fiscal year 2008 from Rs. 1, million for the fiscal year 2007, as a result of an increase in the number of employees for the fiscal year 2007 due to increased manpower requirements and our acquisition of Ascent and was partially offset by a decrease in contributions to provident funds and other funds by 8.9%, to Rs million for the fiscal year 2008 from Rs million for the fiscal year 2007, and a decrease in staff welfare expenses by 20.7% to Rs million for the fiscal year 2008 from Rs million for the fiscal year Operating Expenses: Our operating expenses were 23.8% of our total expenditure for the fiscal year 2008 as compared to 28.0% of our total expenditure for the fiscal year Our operating expenses increased by 9.05% to Rs. 2, million for the fiscal year 2008 from Rs. 2, million for the fiscal year This increase was primarily as a result of an increase in freight and forwarding expenses by 55.1% to Rs million for the fiscal year 2008 from Rs million for the fiscal year 2007 as a result of higher production volumes and export sales of our products, an increase in advertising and selling expenses by 41.3% to Rs million for the fiscal year 2008 from Rs million for the fiscal year 2007 due to increased marketing efforts, an increase in commissions paid out on sales to sales agents and distributors to Rs million for the fiscal year 2008 from Rs million for the fiscal year 2007, an increase in consumables, by 17.0% to Rs million for the fiscal year 2008 from Rs million for the fiscal year 2007, an increase in rent expenses by 18.3% to Rs million for the fiscal year 2008 from Rs million for the fiscal year 2007, an increase in travelling and conveyance expenses by 15.3% to Rs million for the fiscal year 2008 from Rs million for the fiscal year 2007 and an increase in unbilled debtors written off to Rs million for the fiscal year 2008 from nil for the fiscal year The increase in operating expenses for the fiscal year 2008 as compared to the fiscal year 2007 was partially offset by a decrease in other expenses by 49.8% to Rs million for the fiscal year 2008 from Rs million for the fiscal year 2007, a decrease in legal and professional expenses by 19.5% to Rs million for the fiscal year 2008 from Rs million for the fiscal year 2007, a decrease in provision for doubtful debts by 32.7% to Rs million for the fiscal year 2008 from Rs million for the fiscal year

79 Depreciation: Our depreciation expense increased by 9.7% to Rs million for the fiscal year 2008 from Rs million for the fiscal year 2007 as a result of an increase in asset base and on account of the acquisition of Ascent and Quantum Remedies Private Limited. Provision for Tax: Our provision for taxes decreased by 36.8% to Rs million for the fiscal year 2008 from Rs million for the fiscal year 2007, primarily as a result of a decrease in MAT credit entitlement of Rs million for the fiscal year 2008 from MAT costs of Rs million for the fiscal year Profit after Tax and allocation of minority interest: We had a profit of Rs. 1, million for the fiscal year 2008 as compared a loss of Rs million for the fiscal year Liquidity and Capital Resources Historically we have relied on a combination of long-term debt, retained earnings and sale of equity shares to fund our research and development, capital expenditure and the overall growth of our business. We also use short-term debt to supplement our working capital requirements. We have recently completed a major expansion program by establishing two manufacturing facilities in India and acquiring one manufacturing facility in Poland. We funded this capital expenditure through a combination of debt and cash from our operations. Our short-term liquidity requirements are primarily met by cash generated from operations and working capital financing from banks. We believe that our cash flows from operations, together with the proceeds from this Issue, will be sufficient to fund our currently expected capital expenditures, operating expenses and cash requirements for the next 12 months. The following table summarises our statements of cash flows for the periods presented: Fiscal Year 2009 Fiscal Year 2008 Fiscal Year 2007 (Rs. in million) Net cash generated from/(used in) operating activities , Net cash generated from/(used in) investing activities (1,476.44) (2,189.28) (5,913.93) Net cash generated from/(used in) financing activities , Net increase or (decrease) in cash and cash equivalents (876.73) 1, Operating Activities Net cash generated from our operating activities was Rs million for the fiscal year 2009 as compared to Rs. 1, million for the fiscal year The primary reasons for the change in cash flows from operating activities for the fiscal year 2009 was an increase in trade and other receivables to Rs. 1, million for the fiscal year 2009 from Rs million for the fiscal year 2008 and an increase in trade and other payables to Rs. 1, million for the fiscal year 2009 from Rs million for the fiscal year The increase in receivables and payables was consistent with the growth of our business and operations and the consolidation of Ascent for the whole of the fiscal year 2009 as compared to half of the fiscal year Net cash generated from our operating activities was Rs. 1, million for the fiscal year 2008 as compared to Rs million for the fiscal year The primary reason for the change in cash flows from operating activities for the fiscal year 2008 was a decrease in trade and other payables to Rs million for the fiscal year 2008 from Rs. 1, million for the fiscal year Investing Activities Net cash used in investing activities was Rs. 1, million for the fiscal year 2009, which primarily consisted of expenses related to the purchase of assets and capital work in progress in respect of advance paid for purchase of assets of Rs. 1, million and purchase of investments such as Green Cross 79

80 Pharma Private Limited, Singapore and the Plus Farma ehf, Iceland of Rs million, partially offset by proceeds received from the sale of fixed assets of Rs million. Net cash used in investing activities was Rs. 2, million for the fiscal year 2008, which primarily consisted of purchase of investments such as Ascent operations of Rs. 4, million and expenses related to the purchase of assets and capital work in progress in respect of advance paid for purchase of assets of Rs. 3, million, partially offset primarily by proceeds received from the sale or redemption of investments such as our LATAM operations to Aspen and Ascent Pharmahealth (Asia) Private Limited for Rs. 4, million. Net cash used in investing activities was Rs. 5, million for the fiscal year 2007, which primarily consisted of purchase of investments such as Strides Latina SA, Uruguay, Onco Laboratories Limited, Grandix group, of Rs. 4, million, expenses related to the purchase of assets and capital work in progress in respect of advance paid for purchase of assets of Rs. 2, million, partially offset primarily by proceeds received from the sale or redemption of investments in entities such as Onco Laboratories Limited and Sequent Scientific Limited of Rs. 1, million. Financing Activities Net cash generated from financing activities was Rs million for the fiscal year 2009, which primarily consisted of proceeds from long term borrowings used to finance capital expenditure of Rs. 2, million, proceeds from short term borrowings of Rs million, and proceeds from the issue of share capital or share warrants of Rs million, partially offset by proceeds from the repurchase of foreign currency capital bonds of Rs million, interest paid on borrowings of Rs million and repayment of long term borrowings of Rs million. Net cash generated from financing activities was Rs million for the fiscal year 2008, which consisted of proceeds from long term borrowings used to finance capital expenditure of Rs. 1, million, primarily offset by interest paid on borrowings of Rs million and repayment of long term borrowings related to all subsidiaries of Rs million. Net cash generated from financing activities was Rs. 6, million for the fiscal year 2007, which primarily consisted of proceeds from the issue of foreign currency convertible bonds used to finance purchase of investments of Rs. 6, million, net proceeds from short term borrowings used for working capital requirements of Rs million, proceeds from long term borrowings used to finance capital expenditures of Rs million and proceeds from the issue of share capital or share warrants of Rs million, partially offset by interest paid on borrowings of Rs million and repayment of long term borrowings of Rs million. Indebtedness The following table provides a list of our loans outstanding as of June 30, 2010: As of June 30, 2010 (Rs. in million) Unsecured loans 5, Secured loans 11, Total 16, Contractual Obligations The following table sets forth a summary of the maturity profile of our contractual obligations as of December 31, 2009: (Rs. in million) Financial Liabilities Less than one year Between one and Between two and three Between three and Between four and More than five years 80

81 two years years four years five years Bank 3, , , borrowings Interest payable on borrowings Hire purchase liabilities Other 2, , borrowings Trade and other 4, payables not in net debt Fair value of options Fair value of forward exchange derivative contracts Total 11, , , For the purposes of the above table, undiscounted cash flows have been applied and these cash flows will differ from carrying values in the financial statements and the fair values. Floating interest rates have been computed by applying interest rates as of December 31, Foreign currency liabilities have been computed applying spot rates as of December 31, We have also issued preferences shares redeemable at par along with accrued unpaid dividends on or before December 31, For details, see Financial Statements on page F- 1. Contingent Liabilities Our consolidated contingent liabilities as of December 31, 2009 were as follows: income tax demands totalling Rs million that we have disputed; and appeal pending against the order of the Commissioner of Central Excise disallowing transfer of credit of Rs million. Quantitative and Qualitative Disclosures on Market Risk Market risk is the risk of loss related to adverse changes in market prices, including interest rate risk, credit, foreign exchange rate and commodity risk. We are exposed to such risks in the ordinary course of business. Foreign Exchange Risk We are exposed to foreign exchange risk principally as a result of debt incurred in foreign currency, investments in subsidiaries and joint ventures that are in foreign currencies and exposure arising from transactions relating to purchases, revenues and expenses in currencies other than the Indian Rupee. Changes in currency exchange rates influence our results of operations. Our exports and imports are primarily in U.S. Dollars, Euros and British Pounds. Although our exposure to exchange rate fluctuations is partly hedged through the exports of our products and the import of the necessary raw materials and production equipment and the hedges of operating manufacturing facilities in 5 countries, and we hedge a portion of our the resulting net foreign exchange position through the use of forward exchange contracts and derivatives, we are still affected by fluctuations in exchange rates for certain currencies, particularly the U.S. Dollar, Indian Rupee, Euro and British Pound. 81

82 The table below sets forth our open derivative instruments as of December 31, 2009: Nature of Instrument Currency Cross Amount as of December 31, 2009 currency Forward Contract Sell Australian Indian Rupee AU$ 2,100,000 Dollar Option Contract Sell U.S. Dollar Indian Rupee U.S.$ 64,000,000 Option Contract Buy U.S. Dollar Indian Rupee U.S.$ 54,000,000 Although the transactions in the table above were undertaken to act as economic hedges for our exposure to various risks in foreign exchange markets, they have not qualified as hedging instruments under Accounting Standard 30. These instruments are classified as held for trading and gains or losses are recognised in our profit and loss accounts. The table below sets forth our foreign currency exposures that have not been hedged by a derivative instrument or otherwise, as of December 31, 2009: (In million) Receivable/(Payable) in Indian Rupees Receivable/(Payable) in Foreign Currency (7,040.01) USD (151.33) (196.06) EUR (2.93) AUD 5.87 (1.27) CAD (0.03) GBP 1.46 (0.98) JPY (1.94) 1.97 CHF 0.40 The table below sets forth a sensitivity analysis of our exposure to volatility in foreign exchange rate fluctuations based on the prevalent exchange rates as of December 31, 2009: (In million) Particulars Increase / (Decrease) in Equity in 2009 Increase / (Decrease) in Equity in 2008 A 5% appreciation to the U.S. Dollar (352.00) (142.88) A 5% depreciation in the U.S. Dollar A 5% appreciation to the Euro (9.80) A 5% depreciation in the Euro 9.80 (10.91) A 5% appreciation to the Australian Dollar A 5% depreciation in the Australian Dollar (12.28) (0.99) A 5% appreciation to the British Pound A 5% depreciation in the British Pound (5.48) (2.51) Commodity Risk We are also subject to market risks with respect to commodity prices. In particular, some of the formulations and specialty products that we manufacture are dependent on highly specialised raw materials. A shortage in the supply of crucial raw materials could result in a loss of production capacity and, in the event of increased prices for such raw materials we may be unable to pass on such price increases to our customers. Interest Rate Risk As of June 30, 2010, we had Rs. 16, million of principal amount of short and long term loans. Of this amount, EUR 1,340, was floating rate indebtedness. Upward fluctuations in interest rates increase the cost of new and existing indebtedness. We also hold outstanding FCCBs with a face value of US$ million, due in June 2012, which if unconverted would entail an outflow of approximately US$ million upon maturity, subject to price adjustment according to the terms of the FCCBs. Credit Risk 82

83 We are exposed to credit risk on monies owed to us by our customers. If our customers do not pay us promptly, or at all, we may have to make provisions for or write-off such amounts. As of December 31, 2009, 2008 and 2007 and as of June 30, 2010, our sundry debtors owed us, net of debt considered doubtful, Rs. 4, million, Rs. 3, million and Rs. 2, million and Rs. 3, million, respectively, constituting 31.3%, 24.5% and 24.3% and 18.2% of total income for the respective periods. We have deployed a team to reduce overdue debtors and monitor overdue debtors on a regular basis. Related Party Transactions We have in the past and may continue in the future to engage in transactions with related parties on an arm s length basis. Such transactions could be for the purchase or sale of fixed assets, materials or services, the transfer of supply contracts, interest paid or received, payment of brand fees, reimbursement of expenses incurred, rent, loans or advances given or repaid and other income. For details of our related party transactions, see pages F- 37 and F- 81 of this Placement Document. 83

84 INDUSTRY OVERVIEW The Global Pharmaceutical Market The global pharmaceutical market can generally categorised into the emerging and the developed markets. The emerging markets offer low entry barriers in terms of product registration requirements and intellectual property rights. The developed markets, such as the United States and Europe, have high regulatory entry barriers in terms of product registration requirements and intellectual property rights. Consequently, developed markets have premiums for quality and regulatory compliance and also possess relatively higher stability for both volumes and prices. Developed markets have traditionally had more stringent intellectual property protections and product patent recognition than the regimes present in emerging markets, but the trend in many emerging markets has been towards more stringent regimes. The global pharmaceutical market was worth an estimated US$808.3 billion at ex-factory prices in calendar year The North American market (United States and Canada) remained the world s largest market with a 39.8% share, well ahead of Europe and Japan. In 2009, the Asian region was by far the fastest growing market with an estimated growth of 15.9%, while the growth of the North American and European markets was estimated at 5.5% and 4.8% respectively. (Source: European Federation of Pharmaceutical Industries and Associations, The Pharmaceutical Industry in Figures: 2010 Edition ) The following chart illustrates the constant average growth rates of the regions of the global pharmaceutical market for (%): (Source: European Federation of Pharmaceutical Industries and Associations, The Pharmaceutical Industry in Figures: 2010 Edition ) The following chart illustrates the geographical breakdown (by main markets) of the sales of pharmaceutical products launched during : 4% 6% 29% 61% U.S. Europe Japan Rest of the World 84

85 (Source: European Federation of Pharmaceutical Industries and Associations, The Pharmaceutical Industry in Figures: 2010 Edition ) The global pharmaceutical market is expected to grow to sales of US$922 billion in 2013, at a compound annual growth rate ( CAGR ) of 4.4%. (Source: IMS Prognosis Report Global (2009)). The major theme of the current global pharmaceutical market is the geographic swing away from the developed economies of the U.S., Japan, France, Germany, Italy, the U.K., Spain and Canada to a set of emerging markets, especially those of Brazil, Russia, India, China, as well as certain countries of the Middle East and North Africa. These emerging markets offer high potential, with rising GDPs, expanding access to health care, increased government spending on health care and an improving patent and regulatory environment in many cases. Nevertheless, there are barriers to growth, due to such factors as the entrenchment of companies, alreadyestablished domestic products, and the domination of generic products. Patients in these emerging markets bear the highest share of health care spent, making issues of willingness and ability to pay significant. Going forward, a stronger focus on cost containment and tighter government controls over pricing can be expected. (Source: IMS, Pharmerging shake-up: New Imperatives in a Redefined World ) Pharmaceutical Product Types Patented pharmaceutical products are products in respect of which a patent has been granted and is in force. Branded generics are products that are either novel dosage forms of off-patent products produced by a manufacturer that is not the originator of the molecule, or a molecule copy of an off-patent product with a trade name. Branded generics are not the same as authorized generics, which are drugs made by or under license from the innovator company and sold without a brand name. The competitive environment for the branded generics industry has recently gone through substantial changes. These developments include increased competition from companies based in India and China and increasing consolidation of prominent entities in the global generics industry, with some of the key generics companies beginning to boost their internally-branded generics development capabilities. Pharmaceutical Dosage forms Formulations, also known as dosage forms, are pharmaceuticals that are administered to or consumed by patients. Formulations may be sold either by prescription or directly to a consumer. Specialty prescription formulations include brands in chronic therapy areas such as psychiatry, neurology, cardiology and diabetology. Dosage forms include tablets, soft gel capsules, creams, ointments and injectable products. Globally, the manufacturing capacity for injectable products is limited, particularly for lyophilised products. Most biotech products and produced in a lyophlised format. The overall injectable products market stood at US$ 200 billion for the year (Source: IMS Health as on August 10, 2010). A limited number of companies globally are capable of manufacturing sterile injectable products. This limited production capacity has led to shortages in the supply of sterile injectable products in the United States. The following graph illustrates the total number of shortages and shortages involving sterile injectable products in the United States from 2005 to 2009: 85

86 (Source: The New England Journal of Medicine) The following chart illustrates the competition for sterile injectable products in the United States: (Source: ESPICOM, Injectable Generic Drugs: Prospects & Opportunities to 2014 ) The following chart illustrates the number of FDA approvals for sterile injectable products by company for 2008 through the first half of

87 (Source: Approval data from United States FDA) Specialised Sterile Products Intellectual Property Each jurisdiction s pharmaceutical industry is shaped by the development of intellectual property rights within the jurisdiction. Pharmaceutical products can be protected by patents in a several ways. Such protections include, among others: Process Patents Pharmaceutical process patents protect only the method by which a product is made, not the molecular structure of the product itself. If a competitor can create the same product by a different non-infringing process (commonly referred to as designing around or reverse engineering, which uses skills in process chemistry and product development to bring branded generics and formulations to market), the process patent holder cannot legally prevent the product from being reproduced. Emerging markets have not historically recognised product patents, but do recognise process patents. Most developed markets, such as the United States and Europe, recognise both types of patents. These markets typically give 20 years of patent protection from the date of patent application filing. Product Patents Pharmaceutical product patents protect a particular molecular structure, compound, combination, composition, product, formulation, dosage form, and in most jurisdictions, prevent others from making, using, offering for sale and selling a pharmaceutical product that uses the patented molecular structure, 87

88 compound, combination, composition, product, formulation or dosage form, without permission, typically for a period of 15 to 20 years. Most developed markets such as the United States, Canada and the United Kingdom recognise product patents. Many emerging markets, including India, have joined the World Trade Organisation, ( WTO ). As WTO members, these countries are required to be held to the provisions of the General Agreement on Tariff and Trade ( GATT ). GATT provisions require signatory countries to give product patent protection to innovator companies. The WTO allows emerging markets a transition phase to adapt their legislation in order to gradually implement patent protection. Although, due to GATT provisions, emerging markets may in time become more regulated in terms of intellectual property protection, these markets currently allow pharmaceutical companies to manufacture, launch and market reproductions of drugs that are patented in the developed markets. As a result, more than one company may market the same product simultaneously. Products that are marketed by different companies but which contain the same active ingredients are known as generics. Generics that are marketed under different brands by different companies are known as branded generics. Producers of generic drugs may sell their products in emerging jurisdictions (until those jurisdictions recognise product patents) and in developed markets where the patent has expired or has been found invalid or unenforceable. The life cycles of branded and generic drugs are illustrated in the diagram below: Regional Pharmaceutical Markets The Indian Pharmaceutical Market According to IMS data, the Indian retail pharmaceutical market, valued at Rs. 365 billion (approximately US$7.5 billion) for the twelve-month period ended June 30, 2009, grew by 11.2% from the prior year. India is primarily a branded generics market and unbranded generics make up a small percentage of the market. The Indian pharmaceutical industry has traditionally displayed high levels of fragmentation, but has recently trended towards consolidation. According to PricewaterhouseCoopers, the Indian pharmaceutical market is expected to reach US$50 billion by 2020, and will by that time have become one of the industry s top ten markets. This growth will be driven by the expanding Indian economy and increasing per capita GDP. (Source: PricewaterhouseCoopers, Global pharma looks to India: Prospects for growth (2010)) The following table illustrates the breakdown of the Indian pharmaceutical industry by certain key segments: 88

89 (US$ in billions) E E P Compounded annual growth to (E) (E) to (P) Domestic formulation Consumption (DFC) Formulation exports Active pharmaceutical ingredient exports Total market E: Estimated, P: Projected (Source: CRISIL Research, Pharmaceuticals Annual Review March 2010; Directorate General of Foreign Trade ( DGFT )) The following table illustrates the sales of formulations and the growth rate in India for the primary therapeutic categories and the entire Indian retail pharmaceutical market for the twelve-month period ended June 30, 2009: Therapy Area Sales for the twelvemonth period ended June 30, 2009 (Rs. in million) % growth rate from prior twelvemonth period to period ended June 30, 2009 Antibiotic / Antibacterial Systems 64, Anti-Diabetic Therapy 19, Antacid / Anti-Flatulence 18, Anti-Inflammatory / Anti-Rheumatism 17, Vitamins 16, Hypotensives 16, Cough and Cold Preparations 15, Cardiac Therapy 11, Sex Hormones / Stimulants 10, Anti-Asthmatics 9, Ant-Anaemic Preparation 9, Anti-Diarrhea / Intestinal Disinfectant 8, Cholesterol Reducers, etc. 7, Anti-Epileptics 6, Total Market 365, (Source: ORG) For the year ended March 31, 2009, while Indian-based companies maintained dominant market position in India with 81.2% market share, multinational corporations ( MNCs ), increased their market share to 18.8%. The implementation of the product patent regime has given an incentive to MNCs to enter or plan to enter the market. The leading MNCs have formed a presence in India either through product introduction for sales and marketing, establishment of manufacturing facilities or partnerships with existing manufacturing facilities and entry into new sectors such as clinical research work and biotechnology. The leading global generics entities have also displayed greater interest in establishing manufacturing presences in India. The market is transitioning in the way that Indian companies operate. Indian companies have formed partnerships with international pharmaceutical companies to take advantage of their core strengths and consolidate operations. Accompanying the shifts in the competitive structure, the market has also moved towards lifestyle disorders as the ailment pattern for pharmaceutical treatment in India. Top 10 Manufacturers by Sales in Indian Market and Other Key Foreign Players Rank % share of the market for the twelve-month period ended June 30, 2009 Sales for the twelvemonth period ended June 30, 2009 (Rs. in millions) Cipla ,

90 Top 10 Manufacturers by Sales in Indian Market and Other Key Foreign Players Rank % share of the market for the twelve-month period ended June 30, 2009 Sales for the twelvemonth period ended June 30, 2009 (Rs. in millions) Ranbaxy ,959.7 GlaxoSmithKline ,771.5 Piramal Healthcare ,886.8 Zydus Cadila ,204.0 Sun ,797.0 Alkem ,481.2 Lupin Labs ,070.3 Mankind ,570.4 Aristo Pharma ,921.0 (Source: ORG) Prior to India s entry to the WTO and patent regime modernisation, Indian pharmaceutical companies traditionally concentrated on the production of medications without patent protection abroad or without patent protection in India. India had instituted process patents in This regime allowed Indian pharmaceutical companies to manufacture and market patented drugs by designing around the patented processes without incurring the up-front expenses of drug development and clinical research. This state of affairs, coupled with low manufacturing costs, has allowed Indian pharmaceutical companies to leverage substantial production cost advantages over their foreign competitors both in India and in other emerging markets. Because of this potential for lower costs, MNCs encounter difficulty in competing effectively against Indian companies in those markets. Trade Related Agreement on Intellectual Property Rights In 1995, under GATT, India became a signatory to the Trade Related Agreement on Intellectual Property Rights ( TRIPS ). This agreement requires India to recognise product patents in addition to process patents. The new regime provides for: recognition of product patents for 20 years as opposed to the previous seven-year protection for process patents; patent protection to be extended to cover imported products; and under certain circumstances, the burden of proof in process patent infringement cases may be shifted to the alleged infringer. India was granted a ten-year transition phase to comply with product patent laws under the WTO agreement. On March 22, 2005, the Government passed the Patents (Amendment) Act 2005, which introduced a product patent regime for food, chemicals and pharmaceuticals in India. The amendment provides that new molecules for which a patent was applied in India on or after January 1, 1995 and for which a patent is granted, cannot be manufactured or sold in India by other than the patent holder and its assignees and licensees. Pursuant to the amendment, when a patent is granted in respect of an application filed after January 1, 1995, the patentee shall only be entitled to receive reasonable royalties from enterprises which have made significant investment, were producing and marketing the concerned product prior to January 1, 2005, and which continue to manufacture the product covered by the patent on the date of grant of the patent. In view of the typical time frame within which a patent application proceeds through grant process, patented drugs entered the market from The period of the patent is calculated from the date of filing of the relevant patent application for a period of 20 years from that date. Drugs patented internationally before 1995 are not covered by the new patent laws. Indian companies are expected to be able to reproduce all compounds covered by patents issued prior to On average, it 90

91 takes approximately ten to 15 years for a product to enter the market. Despite technological advances, it is expected that drug development time will be at least seven to ten years for a compound patented based on an application filed prior to 2005 to reach the market. As a result, it is unlikely that Indian companies product lineups for drugs reproduced through designing around process patents will end immediately. Industry Growth According to CRISIL Research, the Indian pharmaceutical industry is expected to continue its strong growth and achieve a CAGR of 17-19% from the year ended March 31, 2009 to the year ended March 31, 2014 and expand to constitute a US$43-45 billion industry. This growth will be largely dominated by a significant increase in exports and supported by a steady increase in domestic formulations. However, with burgeoning demand, competition levels and subsequent price erosion in regulated markets are also set to rise. Rising pricing pressure, thinning product pipelines and escalating new drug development costs have made it important for the largest pharmaceutical companies to outsource manufacturing to favourable destinations such as India. (Source: CRISIL Research, Pharmaceuticals Annual Review March 2010) CRISIL Research indicates that branded generics exports are expected to grow at a CAGR of 21-23% from the year ended March 31, 2009 to the year ended March 31, India is projected to remain a prime source of branded generics, in light of the consistent renewal of several existing contracts and the strong growth in the number of Drug Master Files ( DMFs ) filed by India. (Source: CRISIL Research, Pharmaceuticals Annual Review March 2010) Indian formulations exports are expected to grow at a rate of 15-17% (CAGR) from the year ended March 31, 2009 to the year ended March 31, Factors such as regulatory pressure, a rise in the number of potential generics companies and an increase in the number of authorised generic deals have intensified competition in the generics market, despite the steady increase in patent expiries. (Source: CRISIL Research, Pharmaceuticals Annual Review March 2010) The domestic formulations market is expected to grow at the pace of 12-14% from the year ended March 31, 2009 to the year ended March 31, 2014, due to such factors as increased health care awareness and increasing per capita income in India. (Source: CRISIL Research, Pharmaceuticals Annual Review March 2010) Cost Competitiveness India is regarded as an attractive base to source branded generics and intermediate pharmaceutical ingredients, primarily due to the low-cost manufacturing base available in the country. Indian players have demonstrated skills in chemical synthesis and process engineering. Infrastructure costs and equipment costs are typically much lower than in other jurisdictions due to strong competition in the domestic industry. Consequently, branded generics, even for older, off-patent products, typically have manufacturing costs that are substantially lower than in developed markets. R&D Strengths India s R&D strengths result from the country s strong scientific base and low-cost infrastructure. India has one of the largest English-speaking scientific bases in the world, with several leading biology and chemistry institutes with capabilities in organic chemical synthesis and natural products screening. These institutes include the National Chemical Laboratory, the Indian Institute of Chemical Technology, the National Institute for Immunology and the Central Drug Research Institute. The following graph illustrates the number of U.S. FDA-approved facilities in India as compared to the numbers in other leading non-u.s. states: 91

92 (Source: PricewaterhouseCoopers, Global pharma looks to India: Prospects for growth (2010)) Branded Generics Market Often, many versions of the same drug are marketed in India by several pharmaceutical companies under their respective brand names. Brand promotion and marketing are important competitive factors, and the company to first introduce a generic version of a particular product often captures a significant share of the market. Consequently, speed to market is a critical factor in acquiring market share. Entry barriers are, however, high for brands from reputed companies as well as products in specialty therapy areas where the treatment is critical or lifelong, as a prescription in these therapy areas is less likely to be abandoned for another offering. Similarly, products involving differentiated technology are less likely to be switched, and may command a premium over other products. Generic products with leading brands can gain significant market share and can command considerable pricing premiums over similar products marketed under other brands. Thus, pharmaceutical companies expend substantial funding on building brands and strengthening relationships with physicians. Biotechnology Market The Indian biotechnology industry is expected to witness growth owing to an increase in the number of new products introduced in the past few years, increased capital investment, and additional R&D collaborations of Indian companies with foreign and domestic companies. Factors contributing to the growth of the biotech industry in India include the low costs of manufacturing as compared to those in developed markets, and Government support of the emerging biotech industry in India. Government Price Controls The NPPA, an independent public authority established by the Indian Government, has the authority to freeze the prices of branded generics and formulations. The NPPA has usually instituted price ceilings on drugs which are considered to be essential for public health, or of use in national health programmes such as the blindness treatment programme or the tuberculosis eradication programme. These price ceilings require drug manufacturers to sell the controlled products below a set price, which is adjusted from time to time, depending most directly on raw material costs. If a company wishes to revise the price of its drug, an application must be made to the NPPA in a prescribed format. The NPPA also independently monitors and revises prices. Lack of Health Insurance and Traditional Remedies The majority of the Indian population cannot afford modern medicine, due to lower average income levels as compared to those in more developed countries. Many in India, particularly those living outside major metropolitan areas, still rely mainly on traditional herbal remedies and healing methods, and do not have effective access to advanced medical treatments and pharmaceutical products, due to India s limited health care infrastructure. India does have third-party health care payment systems, but these systems are not sufficient to cover the entire population. As a result, a substantial number of those in India are responsible 92

93 for their own health care expenses. This factor, in an environment of low per capita income, has limited market growth. However, per capita income has risen in recent years. Shifting demographics and an increasing awareness of pharmaceuticals (particularly for chronic ailments) are expected to increase per capita drug use and market growth going forward. Fragmented Nature of the Industry India s patent regime has produced low entry barriers into the Indian pharmaceutical market for generic drug makers. As a result, the Indian formulations market is highly fragmented with the leading company holding a share of only 5.38% as of June 30, 2009, according to ORG data. This fragmentation leads to considerable pricing competition between pharmaceutical companies in India. It is estimated that there are approximately 131 medium- to large-scale pharmaceutical companies operating in India having annual nationwide sales over Rs. 250 million and several thousand smaller enterprises, according to ORG data. As of March 31, 2009, approximately 81.2% of the Indian pharmaceutical market was serviced by Indian companies, and the remaining 18.8% by multinational companies, according to ORG. The United States Pharmaceutical Market According to IMS data, the North American market is the largest pharmaceutical market in the world. The United States, the world's largest single jurisdictional market for pharmaceuticals, recognises both product and process patents. Strong patent protection, advanced medical infrastructure, high per capita gross domestic product, the availability of health insurance and an aging population all contribute to the large market for pharmaceutical products. However, growth in the United States pharmaceutical market is slowing due to adverse economic factors in the U.S., the increasing market share of generics, a reduction in number and size of landmark products as patents expire and the shifting of medical care expenses to patients. (Source: IMS Prognosis Report Global (2009). The United States is a highly regulated and developed market, with high barriers to entry and strict quality standards for pharmaceutical products sold in the country. The U.S. FDA also requires that a company s manufacturing methods conform to cgmp, as defined in the U.S. Code of Federal Regulations. Companies that are able to meet such quality standards will most often possess advantages of backwards integration and quality product development and therefore have a significant advantage in the United States market. Patented Drugs Profit margins of patented drugs are typically much higher than those of generic drugs. These higher profit margins help innovator companies recover capital spent in developing such products. As a result, when an innovator sets its price for its brand name pharmaceutical, the company seeks recovery of development costs, as well as its marketing budget and the cost of failures of molecules that had to be discarded in different stages of research, while still returning a profit. Generic Product Opportunity The generic drug market is likely to develop in an environment of favourable political and regulatory forces, significant patent expiries, the need to lower health care costs and the trend of cost-conscious health insurers to push for cheaper generic products where these are available. While the United States offers a generics opportunity, it is also subject to sophisticated competition and pricing challenges, especially when multiple generic companies compete with respect to the same molecule. (Source: IMS Prognosis Report Global (2009)). The following table illustrates projected sales and CAGR of pharmaceuticals in the United States by primary therapeutic classes: Therapeutic Class Sales for 2008 (US$ in millions) Sales for 2013 E (US$ in million) CAGR (2008 to 2013) E 93

94 Therapeutic Class Sales for 2008 (US$ in millions) Sales for 2013 E (US$ in million) CAGR (2008 to 2013) E Alimentary Tract & Metabolism 34,601 34, Blood & Blood-forming organs 18,723 19, Cardiovascular system 34,044 22, Dermatologicals 6,033 5, Genito-urinary system & sex hormones 15,103 16, Systemic anti-infectives 28,331 29, Antineoplastic & Immunomodulating agents 32,775 41, Musculo-skeletal system 13,566 13, Central Nervous system 63,339 64, Respiratory system 21,853 19, E: Estimated (Source: IMS Prognosis Report Global (2009)) United States Regulatory Approval All pharmaceutical makers that sell products in the United States are subject to extensive regulation by the U.S. federal government, most importantly pursuant to the Federal Food, Drug and Cosmetic Act, the Hatch-Waxman Act, the Generic Drug Enforcement Act and other federal government statutes and regulations. These regulations govern or influence the testing, manufacturing, packaging, labeling, storing, record-keeping, safety, approval, advertising, promotion, sale and distribution of products. The U.S. FDA has broad purview over the activities of pharmaceutical manufacturers. Non-compliance with applicable requirements can result in fines, criminal penalties, civil injunction against shipment of products, recall and seizure of products, total or partial suspension of production, sale or import of products, refusal of the U.S. government to enter into supply contracts or to approve new drug applications and criminal prosecution. The U.S. FDA also has the power to deny or revoke approvals of branded generics and dosage forms and the power to halt the operations of non-complying manufacturers. U.S. FDA approval of an Abbreviated New Drug Application is required before a generic equivalent of an existing or referenced brand drug can be marketed. The ANDA process is abbreviated. When processing an ANDA, the U.S. FDA waives the requirement to conduct complete clinical studies, although it typically requires bio-availability and/or bio-equivalence studies. An ANDA may be submitted for a drug on the basis that it is the equivalent of a previously approved drug or, in the case of a new dosage form, is suited for consumption for the specified indications. ANDA applicants in the U.S. may be required to file a Drug Master File ( DMF ). A Drug Master File is a document that contains specific information on a branded generic and is filed with the FDA to support regulatory requirements in the filing of an ANDA. In the United States, there are five types of DMFs, each covering specific information from manufacturing facilities for the specific branded generic to proposed packaging material. An ANDA applicant in the United States must review the patents of the innovator listed in the U.S. FDA publication entitled Approved Drug Products with Therapeutic Equivalence Evaluations, popularly known as the Orange Book, and make an appropriate certification. There are several different kinds of certifications that can be made. A Paragraph IV filing is made when the ANDA applicant believes its product or the use of its product does not infringe on the innovator s patents listed in the Orange Book or where the applicant believes that such patents are not valid or enforceable. The first generic company to file a Paragraph IV filing may be eligible to receive a six-month marketing exclusivity period from the date a court rules the patent is invalid or not infringed. A Paragraph III filing is made when the ANDA applicant does not intend to market its generic product until the patent expiration. A Paragraph II filing is made where the patent has already expired. A Paragraph I filing is done when the innovator has not submitted the required patent information for listing in the Orange Book. Another type of certification is made in cases where a patent claims a method of use, and the ANDA applicant s proposed label does not claim that method of use. When an innovator has listed more than one patent in the Orange Book, the ANDA 94

95 applicant must file individual certifications for each patent. Generally, Paragraph IV and Paragraph III filings are made before the product goes off patent and Paragraph II and Paragraph I filings are made after the patent has expired. The European Pharmaceutical Market In Europe, medicines only constitute a small part of disease costs with, on average, 17.0% of total health expenditure being spent on pharmaceuticals and other medical non-durables. In costly diseases such as cancer and rheumatoid arthritis, medicines account for even less than 10% of the total disease costs. (Source: European Federation of Pharmaceutical Industries and Associations, The Pharmaceutical Industry in Figures: 2010 Edition ) Despite constituting these low portions of disease costs, pharmaceuticals have been and continue to be a prime target of E.U. Member States health care cost-containment policies. With the recent economic crisis, cost-containment policies targeting mainly or exclusively medicines have been proliferating. For example, several European countries fix an overall budget or seek to impose percentage limits on growth in pharmaceutical spending. (Source: European Federation of Pharmaceutical Industries and Associations, The Pharmaceutical Industry in Figures: 2010 Edition ) Germany, which is the second largest generics market in the world, took the lead, introducing legislation that shifted control over generic substitution from physicians to insurers and pharmacists. This changed the structure of the market to the benefit of unbranded generics. (Source: Noble Health Care Thematic 23 July 2009 ) The pharmaceutical industry is one of the few remaining leading high technology industries in Europe, amounting to 17% of E.U. business R&D investments and about 3.5% of the total E.U. manufacturing value added. Like other industrial sectors, pharmaceutical companies have felt the effects of the recent economic downturn. The combination of fixed prices, currency exchange rate volatility, and additional cost containment measures increase pressures on companies bottom lines, and consequently the cash flows needed to feed into R&D. (Source: European Federation of Pharmaceutical Industries and Associations, The Pharmaceutical Industry in Figures: 2010 Edition ) In the difficult economic environment, the pharmaceutical industry operating in Europe faces a number of challenges. The costs of pharmaceutical R&D have soared due to a variety of factors including the increasingly complex nature of science and the size of clinical trials, which require more participants than ever before. There is rapid growth in the market and research environment in emerging economies, resulting in further migration of economic and research activities outside of Europe to these fast-growing markets. According to the March 2010 IMS Health forecasts, emerging economies pharmaceutical markets share expected to grow at a 14-17% percent rate through (Source: European Federation of Pharmaceutical Industries and Associations, The Pharmaceutical Industry in Figures: 2010 Edition ) Innovation uptake remains slow on most European markets. According to data from IMS Health, 61% of sales of new medicines launched during the period were on the US market, compared with 29% on the European market. In 2009, North America accounted for 39.8% of world pharmaceutical sales compared with 30.6% for Europe. In addition, the fragmentation of the E.U. pharmaceutical market has resulted in lucrative parallel trade. This parallel trade deprives the industry of additional resources to fund R&D. (Source: European Federation of Pharmaceutical Industries and Associations, The Pharmaceutical Industry in Figures: 2010 Edition ) Europe is a heterogeneous market with different distribution and reimbursement mechanisms that require generics companies to invest in sales and distribution networks to cater to the local market requirements. E.U. countries vary in terms of the business models, and consequently Indian companies often enter the market through acquisitions. However, large acquisitions have often not delivered the intended results in terms of growth and profitability. The financial performance of acquired assets has been affected by significant regulatory changes, which have limited market growth and margins. (Source: Noble Healthcare Thematic 23 July 2009 ) 95

96 According to CRISIL Research, the European generics market is projected to expand from US$24 billion in the year ended March 31, 2009 to US$41 billion by the year ended March 31, (Source: CRISIL Research, Pharmaceuticals Annual Review March 2010) The following chart illustrates the top five countries from which the E.U. imported its pharmaceutical products in 2008: (Source: European Federation of Pharmaceutical Industries and Associations, The Pharmaceutical Industry in Figures: 2010 Edition ) Patents Unlike in the United States, there is no regulatory mechanism within the European Union of which companies may avail themselves to lodge patent protection challenges. There is also no period of market exclusivity conferred upon the first approved generic product. Generic Products Opportunity The market share of generics cannot be analysed without taking market access conditions for new medicines in each country into consideration. In general there is a link between low levels of generic penetration and poor pricing conditions for innovative medicines on European markets. The market share of generics is significantly lower in price-controlled environments than in unrestricted ones, except in new E.U. Member States with historically low levels of intellectual property protection. (Source: European Federation of Pharmaceutical Industries and Associations, The Pharmaceutical Industry in Figures: 2010 Edition ) European Regulatory Approval Within the European Union, pharmaceutical company activities are governed by Directive 2001/83EC as amended. This Directive gives the legislative framework, including the legal basis of approval, specific licensing procedures, and quality standards including manufacture, patient information and pharmaceutical company vigilance activities. Prior approval of a Marketing Authorisation is needed to supply products 96