You are on page 1of 150

August 2011 Thematic Report | Sector: Pharmaceuticals

Domestic Formulations

New peaks
Nimish Desai (NimishDesai@MotilalOswal.com); Tel: +91 22 3982 5406 Amit Shah (Amit.Shah@MotilalOswal.com); Tel: +91 22 3982 5423

Domestic Formulations | New Peaks

Domestic Formulations
Page No. New peaks - USD21b opportunity by 2015 ...................................... 1-5 4 A's and 4 Ailments ............................................................................ 6-8 A #1 - Affordability ............................................................................. 9-11 A #2 - Access ................................................................................... 12-13 A #3 - Awareness .................................................................................. 14 A #4 - Ailments ................................................................................. 15-17 4 Buys - Cipla, Lupin, Torrent and GSK Pharma.......................... 18-22 Ailments ........................................................................................... 23-30 Infection ............................................................................. 24 CVS Disease .................................................................... 25 Diabetes ........................................................................... 26 CNS Diseases .................................................................. 27 Pain .................................................................................. 28 Gastro-intestinal (GI) Problems ......................................... 29 Respiratory Diseases ....................................................... 30 Annexure ......................................................................................... 31-36 Company ....................................................................................... 37-142 Cipla ............................................................................ 38-49 Lupin ............................................................................ 50-61 Torrent Pharma ............................................................. 62-71 GSK Pharma ................................................................ 72-79 Sun Pharma ................................................................. 80-91 Cadila ........................................................................ 92-103 Ranbaxy ................................................................... 104-115 Dr Reddy's Labs ...................................................... 116-127 Glenmark.................................................................. 128-142

The Indian Pharma Story


4 As. 4 Ailments. 4 Buys

Domestic Formulations market will be USD21b in 2015, 2x over 2010. Buy Cipla, Lupin, Torrent, GSK Pharma The India domestic pharma story is founded on 4 pillars, what we call the 4 A's - Affordability, the number of players who will share the pie. Companies with a strong presence in these
Access, Awareness and Ailments. These 4 A's will enable the market to be 2x - from USD10b in 2010 to USD21b in 2015. A significant share of the market delta is explained by 4 Ailments - CVS, Diabetes, CNS and Infection. These ailment segments rank high on what we call the Attractiveness Factor, measured as incremental market size divided by ailment segments are therefore better placed. Most companies with a meaningful presence in Indian market will clock healthy growth in sales and profits. We have identified winning stocks based on a combined approach of conventional P/E-based valuation and our proprietary MEDICINES Score. Our 4 Buys are Cipla, Lupin, Torrent and GSK Pharma.

4 As
A#1: Affordability
Medicines are becoming more affordable led by (1) Rising per capita income, (2) Urbanization, and (3) Higher penetration of health insurance. This is driving the growth in the domestic pharma market.
2015 Indian pharma market estimate: Affordability approach
Per capita INR (1) FY01 20,786 FY06 33,827 FY11 60,048 FY16 105,668 GDP CAGR (%) (2) 10.2 12.2 12.0 Per capita pharma conspn. INR CAGR (%) (3) (4) 140 212 390 784 8.7 12.9 15.0 Multiplier (x) (5) = (4) / (2) 0.8 1.1 1.3 Pharma market INR b CAGR (%) (6) (7) 151 230 465 983 8.9 15.1 15.0

4 Ailments
CVS, Diabetes, CNS and Anti-infectives
We believe that CATS like Cardiovascular (CVS), Diabetes, Central Nervous System (CNS) will account for a major chunk of the incremental market over the next 5 years. Also, with rising income levels in the rural areas, anti-infectives will also record good growth over the same period. We believe these four will be the key segments of the future.
2015 Indian pharma market estimate: Ailment approach (INR b)
2010 Mkt size Share (%) 27 5.8 53 26 51 41 25 80 26 40 36 59 465 11.3 5.6 11.1 8.8 5.4 17.2 5.7 8.6 7.7 12.8 100.0 CAGR (%) 22.1 17.1 9.4 16.2 13.5 15.1 11.2 26.9 14.3 5.4 27.6 15.1 Mkt size 83 137 65 103 82 51 147 49 68 58 119 962 2015E Incr. mkt Share (%) CAGR (%) 2015 on 2009 8.6 25 56 14.2 6.7 10.8 8.5 5.3 15.3 5.1 7.0 6.0 12.4 100.0 21 20 15 15 15 13 13 11 10 15 15.6 84 39 52 41 26 67 22 28 22 60 496
Dominance

4 Buys
Presence in high-potential segments
The chart below maps the positioning of pharmaceutical players in the key therapeutic segments of CVS, Diabetes, anti-infectives and CNS. We have plotted the dominance of each player in these respective segments using prescription market share as the key measure of dominance.
Company mapping with respect to therapeutic classes
High Sun Pharma, Torrent, Cadila, Cipla, Unichem, Ranbaxy, Lupin Abbott, U S V, Aventis, Sun Pharma Ranbaxy, Alkem, Aristo, Cipla, GSK, Piramal Alembic, Mankind, FDC, Macleods, Lupin Sun Pharma, Intas, Torrent, Abbott, Piramal Aventis, Ranbaxy, Unichem, Micro Labs Novartis, Cipla, Lupin Cipla, GSK Pharma

Anti-diabetic CVS CNS Gastrointestinal Respiratory Dermatology

Aventis, U S V, Medium Emcure, Piramal, Dr Reddys, Intas, Micro Labs IPCA Labs, AstraZeneca, Pfizer

Eli Lilly, Piramal, Micro Labs, Lupin Panacea, Ranbaxy

Cadila, Piramal, Ranbaxy

A#2: Access
People's access to medicines is improving given (1) Rising government spend on healthcare, (2) India's improving medical infrastructure, and (3) Companies' thrust on increasing rural reach. All are combined to further expand the domestic pharma market.
Indias medical infrastructure among the weakest in the world
Russia Italy Germany France US Australia UK Japan Brazil China India 97 39 83 72 31 39 39 139 24 Doctors/10,000 Hospital beds/10,000 30 9 5 12 11 26 25 23 20 34 34 43 42

Anti-infectives Gynaecology Pain/Analgesic Vitamins/Minerals Others Total

Low

Pfizer, Mankind, Dr Reddys, Sun Pharma, Glenmark, Biocon

CVS

Diabetes

Anti-infectives

CNS

Others

CVS, Anti-infectives, Diabetes and CNS: Key segments with relatively fewer players
0 0 CNS AF - 215 Dematology 20 Respiratory AF - 147 GI AF - 109 Diabetes AF - 396 AI AF - 337 CVS AF - 400 20 40 60 80 100

Attractiveness of international business


It is imperative to map the domestic and the non-domestic businesses of companies to take an overall view on them, as depicted below.
Company mapping: Attractiveness of domestic and international business
International Business

10 No. of Players

Favourable

Dr Reddy

Sun Pharma, Cipla, Lupin, Cadila, Torrent Pharma Ranbaxy, GSK Pharma

30

Gynaecology Vitamines Pain

Neutral

Glenmark Pharma

2015 Indian pharma market estimate: Access approach


Year 2000 2005 2010 2015 Pharmacies 322,023 410,992 550,000 736,024 CAGR 5.0 6.0 6.0 Mkt (INR b) Mkt/Pharmacy (INR) 151 467,420 230 465 936 559,622 846,018 1,272,121 CAGR (%) 3.7 8.6 8.5

40

Unfavourable

Increm ental m kt size (Rs b) 2010-15E


Note: AF=Incremental market size divided by number of players Note: Only companies covered in this report have been mapped Unfavorable Neutral Domestic Business Favorable

USD21b opportunity by 2015


We estimate the 2015 Indian domestic market size at Rs960b (USD21b) i.e. a CAGR of 16% over 2010-15 (FY11-16) founded on 4 pillars what we call as 4 A's viz. Affordability, Access, Awareness and Ailments.
Accelerating growth in domestic formulation market (USD b) Indian pharma mkt size-INR b
Approach 1 Approach 2 Approach 3 Average
GR 9.3% CA 4.1 4.7

A#3: Awareness
Health awareness in India is rising on the back of (1) Improving literacy, and (2) Rising penetration of media. This serves as an undercurrent for sustaining pharma demand.
High correlation of literacy with per capita pharma consumption
100 800 Literacy rate (%) 85 70 Per Capita Pharma spend (Rs) 600 400

CVS (2001-10 CAGR - 15.9%)


2010 53 11 45 11 38 11 24 10 14 9 13 9 Segm ent Size (INR b) Contribution to Industry (%) 2000

Diabetes (2001-10 CAGR - 17.8%)


2010 27 6 22 5 18 5 10 4 6 4 5 3 Segm ent Size (INR b) Contribution to Industry (%)
10 10.0 14.0 18.0 20 GSK 30 Dr Reddy Lupin Cadila Cipla Torrent Glenmark Sun

Earnings growth v/s valuation


We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR and FY11 P/E as depicted below. Based on the same, the top picks are Torrent, Cipla & Lupin.
Company mapping with respect to earnings growth and valuation
FY11 P/E 40 Ranbaxy (53%, 65x)

2009

2009

983 936 962 960

R CAG 15.6%

21.0

2008

2008

3.3

3.5

3.7

5.2

6.0

GR % CA 14.2 7.5 7.9 8.3

10.2

2005

2005

55 40 UP Madhya Pradesh Rajasthan Andhra Pradesh Orissa Gujarat Karnataka West Bengal Assam Bihar

200 0 Haryana Punjab Maharashtra Kerala


2001

2001

Tamil Nadu

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2000

22.0

26.0

30.0

FY11-13E EPS CAGR (%)

Acute larger, but chronic faster


Historically, in the Indian pharma market, the acute ailments therapy segment was the largest in terms of sales, although it experienced slower growth rates than some of the chronic therapies. Nevertheless, almost all therapy areas experienced double-digit growth.
Therapeutic mix - 2000
CNS 5% Dermato lo gy 6% A ntidiabeti c Others 3% 1 2% A ntiinfectives 1 8%

A#4: Ailments
As a trend, incidence of chronic/lifestyle ailments (cardiovascular, central nervous system, diabetes) is rising compared to acute ailments. Medicine demand from these segments will grow faster than the rest of the Indian pharma market.
Share of chronic ailments segment is on the rise (%)
Acute segment
Gastro intestinal 1% 1 Respirato y 9%

CNS (2001-10 CAGR - 14.4%)


26 6 22 6 19 5 17 7 8 5 7 5 Segment Size (INR B) Contribution to Industry (%) 2000

Anti-infectives (2001-10 CAGR - 12.4%)

Top picks: Cipla, Lupin, Torrent and GSK


We have identified nine key success factors (KSFs) for shortlisting Indian pharma companies and their stocks. These success factors correspond to the initials of the word "MEDICINES". We have rated the companies on these KSFs to arrive at a final MEDICINES Score out of a maximum possible 100.
Indian domestic pharma players: The MEDICINES scorecard
M Sun Cipla GSK Pharma** Lupin Torrent Pharma Cadila Dr. Reddy's Labs Glenmark Ranbaxy 7 6 4 5 6 6 4 2 6 E 9 7 9 6 7 7 6 3 5 D 8 8 7 6 6 7 6 5 7 I 6 6 3 6 5 5 4 6 5 C 9 6 6 8 6 6 6 6 6 I 9 7 9 5 3 5 2 5 3 N 7 5 6 6 6 7 3 5 E 9 7 6 6 8 6 5 9 3 S 13 14 14 14 14 12 12 10 9 Total 77 66 64 62 61 60 52 49 49

2010

2010

80 17 70 17 61 18 47 20 28 Segment Size (INR B) Contribution to Industry (%) 29

Therapeutic mix - 2010


A ntidiabeti c 6% CNS 6% Dermato lo gy 5% A ntiinfectives 1 6%

2009

2009

Chronic segment
2008

Gastro in testinal 1 0%

Others 1 3%

16

2008

22

23

30
2005

2005

Gynaeco lo gy 6% Cardiac 9%

84

78

77

70

P ain/ A nalgesic 1 0%

Respirato r y Vitamins/ 1% 1 M inerals 1 0%

2001

2001

18

Gynaeco lo gy 6%

P ain/ Cardiac A nalgesic 1% 1 9%

Vitamins/ M inerals 8%

2000

2000

2005

2010

2015E

19

** GSK Pharma total MEDICINES score pro-rated as rating for Non-domestic business is not applicable

August 2011

Indian Power Sector: Story in Pictures

The 4 Ailments
Lifestyle ailments will grow faster than others

Attractiveness Factor - Our key test to check health of ailment segments


Usually, size is considered as the key criteria for the attractiveness of any market

or market segment.

AF = Incremental market size / No. of players. Obviously, higher the AF, better Thus, Gastro and Respiratory will have higher incremental market than CNS. But

But to arrive at the 4 key ailment segments, we have used the measure of

the prospects of incumbents.

Of the 4 key segments, the AF ranking is (1) CVS - 400, (2) Diabetes - 396, (3) CVS, Infection and Diabetes (in that order) rank higher than all other segments, Market share of the 4 key ailments set to rise from 40% in 2010 to 45% in 2015

Infection - 337, and (4) CNS - 215.

Attractiveness Factor (AF).

the same will be shared among a very large number of players, diluting the segments' attractiveness.

both in terms of incremental market size and AF.

The 4 Buys
Based on detailed MEDICINES Score ranking
Mix Chronic therapy contribution (%) 61 42 43 62 5 31 28 24 21

MEDICINES Score - Criteria, maximum score (in brackets) & rating methodology
M - Mix & Market share (10): Strong presence in lifestyle segments rated higher E - Equity with doctors (10): Higher prescription share and rankings rated higher D - Distribution & reach (10): Wider distribution and reach in relevant geographies are rated higher
Distribution & reach Metro/Tier I MR strength Score (% of sales) 73 2,600 8 63 5,100 8 70 3,682 6 73 60 65 68 70 66 3,600 2,500 4,500 3,165 2,078 4,500 6 7 7 6 5 7

I - Introductions (10): Higher contribution from new launches are rated higher C - CAGR & scale-up (10): Consistent high growth is rated higher I - Improvement in MR productivity (10): Consistently high or improving Sales/ MR is rated higher
CAGR & Scale-up (%) - Sales Score 6 6 6 5 3 5 4 6 5 FY05-11 23 14 22 19 8 12 18 19 10 FY11-13 18 13 19 18 14 15 16 17 16 Score 9 6 8 6 6 6 6 6 6

N - Non-domestic business (10): Attractive overseas opportunity (incl one-offs) is rated higher E - Earnings growth (10): High long-term earnings growth (FY05-13) is rated higher S - Stock attractiveness (20): Captures outlook, valuation, and our overall view.
Non domestic business Favorability Score High 7 Medium 5 High 6 High Not applicable High High Low Medium 6 0 6 7 3 5 Earnings Growth (FY11-13) Comment (%) Score 22 9 21 7 13 6 22 16 21 12 24 55 8 6 6 5 9 3 Stock attractiveness Comment Score Neutral 13 Top pick 14 Top pick 14 Top pick Buy Neutral Neutral Neutral Sell 14 14 12 12 10 9

Equity with doctors Score 7 6 5 6 4 6 4 2 6 Comment Leader in CNS, Gynaec and 2nd in CVS, Anti-diabetics Market leader in AI and Respiratory Leader in Anti-TB segment Ranks 2nd in CNS and 7th in CVS Market leader in Derma, Vit and Pain Mgmt Among top 3 players in CVS and GI Ranks 3rd in GI and Pain Mgmt Ranks 2nd in Dermatology Among the leaders in AI and Dermatology Score 9 7 6 7 9 7 6 3 5

MEDICINES Score Sun Cipla Lupin Torrent Pharma GSK Pharma ** Cadila Dr. Reddy's Labs Glenmark Ranbaxy 77 66 62 61 64 60 52 49 49

In last 4 years 124 304 266 151 21 197 89 105 255

Introductions Contbn to growth (%) 56 45 69 49 15 37 31 52 50

Improvement in productivity (Sales/MR, INR m) 2004 2010 Score 3.2 7.8 9 4.8 4.9 7 3.6 3.6 5 1.5 6.5 4.1 3.6 3.1 4.6 2.3 7.1 3.6 3.2 3.6 3.6 3 9 5 2 5 3

** GSK Pharma total MEDICINES score pro-rated as rating for Non-domestic business is not applicable

Domestic formulations companies - Comparative valuations (INR)


Company (CMP) Top Picks Cipla (281) Lupin (450) Torrent (589) GSK (2,155) Others Sun (464) Target Price 361 514 762 2,330 524 Upside (%) 28 14 29 8 13 10 15 -3 -12 FY11 12.0 19.3 31.9 68.6 13.6 30.9 65.6 12.5 25.8 EPS (INR) FY12E 13.4 22.3 40.1 77.5 17.3 28.3 68.6 16.1 11.9 FY13E 16.4 25.7 47.6 89.6 20.9 41.1 81.1 19.7 16.7 FY11 23.3 23.3 18.4 31.4 34.2 26.6 21.6 25.5 15.2 P/E (X) FY12E 21.0 20.2 14.7 27.8 26.8 29.1 20.7 19.7 33.0 FY13E 17.1 17.5 12.4 24.1 22.2 20.0 17.5 16.1 23.3 EV/EBITDA (X) FY11 17.4 19.5 12.4 21.9 22.4 17.2 16.7 17.7 11.1 FY12E 14.5 16.8 9.6 20.2 20.8 17.2 17.1 10.4 23.0 FY13E 12.1 13.8 8.0 17.2 16.7 14.0 14.4 11.1 18.5 FY11 14.5 29.3 29.2 30.1 16.2 37.5 24.1 17.4 19.4 ROE (%) FY12E FY13E 14.4 27.1 29.3 31.3 17.7 27.3 22.5 17.0 11.4 15.6 25.7 27.7 33.4 18.5 27.6 23.5 17.1 10.4

Sector performance vis-a-vis benchmark


Outperformer post the credit crisis
The DF index has consistently outperformed the Sensex and the BSE Healthcare index as well from Sep-2009 onwards. In fact the DF index commenced its outperformance vis--vis the BSE Healthcare index immediately post the credit crises of 2008. We believe that the outperformance reflects the relatively defensive nature of the DF business coupled with reasonable growth and good profitability. The outperformance is also aided by the fact that the DF business is relatively less capital intensive as compared to some of the other pharma businesses.

Domestic Formulations (DF) Index is an outperformer over 5 years ...


Sensex 250
120

... and also in the last 1 year

BSE Healthcare Index

DF Index

130

200
110

150 100 50 Feb-07 Feb-08 Feb-09 Feb-10 Nov-06 Nov-07 Nov-08 Nov-09 May-07 May-08 May-09 May-10 Nov-10 Feb-11 May-11 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11

100 90 80 Oct-10 Dec-10 Feb-11 Aug-10 Apr-11 Jun-11 Aug-11

Cadila (824) 907 DRRD* (1,446) 1,670 Glenmark (318) 310 Ranbaxy ## (468) 412 * Dr. Reddy's

## - Adjusted for Rs77/sh of DCF value of FTF; Dr. Reddy's Labs & Ranbaxy core valuations adjusted for DCF value of Para-IV upsides

All indices re-based to 100

August 2011

Thematic Report | Sector: Pharmaceuticals

Domestic Formulations
Summary New peaks - USD21b opportunity by 2015
4 A's. 4 ailments. 4 buys

4 A's - Lead to USD21b opportunity by 2015


The India domestic pharma story is founded on 4 pillars, what we call the 4 A's A #1 - Affordability Medicines are becoming more affordable led by (1) Rising per capita income, (2) Urbanization, and (3) Higher penetration of health insurance. This is driving the growth in the domestic pharma market. A #2 - Access People's access to medicines is improving given (1) Rising government spend on healthcare, (2) India's improving medical infrastructure, and (3) Companies' thrust on increasing rural reach. All are combined to further expand the domestic pharma market.
Companies covered
Top buys Cipla Lupin Torrent Pharma GSK Pharma Others Sun Pharma Cadila Ranbaxy Dr. Reddy's Labs Glenmark

A #3 - Awareness Health awareness in India is rising on the back of (1) Improving literacy, and (2) Rising penetration of media. This serves as an undercurrent for sustaining pharma demand. A #4 - Ailments As a trend, incidence of chronic/lifestyle ailments (cardiovascular, central nervous system, diabetes) is rising compared to acute ailments. Medicine demand from these segments will grow faster than the rest of the Indian pharma market. Based on the past data and present trends, we have estimated the 2015 (FY16) Indian pharma market using three different approaches Approach 1 (Affordability-based): Correlation between per capita GDP and per capita pharma consumption Approach 2 (Access-based): Trend in pharmacies and sales per pharmacy Approach 3 (Ailment-based): Summation of various ailment segment sizes. Averaging the figure using the three approaches, we estimate the 2015 Indian domestic market size at INR960b (USD21b) i.e. a CAGR of 16% over 2010-15 (FY11-FY16).

Indian pharma mkt (INR b)


Approach 1 (pg 5) Approach 2 (pg 6) Approach 3 (pg 6) Average USD b 983 936 962 960 21

4 ailments - CVS, anti-diabetics, anti-infectives and CNS are high potential segments
We believe that chronic therapies like Cardiovascular (CVS), anti-diabetics and Central Nervous System (CNS) will account for a major chunk of the incremental market over the next 5 years. Also, with rising income levels in the rural areas, anti-infectives will also record good growth over the same period. We believe these four will be the key segments of the future, and garner more than 50% of the delta in the Indian formulations market, 2015 over 2010.
August 2011

Domestic Formulations | New Peaks

We juxtaposed the incremental opportunity of various therapeutic segments against the number of existing players in each of these segments, to arrive at the following plot.
CVS, Anti-infectives, Diabetes and CNS are large segments with relatively fewer players
Increm ental m kt size (INR b) 2010-15E 0 20 40 60 Diabetes AF - 396 80 100

Top 4 ailment segments are mainly based on Attractiveness Factor, which is highest for CVS, Diabetes, Antiinfectives and CNS in that order

0 10 No. of Players 20 30 40 Dermatology Respiratory AF - 147 GI AF - 109 CNS AF - 215 AI AF - 337 CVS AF - 400

Gynaecology Vitamins Pain

Note: AF is Attractiveness Factor of segment, which is defined by the incremental size of the opportunity per player Source: Industry/MOSL

Our key conclusions from this chart: 1. As discussed before, CVS, Anti-infectives, Diabetes and CNS will record maximum share of incremental market (the size of bubble indicates this). 2. We also note that the attractiveness factor (i.e. incremental segment market size divided by number of players) is most favorable for these segments. 3. Hence, companies which enjoy strong positioning in these segments will be able to generate maximum value from their respective domestic formulations businesses.

Valuation summary
EPS CAGR (FY11-13) Cipla Lupin Torrent Pharma GSK Pharma Sun Pharma Cadila Ranbaxy DRL Glenmark 16.7 15.3 22.1 14.2 24.1 15.3 53.1 11.2 25.8 P/E (x) (FY13) 17 18 12 24 22 20 23 18 16

4 buys - Cipla, Lupin, Torrent Pharma and GSK Pharma


Having identified the most attractive ailment segments, we have adopted two approaches to arrive at our top plays on India's domestic formulations opportunity: Approach 1: 3-screen shortlisting process as follows: Screen #1: Identify companies with dominating presence in high-potential ailment segments Screen #2: Of the above, exclude companies with unfavorable non-domestic business Screen #3: Juxtapose the Screen #2 surviving companies vis--vis earnings growth and valuation Approach 2: MEDICINES score, based on nine key success factors for picking domestic formulation stocks Approach 1: 3-screen shortlisting process Screen #1: Identify companies with dominating presence in high-potential ailment segments The chart below maps the positioning of pharmaceutical players in the key therapeutic segments of CVS, Diabetes, anti-infectives and CNS. We have plotted the dominance of each player in these respective segments using prescription market share as the key measure of dominance.

August 2011

Domestic Formulations | New Peaks

Company mapping with respect to therapeutic classes


Sun Pharma, Torrent, Cadila, Cipla, Unichem, Ranbaxy, Lupin Aventis, U S V, Emcure, Piramal, Dr Reddy's, Intas, Micro Labs IPCA Labs, AstraZeneca, Pfizer Abbott, U S V, Aventis, Sun Pharma Ranbaxy, Alkem, Aristo, Cipla, GSK Pharma, Piramal Alembic,Mankind, FDC, Macleods, Lupin Sun Pharma, Intas, Torrent, Abbott, Piramal Cipla, GSK Pharma

High

Dominance

Medium

Eli Lilly, Piramal, Micro Labs, Lupin

Aventis, Ranbaxy, Unichem, Micro Labs

Cadila, Piramal, Ranbaxy

Panacea, Ranbaxy

Novartis, Cipla, Lupin

Low

Pfizer, Mankind, Dr Reddy's, Sun Pharma, Glenmark, Biocon Others Source: MOSL

CVS

Diabetes

Anti-infectives

CNS

Companies in bold have been covered in this report

Screen #2: Most Indian companies are not pure-plays; view on non-domestic business is also important It is imperative to map the domestic and the non-domestic businesses of companies to take an overall view on them, as depicted below.
Company mapping relative to the attractiveness of domestic and international business
Favourable
International Business

Dr Reddy

Sun Pharma, Cipla, Lupin, Cadila, Torrent Pharma Ranbaxy, GSK Pharma

3 of our 4 top picks are favorably placed in both their domestic and international businesses

Neutral

Glenmark Pharma

Unfavourable

Note: Only companies covered in this report have been mapped

Unfavourable

Neutral Domestic Business

Favourable

Source: MOSL

Screen #3: Juxtapose the Screen #2 shortlisted companies vis--vis earnings growth and valuation We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR and FY11 P/E as depicted below. Based on the same, the top picks are Cipla, Lupin and Torrent Pharma. We are also positive on GSK Pharma as we believe it deserves premium valuation due to strong parentage (giving access to large product pipeline), brand-building ability, industry-best RoCE of over 45% and likely positioning in post patent era.

August 2011

Domestic Formulations | New Peaks

Earnings growth v/s Valuation: Cipla, Torrent, Lupin on top ...


40
FY11 P/E (x) Ranbaxy (53%, 65x)

... GSK merits rich valuation due to superior return ratios


RoCE (%) Adj. RoCE (%)
Very high due to -ve capital employed

GSK 30 Dr Reddy 20 Cadila Lupin Cipla

Sun
25 22 7 16 DRL 13 Cadila GSK Ranbaxy Lupin 28 23 47 27

26 14 15 Glenmark
S

Glenmark
22

16 17 Cipla

19

25

Torrent 10 10.0
Sun

14.0

18.0 22.0 FY11-13E EPS CAGR (%)

26.0

30.0

Note - Adj. RoCE - RoCE adjusted for other income in P&L and Cash in Balance sheet RoCE and Adj. RoCE are average of FY11-13

Source: MOSL

Approach 2: The MEDICINES score We have identified nine key success factors (KSFs) for shortlisting Indian pharma companies and their stocks. These success factors correspond to the initials of the word "MEDICINES". We have rated the companies on these KSFs to arrive at a final "MEDICINES Score" out of a maximum possible 100. The companies with the highest MEDICINES Score are the most attractive investment ideas. We have considered the following KSFs for evaluating the domestic formulations business (see box on page 21 for explanation). Our MEDICINES Scorecard is given below.

MEDICINES
Measures

M E D I C I N E S

Mix & Market share Equity with doctors Distribution & reach Introductions CAGR & scale-up Improvement in MR productivity Non-domestic business Earnings growth Stock attractiveness

Indian domestic pharma players: The MEDICINES scorecard


M E D I C I N E Total

4 of the top 5 MEDICINES score companies correspond with Approach 1. We are Neutral on Sun only due to rich valuations

Sun Cipla GSK Pharma ** Lupin Torrent Pharma Cadila Dr. Reddy's Labs Glenmark Ranbaxy ** GSK Pharma score

7 6 4 5 6 6 4 2 6 pro-rated

9 8 6 9 9 7 8 6 6 7 9 7 3 6 9 6 6 6 8 5 7 6 5 6 3 7 7 5 6 5 6 6 4 6 2 3 5 6 6 5 5 7 5 6 3 as rating for Non-domestic business is not

7 9 5 7 6 6 6 6 8 6 6 7 5 3 9 5 3 applicable

13 77 14 66 14 64 14 62 14 61 12 60 12 52 10 49 9 49 Source: MOSL

4 buys: Cipla, Lupin, Torrent, GSK Pharma 4 of the top 5 MEDICINES score companies correspond with Approach 1. Thus, combining both Approaches 1 and 2, our top picks are Cipla, Lupin, Torrent and GSK Pharma. We are Neutral on Sun Pharma only due to rich valuations.
August 2011

Torrent

Domestic Formulations | New Peaks

Financial & valuation summary


Company Cipla Year End 03/11A 03/12E 03/13E Lupin 03/11A 03/12E 03/13E Torrent Pharma 03/11A 03/12E 03/13E GSK Pharma 12/10A 12/11E 12/12E Sun Pharma ** Includes Para-IV/oneoff upsides Cadila 03/11A** 03/12E 03/13E 03/11A 03/12E 03/13E Ranbaxy 12/10A 12/11E 12/12E Dr. Reddy's 03/11A 03/12E 03/13E Glenmark 03/11A 03/12E 03/13E Net Sales (INR M) 63,145 69,193 79,041 57,068 64,784 74,127 22,265 25,596 29,817 21,116 23,740 26,921 57,214 65,601 75,976 46,302 51,717 59,983 89,608 85,242 93,005 74,693 81,754 90,323 29,491 37,007 40,693 PAT (INR M) 9,671 10,760 13,177 8,582 9,913 11,418 2,702 3,392 4,029 5,814 6,567 7,586 18,161 17,952 21,626 6,334 5,801 8,419 10,855 4,991 7,052 11,099 11,615 13,725 3,548 4,584 5,612 EPS (INR) 12.0 13.4 16.4 19.3 22.3 25.7 31.9 40.1 47.6 68.6 77.5 89.6 17.5 17.3 20.9 30.9 28.3 41.1 25.8 11.9 16.7 65.6 68.6 81.1 12.5 16.1 19.7 EPS GR. (%) -3.7 11.1 22.2 25.9 15.5 15.2 0.8 25.6 18.8 15.2 12.9 15.5 34.4 27.9 20.5 26.4 -8.4 45.1 467.1 -54.0 41.3 7.8 18.2 7.2 29.2 22.4 P/E (X) 23.3 21.0 17.1 23.3 20.2 17.5 18.4 14.7 12.4 31.4 27.8 24.1 26.5 26.8 22.2 26.6 29.1 20.0 15.2 33.0 23.3 21.6 20.7 17.5 25.5 19.7 16.1 4.4 3.9 7.8 6.2 5.0 2.9 2.7 2.4 5.3 4.7 4.2 4.2 3.2 2.6 17.7 18.5 37.5 27.3 27.6 19.4 11.4 10.4 24.1 22.5 23.5 17.4 17.0 17.1 20.5 22.2 30.5 25.4 27.2 15.9 10.7 11.1 16.7 15.4 17.0 13.4 15.3 16.3 6.6 5.5 3.8 3.4 2.9 2.3 2.4 2.2 3.5 3.2 2.9 3.6 2.8 2.5 20.8 16.7 17.2 17.2 14.0 11.1 23.0 18.5 16.7 17.1 14.4 17.7 10.4 11.1 P/BV (X) 3.4 3.0 2.7 6.1 5.0 4.1 4.9 3.8 3.1 9.5 8.7 8.0 RoE (%) 14.5 14.4 15.6 29.3 27.1 25.7 29.2 29.3 27.7 30.1 31.3 33.4 RoCE (%) 15.8 17.2 18.8 25.1 28.2 27.1 24.1 24.9 25.1 44.8 46.3 49.5 EV/ Sales 3.6 3.3 2.8 3.6 3.2 2.7 2.3 1.9 1.6 7.6 6.8 5.9 EV/ EBITDA 17.4 14.5 12.1 19.5 16.8 13.8 12.4 9.6 8.0 21.9 20.2 17.2

Domestic Formulations (DF) Index is an outperformer over 5 years ...


Sensex 250 BSE Healthcare Index DF Index

... and also in the last 1 year


130 120

200

110
150 100 50 Feb-07 Feb-08 Feb-09 Feb-10 May-07 May-08 May-09 May-10 Feb-11 May-11 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11

100 90 80 Dec-10 Oct-10 Feb-11 Aug-10 Jun-11 Aug-11 Apr-11

All indices re-based to 100

August 2011

Domestic Formulations | New Peaks

Main Report

4 A's and 4 Ailments


To drive USD21b opportunity by 2015, 2x over 2010
The India domestic pharma story is founded on 4 pillars, what we call the 4 A's -

A #1

Affordability Medicines are becoming more affordable led by (1) Rising per capita income, (2) Urbanization, and (3) Higher penetration of health insurance. This is driving the growth in the domestic pharma market (see page 9). Access People's access to medicines is improving given (1) Rising government spend on healthcare, (2) India's improving medical infrastructure, and (3) Companies' thrust on increasing rural reach. All are combined to further expand the domestic pharma market (see page 12). Awareness Health awareness in India is rising on the back of (1) Improving literacy, and (2) Rising penetration of media. This serves as an undercurrent for sustaining pharma demand (see page 14). Ailments As a trend, incidence of chronic/lifestyle ailments (cardiovascular, central nervous system, diabetes) is rising compared to acute ailments. Medicine demand from these segments will grow faster than the rest of the Indian pharma market (see page 15). USD21b opportunity by 2015 Based on the past data and present trends, we have estimated the 2015 (FY16) Indian pharma market using three different approaches Approach 1 (Affordability-based): Correlation between per capita GDP and per capita pharma consumption Approach 2 (Access-based): Trend in pharmacies and sales per pharmacy Approach 3 (Ailment-based): Summation of various ailment segment sizes. Averaging the market size arrived using each approach, we estimate the total India market size at USD21b by 2015. We discuss below the methodology under the three approaches. Approach 1: Affordability-based
Correlation between per capita GDP and per capita pharma consumption

A #2

A #3

A #4

Approach 1: Affordability Market size: INR983b

We see a strong correlation between India's per capita GDP and per capita pharma consumption. With rising income, pharmaceuticals accounts for a higher share of overall household spend, as indicated by the rising multiplier of per capita pharma consumption CAGR to per capita GDP CAGR. Thus, FY01-06, per capita pharma consumption CAGR was 8.7%, 0.8x of per capita GDP CAGR. Over the next five years (FY06-11), per capita pharma consumption CAGR rose to 12.9%, and the multiplier increased to 1.1x.

August 2011

Domestic Formulations | New Peaks

We estimate FY11-16 per capita GDP CAGR of 12%. Applying a 1.3x multiplier, we arrive at FY16 per capita pharma spend of INR784. Multiplying by the then expected population, we estimate the pharma market size at INR983b, a CAGR of 15% from current level of INR465b.
2015 Indian pharma market estimate: Affordability approach
Per capita GDP INR CAGR (%) (1) (2) FY01 FY06 FY11 FY16 20,786 33,827 60,048 105,668 10.2 12.2 12.0 Per capita pharma conspn. INR CAGR (%) (3) (4) 140 212 390 784 8.7 12.9 15.0 Multiplier (x) (5) = (4) / (2) 0.8 1.1 1.3 Pharma market INR b CAGR (%) (6) (7) 151 230 465 8.9 15.1

983 15.0 Source: Industry/MOSL

Approach 2: Access-based
Trend in pharmacies and sales per pharmacy

Our methodology here is as follows Consider the growth in number of pharmacies in 2005 over 2000, and 2010 over 2005 Calculate the CAGR in average market size per pharmacy over 5-year time frames Extrapolate both of the above for 2015 to arrive at the pharma market size.
Approach 2: Access Market size: INR936b

2015 Indian pharma market estimate: Access approach


Year Pharmacies CAGR (%) Mkt (INR b) Mkt/Pharmacy (INR) CAGR (%)

2000 322,023 151 467,420 2005 410,992 5.0 230 559,622 3.7 2010 550,000 6.0 465 846,018 8.6 2015 736,024 6.0 936 1,272,121 8.5 Note: As precise data on pharmacies is not available, we have back calculated number of pharmacies for 2005 and 2000 based on the 2010 estimate of 550,000 pharmacies and long-term CAGR of 4.5% Source: Industry/MOSL

Approach 3: Ailments-based
Summation of various ailment segment sizes

Approach 3: Ailments Market size: INR962b

The Indian pharma market can be broken down into 10 major therapeutic segments. We have analyzed the 2000-2010 growth trend in each of these segments. Going forward, we believe the growth will accelerate, especially in chronic ailment therapeutic segments such as CVS, CNS and anti-diabetics. Adding up the individual segments in 2015, we arrive at the total Indian pharma market size of INR962b.

August 2011

Domestic Formulations | New Peaks

2015 Indian pharma market estimate: Ailment approach (INR b)


Market size 2005 10 24 17 24 22 13 47 8 21 28 18 212 CAGR (%) 00-05 05-10 10-15E 17.2 13.3 19.6 8.0 6.5 8.7 10.5 -2.3 7.6 12.9 -1.3 7.1 22.1 17.1 9.4 16.2 13.5 15.1 11.2 26.9 14.3 5.4 27.6 13.8 25 21 20 15 15 15 13 13 11 10 15 15.7 Mkt size 2015E Incremental mkt - 2015 over 2010

2000 Anti-diabetic CVS CNS Gastrointestinal Respiratory Dermatology Anti-infectives Gynaecology Pain/Analgesic Vitamins/Minerals Others Total 5 13 7 17 16 8 29 9 14 15 19 151

2010 27 53 26 51 41 25 80 26 40 36 59 406

83 56 137 84 65 39 103 52 82 41 51 26 147 67 49 22 68 28 58 22 119 60 962 436 Source: Industry/MOSL

2015 Indian domestic pharma market of USD21b


Average of the three approaches
Indian pharma mkt (INR b)
Approach 1 Approach 2 Approach 3 Average USD b 983 936 962 960 21

Averaging the figure arrived using the three approaches, we estimate the 2015 Indian domestic market size at INR960b (USD21b) i.e. a CAGR of 16% over 2010-15 (FY11FY16). Independently, McKinsey has also estimated the Indian domestic pharma market after considering factors like income demographics, medical infrastructure, disease incidence and penetration of health insurance. It estimates 2015 market size of USD20b (INR920b @ INR/USD of 46). In the process, India will improve its global rank in terms of value from 14 currently to top 10 by year 2015.

Accelerating growth in domestic formulation market


(USD b)
% C R AG

India will be among world's top 10 pharma markets by 2015


2015 market size (US$b) 444 Grow th over 2005 (x) 3.3 2.9 2.2 1.8 1.2 82 1.4 1.2 1.3 25 38 Canada China 1.7 1.8 1.9 1.9 1.9 2.1

21.0

15
R AG 10.2 %C 14.2 8.3 7.5 7.9 6.0

.6

CAGR 9.3% 5.2 4.1 4.7 3.3 3.5 3.7

46 38 Germany France

25 32 UK Italy

25 Spain

19 20 Mexico Brazil

15 15 Turkey South Korea

20 India

US 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Japan

Source: Mckinsey/MOSL

We proceed to discuss the key issues under each of the 4 As, culminating in the MEDICINES framework to zero-in on our top picks.
8

August 2011

Domestic Formulations | New Peaks

A #1 - Affordability
Rising per capita income, urbanization, and health insurance penetration will drive pharma spend
A #1 Affordability

India's NTD journey will steadily drive up per capita income In 2007, we published our first note on the concept of NTD (next trillion dollar of India's GDP). The core NTD thesis is this: It took India about 60 years post independence to clock the first trillion dollar of GDP. With nominal GDP growth of 14-15%, at constant exchange rates, India's next trillion dollar (NTD) will come in just 4-5 years. Every successive trillion dollar GDP would take lesser time and by 2020 India would comfortably reach a USD5t GDP assuming 8% real GDP growth coupled with 5% estimated inflation.
India's NTD era next trillion dollar of GDP getting added in successively lower time (USD b)
4,811 FY19E 5th USD tn 1.5 years 3,741 4,243 5,456

461

21

33

57

150

293

451

479

508

600

721

837

By FY20 India GDP would triple from the current level and be almost ~5 times the level of FY08

4th USD tn 2 years 3rd USD tn 3.5 years 1st USD tn 58 years 1,728 1,969 2,263 2nd USD tn 4 years 1,230 946 1,214 1,314

FY12E

FY13E

FY14E

2,566

FY15E

2,909

FY16E

3,299

FY17E

FY18E

Source: MOSPI/MOSL

With population growing at a much lower rate than GDP, India's per capita GDP will keep rising steadily for the next several years.
India's per capita GDP is steadily rising (INR)

20,786

22,156

23,476

FY01

FY02

FY03

FY04

25,929

FY05

30,017

FY06

33,827

FY07

38,519

FY08

43,844

FY09

48,696

FY10

53,679

FY11

60,048

FY12

67,195

FY13

75,214

FY14

84,215

India's rising per capita GDP augurs well for domestic pharma market

11.5%

CAG

FY15

94,320

Source: MOSPI/MOSL

FY16

105,668

FY20E

FY51

FY60

FY70

FY80

FY90

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

August 2011

Domestic Formulations | New Peaks

Higher per capita income will boost spend on pharmaceuticals There is a direct co-relation between per capita income and spend on healthcare, including pharmaceuticals. Currently, India has one of the world's lowest per capita spend on pharmaceuticals. As India's per capita income grows going forward, healthcare spend is expected to witness one of the highest growth rate among all categories over the next two decades. Healthcare spend is expected to grow to 13% of GDP by 2025.
India has one of the lowest per capita spend on pharmaceuticals
700 620 490 450
(USD)

% of avg. household income spent on healthcare


US France Germany 11 10.4 10.1 8.9 8.7 8.4 8.4 8 5.4 4.3 4.1
Source: Industry/MOSL

15.7

420 370 280 220 200 130 120 60 60 Romania Germany Turkey 20 10 Pakistan China 55 8 BRICS (avg) India

Canada Australia Italy Brazil UK Japan Russia China India

UK

Canada

France

BRICs healthcare as % of GDP India is the lowest

8.4 5.2

Large population with low healthcare penetration presents huge opportunity India has 16% of the world's population, yet only accounts for 1% of the total amount spent on health globally. India's expenditure on health amounted to 4% of GDP (2008), substantially lower than developed markets and even BRIC peers - Brazil (8.4%), Russia (5.2%) and China (4.3%). Further, public health expenditure accounted for less than 30% of India's total healthcare costs (2008), reflecting the very basic level of healthcare provided by the government, which is insufficient to meet the health needs of the entire population. In comparison, BRIC peer governments accounted for ~50% of their respective country's healthcare spend. Going forward, economic growth coupled with improving government finances should narrow the gap, implying growth in pharma demand.

4.3

4.0

Brazil Russia China

India

Share of tier-1 markets in pharma demand (%) Rising urbanization is a positive


62 61 60 60 63

Urbanization: a positive for pharma demand Increasing urbanization leads to higher demand for pharma products based on factors such as (1) higher affordability, (2) better medical infrastructure, and (3) wider prevalence of chronic diseases. Share of India's tier-1 markets has increased from 60% in 2006 to 63% in 2010. Thus, the trend of rising urbanization in India is a key positive for growth in pharma demand.
10

2006 2007 2008 2009 2010

August 2011

Mexico

Russia

Japan

Italy

Spain

Brazil

USA

Domestic Formulations | New Peaks

Metro and Tier-1 cities market share up from 60% in 2006 to 63% in 2010
METROS 21 19 33 CLASS I TOWNS 21 19 20 19 32 CLASS II TO VI 18 19 32 RURAL

India - population distribution


Urban population (%) 72
17 20 32

Rural Population (%) 63

71

70

70

68

66

60 40

57 43

53 47

51 49

54 46

28

31

28

29

30

30

32

34

37

Tier-1 mkt

29 CY2007

29 CY2008

30 CY2009

31

2000

2005

2009

2010

2015

2020

2025

2030

2035

2040

2045

CY2006

CY2010

Source: Industry/MOSL

Rising health insurance penetration to improve affordability Currently around 300 million people in India are covered under health insurance, and this number is expected to double by 2020. Going forward, health insurance should get a boost by way of various regulatory reforms like non-life tariff deregulation, lower capital requirements for players, increase in FDI limit, etc. Increasing penetration of health insurance over the next few years will spur demand for pharmaceuticals as it becomes possible for patients to afford more sophisticated and more expensive therapies.

Health insurance penetration in India is rising


Premium (INRb) (Rs b) Premium (% of GDP) 0.12% 0.10% 0.13%

Per capita premium almost quadruples in 5 years (INR)


71.5 57.9 45.4

0.07% 0.06% 83.1 66.3 51.3 22.2 FY06 32.1

28.9 20.3

FY07

FY08

FY09

FY10

FY06

FY07

FY08

FY09

FY10

Source: IRDA/MOSL

August 2011

2050

11

Domestic Formulations | New Peaks

A #2 - Access
Rising government spend on healthcare, better infrastructure will improve availability

Rising government spend on healthcare Healthcare for all is high on the agenda of the present Indian government. This was demonstrated in the union budget for 2010-2011, when the healthcare expenditure outlay was increased to USD5.95b from less than a USD5.17b allocated in 2009-10. The budget allocation has been significantly increased for rural healthcare, with the government also announcing plans to set up six "All India Institute of Medical Sciences "(AIIMS) institutions across the country. Government spending on healthcare will play a major role in increasing the penetration of pharmaceuticals especially in rural areas. Government spend has grown at 18% CAGR over FY06-09 and is translating into higher level of access in Tier II and rural markets. Under Rashtriya Swasthya Bima Yojna (National Health Insurance Scheme), the government plans to create health cover for approximately 400m people; 19m families have already been covered and implementation seems to be on track. Going forward, the government has announced plans to take its spending on healthcare to 3% of GDP from the current level of about 1%. Rising government spend on healthcare improves people's access to medicines, helping pharma demand.

Rising government spend on healthcare


Helathcare Exp (Rs b) Healthcare Exp (INR b) 19.3 14.7 10.1 10.5 2.1 280 315 348 415 454 521 632 739 907 286 997 9.5 Grow th (%) 21.3 16.9 22.7

A #2 - Access

Allocation under National Rural Health Mission (INR b)


140.5 119.3 108.9 90 10.0 67.3

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY06

FY07

FY08

FY09

FY10

Source: Economic Survey, Union Budget 2011

Source: Ministry of Health/MOSL

Improving healthcare infrastructure The healthcare infrastructure in India is likely to improve and will be a critical growth driver for pharmaceuticals. Currently, India's healthcare infrastructure is at nascent stage compared to western countries. India has only 9 hospital beds per 10,000 people compared to 30-40 in US and Western Europe. Even other developing countries like Brazil, China and Thailand fare much better than India with 24-30 beds per 10,000. Industry data suggests the number of hospital beds in India is likely to double by 2015. Likewise, India's current doctor-population ratio at 5 per 10,000 is the lowest among major countries. However, with rising number of students gaining admission to medical colleges, this ratio is set to improve going forward. Further, diagnostic laboratory services market (estimated at USD750m) is expected to grow @ 20-25% p.a. over the next few years.
August 2011

12

Domestic Formulations | New Peaks

Hospital beds per 10,000 - India among world's lowest

Doctors per 10,000 people - India the lowest the among world majors
139
Rus s ia Italy Germany Fr anc e A r gentina US A us tr alia UK Mex ic o Japan Br az il China Pakis tan India 5 7 12 11 20 20 30 26 25 23 34 34 43 42

Japan Rus s ia Germany Franc e A us tralia Italy UK Canada US China Braz il India 9 39 39 39 34 31 30 24 72 83 97

Source: WHO

Students entering medical colleges and number of colleges - rising trend


No of medical colleges in India No of students entering medical colleges ('000) 30 33 35

No. of allopathic doctors registered with state medical councils - Rising trend here as well
757,377 736,743 708,043 682,080 660,856

25 18 7 165 FY96 FY01 FY05 189 229

26

29

242

262

266

289

300

FY06

FY07

FY08

FY09

FY10

2005

2006

2007

2008

2009

Source: National Health Profile

Companies are focusing on increasing their rural reach Currently around 67 per cent of India's population or 742 million people live in rural areas, but rural markets contribute to only 17 per cent of the overall pharmaceutical market's sales. In the last few years both MNCs and Indian pharma companies are increasing their attention to tier 2 markets. The above-mentioned factors, namely, increasing government spend on healthcare, improvement in healthcare infrastructure, and growing health awareness etc is expected to drive pharma growth in these markets.
Growth in tier-2 markets showing signs of catching up (%)
METROS CLASS I TOWNS CLASS II TO VI 26 23 21 18 14 11 8 15 16 18 18 16 13 9 2 17 RURAL

CY2007

CY2008

CY2009

CY2010

Source: Industry/MOSL August 2011

13

Domestic Formulations | New Peaks

A #3 - Awareness
Rising literacy levels and media penetration is improving health awareness

A #3 - Awareness

High correlation between literacy and per capita pharma consumption We believe literacy is one of the key factors driving awareness about healthcare in general and pharmaceuticals in particular. In fact, literacy also has an indirect impact on pharma consumption. Higher literacy typically leads to higher per capita income (i.e. A #1, affordability), which in turn drives pharma demand. Our study of pharmaceutical consumption and literacy rates among various states of India confirms a strong correlation between literacy rate and pharma demand. As seen in the graph below, states with high literacy rates like Kerala, Maharashtra, Punjab and Haryana have higher per capita spend on pharmaceuticals compared to states with low literacy rates like Bihar, UP, Rajasthan and Assam.

High correlation of literacy with per capita pharma consumption


Literacy rate (%) 100 85 70 55 Tamil Nadu 40 UP Karnataka Rajasthan Orissa Madhya Gujarat West Bengal Assam Bihar Andhra Per Capita Pharma spend (Rs) 800 600 400 200 0 Haryana Punjab Maharashtra Kerala

Literacy rate in India is rising


Literacy rate (%) Per CapitaGDP (Rs) 80,000 60,000 40,000 20,000 Tamil Nadu 0 Punjab Maharashtra
81 115 2010

100 75 50 25 0 UP Orissa Rajasthan Karnataka Madhya Gujarat West Bengal Assam Bihar Andhra

Haryana

Source: Industry/MOSL

Rising media penetration also leads to higher awareness Penetration of all forms of media is rising in India - print, TV, radio and internet. Higher media exposure leads to better awareness on a whole range of issues including healthcare, thus favourably influencing pharma demand.
Rising media penetration is a positive for healthcare awareness and pharma demand
Total TV HH (m) 53.6 TV penetration (%) 56.3 58.4 60.2
57 63 66 C&S HH (m) C&S penetration (% of TV Household) 73 77

51.4

52.1

108

112

118

129

136

142
62 70 78 94

105

2005

2006

2007

2008

2009

2010

2005

2006

2007

2008

2009

Note: HH stands for Households

Source: Industry/MOSL

Kerala

August 2011

14

Domestic Formulations | New Peaks

A #4 - Ailments
Lifestyle drugs and anti-infectives hold the biggest potential
A #4 - Ailments

India has so far been an acute ailments market Ailments can be of two types - acute and chronic. An acute ailment can be described as a condition of rapid onset and severe symptoms of brief duration e.g. infectious disease like common cold, fever etc. Acute ailments may turn chronic if they remain unresolved. Chronic ailments can be described as conditions that, with current medical knowledge, can be alleviated but not cured. Unlike acute ailments, chronic ailments (1) do not usually resolve of their own accord, and (2) are of longer duration e.g. diabetes, asthma, blood pressure, etc. Due to relatively poor sanitation conditions, drugs addressing infectious diseases are predominant in most developing countries. Hence, the proportion of acute to chronic is higher in developing countries compared with developed countries.

Therapeutic mix of major countries (%): India currently is an acute ailments market
Chronic Acute

Trend in India's therapeutic mix (%) Share of chronic ailments segment is on the rise
Acute segment 16 Chronic segment

35

22

42

23

45

45 65 73

30

84 65 58 55 55 35 27

78

77

70

US

Germany

Japan

UK

China

India

2000

2005

2010

2015E

Source: McKinsey/MOSL

Changing disease profile to boost demand for chronic therapies India is undergoing a transition in terms of disease profile. The incidence and prevalence of non-communicable diseases is rapidly increasing due to demographic changes (e.g. urbanization) and lifestyle changes resulting from socioeconomic development (e.g. obesity, stress). Higher prevalence coupled with higher prescription compliance (due to improved affordability) is likely to drive much stronger growth in chronic ailment therapeutic segments (CATS). In 2006, the share of CATS stood at 22% of pharmaceutical market in India versus 55-65% in developed markets like US, UK and Japan. By 2015, the share of CATS is expected to rise to 30% of the then Indian market. (See pages 24-30 for profiles of major ailments in India.)

August 2011

15

Domestic Formulations | New Peaks

Prevalence rates of key chronic ailments to rise


4.9 3.3 2.8 3.7 2.5 2.7 1.3 0.2 0.2 Coronary heart disease Diabetes Asthma Obesity Cancer 2.7 2005 2015
(% of population)

Market sizes of major corresponding therapies (INR b)


2005 Market size 2005 (Rs b) 2015 Market Size 2015 (Rs b)

137

83

82

24 10 Coronary heart disease Diabetes

22

Respiratory

Source: Industry/MOSL

India: Therapeutic trend (2000 to 2010) Historically, in the Indian pharma market, the acute ailments therapy segment was the largest in terms of sales, although it experienced slower growth rates than some of the chronic therapies. Nevertheless, almost all therapy areas experienced double-digit growth over the 2000-10 period. This is attributed to the preceding three As - Affordability, Access and Awareness. Among key therapies, anti-diabetics was the fastest growing in terms of sales with CY00-10 CAGR of 19.6% followed by CVS (cardiovasculsar system) at 15%. In terms of therapeutic segment market share, both anti-diabetics and CVS gained ~2.5% share each over CY00-10, whereas anti-infectives and vitamins & minerals lost 2% share each.
Trend in major therapeutic segments
Market Size (Rs b) 12.0 2000-10 CAGR (%) 15.2 9.9 9.1 10.9 11.3 11.8 14.4 19.6

Indian pharma market therapeutic mix (2000)


Antidiabetic Others 12% 3% Antiinfectives 18% Gastroin testinal 10%

CNS 5%

10.8

Dermatology 6%

80 Antiinfectives

51 Gastrointestinal

41 Respiratory

36 Vitamins/Minerals

40 Pain/Analgesic

53 Cardiac

26 Gynaecology

25 Dermatology

26 CNS

27 Antidiabetic
Gynaecology 6% Pain/ Analgesic 10% Vitamins/ Minerals 10%

Respiratory 11%

Cardiac 9%

Indian pharma market therapeutic mix (2005)


Antidiabetic 4% CNS 7% Dermatology 5% Gynaecology 3% Others 8% Antiinfectives 21% Gastrointestinal 11%

Indian pharma market therapeutic mix (2010)


Antidiabetic 6% CNS 6% Dermatology 5% Pain/ Analgesic 9% Others 13% Antiinfectives 16% Gastrointestinal 11%

Respiratory 9% Cardiac 11% Vitamins/ Minerals 8%


Source: Industry/MOSL

Cardiac 10%

Pain/ Analgesic 9%

Vitamins/ Minerals 13%

Respiratory 9%

Gynaecology 6%

August 2011

16

Domestic Formulations | New Peaks

CVS, Diabetes, CNS and Anti-infectives will be the high potential segments We believe that CATS like Cardiovascular (CVS), Diabetes, Central Nervous System (CNS) will account for a major chunk of the incremental market over the next 5 years. Also, with rising income levels in the rural areas, anti-infectives will also record good growth over the same period. We believe these four will be the key segments of the future, and garner more than 50% of the delta in the Indian formulations market, 2015 over 2010. We juxtaposed the incremental opportunity of various therapeutic segments against the number of existing players in each of these segments, to arrive at the following plot.
CVS, Anti-infectives, Diabetes and CNS are large segments with relatively fewer players
Increm ental m kt size (INR b) 2010-15E 0 20 40 60 Diabetes AF - 396 80 100

Top 4 ailment segments are mainly based on Attractiveness Factor, which is highest for CVS, Diabetes, Antiinfectives and CNS in that order

0 10 No. of Players 20 30 40 Dermatology Respiratory AF - 147 Pain GI AF - 109 CNS AF - 215 AI AF - 337 CVS AF - 400

Gynaecology Vitamins

Note: AF is Attractiveness Factor of segment, which is defined by the incremental size of the opportunity per player

Source: Industry/MOSL

Our key conclusions from this chart: 1. As discussed before, CVS, Anti-infectives, Diabetes and CNS will record maximum share of incremental market (the size of bubble indicates this). 2. We also note that the attractiveness factor (i.e. incremental segment market size divided by number of players) is most favorable for these segments. 3. Hence, companies which enjoy strong positioning in these segments will be able to generate maximum value from their respective domestic formulations businesses.

August 2011

17

Domestic Formulations | New Peaks

4 Buys
Cipla, Lupin, Torrent and GSK Pharma
Having identified the most attractive ailment segments, we have adopted two approaches to arrive at our top plays on India's domestic formulations Approach 1: 3-screen shortlisting process as follows: Screen #1 - Identify companies with dominating presence in high-potential ailment segments Screen #2 - Of the above, exclude companies with unfavorable non-domestic business Screen #3 - Juxtapose the Screen #2 surviving companies vis--vis earnings growth and valuation Approach 2: MEDICINES score, based on nine key success factors for picking domestic formulation stocks The final list from both the approaches is - Cipla, Lupin, Torrent and GSK Pharma. Approach 1: 3-Screen shortlisting process

Screen #1

Presence in high potential segments

Identify companies with dominating presence in high-potential ailment segments The chart below maps the positioning of pharmaceutical players in the key therapeutic segments of CVS, Diabetes, anti-infectives and CNS. We have plotted the dominance of each player in these respective segments using prescription market share as the key measure of dominance. Given the fragmented nature of the Indian formulations market, we have defined 5% as the minimum threshold market share which qualifies as high dominance while market share of between 3-5% qualifies as medium category.

Company mapping with respect to therapeutic classes


Sun Pharma, Torrent, Cadila, Cipla, Unichem, Ranbaxy, Lupin Aventis, U S V, Emcure, Piramal, Dr Reddy's, Intas, Micro Labs IPCA Labs, AstraZeneca, Pfizer Abbott, U S V, Aventis, Sun Pharma Ranbaxy, Alkem, Aristo, Cipla, GSK Pharma, Piramal Alembic,Mankind, FDC, Macleods, Lupin Sun Pharma, Intas, Torrent, Abbott, Piramal Cipla, GSK Pharma

High

Dominance

Medium

Eli Lilly, Piramal, Micro Labs, Lupin

Aventis, Ranbaxy, Unichem, Micro Labs

Cadila, Piramal, Ranbaxy

Panacea, Ranbaxy

Novartis, Cipla, Lupin

Low

Pfizer, Mankind, Dr Reddy's, Sun Pharma, Glenmark, Biocon Others Source: MOSL

CVS

Diabetes

Anti-infectives

CNS

Companies in bold have been covered in this report

August 2011

18

Domestic Formulations | New Peaks

Sun, Cipla, Lupin, Abbott, GSK best placed to capture the opportunity We note that these companies are best placed to capture the incremental opportunity in the high-growth life-style and anti-infectives segments by virtue of: 1. Strong presence in these key segments 2. High prescription market share of at least 5% 3. Brand-building ability of these companies Ranbaxy, Cadila and Aventis also reasonably well placed These companies are also relatively well placed in the Indian formulations market and form the 2nd-tier of companies which should be focused on as participants in this large opportunity. Dr. Reddy's & Glenmark need to further strengthen their positioning The chart above indicates that DRL and Glenmark have a lot of catching-up to do to qualify as companies which will be able to exploit the large opportunity in the domestic formulations business. These companies suffer from relatively lower prescription market share in the high growth therapeutic segments.

Screen #2

Non-domestic business

Most Indian companies are not pure-plays; view on non-domestic business is also important It is well-known that most Indian pharmaceutical companies are not pure-plays on the domestic opportunity given their strong focus on international generic businesses. Hence, it becomes imperative to map the domestic and the non-domestic businesses of these companies to take an overall view on these companies. The chart below depicts the matrix of these two businesses:
Company mapping relative to the attractiveness of domestic and international business
Favourable
International Business

Dr Reddy

Sun Pharma, Cipla, Lupin, Cadila, Torrent Pharma Ranbaxy, GSK Pharma

3 of our 4 top picks are favorably placed in both their domestic and international businesses

Neutral

Glenmark Pharma

Unfavourable

Note: Only companies covered in this report have been mapped

Unfavourable

Neutral Domestic Business

Favourable

Source: MOSL

Screen #3
Earnings growth v/s Valuation

Juxtapose the Screen #2 shortlisted companies vis--vis earnings growth and valuation We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR and FY11 P/E as depicted below. Based on the same, the top picks are Cipla, Lupin and Torrent.
19

August 2011

Domestic Formulations | New Peaks

Earnings growth v/s Valuation: Cipla, Torrent, Lupin on top ...


40
FY11 P/E (x) Ranbaxy (53%, 65x)

... GSK merits rich valuation due to superior return ratios


RoCE (%) Adj. RoCE (%)
Very high due to -ve capital employed

GSK 30 Dr Reddy 20 Cadila Lupin Cipla

Sun
25 22 7 16 DRL 13 Cadila GSK Ranbaxy Lupin 28 23 47 27

26 14 15 Glenmark
S

Glenmark
22

16 17 Cipla

19

25

Torrent 10 10.0
Sun

14.0

18.0 22.0 FY11-13E EPS CAGR (%)

26.0

30.0

Note - Adj. RoCE - RoCE adjusted for other income in P&L and Cash in Balance sheet RoCE and Adj. RoCE are average of FY11-13

Source: MOSL

Approach 2: The MEDICINES score We have identified nine key success factors (KSFs) for shortlisting Indian pharma companies and their stocks. These success factors correspond to the initials of the word "MEDICINES". We have rated the companies on these KSFs to arrive at a final "MEDICINES Score" out of a maximum possible 100. The companies with the highest MEDICINES Score are the most attractive investment ideas. We have considered the following KSFs for evaluating the domestic formulations business (see box on page 21 for explanation). Our MEDICINES Scorecard is given below.

MEDICINES
Measures

M E D I C I N E S

Mix & Market share Equity with doctors Distribution & reach Introductions CAGR & scale-up Improvement in MR productivity Non-domestic business Earnings growth Stock attractiveness

Indian domestic pharma players: The MEDICINES scorecard


M E D I C I N E Total

4 of the top 5 MEDICINES score companies correspond with Approach 1. We are Neutral on Sun only due to rich valuations

Sun Cipla GSK Pharma ** Lupin Torrent Pharma Cadila Dr. Reddy's Labs Glenmark Ranbaxy ** GSK Pharma score

7 6 4 5 6 6 4 2 6 pro-rated

9 8 6 9 9 7 8 6 6 7 9 7 3 6 9 6 6 6 8 5 7 6 5 6 3 7 7 5 6 5 6 6 4 6 2 3 5 6 6 5 5 7 5 6 3 as rating for Non-domestic business is not

7 9 5 7 6 6 6 6 8 6 6 7 5 3 9 5 3 applicable

13 77 14 66 14 64 14 62 14 61 12 60 12 52 10 49 9 49 Source: MOSL

4 buys: Cipla, Lupin, Torrent, GSK Pharma 4 of the top 5 MEDICINES score companies correspond with Approach 1. Thus, combining both Approaches 1 and 2, our top picks are Cipla, Lupin, Torrent and GSK Pharma. We are Neutral on Sun Pharma only due to rich valuations.
August 2011

Torrent

20

Domestic Formulations | New Peaks

MEDICINES Score - Criteria & rating methodology


We briefly explain below the KSFs and the rating criteria. M - Mix & Market share Maximum score: 10 C - CAGR and scale-up Maximum score: 10

Mix & Market share indicates the therapeutic mix for the company in the domestic formulations market. We have identified life-style segments (CVS, Diabetes & CNS) and Anti-infectives as the most attractive segments for driving future growth and profitability. Companies with strong presence in these segments will be rated higher. E - Equity with doctors Maximum score: 10

CAGR & scale-up captures the past and future growth in the domestic formulations portfolio driven by various factors like therapeutic mix, brand equity, productivity of sales force, new launches, etc. Companies with consistent high growth are rated higher. I - Improvement in MR productivity Max. score: 10

Equity with doctors implies the brand equity which the company enjoys with doctors. We have used prescription market share and prescription rankings as the proxy to measure brand equity with doctors. Companies with higher prescription share and better prescription rankings are rated higher. D - Distribution & reach Maximum score: 10

MR (medical representative) productivity captures the ability of a company to drive growth in its domestic formulations portfolio through improvement in productivity of the sales force (measured as Sales/MR). Companies with consistently high or improving sales force productivity are rated higher. N - Non-domestic business Maximum score: 10

This captures our view on the other businesses of the company including one-off option values. Companies expected to do well in these businesses are rated higher. E - Earnings growth Maximum score: 10

This measures the distribution strength of a company in terms of its presence in metros, Tier-I cities, towns, and rural areas. Companies with wider distribution reach in relevant geographies are rated higher. I - Introductions Maximum score: 10

We have considered overall earnings growth, and not just from the domestic business. Companies with high longterm earnings growth (FY05-13) are rated higher. S - Stock Attractiveness Maximum score: 20

Introductions measures the ability of a company to drive sales from new launches in the Indian formulations market (since this is an important growth contributor for most Indian companies). Companies with higher contribution from new launches are rated higher.

Stock attractiveness has a higher weight of 20 compared to others, and captures our view on the stock including issues such as depth of management, corporate governance, return ratios, and valuations. Companies with favorable outlook are rated higher.

August 2011

21

Domestic Formulations | New Peaks

Detailed MEDICINES Score


MEDICINES Score 77 66 62 61 64 60 52 49 49 Mix Chronic therapy contribution (%) 61 42 43 62 5 31 28 24 21 Equity with doctors Score 7 6 5 6 4 6 4 2 6 Comment Leader in CNS, Gynaec and 2nd in CVS, Anti-diabetics Market leader in AI and Respiratory Leader in Anti-TB segment Ranks 2nd in CNS and 7th in CVS Market leader in Derma, Vit and Pain Mgmt Among top 3 players in CVS and GI Ranks 3rd in GI and Pain Mgmt Ranks 2nd in Dermatology Among the leaders in AI and Dermatology Score 9 7 6 7 9 7 6 3 5

Sun Cipla Lupin Torrent Pharma GSK Pharma ** Cadila Dr. Reddy's Glenmark Ranbaxy

Distribution & reach Metro/Tier I MR strength Score (% of sales) 73 2,600 8 Sun 63 5,100 8 Cipla 70 3,682 6 Lupin 3,600 6 Torrent Pharma 73 2,500 7 GSK Pharma ** 60 65 4,500 7 Cadila 68 3,165 6 Dr. Reddy's 70 2,078 5 Glenmark 66 4,500 7 Ranbaxy

In last 4 years 124 304 266 151 21 197 89 105 255

Introductions Contbn to growth (%) 56 45 69 49 15 37 31 52 50

CAGR & Scale-up (%) - Sales Score 6 6 6 5 3 5 4 6 5 FY05-11 23 14 22 19 8 12 18 19 10 FY11-13 18 13 19 18 14 15 16 17 16 Score 9 6 8 6 6 6 6 6 6

Improvement in productivity (Sales/MR, INR m) 2004 2010 Score Sun 3.2 7.8 9 Cipla 4.8 4.9 7 Lupin 3.6 3.6 5 Torrent Pharma 1.5 2.3 3 GSK Pharma ** 6.5 7.1 9 Cadila 4.1 3.6 5 Dr. Reddy's 3.6 3.2 2 Glenmark 3.1 3.6 5 Ranbaxy 4.6 3.6 3

Non domestic business Favorability Score High 7 Medium 5 High 6 High 6 Not applicable N.A. High 6 High 7 Low 3 Medium 5

Earnings Growth (FY11-13) Comment (%) Score 22 9 21 7 13 6 22 8 16 6 21 6 12 5 24 9 55 3

Stock attractiveness Comment Score Neutral 13 Top pick 14 Top pick 14 Top pick 14 Buy 14 Neutral 12 Neutral 12 Neutral 10 Sell 9

** GSK Pharma total MEDICINES score pro-rated as rating for Non-domestic business is not applicable

Domestic formulations companies - Comparative valuations (INR)


Company Target Upside (CMP) Price (%) Top Picks Cipla (281) 361 28 Lupin (450) 514 14 Torrent (589) 762 29 GSK (2,155) 2,330 8 Others Sun (464) 524 Cadila (824) 907 DRRD* (1,446) 1,670 Glenmark (318) 310 Ranbaxy ## (468) 412 * Dr. Reddy's ## - Adjusted for Rs77/sh of August 2011 13 10 15 -3 -12 FY11 12.0 19.3 31.9 68.6 13.6 30.9 65.6 12.5 25.8 EPS (INR) FY12E FY13E 13.4 22.3 40.1 77.5 17.3 28.3 68.6 16.1 11.9 16.4 25.7 47.6 89.6 20.9 41.1 81.1 19.7 16.7 FY11 23.3 23.3 18.4 31.4 34.2 26.6 21.6 25.5 15.2 P/E (X) FY12E FY13E 21.0 20.2 14.7 27.8 26.8 29.1 20.7 19.7 33.0 17.1 17.5 12.4 24.1 22.2 20.0 17.5 16.1 23.3 EV/EBITDA (X) FY11 FY12E FY13E 17.4 19.5 12.4 21.9 22.4 17.2 16.7 17.7 11.1 14.5 16.8 9.6 20.2 20.8 17.2 17.1 10.4 23.0 12.1 13.8 8.0 17.2 16.7 14.0 14.4 11.1 18.5 FY11 14.5 29.3 29.2 30.1 16.2 37.5 24.1 17.4 19.4 ROE (%) FY12E FY13E 14.4 27.1 29.3 31.3 17.7 27.3 22.5 17.0 11.4 15.6 25.7 27.7 33.4 18.5 27.6 23.5 17.1 10.4

DCF value of FTF; Dr. Reddy's Labs & Ranbaxy core valuations adjusted for DCF value of Para-IV upsides

22

Domestic Formulations | New Peaks

Ailment Profiles

Ailments
Infection CVS Disease Diabetes CNS Diseases Pain Gastro-intestinal (GI) Problems Respiratory Diseases

August 2011

23

Domestic Formulations | New Peaks


Ailment & Therapy profile

Infection
Ailment snapshot
An infection is the colonization of a host organism by a parasite species. Infecting parasites seek to use the host's resources to reproduce, often resulting in disease. Colloquially, infections are usually considered to be caused by microscopic organisms or microparasites like viruses, prions, bacteria, and viroids, though larger organisms like macroparasites and fungi can also infect. Hosts normally fight infections themselves via their immune system. Mammalian hosts react to infections with an innate response, often involving inflammation, followed by an adaptive response. Pharmaceuticals can also help fight infections.

Anti-infectives
Therapy snapshot
Anti-infective drugs are used to suppress/cure the infection. Four types of anti-infective or drugs exist: antibacterial (antibiotic), antiviral, antitubercular, and antifungal. Depending on the severity and the type of infection, the antibiotic may be given by mouth, injection or may be applied topically. Severe infections of the brain are usually treated with intravenous antibiotics. Sometimes, multiple antibiotics are used to decrease the risk of resistance and increase efficacy. Antibiotics only work for bacteria and do not affect viruses. Antibiotics work by slowing down the multiplication of bacteria or killing the bacteria.

Key Drugs
Penicillins, Cephalosporins, Aminoglycosides, Macrolides, Quinolones, Tetracyclines
Anti-infectives Segment (2001-10 CAGR - 12.4%)
Segment Size (INR B) 20 19 18 29 28 47 Contribution to Industry (%) 80 70 61 18 17

Key Brands
Augmentin - GSK, Zifi - FDC, Taxim - Alkem, Mox - Ranbaxy Azithral - Alembic
Anti-infectives Segment - Prescription Rankings
Company Cipla Mankind Ranbaxy FDC Piramal (Abbott) Macleods Unbranded Alkem Alembic GSK Jan-07 1 5 2 3 7 10 6 8 4 9 Jan-08 1 4 2 3 7 10 6 8 5 9 Jan-09 1 4 3 2 5 10 7 8 6 9 Jan-10 1 3 2 4 5 9 7 8 6 10 Oct-10 1 2 3 4 5 6 7 8 9 10

17

2000

2001

2005

2008

2009

2010

Anti-infective segment - Value market share (%) - 2010


Ranbaxy, 10.8 Alkem, 10.5 Aristo, 7.3 Macleods, 4.8 Alembic, 5 FDC, 5.1 Mankind, 5.6 Cipla, 6.7 GSK, 6 Piramal (Abbott), 5.7

Anti-infective segment-prescription market share (%) - 2010


Cipla, 8.4 Mankind, 8.3 Ranbaxy, 7.8 Others, 44.8 FDC, 7.1 Piramal (Abbott), 5.4 Macleods, 4.5 Alkem, 4.0 Alembic, 4.0
Source: Industry/MOSL

Others, 32.5

Aristo, 2.8 GSK, 2.9

August 2011

24

Domestic Formulations | New Peaks


Ailment & Therapy profile

CVS Disease
Ailment snapshot
Cardiovascular disease are the class of diseases that involve the heart or blood vessels (arteries and veins).While the term technically refers to any disease that affects the cardiovascular system, it is usually used to refer to those related to atherosclerosis (arterial disease). These conditions usually have similar causes, mechanisms, and treatments. In practice, cardiovascular disease is treated by cardiologists, thoracic surgeons, vascular surgeons, neurologists, and interventional radiologists, depending on the organ system that is being treated.

CVS Drugs
Therapy snapshot
Cardiovascular medications are used as a means to control or to prevent certain forms of heart disease. Many people with advanced heart disease may take several of these drugs. Types of cardiovascular drugs may be broken into groups depending upon their action or what they treat. Categories that might describe drug actions include the following: statins (for cholesterol), diuretics (for blood pressure), anticoagulants (for blood thinning), anti-platelet (for removing bold clots), beta-blockers (for preserving normal heart rhythm after a heart attack and for lowering high blood pressure), digitalis drugs (for cardiac failure), vasodilators (for facilitating blood supply to the heart), calcium channel blockers (for angina & high blood pressure) and ACE inhibitors (for high blood pressure).

Key Drugs
Angiotensin II Receptor Blockers, Angiotensin-Converting Enzyme (ACE) Inhibitors, Antiarrhythmics, Antiplatelet
CVS Segment (2001-10 CAGR - 15.9%)
Segment Size (INR B) 10 9 9 11 11 Contribution to Industry (%) 11

Key Brands
Storvas - Ranbaxy, Cardace - Sanofi, Aten - Cadila, LosarH - Unichem, Minipress-XL - Pfizer
CVS Segment - Prescription Rankings
Company USV Sun Piramal (Abbott) Cipla Lupin Torrent Zydus-Cadila Sanofi Unichem Micro Labs Jan-07 1 2 4 5 9 8 3 7 6 11 Jan-08 1 2 4 5 7 8 3 6 9 10 Jan-09 1 2 3 4 7 6 5 9 8 10 Jan-10 1 2 3 4 6 5 7 9 8 11 Oct-10 1 2 3 4 5 6 7 8 9 10

38 24 13 2000 14 2001 2005 2008

45

53

2009

2010

CVS Segment - Value market share (%) - 2010


Sun, 7.1 Others, 41.1

CVS Segment - Prescription market share (%) - 2010


USV, 9.3

Torrent, 6.8 ZydusCadila, 6.5 Unichem, 6.2 Cipla, 5.9 Ranbaxy, 5.8 Lupin, 5.6 USV, 5.1

Sun, 6.8 Piramal (Abbott), 5.3 Others, 48.2 Cipla, 5.1 Lupin, 5.0 Torrent, 4.6 ZydusCadila, 4.5 Sanofi, 4.0
Source: Industry/MOSL

Emcure, 4.8 Sanofi, 5.1

Micro Labs, 3.3

Unichem, 4.0

August 2011

25

Domestic Formulations | New Peaks


Ailment & Therapy profile

Diabetes
Ailment snapshot
Diabetes mellitus, often simply referred to as diabetes, is a group of metabolic diseases in which a person has high blood sugar, either because the body does not produce enough insulin, or because cells do not respond to the insulin that is produced. There are three main types of diabetes: Type 1 diabetes: results from the body's failure to produce insulin, and presently requires the person to inject insulin. Type 2 diabetes: results from insulin resistance, a condition in which cells fail to use insulin properly, sometimes combined with an absolute insulin deficiency. Gestational diabetes: is when pregnant women, who have never had diabetes before, have a high blood glucose level during pregnancy. It may precede development of type 2 diabetes.

Anti-diabetic
Therapy snapshot
Anti-diabetic medications treat diabetes mellitus by lowering glucose levels in the blood. With the exceptions of insulin, exenatide, and pramlintide, all are administered orally. There are different classes of anti-diabetic drugs, and their selection depends on the nature of the diabetes, age and situation of the person, as well as other factors. Type 1 diabetes can only be controlled with the help of injected insulin. Type 2 diabetes treatments include (1) agents which increase the amount of insulin secreted by the pancreas (Secretagogues), (2) agents which increase the sensitivity of target organs to insulin (Insulin sensitizers), and (3) agents which decrease the rate at which glucose is absorbed from the gastrointestinal tract (Alpha-glucosidase inhibitors).

Key Drugs
Insulin, Alpha-glucosidase inhibitors, Glimepiride, Insulin sensitizers, Secretagogues
Diabetes Segment (2001-10 CAGR - 17.8%)
Segment Size (INR B) Contribution to Industry (%) 5.3 4.0 3.3 27 18 5 2000 6 2001 10 22 4.3 5.4 5.8

Key Brands
Human Mixtrad - Novo, Lantus - Sanofi, Glycomet GP USV, Novomix - Novo, Amaryl - Sanofi
Diabetes Segment - Prescription Rankings
Company USV Sun Abbott Sanofi Micro Labs Lupin Franco Piramal (Abbott) Eris Glenmark Jan-07 1 2 3 4 5 8 7 6 NA 9 Jan-08 1 2 3 4 7 8 6 5 NA 9 Jan-09 1 2 3 6 7 8 5 4 NA 9 Jan-10 1 2 3 4 6 8 7 5 12 10 Oct-10 1 2 3 4 5 6 7 8 9 10

2005

2008

2009

2010

Diabetes Segment - Value market share (%) - 2010


Others, 29.6 Abbott, 20

Diabetes Segment - Prescription market share (%) - 2010


USV, 14.2 Sun, 7.8 Others, 40.9

USV, 12.4 Franco, 2.7 Wockhardt, 3.2 MSD, 3.2 Lupin, 3.8 Micro Labs, Piramal (Abbott), 4 4.2 Sanofi, 9.1 Sun, 7.8 Glenmark, 2.9 Eris, 3.3

Abbott, 6.6 Sanofi, 5.2 Micro Labs, 5.2 Lupin, 4.9 Piramal (Abbott), 4.5 Franco, 4.6

Source: Industry/MOSL

August 2011

26

Domestic Formulations | New Peaks


Ailment & Therapy profile

CNS Diseases
Ailment snapshot
A central nervous system disease can affect either the spinal cord (myelopathy) or brain (encephalopathy), both part of the central nervous system. The central nervous system controls behaviors in the human body, so this can be a fatal illness. Common CNS diseases include Encephalitis, Meningitis, Alzheimer's disease, Parkinson's disease, Multiple sclerosis and depression.

CNS Drugs
Therapy snapshot
The key central nervous system drugs obtainable in the market are antidepressant, ergot derivative, sedative, antipsychotic, benzodiazepine and antiemtic. Out of the whole central nervous system drugs market; antidepressants, antipsychotics and anti epileptics are the largest growing segments.

Key Drugs
Phenytoin sodium, Mecobalamin, Gabapentin, Citalopram, Alprazolam.
CNS Segment (2001-10 CAGR - 14.4%)
Segment Size (INR B) Contribution to Industry (%) 5 6

Key Brands
Eptoin - Abbott, Nurokind Plus - Mankind, Vertin - Solvay Alprax - Torrent, Trika - Unichem
CNS Segment - Prescription Rankings
Company Sun Intas Torrent Piramal (Abbott) UCB Micro Labs Local companies Unichem Abbott Wockhardt Jan-07 1 3 2 5 6 7 NA 4 9 10 Jan-08 1 3 2 4 6 7 NA 5 9 10 Jan-09 1 3 2 4 5 7 12 6 9 10 Jan-10 1 2 3 4 5 6 8 7 9 11 Oct-10 1 2 3 4 5 6 7 8 9 10

5 4 3 4

27 18 5 2000 6 2001 10 22

2005

2008

2009

2010

CNS Segment - Value market share (%) - 2010


Others, 24.2 Sun, 20.7

CNS Segment - Prescription market share (%) - 2010


Sun, 12.1 Intas, 8.2 Others, 43.7 Torrent, 8.1

Micro Labs, 3.5 Ranbaxy, 3.8 Unichem, 3.9 Pfizer, 4.2 Sanofi, 4.8

Intas, 12.2
Piramal (Abbott), 5.5

Torrent, 8.6 Piramal (Abbott), 6.5


Cipla, 2.9

UCB, 5.0 Micro Labs, 4.2

Abbott, 7.6

Wockhardt, 3.1

Abbott, 3.5

Unichem, 3.8

Source: Industry/MOSL

August 2011

27

Domestic Formulations | New Peaks


Ailment & Therapy profile

Pain
Ailment snapshot
Pain, by itself, is not a disease, but is an indicator of temporary or long-lasting damage to the human body. It is a major symptom in many medical conditions. Pain is usually transitory, lasting only until the noxious stimulus is removed or the underlying damage or pathology has healed, but some painful conditions, such as rheumatoid arthritis, peripheral neuropathy, cancer and idiopathic pain, may persist for years. Pain that lasts a long time is called chronic, and pain that resolves quickly is called acute. Acute pain is usually managed with medications while management of chronic pain, is much more difficult and may require the coordinated efforts of doctors, physiotherapists along with medicines.

Pain/NSAIDS Drugs
Therapy snapshot
The key pain management drugs obtainable in the market are aSalicylates (like Aspirin), Propionic acid derivatives (like Ibuprofen, Naproxen), Acetic acid derivatives (like Diclofenac), Oxicam derivatives, Fenamates, Cox-2 Inhibitors, Sulphonanilides.

Key Drugs
Salicylates, Propionic acid derivatives, Acetic acid derivatives, Oxicam derivatives, Fenamates, Cox-2 Inhibitors, Sulphonanilides
Pain/NSAIDS Segment (2001-10 CAGR - 11.2%)
Segment Size (INR B) 10.0 9.3 9.0 8.7 8.7 8.6 Contribution to Industry (%)

Key Brands
Voveran - Novartis, Calpol - GSK, Spamo-Proxyvon Wockhardt, Combiflam - Sanofi, Volini - Ranbaxy
Pain/NSAIDS Segment - Prescription Rankings
Company GSK Generic-generics Dr. Reddy's Micro Labs Local Companies Cipla Ipca Mankind Alkem Sanofi Jan-07 1 2 3 9 NA 4 11 15 7 6 Jan-08 1 2 3 9 NA 5 11 12 8 4 Jan-09 2 1 3 8 11 5 12 9 10 4 Jan-10 2 1 3 7 4 5 10 6 12 9 Oct-10 1 2 3 4 5 6 7 8 9 10

14 2000

16 2001

21 2005

30 2008

35 2009

40 2010

Pain/NSAIDS Segment - Value market share (%) - 2010


Novartis, 7.2 Ranbaxy, 7 GSK, 6.4 Alkem, 5.8 Others, 47.5 Piramal (Abbott), 5.5 Sanofi, 4.6 Ipca, 4.3 Dr. Reddy's, 4

Pain/NSAIDS Segment - Prescription market share (%) - 2010


GSK, 7 Dr. Reddy's, 4.1 Micro Labs, 3.9 Cipla, 3.4 Ipca, 3.3 Mankind, 3.2 Alkem, 3.1 Sanofi, 3.0 Others, 63.5 Novartis, 2.7 Piramal (Abbott), 2.7
Source: Industry/MOSL

Elder, 3.7

ZydusCadila, 4

August 2011

28

Domestic Formulations | New Peaks


Ailment & Therapy profile

Gastro-intestinal (GI) Problems


Ailment snapshot
Diseases/problems related to the GI tract mainly affect the stomach and the intestines in humans. While the most common problems are acidity/ulcers, other more serious diseases include Cancer, Cholera, Colorectal cancer, Gastroenteritis, Inflammatory bowel disease, Irritable bowel syndrome, Pancreatitis, Peptic ulcer disease, Gastroesophageal reflux disease (GERD), etc. While some of these problems are temporary in nature and can be cured by medicines, diet alterations, etc., many of these problems are chronic in nature and generally require longterm treatments by way of medicines and gastroenterologists consultations.

GI Drugs

Therapy snapshot
The key GI drugs obtainable in the market are Antacids, Anti-reflux agents, Antiulcerants, GIT regulators, Antiflatulents, Anti-inflammatories, Anti-spasmodics, Laxatives, Purgatives, Digestives, Anti-emetics

Key Drugs
Antacids, Anti-reflux agents, Antiulcerants, GIT regulators Antiflatulents, Anti-spasmodics, Laxatives, Purgatives
GI Segment (2001-10 CAGR - 17.1%)
Segment Size (INR B) 11.3 8.0 10.6 Contribution to Industry (%) 10.8 10.9 11.1

Key Brands
Zinetac - GSK, Omez - DRL, Digene - Abbott, Aciloc Cadila, Gelusil MPS - Pfizer
GI Segment - Prescription Rankings
Company Mankind Cadila Dr. Reddy's JB Chem Torrent Local Companies Piramal (Abbott) Alkem Generic-generics Jan-07 2 1 5 3 7 NA 6 13 9 Jan-08 1 2 3 4 6 NA 5 11 8 Jan-09 1 2 4 3 5 14 6 10 7 Jan-10 1 2 4 3 6 5 7 9 8 Oct-10 1 2 3 5 6 7 8 9 10

17 2000

12 2001

24 2005

37 2008

43 2009

51 2010

GI Segment - Value market share (%) - 2010


Abbott, 7.2 ZydusCadila, 6.5 Dr. Reddy's, 5.6 Alkem, 5.3 Mankind, 5.2 Sun, 4.7 Aristo, 4.6 Piramal (Abbott), 3.8

GI Segment - Prescription market share (%) - 2010


Mankind, 6.9 Cadila Pharma, 4.5 Dr. Reddy's, 4.4 ZydusCadila, 4.2 JB Chem, 4.0 Torrent, 3.6 Piramal (Abbott), 3.5 Alkem, 3.4 Sun, 2.7 FDC, 2.9
Source: Industry/MOSL

Others, 49.9

Others, 60.1

Torrent, 3.6

Ranbaxy, 3.6

August 2011

29

Domestic Formulations | New Peaks


Ailment & Therapy profile

Respiratory Diseases
Ailment snapshot
Respiratory disease is the term for diseases of the respiratory system. These include diseases of the lung, pleural cavity, bronchial tubes, trachea, upper respiratory tract and of the nerves and muscles of breathing. Respiratory diseases range from mild and self-limiting such as the common cold to chronic diseases like asthma/ COPD and life-threatening such as bacterial pneumonia or pulmonary embolism. They are a common and important cause of illness and death.

Respiratory Drugs
Therapy snapshot
The key Respiratory Drugs obtainable in the market are Common cough & cold medicines, Corticosteroids, Bronchodilators, Mechanical ventilation.

Key Drugs
Common cough & cold medicines, Corticosteroids, Bronchodilators, Mechanical ventilation
Respiratory Segment (2001-10 CAGR - 11.4%)
Segment Size (INR B) 10.0 10.0 9.4 8.8 8.9 8.8 Contribution to Industry (%)

Key Brands
Corex - Pfizer, Phensedyl - Piramal (Abbott), Asthalin Cipla, Seroflo - Cipla, Aerocort - Cipla
Respiratory Segment - Prescription Rankings
Company Cipla Generic-generics Zydus-Cadila GSK Mankind Local Companies Centaur Labs Indoco Sanofi Alembic Jan-07 1 4 3 2 22 NA 7 8 9 6 Jan-08 1 4 3 2 22 NA 7 8 10 6 Jan-09 1 4 2 3 12 10 6 7 9 8 Jan-10 1 4 2 3 6 5 7 8 11 10 Oct-10 1 2 3 4 5 6 7 8 9 10

15 2000

16 2001

22 2005

30 2008

36 2009

41 2010

Respiratory Segment - Value market share (%) - 2010


Cipla, 22.1 Others, 33.3 Piramal (Abbott), 9.4

Respiratory Segment - Prescription market share (%) - 2010


Cipla, 6.1 ZydusCadila, 4.9

GSK, 4.9

Sanofi, 2.7 Glenmark, 2.8 Wockhardt, 3.2

Mankind, 3.6 Centaur Labs, 3.0 Indoco, 3.0 Sanofi, 2.8 Alembic, 2.7 Piramal (Abbott), 2.5 Dr. Reddy's, 2.6

Pfizer, 7.8 ZydusCadila, 5.4 GSK, 5.1

Others, 63.9

Alembic, 3.4

Lupin, 4.8

Source: Industry/MOSL

August 2011

30

Domestic Formulations | New Peaks

Annexure 1: Evolution of the market and state of the industry


Till 1970, due to product patent regime, multinational pharmaceutical companies dominated the domestic market and enjoyed 80% market share. However, with the introduction of process patent law in 1970, the scenario changed dramatically in the last 4 decades. Today the domestic market is dominated by Indian companies with market share of ~80%. During the same period, in the absence of product patent, many multinational companies exited the country while many others followed cautious approach in terms of new product launches. Dominance of local companies Domestic pharmaceutical companies are dominant in India. Due to strong chemistry skills, local companies have managed to garner ~80% market share in India. Currently, the market is a fragmented market with the largest player holding 7% market share. The presence of small and regional players has increased significantly over the years. Due to intensified competition, prices of the drugs in India are one of the lowest in the world. However, with the introduction of new product patent law in 2005 as per WTO commitment, MNCs have started focusing on Indian operations. Many MNCs have shown interest in expanding their presence in India through organic and inorganic growth means. We believe that, in the coming years, MNCs will see their market share increasing gradually on led by Patented product pipeline of parent, strong brand equity among physicians, strong financial muscles and increased focus of large MNCs on emerging markets as a next growth driver in light of dwindling revenues in developed countries.
Market share of MNCS in Emerging markets (%)
MNCs 21 23 Local

36 74 78

79

77

64 26 22 India
Source: McKinsey/MOSL

Poland

Russia

Brazil

China

August 2011

31

Domestic Formulations | New Peaks

Branded generic nature of the industry Indian pharmaceutical market is largely a branded generic market where the same molecule is sold by number of companies under different brand name. Nearly 80% of the Indian retail market is made up of branded generics while rest is distributed between OTC and generic drugs. Due to the branded generic nature of the business, trade power lies with the physicians. Here, the relationship and brand equity of the pharmaceutical companies with physicians is a key determinant of success. The share of branded generics is in India is higher that some of the other emerging markets. In Brazil and Russia, branded generics account for 60% and 40% of the market. We believe that, going forward the markets will be dominated by branded generic segment while patented products will contribute 10% to the market demand in 2015. Indian companies have large options for launch of new generics from the basket of pre-1995 drugs. (The total no of such products is more than 200). Further, domestic players have opportunity to develop new combination and formulation of the products that are already in the market. Also it is likely that a proportion of post 1995 molecules will not get full patent protection due to relatively narrow definition of patentability in the India patent act. Low pricing levels Prices of medicines in India are one of the lowest in the world. Prices of drugs in India are at around 10-12% of US prices and for some products, prices are lower than those in neighbouring countries such as Sri Lanka, Pakistan and Bangladesh. Severe competition has resulted in such low prices. On an average there are 50 brands for any major molecule. The level of specialization of molecule is important driver of pricing premium. We believe that with the reduction in competition going forward on back of consolidation in the industry and shift toward specialty therapy segments, prices are likely to stabilize at current levels if not improve.

August 2011

32

Domestic Formulations | New Peaks

Annexure 2: Regulatory framework of the Indian formulations industry


Product patent regime begun from 2005 India adopted product patent regime in 2005. Earlier, as per original Indian patent act 1970, patents were granted on the basis of process and not products, which helped to build the basis of a strong and competitive domestic pharmaceutical industry. Indian pharmaceutical industry had price control mechanism that helped to deliver medicines at affordable prices to patients in India. Further, the burden of proof in case of infringement was on the patent holder. However, due to WTO commitments, India made two important amendments to the patent act. The first amendment introduced the mailbox system to grant exclusive marketing rights to post 1995 patent holders in other markets. The second amendment extended patent term to 20 years and shifted the burden of proof to the patent infringer. In 2005, the new Indian patent act was introduced to grant product patents to pharmaceuticals. The act defines the scope of patentability and pre-grant, post-grant opposition provisions, compulsory licensing and regulatory data protection Patentability: The patent act established product patent protection for the period of 20 years. The act precludes salts, esters, isomers, polymorphs, metabolites, pure form, particle size, combinations, derivatives of know substances etc. from patent protection unless they differ significantly in efficacy, thus effectively restricting patentability only to the NCEs Pre and Post grant opposition: Both pre and post-grant opposition have been introduced allowing oral hearing. Opposition can be filed any time from the date of publication of the patent to the date of grant. This could result into several pre-grant oppositions being filed causing delay in patent granting process. Pre-grant oppositions have proven to be a big impediment to patent issuance in India. This allows anyone to file opposition patents on any of 11 potential grounds for 6 months after a patent application is published but before the patent is granted. India is the only country in the world with such a system. Multinational companies claim that domestic companies are using sequential filings to delay patents, and point to there being no mechanism to dismiss even the most frivolous oppositions. PhRMA reports than 200 pre-grant oppositions were pending as of early 2009 and most of these concerned pharmaceuticals (PhRMA, 2009). In addition, there is no mechanism for the applicant to respond and this is likely to be of significant concern to branded pharmaceutical companies.

August 2011

33

Domestic Formulations | New Peaks

Compulsory licensing: Under Paragraph 6 of the DOHA Declaration on TRIPS and Public Health (from 2001), India is permitted to use compulsory licenses under which the government forces a patent holder to grant use of a given product to the state. The patent holder will be entitled for compensation from licensee. CL will be available for export to developing countries such as in Africa which have insufficient or no manufacturing capacity in cases of national health emergencies. Thus Indian generics industry has benefited from compulsory licenses issued in other developing markets. Scope of compulsory licensing has been broadened to include affordability, non-working of patent etc. The Department of Industrial Policy and Promotion is considering developing new guidelines to enable the use of compulsory licensing beyond emergencies, such as in view of anti-competition law and high drug prices. This could threaten the companies in the long term, particularly if licenses are used in situations other than emergencies, suggesting they could be used more liberally. Regulatory data protection: Regulatory data protection is an integral part of IPR. Lack of the provision will be a disincentive to R&D based companies and innovators. The issue is in active consideration. Since the Patent Amendment Act of 2005, product in addition to process patents are recognized in India. However, from the perspective of the research-based drug industry, there are several problems with the IP environment in India. Pharmaceuticals are fighting to enforce patent linkage in India and meanwhile a string of product patent rejections have reduced confidence in the Indian market. Despite improvements to the patent legislation, issues over ever-greening mean that some brands may not necessarily receive patent protection in India - a move that is detrimental to branded players, but provides a significant opportunity for domestic generics manufacturers. So far certain drug classes, such as those that are viewed as expensive life-saving drugs, including cancer and HIV medication, have been most affected indicating for such drugs it may be more difficult to patent in India as the legal system is more likely to apply its discretion in the interpretation of the law and prevent those drugs from being patented. Roche was the first company to have a patent granted in India under the new patent regime in February 2006, a patent for Pegasus (paginated interferon alpha-2a) was granted. However, since then several different product patent applications for other drugs have been refused. Most recently, the Indian Patent Office rejected Roche's product patent for its new formulation of the cytomegalovirus infection treatment Calcite (valganciclovir). In August 2009, India rejected patent applications for Viread (tenofovir, Gilead) - a frontline drug against human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/ AIDS) in developing countries. Such patent rejections will undoubtedly lower confidence in the Indian market as such occurrences are no longer seen as isolated events. This indicates that certain drug classes, such as those that are viewed as expensive lifesaving drugs, including cancer and HIV medication, may be more difficult to patent in India as the legal system is more likely to apply its discretion in the interpretation of the law and prevent those drugs from being patented. This could have a significant impact on the pharmaceutical companies' choice of products to be marketed in India. However, it is not all bad news for pharmaceutical players, with some companies managing to emerge
August 2011

34

Domestic Formulations | New Peaks

from the patent system triumphant. In February 2008, Johnson & Johnson secured a key patent for its antiretroviral drug Intelence (etravirine), making it the second antiretroviral therapy to attain exclusivity in India after Pfizer's Selzentry (maraviroc). This strengthened the company's position in the Indian market, and is likely to have given the pharmaceutical industry in general some hope. Pricing regulations and role of NPPA National Pharmaceutical Pricing Authority (NPPA) is responsible for pricing decisions in India. This body falls under the Ministry of Chemicals and Fertilizers and was established in 1997. The NPPA is responsible for setting and regulating the prices of bulk drugs and monitoring the availability of treatments in the market to identify shortages and take remedial steps. The body also maintains data on exports and imports as well as market shares and the profitability of individual companies. NPPA regulates the prices of certain drugs/ formulations known as 'controlled bulk drugs', while also keeping a tab on the prices of drugs not in this list so that they are maintained at reasonable levels. Two main criteria are used for identifying controlled drugs: the drug should be of a mass consumption nature and there should be an absence of sufficient competition for the drug. As per the Drugs Prices Control Order (DPCO) of 1997, the NPPA is responsible for fixing and revising the prices of certain controlled bulk drugs and formulations. In 1970, the first DPCO was introduced, bringing in direct controls on the profitability of pharmaceutical businesses: a maximum of 15% pre-tax profit alongside an indirect control on prices. A revision introduced in 1979 established a price ceiling for certain controlled bulk drugs and formulations. This revision tried to regulate the retail prices by permitting a mark-up on ex-factory costs and around 370 drugs were implicated with direct price controls, a measure that affected 80% of the companies in the market. The subsequent revisions to the legislation reduced the number of controlled drugs to 142 in 1987, 76 in 1995 and 74 in 1997. Pricing: The DPCO fixes ceiling price for some of the APIs and formulations. The APIs and formulations falling under the purview of the legislation are called scheduled drugs. The NPPA is responsible for the collection of data and study of pricing structures of APIs and formulations, and provides recommendation to the Ministry of Chemical and Fertilizers. Currently, 74 bulk drugs and the formulation thereof are under the preview of price control. Pricing of scheduled bulk drugs: Scheduled bulk drugs are allowed prices (excluding local taxes) that results in post tax return of 14% on net worth (share capital + free reserves - value of investments not related to bulk drug business), or a 22% return on capital employed (fixed asset + working capital). Vis--vis a new plant an internal rate of return based on long term marginal costing is allowed. For a bulk drug produced from the basic stage, a post tax return of 18% on net worth or a return of 26% of capital employed is allowed. The NPPA sanctions prices after reviewing detailed supporting calculations, and only when the approval is sanctions can players go ahead with the sale of the drug. Sanctioned prices can not be revised without prior approval. When there is one manufacturer of the bulk drug, the maximum sale price is fixed at 2/3rd of the cutoff level or weighted average price, depending upon the situation.
August 2011

35

Domestic Formulations | New Peaks

Pricing of scheduled formulations manufactured in India: Scheduled formulations are based on the formula: RP = (MC+CC+PM+PC) x (1+MAPE/100) + ED RP: Retail Price MC: Material Cost CC: Conversion Cost PM: Packaging Material PC: Packaging Charges MAPE: Maximum Allowable Post Manufacturing Expenses ED: Excise Duty MAPE is intended to cover all the costs incurred by a manufacturer after packing - that is, transport, manufacturer's profit, dealer/retailer's profit etc. As per current order MAPE should not exceed 100%. Local taxes are added on at the wholesaler/retailers level and are not part of retail price as above. Further, the margins earned by distributors and retailers are also regulated. The maximum margin that a distributor can take is 8% of the maximum retail price; the highest permitted margin is 16% for retailers. In the case of decontrolled drugs, the margin set for distributors is 10%, while for retailers it is 20%. The NPPA further ensures that manufacturers do not remove the price-controlled brands from the market so that essential medicines are still available for customers. In spite of these regulations, however, violations have been observed quite frequently. For instance, a study noted that companies market products with pricecontrolled ingredients without getting the price fixed by the NPPA, even though theoretically they are required to obtain an official price from the NPPA every time the price of the controlled ingredient is revised. Proposed new pharmaceutical policy The proposed pharmaceutical policy talks about bringing 354 essential drugs under the purview of the DPCO. Reportedly, this account for ~50% of the industry sales. The new policy is likely to allow MAPE of 150% with an additional 50% margin for the companies that invest sufficient on new drug research. Currently, there is lot of pressure being built on the government by players and key pharmaceutical associations to revoke the new draft, as the industry views this policy as regressive in nature. However, it is difficult to comment on the implications of the proposed price control order before the final verdict is in place. If implemented in the current form, the new policy will have significant adverse impact on the domestic formulations players.

August 2011

36

Domestic Formulations | New Peaks

Companies

Companies
Top buys Cipla Lupin Torrent Pharma GSK Pharma Others Sun Pharma Cadila Ranbaxy Dr. Reddy's Labs Glenmark

August 2011

37

Domestic Formulations | New Peaks

MEDICINES

CAPSULE

Cipla
CMP: INR281 TP: INR361

MEDICINES Score

66/100
CIPLA IN

Improving asset utilization


M: Mix 6/10

Buy
7/10

E: Equity with doctors

Cipla offers a balanced play on chronic and acute therapeutic segments. Cipla derives 42% revenue from chronic therapeutic areas and has a dominant presence in large segments like anti-infective and CVS. It has leadership position in the respiratory segment.

Cipla has strong brand equity in some of the largest therapeutic segments in the industry and ranks first in the respiratory segment, fourth in the anitinfective and fifth in the CVS segments. Based on prescription ranking, Cipla is the market leader in the anti-infective and respiratory segments and it is among the leaders in the pain management and CVS segments.

D: Distribution & reach

8/10

I: Introductions

6/10

Cipla derives 63% of its revenue from metros and tier-I cities. Distribution in metros and tier-I towns increased over time and Cipla is expanding its reach in tier-II to tier-VI towns. It has one of the largest field force in the industry with an MR strength of 5,100.

Cipla has been one of the most aggressive players in launching new products. It launched 76 new products a year over the past four years. The ramp-up in domestic formulations revenue has been driven by existing products and new launches over the past four years.

Stock info
Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) M.Cap. (INR b) M.Cap. (USD b) 802.9 381/275 2/3/0 225.6 4.9

Financial & valuation summary


Year End 03/10A 03/11A 03/12E 03/13E Net Sales PAT EPS EPS (INR M) (INR M) (INR) GR. (%) 56,057 63,145 69,193 79,041 10,050 9,671 10,760 13,177 12.5 12.0 13.4 16.4 25.0 -3.7 11.1 22.2 P/E (X) 22.4 23.3 21.0 17.1 P/BV (X) 3.8 3.4 3.0 2.7 RoE (%) 17.0 14.5 14.4 15.6 RoCE (%) 20.6 15.8 17.2 18.8 EV/ EV/ Sales EBITDA 4.0 3.6 3.3 2.8 16.4 17.4 14.5 12.1

Background

Cipla is a leading player in the domestic formulations market and has a presence across most therapeutic areas. The company also has robust exports to several markets including Europe, South Africa, Australia, US and the Middle East. Cipla's strategy for regulated markets (Europe and US) exports is built around supply tie-ups with global players.

August 2011

38

Cipla

Chairman Profile Barring the past two years, Cipla has been one of the most consistent performers amongst the Indian pharmaceutical companies. It was promoted by Dr K A Hamied and is currently managed by Dr Yusuf Hamied, the founder's son. Establishing a strong presence in India and emerging markets organically coupled with a low-risk conservative approach is his key achievement.

Chairman

C: CAGR and scale-up

6/10

I: Improvement in productivity

7/10

Cipla reported in line industry performance, posting revenue CAGR of 14% over FY05-11. The company scaled up the business rapidly over the years and gained market share from competitors, in certain key segments. We expect Cipla to post revenue CAGR of 12% over FY11-13, which is lower than the industry average, mainly due to a high base and intensifying competition in the anti-infection segment. Rapid scale-up in revenue will be difficult given the high base and sizable presence in highly competitive and slow growing acute segments.

Cipla did not improve its MR productivity over 200410 as sales growth was in line with MR additions. MR growth was 13.4% and revenue growth was 13.7% over 2004-10 Revenue per MR has been stagnant at INR4.9m over 2004-10 years. However, even at this level, productivity is above the industry average.

N: Non-domestic business

5/10

E: Earnings growth

7/10

We are positive on Cipla's international business, given its strong chemistry skills, large underutilized capacities and strong generic pipeline. Short-term performance may be muted until international regulatory authorities approve the new Indore SEZ. We expect the international business to post 13% revenue CAGR over FY11-13 led by 14% CAGR for formulation exports. Option values (approval for CFC-free inhalers and potential MNC contracts) can upgrade FY13 EPS.

We expect overall top-line CAGR of 12% over FY1113, leading to EPS CAGR of 17%. EPS growth is higher than top-line growth mainly due to our expectation of increased capacity utilization at Indore SEZ leading to better cost absorption.

S: Stock Attractiveness
Cipla has one of the most conservative managements among Indian pharma companies. Return ratios are muted pending utilization of significant capex over the past 2-3 years. Cipla is valued at 21.0x FY12E and 17.1x FY13E consolidated earnings. Reiterate Buy with a target price of INR361 (22x FY13E EPS) excluding potential upsides.
Stock performance (1 year)
Cipla 400 360 320 280 240 Aug-10 Sensex - Rebased

14/20

Nov-10

Feb-11

May-11

Aug-11

August 2011

39

Cipla

India formulations snapshot


Domestic formulations the largest business segment for Cipla : The domestic formulations business is the leading revenue contributor to Cipla's top-line though the contribution has fallen from 75% in FY01 to 44% in FY11. It is Cipla's most profitable segment, with EBITDA contribution estimated at 44%. This business grew at 14% CAGR over the past six years. EBITDA Contribution Non-DF EBITDA, 56% DF EBITDA,44%

Improving asset utilization


Balanced play on chronic and acute therapeutic segments
Cipla, a leading company in the domestic formulations space, has a strong presence in therapeutic segments such as AI, respiratory and CVS. Cipla has outperformed market growth over the past four years and has consistently improved its market share. Cipla offers a balanced play on lifestyle and acute therapeutic segments.

1. Mix:

6/10

Respiratory, AI, CVS, gynecology dominate sales The top four therapeutic segments, the respiratory, AI, CVS and gynecology segments, contribute ~70% of Cipla's domestic formulation revenue. Cipla is the market leader in two of the largest therapy segments, AI and respiratory segments, though dependence on AI has fallen over the years. Cipla derives 58% of its revenue from acute therapies and the rest from chronic therapeutic areas. Cipla's sizable presence in these segments makes it an attractive play in the domestic formulations business.
Cipla: Therapeutic break-up
Gynae cology 2% GI Pain FY01 3% Mgmt 6%

The largest Indian player in the industry Before Abbott took over Piramal Healthcare's domestic formulations business, Cipla was the leader in the domestic formulations market for a few years. Although Cipla occupies second position in the pharmaceuticals industry, it is the largest Indian company in the domestic formulations space. Cipla holds 5.24% market share in the pharmaceuticals industry , which has grown from 5.05% in 2006. It posted revenue of 14% CAGR over the past six years in line with the industry's CAGR of 14%. Market Share & growth

CVS 15%

Respira tory 29%

Dermatol ogy 3% HIV 3% Ophthal mology 3% Pain 4%

FY11

CNS 3%

Others 8%

Respirat ory 31%

AI 45%

GI 6% Gynaec 7%

CVS 12%

AI 20%

Source: Company/Industry/MOSL

2. Equity with doctors:

7/10

Mkt Share (%) Grow th (%) 16.2 5.1 13.3 5.1 16.5 5.3 19.8 13.4 5.3 5.2

Good brand equity with physicians; strong positioning in respiratory, AI, CVS segments Cipla has been a dominant player in the AI, respiratory and CVS segments, three of the largest therapeutic segments of the industry. Cipla ranks first in the respiratory segment and fourth in the AI segment with market shares of 22.1% and 6.7% respectively. It ranks fifth in the CVS segment with market share of 5.9%. In most of these segments, Cipla has grown in line with market growth over the past two years. In terms of the number of prescriptions written, Cipla ranks first in the AI and respiratory segments with a prescription market share of 8.4% and 6.1% respectively and it ranks fourth and sixth in the CVS and pain management segments with a prescription market share of 5.1% and 3.4% respectively. In the AI, respiratory and CVS segments Cipla has maintained or improved its market ranking but in the other therapeutic segments it has lost out on ranking.
40

2006 2007 2008 2009 2010

August 2011

Cipla

Market share in key therapies (%) (2010)


22.1

Growth comparison (%) (2010)


Avg Gr - Company Avg Gr - Industry 38.9

6.7

8.2 5.9 3.3

15.9

18.4 14.6

17.9

15.0 16.2

18.1

19.9

18.4

AI

CVS

Respiratory Gynaecology Dermatology

AI

CVS

Respiratory Gynaecology Dermatology


Source: Industry/MOSL

* Average growth over 2009-2010

Cipla's prescription ranking


Jan-07 Anti-infectives Respiratory CVS Pain Mgmt CNS GI Derma Vit Gynaec 1 1 5 4 8 11 10 11 Jan-08 1 1 5 5 8 10 12 11 Jan-09 1 2 4 5 8 8 15 14 21 Jan-10 Oct-10 1 1 1 1 4 4 4 5 10 11 11 13 15 12 13 13 18 21 Source: Industry/MOSL

Top 10 brands contribute 30% of revenue Cadila's top 10 brands contribute ~30% to total revenue, indicating lower brand concentration. All Cipla's top 10 brands feature among the top 300 brands of the industry. Its No1 brand Asthalin (Salbulamol, in the respiratory segment) ranks fourteenth in the industry and reported growth of 11.7% CAGR over the past four years . Cipla's top four brands belong to the respiratory segment.
Cipla's top 10 brands
Brand Drug Product Launch 2000 1993 2008 2001 2002 1980 1989 2006 1996 1994 Sales (INR m) 925 1,268 836 761 654 878 818 503 439 423 YoY Gr (%) CAGR (%) Seroflo Salmeterol+Fluticasone Asthalin Salbutamol Aerocort Salbutamol+Beclomethasone Foracort Formoteral+Budesonide Mt pill Mifepriston Novamox Amoxycillin Ciplox Ciprofloxacin Duolin Salbutamol+Ipratropium Amlopres-at Atenolol+Amlodipine Budecort Budesonide CAGR through 2006-10 7.0 8.2 9.8 11.7 12.4 23.2 22.0 -4.8 14.6 14.2 9.3 11.4 8.9 26.3 60.1 4.1 8.4 24.7 18.5 Source: Industry/MOSL

3. Distribution and reach:

8/10

Cipla derives 63% of its revenue from metros and class-I towns, in line with the industry average. Over the past four years, Cipla's revenue CAGR in rural and metro areas, has been better than that of industry average.
August 2011

41

Cipla

Cipla: Geographical distribution of revenues (%)


METROS 23.0 17.9 29.6 CLASS I TOWNS 24.2 18.4 27.9 22.3 18.0 28.8 CLASS II TO VI 19.2 17.9 30.1 RURAL 18.3 18.6 30.3

Industry: Geographical distribution of revenues (%)


METROS 20.6 19.2 CLASS I TOWNS 20.9 19.0 31.3 20.0 19.5 CLASS II TO VI 18.1 19.4 RURAL 17.3 19.6 32.0

32.6

31.6

32.5

29.6

29.5

30.8

32.8

32.7

27.6 CY06

28.9 CY07

28.9

30.0

31.0

CY06

CY07

CY08

CY09

CY10

CY08

CY09

CY10

Cipla: Geography-wise growth rates (%)


METROS CLASS II TO VI 21.6 19.2 16.5 13.0 7.0 7.7 20.3 14.2 12.3 CLASS I TOWNS RURAL 25.0 20.7 18.6 20.5 19.5 14.4

Industry: Geography-wise growth rates (%)


METROS CLASS II TO VI CLASS I TOWNS RURAL

26.2 23.5 20.7 17.5

17.6 14.0

17.5 15.6 14.7

17.7 16.4 13.0

11.1 7.9 9.5

2.5
-2.6 CY07 CY08 CY09 CY10

CY07

CY08

CY09

CY10

Source: Industry/MOSL

4. Introductions:

6/10

Among the most aggressive players in the industry in product launches; revenue-per-new-launch rises Over the past four years, Cipla launched 76 new products (including line extensions) annually and the average revenue per new launch almost doubled, suggesting better penetration of launched brands. Overall, revenue growth was driven by existing products and new launches.
Cipla: New launches
No. Of launches in last 2 yrs Avg sales per launch (INR m) 105.0

Cipla: Growth composition (%)


New Launches Existing Brands

85.6
11.0 3.4

12.1 8.0 9.9 7.7

54.2

53.8

131 CY07

157 CY08

205 CY09

147 CY10

5.3 CY07

5.6 CY08 CY09

CY10
Source: Industry/MOSL

August 2011

42

Cipla

5. CAGR and scale up:

6/10

We expect Cipla's domestic formulations business to post 12% CAGR over FY11-13, led by one of the largest field forces and rapid new launches but partly tempered down by a large base effect and increasing competition in some of the acute therapeutic segments. This is below our forecast of 15-16% CAGR for the industry. Cipla is likely to maintain its leadership in the sector given its high market share in some of the largest therapeutic segments. Although Cipla employs the largest field force in the industry, its focus on enhancing workforce productivity must be enhanced, for more profitable growth.
Cipla: Domestic formulations performance
DF Revenue (INR m) 17.7 16.7 15.2 12.9 10.2 12.2 10.0 13.5 YoY Grow th (%)

15,014

17,523

19,783

22,786

25,113

28,178

30,995

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

Source: Company/MOSL

6. Improvement in MR productivity:

Sales force additions drive top-line growth Over FY04-10, Cipla's domestic formulations business posted revenue CAGR of 13.7% while its sales force grew at a CAGR of 13.4%, implying marginal productivity improvement of the salesforce. In 2004, Cipla derived INR4.8m revenue per MR, which increase marginally to INR4.9m in FY10, which is still above industry average.
Cipla: Sales force productivity (2004-10)
No. of MRs Revenue per MR (INR m) 4.9

Sales force addition CAGR (%) Productivity Improvement CAGR (%)

13.4
4.8 2,400 2004 5,100

11.5

0.3
2010

1.9 Industry
Source: Industry/Company/MOSL

Cipla

35,180

7/10

August 2011

43

Cipla

7. Non-domestic business:
Cipla's non-domestic business Positives Strong presence in emerging markets through partners. Strong chemistry skills and fully backward integrated low-cost operations. Low-risk partnership model Large underutilized capacities. Has one of the largest global CFC-free inhaler capacities. Potential tie-ups with MNCs.

5/10

Risks and concerns Temporary mismatch between expenses on new SEZ without commensurate revenue streams pending regulatory approval. Working capital intensive. Lack of succession planning. Delay in planning capacity expansions for future growth. Key news flow/triggers Regulatory approvals for a new SEZ. Regulatory approvals for CFC-free inhalers in Europe. Signing of supply agreements with MNCs.

Impact assessment We are positive on Cipla's international business given its strong chemistry skills, large underutilized capacities and strong generic pipeline. Short-term performance may be muted until international regulatory authorities approve the new Indore SEZ. Expect international business to record 13% CAGR over FY11-13, led by 14% CAGR of formulation exports. Option values (approval for CFC-free inhalers and potential MNC contracts) can upgrade FY13 EPS.
Sales mix (INR m)
FY09 Domestic % of revenues Exports % of revenues Formulations APIs Other Operating Income % of revenues Total Revenues 22,786 43.0 27,430 51.8 21,635 5,795 2,737 5.2 52,953 FY10 25,113 44.4 29,004 51.3 23,188 5,816 2,462 4.4 56,579 FY11 28,178 44.3 33,548 52.8 26,756 6,792 1,842 2.9 63,567 FY12E FY13E FY11-13 CAGR (%)

EBITDA Contribution
Non-DF EBITDA 56% DF EBITDA 44%

30,995 35,180 11.7 44.4 44.2 36,971 42,645 12.7 53.0 53.5 29,431 34,729 13.9 7,539 7,916 8.0 1,775 1,838 -0.1 2.5 2.3 69,741 79,663 11.9 Source: Company/MOSL

Source: Company/MOSL

August 2011

44

Cipla

8-9. Earnings growth and stock attractiveness:

21/30

We believe Cipla has one of the strongest generic pipelines among Indian companies. After a long delay, we believe Cipla's CFC-free inhaler pipeline is likely to be gradually commercialized in Europe and upsides from high-margin opportunities like Seretide can potentially come through over the next two years (our estimates do not include these upsides). Cipla's large manufacturing infrastructure, strong chemistry skills and huge inhaler capacity make it a partner of choice for global MNCs that are ramping up their generics and presence in emerging markets. This, along with its low-risk strategy and a strong capex (currently underutilized) should ensure good long-term potential. Temporary slow-down in overall growth, increased expenses to maintain its Indore SEZ without commensurate revenue and increasing working capital requirements are our key concerns. We estimate base-case EPS CAGR at 17% over FY11-13 with potential upsides from MNC supplies and CFC-free inhalers. The growth will be led by 13% CAGR for the international business, tempered by reducing technology licensing income. We are positive on Cipla's long-term prospects (especially upsides from MNC contracts and commercialization of CFC-inhalers). Cipla's management has officially confirmed that it is negotiating supply contracts with MNCs. However, it is taking time to consummate the deal. When details of such contracts are made public, we expect an upgrade in earnings to take into account upsides from such contracts. Maintain Buy with a target price of INR361 (22x FY13E EPS).
Cipla RoE & RoCE (%)
RoE 19.1 17.9 18.7 14.5 17.1 20.6 15.8 17.2 17.0 18.8 14.4 15.6 RoCE

Cipla one year forward P/E


32 P/E (x) Avg(x) 29.5 27 22.8 22 19.1 15.4 12 Mar-07 Feb-08 Feb-09 Feb-10 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Feb-11 Aug-11 Peak(x) Min(x)

17

2008

2009

2010

2011

2012E

2013E

August 2011

45

Cipla

Annexure: Cipla non-domestic business Strong generic pipeline In the US, Cipla entered into partnership for 118 products with 22 partners. The number of partners increased from 17 to 22 over the past 18 months. Of the pipeline of 110 ANDAs filed so far, 64 have been approved and 46 are awaiting approval.
Strengthening US parnerships (nos)
22 17 12 8

FY07

FY08

FY09

FY10
Source: Company/MOSL

Strong capex Over the past three years, Cipla invested INR18b in expanding its formulations, API and R&D capacities. A large portion is this capex is underutilized pending facility/product approvals from international regulatory authorities.
Cipla's gross block (INR b)
43.3 35.8 30.6 24.3 18.7 14.5 10.9

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Source: Company/MOSL

can lead to INR36b in revenue over the next few years Going by Cipla's past asset-turnover ratios, we estimate this large capex can generate INR36b in revenue in the next few years. This compares favorably with reported revenue of INR56b in FY10 and revenue of INR63b in FY11. Cipla's management is known for its conservative, low-risk strategy, which implies it would not have embarked on such a large capex without reasonable revenue visibility. Significant expenses on Indore SEZ; commensurate revenue to ramp-up Cipla has invested significant amounts of money, on setting up facilities, over the past 2-3 years. One of its large investments has been in the INR8b Indore SEZ, commissioned in 1QFY11. This is one of the largest investments in an SEZ by a pharmaceutical company.
August 2011

46

Cipla

The company is incurring expenses of INR250m-300m per quarter on this SEZ without commensurate revenue, pending regulatory approvals. We believe the company is facing a temporary mismatch between timing of such expenses and commensurate revenue streams from this investment. The Cipla management has indicated regulatory authorities from the UK, Australia and South Africa had recently inspected this facility. It expects exports to these markets to ramp-up up gradually in forthcoming quarters. The US FDA inspection is yet to take place. The management also indicated it expected this SEZ to contribute 10-12% to overall sales by the end of FY12. This is a key factor impacting Cipla's operational performance. Potential MNC contracts can upgrade earnings, negotiations ongoing Cipla is negotiating with some MNCs like Pfizer, GSK and Boehringer for long-term supply agreements. Generally, such deals span many products and multiple markets. These potential contracts are likely to raise earnings for FY13 (not included in our estimates). We believe Cipla is well positioned to emerge as a key supplier of generic products to global MNC companies due to its large manufacturing infrastructure, strong chemistry skills and large capacity for inhalers.
Pfizer Partnership: Potential Upsides
Pfizer's generic revenue (USD b) 10 Estimated mark up over outsourced products (%) 25 Outsourced products (percentage of total) - assumed 50 Cost of outsourced products for Pfizer (USD b) 4 Upside for Cipla Low Case Cipla's contribution to Pfizer's outsourcing (%) 1 Sales (USD m) 40 INR/USD - assumed 43 Sales (INR m) 1,720 PAT Margin (%) - assumed 15 PAT (INR m) 258 Incremental EPS 0.3

Moderate Case High Case 5 10 200 400 43 43 8,600 17,200 15 15 1290 2580 1.6 3.2 Source: Company/MOSL

CFC-free inhalers a key long-term trigger Cipla has the third largest global capacity for inhalers and has been the domestic market leader in the segment over years. Cipla has the advantage of strong chemistry skills and low-cost of production in this segment.
Inhaler capacity has increased...
Aerosols/Inhalation Devices Capacity (m) 143

... but utilization is at the lowest


Aerosols/Inhalation Devices Capacity Utilization (%) 89 80 96 96 67 64 56 77

71 46 54

71

38

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Source: Company/MOSL August 2011

47

Cipla

Cipla is developing eight inhalers and has the third largest inhaler manufacturing capacity globally. It has commercialized some of its inhalers in the UK, Germany, Spain and Portugal. While the launch of these inhalers is a key long-term trigger, the visibility of launch timelines is poor. The management expects its range of eight inhalers to be commercialized in Europe over the next 2-3 years and it expects 3-6 players for each product in this category, implying that this will be a low-competition, high-margin opportunity. Through its partner, Neo Labs, Cipla filed for regulatory approval of a generic Seretide Inhaler (GSK's US$6.5b global brand with US$250m sales in the UK) in September 2008 in the UK, after the expiry of GSK's data exclusivity. We believe that approval for this product is likely to come through over the next few quarters. Our estimates do not include these upsides.
CFC-free Inhalers: Potential Upside
Current global market size of inhalers (USD b) 17 No of generic players including Cipla (assumed) 6 Price erosion (%) (assumed) 70% Addressable market size (USD b) 5.1 Upside for Cipla Low Case Cipla's market share (%) 1 Sales (USD m) 51 INR/US dollar (assumed) 43 Sales (INR m) 2,193 PAT margin (%) (assumed) 20 PAT (INR m) 439 Incremental EPS 0.5

Moderate Case High Case 3 5 153 255 43 43 6,579 10,965 20 20 1,316 2,193 1.6 2.7 Source: Industry/MOSL

Reducing technology licensing income Given Cipla's partnership model, it earns licensing income from its partners. This income has been a key contributor to Cipla's earnings and it recorded 26% CAGR to INR1.5b over FY07-10. However, this has fallen to INR637m by FY11, adversely impacting Cipla's earnings growth (licensing income has 100% contribution to the company's PBT).
Reducing licensing income
Tech Licensing Income (INR m) 2,178

1,534

1,538

765 415 424

637

510

510

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

Source: Company/MOSL

Forex cover - currently under hedged Cipla's management continues with its policy of hedging net exposure on a monthly basis. Current forex hedges are US$190m (down from USD230m in September 2010), which we believe will be inadequate if the rupee were to appreciate significantly against the US dollar. We believe Cipla is under-hedged, given its annual net exposure of ~US$300m as well as some exposure to the euro.
August 2011

48

Cipla

Financials and valuations: Cipla


Income Statement
Y/E March Gross Sales Change (%) Exports Net Domestic Sales Other Operating Income Net Income Change (%) Total Expenditure EBITDA Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT before EO Items Extra Ordinary Expense PBT but after EO Exp. Tax Tax Rate (%) Reported PAT Adj PAT Change (%) Margin (%) 2010 54,117 7.8 29,004 24,592 2,462 56,057 7.1 42,315 13,742 24.5 1,671 12,071 230 469 12,311 -950 13,261 2,435 18.4 10,826 10,050 29.4 17.9 2011 61,798 14.2 33,548 27,755 1,842 63,145 12.6 49,927 13,218 20.9 2,542 10,677 173 1,122 11,625 0 11,625 1,954 16.8 9,671 9,671 -3.8 15.3

(INR Million)
2012E 67,966 10.0 36,971 30,447 1,775 69,193 9.6 53,550 15,643 22.6 3,144 12,499 283 1,234 13,450 0 13,450 2,690 20.0 10,760 10,760 11.3 15.6 2013E 77,825 14.5 42,645 34,558 1,838 79,041 14.2 60,726 18,315 23.2 3,476 14,839 126 1,357 16,070 0 16,070 2,893 18.0 13,177 13,177 22.5 16.7

Ratios
Y/E March Basic (INR) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E PEG (x) Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Working Capital (Days) Leverage Ratio (x) Current Ratio Debt/Equity 2010 12.5 14.6 73.5 4.7 19.8 2011 12.0 15.2 82.9 6.5 30.8 2012E 13.4 17.3 93.0 5.7 25.0 2013E 16.4 20.7 105.3 7.0 25.0

23.0 -6.1 18.2 3.3 3.6 17.2 2.4

20.7 1.8 16.0 3.0 3.2 14.3 2.1

16.9 0.8 13.4 2.6 2.8 12.0 2.5

17.0 20.6

14.5 15.8

14.4 17.2

15.6 18.8

Balance Sheet
Y/E March Equity Share Capital Reserves Revaluation Reserves Net Worth Loans Deferred Liabilities Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. Account Payables Net Current Assets Appl. of Funds 2010 1,606 57,410 90 59,106 51 1792 60,948 28,973 8,861 20,112 6,842 2,464 43,673 15,126 15,666 621 12,260 12,144 12,144 31,530 60,948 2011 1,606 64,966 90 66,661 5,719 2131 74,511 42,411 11,465 30,946 2,853 5,904 46,599 19,062 14,908 1,010 11,619 11,791 11,791 34,808 74,511

(INR Million)
2012E 1,606 73,036 90 74,731 3,719 1351 79,801 47,411 14,609 32,802 2,853 5,904 2013E 1,606 82,918 90 84,614 480 869 85,962 51,911 18,085 33,826 2,853 5,904

2.8 102 98 201

2.5 86 110 195

2.2 93 107 191

2.4 89 103 183

3.6 0.0

4.0 0.1

3.7 0.0

3.7 0.0

Cash Flow Statement


Y/E March 2010 Op. Profit/(Loss) before Tax 13,742 Interest/Dividends Recd. 469 Direct Taxes Paid -2,285 (Inc)/Dec in WC -1,289 CF from Operations 10,637 EO expense -950 CF from Oper. incl EO Exp. 11,587 (inc)/dec in FA (Pur)/Sale of Investments CF from Investments Issue of Shares Inc/(Dec) in Debt Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance -5,037 -1,651 -6,688 6,912 -9,352 -230 -2,139 -4,809 91 530 621 2011 13,218 1,122 -1,614 -2,889 9,837 0 9,837 -9,386 -3,440 -12,826 867 5,668 -173 -2,983 3,379 390 621 1,010

(INR Million)
2012E 15,643 1,234 -3,470 -2,367 11,039 0 11,039 -5,000 0 -5,000 0 -2,000 -283 -2,690 -4,973 1,066 1,010 2,077 2013E 18,315 1,357 -3,375 -3,359 12,938 0 12,938 -4,500 0 -4,500 0 -3,239 -126 -3,294 -6,660 1,779 2,077 3,855

52,259 59,620 20,318 22,209 17,690 19,190 2,077 3,855 12,175 14,367 14,017 16,241 14,017 16,241 38,242 43,380 79,801 85,962 E: MOSL Estimates

August 2011

49

Domestic Formulations | New Peaks

MEDICINES

CAPSULE

Lupin
CMP: INR450 TP: INR514

MEDICINES Score

62/100
LPC IN

Transformed transnational
M: Mix 5/10

Buy
6/10

E: Equity with doctors

Lupin is a balanced play on the domestic chronic and acute therapeutic segments. The company derives 43% revenue from chronic therapeutic areas. The respiratory, AI, CVS and Anti-TB segments contribute 56% to Lupin's domestic formulation revenue.

Lupin has moderate brand equity in the pharmaceutical industry but good brand equity in select segments like the anti-TB segment, in which it ranks No1 in the industry. Lupin has been gradually improving its brand equity in the CVS and anti-diabetes segments and has improved its prescription ranking in the segments considerably over the past four years.

D: Distribution & reach

6/10

I: Introductions

6/10

Lupin derives 70% of its revenue from metros and tier-I cities. Distribution reach in metros and tier-I towns increased significantly and the contribution of other geographies to revenue has reduced over the past four years. Lupin has a field force of 3,682 MRs.

Lupin has been aggressive in launching new products over the past four years, compared with its peers. It launched 67new products and line extensions a year over the past four years. New launches contributed significantly to Lupin's revenue growth over the past few years.

Stock info
Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) M.Cap. (INR b) M.Cap. (USD b) 446.2 520/348 12/20/29 200.8 4.4

Financial & valuation summary


Year End 03/10A 03/11A 03/12E 03/13E Net Sales PAT EPS (INR m) (INR m) (INR) 47,405 57,068 64,784 74,127 6,816 8,582 9,913 11,418 15.3 19.3 22.3 25.7 EPS Gr. (%) 34.8 25.9 15.5 15.2 P/E (x) 29.4 23.3 20.2 17.5 P/BV (x) 7.8 6.1 5.0 4.1 RoE (%) 34.1 29.3 27.1 25.7 RoCE (%) 27.5 25.1 28.2 27.1 EV/ EV/ Sales EBITDA 4.4 3.6 3.2 2.7 24.6 19.5 16.8 13.8

Background

Lupin is a second tier company actively targeting the regulated generics markets. Historically very strong in the anti-TB segment, it has over the years built up expertise in fermentation-based products and segments like cephalosporins, prils and statins. It is also in the process of building a niche portfolio of oral contraceptives and branded products in the US market.

August 2011

50

Lupin Lupin

Chairman Profile

Chairman

Lupin is promoted by Dr. D. B. Gupta (Chairman), a first generation entrepreneur supported by a team of senior professionals including Dr. Kamal Sharma (MD). Rapid scale-up in the US market (despite being a relatively late entrant), significant improvement in the product and geographical mix over the past 5 years coupled with strong backward integration skills are the key achievements.

C: CAGR and scale-up

8/10

I: Improvement in productivity

5/10

Lupin significantly outperformed the industry with revenue CAGR of 21% over FY05-11. It has scaled up the business rapidly though on a very low base. However, the main growth driver was the tripling of its field force and aggressive new launches, rather than an increase in productivity. We expect Lupin to post 18% revenue CAGR over FY11-13 outperforming the industry, led by a rapidly expanding presence in the fast growing chronic therapeutic areas like CVS and anti-diabetes segments, an increase in the field force and aggressive new launches.

Lupin was not able to improve MR productivity over 2004-10. Revenue per MR was stagnant at INR3.6m over 2004-10. At this level the productivity is in line with the industry average.

N: Non-domestic business

6/10

E: Earnings growth

6/10

We are positive about Lupin's international business, given its strong and differentiated portfolio in the US and its gradually expanding presence in Japan. We expect Lupin's international business to post 13% CAGR over FY11-13, excluding upsides from Para-IV sales. Option values include upsides from Para-IV products in the US.

We expect overall top-line CAGR of 14% over FY1113 leading to EPS CAGR of 15.3%. Regulated markets and India formulations will be key growth drivers.

S: Stock Attractiveness
Cautious approach to international expansion coupled with a highly profitable US business has ensured good return ratios in the past. We expect this to sustain in future. Lupin is valued at 20.2x FY12E and 17.5x FY13E consolidated earnings. Reiterate Buy with a target price of INR514 (20x FY13E EPS) excluding potential one-off upsides.
Stock performance (1 year)

14/20
Lupin Sensex - Rebased

520 465 410 355 300 Aug-10

Nov-10

Feb-11

May-11

Aug-11

August 2011

51

Lupin

India formulations snapshot


Domestic formulations: Meaningful contributor to revenue, profitability The domestic formulations business is a meaningful contributor to Lupin's revenue and EBITDA with contribution of ~25%. Unlike some leading companies in the domestic formulations space, we believe Lupin's profitability in this business is lower than its peers due to a significant presence in anti-TB segments and rapid expansion of sales force. The business posted revenue CAGR of 21.5% over the past six years. EBITDA Contribution DF EBITDA 25%

Transformed transnational
Transiting from acute to chronic, generic to branded
Lupin is among the leading Indian companies in the domestic formulations segment. The company holds a leading position in the anti-TB segment and is among the leaders in the CVS and anti-diabetes segments. Lupin's revenue growth over the past few years has been driven by an augmented sales force and new launches. Lupin derives a large part of its revenue from metros and class-I towns. It is expected to sustain its out-performance to the industry in future.

1. Mix:

5/10

Respiratory, AI, CVS, anti-TB dominate sales The top four therapeutic segments, CVS, AI, respiratory and anti-TB contribute ~56% to Lupin's domestic formulations revenue. Lupin derives ~43% of its domestic formulations revenue from chronic therapeutic segments. It used to derive about half its domestic formulations revenue from the Anti-TB segment 10 years ago. However, Lupin's dependence on the segment has fallen considerably and it now contributes ~10% to revenues. Meanwhile, It has increased its presence in the CVS and respiratory segments over the past 10 years.
CVS, AI, Respiratory and Anti-TB dominates the therapy mix
FY01
Others 9% CVS 5% AI 21% Respira tory 0%

Non-DF EBITDA, 75% Among the top 10 players in the industry Lupin ranks among the top 10 players in the domestic formulations industry in terms of revenues. It commands 2.69% market share, which has grown from 2.32% in 2006. Lupin has outperformed the industry over the past six years with revenue CAGR of 21.5% against the industry CAGR of 14%. Lupin

Pain 4% VMN 11% CNS 1% GI 1%

Others 20% Pain 3%

FY05
CVS 11% AI 23%

Diabetes 5%
Anti-TB 48%

GI 3%

Anti-TB 33%

Respira tory 2%

Others 22% Pain 2% Gynaecology 3%

FY11

CVS 21%

Mkt Share (%) Grow th (%) 25.0 24.2 22.7 18.7 12.3 2.32 2.75 2.69

AI 16% CNS 4%

2.5

2006 2007 2008 2009 2010

2.8

Diabetes 7%

GI 6%

Anti-TB 10%

Respiratory 9%

Source: Company/Industry/MOSL

August 2011

52

Lupin

2. Equity with doctors:

6/10

Brand equity among physicians strong in some therapeutic segments Lupin's brand equity is strong in some therapeutic segments like anti-TB, in which it ranks No1, but overall it has average brand equity. In CVS, respiratory and the anti-diabetes segment, Lupin ranks No. 7, No. 6 and No. 7 with market share of 5.6%, 4.8% and 3.8% respectively. It has been improving its market share in these segments over the past few years, outperforming the segments' growth.
Market share in key therapies (%)
5.6 4.8 3.8
27.7 23.3 17.917.9 16.2

Growth comparison (%) (2010)


Avg Gr - Company Avg Gr - Industry 39.5

CVS

Respiratory

Anti-Diabetic

CVS

Respiratory

Anti-Diabetic

* Average growth over 2009-2010

Source: Industry/MOSL

In terms of the number of prescriptions written, Lupin has consistently led the anti-TB segment with a prescription market share of 51%. It has been gradually improving its brand equity in the CVS and anti-diabetes segments and improved its prescription ranking in these segments over the past four years. It ranks fifth in the CVS segment with a prescription market share of 5% and ranks sixth in the anti-diabetes segment with a market share of 4.9%.
Lupin's prescription ranking
Jan-07 Anti-TB CVS Anti-diabetic CNS Anti-infectives Respiratory 1 9 8 13 13 17 Jan-08 1 7 8 13 12 16 Jan-09 1 7 8 17 13 16 Jan-10 Oct-10 1 1 6 5 8 6 13 13 14 15 17 15 Source: Industry/MOSL

Top 10 brands contribute 20% of the revenues Lupin's top 10 brands contribute ~20% to its revenue, indicating low brand concentration. None of these feature in the top 100 brands of the industry. Its No1 brand, Tonact, (Atorvastatin, CVS) ranks No101 in the industry and it reported 19% growth over the past four years. The absence of big brands indicates Lupin's limited brand building ability in segments other anti-TB therapy.

August 2011

53

Lupin

Lupin's top 10 brands


Brand Drug Product Launch 2000 2001 2003 1986 2004 2002 1989 2004 2002 2007 Sales (INR m) 476 273 262 257 252 245 214 207 197 194 YoY Gr (%) CAGR (%) Tonact Atorvastatin Ramistar Ramipril Gluconorm-g Glimepiride+Metform. R-cinex Anti-TB Budamate Formoteral+Budesonide L-cin Levofloxacin Odoxil Cefadroxil oral Esiflo Salmeterol+Fluticasone Rablet Rabeprazole Percin Other quino CAGR through 2006-10 18.4 19.1 13.5 11.0 43.8 38.6 -8.3 -6.6 20.3 30.3 2.1 9.2 -10.9 2.2 13.4 14.1 18.6 20.4 23.1 Source: Industry/MOSL

3. Distribution and reach:

6/10

Lupin derives 70% of its revenue from metros and class-I towns compared with 63% of the industry average. Over the past four years, revenue CAGR for various geographies has been much higher than that of industry average except for in rural areas. The outperformance is significant in metros and class-I towns. The contribution of the metro region to the sales grew from 28% to 34% over the past five years.

Lupin: Geographical distribution of revenues (%)


Metros 17.3 19.3 35.5 Class I Tow ns 17.0 18.9 34.7 15.4 19.2 35.9 Class II to VI 13.3 18.2 36.7 Rural 11.9 17.6 36.3

Geographical distribution of revenues: Industry (%)


Metros 20.6 19.2 32.6 Class I Tow ns 20.9 19.0 31.3 20.0 19.5 31.6 Class II to VI 18.1 19.4 32.5 Rural 17.3 19.6 32.0

27.8 CY06

29.5 CY07

29.5 CY08

31.9 CY09

34.2

27.6 CY06

28.9 CY07

28.9 CY08

30.0 CY09

31.0

CY10

CY10

Lupin: Geography-wise growth rates (%)


Metros 31.4 22.2 21.2 21.0 27.2 25.2 22.7 14.7 10.6 6.0 -3.0 CY07 CY08 CY09 CY10 6.2 21.7 27.2 Class I Tow ns Class II to VI Rural

Industry: Geography-wise growth rates (%)


Metros Class I Tow ns Class II to VI Rural 26.2 23.5 20.7 17.5 16.4 14.7 9.5 2.5 CY07 CY08 CY09 CY10
Source: Industry/MOSL

17.6
17.6 15.1

17.5 15.6

17.7

14.0 11.1 7.9

13.0

August 2011

54

Lupin

4. Introductions:

6/10

Lupin has been among the most aggressive players in launching new products Lupin has aggressively launched new products over the past four years, compared with its peers. It launched 67 new products annually (including line extensions) over the past four years. However average revenue per new launches has been stable over the period. New launches contributed significantly to Lupin's revenue growth over the past few years though average revenue per new launch declined from INR104m in CY07 to INR65m in CY10.
Lupin: New launches
No. Of launches in last 2 yrs Avg sales per launch (INR m) 104.4 97.3
7.0

Lupin: Growth composition (%)


New Launches Existing Brands

73.2

64.5

11.0 7.8 17.2 11.7

14.0

10.8

100 CY07

91 CY08

177 CY09

175 CY10
CY07 CY08 -1.6 CY09 CY10
Source: Industry/MOSL

5. CAGR and scale up:

8/10

We expect Lupin's domestic formulations to post revenue of 18% CAGR over FY11-13 led by a rapidly expanding presence in fast growing chronic therapeutic areas like CVS and anti-diabetes, increase in its field force and new launches. We believe Lupin will continue its out-performance of the industry as historically it has grown much faster than the industry, clocking revenue of 21.5% CAGR over FY05-11.
Lupin: Domestic formulations revenue rampup
India Formulation Sales (INR M) 26.1 20.2 16.4 19.4 Grow th (%)

18.0

18.0 22,087

9,496

11,412

13,281

15,863

18,718

FY08

FY09

FY10

FY11

FY12E

FY13E
Source: Company/MOSL

August 2011

55

Lupin

6. Improvement in MR productivity:

5/10

Lupin's top-line growth is driven by additions to its sales force, but has not been able to improve productivity Lupin's domestic formulations business revenue posted 20.4% CAGR over FY04-10 and its sales force grew by 20.2% CAGR, implying stagnant MR productivity. In 2004, Lupin derived revenue of INR3.6m per MR, which was the same in FY10. Compared with the average of companies covered in this report, Lupin's performance was below average.
Lupin: Sales force productivity
No. of MRs 3.6 Revenue per MR (INR m) 3.6

Sales force addition CAGR (%) Productivity Improvement CAGR (%)

3,682

20.2 11.5

1,219

0.1
2004 2010

1.9 Industry

Lupin

Source: Company/Industry/MOSL

7. Non-domestic business:

6/10

Lupin's non-domestic business snapshot Positives Lupin has demonstrated one of the fastest ramp-ups in the US, led by branded and generic products, and gradually increasing precription share. Trying to build a differentiated portfolio in the US by targeting niche segments of oral contraceptives and ophthalmology, coupled with some branded products. It is the only Indian player to have a branded presence in the US and has been an early entrant in Japan through Kyowa acquisition. It is highly cost competitive due to backward integration for most of its products. Risks & concerns Generic competition for Suprax (a key product) in US. Delays in receiving US FDA approval for oral contraceptives. No major progress on NCE research despite working on it for many years. Key news flows/triggers Ramp-up in Antara sales in the US. US FDA approvals for oral contraceptives. Potential acquisitions in Japan and Latin America.

August 2011

56

Lupin

Impact assessment We are positive about Lupin's international business, given its strong and differentiated portfolio in the US and its gradually expanding presence in Japan. We expect international business to record 12% CAGR over FY11-13, excluding upsides from Para-IV sales. Our estimates factor in the potential competition for Suprax in US. Option values include upsides from Para-IV products in the US.
Sales mix (INR m)
FY09 India APIs Formulations Total % of sales Regulated APIs Formulations Total % of sales Un-regulated APIs Formulations Total % of sales Others Grand Total FY10 FY11 FY12E FY13E FY11-13E CAGR (%) 2,772 22,087 24,859 33.3 562 35,539 36,101 48.4 5.0 18.0 16.3

EBITDA Contribution
DF EBITDA 25%

2,192 11,412 13,604 35.6 650 17,341 17,991 47.1 4,296 1,930 6,226 16.3 417 38,238

2,302 13,281 15,583 32.7 543 23,234 23,777 49.9 4,565 3,204 7,769 16.3 550 47,678

2,514 15,863 18,377 32.0 597 28,229 28,826 50.2 5,477 4,393 9,870 17.2 348 57,422

2,640 18,718 21,358 32.8 579 31,385 31,965 49.0

-3.0 12.2 11.9

Non-DF EBITDA 75%

5,751 6,039 5.0 5,711 7,139 27.5 11,462 13,177 15.5 17.6 17.7 390 437 65,175 74,574 14.0 Source: Company/MOSL

8-9. Earnings growth and stock attractiveness:

20/30

Lupin is likely to gradually improve its fundamentals, led by an expanding US generics pipeline, niche/Para-IV opportunities in the US, strong performance in emerging markets (including India) and sustained traction in the Japanese business. While our estimates factor in generic competition for Suprax from FY13 onwards, any out-of-court settlement for Suprax patent litigation is likely to raise our earnings forecast for FY13. Lupin continues to target niche, low-competition opportunities to drive growth and improve profitability. Its initiatives in the US oral contraception space are efforts in this direction. The stock trades at, 19.7x FY12E and 17.1x FY13E EPS with a sustained ~25-30% RoE. Our estimates do not include one-time upsides for Lupin's FTF pipeline in the US. Maintain Buy with a target price of INR514 (20x FY13E EPS).

August 2011

57

Lupin

Lupin RoE & RoCE


RoE (%) 37.1 34.1 29.3 25.6 27.5 RoCE (%)

Lupin one year forward P/E


29 23
27.1 28.2 25.7 27.1

P/E (x)

Avg(x)

Peak(x)

Min(x)

23.9 19.5

25.1

17 11 5 Mar-07 Feb-08 Aug-06 Aug-07

14.6

7.8 Feb-09 Feb-10 Aug-08 Aug-09 Aug-10 Feb-11 Aug-11

2009

2010

2011

2012E

2013E

Lupin non-domestic business: key trends, triggers & risk US generics: One of the fastest entries by an Indian player Lupin has the distinction of achieving the fastest ramp-up in the US by any Indian company. This was achieved through brand acquisition/in-licensing, focusing on niche, low-competition products, supported by an aggressive pace of filings in the US market. Lupin, which entered the US market in FY05, posted FY11 US revenues of INR20b, a growth of 9x over FY06-11. Targeting niche opportunities resulted in better profitability Lupin has differentiated itself from other Indian generic companies in the US by: 1. Focusing on branded innovator products - it is the only Indian company to do so. 2. Launching at least one low-competition/patent challenge product in the US every year over the past few years. A few years ago, Lupin in-licensed Suprax brand from Fujisawa (the latter had stopped promoting this brand in the US) and ramped-up sales of the product through price increases, volume growth and the launch of line extensions of the brand. While Lupin does not disclose Suprax revenues separately, we estimate they contributed USD80m-90m to its FY11 US revenues. Expanding brand portfolio in the US through acquisitions/in-licensing After its success with Suprax, Lupin has attempted to expand its brand portfolio in the US by acquiring the Antara brand in FY10 and in-licensing a couple of brands from other players. While it is yet to replicate the Suprax success for Antara, we believe the brand holds promise. The other two brands are likely to contribute to revenue in the long-term. Lupin's niche initiatives in the US have helped it to achieve two main objectives. 1. It rapidly ramped up US revenues with 9x growth CAGR over FY06-11 to INR20b. 2. It significantly improved the profitability of its US operations since branded innovator products and low-competition/patent challenge generic products enjoy higher profitability compared with normal generic products. Niche/patent challenge upsides in the US to continue The trend of launching niche products in the US will continue. After the contribution from generic Lotrel during FY11, Lupin has scheduled similar launches in FY12. The commercialization of its oral contraceptive (a US$4.5b market in the US) products will add to its protfolio from FY13.
August 2011

58

Lupin

The management has guided for 12 new launches in the US in FY12 of which 3-4 are expected to be oral contraceptives (with branded market size of USD300m-500m). The remaining products will target a branded US market worth about USD5b. Lupin has made 23 filings in the oral contraceptives segment as part of its strategy to exploit niche and low-competition segments. To strengthen this portfolio, it is focusing on filing products in the ophthalmology and dermatology segments. Given that Lupin will be a new player in the oral contraceptives market, we have conservatively factored in upsides from this opportunity from FY13 despite the management guidance of launching 3-4 products in FY12. These potential low-competition launches along with a steady ramp-up in its branded revenue in the US (sales force strength increased from 70 to 160 MRs) will enable Lupin to sustain double-digit growth. We factor in 9% revenue CAGR for Lupin's US operations (over FY11-13) after factoring in the slowdown in the US branded business and potential competition from generic Suprax. Our estimates exclude potential one-off opportunities. Japan can be a large opportunity in the long term Japan is the new emerging opportunity in the global generics market with the Japanese government trying to reduced overall healthcare costs in the US$70b Japanese pharmaceutical market. The government has, in the past two years, legislated to encourage the use of generics. However, given the Japanese market's concern for quality products and a brand-conscious mentality, progress has been gradual for generic products. We, however, believe the Japanese market holds huge long-term potential for generic players who can convince the Japanese population about the quality of their products. A successful presence in such a market will require tie-ups/associations with known local names since Indian companies are still unknown entities in Japan. One of the few companies to access Japan's generics market Given Lupin's entry in the Japanese generic market through the Kyowa acquisition, it is better positioned to exploit the Japanese generics opportunity compared with its peers. Lupin acquired Kyowa in October 2007 and ramped-up the business to INR6.2b by FY11. We estimate 17% revenue CAGR for the Japanese operations, led mainly by new launches. Gradually expanding profitability of Japanese operations Lupin expanded gross margins for Kyowa from 33% to 40% over the past two years and is shifting part of its manufacturing to its Indian facilities, which is likely augment margins. In FY12 Lupin will shift some of trhe API production to India and the formulation manufacturing will be gradually shifted to India from FY13. These initiatives are likely to gradually expand the profitability of Lupin's Japanese operations in the long-term.

August 2011

59

Lupin

Financials and valuations: Lupin


Income Statement
Y/E March Net Sales Change (%) Total Expenditure EBITDA Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT before EO item PBT after EO item Tax Tax Rate (%) Reported PAT PAT Adj for EO items Change (%) Margin (%) Less: Minority Interest Adj Net Profit 2010 47,405 25.5 38,869 8,536 18.0 1,239 7,297 385 1,445 8,357 8,357 1,360 16.3 6,997 6,997 37.8 14.8 180 6,816 2011 57,068 20.4 46,410 10,659 18.7 1,755 8,903 325 1,341 9,920 9,920 1,169 11.8 8,750 8,750 25.1 15.3 168 8,582

(INR Million)
2012E 64,784 13.5 52,590 12,194 18.8 1,955 10,239 304 2,921 12,857 12,857 1,928 15.0 10,928 10,163 16.1 15.7 250 9,913 2013E 74,127 14.4 59,521 14,605 19.7 2,248 12,357 232 1,625 13,750 13,750 2,063 15.0 11,688 11,688 15.0 15.8 270 11,418

Ratios
Y/E March Basic (INR) EPS (Fully Diluted) Cash EPS (Fully Diluted) BV/Share DPS Payout (%) Valuation (x) P/E (Fully Diluted) Cash P/E (Fully Diluted) P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Wkg. Capital Turnover (Days) Leverage Ratio Debt/Equity (x) 2010 15.3 18.1 57.7 2.8 21.2 2011 19.3 23.2 73.5 3.2 18.9 2012E 22.3 26.7 90.5 6.0 28.6 2013E 25.7 30.7 108.6 6.4 28.6

23.3 19.4 6.1 3.6 19.5 0.7

20.2 16.9 5.0 3.2 16.8 1.3

17.5 14.6 4.1 2.7 13.8 1.4

34.1 27.5

29.3 25.1

27.1 28.2

25.7 27.1

Consolidated Balance Sheet


Y/E March Equity Share Capital Fully Diluted Equity Capital Other Reserves Total Reserves Net Worth Minority Interest Deferred liabilities Total Loans Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Goodwill & Intangibles Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. Account Payables Provisions Net Current Assets Appl. of Funds E: MOSL Estimates 2010 889 889 24,789 24,789 25,678 255 1,435 11,399 38,767 22,937 7,072 15,865 3,579 264 3,197 27,755 9,715 11,266 2,015 4,759 11,893 9,649 2,243 15,862 38,767 2011 892 889 31,918 31,918 32,811 515 1,411 11,624 46,361 26,389 9,075 17,313 5,312 32 3,255 34,967 12,000 12,558 4,201 6,208 14,518 11,800 2,718 20,449 46,361

(INR Million)
2012E 892 889 39,473 39,473 40,366 515 1,411 8,624 50,916 30,889 11,030 19,859 5,312 32 3,255 39,049 13,605 14,252 4,714 6,478 16,591 12,957 3,634 22,459 50,916 2013E 892 889 47,551 47,551 48,444 515 1,411 5,624 55,994 35,389 13,278 22,110 5,312 32 3,255 44,034 15,567 16,308 4,747 7,413 18,748 14,825 3,923 25,285 55,994

2.3 90 75 122 0.4

2.3 87 77 131 0.4

2.3 87 77 127 0.2

2.2 85 77 125 0.1

Cash Flow Statement


Y/E March 2010 Oper. Profit/(Loss) before Tax 8,536 Interest/Dividends Recd. 1,445 Direct Taxes Paid -1,090 (Inc)/Dec in WC -4,478 CF from Op. incl EO Exp. 4,414 (inc)/dec in FA (Pur)/Sale of Investments CF from Investments Change in Net Worth Inc/(Dec) in Debt Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance -6,454 -49 -6,503 6,029 -834 -385 -1,483 3,327 1,238 778 2,015 2011 10,659 1,341 -1,193 -2,401 8,405 -4,996 233 -4,763 300 226 -325 -1,658 -1,457 2,186 2,015 4,201

(INR Million)
2012E 12,194 2,921 -1,928 -1,497 11,690 -4,500 0 -4,500 -250 -3,000 -304 -3,123 -6,677 513 4,201 4,714 2013E 14,605 1,625 -2,063 -2,794 11,374 -4,500 0 -4,500 -270 -3,000 -232 -3,340 -6,841 33 4,714 4,747

August 2011

60

Domestic Formulations | New Peaks

This page is left blank intentionally

August 2011

61

Domestic Formulations | New Peaks

MEDICINES All's in place


M: Mix

CAPSULE

Torrent Pharma
CMP: INR589 TP: INR762

MEDICINES Score

61/100
TRP IN

Buy
7/10

6/10

E: Equity with doctors

Torrent is one of the better plays on remedies for high-growth lifestyle segments of CNS, CVS and diabetes. It derives 59% of its revenue from chronic lifestyle segments. CVS is the highest contributor with 35% contribution followed by CNS (21%) and Gastro Intestinal (17%).

Torrent enjoys good brand equity with specialist in the CNS and CVS segments. In the CNS segment, Torrent Pharma ranks 3rd with a prescription market share of 8.1% and in the CVS segment its ranks seventh with a prescription market share of 4.6%. Torrent Pharma has either maintained or improved its prescription ranking in the most of the therapeutic segments in which it operates.

D: Distribution & reach

6/10

I: Introductions

5/10

Torrent Pharma derives 73% of its revenue from metros and tier-I cities. The contribution of rural areas to revenue has fallen over the past five years from 18.2% to 12.8%. Over the past four years, revenue CAGR for all geographies has been below the industry average except in Metro's. Torrent Pharma has a field force of 3,600

Torrent Pharma's new product launch rate has been good compared with its peers in the industry. It launched 38 new products a year (including line extensions) over the past four years. It's revenue growth is driven by its existing products as well as new launches.

Stock info
Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) M.Cap. (INR b) M.Cap. (USD b) 84.6 687/497 3/19/18 54.6 1.2

Financial & valuation summary


Year End 03/10A 03/11A 03/12E 03/13E Net Sales PAT EPS (INR m) (INR m) (INR) 19,040 22,265 25,596 29,817 2,680 2,702 3,392 4,029 31.7 31.9 40.1 47.6 EPS Gr. (%) 9.9 0.8 25.6 18.8 P/E (x) 18.6 18.4 14.7 12.4 P/BV (x) 6.0 4.9 3.8 3.1 RoE (%) 36.2 29.2 29.3 27.7 RoCE (%) 28.7 24.1 24.9 25.1 EV/ EV/ Sales EBITDA 2.7 2.3 1.9 1.6 12.5 12.4 9.6 8.0

Background

Though ranked 17th in terms of total revenue in the domestic formulations segment, Torrent derives its strength from being the leader in some of the most lucrative and fastest growing chronic therapy segments. It has consistently maintained its leadership in these therapeutic classes, with strong brands and new product launches.

August 2011

62

Torrent Pharma

Chairman Profile

Chairman

Torrent Pharma was set-up by Late U N Mehta. Mr Mehta started his career as a clerk with the government. Later, he took a job as a medical representative for Sandoz. Post which he started his own business in pharmaceutical and eventually established the company. Currently, his son Mr. Sudhir Mehta and Mr. Sameer Mehta handle the operations of the company.

C: CAGR and scale-up

6/10

I: Improvement in productivity

3/10

Torrent Pharma has significantly outperformed the industry with revenue CAGR of 19% over FY05-11. The company has scaled up the business rapidly albeit on a low base and growth has been achieved largely because of a favorable therapeutic mix, improvement in brand equity and increase in field force productivity. We expect Torrent Pharma to post 16% CAGR over FY11-13, outperforming the industry, led by a strong presence in fast growing chronic therapeutic areas like CVS, CNS and anti-diabetes and improvement in brand equity.

Torrent Pharma ranks very low compared to its larger peers when it comes to field force productivity. However the company has managed to improve the productivity over the last 6 years. Revenue per MR improved from Rs1.5m in 2004 to Rs2.2m in 2010

N: Non-domestic business

6/10

E: Earnings growth

8/10

We are positive about Torrent Pharma's nondomestic business given it's has strong presence in Latin America and expanding its reach in various regulated and emerging markets. We expect the international business to post 15.7% CAGR over FY11-13 mainly led by the US and Latin American markets. The company has tie-up with 3 global innovators for supplying various products. We expect these supplies to grow at 16.5% CAGR over FY11-13. Option values include upsides from NCE business.

We expect overall top-line CAGR of 16% over FY1113 leading to EPS CAGR of 22.1%. Earnings growth will be driven by the domestic formulation business and increase in profitability of international operations.

S: Stock Attractiveness
A focused and cautious approach to international expansion along with a highly profitable domestic business has ensured good return ratios, RoIC is estimated at 40% over the next two years. Torrent Pharma is valued at 14.7x FY12E and 12.4x FY13E consolidated earnings. Reiterate Buy with a target price of INR762 (16x FY13E EPS).
Stock performance (1 year)
Torrent Pharma 700 650 600 550 500 Aug-10 Nov-10 Feb-11 May-11 Sensex - Rebased

14/20

Aug-11

August 2011

63

Torrent Pharma

India formulations snapshot


Domestic formulations major contributor to revenue, profits The domestic formulations business contributes ~40% to Torrent Pharma's revenue. The segment is the most profitable for Torrent and contributes ~70% to consolidated EBITDA. Revenue/PBT Contribution

All's in place
Strong profitable growth, robust balance sheet, attractive valuation
Torrent derives its strength from its strong positioning in some of the most lucrative and fastest growing chronic therapy segments. It has consistently maintained its leadership in these therapeutic classes, with strong brands and new product launches. Torrent has 6 brands in the industry's top 300 brands, and has 37 brands in leadership positions in their respective molecule segments. The company has a field force of 3,600 medical representatives (MRs). Domestic business has grown at a CAGR of 19% over the last 6 years through FY11. Torrent derived 40% of its revenue from the domestic formulations business in FY11, down from 85% in FY04 due to relatively higher growth in its international business.

Non-DF EBITDA 30%

Torrent Pharma DF EBITDA 70%

1. Mix:

6/10

The leading player in the chronic therapeutic segment Torrent Pharma has grown its market share over the years due to a significant presence in fast growing chronic therapeutic areas. It is among the largest companies in the chronic segments. The company's market share has gone up from 1.9% in 2006 to 2% in 2010. The company posted 19% CAGR over the past five years against 14% CAGR for the industry. Market share has increased marginally

Lifestyle segments like CVS, CNS, anti-diabetes dominate sales Torrent Pharma derives 59% of its revenue from chronic therapeutic segments, which dominate the company's revenue mix. The top five therapeutic segments including CNS, CVS, GI, AI and anti-diabetes contribute ~91% to Torrent's domestic formulations revenue. Torrent is among the market leader in two of the fastest growing therapeutic segments, CNS and CVS. Torrent's sizable presence in the chronic therapy segments makes it an attractive play in the domestic formulations business.
Therapeutic break-up (FY05)
Antidiabetic 3% others 2% Cardiac 36%

Therapeutic break-up (FY11)


Cardiac CNS Pain others Anti-diabetic Anti-infectives GI 5% 33% 19%

Pain 6% Antiinfectives 14%

4%

CNS 17%

GI 22%

13%

5% 21%
Source: Company/Industry/MOSL

2.1 2.1 2.0 2.0 1.9 1.9 2006

Mkt Share (%) Grow th (%)

25 20 15 10 5 0

2. Equity with doctors:

7/10

Strong brand equity among specialists, among leaders in the CVS and CNS Torrent has been a dominant player in two of the industry's fastest growing therapeutic segments i.e CNS and CVS. Torrent ranks No2 in the CVS and No.3 in CNS segments with a value market share of 6.8% and 8.6% respectively.

2007

2008

2009

2010

August 2011

64

Torrent Pharma

Market share in key therapies (%)


8.6 6.8

Growth comparison (%) (2010)


Avg Gr - Company 16.8 17.9 15.1 Avg Gr - Industry 17.1 18.0 18.7

3.6

CVS

GI

CNS

CVS

GI

CNS
Source: Industry/MOSL

* Average growth over 2009-2010

In terms of prescriptions Torrent Pharma has been one of the leading players in two of the industry's fastest growing therapeutic segments viz. CNS and CVS. Torrent Pharma ranks No3 in the CNS and No. 7 in CVS segments with a prescription market share of 8.1% and 4.6% respectively. It ranks sixth in the GI segment. Over the last 4 years, the company has either maintained or improved its ranking in almost all the therapeutic areas it operates in.
Torrent's Prescription ranking has improved across therapy segments
Jan-07 CVS CNS Anti Diabetics Anti infectives GI 8 2 17 14 7 Jan-08 8 2 10 14 6 Jan-09 6 2 13 14 5 Jan-10 Oct-10 5 7 3 3 13 14 15 14 6 6 Source: Industry/MOSL

Top 10 brands contribute 30% of the revenues Torrent Pharma's top 10 brands contribute ~30% to total revenue, which shows low brand concentration compared with other leading companies. Four brands of the company feature among the top 300 brands of the industry. Torrent Pharma's No1 brand, Dilzem, (Diltiazem, CVS) ranks 102nd in the industry and it posted revenue CAGR of 13% over the past four years. Seven of its top 10 brands have grown at double digit CAGR over past 4 years.
Top 10 brands of the company
Brand Dilzem Nikoran Alprax Nebicard Topcef Domstal Droxyl Azulix-mf Deplatt-a Lamitor CAGR through 2006-10 August 2011 Drug Diltiazem Nicorandil Alprazolam Nebivolol Cefixime Domperidone Cefadroxil Glimepiride+Metformin Aspirin + Clopidogrel Lamotrigine Product Category CVS CVS CNS CVS Anti-infective Gastro-intestinal Anti-infective Diabetes CVS CNS Product Launch 1987 1997 1988 2003 1994 1988 1989 2002 2002 1998 Sales (INRm) 475 410 396 252 235 229 213 197 191 170 YoY Gr. (%) 5.7 17.6 0.0 14.5 18.7 CAGR (%) 13.0 19.2 5.4 19.8 16.0

5.5 5.4 3.3 3.5 27.5 33.2 11.8 24.3 17.0 18.5 Source: Industry/MOSL

65

Torrent Pharma

3. Distribution and reach:

6/10

Torrent Pharma derives 73% of its revenue from metros and class-I towns, compared with 63% of the industry average, suggesting a focus on these geographies. In the past four years, revenue CAGR for all geographies has been lower than that of the industry average except for Metros. The contribution of rural areas to revenue has fallen over the past five years from 18.2% in 2006 to 12.8% in 2010.

Geographical distribution of revenues - Torrent Pharma (%)


Metros 18.2 15.7 30.6 Class I Tow ns 17.6 15.6 28.7 16.9 15.8 29.9 Class II to VI 13.8 14.2 27.8 Rural 12.8 14.2 28.5

Geographical distribution of revenues - Industry (%)


Metros 20.6 19.2 32.6 Class I Tow ns 20.9 19.0 31.3 20.0 19.5 31.6 Class II to VI 18.1 19.4 32.5 Rural 17.3 19.6 32.0

35.5

38.1

37.4

44.3

44.5
27.6 28.9 CY07 28.9 CY08 30.0 31.0

CY06

CY07

CY08

CY09

CY10

CY06

CY09

CY10

Geography-wise growth rates - Torrent Pharma (%)


Metros Class I Tow ns Class II to VI 41.1 26.6 16.8 14.1 10.6 CY07 19.0 16.4 16.0 7.9 Rural

Geography-wise growth rates - Industry (%)


Metros Class I Tow ns Class II to VI Rural 26.2 23.5 17.6 14.0 11.1 7.9 17.5 15.6 14.7 13.0 9.5 2.5 17.7 16.4 20.7 17.5

12.7 9.7 6.3 3.8 CY08

10.7 6.7 -3.0 CY09

CY10

CY07

CY08

CY09

CY10

Source: Industry/MOSL

4. Introduction:

5/10

Torrent Pharma's pace of new product launches has been moderate compared with its peers in the industry. There has been significant improvement in revenue per new product launched Torrent's new product launch rate has been moderate compared to its peers in the industry. It has launched 38 new products annually (including line extensions) over the last 4 years. The revenue growth is driven by both existing products as well as new launches. The average revenue per new launch has risen substantially in the past four years from Rs32.7m in 2006 to Rs118m in 2010, suggesting better penetration of launched brands.

August 2011

66

Torrent Pharma

Torrent Pharma's - new launches


No. Of launches in last 2 yrs Avg sales per launch (INR m) 137.2 118.3 73 43 57.1 32.7 CY07 CY08 CY09 CY10 39

Torrent Pharma's growth compositions (%)


New Launches Existing Brands

126

9.8 1.3 8.1 6.9

10.1 9.9

9.1 5.9 CY09 CY10


Source: Industry/MOSL

CY07

CY08

5. CAGR and scale-up:

6/10

We expect 16% CAGR from Torrent Pharma's domestic formulations business led by a strong presence in the fastest growing chronic therapeutic segments. We believe the company will continue to outperform the industry and its peers over the foreseeable future. Historically the company has outperformed industry in this segment with FY05-11 revenue CAGR of 19% versus that of 14% for the industry during the same period. We believe that, Torrent is likely to strengthen its presence in key therapeutic areas, improving its ranking in the industry.
Torrent Pharma: Domestic formulations revenue ramp-up
Revenues (INR m) Grow th (%) 11,285 35.0 38.8 7,254 5,444 3,921 2,848 2,904 6.8 2.0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E 7.3 5,813 6,240 16.3 15.6 18.0 14.0 9,563 8,389

Source: Company/MOSL

6. Improved MR productivity:

3/10

Torrent's topline growth is driven by both addition to the MR strength and improvement in the MR productivity. However MR productivity is low compared to large peers Torrent Pharma has done a good job over the past six years with a improvement in workforce productivity. Over FY04-10, Torrent Pharma's domestic formulations business revenue posted 19.3% CAGR and its sales force expanded by just 10.7% CAGR, implying significant productivity improvement of the workforce. In 2004, Torrent derived revenue of Rs1.5m per MR, which rose to Rs2.3m in 2010. However the MR productivity is still very low compared to large peers.
August 2011

67

Torrent Pharma

Torrent: Salesforce productivity


No. of MRs Revenue per MR (INR m) 2.3

Sales force addition CAGR (%) Productivity Improvement CAGR (%)

1.5 3,600

10.7

11.5
1,959

7.8 1.9
2004 2010

Torrent

Industry
Source: Company/Industry/MOSL

7. Non-domestic business snapshot:

6/10

Positives Strong presence in emerging markets like Brazil and RoW markets. Increasing presence in other emerging markets Increasing presence in US market with healthy product pipeline Strong chemistry skills and backward integrated low-cost operations. Improving profitability of international subsidiaries. Risks & concerns Delay in getting regulatory approvals for the products Worsening of pricing environment in key markets like Germany and US. Rupee appreciation vs US$ may have negative impact on earnings. Continued losses at Russian subsidiaries will impact overall profits. Key news flows/triggers Ramp up in US revenue in FY12-13 Begining of supplies to AstraZeneca Improvement in profitability of international business Impact assessment Expect the international business to post 15% CAGR over FY11-13 led mainly by US and CRAMS supplies to AstraZeneca We expect the international business to record 16% CAGR over FY11-13 excluding low-competition and Para-IV products in the US. Option values include upsides from future inorganic initiatives.

August 2011

68

Torrent Pharma

Sales mix (INR m)


FY09 FY10 FY11 8,389 15.6 10,702 16.9 3,519 583 1,245 2,986 1,276 1,093 2,096 13.4 33 -52.8 21,220 15.8 1,045 47.1 22,265 16.9 FY11-13 CAGR (%) 9,563 11,285 16.0 14.0 18.0 12,421 14,331 15.7 16.1 15.4 4,223 4,983 19.0 525 577 -0.5 1,469 1,704 17.0 3,135 3,292 5.0 1,429 1,643 13.5 1,640 2,131 39.6 2,431 2,845 16.5 16.0 17.0 36 40 10.0 10.0 10.0 24,451 28,500 15.9 15.2 16.6 1,145 1,317 12.2 9.6 15.0 25,596 29,817 15.7 15.0 16.5 Source: Company/MOSL FY12E FY13E

EBITDA Contribution
Torrent Pharma
Non-DF EBITDA 30% DF EBITDA 70%

Domestic formulation 6,240 7,254 YoY Growth (%) 7.3 16.3 International formulation7,970 9,157 YoY Growth (%) 37.8 14.9 Latin America 2,566 3,006 Russia/CIS 658 391 Europe (ex-Germany) 1,011 1,163 Germany (Heumann) 2,573 2,547 RoW 885 1,141 US 278 909 CRAMS 1,601 1,849 YoY Growth (%) 7.4 15.5 Others 53 69 YoY Growth (%) 64.8 29.7 Net Sales 15,864 18,329 YoY Growth (%) 20.9 15.5 Other operating income 441 710 YoY Growth (%) 3.7 61.0 19,040 Income from op. 16,306 YoY Growth (%) 20.4 16.8

8-9. Earnings growth and stock attractiveness:

22/30

Over the past five years Torrent posted earnings CAGR of 34% and CAGR of capital employed in the business was 17%. Torrent consistently improved its profitability, with RoCE increasing from 14.5% in FY05 to 24.1% in FY11. Torrent is likely to post earnings of 22% CAGR over FY11-13, in line with strong operating performance. It is likely to sustain high return ratios despite large capex and growing cash on its books. We believe current valuations do not reflect the improvement in business profitability, turnaround of international operations and Torrent's strong positioning in the domestic formulations segment. Torrent should trade at a premium to most mid-cap pharmaceutical companies, and its valuation gap vis--vis frontline pharmaceutical companies should fall, going forward. The stock trades at 14.7x FY12E and 12.4x FY13E earnings. We believe Torrent's superior financial performance will drive re-rating. Maintain Buy with a target price of INR762 (16x FY13E EPS), an upside of 26%.
Torrent Pharma RoE & RoCE
42.0 RoE (%) 36.2 29.2 28.1 28.7 24.1 24.9 25.1
6 3.9 0 Dec-05 Jan-08 May-07 Aug-06 Dec-10 Mar-05 Jul-09 Mar-10 Oct-08 Aug-11

Torrent Pharma one year forward P/E


RoCE (%)
24 18 P/E (x) Avg(x) 21.4 13.4 11.9 Peak(x) Min(x)

29.3

27.7

12

FY09

FY10

FY11

FY12E

FY13E

August 2011

69

Torrent Pharma

Financials and valuations: Torrent Pharma


Income Statement
Y/E March 2010 Net Revenues 19,040 Change (%) 16.8 Total Expenditure 14,944 % of Sales 78.5 EBITDA 4,096 Margin (%) 18.5 Depreciation 661 EBIT 3,435 Int. and Finance Charges 251 Other Income - Rec. 127 PBT before EO Expense 3,312 Extra Ordinary Exp./(Inc.) 368 PBT after EO Expense 2,944 Current Tax 705 Deferred Tax -74 Tax 632 Tax Rate (%) 19.1 Reported PAT 2,312 Adj PAT 2,680 2011 22,265 16.9 18,173 81.6 4,092 14.4 626 3,466 121 81 3,427 0 3,427 720 5 725 21.2 2,702 2,702

(INR Million)
2012E 25,596 15.0 20,445 79.9 5,151 16.4 952 4,199 172 109 4,137 -21 4,158 745 0 745 18.0 3,413 3,392 2013E 29,817 16.5 23,748 79.6 6,069 16.7 1,137 4,932 172 153 4,913 0 4,913 884 0 884 18.0 4,029 4,029

Ratios
Y/E March Basic (INR) EPS (INR) Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) EBITDA Margins (%) Net Profit Margins (%) RoE RoCE Working Capital Ratios Asset Turnover (x) Fixed Asset Turnover (x) Debtor (Days) Leverage Ratio (x) Current Ratio Interest Cover Ratio Debt/Equity 2010 31.7 35.1 98.2 7.0 25.6 2011 31.9 39.3 120.8 9.3 29.1 2012E 40.1 51.6 153.1 8.1 20.0 2013E 47.6 61.1 191.2 9.5 20.0

18.4 15.0 4.9 2.3 12.4 1.6

14.7 11.4 3.8 1.9 9.6 1.4

12.4 9.6 3.1 1.6 8.0 1.6

18.5 14.1 36.2 28.7

14.4 12.1 29.2 24.1

16.4 13.3 29.3 24.9

16.7 13.5 27.7 25.1

Balance Sheet
Y/E March Equity Share Capital Total Reserves Net Worth Deferred liabilities Total Loans Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Account Receivables Cash and Bank Balance Loans & Advances Curr. Liability & Prov. Account Payables Provisions Net Current Assets Appl. of Funds E: MOSt Estimates 2010 423 7,887 8,310 499 5,224 14,033 8,129 2,718 5,411 1,098 1,412 11,607 3,236 2,982 3,883 1,506 5,496 4,216 1,280 6,111 14,033 2011 423 9,801 10,224 480 5,721 16,441 10,385 3,343 7,041 1,500 1,460 15,346 5,048 3,404 4,788 2,106 8,907 7,479 1,427 6,440 16,441

(INR Million)
2012E 423 12,531 12,955 480 5,721 19,155 12,685 4,295 8,390 1,200 1,460 17,990 5,794 4,090 5,856 2,250 9,884 7,839 2,045 8,106 19,155 2013E 423 15,755 16,178 480 5,721 22,378 14,885 5,432 9,452 1,500 1,460 21,490 6,676 4,927 7,105 2,782 11,524 9,140 2,384 9,966 22,378

1.4 3.6 56

1.4 3.6 55

1.3 3.3 57

1.3 3.3 59

2.1 13.7 0.6

1.7 28.7 0.6

1.8 24.5 0.4

1.9 28.7 0.4

Cash Flow Statement


Y/E March Oper. P/L before Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations 2010 4,096 127 -717 349 3,856 2011 4,092 81 -744 577 4,005 0 4,005 -2,657 -48 -2,705 513 -121 -787 -1 -395 905 3,883 4,788

(INR Million)
2012E 5,151 109 -745 -598 3,917 -21 3,938 -2,000 0 -2,000 -16 -172 -683 0 -870 1,068 4,788 5,856 2013E 6,069 153 -884 -611 4,726 0 4,726 -2,500 0 -2,500 0 -172 -806 0 -977 1,249 5,856 7,105

EO Expense / (Income) 368 CF from Oper. incl EO Exp. 3,488 (inc)/dec in FA (Pur)/Sale of Investments CF from Investments (Inc)/Dec in Debt Interest Paid Dividend Paid Others CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance -1,487 -17 -1,504 398 -251 -592 44 -401 1,583 2,300 3,883

August 2011

70

Domestic Formulations | New Peaks

This page is left blank intentionally

August 2011

71

Domestic Formulations | New Peaks

MEDICINES

CAPSULE

GSK Pharma
4/10 E: Equity with doctors

MEDICINES Score

64/100
GLXO IN

Of patent and parent


M: Mix

CMP: INR2,155 TP: INR2,330

Buy
9/10

GSK derives majority of its revenue from the acute therapeutic segments and has very little presence in the chronic segments. GSK derives 95% of its revenues from acute therapeutic segments with dominant presence in Anti-infcetives, dermatology, pain management and Vitamins. It also enjoys leadership position in the Dermatology segment.

Enjoys strong brand equity in its some of the largest therapeutic segments in the industry. It ranks no.1 in dermatology segment, no.3 in Pain management and Vitamins segments and no5 in AI and respiratory segments. Based on prescription ranking, GSK Pharma is the market leader in Dermatology, vitamins and pain managements segment while ranks no.4 in respiratory segment.

D: Distribution & reach

7/10

I: Introductions

3/10

Derives 60% of the revenues from Metro and Tier I cities. Contribution of Tier II and rural area to total revenues has remained stagnant over the last 5 years. It has field force of 3000MRs which is on a lower side compared to other Indian companies of similar size.

GSK is among the laggards when it comes to launch of new products. GSK has launched very few new products over the last 4 years compared to its peers. It has launched 5 new products (including line extensions) annually over the last 4 years. Ramp-up in domestic formulations revenues is driven largely by existing products.

Stock info
Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) M.Cap. (INR b) M.Cap. (USD b) 84.7 2,475/1,850 5/7/22 182.5 4.0

Financial & valuation summary


Year End 12/09A 12/10A 12/11E 12/12E Net Sales PAT EPS (INR m) (INR m) (INR) 18,708 21,116 23,740 26,921 5,049 5,814 6,567 7,586 59.6 68.6 77.5 89.6 EPS Gr. (%) 12.6 15.2 12.9 15.5 P/E (x) 31.4 27.8 24.1 P/BV (x) 9.5 8.7 8.0 RoE (%) 28.7 30.1 31.3 33.4 RoCE (%) 43.0 44.8 46.3 49.5 EV/ EV/ Sales EBITDA 7.6 6.8 5.9 21.9 20.2 17.2

Background

GSK Pharma is the 4th largest formulations company in India, with a strong presence in segments like dermatology, respiratory and vaccines. Its parent has one of the richest product and R&D pipelines among Pharma companies worldwide. The company is in the process of expanding its presence in the life-style segment led by new launches from the parent's portfolio, launch of branded generics and in-licensing.

August 2011

72

GSK Pharma

CEO Profile

GSK Pharma is a 50% subsidiary of GSK Plc (UK) and is being currently managed by Dr. Hasit Joshipura (MD). Maintaining a leading presence in India and sustaining one of the highest profitability and return ratios in the industry despite miniscule presence in the high-growth life-style segments is the key achievement.

CEO

C: CAGR and scale-up

6/10

I: Improvement in productivity

9/10

GSK has significantly underperformed the industry with revenue CAGR of 8.1% over CY04-10 versus industry revenue CAGR of 14.8% over the same period. The company has gradually lost its market share and slipped through the ranking. We expect it to grow at 13-14% CAGR over CY1012 which is slightly lower than the industry average, mainly due to high base and intensifying competition in acute segment.

GSK enjoys one of the highest MR productivity in the industry with annual revenue per MR at INR7.7m. MR growth was at 5.9% compared to revenue growth of 8.1% for CY04-10 The company has reported an improvement in workforce productivity over CY04-10. At this level the productivity is amongst the best in the industry.

N: Non-domestic business
NA

NA

E: Earnings growth

6/10

Expect overall topline CAGR of 13% for CY10-12 leading to EPS CAGR of 14.2% " EPS growth is higher than topline growth mainly due to expanding EBITDA margins.

S: Stock Attractiveness
One of the most conservative managements amongst Indian pharmaceutical companies Return ratios are amongst the best in the industry with ROCE in excess of 40% and RoEs in excess of 30%. GSK is currently valued at 27.8x CY11E and 24.1x CY12E Maintain Buy with TP of INR 2,330 (26x CY12E EPS)
Stock performance (1 year)
GSK Pharma 2,600 2,350 2,100 1,850 1,600 Aug-10 Nov-10 Feb-11 May -11 Sens ex - Rebas ed

14/20

Aug-11

August 2011

73

GSK Pharma

India formulations snapshot


Second largest Pharma MNC in India. Before Abbott took over Piramal Healthcare's domestic formulation business, GSK was the largest pharma MNC in India. We believe GSK is one of the best plays on the IPR regime in India with aggressive plans to launch new products in the high-growth lifestyle segments. These launches are expected to bring long-term benefits. EBITDA Contribution

Of patent and parent


Solid play on new patent regime
GSK Pharma is among the best performing MNCs in the domestic formulation space with its strong parentage and brand equity among doctors. It leads the industry in profitability despite its meager presence in highly profitable chronic segments. GSK's MR productivity is the best among the leading companies. We believe GSK's growth trajectory will increase from CY13 as it gets meaningful revenue from new launches.

1. Mix:

4/10

Acute segments account for most of GSK's sales The top seven therapeutic segments, AI, Dermatology, Pain Management, Vitamins, Respiratory, Hormones and GI, contribute ~86% to GSK's domestic formulations revenue. GSK derives 95% of its revenue from acute therapeutic segments. Over the past 10 years the contribution of Dermatology and Pain Management rose from lower single digits to double digits while that of Vitamins and Respiratory segments fell from 50% to 18.4%.

DF EBITDA 100%

GSK Pharma: Therapeutic mix


CY 2000
CY 2004

Among the leading players in the industry GSK has maintained leadership in the industry though its ranking has slipped from No1 to No4 over the past few years. However, GSK has maintained its strong position despite few new launches. Its market share fell from 5.23% in 2006 to 4.26% in 2010 due to low growth stemming from very few new launches and stiffer competition. GSK's business posted CAGR of 8.1% over the past six years against 14% CAGR for industry. Market share and growth

Others 15% GI 7%

AI 21%

Dermatol ogy/Ster oids 2% Pain 5%

GI 6%

Others 15%

AI 25%

Dermatol ogy/Ster oids 18%

Res pirat ory 24%

VMN 26%

Res pirat ory 10%

VMN 15%

Pain 11%

March 2011

Gynaec 3% Anti-Parasitic 3% GI 7%

CVS 3%

Others 6% AI 21%

Mkt Share (%) Grow th (%) 4.3 19.2 4.3 5.2 4.9 4.5

Hormones 8%

Respiratory 9% VMN 10% Pain 11%

Dermatology 19%

6.8

2.9

3.6

9.3

Source: Company/Industry/MOSL

2006 2007 2008 2009 2010

August 2011

74

GSK Pharma

2. Equity with doctors:

9/10

GSK leads the industry in AI, Dermatology, Pain Management GSK ranks first in the Dermatology space in India with market share of 20% and ranks third in the Pain Management and Vitamins segments with market share of 6.4% and 7.3% respectively. It ranks fifth in two of the industry's largest therapeutic segments, AI and Respiratory, with market share of 6% and 5.1% respectively. However over the past two years, the company lagged the industry growth rate in almost all therapeutic segments due to very few new launches.
GSK Pharma: Market share in key therapies (%)
20.3

GSK Pharma: Growth composition (%) (2010)


Avg Gr - Company 16.0 14.6 16.2 Av g Gr - Industry 16.7 13.9 9.8 16.4 17.4 18.4

5.1

6.4

7.3

7.1

AI

Respiratory Pain/Analgesic

VMN

Dermatology

AI

Res piratory Pain/Analgesic

VMN

Dermatology

* Average growth over 2009-2010

Source: Industry/MOSL

GSK has strong brand equity among physicians, which is visible from its market share and prescriptions rankings. GSK ranks first in the Dermatology, Vitamins and Pain Management segments with prescription market share of 10.4%, 8.7% and 7% respectively. GSK ranks fourth in the Respiratory segment and sixth in the Gynecology segment.
Prescription ranking of GSK
Jan-07 Derma Vit Pain Mgmt Respiratory Gynaec Anti-infectives GI CVS 1 1 1 3 1 9 10 16 Jan-08 1 1 1 3 4 9 9 18 Jan-09 1 1 2 3 6 9 13 18 Jan-10 Oct-10 1 1 1 1 2 1 3 4 6 6 10 10 15 15 19 20 Source: Industry/MOSL

Top 10 brands contribute 45% to GSK revenue GSK's top 10 brands contribute ~45% to its total revenue. The brand concentration is among the highest in the industry. It shows GSK's brand building ability and its strong brand recall among physicians. GSK's top 10 brands feature among the industry's top 100 brands. Its No1 brand, Augmentin (Amoxycillin, AI), ranks fifth in the industry and posted 18% growth over the past four years. Eight of the 10 brands posted double-digit CAGR over the past four years.

August 2011

75

GSK Pharma

Top 10 brands
Brand Drug Product Launch Sales (INR m) 1986 1994 1991 1995 1989 2000 1996 1996 1996 1971 1,032 1,704 798 1,101 813 638 633 631 630 822 YoY Gr (%) CAGR (%) Zinetac Ranitidine Augmentin Amoxy. & Clav. Ceftum Cefuroxime Calpol Paracetamol Phexin Cephalexin Eltroxin Levothyroxine Betnovate-c Betameth.+Chinoform. Betnovate-n Betameth.+Neom. Neosporin Antibio. Comb. Betnesol Betamethasone injectables CAGR through 2006-10 12.5 12.6 27.7 18.0 23.8 14.0 16.6 15.5 10.2 6.4 19.2 17.0 31.7 13.7 29.3 10.9 18.8 15.5 11.3 7.2 Source: Industry/MOSL

3. Distribution and reach:

7/10

GSK derives 60% of its revenue from metros and Class-I towns compared with an industry average of 63%. Over the past four years revenue CAGR for all geographies has lagged the industry average. However, GSK's CY10 growth in all geographies was in higher double digits.
GSK: Geographical distribution of revenues (%)
METROS 21.9 19.0 31.7 CLASS I TOWNS 22.9 19.4 30.7 22.4 20.6 31.4 CLASS II TO VI 20.7 20.4 32.3 RURAL 19.7 20.1 32.0

Geographical distribution of revenues: Industry (%)


METROS 20.6 19.2 32.6 CLASS I TOWNS 20.9 19.0 31.3 20.0 19.5 31.6 CLASS II TO VI 18.1 19.4 32.5 RURAL 17.3 19.6 32.0

27.4 CY06

27.0 CY07

25.6 CY08

26.6 CY09

28.2 CY10

27.6 CY06

28.9 CY07

28.9 CY08

30.0

31.0

CY09

CY10

GSK: Geography-wise growth rates (%)


METROS CLASS II TO VI CLASS I TOWNS RURAL

Industry: Geography-wise growth rates (%)


METROS CLASS II TO VI CLASS I TOWNS RURAL

26.7 17.7 17.7


17.6 14.0 11.1 7. 9

26.2 23.5 20.7 17.5

13.3 9.7 7.5 5.2 1.3 -0.5 CY07 1.6 CY08 -1.8 6.0 13.3 12.7 8.3 0.8 CY09 CY10

17.5 15. 6 14.7 9.5

17.7 16.4 13.0

2.5 CY07 CY08 CY09 CY10

Source: Industry/MOSL

August 2011

76

GSK Pharma

4. Introductions:

3/10

Existing products lead revenue growth over the past four years Over the past four years, GSK launched very few new products-22 new products including line extensions-compared with its peers. The average revenue per new launch has improved marginaly from been virtually stagnant from INR71m in CY07 to INR81m in CY10. Topline growth over the past four years has been almost entirely driven by existing products, which reflects GSK's ability to leverage existing brands.
GSK Pharma: New launches
No. Of launches in last 2 yrs Av g s ales per launc h (INR m) 124.5

GSK Pharma: Growth composition (%)


New Launches Ex is ting Brands

81.6 71.4

81.3 17.4 7.4

13 CY07

15 CY08

23 CY09

36 CY10

2.2 0.7 CY07

2.8 0.8 CY08

1.9 CY09

1.8 CY10
Source: Industry/MOSL

5. CAGR and scale up:

6/10

We expect 13-14% CAGR for GSK's domestic formulations business over the next few years. GSK's top-line growth will be led by a focus on priority products, which will sustain double-digit growth. This will be driven by expanding therapeutic and geographic coverage and with incremental contribution from new launches. We believe the growth trajectory will improve in the long term as new launches contribute meaningfully to the top-line.

6. Improvement in MR productivity:

9/10

GSK's sales force productivity increases GSK's revenue posted CAGR of 8.7% over CY04-10 and its sales force posted CAGR of 5.9% over CY04-10, implying improvement in salesforce productivity. In 2004, GSK derived INR6.5m revenue per MR, which rose to INR7.7m in CY10. GSK's current MR productivity is arguably one of the best in the industry.

August 2011

77

GSK Pharma

GSK Pharma: Salesforce productivity


No. of MRs Revenue per MR (INR m) 7.7
Sales forc e addition CAGR (%) Produc tivity Improv ement CAGR (%)

6.5
5.9

11.5

1,775 2004

2,500 2010

1.5 GSK

1.9 Indus try


Source: Company/Industry/MOSL

8-9. Earnings growth and stock attractiveness:

20/30

We believe GSK is one of the best plays on the IPR regime in India with aggressive plans to launch new products in the high growth lifestyle segments. These launches are expected to bring it long-term benefits. We believe GSK is likely to sustain double-digit topline growth over the next few years. We believe this growth trajectory will improve after CY13, as new launches contribute meaningfully to the top-line. Given the high profitability of operations, we expect this growth to lead to sustainable double-digit earnings growth and RoE of ~30%. This growth is likely to be funded through miniscule capex and negative net working capital. GSK deserves premium valuations due to strong parentage (giving access to a large product pipeline), brand-building ability and likely positioning in the post patent era. GSK is one of the very few companies with the ability to drive reasonable growth without major capital requirement, leading to high RoCE of over 45%. We expect GSK to record CY11E EPS of INR77.5 (up 12.9%) and CY12E EPS of INR89.6 (up 15.5%). The stock is valued at 27.8x CY11E and 24.1x CY12E earnings. Maintain Buy with a target price of INR2,330 (26x CY11E).
GSK RoE & RoCE (%)
RoE 44.0 44.8 RoCE 46.3 49.5

GSK one year forward P/E


34 28 P/E (x ) Av g(x ) 30.2 23.1 22 16 10 Mar-07 F eb-08 F eb-09 F eb-10 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 F eb-11 14.8 24.6 Peak(x) Min(x)

43.0 28.7

29.1

30.1

33.4 31.3

2008

2009

2010

2011E

2012E

August 2011

Aug-11

78

GSK Pharma

Financials and valuations: GSK Pharma


Income Statement
Y/E December Net Sales Change (%) Materials Consumed Personnel Expenses Other Expenses Total Expenditure EBITDA Change (%) Margin (%) Depreciation Int. and Finance Charges Other Income - Rec. PBT & EO Expense Tax Tax Rate (%) Adj PAT EO Expense (net of tax) Reported PAT Change (%) Margin (%) 2009 18,708 12.7 6,922 2,094 3,146 12,162 6,546 13.3 35.0 164 4 1,206 7,585 2,536 33.4 5,049 -74 5,123 12.6 27.4 2010 21,116 12.9 7,770 2,409 3,560 13,739 7,378 12.7 34.9 176 6 1,477 8,673 2,859 33.0 5,814 177 5,637 15.2 26.7

(INR Million)
2011E 23,740 12.4 8,784 2,842 4,163 15,789 7,951 7.8 33.5 202 0 1,969 9,718 3,152 32.4 6,567 1,859 4,708 12.9 19.8 2012E 26,921 13.4 9,961 3,212 4,525 17,698 9,223 16.0 34.3 231 0 2,234 11,226 3,641 32.4 7,586 0 7,586 15.5 28.2

Ratios
Y/E December Basic (INR) EPS Cash EPS BV/Share DPS Payout (%) Valuation P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Working Capital (Days) Leverage Ratio Debt/Equity 2009 59.6 61.5 207.7 30.0 58.9 2010 68.6 70.7 228.0 40.0 66.5 2011E 77.5 79.9 247.7 50.0 73.5 2012E 89.6 92.3 267.9 60.0 76.4

31.4 30.5 9.5 7.6 21.9 1.9

27.8 27.0 8.7 6.8 20.2 2.3

24.1 23.4 8.0 5.9 17.2 2.8

28.7 43.0

30.1 44.8

31.3 46.3

33.4 49.5

Balance Sheet
Y/E December Equity Share Capital Reserves Capital Reserve Net Worth Loans Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Curr . Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. Account Payables Provisions Net Current Assets Deferred Tax Assets 2009 847 16,728 17 17,591 54 17,646 2,892 1,964 928 214 1,909 21,144 2,530 537 16,726 1,351 6,996 3,167 3,830 14,148 447 2010 847 18,445 17 19,308 52 19,360 3,184 2,095 1,089 87 1,604 24,483 2,815 470 19,481 1,717 8,468 3,567 4,900 16,016 564

(INR Million)
2011E 847 20,115 17 20,979 0 20,979 3,784 2,297 1,487 214 20,566 6,932 3,157 665 1,187 1,923 8,784 4,036 4,748 -1,852 564 20,979 2012E 847 21,826 17 22,689 0 22,689 4,184 2,528 1,656 214 22,194 7,834 3,580 727 1,346 2,181 9,772 4,523 5,250 -1,938 564 22,689

20.4 10 49 -50

20.9 8 49 -60

18.4 10 49 -47

17.1 10 49 -45

0.0

0.0

0.0

0.0

Cash Flow Statement


Y/E December 2009 Oper. Profit/(Loss) bef. Tax 6,546 Interest/Dividends Recd. 1,206 Direct Taxes Paid -2,687 (Inc)/Dec in WC 1,153 CF from Operations 6,218 EO expense CF frm Op. incl EO exp. (inc)/dec in FA (Pur)/Sale of Investments CF from investments Change in Net Worth Inc/(Dec) in Debt Interest Paid Dividend Paid CF from Fin. Activity -74 6,292 -184 5,535 5,350 0 -2 -4 -3,976 -3,982 2010 7,378 1,477 -2,976 -3 5,876 177 5,699 -166 216 50 0 -3 -6 -2,985 -2,994

(INR Million)
2011E 7,951 1,969 -3,152 -1,392 5,376 1,859 3,518 -726 -17,204 -17,931 53 -52 0 -3,863 -3,862 -18,274 19,481 1,187 2012E 9,223 2,234 -3,641 -720 7,096 0 7,096 -400 -1,729 -2,129 21 0 0 -4,829 -4,808 159 1,187 1,346

Appl. of Funds 17,646 19,360 E: MOSL Estimates; ^Standalone results

Inc/Dec of Cash 7,660 2,755 Add: Beginning Balance 9,065 16,726 Closing Balance 16,726 19,481 E: MOSL Estimates ^ - Standalone results

August 2011

79

Domestic Formulations | New Peaks

MEDICINES

CAPSULE

Sun Pharma
CMP: INR464 TP: INR524

MEDICINES Score

77/100
SUNP IN

The Sun shines bright !


M: Mix 7/10

Neutral
9/10

E: Equity with doctors

Sun is the best play on the high-growth life-style segments of CNS, CVS and Diabetes. It derives 61% of its revenues from lifestyle chronic segments Sun is one of the very few companies which has focussed on the life-style from its inception.

Sun pharma enjoys strong brand equity in CNS, Gynaecology, CVS and Anti-diabetic segments. In CNS and Gynaecology segments, Sun Pharma ranks No.1 with prescription market share of 12% and 4.2% respectively while in CVS and Antidiabetics segment it ranks no 2 with prescription market share of 6.8% and 7.8% respectively. Further, it has either maintained or improved its prescription ranking in the therapeutic areas where it is present.

D: Distribution & reach

8/10

I: Introductions

6/10

Derives 73% of the revenues from Metro and Tier I cities. The contribution of rural areas to revenues has come down over the last 5 years. Further, in last 4 year, revenue CAGR for all geographies has been in-line or better than industry average It has field force strength of 2,600

Sun Pharma's new product launch rate has been moderate compared to its peers in the industry. It has launched 31 new products annually (including line extensions) over the last 4 years. The revenue growth is driven by both existing products as well as new launches.

Stock info
Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) M.Cap. (INR b) M.Cap. (USD b) 1,035.6 538/341 2/22/41 480.5 10.4

Financial & valuation summary


Year End 03/11A 03/11A* 03/12E Net Sales PAT EPS (INR m) (INR m) (INR) 52,066 57,214 65,601 14,041 18,161 17,952 13.6 17.5 17.3 EPS Gr. (%) 47.8 34.4 27.9 20.5 P/E (x) 34.2 26.5 26.8 22.2 4.4 3.9 17.7 18.5 20.5 22.2 6.6 5.5 20.8 16.7 P/BV (x) 5.1 RoE (%) 16.2 RoCE (%) 22.9 EV/ EV/ Sales EBITDA 7.7 22.4

03/13E 75,976 21,626 20.9 * Including Para-IV/one-off upsides

Background

Sun Pharma is one of the largest Indian companies in the domestic formulation space with significant presence and leadership in fast growing chronic therapeutic areas like CVS, Diabetes, CNS etc. It offers the best play on fast growing and most lucrative lifestyle therapeutic segments in India. Over the past decade it has also expanded its presence to US and 40 other markets. Key markets include India and US.

August 2011

80

Sun Pharma

CEO Profile

Dilip S. Shanghvi is a graduate in commerce from Kolkata University. He founded Sun Pharma in 1982 and has extensive experience in the pharmaceutical industry. Focused approach to business and sustaining superior profitability and growth on higher base are his key achievements.

CEO

C: CAGR and scale-up

9/10

I: Improvement in productivity

9/10

Sun Pharma has significantly outperformed the industry with revenue CAGR of 23% over FY05-11. The company has scaled up the business rapidly albeit on a low base. The growth is achieved largely because of favorable therapeutic mix, improvement in brand equity and increase in field force productivity. We expect it to grow domestic formulations at 18.5% CAGR over FY11-13 outperforming the industry led by strong presence in fast growing chronic therapeutic areas like CVS, CNS and Antidiabetics, and improvement in brand equity.

Sun ranks the best in the industry in terms of MR productivity. Revenue per MR has improved significantly from INR3.2m in 2004 to INR7.8m in 2010. The current field force productivity is one of the best in the industry.

N: Non-domestic business

7/10

E: Earnings growth

9/10

Remain positive on Sun's US business given its strong chemistry skills, strong generic pipeline and monetization of some of the niche, low-competition opportunities Expect international business to record 15.2% CAGR for FY11-13 mainly led by the Taro acquisition. Core international business (excluding one-offs in US) to record 34% CAGR Option values includes upsides from one-off opportunities in US.

Expect overall topline CAGR of 15.2% for FY11-13 leading to EPS CAGR of 24% Earnings growth will be driven by the Taro acquisition, sustained momentum in the India formulations business and gradual improvement in Caraco

S: Stock Attractiveness
Focused and cautious approach to international expansion coupled with highly profitable domestic business has ensured good return ratios which, partly muted due to significant cash of USD1b. Sun is currently valued at 26.8x FY12E and 22.2x FY13E consolidated earnings We maintain Neutral with TP of INR524 (25x FY13E EPS) excluding Para-IV upsides
Stock performance (1 year)
Sun Pharma 540 480 420 360 300 Aug-10 Nov-10 Feb-11 May-11

13/20

Sensex - Rebased

Aug-11

August 2011

81

Sun Pharma

India formulations snapshot


Domestic formulations major contributor to revenue, profits The domestic formulations business contributes 42% to Sun Pharma's revenue, a contribution that is the highest among leading Indian generic companies. The segment is the most profitable for Sun Pharma and contributed almost 72% to EBITDA in FY11. EBITDA Contribution

The Sun shines bright !


But dazzling valuation merits caution
Sun Pharma is one of the largest Indian companies in the domestic formulations space with a significant presence and leadership in fast growing chronic therapeutic areas like CVS, diabetes and CNS. Over the years, Sun Pharma out-performed industry growth and increased its market share and brand equity in its major segments. Sun Pharma is arguably the best company in the industry in terms of improvement in workforce productivity and the best play on fast growing and the lucrative lifestyle therapeutic segments.

1. Mix:

7/10

Sun Pharm a
Non-DF EBITDA 28%

Lifestyle segments like CVS, CNS, anti-diabetes dominate sales Sun Pharma derives 61% of its revenue from lifestyle therapeutic segments, which dominate the company's revenue mix. The top four therapeutic segments including CNS, CVS, GI and anti-diabetes contribute ~70% to Sun Pharma's domestic formulations revenue. It is the market leader in two of the fastest growing therapy segments, CNS and CVS. Sun Pharma's sizable presence on the chronic therapy segments makes it the most attractive play in the domestic formulations business.
CNS, CVS, Diabetes dominates the therapy mix
FY01
FY11 Respirat Others Ophthalm ory 4% 8% ology 5%

DF EBITDA 72%

The largest player in the chronic therapeutic segment Sun Pharma is one of the largest players in the industry and has grown its market share over the years due to significant presence in fast growing chronic therapeutic areas. Sun Pharma is the largest company in the chronic segments, in which it commands 3.66% market share, which grew from 3.21% in 2006. The company posted 23.2% CAGR over the past six years against 14% CAGR for the industry. Sun Pharma

Others 23% Respirat ory 6%

CNS 32%

CNS 27%

Pain 6% Gynaec 7%
Gynaeco GI logy 6% 2% CVS 21%

Pain 10%

Diabetes 10% GI 12%

CVS 21%

Source: Company/Industry/MOSL

2. Equity with doctors:

9/10

Mkt Share (%) Grow th (%) 23.9 17.5 13.7 17.5 18.2

3.21

3.58

2006 2007 2008 2009 2010

3.66

3.3

3.4

Strong brand equity among specialists, leader in the CVS, CNS, GI and anti-diabetes segments Sun Pharma has been a dominant player in three of the industry's fastest growing therapeutic segments, CNS, CVS and anti-diabetes. Sun Pharma ranks No1 in the CNS and CVS segments with a value market share of 20.7% and 7.1% respectively. It ranks fourth in the anti-diabetes segment with market share of 7.8% and sixth in the GI and gynecology segments with market share of 4.7% and 5.5% respectively. Except in the anti-diabetes segment, in all other segments the average growth rate over the past two years has been higher than the industry's.

August 2011

82

Sun Pharma

Market share in key therapies (%)


20.7

Growth comparison (%) (2010)


Avg Gr - Company Avg Gr - Industry

7.1 4.7

7.8 5.5

25.8 20.7 20.2 17.1 GI 18.1 Gynaecology 18.8 18.7 CNS 21.2

17.9
CVS GI Gynaecology CNS Anti Diabetic

23.3 Anti Diabetic

CVS

* Average growth over 2009-2010

Source: Industry/MOSL

Sun Pharma has strong brand equity in the CNS, gynaecology, CVS and anti-diabetes segments, in terms of the number of prescriptions written in the segments. In the CNS and gynaecology segments, Sun Pharma ranks No1 with a prescription market share of 12% and 4.2 respectively while in the CVS and anti-diabetes segments it ranks second and its prescription market share is 6.8% and 7.8% respectively. Over the past few years Sun Pharma has either maintained or improved its prescription ranking in the therapeutic areas in which it is present.
Sun Pharma's prescription ranking
Jan-07 CNS Gynaec CVS Anti-diabetic GI Respiratory 1 5 2 2 15 23 Jan-08 1 2 2 2 14 25 Jan-09 1 2 2 2 15 23 Jan-10 Oct-10 1 1 1 1 2 2 2 2 12 12 22 22 Source: Industry/MOSL

Top 10 brands contribute 20% of the revenues Sun Pharma's top 10 brands contribute ~20% to total revenue, which shows low brand concentration compared with other leading companies. Seven of its brands feature among the top 300 brands of the industry. Sun Pharma's No1 brand, Pantocid, (Pantoprazole, GI) ranks 87th in the industry and has posted revenue CAGR of 19% over the past four years. This is the only company among the companies covered in this report to post double-digit revenue CAGR in all its top 10 brands.
Top 10 brands of the company
Brand Pantocid Glucored Susten Aztor Pantocid-D Gemer Strocit Repace Encorate Chrono Clopilet August 2011 Drug Pantoprazole Solids Glibenclamide + Metformin Progesterone Atorvastatin Pantopr.+ Domperidone Glimepiride+Metformin Citocholine Losartan Sodium Valproate Clopidogrel Product Category Gastro-intestinal Anti-diabetics Gynaecology CVS Gastro-intestinal Anti-diabetics CVS CNS CVS Product Launch 1999 2000 2000 2000 2003 2002 2004 1998 1999 2001 Sales (INR m) 479 457 430 400 355 287 253 243 234 230 YoY Gr. (%) CAGR (%)

20.2 19.5 11.2 11.3 16.9 14.3 11.6 24.1 22.4 28.2 20.3 32.6 2.7 17.7 8.9 12.3 10.3 13.9 17.7 25.0 Source: Industry/MOSL

83

Sun Pharma

3. Distribution and reach:

8/10

Sun Pharma derives 73% of its revenue from metros and class-I towns, compared with 63% of the industry average, suggesting a focus on these geographies. In the past four years, revenue CAGR for all geographies has been in line/better than the than that of the industry average. The contribution of rural areas to revenue has fallen over the past five years.

Geographical distribution of revenues - Sun Pharma (%)


Metros 14.6 14.3 34.0 Class I Tow ns 14.1 14.5 32.6 13.6 14.2 34.1 Class II TO VI 12.2 15.2 32.8 Rural 11.0 16.3 33.2

Geographical distribution of revenues - Industry (%)

37.1

38.8

38.2

39.9

39.5

CY06

CY07

CY08

CY09

CY10

Geography-wise growth rates - Sun Pharma (%)


Metros Class I Tow ns Class II To VI Rural 32.9 26.4 19.0 14.9 9.2 9.5 22.7 14.9 15.7 13.1 6.2 CY07 CY08 CY09 CY10 23.4 13.6 12.2 25.8 22.6

Geography-wise growth rates - Industry (%)

Source: Industry/MOSL

4. Introductions:

6/10

Sun Pharma's new product launches have been moderate compared with its peers in the industry. There has been significant improvement in revenue per new product launched Sun Pharma's new launch rate has been moderate compared with its peers in the industry. It launched 31 new products each year (including line extensions) over the past four years. The average revenue per new launch has risen substantially in the past four years from INR112m in 2006 to INR163m in 2010, suggesting better penetration of launched brands. Revenue growth was driven by existing products and new launches.

August 2011

84

Sun Pharma

Sun Pharma's - new launches


No. Of launches in last 2 yrs Av g s ales per launc h (INR m)

Sun Pharma's growth compositions (%) (2010)


New Launc hes Ex is ting Brands

163.2

112.3

103.5

95.8
1.5 12.2 8.4 6.9

15.6

9.1

11.3

86 CY07

64 CY08

64 CY09

60 CY10
CY07 CY08 CY09

8.3 CY10
Source: Industry/MOSL

* Average growth over 2009-2010

5. CAGR and scale up:

9/10

We expect 18.5% CAGR from Sun Pharma's domestic formulations business led by a strong presence in the fastest growing chronic therapeutic segments. We believe that the company will continue to outperform the industry and its peers over the foreseeable future despite a sizable revenue base. We believe that, Sun is likely to strengthen its presence in key therapeutic areas, improving its ranking in the industry.
Sun Pharma: Domestic formulations revenue ramp-up
Revenue (INR m) 32.7 23.1 17.7 14,762 11,810 6,800 -6.6 23,801 25.0 19,597 18,301 10.9 Grow th (%) 31,132 30.1 26,383 18.0

FY05

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

Source: Company/MOSL

6. Improvement in MR productivity:

9/10

Unlike other leading companies covered in this report, Sun Pharma's topline growth was driven by a significant improvement in MR productivity. The company leads the pack in productivity improvement Sun Pharma has done a stellar job over the past six years with a significant improvement in workforce productivity. Over FY04-10, Sun Pharma's domestic formulations revenues posted 23.3% CAGR and its sales force expanded by just 6.3% CAGR, implying significant productivity improvement of the workforce. In 2004, Sun Pharma derived revenue of INR3.2m per MR, which rose to INR7.8m in 2010. The productivity was among the best in the industry.
August 2011

85

Sun Pharma

Sun Pharma: Sales force productivity


No. of MRs Revenue per MR (INR m) 7.8
Sales force addition CAGR (%) Productivity Improvement CAGR (%) 6.3

3.2

16.0 11.5

1,799 2004

2,600 2010
Sun Pharma

1.9 Industry
Source: Company/Industry/MOSL

7. Non-domestic business:

7/10

Positives Strong presence in the US through its own supplies, Taro and Caraco. Strong chemistry skills and backward integrated low-cost operations. Pragmatic mix of low-competition, Para-IV and normal products for the US market. Targets niche opportunities in the US market. One of the most profitable domestic business with strong presence in high growth segments Risks & concerns Slow progress in resolving cGMP issues at Caraco Potential damages for "at-risk" launch of generic Protonix in the US. Integration of Taro and sustaining the improvement in its profitability will be a key challenge. Gradual ramp-up in emerging market portfolio. Astute tax planning results in very low taxes - tax can increase significantly if tax laws are changed. Key news flows/triggers Update on generic Eloxatin. Launch of generic Prandin in US under exclusivity. US Federal Circuit Court ruling on Protonix patent litigation. Ramp-up in generic Effexor XR sales. Steps to sustain profitability of Taro and to improve its R&D productivity.

Impact assessment Positive on Sun Pharma's US business given its strong chemistry skills, generic pipeline and monetization of some niche, low-competition opportunities. Expect the international business to post 15.2% CAGR over FY11-13 led mainly by the Taro acquisition. Core international business (excluding one-offs in the US) will post 34% CAGR over FY11-13. Option values include upsides from future inorganic initiatives - the company has cash of ~USD1b.
August 2011

86

Sun Pharma

Sales mix (INR m)


FY09 FY10 FY11 FY12E FY13E FY11-13 CAGR (%) 14.4 4.5 14.4 13.9

EBITDA Contribution
Sun Pharm a
Non-DF EBITDA 28%

Domestic Sales Formulations 19,597 18,301 API 1,042 1,021 Others 11 11 Total Domestic Sales 20,650 19,334 % of total sales 47.2 47.4 International sales Formulations 19,256 16,892 Taro 0 0 Caraco-Generics15,409 11,076 Branded 3,847 5,816 API 3,804 4,470 Others 41 66 Total International sales 23,101 21,428 % of total sales 52.8 52.6 Gross Sales 43,751 40,761 Less: Indirect Taxes 1,917 1,728 Net Sales 41,833 39,033

23,801 1,130 17 24,948 43.0 28,982 9,962 13,042 5,978 4,083 54 33,119 57.0 58,066 852 57,214

26,383 1,186 17 27,586 41.4

31,132 1,234 17 32,383 41.9

34,607 39,922 17.4 17,357 19,008 4,882 6,072 -31.8 12,368 14,842 57.6 4,409 4,850 2.8 60 66 11.0 39,076 44,839 16.4 58.6 58.1 66,662 77,221 15.3 1,061 1,245 65,601 75,976 15.2 Source: Company/MOSL

DF EBITDA 72%

8-9. Earnings growth and stock attractiveness:

21/30

We expect overall top-line CAGR of 15% over FY11-13, leading to EPS CAGR of 24%. Earnings growth will be driven by the Taro acquisition, sustained momentum in the India formulations business and gradual improvement in Caraco. Sun Pharma has been one of the most consistent performers among Indian pharmaceutical companies over the past decade. Its profitability is one of the highest among its peers. It has been able to achieve this despite being a late entrant in the domestic formulations and the US generic markets, compared with peers like Ranbaxy, Dr Reddy's Labs and Cipla. Key USPs of the company include: 1. Ability to scale up its operations in India and the US without sacrificing profitability, i.e., ability to strike an optimum balance between growth and profitability. 2. Has established a very strong and profitable domestic formulations business which, given its predictable nature, offers a strong foundation to scale-up its international initiatives. 3. A focused approach by the management - Unlike some of its peers it has not spread itself very thin by expanding across the globe. Its key markets continue to be India and the US with expanding presence in some of the emerging markets. It has been able to avoid the temptation to expand in regulated European markets wherein most of its peers have got adversely impacted over the past few years due to regulatory changes.

August 2011

87

Sun Pharma

An expanding generic portfolio coupled with sustained double-digit growth in high-margin life-style segments in India is likely to bring in long-term benefits for Sun Pharma. Its ability to sustain superior margins even on a high base is a clear positive. Key drivers for future include: 1. Ramp-up in US business and resolution of Caraco's cGMP issues 2. Monetization of the Para-IV pipeline in the US 3. Taro integration with potential for improvement in its profitability 4. Launch of controlled substances in the US. While we are positive about SUNP's business outlook, rich valuations have tempered our bullishness. We maintain Neutral with a target price of INR524 (25x FY13E EPS). Inorganic initiatives (Sun has cash of ~USD1b) are a key risk to our rating. However, we believe that given the recent acquisition of Taro, Sun is unlikely to make a large acquisition.
Sun Pharma RoE & RoCE (%) Sun Pharma one year forward PE
34 27 20 20.2 13 11.9 6 Mar-07 Feb-08 Feb-09 Feb-10 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Feb-11 Aug-11 P/E (x) Avg(x) Peak(x) Min(x)

29.6 25.0

Sun Pharma non-domestic business: key trends, triggers & risk Building a strong and focused US business Sun has been able to establish itself as a key Indian player in the US generics market through a combination of: 1. Strong chemistry skills which has enabled it to develop a strong generic pipeline for the US market. 2. Good product selection in building presence in the US market - Rather than targeting all the large products, Sun has focused on building a pragmatic mix of niche, low-competition products along with other normal products. 3. Identifying key opportunities - This capability is clearly visible in the Taro acquisition wherein, despite a 3-year delay, Sun has been able to acquire the company and consequently a profitable portfolio of dermatology and paediatric products. Over the past few years, Sun has been able to build a very strong pipeline of generic products for the US market. It currently has 149 ANDAs pending US FDA approval - one of the strongest pipelines amongst Indian companies.
August 2011

88

Sun Pharma

Key Indian companies - ANDA pipeline


Filed Approved 383 Pending Approval

215 180 138 77 104 76

204 138 66

232 151 109 69 40 51 152 101

Aurobindo

Dr. Reddy's

Ranbaxy

Sun

Glenmark

Lupin

Source: Company/MOSL

Taro acquisition - fills a key gap and complements Sun's US presence About 90% of Taro's sales come from the US markets. It has expertise in the dermatology and paediatric segments and has about 170 scientists involved in product development. One of the key attractions is Taro's capabilities of developing and manufacturing of ointments, creams, lotions in the semi-solids category. The acquisition fills-in a key gap in Sun's US portfolio and complements its existing presence in this important market. Taro enjoys relatively high profitability compared to peers Given its strengths in the low-competition therapeutic segment, Taro has traditionally enjoyed relatively higher profitability in the US generics market. We believe that this is sustainable and in fact, under the control of a capable management like Sun, the profitability is likely to improve in the future, albeit gradually.
TARO - Key financials
(USD M) Sales Growth (%) EBITDA EBITDA Margins (%) PBT Tax PAT Growth (%) CY08 337 55 16.4 56 12 44 CY09 359 6.6 67 18.8 51 (70) 121 173.2 CY10 393 9.4 85 21.7 71 18 52 (56.8) 2QCY10 98 19 19.9 20 4 17 2QCY11 112 14.2 34 30.6 38 2 36 119.6 1HCY10 187 1HCY11 219 17.4 39 68 20.8 30.8 31 71 6 8 25 62 147.9 Source: Company/MOSL

Taro - Good acquisition at reasonable valuations Unlike some of its other Indian peers, Sun has been extremely cautious in paying for inorganic growth. The Taro acquisition is a case in point. It has paid ~USD280m for a 66% economic interest in Taro valuing the company at 1x EV/Sales and 4.6x EV/EBITDA which, we believe is a reasonable valuation compared to some of the other acquisitions made by a few Indian players.

August 2011

89

Sun Pharma

Caraco - US FDA resolution is likely to be long-drawn While there is no fresh update on the US FDA resolution at Caraco, the company has, in the past, indicated that the process will be very gradual. We estimate part-recovery in Caraco's core US revenue from FY13, based on the assumption that the US FDA issues will get resolved in FY12. The ongoing US FDA issues have adversely impacted Caraco's core revenue (excluding distributed products revenue) for the past two years.
Caraco - revenue trend (USD m)
Caraco Revenue - Total 350 337 288 234 117 112 125 112 22 FY07 FY08 FY09 FY10 23 FY11E 108 45 138 65 Caraco Revenue - Mf gd Products

FY12E

FY13E

Note: Caraco's FY11 financials not given separately; hence, our estimates

Source: Company / MOSL

Guidance - topline growth of 28-30% for FY12 Sun Pharma management has guided 28-30% topline growth for FY12. The strong growth will be partly driven by full-year consolidation of Taro financials as compared to a little over two quarters for FY11. Sun had recorded significant one-off upsides, which we estimate at INR8.4b for FY11 (the company has not disclosed these numbers separately) and at INR5b for FY12. The guidance includes one-offs for both these years. Based on these upsides for one-offs, the implied growth guidance for core revenue (ex-Taro) is 1819% for FY12. The company intends to file ~25 ANDAs for FY12, R&D expenses are estimated at 6% of sales, and capex is estimated at INR4.5b. One-offs to continue in FY12 as well albeit with lower magnitude We believe SUNP will try to capitalize on some of the Para-IV/low-competition opportunities in the US in FY12. This will be in line with its past trend of exploiting a few such opportunities every year. However, we also believe that one-off upsides are likely to decline YoY in FY12 due to the absence of large opportunities like generic Eloxatin which was a key contributor in FY11.
FTF/low-competition Upsides in US (INR m)
FY11 Eloxatin Exelon Keppra Inj Effexor-XR Protonix Taxotere Prandin Total one-off revenues Total one-off PAT 4,530 1,076 704 1,342 760 8,412 4,119 FY12E 1,404 918 1,181 1,553 5,056 2,378 Source: Company / MOSL

August 2011

90

Sun Pharma

Financials and valuations: Sun Pharma


Consolidated Income Statement
Y/E March Net Sales Change (%) Total Expenditure % of Sales EBITDA Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT Tax Tax Rate (%) Profit After Tax Change (%) Margin (%) Less: Mionrity Interest Net Profit Adj. PAT 2010 41,028 -1.9 27,394 66.8 13,633 33.2 1,533 12,100 62 2,111 14,149 679 4.8 13,471 -28.3 33 -40 13,511 9,501 2011 57,214 39.5 37,543 65.6 19,672 34.4 2,041 17,631 149 2,876 20,358 1,284 6.3 19,074 41.6 33 913 18,161 14,041

(INR Million)
2012E 65,601 14.7 44,811 68.3 20,791 31.7 2,716 18,075 56 3,351 21,370 1,069 5.0 20,302 6.4 31 2350 20,330 17,952 2013E 75,976 15.8 51,008 67.1 24,968 32.9 3,031 21,938 60 4,333 26,211 1,835 7.0 24,376 20.1 32 2750 21,626 21,626

Ratios
Y/E March Basic (INR) EPS Fully Diluted EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Working Capital T/O (Days) Leverage Ratio Debt/Equity (x) 2010 13.0 13.0 14.5 75.6 2.8 24.7 2011 17.5 13.6 19.5 91.6 3.5 22.2 2012E 19.6 17.3 22.3 104.7 3.6 21.2 2013E 20.9 20.9 23.8 120.4 4.5 22.2

35.6 31.9 6.1 10.9 32.7 0.6

34.2 23.8 5.1 7.7 22.4 0.8

26.8 20.9 4.4 6.6 20.8 0.8

22.2 19.5 3.9 5.5 16.7 1.0

12.8 18.7

16.2 22.9

17.7 20.5

18.5 22.2

Consolidated Balance Sheet


Y/E March Equity Share Capital Total Reserves Net Worth Minority Interest Deferred Liabilities Secured Loan Unsecured Laon Total Loans Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Goodwill Investments Curr. Assets Inventory Account Receivables Cash and Bank Balance L & A and Others Curr. Liability & Prov. Account Payables Provisions Net Current Assets Appl. of Funds E: MOSL Estimates 2010 1,036 77,254 78,289 1,932 -890 1,003 708 1,711 81,042 23,340 8,013 15,328 1,448 4,060 30,664 37,121 10,739 11,748 6,072 8,562 7,579 4,095 3,484 29,542 81,042 2011 1,036 93,798 94,833 8,472 -3652 0 4,256 4,256 103,908 36,545 10,053 26,492 1,448 7,720 22,310 60,172 14,794 11,716 21,936 11,726 14,234 9,203 5,030 45,939 103,908

(INR Million)
2012E 1,036 107,441 108,477 10,822 -3652 0 1,500 1,500 117,146 41,045 12,769 28,276 1,448 7,720 22,310 71,981 16,728 13,480 28,293 13,480 14,589 9,212 5,377 57,392 117,146 2013E 1,036 123,661 124,696 13,571 -3652 0 1,500 1,500 136,115 45,545 15,799 29,746 1,448 7,720 22,310 93,114 18,734 15,612 43,157 15,612 18,221 10,980 7,241 74,892 136,116

2.7 105 96 263

2.7 75 94 293

2.4 75 93 319

2.6 75 90 360

0.0

0.0

0.0

0.0

Cash Flow Statement


Y/E March 2010 Oper. Profit/(Loss) bef. Tax 13,633 Interest/Dividends Recd. 2,111 Direct Taxes Paid -890 (Inc)/Dec in WC -4,675 CF from Operations 10,179 (inc)/dec in FA (Pur)/Sale of Investments CF from investments Change in networth (Inc)/Dec in Debt Interest Paid Dividend Paid CF from Fin. Activity -2,920 -12,069 -14,989 -2,348 -78 -62 -3,321 -5,809 2011 19,672 2,876 -4,046 -533 17,968 -16,864 8,354 -8,510 8,251 2,545 -149 -4,241 6,406

(INR Million)
2012E 20,791 3,351 -1,069 -5,097 17,977 -4,500 0 -4,500 0 -2,756 -56 -4,308 -7,121 6,357 21,936 28,293 2013E 24,968 4,333 -1,835 -2,637 24,830 -4,500 0 -4,500 0 0 -60 -5,407 -5,467 14,864 28,293 43,157

Inc/Dec of Cash -10,618 15,864 Add: Beginning Balance 16,690 6,072 Closing Balance 6,072 21,936 Note: Cashflows do not tally due to acquisition

August 2011

91

Domestic Formulations | New Peaks

MEDICINES

CAPSULE

Cadila Healthcare
CMP: INR824 TP: INR907

MEDICINES Score

60/100
CDH IN

Guts and glory!


M: Mix 6/10

Neutral
7/10

E: Equity with doctors

Cadila's relatively small presence in the fast growing segments of Diabetes, CNS & CVS (contributes ~24% to sales) will make it difficult for the company to outpace the market growth. The CVS and GI segments' contribution to revenue has risen over the past 10 years from 24% to 37% while that of respiratory and anti-infectives has fallen from 32% to 21%.

Enjoys good brand equity in a couple of therapeutic segments. Cadila is among the top three players in two of the largest therapeutic segments, CVS and GI. The company ranks first in the fast growing gynecology segment. Cadila has a good prescription market share in the GI, respiratory and CVS segments.

D: Distribution & reach

7/10

I: Introductions

5/10

Cadila derives 65% of its revenue from metro and tier-I cities and is expanding its presence in tier-II to tier-VI towns. The company's growth rate in all geographies has accelerated from CY09. It employs one of the larger field forces in the industry with MR strength of 4,000.

Cadila has few new introductions compared with its peers and this is one reason why it has not been able to outperform the market in the past. Revenue growth has been driven largely by its existing products over the past four years.

Stock info
Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) M.Cap. (INR b) M.Cap. (USD b) 204.7 984/599 5/18/44 168.7 3.7

Financial & valuation summary


Year End 03/10A 03/11A 03/12E 03/13E Net Sales PAT EPS EPS (INR M) (INR M) (INR) GR. (%) 36,868 46,302 51,717 59,983 5,011 6,334 5,801 8,419 24.5 30.9 28.3 41.1 55.2 26.4 -8.4 45.1 P/E (X) 33.7 26.6 29.1 20.0 P/BV (X) 10.4 7.8 6.2 5.0 RoE (%) 35.4 37.5 27.3 27.6 RoCE (%) 26.4 30.5 25.4 27.2 EV/ EV/ sales EBITDA 4.8 3.8 3.4 2.9 22.1 17.2 17.2 14.0

Background

Cadila is amongst one of the largest domestic pharma companies in India with a strong focus on the global generics opportunity. The company is gradually building its presence in the regulated generic markets beginning with the US and France. It also plans to tap some unique opportunities through its JVs with Nycomed, Hospira. Bayer and Bharat Serums.

August 2011

92

Cadila

Chairman Profile

Chairman

Cadila is one of the most consistent performers amongst the Indian pharmaceutical companies. It is promoted by Mr. Pankaj Patel. Sustaining strong growth and return ratios coupled with a very conservative, low-risk management style is his key achievement.

C: CAGR and scale-up

6/10

I: Improvement in productivity

5/10

Cadila's domestic formulations business posted revenue CAGR of 12.4% over FY05-11, which is slightly below market growth during the same period. We expect Cadila to post revenue CAGR of 1314% over FY11-13, which is slightly below compared to 15-16% CAGR for the industry. Rapid scale-up in revenue would be difficult given Cadila's high base and small presence in fastgrowing chronic segments.

Cadila's is MR productivity has declined at 2% CAGR over 2004-10. MR growth was 11.3% and revenue growth was 9.2%, indicating a fall in sales force productivity. Revenue per MR declined from INR4.1m in 2004 to INR3.6m in 2010, which however, is in line with the industry average.

N: Non-domestic business

6/10

E: Earnings growth

6/10

We are positive on Cadila's international business, given its strong chemistry skills and pragmatic mix of its geographic presence and partnerships. A cautious approach to establishing international presence has ensured sustained higher return ratios for investors. Cadila has a good track record of forging partnerships with global players. We expect Cadila's international business to post revenue CAGR of 16% over FY11-13, led by 18% CAGR for formulation exports.

Cadila is one of the most consistently performing Indian pharmaceutical companies. We expect overall top-line CAGR of 14% over FY1113 leading to EPS CAGR of 15%. Earnings growth will be led by traction in the international business and steady growth in the domestic portfolio.

S: Stock Attractiveness
We expect RoE of 25-30% over the next two years, driven by a cautious approach towards international expansion and a profitable domestic business. Cadila is valued at 29.1x FY12E and 20.0x FY13E consolidated earnings. Reiterate Neutral with a target price of INR907(22x FY13E EPS plus INR3 upside from Taxotere).
Stock performance (1 year)
Cadila Health 1,000 850 700 550 400 Aug-10 Nov-10 Feb-11 May -11 Sensex - Rebas ed

12/20

Aug-11

August 2011

93

Cadila

India formulations snapshot


Domestic formulations contribute most to revenue The domestic formulations business is a major contributor to Cadila's revenue and EBITDA. In FY11 the segment contributed 40% to Cadila's revenue and we estimate EBITDA contribution was ~45%, since it is one of Cadila's most profitable businesses. We believe despite strong contribution to profitability, capital employed in the business is proportionately lower. EBITDA Contribution

Guts and glory!


Strong in GI, CVS; maintains market share amidst rising competition
Cadila is among the leading companies in the domestic formulations business and has maintained its market share over the years despite growing competition. Some of Cadila's brands lead in their segments and the company has strong brand equity in therapeutic segments like CVS and GI. Besides, Cadila is the largest player in the gynecology segment. The company has been expanding its presence in all geographies, which is visible from its growth in 2009 and 2010. We believe Cadila is likely to post a top-line of 13-14% CAGR over FY11-13, which is slightly below compared to the industry growth.

1. Mix:

6/10

Non-DF EBITDA 55%

DF EBITDA 45%

CVS, GI, gynecology dominate sales The top 3 therapeutic segments, CVS, GI and gynecology, contribute about half of Cadila's domestic formulations revenue. Other large segments, such as respiratory and anti-infective, contribute 11% and 10% respectively to total revenue. Over the past 10 years, the contribution of CVS and GI segments to revenue rose from 24% to 37% while that of respiratory and anti-infective segments fell from over 32% in FY01 to less than 21% in FY10.
CVS, GI and Gynaecology dominates the therapy mix
CNS 2% Others 13% FY01 CVS 13% Others 20% FY05

Among the leading players in the industry Cadila leads in the highly competitive domestic formulations market and is among the top five companies in the industry with market share of 3.7%. Cadila's market share rose to 3.74% in 2010 from 3.46% in 2006. Cadila's domestic formulations business grew at 12.4% CAGR over the last 6 years versus 14% CAGR for industry. Cadila has maintained it market share over the years despite growing competition

VMN 9%

GI 11%

CNS 2%

CVS 22%

Pain Mgmt 9%

AI 16%

Respira tory 15%

Gynae cology 12%

Pain Mgmt 9%

AI 11%

Respira tory 10%

Gynae cology 10%

GI 16%

CVS, GI and Gynaecology dominates the therapy mix


FY11 Anti-Malaria 0% VMN 2% Dermatology 3% GI 17% CNS Others 3% 16% CVS 21%

Mkt Share (%) Gr. (%) 13.6 16.9 3.5 3.7 14.8 8.6 3.6 3.7

24.2

Pain Mgmt AI 7% 10%


3.7

Res pira tory 11%

Gy naec ology 10%

2006 2007 2008 2009 2010

Source: Industry/MOSL

August 2011

94

Cadila

2. Equity with doctors:

7/10

Good brand equity; among leaders in CVS, GI, gynecology segments Cadila has been a dominant player in two of the largest therapeutic segments of the industry, CVS and GI. Cadila ranks first in the gynecology segment with value market share of 10.4%. It ranks second in the GI segment with value market share of 6.5% and it ranks third in the fast growing and second largest, CVS segment with value market share of 6.5%. Cadila has either grown in line with or above the industry average in its top 4-5 therapeutic segments. In the pain management and dermatology segments, Cadila's has outperformed the respective segment growth.
Value market share in key therapies (%) (2010)
10.4

Value growth comparison (%) (2010)


Av g Gr - Company Av g Gr - Industry

66.2

6.5

6.5 5.4 4.0 3.7


15.8 17.9 18.9 17.1 18.4 16.2 24.8 16.7 16.7 18.1 18.4

GI

* Average growth over 2009-2010

Pain/Analgesic

Pain/Analgesic

Gynaecology

Source: Industry/MOSL

In terms of the number of prescriptions written, Cadila ranks second in the GI segment with a prescription market share of 4.5%. It ranks third in the respiratory segment with market share of 4.9% and seventh in the CVS segment with a prescription market share of 4.5%. Cadila has improved its ranking in the gynecology and respiratory segments and its ranking in CVS deteriorated a bit.
Cadila's prescription ranking
Jan-07 GI Gynaec Respiratory CVS Pain Mgmt 1.0 3.0 2.0 3.0 Jan-08 2.0 3.0 2.0 3.0 Jan-09 2.0 1.0 1.0 5.0 24.0 Jan-10 Oct-10 2.0 2.0 2.0 2.0 2.0 2.0 7.0 6.0 24.0 20.0 Source: Industry/MOSL

Top 10 brands contribute 30% of revenue Cadila's top 10 brands contribute ~30% to total revenue, indicating lower brand concentration. Its No1 brand, Aten (Atnolol, CVS), ranks thirty-seventh in the industry and it reported 12.5% CAGR over the past four years. Six of the top 10 brands posted CAGR in double digits over the past four years.
August 2011

Gynaecology

Dermatology

Dermatology

CVS

GI

Respiratory

Respiratory

CVS

95

Cadila

Cadila's top 10 brands


Brand Drug Product Launch Sales (INR m) 1993 2000 1991 1996 1981 1969 1995 1983 2002 1999 865 585 517 484 637 432 379 352 346 456 YoY Gr (%) CAGR (%) Aten Atenolol Atorva Atorvastatin Ocid Omeprazole Falcigo Artesunate Deriphyllin Etophylline+Theophylline Primolut-n Norethisterone Amlodac Amlodipine Dulcolax Bisacodyl Mifegest Mifepriston Pantodac Pantoprazole CAGR through 2006-10 19.2 12.5 16.2 19.5 6.6 10.2 10.7 30.6 8.4 2.9 5.3 4.1 16.1 8.4 18.7 11.5 -5.7 1.6 13.0 11.3 Source: Industry/MOSL

3. Distribution and reach:

7/10

Cadila derives 65% of its revenue from metros and class-I towns compared with 63% of the industry average. In the past four years, revenue CAGR for all geographies except metros were in line or marginally better than that of the industry average.
Cadila: Geographical distribution of revenues (%)
METROS 18.3 18.7 32.5 CLASS I TOWNS 18.5 18.5 30.5 18.1 18.9 31.3 CLASS II TO VI 16.5 18.8 32.4 RURA L 15.9 19.1 32.4

Industry: Geographical distribution of revenues (%)


METROS 20.6 19.2 32.6 CLASS I TOWNS 20.9 19.0 31.3 20.0 19.5 31.6 CLASS II TO VI 18.1 19.4 32.5 RURAL 17.3 19.6 32.0

30.5 CY 06

32.4

31.8

32.2

32.7

27.6 CY06

28.9 CY07

28.9 CY08

30.0 CY09

31.0

CY07

CY08

CY09

CY10

CY10

Cadila: geography-wise growth rates (%)


Metros 24.4 18.2 15.6 10.0 11.3 10.8 6.5 5.8 CY07 CY08 5.0 CY09 CY10 19.0 16.3 14.5 Clas s I Tow ns Class II to VI Rural 25.9 25.9 24.0 19.3

Industry: geography-wise growth rates (%)


Metros Class I Tow ns Clas s II to VI Rural 26.2 23.5 20.7 17.5

17.6 14.0 11.1 7.9

17.5 15.6 14.7 9.5

17.7 16.4 13.0

2.5 CY07 CY08 CY09 CY10


Source: Industry/MOSL

August 2011

96

Cadila

4. Introductions:

5/10

Cadila's growth over the past four years has been led by existing products and new launches Over the past four years Cadila launched 49 new products (including line extensions) annually which is in line with its peers. Average revenue per new launches has grown from INR42m in CY07 to INR94m in CY10. Cadila's revenue growth is driven by existing products and new launches.
Cadila - new launches
No. Of launc hes in last 2 y rs Avg s ales per launch (INR m) 75.6 74.4 16.5 41.7 13.0 2.9 90 CY07 84 CY08 101 CY09 113 CY10 4.0 CY07 5.7 CY08 6.2 CY09 7.7 CY10
Source: Industry/MOSL

Cadila growth compositions (%)


New Launches 94.4 Existing Brands

8.5

5. CAGR and scale up:

6/10

We expect 13-14% CAGR for Cadila's domestic formulations business led by existing products, increasing geographical penetration and incremental contribution from new launches. This is below our estimated forecast of 15-16% CAGR for the industry. Outperformance of the industry seems difficult due to a lower prescription share in highgrowth lifestyle segments and the anti-infective segment. It's absence in fast growing lifestyle segments except CVS, will make it difficult for it to outpace industry growth. Its focus on improving workforce productivity needs to be enhanced for it to grow its business more profitably.
Cadila - domestic formulations performance
DF Revenues (INR m) 15.4 10.9 8.3 10,603 11,763 12.2 9.6 12.8 YoY Grow th (%) 18.6 14.7

12,889

14,458

17,146

19,347

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

Source: Company/MOSL

22,197

9,793

August 2011

97

Cadila

6. Improvement in MR productivity:

5/10

Cadila's top-line growth is driven by sales force additions; fares poorly when compared with the industry productivity Cadila's domestic formulations business revenue posted 9.2% CAGR over FY04-10 and its sales force posted 11.3% CAGR, implying negative productivity of the workforce. In 2004, Cadila derived sales of INR4.1m per MR, which fell to INR3.6m in FY10. Cadila's performance was below average, compared with the average of performances covered in the report.

Cadila - Sales force productivity (2004-10)


No. of MRs 4.1 Rev enue per MR (INR m) Sales forc e addition CAGR (%) Productivity Improv ement CAGR (%)

11.5 4,000 3.6 2,100 -1.9 11.3 1.9

2004

2010

Cadila

Indus try
Source: Industry/Company/MOSL

7. Non-domestic business Snapshot:

6/10

Non-domestic business: Snapshot Positives Expanding presence in emerging and regulated markets through a mix of its own presence and front-end acquisitions. Strong chemistry skills and fully backward integrated low-cost operations help in making the US business viable despite being a late entrant. Low-risk strategy to access international markets through its own presence and partnerships. Supplies of injectables to Hospira to ramp-up in the next 1-2 years while the Abbott tie-up for emerging markets is likely to contribute from FY13 onwards. Risks and concerns Needs to build a differentiated portfolio in the US to access low-competition opportunities. The company has initiated steps in this directions. NCE research yet to deliver desired returns for investors. Slow progress in accessing the Japanese generic opportunity. News flow/triggers Ramp-up in supplies to Hospira and Abbott. Signing of supply agreements with MNCs.
August 2011

98

Cadila

Impact assessment We are positive on Cadila's international business given its strong chemistry skills and pragmatic mix of own presence and partnerships. Cautious approach to establishing an international presence has ensured sustained higher return ratios for investors. Has a good track record of forging partnerships with global players. Expect 16% CAGR for the international business over FY11-13 led by 18.3% CAGR for formulation exports.
Sales mix (INR M)
FY09 FY10 FY11 FY12E FY13E FY11-13 CAGR (%)

EBITDA Contribution

Domestic Sales Formulations 12,889 14,458 17,146 19,347 22,197 13.8 APIs 426 318 352 317 348 -0.5 Consumer & Others 3,120 3,948 4,827 5,458 6,372 14.9 Gross Domestic sales16,435 18,724 22,325 25,121 28,917 13.8 % to sales 56.3 51.8 49.4 49.5 48.6 Export Formulations 9,676 14,018 19,214 22,170 26,838 18.2 Export APIs 3,060 3,400 3,672 3,472 3,712 0.5 Total Exports 12,736 17,418 22,886 25,642 30,550 15.5 % to sales 43.7 48.2 50.6 50.5 51.4 Gross Sales 29,172 36,142 45,211 50,763 59,467 14.7 Note:Estimates exclude Nesher acquisition pending availability of more details from Cadila management.

Non-DF EBITDA 55%

DF EBITDA 45%

Source: Company/MOSL

8-9. Earnings growth and stock attractiveness:

18/30

Cadila's growth will be led by increased traction in its international businesses, ramp-up in supplies to Hospira and sustained double-digit growth in domestic formulations and consumer businesses. We estimate 15% revenue and EPS CAGR for FY11-13 for core operations excluding one-offs and RoE of 27-28% over the next two years. Sustaining double-digit growth without diluting return ratios has been the company's USP and has led to a significant re-rating of the stock. We believe that this track record would be subjected to many challenges, as Cadila tries to aggressively scale-up to achieve its revenue target of USD3b by FY16. This target implies a topline CAGR of 25% for FY11-16, which we believe is very aggressive. The company will have to invest significant resources to achieve this target, which can raise its risk profile. Given the disappointing core performance for the last two quarters and likely impact of the Nesher acquisition, the strong earnings upgrade cycle of the past two years could break. Cadila trades at 29.1x FY12E and 20.0x FY13E consolidated EPS. We believe that valuations are rich and leave little scope for further re-rating. We maintain Neutral. Our target price is INR907 (22x FY13E EPS + INR3/share DCF value of earnings from Taxotere).

August 2011

99

Cadila

Cadila RoE & RoCE (%)


RoE 37.5 35.4 RoCE

Cadila one year forward P/E


P/E (x) 35 28 22 30.2 24.6 15.8 Avg(x) Peak(x ) Min(x )

26.7

26.9 26.4

30.5

27.3 25.4

27.6
15

27.2
9 2 Mar-07 F eb-08 Aug-06 Aug-07 Aug-08 6.5 F eb-09 F eb-10 Aug-09 Aug-10 F eb-11 Aug-11

23.1

23.6

2008

2009

2010

2011

2012E

2013E

Annexure: Cadila non-domestic business New launches to drive growth in the US Cadila has a pipeline of 65 ANDAs pending approval and has received 65ANDA approvals so far (including tentative approvals). The company filed 24 ANDAs in FY11 and launched 11 products in the US. It expects to file 15-20 ANDAs with the US FDA every year and get about 8-10 approvals a year. Cadila's US business is witnessing increased traction due to the absence of some of the competitors (due to US FDA issues) and new product launches. The company is also improving its market share in already launched products. We expect Cadila to post sales of INR11.9b in FY12 against INR9.7b in FY11. We expect this business to grow by 20% CAGR over FY11-13. Cadila has also commenced development and filing of potential low-competition products with delivery advantages (trans-dermal patches and respiratory products) and is focusing on developing a pipeline of such niche products (likely to be commercialized after FY12). Nesher acquisition - long-term positive, but may pressurize P&L in short term Cadila recently entered into an agreement to acquire certain assets and liabilities of Nesher Pharma in the US (a subsidiary of KV Pharma) for ~USD60m. It has acquired Nesher's existing and future product pipeline, its manufacturing facility and R&D lab. Cadila will also take over certain liabilities. The transaction is likely to close by August/September 2011 and Cadila will be consolidating Nesher's financials with effect from August/ September. With this acquisition, Cadila gets access to Nesher's controlled substances pipeline (besides other products) as well as access to its manufacturing facility for these controlled substances. Nesher's ANDA pipeline includes 8 filings and another 5 products under development, which address a potential on-patent market of USD2.1b. We note that given the possibility of controlled substances being abused as drugs, the US government has put stringent rules in place for monitoring the manufacturing and sale of such products. This includes a prerequirement of a local manufacturing facility with DEA license to manufacture and supply such products in the US. Through the Nesher acquisition, Cadila gets access to a DEAlicensed facility.

August 2011

100

Cadila

Given the entry barriers, we believe that the controlled substances market will be a lowcompetition market for generics players. Currently, Nesher is making net losses, which may pressurize Cadila's P&L till it is able to turn around Nesher's operations. Cadila management has guided that Nesher is likely to contribute ~USD15m in revenue for FY12. It expects Nesher to report a minor net loss for FY12 and a positive bottomline for FY13. We are awaiting further clarity from Cadila on the plans for achieving this turnaround. We also note that Cadila management has a track record of being conservative in its inorganic initiatives and has not made any acquisitions in the past which have diluted the return ratios for investors. Hospira supplies to ramp up in FY12 led by Taxotere, new launches Cadila's supplies to Hospira commenced in FY10, recording INR839m in revenues for supplies to Europe. It posted FY11 revenue of INR2.15b led by the launch of exclusivity product generic Taxotere in the US. We expect a ramp-up in this business in FY11 led by commercialization of more products and revenue from limited competition product Taxotere for some more time. We expect FY12 revenue of INR803m to Cadila from Taxotere. However we have not included it in our FY12 estimates. We are valuing the upside based on the DCF method (INR3/share) since this is a limited period opportunity. French operations to record 14% CAGR While Cadila's French operations are completely aligned to a low-cost generic market, we expect only 14% CAGR for this business over FY11-13 driven mainly by the slow market growth. Emerging market revenue to grow by double-digits Among emerging markets, Cadila is present mainly in Latin America. We expect Cadila's emerging market revenue to record 17% CAGR over FY11-13 driven by new launches and favorable demographics. Abbott tie-up: Supplies to start from FY13 In FY10, Cadila entered into a supply agreement with Abbott to supply 24 branded generic products to meet Abbott's requirements in 15 emerging markets (names not disclosed). The agreement also includes an option for 40 additional products to be included over the term of the collaboration. Cadila will make the products at its facilities in India. The products selected fall in categories of pain, cancer, CVS, neurology and respiratory illnesses. Product names have not been disclosed. The supplies will enable Cadila to capture a part of the upsides in some emerging markets where it does not have a presence. We believe this is a long-term positive for Cadila, given the possibility that such arrangements tend to include a larger product basket over time. We expect the supplies to start from FY13.

August 2011

101

Cadila

Financials and valuations : Cadila


Income Statement
Y/E March 2010 2011 46,302 25.6 36,040 10,262 22.2 1,269 8,993 699 131 8,425 0 8,425 1,064 1,064 12.6 7,361 251 7,110 6,334 Net Sales 36,868 Change (%) 25.9 Total Expenditure 28,863 EBITDA 8,006 Margin (%) 21.7 Depreciation 1,339 EBIT 6,667 Int. and Finance Charges 821 Other Income - Rec. 159 PBT before EO Expense 6,004 Extra Ordinary Exp./(Inc.) 46 PBT after EO Expense 5,958 Current Tax 741 Tax 741 Tax Rate (%) 12.4 Reported PAT 5,217 Less: Mionrity Interest 247 Net Profit 4,970 PAT Adj for EO Items 5,011

(INR Million)
2012E 51,717 11.7 41,427 10,291 19.9 1,569 8,721 731 207 8,197 0 8,197 1,230 1,230 15.0 6,968 301 6,667 5,801 2013E 59,983 16.0 47,500 12,483 20.8 1,779 10,704 650 272 10,326 0 10,326 1,549 1,549 15.0 8,777 358 8,419 8,419

Ratios
Y/E March Basic (INR) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE 2010 24.5 30.8 79.0 5.0 23.7 2011 30.9 40.9 106.1 6.3 20.8 2012E 28.3 40.2 132.7 6.3 21.6 2013E 41.1 49.8 165.4 8.7 23.8

33.7 26.7 10.4 4.8 22.1 0.6

26.6 20.1 7.8 3.8 17.2 0.8

29.1 20.5 6.2 3.4 17.2 0.8

20.0 16.5 5.0 2.9 14.0 1.1

35.4 26.4

37.5 30.5

27.3 25.4

27.6 27.2

Balance Sheet
Y/E March Equity Share Capital Total Reserves Net Worth Minority Interest Deferred liabilities Total Loans Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Curr . Assets Inventory Account Receivables Cash and Bank Balance Loans & Advances Curr. Liability & Prov. Account Payables Provisions Net Current Assets Appl. of Funds E: MOSL Estimates 2010 682 15,501 16,183 392 1141 10,905 28,621 25,578 8,734 16,844 2,482 207 17,749 7,504 4,668 2,507 3,070 8,661 6,710 1,951 9,088 28,621 2011 1,024 20,691 21,715 669 1127 10,973 34,484 28,320 9,994 18,326 4,310 207 22,829 8,119 7,652 2,952 4,106 11,188 8,955 2,233 11,641 34,484

(INR Million)
2012E 1,024 26,154 27,178 0 1127 10,442 38,748 33,320 11,563 21,757 4,310 207 26,084 10,025 9,524 1,773 4,762 13,611 10,777 2,834 12,473 38,746 2013E 1,024 32,841 33,865 0 1127 9,286 44,290 36,320 13,342 22,978 4,310 207 33,719 12,924 12,337 2,877 5,581 16,937 13,218 3,719 16,782 44,290

Working Capital Ratios Fixed Asset Turnover (x) 2.3 Debtor (Days) 46 Inventory (Days) 74 Working Cap. Turnover (Days) 65 Leverage Ratio (x) Current Ratio 2.0 Debt/Equity 0.5 * Ratios adjusted for bonus issue

2.6 60 64 68

2.6 66 71 76

2.7 74 79 85

2.0 0.4

1.9 0.3

2.0 0.2

Cash Flow Statement


Y/E March Oper. Profit/(Loss) bef. Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations CF from Oper. incl EO Exp. (inc)/dec in FA (Pur)/Sale of Investments CF from Investments Change in Networth Inc/(Dec) in Debt Interest Paid Dividend Paid Others CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance 2010 8,006 159 -741 -402 7,022 6,976 -3,478 42 -3,436 289 -1,605 -821 -1,237 -175 -3,550 -10 2,517 2,507 2011 10,262 131 -1,064 -2,108 7,222 7,222 -4,579 0 -4,579 -301 345 -699 -1,529 -14 -2,198 445 2,507 2,952

(INR Million)
2012E 10,291 207 -1,230 -2,011 7,257 7,257 -5,000 0 -5,000 0 -1,200 -731 -1,505 -3,436 -1,179 2,952 1,773 2013E 12,483 272 -1,549 -3,206 8,000 8,000 -3,000 0 -3,000 0 -1,156 -650 -2,090 -3,896 1,105 1,773 2,878

August 2011

102

Domestic Formulations | New Peaks

This page is left blank intentionally

August 2011

103

Domestic Formulations | New Peaks

MEDICINES

CAPSULE

Ranbaxy
CMP: INR468 TP: INR412

MEDICINES Score

49/100
RBXY IN

Sayonara, unless ...


M: Mix 6/10

Sell
5/10

E: Equity with doctors

Ranbaxy operates mainly in acute therapeutic segments, deriving 76% of its revenue from the segment. It is yet to strengthen its presence in the chronic segment. Ranbaxy is a dominant player in large therapy segments like AI, CVS and pain management. The segments, along with the sex stimulant segment, contribute ~68% to Ranbaxy's domestic formulations revenue.

Ranbaxy enjoys low brand equity with doctors except in the AI and dermatology segments. Some of its brands like Storvas have good brand equity in the CVS segment. Ranbaxy is ranked at No3 position in the AI segment with a prescription market share of 7.8% and it ranks No4 in the dermatology segment with a prescription market share of 5.4%. Over the past five years, Ranbaxy's brand equity has taken a beating in almost all therapy areas.

D: Distribution & reach

7/10

I: Introductions

5/10

Ranbaxy derives 66% of its revenues from metros and tier-I cities. Distribution reach in metros has increased over time but the contribution of rural geographies to revenue has fallen over the past four years. Ranbaxy's field force has been recently expanded by 50% to 4,500 MRs.

Ranbaxy has been aggressive in launching new products over the past four years compared with its peers. It launched 65 products (including line extensions) a year over the past four years. Revenue growth has been driven by existing products and new launches.

Stock info
Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) M.Cap. (INR b) M.Cap. (USD b) 420.4 625/414 0/6/6 196.8 4.3

Financial & valuation summary


Year End 12/09A 12/10A 12/11E 12/12E Net Sales PAT EPS (INR m) (INR m) (INR ) 75,970 89,608 85,242 93,005 1,911 10,855 4,991 7,052 4.5 25.8 11.9 16.7 EPS Gr. (%) -38.2 467.1 -54.0 41.3 P/E (x) 15.2 33.0 23.3 P/BV (x) 2.9 2.7 2.4 RoE (%) 4.4 19.4 11.4 10.4 RoCE (%) 9.8 15.9 10.7 11.1 EV/ EV/ Sales EBITDA 2.3 2.4 2.2 11.1 23.0 18.5

Background

Ranbaxy is a leading global generic company with global revenues of over USD1.9b. The company has established a direct presence across the world in key markets like US, UK, Germany, France, Brazil and other emerging markets. Around 40% of its revenues come from the developed markets of the US and Europe while emerging markets contribute about 50-55% of revenues.

August 2011

104

Ranbaxy

CEO Profile

Ranbaxy is currently a 64% subsidiary of Daiichi Sankyo (Japan). It is being currently managed by a team of professionals headed by Mr. Arun Sawhney (MD). Establishing a global generics business and a leading position in India, coupled with one of the strongest pipeline of First-to-File opportunities in the US is the key achievement of the company.

CEO

C: CAGR and scale-up

6/10

I: Improvement in productivity

3/10

Ranbaxy posted revenue CAGR of 10.2% in the domestic formulations market over CY04-10, underperforming market's growth. We expect CAGR of 14% for Ranbaxy's domestic formulations business led by its recent field-force expansion and rapid new launches. This slightly lower than our forecast CAGR of 15-16% for the industry. Ranbaxy is likely to maintain its leading position in the sector given its strong position and market share in some of the largest therapeutic segments.

Ranbaxy's domestic formulation revenue posted 10.2% CAGR and its sales force posted 15% CAGR over 2004-10 implying negative MR productivity. The current productivity of INR3.6m per MR is in line with the industry average.

N: Non-domestic business

5/10

E: Earnings growth

3/10

We are neutral on Ranbaxy's international business despite its strong presence in the US and in emerging markets due to ongoing US FDA issues and moderate profitability of its international operations. We expect the international business to post 13% CAGR over CY10-12 excluding low-competition and Para-IV products in the US. Option values (Para-IV products) will make a onetime contribution to PAT of INR38.2b over CY1114, leading to DCF value of INR77/share.

We expect overall core top-line CAGR of 14.4% over CY10-12, leading to EPS CAGR of 53%, albeit on a very low base. Cost reductions leading to improved profitability and gradual recovery in the US business will be key growth drivers.

S: Stock Attractiveness
Aggressive international expansion, high cost acquisitions and on-going US FDA issues have adversely impacted overall return ratios. While we expect some improvement in return ratios by CY12, they will still remain sub-optimal. Ranbaxy is valued at 33.0x CY11E and 23.3x CY12E consolidated earnings. Reiterate Sell with a target price of INR412 (20x CY12E EPS) excluding Para-IV upsides.
August 2011

9/20
Stock performance (1 year)
Ranbaxy Labs 640 580 520 460 400 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Sensex - Rebased

105

Ranbaxy

India formulations snapshot


Domestic formulations significant PAT contribution The domestic formulations business is a leading contributor to Ranbaxy's revenue and contributes ~98% to its EBITDA excluding one off upsides. Ranbaxy has been posting large losses in its core US business because of ongoing US FDA issues. EBITDA Contribution Non-DF EBITDA, 2%

Sayonara, unless ...


Key challenges are resolved at the earliest
Ranbaxy is the second largest Indian company by revenue in the domestic formulations space after Cipla and ranks third in the overall ranking. Ranbaxy's strength lies in its strength in the acute therapeutic segments. However, it has underperformed the market over the past four years and has been losing market share.

1. Mix:

6/10

AI, CVS, pain management dominate sales The top four therapeutic segments including AI, CVS, pain management and sex stimulants contribute ~68% to Ranbaxy's domestic formulations revenue. Ranbaxy is among the market leaders in three of the largest therapy segments, AI, CVS and pain management. Ranbaxy derives ~76% of its revenue from acute therapies. Ranbaxy's dependence on the AI segment has fallen over the past 10 years while the contribution of CVS, pain and GI improved over the years.
Ranbaxy: Therapeutic mix
CY 2000 Others 7%
Respirat ory 4%
March 2011 Diabetes Others 2% 7%

DF EBITDA, 98%

The second largest Indian player in the industry Ranbaxy has consistently ranked among the top three players in the industry due to its strong presence in two of the largest therapeutic segments in the industry. Ranbaxy holds 4.69% market share, which has fallen from 5.1% in 2006. The company grew its business at 10.2% CAGR over the past six years while the industry posted 14% CAGR. This under performances can be attributed to the fact that Ranbaxy derives most of its revenue from highly competitive acute therapeutic segment. Ranbaxy is among top three players in the industry

Vitamins Respira 14% tory 2% CNS 5% Derma 3% GI 4% Pain 8%

AI 51%

CNS 4% GI 7% Derma 8%

AI 35%

CVS 6%

Sex
stimulants

9%

Pain 11%

CVS 13%

Source: Company/Industry/MOSL

2. Equity with doctors:

5/10

Mkt Share (%) Grow th (%) 21.4 7.8 5.09 5.02 5.2 17.0 7.1 4.97 4.69 14.6

Good brand equity in AI, CVS, pain management, dermatology segments Ranbaxy has been a dominant player in three of the largest therapeutic segments of the industry, AI, CVS and pain management. Ranbaxy ranks first in AI, with market share of 10.8%, it ranks sixth in the CVS segment with market share of 5.8%, second in the pain management segment with market share of 7% and third in the dermatology segment with market share of 8.9%. However Ranbaxy's growth has been sluggish compared with the segments' growth over the past two years.

2006 2007 2008 2009 2010

August 2011

106

Ranbaxy

Market share in key therapies (%)


10.8 7 5.8 3.6 3.8

Growth comparison (%) (2010)


Avg Gr - Company Avg Gr - Industry 20.0 17.1 12.8 16.7 18.4 10.9 7.6 18.7

8.9
14.6 9.0 13.8

17.9

* Average growth over 2009-2010

Pain/Analgesic

Pain/Analgesic

Dermatology

Source: Industry/MOSL

In terms of the number of prescriptions written, Ranbaxy's brand equity with physicians is high only in the AI and dermatology segments. Ranbaxy is ranked third in the AI segment with a prescription market share of 7.8% and it ranks fourth in the dermatology segment with a prescription market share of 5.4%. Over the past five years, Ranbaxy's brand equity has taken a beating in almost all therapy areas.
Ranbaxy's prescription ranking
Jan-07 Anti-infectives Derma GI CNS Pain Mgmt CVS Anti-diabetic Respiratory 2 3 12 11 12 13 10 15 Jan-08 2 3 13 11 13 15 12 12 Jan-09 3 3 9 11 13 13 11 17 Jan-10 Oct-10 2 3 4 4 14 14 14 14 13 14 17 15 15 16 18 19 Source: Industry/MOSL

Top 10 brands contribute 40% of the revenues Ranbaxy's top 10 brands contribute ~40% to its revenue and they feature among the industry's top 300 brands. Its No1 brand Revital (Vitamins) ranks sixth in the industry and it posted revenue CAGR of 30% over 2006-10. Most of Ranbaxy's top 10 brands recorded double-digit CAGR over the past four years.
Ranbaxy's top 10 brands
Brand Revital Drug Ginseng products Product Launch 1989 1997 1999 1994 1989 1980 1990 1999 2003 1975 Sales (INR m) 1,607 1,346 996 924 863 904 660 646 346 341 YoY Gr (%) CAGR (%) 29.4 30.4 14.6 15.3 13.4 22.3 36.0 33.2 -1.6 2.4 5.0 5.1 4.1 9.0 17.4 20.9 57.4 56.1 26.0 26.2 Source: Industry/MOSL

Mox Amoxycillin Storvas Atorvastatin Volini Nsaids Cifran Ciprofloxacin injectables Sporidex Cephalexin Zanocin Ofloxacin Cepodem Cefpodoxime Rosuvas Rosuvastatin Fortwin Injectables CAGR through 2006-10

Dermatology

CVS

CNS

CVS

CNS

GI

AI

GI

AI

August 2011

107

Ranbaxy

3. Distribution & reach:

7/10

Ranbaxy derives 66% of its revenue from the metros and class-I towns, compared with 63% of the industry average. Over the past four years, revenue CAGR for all geographies has been below the industry average. The contribution of metros to revenue has risen over the past five years, in line with the industry trend.
Ranbaxy: Geographical distribution of revenues (%)
Metros 19.6 17.9 31.6 Class I Tow ns 19.6 17.1 30.9 18.6 17.7 30.0 Class II to VI 16.3 17.7 30.4 Rural 16.0 17.7 30.3

Geographical distribution of revenues: Industry (%)


Metros 20.6 19.2 32.6 Class I Tow ns 20.9 19.0 31.3 20.0 19.5 31.6 Class II to VI 18.1 19.4 32.5 Rural 17.3 19.6 32.0

30.9 CY06

32.3 CY07

33.7 CY08

35.6

36.1

27.6 CY06

28.9 CY07

28.9 CY08

30.0 CY09

31.0 CY10

CY09

CY10

Ranbaxy: Geography-wise growth rates (%)


Metros Class I Tow ns 21.5 21.8 13.6 10.7 Class II to VI Rural

Geography-wise growth rates


Metros Class II to VI 17.5 15.6 14.7 9.5 2.5 CY10 CY07 CY08 CY09 CY10
Source: Industry/MOSL

Class I Tow ns Rural 17.7 16.4 13.0

12.7 8.0 5.5 3.1

13.4 8.2 7.1 -6.0

16.0 14.2 14.2 12.4

17.6 14.0 11.1 7.9

26.2 23.5 20.7 17.5

CY07

CY08

CY09

4. Introductions:

5/10

Ranbaxy has been one of the most aggressive players in the industry in launching new products Ranbaxy has aggressively launched new products over the past four years. It launched 65 new products (including line extensions) annually over the past four years. However, the average revenue per new launch has declined from INR94m in CY07 to INR60m in CY10. Revenue growth is driven by existing products and new launches.
Ranbaxy: New launches (INR m)
No. Of launches in last 2yrs Avg sales per launch (INR m) 94.0 92.4 73.1 60.5
0.8 10.6 9.6 2.4 6.4 CY08 4.8 CY09 5.0 CY10
Source: Industry/MOSL August 2011

Ranbaxy: Growth composition (%)


New Launches Existing Brands

104 CY07

104 CY08

114 CY09

154 CY10

7.0

CY07

108

Ranbaxy

5. CAGR amd scale-up:

5/10

We expect Ranbaxy's domestic formulations revenue to post 14% CAGR over CY10-12, led by a large field force and rapid new launches. This is lower than our forecast of 1516% CAGR for the industry. Ranbaxy is likely to maintain its leading position in the sector given its strong position and market share in some of the largest therapeutic segments. Though Ranbaxy employs one of the largest field forces in the industry the company's focus on improving productivity of the salesforce needs to be enhanced for it to grow the business more profitably.
Ranbaxy: Domestic formulations revenue ramp-up

Source: Company/MOSL

6. Improvement in MR productivity:

3/10

Top-line growth driven by sale force additions; MR productivity declines Ranbaxy's domestic formulations revenue posted 10.2% CAGR over FY04-10 and its sales force posted 15% CAGR, implying negative productivity of the salesforce. In CY04 Ranbaxy derived INR4.6m revenue per MR, which fell to INR3.6m in CY10. This is partially attributed to recent additions to the sale force.
Sales force productivity
No. of MR 4.6 Revenue per MR (INR m) 4,500 3.6

1,950

2004

2010
Source: Company/Industry/MOSL

August 2011

109

Ranbaxy

7. Non-domestic business snapshot


Positives Strong presence in the US and emerging markets. Strong chemistry skills and backward integrated low-cost operations. Para-IV pipeline in the US market is strongest among peers. Strong parentage (Daiichi, Sankyo, Japan).

5/10

Risks & concerns Resolution of US FDA issues imperative to monetize large Para-IV opportunities in the US. This can result in a large one-time penalty payment. Needs to reduce fixed costs. Yet to initiate steps to exploit the bio-similars space. Acquisitions have not delivered desired results, impacting return ratios. Key news flows/triggers US FDA resolution for Paonta and Dewas facility. Launch of generic Lipitor with 180-day exclusivity in November 2011. Further visibility on exploiting synergies with Daiichi.

Impact assessment We are neutral on Ranbaxy's international business despite its strong presence in the US and emerging markets, due to ongoing US FDA issues and high fixed cost in some of the European markets We expect the international business to record 14.5% CAGR over CY10-12 excluding low-competition and Para-IV products in the US. Option values (Para-IV products) to contribute INR38.2b in one-time PAT over CY1114 with DCF value of INR77/share.
Sales mix (INR m)
2008 Dosage Form India Growth (%) 2009 2010 2011E 2012E CY10-12 CAGR (%) 519 18.6 15.9 15.0 19.4

EBITDA Contribution
Non-DF EBITDA 2%

368 8.9

359 -2.5

387 7.7

438 13.2

Europe, CIS and Africa 571 480 527 621 697 Growth (%) -1.9 -15.9 9.8 17.8 12.2 Japan,Asia Pacific 100 100 93 102 133 & Middle East Growth (%) -9.1 0.0 -7.0 10.0 29.7 Latin America 74 71 83 80 102 Growth (%) 15.6 -4.1 16.9 -3.6 27.7 USA 448 397 660 467 473 Growth (%) 6.9 -11.4 66.2 -29.3 1.2 Total dosage 1,561 1,407 1,750 1,708 1,924 Growth (%) 3.2 -9.9 24.4 -2.4 12.6 API 117 112 114 143 143 Growth (%) 12 -5 2 25 0 Allied business 4 0 0 0 0 Growth (%) 0 -100 -99 -99 -99 Total sales 1,682 1,519 1,864 1,851 2,066 Note - Estimates exclude Para-IV/low-competition opportunities in US except for August 2011

10.9 -15.4 4.9 11.8 5.3 CY11

DF EBITDA 98%
Source: Company/MOSL

110

Ranbaxy

8. Earnings growth and stock attractiveness:

6/30

We expect overall top-line CAGR of 14.4% over CY10-12, leading to EPS CAGR of 53%, albeit on a very low base. Cost cuts, leading to improved profitability and gradual recovery in the US business, will be key growth drivers. The key near term determinant for Ranbaxy's valuations will be the expected resolution of the US FDA and DoJ issues. Ranbaxy management has been trying to resolve these issues. However, time-lines for such a solution are not known. Valuations imply market attaching sustainable P/E multiples to Para-IV upsides Current valuations implies that market is attaching sustainable P/E multiples to Para-IV upsides: Given the potential recurrence of Para-IV upsides every year for the CY11-12 period, Para-IV upsides are attracting P/E based valuations. We believe that these are one-off upsides and hence continue to value them on DCF basis. Our current DCF value of all potential Para-IV upsides is INR77/sh. US FDA resolution imperative: Since sustaining current valuations is dependent on upsides from Lipitor & Nexium, it is imperative for RBXY to resolve outstanding US FDA issues and salvage the upsides from these two opportunities which account for 80% of overall Para-IV upsides. Valuations discount best-case scenario: Ranbaxy is currently valued at 33.0x CY11E and 23.3x CY12E core EPS. Our estimates exclude MTM forex gains and one-off upsides from Para-IV opportunities. Our current DCF value of all potential Para-IV upsides is INR77/sh. We believe that current valuations are discounting the best-case scenario for both the core business as well as for the Para-IV upsides. We maintain Sell with target price of INR412 (20x CY12E EPS + FTF DCF value of INR77/sh).

Ranbaxy RoE & RoCE (%)


RoE 19.4 RoCE

Ranbaxy one year forward P/E


120 90 60 37.7 30 0 Feb-08 Aug-06 Mar-07 Aug-07 14.3 Feb-09 Feb-10 Aug-08 Aug-09 Aug-10 Feb-11 Aug-11 30.7 P/E (x) Avg(x) 94.6 Peak(x) Min(x)

15.9 9.8 7.2 9.8 4.4

11.4 10.7

10.4 11.1

2008

2009

2010

2011

2012E

August 2011

111

Ranbaxy

Ranbaxy non-domestic business: key trends, triggers & risk Getting the US business on track is key: Over the past 3-4 years, Ranbaxy has been facing cGMP issues, which have gradually aggravated. The problems started with a warning letter for the Paonta facility and gradually aggravated into an import alert for the Paonta and Dewas facilities and culminated in the Application of Integrity Policy (AIP) being invoked for the Paonta facility. The US FDA's steps resulted in the stopping of exports of US formulations from both the facilities. Ranbaxy's US facility is the only facility that supplies products in the US, pending the resolution of the US FDA issues at its India facilities. We believe getting the US business back on track through the clearance of the Paonta and Dewas facilities is crucial for the Ranbaxy management in the near-term. Resolution of US FDA issues imperative: We believe it is imperative for Ranbaxy to resolve its long-pending US FDA cGMP problems, without which the significantly large upsides for its US business are at a risk. The management has been attempting to resolve the issues and is trying to obtain a comprehensive solution with the US FDA and the DoJ for all outstanding issues. While the time-lines for such a resolution are not predictable, we note that, given past precedence, Ranbaxy may be required to pay a one-time penalty for the resolution. Risks to Para-IV opportunities: Given the seriousness of the US FDA issues, we believe there are risks to high value FTF opportunities like generic Lipitor and Nexium (cumulative one-time PAT of INR38.2b over CY11-14). Ranbaxy must demonstrate that these high-value Para-IV opportunities are not at risk.
Para-IV upsides: Ranbaxy: One-time PAT from Para-IV upsides (INR m)
Brand Innovator Sales (USD m) Launch CY09 CY10 CY11E CY12E CY13E CY14E Total % of total

Valtrex 1500 Flomax 1452 Aricept 1900 Lipitor 5000 Caduet 304 Diovan 1300 Valcyte 300 Nexium 2800 Total 17,956 One-Time EPS

25-Nov-09 Mar-10 30-Nov-10 Nov-11 Nov-11 Sep-12 Mar-13 May-14

2,724 2,724 6.5

5,893 1,561 393 7,846 18.7

1,993 2,250 247 4,489 10.7

6,750 740 2,683 10,173 24.2

1,342 2,007 3,348 8.0

20,168 20,168 48.0

8,616 1,561 2,386 9,000 986 4,025 2,007 20,168 48,749

18 3 5 18 2 8 4 41 100

Ranbaxy - Para-IV Upsides in US (INR M)


20,168

Ranbaxy - Core & Para-IV Profits (INR M)


Core PAT Para-IV PAT

20,168
10,173 7,846 2,724 4,489 3,348

10,173 7,846 3,008 4,489 4,991 CY11E 7,052 CY12E

3,348 8,437 CY13E 9,702 CY14E

CY09

CY10

CY11E

CY12E

CY13E

CY14E

CY10

August 2011

112

Ranbaxy

Key FTF upsides: Nexium at risk Nexium account for a major portion of Ranbaxy's FTF upsides. We believe there are potential risks to the monetization of these opportunities due to ongoing US FDA issues. Settlements for Nexium raise uncertainty AstraZeneca entered into an out-of-court settlement with Teva and recently with Dr Reddy's Labs for the potential launch of their respective generic versions in May 2014. This raises uncertainty over Ranbaxy's FTF status and an out-of-court settlement with AstraZeneca since Ranbaxy's 180-day exclusivity on Nexium is likely to commence from May 2014. Teva and Dr Reddy's indicated that if Ranbaxy got final US FDA approval, they would launch their generic versions after the expiry of Ranbaxy's exclusivity. However, the matching launch time-lines for the three settlements (May 2014) and the fact that Ranbaxy is yet to receive even tentative approval, raises uncertainty over upsides for Ranbaxy. The table highlights the upsides for Ranbaxy in both cases:
NEXIUM UPSIDE (USD m) - Sensitivity Analysis
Only Ranbaxy on market Innovator Sales (USD mn) Sales period (mths) Price discount (%) Potential Mkt for generics No. of players in mkt Ranbaxy Mkt Share (%) Ranbaxy Sales (USD mn) Assumed exchange rate (INR/USD) Ranbaxy Sales (INR mn) PAT Margin (%) PAT (INR mn) WACC (%) PV Factor PV of cash flow NPV (INR/share) 2,800 6 30 980 2 70 686 42 28,812 70 20,168 14 1 11,941 28.4 Ranbaxy along with DRL and Teva 2,800 6 70 420 4 30 126 42 5,292 40 2,117 14 0.6 1,253 3.0 Source: Company/MOSL

August 2011

113

Ranbaxy

Long-term plan to exploit synergies with Daiichi Ranbaxy formulated a three-year plan (2010-12) to exploit synergies with Daiichi. This plan straddles multiple areas in which the partners can leverage each other's strengths. The areas include: 1. Accessing the Japanese generic market through Daiichi; 2. Leveraging Ranbaxy's distribution network to launch Daiichi's products, with the key target markets including India, Africa, Latin America and parts of Europe. 3. Synergies for NCE research: Daiichi has bought Ranbaxy's NCE operations. 4. Accessing Ranbaxy's low-cost manufacturing facilities in India as a sourcing base for Daiichi. Accessing the Japanese generic market The USD70b Japanese pharmaceutical market (with 5% generic penetration at ~USD3.5b) is undergoing a change with the government planning to reduce health care costs by encouraging generics. The Japanese government aims to double the generic penetration over the next five years. Ranbaxy plans to become a strong player in this market by accessing Daiichi's presence and brand-equity in this market as well as its own product pipeline. We do not expect major upsides from this initiative in the short- to medium term as Ranbaxy will have to file products with the Japanese authorities and get them approved, which will be timeconsuming. Leveraging Ranbaxy's distribution network to launch Daiichi products Key target markets include India, Africa, Latin America and parts of Europe, in which Ranbaxy's front-end presence will be leveraged to distribute Daiichi's products (can also include patented products). A beginning has been made with Ranbaxy starting marketing of a few products in India, Mexico and Romania. We believe this could result in incremental upsides to Ranbaxy in the medium term. Cost savings for NCE research division In July 2010, Ranbaxy transferred its NCE research operations to Daiichi along with all its NCE assets and ~150 employees. In return, it received some upfront consideration (not quantified) from Daiichi. The transfer of NCE research to Daiichi will result in cost savings for Ranbaxy besides the upfront cash inflow. We estimate Ranbaxy spends ~20% of its annual R&D expenditure on NCE research, which has now been transferred to Daiichi, leading to cost savings. Our estimates take into account the savings in R&D cost due to the sale of NCE research operation to Daiichi. Shifting manufacturing to Ranbaxy's Indian facilities Ranbaxy can supply some products to Daiichi (especially APIs) from its Indian facilities, resulting in upsides for both partners. However, this may be a time-consuming exercise as it will require changing Daiichi's filings for these products.

August 2011

114

Ranbaxy

Financials and valuations: Ranbaxy


Income Statement
Y/E December Net Sales Change (%) Other Operating Income Total Expenditure EBITDA Change (%) Margin (%) Depreciation EBIT Int. and Forex loss Other Income - Rec. PBT pre EO Expense Change (%) Extra Ordinary Expense PBT after EO Exp. Tax Tax Rate (%) Reported PAT Minority Interest Adj PAT after Min. Int. Change (%) Margin (%) Adj PAT excl one-offs 2009 73,294 1.5 2,676 68,846 7,124 -15.1 9.4 2,676 4,448 -783 2,935 8,166 -459.2 -1,931 10,098 6,991 69.2 3,107 142 1,911 -38.2 2.6 -812 2010 85,355 16.5 4,253 70,955 18,652 161.8 20.8 5,533 13,120 -793 2,795 16,708 104.6 -4,293 21,001 5,849 27.8 15,152 185 10,855 467.9 12.7 3,008

(INR Million)
2011E 83,111 -2.6 2,132 76,209 9,033 -51.6 10.6 3,210 5,823 1,063 3,290 8,050 -51.8 -1,138 9,188 1,516 16.5 7,672 80 6,984 -35.7 8.4 4,991 2012E 90,736 9.2 2,268 81,969 11,035 22.2 11.9 3,894 7,141 204 1,862 8,800 9.3 -700 9,500 1,615 17.0 7,885 0 7,052 1.0 7.8 7,052

Ratios
Y/E December Basic (INR) EPS (Fully diluted)* Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E (Fully diluted) PEG (x) Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Working Capital (Days) Leverage Ratio (x) Current Ratio Debt/Equity 2009 4.5 10.9 103.1 0.0 0.0 2010 25.8 38.9 132.9 2.0 6.5 2011E 11.9 24.2 145.7 4.7 30.0 2012E 16.7 26.0 160.7 3.2 20.0

15.2 0.0 10.0 2.9 2.3 11.1 0.5

33.0 -0.9 16.1 2.7 2.4 23.0 1.2

23.3 23.9 15.0 2.4 2.2 18.5 0.8

4.4 9.8

19.4 15.9

11.4 10.7

10.4 11.1

Balance Sheet
Y/E December Equity Share Capital Fully Diluted Eq Cap Reserves Revaluation Reserves Net Worth Minority Interest Loans Deferred liabilities Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Goodwill/Intangibles Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. Account Payables Provisions Net Current Assets Appl. of Funds E: MOSL Estimates 2009 2,102 2,102 41,261 71 43,434 533 36,295 -4746 75,517 62,786 17,880 44,905 6,231 5,407 21,446 60,086 18,407 18,399 12,416 10,863 41,112 32,511 8,602 18,974 75,517 2010 2,105 2,105 53,871 71 56,047 647 43,348 -227 99,815 67,050 21,571 45,479 3,818 4,985 19,009 86,932 21,926 16,052 32,644 16,309 41,398 31,865 9,534 45,534 99,815

(INR Million)
2011E 2,105 2,105 59,241 71 61,417 567 23,328 -227 85,085 69,550 24,781 44,769 6,231 4,985 19,009 64,226 21,632 15,971 12,506 14,117 35,125 30,774 4,350 29,101 85,085 2012E 2,105 2,105 65,549 71 67,725 567 13,328 -227 81,393 72,050 28,675 43,375 6,231 4,985 19,009 61,286 23,616 17,436 6,063 14,170 34,483 29,750 4,733 26,803 81,393

1.6 92 92 33

1.9 69 94 55

1.8 70 95 73

2.1 70 95 83

1.5 0.8

2.1 0.8

1.8 0.4

1.8 0.2

Cash Flow Statement


Y/E December Op.Profit/(Loss) bef. Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations CF frm Op.incl EO Exp. (Inc)/Dec in FA (Pur)/Sale of Investments CF from Investments Change in networth Inc/(Dec) in Debt Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance 2009 7,124 2,935 493 -11,296 -743 -743 -4,205 24 -4,181 -704 -6,695 783 0 -6,616 -11,540 23,956 12,416 2010 18,652 2,795 -1,331 -6,332 13,785 13,785 -3,694 423 -3,271 2,736 7,167 793 -982 9,714 20,228 12,416 32,644

(INR Million)
2011E 9,033 3,290 -1,516 -3,706 7,101 7,101 -4,913 0 -4,913 1,138 -20,100 -1,063 -2,302 -22,327 -20,139 32,644 12,506 2012E 11,035 1,862 -1,615 -4,144 7,138 7,138 -2,500 0 -2,500 700 -10,000 -204 -1,577 -11,081 -6,442 12,506 6,063

August 2011

115

Domestic Formulations | New Peaks

MEDICINES

CAPSULE

Dr Reddy's
4/10 E: Equity with doctors

MEDICINES Score

52/100
DRRD IN

The homecoming
M: Mix

CMP: INR1,446 TP: INR1,670

Neutral
6/10

Dr Reddy's Laboratories (DRL) derives 72% revenue from the acute therapy segment and has small presence in chronic therapy segments through the CVS segment. GI, CVS, pain management and AI contribute ~64% to DRL's domestic formulation revenue.

DRL has good brand equity in the GI and pain management segments but is not a market leader in these therapeutic segments. DRL ranks third in the GI and pain management segments with a prescription market share of 4.4% and 4.1% respectively. In other major segments its brand equity is not very strong. DRL has not been able to improve its brand equity in most after therapeutic areas in which it is present.

D: Distribution & reach

6/10

I: Introductions

4/10

DRL derives 68% of its revenue from metros and tier-I cities. The company's distribution in metros has increased significantly over time and the contribution of other geographies to revenue has fallen over the past four years. DRL has a large field force with 3,165 MRs which helps it to tap both the urban and semi-urban market.

DRL launched fewer new products over the past four years than its peers. It launched 22 new products (including line extensions) annually over the past four years. Over the past two years DRL's revenue growth has been driven largely by old products rather than new launches.

Stock info
Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) M.Cap. (INR b) M.Cap. (USD b) 168.4 1,855/1,320

Financial & valuation summary


Year Net Sales End 5/4/20 243.5 5.3 PAT EPS EPS P/E Adj P/E P/BV (X) 716.2 21.6 20.7 17.5 (X) 5.7 5.3 4.7 4.2 RoE (%) 2.5 24.1 22.5 23.5 RoCE (%) 2.6 16.7 15.4 17.0 EV/ EV/ (INR M) (INR M) (INR) GR. (%) (X) 334 11,099 11,615 2.0 65.6 68.6 7.8 18.2 729.7 22.0 21.1 17.8 Sales EBITDA 3.5 3.5 3.2 2.9 17.4 16.7 17.1 14.4

03/10A 68,179 03/11A 74,693 03/12E 81,754 03/13E 90,323

13,725 81.1

Background

Dr. Reddy's is a vertically integrated company with presence across the pharmaceutical value chain through its core businesses of Global Generics, Pharmaceutical Services & Active Ingredients (PSAI), and Proprietary Products. The company is currently developing bio-generics and NCEs. Key focus markets include India, US, Europe and Russia.

August

116

Dr Reddy's

Chairman Profile

Chairman

Dr. Reddy's Labs was promoted by Dr. Anji Reddy, a first generation entrepreneur. The day-to-day operations of the company are currently managed by Mr. G.V. Prasad (Vice Chairman & CEO) and Mr. Satish Reddy (MD & COO). Building a strong business in US and Russia coupled with global scale in the API business are the key achievements of the company.

C: CAGR and scale-up

6/10

I: Improvement in productivity

2/10

DRL outperformed the industry with revenue CAGR of 18% over FY05-11. The company scaled up its business rapidly albeit on a low base. We expect DRL to post revenue CAGR of 15% over FY11-13, in line with the industry, given its small base, recent additions to field force and considering the management's increased focus on the business.

DRL posted negative MR productivity over 200410. The number of MRs grew 16% against revenue growth of 13.6%, indicating a fall in sales force productivity. Revenue per MR declined from INR3.6m in 2004 to INR3.2m in 2010. At this level, productivity is the lowest among peers.

N: Non-domestic business

7/10

E: Earnings growth

5/10

We are positive on DRL's international business given its strong US and emerging markets portfolio, backed by a strong API portfolio. We expect non domestic business to record 15.2% CAGR over FY11-13, excluding low-competition and Para-IV products in the US. Option values (low-competition and Para-IV products in US) will contribute INR12.9b to sales and INR5.4b to PAT in FY12.

We expect DRL to post top-line of 15% CAGR over FY11-13, leading to EPS CAGR of 11%, excluding Para-IV upsides. DRL's core earnings growth will be driven by sustained double-digit growth in the branded formulations business but will be partly tempered down by higher taxes.

S: Stock Attractiveness
Return ratios are muted due to a high cost German acquisition, which is not yielding desired returns. DRL is valued at 20.7x FY12E and 17.5x FY13E consolidated earnings. We had placed our recommendation "Under Review" for a potential downgrade (from Buy earlier) some time back. We now rate the stock Neutral with TP of INR1,670.
Stock performance (1 year)
Dr Reddy s Labs 2,000 1,750 1,500 1,250 1,000 Aug-10 Nov-10 Feb-11 May-11 Sensex - Rebased

12/20

Aug-11

August 2011

117

Dr Reddy's

India formulations snapshot


Domestic formulations: Revenue contribution marginal, sizable contribution to profits The domestic formulations business contributes just ~15% to DRL's revenue but is one of its most profitable businesses. We estimate contribution of 23% to EBITDA. EBITDA Contribution Non-DF EBITDA 77% DF EBITDA 23%

The homecoming
Balancing focus between overseas and domestic markets
Despite being one of the largest Indian generic companies, Dr Reddy's Laboratories (DRL) has been lagging its peers in the domestic formulations business. DRL, ranked a distant thirteenth in the industry with 2.17% market share, has strong brand equity in the gastrointestinal and pain management segments. DRL lagged the industry average growth rate over the past four years in all geographies except metros. However, of late, it has been expanding in the domestic market, which is visible from its growth up-tick in 2009 and 2010.

1. Mix:

4/10

Acute therapeutic segments dominate sales The top four therapeutic segments, GI, CVS, pain management and AI contribute ~63% to DRL's domestic formulations revenue. Overall, the acute therapeutic segments contribute ~72% to sales. Over the past 10 years, the GI and respiratory segments increased their contribution from 19% in FY01 to 29% in FY11 while contributions from pain management and anti-infective segments fell from more than 32% in FY01 to 20.6% in FY11.
Dr. Reddy's: Therapeutic breakup
FY01
FY05
Diabetes 7% AI 8% Pain 17% CVS 22% Derma tology 5% Respira tory 4% VMN 6% Others 9% GI 22%

Among laggards in the segment compared with peers DRL ranks thirteenth in the industry and has a market share of 2.17%. Over the past five years DRL's market share dropped from 2.31% in 2006 to 2.17% in 2010. DRL's focus on growing the international generic business had resulted in low focus on the domestic formulations business in the past which has impacted overall business growth. DRL posted revenue CAGR of 18% over the past six years, against the industry's 14% CAGR. DRL market growth share and

Diabetes 5% AI 15%

Derma tology 3%

Respi ratory 1% VMN 9% Others 13%

Pain 17%

CVS 19%

GI 18%

FY11

VMN 5% Stomatologicals 5% Respiratory 5% Dermatology 6%

Others 10% GI 23%

Mkt Share (%) Grow th (%) 18.6 14.7 10.5 2.31 2.4 2.3 8.0 2.2 2.2 20.6

Diabetes 6% AI 8% Pain 13%

CVS 19%

2006

2007

2008

2009

2010

Source: Company/Industry/MOSL

August 2011

118

Dr Reddy's

2. Equity with doctors:

6/10

Good brand equity in GI, pain management segments DRL is not a market leader in any therapeutic segment. It ranks third in the GI segment with market share of 5.6%, eighth in the pain management segment with market share of 4% and tenth in the dermatology segment with market share of 3%. A major drawback in DRLs portfolio is that it is not among the top 10 players in any major chronic therapeutic segment. Over the past two years, DRL's growth in key segments like the GI and pain management segments has been lower than that of industry.
Market share in key therapies (%) (2010)
5.6

Growth comparison (%) (2010)


Avg Gr - Company Avg Gr - Industry 23.0

4 3
15.5 17.1 16.7

18.4

4.4

GI

Pain/Analgesic

Dermatology

GI

Pain/Analgesic

Dermatology
Source: Industry/MOSL

* Average growth over 2009-2010

DRL does not have high brand equity except in the GI and pain management segments in terms of the number of prescriptions written. DRL ranks at third position in the GI and pain management segments with prescription market shares of 4.4% and 4.1% respectively. In other major segments the brand equity is not very strong. DRL has not improved its brand equity in most therapeutic areas in which it is present.
DRL's prescription ranking
Jan-07 Pain Mgmt GI Respiratory Vit CVS Anti-diabetic Anti-infectives Derma 3 5 10 9 10 11 17 23 Jan-08 3 3 9 8 11 13 15 19 Jan-09 3 4 10 11 12 15 16 22 Jan-10 Oct-10 3 3 4 3 11 10 14 11 12 13 14 13 16 16 19 21 Source: Industry/MOSL

Higher brand concentration DRL's top 10 brands contribute ~37% to its total revenue and seven of its top 10 brands feature among the industry's top 300 brands. Its No1 brand Omez (Omeprazole in the GI segment) ranks twenty-seventh in the industry and has been posting revenue CAGR of 17% over the past two years. Six out of the top 10 brands reported double-digit revenue CAGR over the past two years.
August 2011

119

Dr Reddy's

DRL's top 10 brands


Brand Drug Product Launch 1992 1996 1994 2005 1996 2002 2000 1989 2005 Sales (INR m) 1,065 700 507 405 377 328 285 278 209 200 YoY Gr (%) CAGR (%) Omez Omeprazole Nise Nimesulide Stamlo Amlodipine Reditux Rituximab Omez-D Omeprazole & Domperidone Stamlo Beta Atenelol & Amlodipine Razo Rabeprazole Atocor Atorvastatin Mintop Minoxidil Razo-D Rabeprazole & Domperidone CAGR through 2009-2011 14.8 17.2 1.4 7.6 7.2 9.6 74.6 42.7 21.6 34.0 0.6 4.4 15.4 15.4 1.5 1.7 6.6 10.2 19.0 20.4 Source: Company/MOSL

3. Distribution and reach:

6/10

DRL derives 68% of its revenue from metros and class-I towns, against an industry average of 63%. Over the past four years revenue CAGR for all geographies have been either in line or below the industry average.
DRL: Geographical distribution of revenues (%)
Metros 20.5 17.1 31.9 Class I Tow ns 20.9 16.5 31.5 20.8 16.3 32.4 Class II to VI 17.9 16.1 32.1 Rural 16.0 15.6 30.6 32.6 37.8 31.3 31.6 32.5

Industry: Geographical distribution of revenues (%)


Metros 20.6 19.2 Class I Tow ns 20.9 19.0 20.0 19.5 Class II to VI 18.1 19.4 Rural 17.3 19.6 32.0

30.5

31.1

30.5

33.9

27.6 CY06

28.9 CY07

28.9 CY08

30.0 CY09

31.0

CY06

CY07

CY08

CY09

CY10

CY10

DRL: Geography-wise growth rates (%)


Metros Class I Tow ns Class II to VI Rural 34.3 20.1 17.2 13.6 9.8 9.4 6.8 8.3 6.7 17.2 15.1 7.7

Industry: Geography-wise growth rates (%)


Metros Class I Tow ns Class II to VI Rural 26.2 23.5 20.7 17.5 16.4 14.7 9.5 2.5 13.0

17.2 13.2 10.5

17.6 14.0 11.1 7.9

17.5 15.6

17.7

CY07

CY08

-7.0 CY09

CY10

CY07

CY08

CY09

CY10

Source: Industry/MOSL

August 2011

120

Dr Reddy's

4. Introductions:

4/10

DRL's growth over the past four years has been led by existing products as It launched fewer new products compared with the industry Over the past four years DRL launched 22 new products (including line extensions), annually which is less than its peers. The average revenue per new launch has fallen over the past four years, indicating a sharp decline in value derived out of new launches. Over the past two years, DRL's revenue growth has been largely driven by existing products rather than new launches.
DRL: New launches
No. Of launches in last 2 yrs Avg sales per launch (INR m) 138.8 142.2

DRL: Growth composition (%)


New Launches Existing Brands

7.0 5.2

18.5

19.4 34 CY07 26 CY08 54 CY09

28.3 63 CY10

7.7

6.6 5.3 1.4 2.1 CY10 CY08 CY09

CY07

Source: Industry/MOSL

5. CAGR and scale-up:

6/10

DRL is aggressively targeting strong growth in the domestic formulations business and expects double-digit growth, led by new launches and strengthening of its field force (600 MRs added over the past few quarters to total ~3,000). We expect DRL's domestic formulations business to post revenue CAGR of 15% over FY11-13. We expect DRL to report in line industry growth over the next two years, considering the management's increased thrust on the business and relatively low base.
Dometic formulation revenues
DF Revenue (INR m) 26.7 26.0 19.8 15.7 15.1 16.0 13.0 YoY Grow th (%)

5.2 5,526 FY06 6,964 FY07 8,060 FY08 8,478 FY09 10,158 FY10 11,690 FY11 13,210 FY12E 15,323 FY13E

Source: Company/MOSL

August 2011

121

Dr Reddy's

6. Improvement in MR productivity:

2/10

DRL's sales force productivity fairs poorly compared with the industry DRL's domestic formulations business posted revenue of 13.6% CAGR over FY04-10 and its sales force grew 16% CAGR, implying negative productivity of the salesforce. In 2004, DRL derived INR3.6m revenue per MR, which fell to INR3.2m in FY10. Compared with the companies covered in this report, DRL's performance was below average.

DRL: Sales force productivity (2004-10)


No. of MRs 3.6 Revenue per MR (INR m)

Sales force addition CAGR (%) Productivity Improvement CAGR (%)

3,165

16.0

11.5

3.2 1,300

1.9 -2.1

2004

2010

DRL

Industry
Source: Company/Industry/MOSL

7. Non-domestic business snapshot:

7/10

Positives DRL has a strong presence in the US and emerging markets. It has strong chemistry skills and fully backward integrated, low-cost operations. It has a pragmatic mix of low-competition, Para-IV and normal products for the US market. It is one of the few Indian players to target the bio-similar opportunity. It is among the top three global API players. Risks and concerns Further write-offs for DRL's German operations cannot be ruled out. They are related to potential price erosions in the tender market. DRL has yet to tie up with a global player to capitalize on the bio-similar opportunity in regulated markets. DRL's CRAMS business may not scale-up due to a conflict of interest with a strong generic business. DRL's past acquisitions have not delivered the desired results, which has impacted return ratios.

News flow/triggers Launch of generic Zyprexa in US with 180 days exclusivity expected in October 2011 US FDA approval for generic Arixtra in the US expected in FY12. Ramp-up in supplies to GSK for emerging markets expected in FY13. Further visibility on DRL's achieving US$2.7b revenue by FY13.
August 2011

122

Dr Reddy's

Impact assessment We are positive on DRL's international business given its strong US and emerging markets portfolio backed by a strong API portfolio. We expect the non-domestic business to record 15.2% CAGR over FY11-13 excluding low-competition and Para-IV products in the US. Option values (low-competition and Para-IV products) will contribute INR12.9b to DRL's sales and INR5.4b to PAT in FY12.
Sales mix (INR m)
FY09 PSAI India 18,758 2,383 FY10 20,404 2,646 FY11 19,648 2,619 FY12E 20,655 2,750 FY13E 22,427 2,887 FY10-13 CAGR (%) 6.8 5.0 7.1 15.6 14.5 16.5 5.7 6.0 4.9 24.2 10.0

EBITDA Contribution
DF EBITDA 23%

International 16,375 17,758 17,029 17,905 19,540 Branded Formulations 18,060 22,145 25,913 29,708 34,627 India 8,478 10,158 11,690 13,210 15,323 International 9,582 11,987 14,223 16,499 19,303 Generics 31,730 26,460 27,427 29,220 30,638 US 19,844 16,817 18,996 20,532 21,354 EU 11,886 9,643 8,431 8,688 9,284 Others 893 1,268 1,705 2,171 2,631 Total 69,441 70,277 74,693 81,754 90,323 Note - Estimates exclude Para-IV/low-competition opportunities in the US

Non-DF EBITDA 77%

Source: Company/MoSL

8-9. Earnings growth and stock attractiveness:

17/30

Traction in the branded formulations and US businesses will be key growth drivers for DRL over the next two years. We estimate core EPS of INR68.6 in FY12 and INR81.1 in FY13, adjusting for the interest cost of the bonus debentures and factoring-in the impact of likely withdrawal of DEPB scheme. Our core estimates exclude upsides from patent challenges/low-competition opportunities in the US. The stock trades at 20.7x FY12E and 17.5x FY13E core earnings. While current valuations are supported by large potential one-time opportunities in the US, they do not fully discount the slowdown in DRL's core business. We had placed our recommendation "Under Review" for a potential downgrade (from Buy earlier) some time back. We now rate the stock Neutral with TP of INR1,670 (20x FY13E core EPS + INR47/sh of DCF value).
Dr Reddy's RoE & RoCE (%)
RoE RoCE 24.1

Dr Reddy's one year forward PE


84
22.5 23.5

P/E (x)

Avg(x)

Peak(x) 77.2

Min(x)

64
9.9 4.0 2.5 -2.9 2.6 16.7 15.4 17.0

44 24

Negative Earnings Cycle 16.4 Mar-07 Feb-08 Feb-09

25.4

19.7 Feb-10 Aug-09 Aug-10 Feb-11 Aug-11

Aug-06

Aug-07

2008

2009

2010

2011

2012E

2013E

Aug-08

-12.3

August 2011

123

Dr Reddy's

DRL non-domestic business: key trends, triggers & risk Revenue target of USD2.7b by FY13 implies 27% CAGR DRL aims at a top-line of USD3b by FY13 implying 27% revenue CAGR over FY11-13. We believe this is a slightly aggressive target given that most of its businesses are growing at much lower than 27% CAGR. Hence, we estimate DRL's core revenue will grow at 15% CAGR to USD2.1b. One-off and low-competition opportunities in the US are likely to contribute ~USD286m in FY12 and ~USD173m for FY13. We expect revenues of USD2.2b in FY13 including the upside from low competition opportunities. We believe that without some inorganic initiative, it will be difficult for DRL to achieve USD2.7b in revenue by FY13. Strong positioning in emerging markets led by a focused approach We expect DRL's formulation exports to emerging markets to record 18% CAGR over FY11-13 led by a ramp-up in its Russian operations and the start of supplies to other emerging markets under the GSK supply agreement. The main target markets for the company's emerging market initiative include Russia and the CIS region, Venezuela and Brazil. Russia, CIS key markets With 76 percentage contribution to DRL's emerging market exports, Russia and the CIS region is a key market for the company. To sustain double-digit growth in this region, DRL has begun to focus on the Russian OTC market (with the addition of more products and expansion of the field force) and has in-licensing arrangements to expand its product portfolio in the region. US business to ramp-up significantly over the next two years DRL's revenue target of US$1b in the US implies 55% CAGR over FY11-13, led mainly by its FTF pipeline of 12 products and contribution from other low-competition opportunities. Such opportunities are likely to contribute ~INR12.9b and ~INR7.6b in sales and INR5.4b and INR2.3b to PAT in FY12 and FY13 respectively. We have excluded such opportunities from our core estimates and forecast that DRL will post core US revenue of 27.5% CAGR over FY11-13. Low-competition/patent challenge opportunities in the US gain momentum DRL management has guided for launch of at least one patent challenge/low-competition product in the US every year over the next few years. DRL has a pipeline of 11 FTFs. A combination of scale-up in existing patent challenge/low-competition products and new opportunities will help the company to achieve its revenue guidance of USD1b by FY13 in the US.

August 2011

124

Dr Reddy's

DRL US portfolio - one-time pat contribution (INR m)


Product Generic Arixtra Generic Accolate Generic Zyprexa Generic Prevacid Generic Exelon Generic Clarinex Generic Geodon Generic Lipitor Total Launch Status Launched in Jul-2011 Launched Likely launch on 23-Oct-2011 Launched on 15-Oct-2010 Expected in August 2012 Expected in January 2012 Expected in Mar 2012 Expected in May 2012 FY12E 310 366 3,503 1,063 101 79 5,421 FY13E 1,122 358 60 124 385 229 2,277

DRL US portfolio - one-time revenue contribution (INR m)


Product Generic Arixtra Generic Accolate Generic Zyprexa Generic Prevacid Generic Exelon Generic Clarinex Generic Geodon Generic Lipitor Total Launch Status Launched in Jul-2011 Launched Likely launch on 23-Oct-2011 Launched on 15-Oct-2010 Expected in August 2012 Expected in january 2012 Expected in Mar 2012 Expected in June 2012 FY12E 1,721 731 7,005 3,038 169 225 FY13E 4,488 715 172 206 1,100 917 12,889 7,598 Source: Company/MOSL

Import alert for Mexico facility to temper core performance DRL's Mexico facility recently received a warning letter and subsequently an import alert from the US FDA. This is the fallout of the US FDA inspection done in November 2010 wherein it issued 12 observations. Of these, DRL was able to resolve 8. However, the US FDA has issued a warning letter for the remaining four deviations. The warning letter has identified the following cGMP lapses at this facility: non-validation of analytical methods to test APIs, incomplete cleaning validation for some manufacturing equipment, out-of-specification investigations data did not include analysis of all available data, and lack of responsibility of the quality unit to ensure API manufactured were in compliance with GMP. This facility generates annual revenue of ~USD65m, of which ~USD30m is from Naproxen, which is not included in the import alert. DRL can continue to supply this product to its customers. Supply of remaining products (contributing ~USD35m in revenue) will have to be suspended till the import alert is resolved. These are low-margin products for DRL, with gross margins of 25-30%, implying EBITDA hit of USD8m-10m on annual basis. Our estimates factor in the impact of this development for DRL. Germany: Cost structure aligned for a pure generic model Over the past three years, DRL has significantly altered its German operations through cost cutting to align it with the low-margin pure generic market. While the high cost acquisition of Betapharm seems to have been mistimed, we believe that, contrary to past trend, the German operations will not be a drag on the company's PAT in the coming years.
August 2011

125

Dr Reddy's

Financials and valuations : Dr Reddy's


Income Statement
Y/E March Net Sales Change (%) Other Income Total Expenditure EBITDA Margin (%) Deprec. & Amortization EBIT Net Interest Exp Forex (Gains)/Losses PBT & EO Expense Change (%) PBT after EO Expense Tax Tax Rate (%) Reported PAT Adjusted Net Profit Change (%) Margin (%) 2010 70,277 1.2 617 56,075 14,202 20.2 12,763 1,439 75 -72 2,053 -151.4 2,053 985 48.0 1,068 1,068 -120.7 1.5 2011 74,693 6.3 1,115 59,073 15,620 20.9 4,107 11,513 132 57 12,439 505.9 12,439 1,403 11.3 11,036 11,099 939.2 14.9

(INR Million)
2012E 81,754 9.5 493 66,384 15,370 18.8 4,555 10,814 806 -158 10,659 -14.3 10,659 1,706 16.0 8,953 11,615 4.6 14.2 2013E 90,323 10.5 549 72,259 18,065 20.0 4,845 13,220 712 0 13,057 22.5 13,057 2,089 16.0 10,968 13,725 18.2 15.2

Ratios
Y/E March Basic (INR) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Working Capital (Days) Leverage Ratio Current Ratio (x) Debt/Equity (x) 2010 6.3 81.9 254.2 0.8 28.2 2011 65.6 89.9 271.8 8.2 29.2 2012E 68.6 95.6 304.7 8.6 29.2 2013E 81.1 109.7 345.9 10.1 29.2

22.0 16.1 5.3 3.5 16.7 0.6

21.1 15.1 4.7 3.2 17.1 0.6

17.8 13.2 4.2 2.9 14.4 0.7

2.5 2.6

24.1 16.7

22.5 15.4

23.5 17.0

Balance Sheet
Y/E March Equity Share Capital * Reserves Net Worth Loans Deferred Liabilities/Tax Capital Employed 2010 844 42,071 42,915 14,695 1,438 59,048 2011 846 45,144 45,990 23,572 87 69,649 29,955 309 15,246 47,560 16,059 17,615 5,729 8,157

(INR Million)
2012E 846 50,712 51,558 23,572 87 75,217 38,755 -1,191 15,246 42,028 15,533 14,716 5,647 6,132 2013E 846 57,679 58,525 23,572 87 82,184 43,155 -1,191 15,246 45,748 16,258 15,355 7,361 6,774

3.2 62 69 62

2.8 86 78 90

2.4 66 69 75

2.2 62 66 71

1.9 0.3

2.0 0.5

2.1 0.5

2.2 0.4

Net Fixed Assets 22,769 Investments 3,843 Goodwill/Intangible Assets 13,973 Curr. Assets Inventory Account Receivables Cash and Bank Balance Others 38,463 13,371 11,960 6,584 6,548

Cash Flow Statement


Y/E March 2010 Op. Profit/(Loss) before Tax 14,202 Interest/Dividends Recd. 614 Direct Taxes Paid -985 (Inc)/Dec in WC 3,629 CF from Operations 17,460 CF from Oper. incl EO Exp.17,460 (inc)/dec in FA -6,182 (Pur)/Sale of Investments -3,113 CF from Investments -9,295 Change in networth (Inc)/Dec in Debt Other Items Dividend Paid CF from Fin. Activity 103 -5,006 -1,973 -301 -7,177 2011 15,620 926 -1,403 -6,531 8,612 8,612 -12,566 3,534 -9,032 -4,726 8,877 0 -3,235 916

(INR Million)
2012E 15,370 -155 -1,706 1,650 15,159 15,159 -13,355 1,500 -11,855 0 0 0 -3,386 -3,386 2013E 18,065 -163 -2,089 -853 14,959 14,959 -9,245 0 -9,245 0 0 0 -4,001 -4,001 1,713 5,647 7,360 to IFRS

Curr. Liability & Prov. 20,000 23,421 19,621 20,774 Account Payables 9,322 8,480 8,993 9,936 Other Current Liabilities 10,678 14,941 10,628 10,839 Net Current Assets 18,463 24,139 22,407 24,974 Appl. of Funds 59,048 69,649 75,217 82,184 * IFRS reporting from FY09 onwards. Financials prior to FY09 are as per US GAAP E: MOSL Estimates

Inc/Dec of Cash 988 496 -82 Add: Beginning Balance 5,596 6,584 5,729 Closing Balance 6,584 7,080 5,647 Note: Reported cashflow differs due to acquisitions & change reporting from FY09 onwards

August 2011

126

Domestic Formulations | New Peaks

This page is left blank intentionally

August 2011

127

Domestic Formulations | New Peaks

MEDICINES

CAPSULE

Glenmark Pharma
CMP: INR318 TP: INR310

MEDICINES Score

49/100
GNP IN

Needs to improve returns ratios


M: Mix 2/10

Neutral
3/10

E: Equity with doctors

Acute therapeutic segments such as dermatology, AI and respiratory segments dominate the sales mix, contributing 76% of the company's revenue. Glenmark has been trying to expand its presence in chronic therapy segments. Over the past 10 years, Glenmark has tried to diversify its therapeutic mix as the contribution to revenue from the respiratory, gastro and dermatology segments has fallen significantly.

Glenmark lags other leading companies when it comes to brand equity among doctors. The only therapeutic segment in which Glenmark has made its mark is dermatology, in which it ranks second in the industry, with market share of 11.5%. However, Glenmark has gradually improved its prescription ranking in the gynecology and CVS segments over the past four years.

D: Distribution & reach

5/10

I: Introductions

6/10

Glenmark has better distribution in metros and tierI cities as it derives 70% of the revenue from such areas, which is above average compared with the industry. Distribution in metros has increased significantly over time while the contribution of other geographies to revenue has fallen. Glenmark has a field force of 2,078 MRs.

Glenmark has launched fewer new products compared with some of its peers. It launched 26 new products annually over the past four years. Glenmark's revenue growth is led by both existing products new launches over the past four years.

Stock info
Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) M.Cap. (INR b) M.Cap. (USD b) 269.8 390/242 10/22/20 85.8 1.9

Financial & valuation summary


Year End 03/10A 03/11A 03/12E 03/13E Net Sales PAT EPS (INR m) (INR m) (INR) 24,616 29,491 37,007 40,693 3,310 3,548 4,584 5,612 11.6 12.5 16.1 19.7 EPS Gr. (%) 174.9 7.2 29.2 22.4 P/E (x) 27.3 25.5 19.7 16.1 P/BV (x) 3.6 4.2 3.2 2.6 RoE (%) 14.1 17.4 17.0 17.1 RoCE (%) 12.7 13.4 15.3 16.3 EV/ EV/ Sales EBITDA 4.2 3.6 2.8 2.5 17.3 17.7 10.4 11.1

Background

Glenmark is one of the second tier integrated pharmaceutical companies which has differentiated itself through its success in NCE research. The company has pipeline of 5 Novel drugs in different phases of clinical studies. It is also one of the leading Indian generic companies in US with focus on niche generics segments. Glenmark has reasonable presence in semi-regulated markets.

August 2011

128

Glenmark Pharma

CEO Profile

Glenmark was founded by Mr. Gracias Saldanha (Founder & Chairman Emeritus) and is being currently managed by Mr. Glenn Saldanha (CMD). Developing a strong NCE pipeline coupled with expanding presence in the US and emerging markets are the key achievements. It is the most successful NCE research company from India till date.

CEO

C: CAGR and scale-up

6/10

I: Improvement in productivity

5/10

Glenmark has outperformed the average industry growth with revenue CAGR of 18.6% over FY0511. The company scaled up its business rapidly albeit on a very low base. We expect Glenmark to post revenue CAGR of 17% over FY11-13, outperforming the industry, given its low base and aggressive focus on driving growth in this business.

Glenmark has shown marginal increase in MR productivity over the past six years. Glenmark's MR growth was 14.2% compared with revenue growth of 17.3%, indicating improved productivity. Revenue per MR improved from INR3.1m in 2004 to INR3.6m in 2010. At this level productivity is in line with average.

N: Non-domestic business

3/10

E: Earnings growth

7/10

We are neutral on Glenmark's international business despite its ramp-up in emerging markets due to the low return ratios in these markets. We expect international formulation business to record 17% CAGR over FY11-13. Option values include potential NCE out-licensing and the launch of Crofelemer in some emerging markets.

We expect topline of 18.3% CAGR over FY11-13 leading to EPS CAGR of 25.8%. Reduction in interest costs in the long-term will partly drive earnings growth.

S: Stock Attractiveness
Return ratios have been muted due to the workingcapital intensive nature of Glenmark's operations. Glenmark is valued at 19.7x FY12E and 16.1x FY13E consolidated earnings. Maintain Neutral with a target price of INR310 (15x FY13E EPS plus DCF value of Crofelmer and Para IV products).
Stock performance (1 year)
Glenmark Pharma 400 350 300 250 200 Aug-10 Nov-10 Feb-11 May-11

10/20

Sensex - Rebased

Aug-11

August 2011

129

Glenmark Pharma

India formulations snapshot


Domestic formulations contribute ~30% to revenue The domestic formulations business, which contributed 30% to Glenmark's revenue in FY11 and an estimated 27% to EBITDA, is a leading contributor to Glenmark's topline and profitability. Interestingly, unlike other leading generic companies, Glenmark's profitability from the domestic formulations business is lower than from its regulated market generics business. EBITDA Contribution Non-DF EBITDA 73% DF EBITDA 27%

Needs to improve return ratios


Ranks 25th in the domestic market
Glenmark is a niche player in the domestic formulations segment with strong presence in a few niche therapeutic areas like dermatology. It ranks twenty-fifth in the industry with market share of 1.53%. The company has been gradually increasing its presence in chronic therapy areas. Glenmark is among the few companies to have improved the productivity of its workforce over the years.

1. Mix:

2/10

Acute therapeutic segments account for 76% of revenue; dermatology, CVS, AI, respiratory segments dominate sales Acute therapeutic segments, in which Glenmark has 76% market share, dominate Glenmark's sales mix. The top four therapeutic segments, including dermatology, CVS, AI and respiratory segments, account for about 76% of Glenmark's domestic formulation revenue. Its top therapy segment, dermatology, contributes 29% to total revenue. Over the past 10 years, the contribution of CVS and AI segments increased while that of respiratory, gastro and dermatology segments fell. Glenmark has been trying to expand its presence in chronic segments.
Acute segments contributes 76% to the revenue
GI 10% Others FY01 7% Derma tology 37%

Glenmark ranks twentyfifth in the domestic formulations segment Glenmark ranks twenty-fifth in the domestic formulations market and has a market share of 1.53%. However, over the past five years, the company improved its market share from 1.26% in 2006 to 1.53% currently. Over the past six years, Glenmark's revenue posted 19% CAGR and the industry posted 14% CAGR. Glenmark has improved market share over the last 5 years

Gynae cology 9%

Gynaeco logy 5% Pain 13%

FY05
GI 7% Others 3% Dermatol ogy 33%

Pain 4% Diabetes 0% Respira tory 22% AI 11% CVS 0%

Diabetes 8%

Respirat ory 15%

AI 11%

CVS 5%

FY11

Gynaec 5% Pain 6%

GI 3%

Others 6% Dermatology 28%

Diabetes 6%

Mkt Share (%) 25.9 Grow th (%) 21.8 20.1 18.5 17


AI 14% Respiratory 15% CVS 17%
Source: Company/Industry/MOSL

1.26

1.3

1.4

1.5

2006 2007 2008 2009 2010

1.5

August 2011

130

Glenmark Pharma

2. Equity with doctors:

3/10

Glenmark lags in terms of brand equity except in dermatology Glenmark lags leading companies covered in this report in terms of brand equity. The only therapeutic segment in which Glenmark made its mark is dermatology, in which it ranks second in the industry with market share of 11.5%. In the respiratory segment, Glenmark ranks ninth with market share of 2.8%.
Market share in key therapies (%)
11.5

Growth comparison (%) (2010)


Avg Gr - Company Avg Gr - Industry 25.4

18.3 16.2

18.4

2.8

Respiratory

Dermatology

Respiratory

Dermatology
Source: Industry/MOSL

* Average growth over 2009-2010

Glenmark has maintained its strong brand equity in the dermatology segment over the years with prescription ranking of No2 and 8% of the prescription market share. It has improved its prescription ranking in the gynecology and CVS segments over the past four years.
Glenmark's prescription ranking
Jan-07 Derma Anti-diabetic Gynaec Respiratory CVS Anti-infectives 2 9 16 11 Jan-08 2 9 12 11 24 23 Jan-09 2 9 9 14 21 23 Jan-10 2 Oct-10 2

10 10 11 8 13 13 20 17 20 23 Source: Industry/MOSL

August 2011

131

Glenmark Pharma

3. Distribution and reach:

5/10

Glenmark derives 70% of its revenue from metros and class-I towns against the industry average of 63%. Over the past four years revenue CAGR for all geographies except rural areas has been better than that of the industry average.

Glenmark: Geographical distribution of revenues (%)


Metros 19.3 18.3 30.2 Class I Tow ns 20.3 17.2 28.3 18.3 16.0 25.7 Class II to VI 15.5 15.4 25.5 Rural 14.3 15.6

Geographical distribution of revenues: Industry (%)


Metros 20.6 19.2 Class I Tow ns 20.9 19.0 31.3 20.0 19.5 31.6 Class II to VI 18.1 19.4 32.5 Rural 17.3 19.6 32.0

26.7
32.6

32.2

34.2

40.0

43.6

43.5
27.6 28.9 CY07 28.9 CY08

30.0

31.0

CY06

CY07

CY08

CY09

CY10

CY06

CY09

CY10

Glenmark: Geography-wise growth rates (%)


Metros Class I Tow ns 38.4 27.7 26.4 16.3 12.5 12.5 7.5 12.7 7.1 10.5 27.5 Class II to VI Rural 31.5 27.1 25.7 15.8

Industry: Geography-wise growth rates (%)


Metros Class I Tow ns Class II to VI Rural 26.2 23.5 17.6 14.0 14.7 11.1 7.9 9.5 2.5 17.5 15.6 17.7 16.4 13.0 20.7 17.5

-1.1 CY07 CY08 CY09 CY10


CY07 CY08 CY09 CY10

Source: Industry/MOSL

4. Introductions:

6/10

Glenmark's revenue growth from new launches has been gradually declining over the past few years Glenmark's revenue growth was led mainly by new launches in CY07, CY08 and CY09 but in CY10 the contribution of existing brands to revenue growth was higher than that of new launches. Glenmark launched 26 new products annually on average over the past four years. Average revenue per new launch has risen over the past four years from INR66m to INR90m.

August 2011

132

Glenmark Pharma

Glenmark: New launches


No. Of launches in last 2 yrs Avg sales per launch (INR m) 98.3 65.7 96.7 90.3

Glenmark: Growth composition (%)


New Launches Existing Brands

8.7

5.6 7.5 12.9

17.2

11.4

9.5

57 CY07

52 CY08

46 CY09

53 CY10
CY07 CY08 CY09

8.7

CY10
Source: Industry/MOSL

5. CAGR and scale up:

8/10

Glenmark posted domestic formulation revenue CAGR of 19% over FY05-11, much faster than the industry average. We believe the company can sustain its out-performance of the industry by changing its therapeutic mix in favor of chronic therapeutics segments and consistent improvement in workforce productivity. We expect Glenmark's domestic formulations business to post 17% CAGR over FY11-13 against the industry's 15-16% CAGR.
Glenmark: domestic formulations performance
DF revenue (INR m) 27.1 Grow th (%)

16.8 9.0

18.1 12.2

18.0

16.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

Source: Company/MOSL

6. Improvement in MR productivity:

Glenmark's above-average MR productivity leads growth Glenmark's revenue from the domestic formulations business grew at 17.3% CAGR over FY04-10 and its sales force strength increased by 14.2% CAGR, implying improvement in salesforce productivity. Glenmark's MR productivity improvement is visible from the fact that, in 2004, Glenmark derived sales of INR3.1m per MR, which went up to INR3.6m in FY10.

11,562

3,937

4,290

5,454

6,372

7,529

8,447

9,967

5/10

August 2011

133

Glenmark Pharma

Glenmark: Salesforce productivity


No. of MRs Revenue per MR (INR m) 3.6

Sales force addition CAGR (%) Productivity Improvement CAGR (%)

14.2
3.1

11.5

936 2004

2,078 2010

2.7 Glenmark

1.9 Industry
Source: Company/Industry/MOSL

7. Non-domestic business snapshot:

3/10

Positives Trying to build a differentiated portfolio in the US by targeting niche segments of dermatology, oral contraceptive and controlled substances. One of the most successful NCE players from India despite setbacks on some NCEs. Glenmark has generated upfront and milestone income of USD187m from NCEs so far. Glenmark is gradually ramping up its presence in emerging markets. Risks and concerns Working capital intensive operations, especially in emerging markets NCE out-licensing has become difficult and time-consuming, which may lead to higher R&D expenses in coming years. Key news flows/triggers Stoppage of Oxycodone supplies by other generic players in the US will make Glenmark the sole player. Launch of Calcipotriene ointment in the US makes Glenmark the sole supplier. Launch of generic Malarone in the US under agreement with GSK. Signing of NCE out-licensing deals with MNCs.

Impact assessment We are neutral on Glenmark's international business given the working capital intensiveness of its emerging market business. We expect the international formlation business to record 17% CAGR for FY11-13. Option values include potential NCE out-licensing and the launch of Crofelemer in some emerging markets.

August 2011

134

Glenmark Pharma

Sales mix (INR m)


FY09 Formulations 19,188 Branded 11,303 India 6,372 Europe-branded 996 Latam-branded 1,580 Semi-regulated mkts 2,355 Generics 7,885 Latin America 400 North America 7,338 Europe 147 API 1,972 NCE Income 0 Gross Sales 21,160 FY10 21,989 14,116 7,529 1,363 1,361 3,864 7,873 343 7,230 299 2,627 0 24,616 FY11 25,259 15,963 8,447 1,528 1,919 4,070 9,296 401 8,352 544 3,337 895 29,491 FY12E 30,821 19,163 9,967 1,669 2,478 5,048 11,658 478 10,370 810 3,610 2,475 36,906 FY13E FY11-13E CAGR (%) 35,907 22,188 11,562 1,795 2,908 5,923 13,719 561 12,168 990 4,026 660 40,592 19.2 17.9 17.0 8.4 23.1 20.6 21.5 18.3 20.7 35.0 9.8 17.3

EBITDA Contribution
DF EBITDA 27%

Non-DF EBITDA 73%


Source: Company/MoSL

8-9. Earnings growth and stock attractiveness:

17/30

Sustaining growth in existing businesses and funding of NCE research expenses has resulted in high leverage for Glenmark. Debt has particularly increased after the credit crisis of FY09 and has not reduced significantly since. We believe the key determinant for Glenmark's valuations will be its ability to de-leverage without sacrificing growth traction. High debt and high working capital are our key concerns for Glenmark. Expect 26% EPS CAGR over FY11-13: We expect Glenmark to record 18.3% topline CAGR over FY11-13 led by 17.1% CAGR in the generic business and 18% CAGR in branded generic business. EPS CAGR is estimated at 26% over FY11-13. Glenmark has differentiated itself among Indian pharmaceutical companies through its success in NCE research (resulting in licensing income of USD187m so far). Given this success, Glenmark has been aggressive in adding new NCEs to its pipeline, which will put pressure on its operations in the short to medium term as it will have to fund R&D expenses for these NCEs on its own until they are out-licensed. High interest costs and likely absence of strong forex gains will temper down the strong operational performance for FY12. Low return ratios is our main concern. The stock is valued at 19.7x FY12E and 16.1x FY13E earnings. Maintain Neutral with a target price of INR310 (15x FY13E EPS+ DCF value of INR14 for Para-IV pipeline and crofelemer).
Glenmark Pharma RoE & RoCE (%)
RoE 17.4 14.1 15.3 12.7 8.0
40 37.4 18.4 0 Mar-07 Feb-08 Aug-06 Aug-07 13.1 Feb-09 Feb-10 Aug-08 Aug-09 Aug-10 Feb-11 Aug-11

Glenmark Pharma one year forward PE


RoCE 17.0 17.1 16.3
120 80 137.7 160 P/E (x) Avg(x) Peak(x) Min(x)

13.4

7.0

2009

2010

2011

2012E

2013E

August 2011

135

Glenmark Pharma

Glenmark non-domestic business: key trends, triggers & risk Trying to build a differentiated portfolio in the US Glenmark is focusing on filing products in the niche segments of dermatology, controlled substances and hormones for the US market. This coupled with a few FTF filings are expected to be key growth drivers for the US business. However, we are cautious about these product categories given the complexities of manufacturing and the stretched US FDA approval time-lines for ANDA approvals. We estimate Glenmark's US portfolio (exupsides from one-off FTF opportunities) to post revenue of 21% CAGR over FY11-13.
ANDAs filed/marketed (includes partner filings)
As of 31 March 2009 Dermatology Controlled substance Modified release Hormones Para-IV FTF Normal generics Total 18 6 2 7 9 45 87 As of 31 March 2010 20 9 6 15 9 46 105 As of 31 March 2011 21 3 9 15 13 48 109 Source: Company/MOSL

Para-IV pipeline not significant Unlike some of its peers, Glenmark has not focused on developing a strong patent challenge pipeline for the US. It has a pipeline of six Para-IV products (of which five are FTFs) targeting an innovator market size of USD2.3b.
Glenmark: Para IV pipeline
Product Indication Brand Innovator Market Size (USD m) 1500 Status

Ezetimibe

Cholesterol

Zetia

Schering (Merck)

Has tentative approval with FTF. Sued on 22-Mar-07. 30-month stay period expired in Oct-2010. Court case started in May-10. Signed licensing & cost-sharing deal with Par Pharma on 04-May-10 for small upfront payment. Par to share risks/costs of litigation as well as profits. Settled out-of-court with innovator. Launch scheduled on 12-Dec-2016 Glenmark is FTF and was sued on 07-Dec-07. 30-month stay expired in May-2010. Received final approval on 10-May-2010. Innovator's summary motion rejected. Glenmark launched "at-risk" in Jun-10; Federal Jury ruled against Glenmark in Jan-2011 and awarded Abbott USD16m in damages post which Glenmark has stopped further sales. District Court Judge's ruling will determine the final outcome with losing party having right to appeal to the Federal Circuit Court Glenmark seems the FTF. Sued on 12-Dec-08. Received final approval on 02-May-2011. Settled out-of-court with Nycomed for potential launch in Mar-2012. Glenmark will pay mid-teens royalty to Nycomed. Only one other generic filing till date Glenmark has FTF. GSK sued Glenmark on 17-Aug-09. Settled out-of-court on 12-Apr-10. Launch scheduled in Sep-2011 with 180-day exclusivity. No AzG. Glenmark seems to be the only filer till and date Not an FTF product. Glenmark's partner Lehigh Valley Tech (LVT) has filed NDA with US FDA since it is a pre-1938 product. NDA approval awaited. If successfully approved all other generic players will have to file ANDAs referencing Glenmark's product & hence could give Glenmark ~18 months of indirect exclusivity. Product has to be manufactured in the US as it is a controlled substance

Tradolapril + Verapamil

Antihypertensive

Tarka

Abbott/ Sanofi

58

Fluticasone lotion 0.005%

Dermatology

Cutivate Nycomed

48

Atovaquone Proguanil HCl Oxycodone Hydrochloride Capsules & Liquid Solution

Anti-malarial

Malarone GSK

58

250mg/100mg tablets NA Pre-1938 product 13

August 2011

136

Glenmark Pharma

Glenmark: Para IV pipeline


Product Indication Brand Innovator Market Size (USD m) 93 Status

Calcipotriene ointment

Dermatology

Dovonex Leo Pharma

Leo Pharma discontinued marketing in 2007 when annual revenues were USD93m as it planned to shift prescriptions to a combination but has not been successful. Glenmark currently is the only approved product on the market. It has tied up with Taro exclusively for branding & promoting the product. Current revenue run-rate will be much lower than USD93m (likely to be USD25m for FY11) as the product has not been promoted for the past 3 years. Glenmark to receive small milestone income prior to launch & then royalty on Taro's sales. Royalty will be minimum 30% Settled with Sepracor on 9th Aug 2010. As per settlement Glenmark can launch after 30-Nov-2013, which is 2.5months prior to the expiry of '673 patent, or after 30-May-2014 if Sepracor obtains pediatric exclusivity. Other Para IV filers are Teva, DRL, Cobalt, Orchid, Lupin, Roxane, Wockhardt and Sun. Settled with Lupin, Wockhardt, Cobalt and Teva. Received tentative approval on 22- Dec-10 Glenmark has FTF. Sued on 04-Nov-10. The 30-month stay expires in May2013. Patent expires on 03-Jun-2014. Settled out-of-court on 25-May-2011 with launch scheduled in 3QFY12. There will be no AzG, but Glenmark will have to pay royalty to the innovator. Royalty amount/ percentage not disclosed Glenmark not sued till date. The '314 patent expiring in 2016 has been upheld by court. Astra sued 8 generic players in Apr-10 for the '152 patent expiring on 02-apr-2018 and '618 patent expiring on 17-Dec- 2021. Glenmark's 30month stay expires in Nov-2012. Patent litigation is on. No timelines known 9 generic players have FTF status alongwith Glenmark. Many generic filings with Para-IV status - Teva, Sandoz, Actavis, Mylan, Glenmark, Cadila, Apotex, Aurobindo, Synthon. DRL has tentative approval Perriogo seems to be the FTF. Other generic players with Para-IV filings include Glenmark, Taro & Nycomed. Perrigo has settled with launch scheduled in Dec-2013. Glenmark & Taro have also settled with launch scheduled in Dec-2013. Glenmark's 30-month stay expires in Nov-2011 Source: Company/MOSL

Eszopiclone tablets

Insomnia

Lunesta Sunovion

787

Hydrocortisone Butyrate

Eczema Locoid (Dermatology) Lipocream Cholesterol Crestor

Astellas /Triax

38

Rosuvastatin Calcium

AstraZeneca

3600

Atomoxetine HCl

AttentionDeficit/ Hyperactivity (ADHD) Dermatology

Strattera Eli Lilly

530

Fluocinonide

Vanos

Medicis

30

Tarka has witnessed negative news flow On 15 January 2011, a US jury ruled against Glenmark on one of the contentions of the patent litigation for generic Tarka (a USD58m brand) at a US District Court (lower court). The federal jury rejected Glenmark's challenge to the validity of a Sanofi patent that expires in February 2015. Glenmark had argued that the patent covered an invention that was protected by an expired patent. Abbott markets the drug in the US and sought USD25m as compensation from Glenmark and the US jury awarded damages of USD16m. The District Court judge will now have to either accept or reject the jury ruling on this aspect of invalidation and give a ruling on other aspects of the case. The final outcome of the case will depend on what the judge rules on all the aspects of the case (the ruling is expected in next few weeks).

August 2011

137

Glenmark Pharma

Glenmark undertook an "at-risk" launch of generic Tarka in the US in June 2010. Glenmark generates US$5m in revenue per quarter from generic Tarka with about 55% PAT margins resulting in USD2.75m PAT per quarter. For FY11, we estimated one-time PAT of USD8m from this opportunity for Glenmark. The jury ruling implies potential damages of USD16m which Glenmark will have to pay Abbott if it loses the case. Glenmark has temporarily halted sales of generic Tarka until the District Court judge gives a ruling. Identifying niche opportunities in the US Besides Para-IV filings, identifying niche, low-competition opportunities in the US is a key focus area of Glenmark's US strategy. It has met with some success in this strategy with Oxycodone and Calcipotriene. (A) Oxycodone Glenmark's US partner, Lehigh Valley Technologies (LVT), received NDA approval for Oxycodone 5mg capsule and 100mg/5mL oral solution in June 2010. LVT will make the product and while Glenmark will have exclusive distribution rights for these dosages in the US (market size of USD13m/year). Background to the NDA filing Since Oxycodone is a pre-1938 product all generic players launched their generic versions in the US without US FDA approvals. The US FDA has been gradually trying to get the products approved. As part of this process, LVT filed an NDA for the 5mg capsules and 100mg/5mL oral solution with the US FDA, which has been approved. As per US FDA guidelines, a successful NDA approval will force the remaining generic companies to withdraw from the market and re-file their products with reference to LVT's approved NDA. The US FDA will issue a warning letter to the remaining generic players to withdraw their versions from the market after it is convinced that it will not lead to drug shortages and that Glenmark/LVT will be able to meet the demand. US FDA approval time-lines for ANDAs is approximately for 18-24 months. This will result in Glenmark/LVT being the only approved Oxycodone player in the market for the next 24 months. Sole player - may be able to raise prices Being the sole player in the market, Glenmark/LVT will enjoy indirect exclusivity for the dosages until other generic players receive new approvals. This product will qualify as a niche (high margin) opportunity targeted by Glenmark in the US market. Absence of other generic players (for ~24 months) will give it an opportunity to raise prices of Oxycodone, enhancing the size of the opportunity to US$25m-30m over the next 12 months. (B) Calcipotriene Glenmark is the only US FDA approved player in the Calcipotriene ointment market. Leo Pharma discontinued marketing in 2007 when annual revenue was USD93m as it planned to shift prescriptions to a combination of Calcipotriene & Betamethasone but has not been successful. Glenmark is the only approved product on the market. It has tied up with Taro exclusively to brand and promote the product. Current revenue run-rate will be lower than US$93m (likely to be USD25m) as the product has not been promoted over the past three years.
August 2011

138

Glenmark Pharma

We expect Glenmark/Taro to launch this product in FY12. It will receive a small milestone income prior to launch and then royalty on Taro's sales. While Glenmark has not disclosed financial details of its tie-up with Taro, we believe the royalty will be fairly remunerative. Most successful NCE company from India so far Glenmark has been one of the most successful NCE companies from India, generating ~USD202m in upfront and licensing income over the past decade. This is despite its being a relatively late entrant in this segment compared with the likes of Ranbaxy and Dr Reddy's.

Glenmark - NCE Pipeline Snapshot


Molecule Indication Clinical Trials Out-licensing Partner Licensing Income (USD m) Upfront Mile- Total Estimated s t o n e s Deal Value Initially Merck KgA 31 - Partner returned but molecule returned molecule to Glenmark - -

Melogliptin (GRC 8200) Revamilast (GRC 4039)

Diabetes - DPP IV Inhibitor Rheumatoid Arthritis, Asthma

Phase-IIb completed

Initiated Phase-II trials in UK, Poland, India, Czech Republic and Philippines -

Tedalinab (GRC 10693)

GRC 15300 GBR 500 GBR 600

GRC 17536

Oglemilast

GRC 6211

Crofelemer

in Aug-2011 Neuropathic pain, Phase-I completed. Osteoarthritis and To initiate Phase-II Inflammatory pain. in FY12 Initially targeted for Neuropathic pain Osteoarthritis, Phase I completed Neuropathic pain in UK Crohn's disease & Phase I completed Multiple Sclerosis in US Acute Stroke/ To initiate Phase-I Coronary Syndrome, in UK Thrombosis Cardiovascular Disorders Osteoarthritis, Phase I in Neuropathic pain & Netherlands Respiratory disorders Asthma, COPD Partner stopped clinical development post Phase-IIb Osteoarthritis, Partner stopped Neuropathic pain, clinical development Dental pain, post Phase-IIb Incontinence Adult acute Completed Phase III infectious diarrhoea, in US and Phase IIb HIV-related diarrhoea in India

Sanofi Sanofi

20 50 -

325 613 -

Forest/Teijin

16

25

Clinical development stopped Clinical development stopped

Eli Lilly

45

In-licensed from Napo Pharma

15

Glenmark holds rights only for 140 RoW markets and not for regulated markets 25 Source: Company/MOSL

Total

177

August 2011

139

Glenmark Pharma

Out-licensing of NCEs imperative to control R&D costs Glenmark has a pipeline of Eight NCEs undergoing clinical development. Since NCE research has been a differentiating factor for Glenmark compared with its peers, and since it is the most successful NCE research company from India so far, the company has been prompted to aggressively add new NCEs to its pipeline. As these NCEs progress in clinical trials, they will put pressure on Glenmark's P&L in the short to medium term as it will have to fund R&D expenses for these NCEs on its own. Hence, we believe, outlicensing of some of these NCEs is imperative to control the expected increase in R&D costs. Crofelemer: Not a big opportunity Glenmark has in-licensed this NCE from Napo and holds distribution and marketing rights for 140 emerging markets. It does not hold rights for the product in regulated markets. A launch across 140 emerging markets will be phased. Glenmark has, in the past, indicated peak revenue of USD80m from this product (across unregulated markets that Glenmark will target). Revenue ramp-up will be phased from FY13/14 and is likely to take a few years. We believe the profitability of this product for Glenmark will not be very high due to: 1. Relatively low profitability (compared with other NCEs) given the difficulty in manufacturing such products and lower flexibility in pricing the product since it is related to HIV. 2. Payment of single-digit royalty on sales by Glenmark to Napo. 3. We do not expect a big upside for Glenmark from this opportunity. We estimate the DCF value of this opportunity at INR9/share for Glenmark.
Glenmark - Crofelemer DCF Valuation
(USD m) FY11 FY12 Total Market Size 0 0 Regulated Markets Semi-regulated Markets (SRM) Glenmark - Upside from SRM Revenues EBITDA Margin (%) EBITDA Royalty to Napo at 8% of revenues (assumed) PAT Glenmark - Upside from Regulated Markets Salix/Napo's revenues Cost of API (%) Glenmark's revenue from API supplies PAT margin (%) PAT from API supplies Total upside for Glenmark WACC (%) Year 0 1 PV of cash inflow 0 0 Exchange Rate (INR/USD) 45.0 44.5 PV (INR m) 0 0 Total PV (INR m) 2,484 Total PV per share (INR) 9 FY13 15 0 15 15 30 5 1 3 FY14 75 50 25 25 30 8 2 6 50 10 10 15 0.8 6 14 3 4 42.0 177 FY15 150 100 50 50 30 15 4 11 100 10 18 15 2 13 14 4 7 40.7 302 FY16 255 175 80 80 30 24 6 18 175 10 30 15 3 20 14 5 11 39.5 415 FY17 380 300 80 80 30 24 6 18 300 10 30 15 5 22 14 6 10 38.3 386 FY18 380 300 80 80 30 24 6 18 300 10 30 15 5 22 14 7 9 37.2 328 FY19 380 300 80 80 30 24 6 18 300 10 15 5 22 14 8 8 36.1 279 FY20 80 0 80 80 30 24 6 18 FY21 80 0 80 80 30 24 6 18 FY22 80 0 80 80 30 24 6 18

Patent Expiry

3 14 2 3 43.0 109

18 14 9 5 35.0 189

18 14 10 5 33.9 161

18 14 11 4 32.9 137

Source: Company/MOSL August 2011

140

Glenmark Pharma

Strong growth in emerging markets but working capital intensive Glenmark's revenue in emerging markets have grown 4x over FY05-11, albeit on a low base. These include markets like Latin America, Australasia, Africa, Russia and the CIS and parts of eastern and central Europe. Barring a slowdown in FY09, due to the credit crisis, the portfolio has been growing steadily over the years. However, we believe this growth traction has been partly achieved by expanding working capital in the business leading to increased borrowings. We believe Glenmark must strike an optimum balance between growth and working capital in these markets. We expect this portfolio to record 19% revenue CAGR over FY11-13, partly impacted by a potential rupee appreciation against the US dollar. High debt, working capital key concerns High net debt of over INR18b and net working capital of ~INR18b are key concern areas. While Glenmark is attempting to reduce its working capital requirements, we believe it may not be easy for it to reduce it significantly without sacrificing growth, resulting in slower progress on this front.
Sales ramp-up v/s net working capital (INR b)
Revenue (Ex-NCE income) Non Cash WC 34.5 28.6 24.6 20.9 17.4 10.8 6.8 4.6 7.6 11.7 15.5 18.0 16.4 18.8 21.1 40.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

Source: Company/MOSL

August 2011

141

Glenmark Pharma

Financials and valuations: Glenmark Pharma


Income Statement (INR Million) Ratios
Y/E March Basic (INR) EPS (Fully diluted)* Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E (Fully diluted) PEG (x) Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Working Capital (Days) Leverage Ratio (x) Current Ratio Debt/Equity 2010 11.6 15.9 87.6 2.0 3.8 2011 12.5 15.8 75.4 3.7 5.2 2012E 16.1 19.9 99.7 3.7 3.5 2013E 19.7 23.9 121.4 5.0 5.1

Y/E March 2010 2011 2012E 2013E Net Sales 24,616 29,491 37,007 40,693 Change (%) 18.0 19.8 25.5 10.0 Materials Consumed 8,061 9,918 11,396 13,211 Personnel Expenses 3,425 5,103 5,613 6,455 R&D Expenses 1,200 1,386 1,899 2,442 Other Expenses 5,966 7,161 8,288 9,608 Total Expenditure 18,653 23,568 27,196 31,716 EBITDA 5,963 5,923 9,811 8,977 Change (%) 76.4 -0.7 65.7 -8.5 Margin (%) 24.2 20.1 26.5 22.1 Adjusted EBITDA 5,963 5,028 7,336 8,317 Margin (%) 24.2 17.6 21.2 20.8 Depreciation 1,206 947 1,086 1,186 EBIT 4,757 4,976 8,725 7,791 Interest 1,640 1,566 1,482 1,276 OI & forex gains/losses 722 1,405 562 646 PBT before EO Expense 3,839 4,816 7,805 7,162 Change (%) 42.8 25.4 62.1 -8.2 PBT after EO Exp. 3,839 4,816 7,805 7,162 Tax 529 237 994 976 Tax Rate (%) 13.8 4.9 12.7 13.6 Reported PAT 3,310 4,578 6,812 6,186 Adj PAT** 3,310 3,548 4,584 5,612 Change (%) 194.3 7.2 29.2 22.4 Margin (%) 13.4 12.4 13.3 14.0 ** - Excl NCE upsides & incl adjustment for R&D exp capitalization

25.5 3.5 20.1 4.2 3.6 17.7 1.2

19.7 0.7 15.9 3.2 2.8 10.4 1.2

16.1 0.7 13.3 2.6 2.5 11.1 1.6

14.1 12.7

17.4 13.4

17.0 15.3

17.1 16.3

1.5 160 105 266

1.5 140 100 203

1.7 126 103 185

1.8 125 103 189

Balance Sheet
Y/E March Equity Share Capital Fully Diluted Eq Cap Reserves Net Worth Minority Interest Loans Deferred liabilities Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Intangibles (net) Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. Account Payables Provisions Net Current Assets Appl. of Funds E: MOSL Estimates August 2011 2010 269 284 23,282 23,551 130 18,693 710 43,085 21,586 3,929 17,656 6,224 181 7,259 24,210 7,085 10,783 1,069 5,273 5,186 4,987 200 19,023 43,085 2011 270 284 20,102 20,372 267 21,258 -1081 40,816 25,899 4,876 21,023 1,100 309 10,329 25,988 8,070 11,308 1,959 4,651 7,605 7,560 44 18,384 40,816

(INR Million)
2012E 270 284 26,678 26,948 267 18,258 -1081 44,391 28,399 5,962 22,437 1,100 309 9,606 30,608 10,407 12,772 1,752 5,676 10,063 9,663 400 20,545 44,391 2013E 270 284 32,549 32,819 267 15,758 -1081 47,763 30,899 7,148 23,751 1,100 309 8,934 33,643 11,483 13,936 1,535 6,689 11,041 10,591 450 22,602 47,763

4.7 0.8

3.4 1.0

3.0 0.7

3.0 0.5

Cash Flow Statement


Y/E March 2010 Op. Profit/(Loss) before Tax 5,963 Interest/Dividends Recd. 722 Direct Taxes Paid -388 (Inc)/Dec in WC -2,441 CF from Operations 3,857 CF frm Op.incl EO Exp. (Inc)/Dec in FA CF from Investments Change in Networth Inc/(Dec) in Debt Interest Paid Dividend Paid CF from Fin. Activity 3,857 -3,970 -3,970 4,386 -2,151 -1,640 -126 468 2011 5,923 1,405 -2,029 1,530 6,829 6,829 810 682 -7,521 2,701 -1,566 -236 -6,621

(INR Million)
2012E 9,811 562 -994 -2,368 7,012 7,012 -2,500 -2,500 0 -3,000 -1,482 -236 -4,718 2013E 8,977 646 -976 -2,275 6,373 6,373 -2,500 -2,500 0 -2,500 -1,276 -315 -4,090

Inc/Dec of Cash 354 890 Add: Beginning Balance 715 1,069 Closing Balance 1,069 1,959 Note: Reported cashflow differs due to acquisitions reporting from FY09 onwards

-207 -217 1,959 1,752 1,752 1,535 & change to IFRS

142

Domestic Formulations | New Peaks

N O T E S

August 2011

143

Disclosures
This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Group/Directors ownership of the stock 3. Broking relationship with company covered 4. Investment Banking relationship with company covered Companies where there is interest None GSK Pharma None None

Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

Regional Disclosures (outside India)


This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.

For U.K.
This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to which this document relates is only available to investment professionals and will be engaged in only with such persons.

For U.S.
MOSt is not a registered broker-dealer in the United States (U.S.) and, therefore, is not subject to U.S. rules. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, Marco Polo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

Motilal Oswal Securities Ltd


3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021 Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: reports@motilaloswal.com

Motilal Oswal Company Gallery

Motilal Oswal Sector Gallery

You might also like