MO Healthcare Oct 2013

Sector Update | October 2013
Healthcare
Only the fittest thrive!

Alok Dalal (Alok.Dalal@motilaloswal.com); +91 22 3982 5584 Hardick Bora (Hardick.Bora@motilaloswal.com); +91 22 3982 5432
Healthcare | Only the fittest thrive!

Sustainable business + Optimum geographic mix = OUTPERFORMANCE
Page No. Summary ........................................................................................................................ 3-4 Sustainable businesses have three attributes ............................................................ 5-7 Depth in product mix Continuous improvement in product mix Cost efficiency Right geographic mix essential to effectively monetize strengths ........................... 8-24 1. US: Strong pipeline and execution can lead to positive surprises 2. Russia: Market dynamics favor Indian generics companies 3. India: Short term hiccups; longer term story intact 4. Brazil: Government intervention diluting potential Greater FDA vigilance, government interference in pricing here to stay .............. 25-35 Increasing regulatory vigilance of the US FDA Analysis of US FDA inspections in the past Government intervention in pharmerging markets Valuations leave room for reasonable returns ........................................................ 36-39 Sector outperformance led by strong earnings growth over last two years Consistent upgrade in consensus EPS estimates Advocating basket approach to buying pharmaceuticals stocks Annexure .................................................................................................................... 40-41 1: Consent decree related past instances ............................................. 40 2: Company snapshot - India formulations ............................................. 41 Companies .................................................................................................................. 42-81 Sun Pharma .......................................................................................... Lupin .................................................................................................... Dr. Reddy's Labs .................................................................................... Cipla ...................................................................................................... Ranbaxy ................................................................................................ Glenmark Pharma ................................................................................ Cadila Healthcare ................................................................................. Divi's Labs ............................................................................................. IPCA Labs .............................................................................................. Torrent Pharma .................................................................................... 42 46 50 54 58 62 66 70 74 78
18 October 2013
Sector Update
Healthcare
Sustainable business + Optimum geographic mix = OUTPERFORMANCE
Since the beginning of FY13, the BSE Healthcare index has outperformed the BSE Sensex by as much as 26% in terms of absolute returns. Most large pharmaceuticals companies are trading at the higher end of their historical valuations. In this backdrop, we try to identify pharmaceutical companies that offer sustainable business opportunities, predictable earnings growth and as a result would outperform over the next two years. We prefer Dr Reddys, Sun Pharma and Lupin in the large-cap pharma space, while among the mid-caps we prefer Divis Labs and Ipca Labs. We believe these companies have (a) sustainable business models, (b) optimum geographic mix, and (c) ability to withstand regulatory risks. Consequently, these companies have scope to positively surprise on earnings growth over the next two years in our view. Despite the recent run-up, we expect our top picks to continue to outperform the sector.
Sustainable businesses have three attributes

For the pharmaceuticals industry, sustainability of business models would come from three key attributes in our view: (1) Depth in product offerings - helps gain better visibility with the doctor/patient community and strengthens the companys position over distributor channel; (2) Focus on improving therapeutic mix - enables entry into new markets, thereby building upon brand equity and widening its growth prospects and (3) Cost competitiveness - to tackle competitive threats in existing as well as new markets. Besides our preferred picks, Cipla offers many of the above attributes.
Right geographic mix essential to effectively monetize strengths

Companies focused on geographies with strong growth prospects and relatively unhindered by government intervention offer predictable earnings growth. We believe that the US will continue to be the most important geography for large Indian pharmaceuticals companies over the next two-three years. Within the US, companies targeting complex product opportunities have the potential to grow ahead of their peers in our view. Our analysis of the product pipelines of companies under our coverage makes us believe that there is high probability of the US market continuing to generate positive surprises. Emerging markets like India, Russia and Brazil continue to be exciting in the longer run, but India and Brazil may face nearterm challenges due to changes in the regulatory systems. We believe Lupin, Dr. Reddys, Sun Pharma and Glenmark have the right geographic mix.
Greater FDA vigilance, government interference in pricing here to stay

The US FDA has issued more than twice as many warning letters in the year till date compared to the same period last year. While there has been an increase in enforcement actions against Indian companies, our analysis suggests that there is no bias towards India. With more resources in hand, the frequency of such inspections is only going to increase. We believe companies will have to raise their standards for continued compliance with GMP guidelines laid down by the FDA.
Investors are advised to refer through disclosures made at the end of the Research Report. 18 October 2013
We note that few Indian companies like Cipla, Glenmark, Divis Labs and Torrent Pharma have had no issues with FDA so far, which is a tremendous achievement. However, some companies like Sun Pharma, Dr. Reddys, Lupin and Cadila Healthcare have proactively dealt with the US FDA issues in the past and thus are well placed to counteract any future challenges in our view. Our analysis of the manufacturing facilities of the companies supplying products to the US brings out interesting trends. Local governments in key emerging markets are likely to continue interfering in the pricing of essential drugs. We believe companies with the ability to develop products with high entry barriers or companies with strong geographical spread, depth in product mix and presence in free-priced markets like OTC will be eventual winners in these markets.
Valuations leave room for reasonable returns; Advocate basket approach

We estimate the companies covered in this report to deliver a core earnings growth of 24% over FY13-15E, which is stronger than the 20% growth achieved over FY08-13. This would be driven by an improving product mix and favorable currency. Based on our valuations screen, we believe current valuations still leave room for reasonable returns. However, given the risks associated with greater scrutiny by US FDA and possibility of increase in span of price controls for key emerging markets like India, Brazil and Russia, we recommend a basket approach to pharma sector allocation. Our top large-cap picks are Dr. Reddys, Lupin and Sun Pharma, while our best midcap picks are IPCA Labs and Divis Labs.
Valuation matrix
Company MCap USD b TP INR Upside/ Rating EPS Downside CAGR (%) FY13E 14% 17% 17% 7% -30% 11% 25% 29% 24% 24% Buy Buy Buy Neutral Sell Buy Buy Buy Buy Buy 29.9 34.7 18.9 19.5 3.3 31.6 13.9 21.1 41.1 11.6 P/E (x) FY14E FY15E 28.9 28.6 22.5 20.9 29.6 22.0 18.5 18.8 22.0 13.8 25.0 21.5 18.9 18.7 27.8 17.5 16.0 15.5 13.7 12.0 EV/EBITDA Div. Yield (x) (%) FY14E FY15E FY15E 18.9 16.7 15.1 13.2 15.4 14.1 13.0 14.3 12.5 9.4 15.8 13.8 12.8 11.7 8.2 11.9 11.1 11.4 9.4 8.2 0.6 0.9 0.6 0.9 1.3 0.7 1.6 2.5 1.5 2.1 Source: RoE (%) FY14E FY15E 27.9 23.8 20.3 15.6 -4.7 26.5 25.4 20.0 15.0 28.8
Market cap >USD2.5b Sun Pharma 20.8 Lupin 6.5 Dr. Reddy's Labs 6.5 Cipla 5.5 Ranbaxy 2.6 Market cap <USD2.5b Glenmark Pharma 2.4 Cadila Healthcare 2.2 Divi's Labs 2.2 IPCA Labs 1.4 Torrent Pharma 1.1 *Prices as on 15 October 2013
710 1049 2808 452 270 623 828 1329 870 519
20.5 21.1 22.8 22.3 26.7 27.7 23.5 30.3 31.2 28.6 Company, MOSL
18 October 2013
Sustainable businesses have three attributes

Depth in product mix, improving product profile and cost competitiveness are three attributes of sustainability
For the pharmaceuticals industry, sustainability of business models would come from three key attributes in our view: (1) Depth in product offerings - helps gain better visibility with the doctor/patient community and strengthens the companys position over distributor channel; (2) Focus on improving therapeutic mix - enables entry into new markets, thereby building upon brand equity and widening its growth prospects and (3) Cost competitiveness - to tackle competitive threats in existing as well as new markets. Besides our preferred picks, Cipla too offers many of these attributes
Depth in product mix

We believe depth in product mix provides: Portfolio diversification Control over supply chain Protection from uncertain events like price controls A natural entry barrier for competition, particularly in branded emerging markets We map the presence of the top companies covered in this report with the top therapeutic mix in the chronic and acute areas for the Indian market to understand this aspect better. From our analysis, we understand that Sun Pharma and Lupin have lower contribution from top 10 brands indicating significant depth in product mix.
Depth in product mix
Therapy Contribution Contribution of to overallMolecules molecules to SUNP IPM (%) analysed therapy (%) 12 6 12 17 47 32 19 13 17 81 60 55 60 60 17 15 6 2 40 CDH 18 11 9 8 46 LPC 19 3 7 12 41 RBXY 15 9 6 7 37 TRP 21 16 8 6 51 CIPLA IPCA GNP DRRD
CVS CNS Gasto Anti infectives
21 7 3 11 11 7 0 1 8 4 3 6 11 6 3 5 51 24 9 23 Source: Company, Industry, MOSL
Product concentration
Company Top 10 brands Cipla Cadila Dr Reddys Glenmark IPCA Labs Lupin Ranbaxy Sun Pharma Torrent Pharma 26.3 25.1 32.6 36.5 35.2 21.0 33.6 19.5 27.3 Product concentration (% of India sales) Brands 11-25 Brands 25-50 18.0 18.7 20.6 18.3 23.3 17.9 17.5 15.5 18.8 Brands Above 50 39.8 41.2 31.1 29.0 22.9 40.5 35.3 49.8 36.3 MOSL
15.9 14.9 15.6 16.2 18.6 18.4 13.6 15.2 17.7 Source: Company, Industry,
18 October 2013
Continuous improvement in product mix

We believe continuous improvement in product mix provides: Entry barriers for competition Improvement in efficiency of various units involved with these products Increase in financial strength of the company Not only have filings in US moved towards greater complexity, product profile in India has shifted towards fast growing chronic areas We analyze this aspect by studying the US filing and approval trends for the companies under coverage. We see a trend of top Indian companies like Sun Pharma, Lupin and Dr Reddys moving away from traditional generics to more complex products. In the Indian market, Lupin and Ipca Labs have demonstrated a significant shift in their therapy mix over the last decade. We note that many other Indian companies attempted to decrease high dependence on one molecule (for Lupin: anti-TB, for Ipca: anti-malaria) but did not do so successfully.
Trend in ANDA approvals - Improving prodcut mix in US generic market

Ta bs ./Ca ps ./Sus p./Sol n. 5% 20% 8% Modi fi ed Rel eas e 2% 5% 9% 10% Injecti ons 2% 6% 5% 3% 19% Ora l Contra cepti ves 1% 3% 6% 9% 28% Topi ca l s 3% 3% 14% 2% 13% Ophtha l mi cs 2% 3% 12% 23% 13% 66% 74% 65% 52% 65% 47% Na s al
2008
2009
2010
2011
2012
2013
Source: US FDA, Company, MOSL
Improving prodcut mix in India formulations business
LUPIN
CVS Anti-TB Anti-As thma Anti-bi oti cs Anti-di a beti c Others 23% 2% 3% 33% 26% 2005 13%
2013 23% 28% CVS Anti -TB Anti -As thma 9% 15% 16% Anti -bi oti cs Anti -di a beti c 9% Others
IPCA
CVS a nd a nti di a beti c NSAID Anti ma la ri a Anti ba cteri a GI CNS Others 22% 15% 12% 10% 5%
7%
7% 29%
6% 28%
CVS a nd anti di abeti c NSAID Anti ma l ari a Anti bacteri a
8%
11%
GI CNS 17% 23% Others
Source: Company, MOSL 18 October 2013 6
Cost efficiency
We believe cost efficiency provides: Ability to stay competitive in a commodity market Better control in case of uncertain events like price controls Stronger cash flows/balance sheet, strengthening ability to seize inorganic growth opportunities We analyze the cost structure of the companies covered in this report to understand this aspect better. Sun Pharma and Divis Labs are the most cost competitive, which is a result of their judicious product mix, right geographical spread and organization culture favoring cost efficiency.
Sun Pharma and Divis Labs are the most cost competitive, which is a result of their judicious product mix, right geographical spread and organization culture
Trend in cost structure: Large companies

Sun Pharma FY05 FY09 FY13 Material cost 28.5 Staff cost 9.8 R&D cost 8.8 SG&A cost 16.5 *Y/E December 20.0 8.0 7.3 21.1 18.3 13.6 5.5 19.3 FY05 50.8 10.5 6.0 21.7 Lupin FY09 41.5 12.6 8.1 18.7 FY13 36.8 13 8.1 18.6 FY05 48.6 5.2 4.9 19.0 Cipla FY09 44.9 5.2 4.7 21.8 FY13 35.7 12.5 4.5 20.8 Dr Reddys FY05 FY09 FY13 51.9 16.0 5.5 23.8 55.7 14.6 5.8 10.6 44.6 13.8 6.7 13.6 Ranbaxy* FY05 FY09 FY13 49.5 42.9 16.5 17.0 8.8 6.4 41.0 25.8 Source: Company, 32.6 15.5 3.6 32.7 MOSL
Trend in cost structure: Mid-sized companies

FY05 Material cost Staff cost R&D cost SG&A cost 42.7 13.2 1.8 25.0 IPCA Labs FY09 FY13 39.4 14.6 3.9 20.8 39.0 13.9 3.6 21.3 Glenmark Pharma FY05 FY09 FY13 30.1 7.0 6.0 28.5 31.5 14.2 4.2 33.9 33 15.9 7.8 22.1 Torrent Pharma FY05 FY09 FY13 32.5 16.0 13.5 24.4 32.8 15.7 7.1 26.0 28.8 19.4 4.5 25.7 Cadila Healthcare FY05 FY09 FY13 38.0 11.5 5.6 26.1 32.7 10.6 5.3 30.7 36.5 14.2 6.0 25.6 Divi's Labs FY05 FY09 FY13 45.6 39.2 37.3 4.3 5.6 9.2 2.1 1.0 1.1 17.9 10.3 14.5 Source: Company, MOSL
For the US, we study the trend in ANDA filings by Indian companies with their own DMF backing. This is important in the light of having significant competitive advantage in a commodity market. Lupin, Dr Reddys, and Ipca have the highest percentage of ANDAs backed by their own DMF filing, which makes them cost competitive versus competitors.
Backward integrated ANDA filings
145.5 DMFs /ANDAs fi l ed
95.3 78.4 64.8 63.9 57.3
44.1
36.5
35.8
IPCA La bs Dr Reddy's
Lupi n
Cadi l a Aurobi ndo Ra nba xy Gl enma rk Sun Heal thca re Pha rma Pha rma Pha rma
Torrent Pha rma
Source: US FDA, Company, MOSL 18 October 2013 7
Right geographic mix essential to effectively monetize strengths

US to remain most important geography; opportunities in emerging markets too

Companies focused on geographies with strong growth prospects and relatively unhindered by government intervention offer predictable earnings growth. We believe that the US will continue to be the most important geography for large Indian pharmaceuticals companies over the next two-three years. Our analysis of the product pipelines of companies under our coverage makes us believe that there is high probability of the US market continuing to generate positive surprises. Emerging markets like India, Russia and Brazil continue to be exciting in the longer run, but local markets of India and Brazil may face near-term challenges due to changes in the regulatory systems. We believe that Lupin, Dr. Reddys, Sun Pharma and Glenmark have the right geographic mix.
Aggregate sales break-up
The four largest markets

India, USA, Russia and Brazil together contributed over 65% to the FY13 revenues for the companies under our coverage. Since these are the key geographies which have been identified, and invested into, by the industry, we have restricted our analysis to these economies in our exercise to identify the right geographic mix for the medium term. We have concluded that, over the medium term, USA and Russia will continue to drive growth for companies focused in these markets. Growth in India will be hampered till the new Drug Price Control Order (DPCO) 2013 is fully implemented. In Brazil, companies like Torrent Pharma and Cadila Healthcare that have been concentrating on the CVS and anti-diabetic space could continue to see slowdown.
35%: REST 65%: INDIA, US, BRAZIL & RUSSIA
Source: Company, MOSL
1. US: Strong pipeline and execution can lead to positive surprises

The US generics market remains an attractive opportunity for Indian companies though fewer products would be losing patent protection over the next five years than in the last five years. The US is expected to remain a free-priced market and the US government is keen to promote generics. This augurs well for for Indian companies that hold less than 10% of the US generics market (in value terms) and are yet to fully exploit the potential. Over the last few years, their product offerings have matured significantly and this is visible in the recent approvals that some Indian companies have been able to garner. Given their strong product pipeline and backward integration capabilities, we believe that Indian companies would not only sustain their current growth momentum in the US, but could also surprise positively over the next few years.
18 October 2013
Indian companies hold just ~10% value market share in US generics, though in volume terms, their share would be materially higher.
Indian companies hold less than 10% value market share in US; significant opportunity to grow with existing drugs The US generics market is estimated at USD40b-45b and the top-10 Indian companies collectively derive sales of USD4b-4.5b (FY13) from the US. Indian companies hold just ~10% value market share in US generics, though in volume terms, their share would be materially higher. We believe Indian companies have the potential to increase market share in existing products in the US, given their increasing investments in strengthening backend capabilities and stronger execution.
US generics market size and share of Indian companies
Generi c ma rket (USD m) Market s hare of l eadi ng Indi an cos (%) 9.5 8.4 6.8 5.6 4.5 27.0 4.7 29.0 31.7 5.2 34.0 37.8 40.0 43.2
2006
2007
2008
2009
2010
2011
2012
Source: US FDA, Industry, Company, MOSL
Indian companies have scaled up significantly in the US over the last five years (sales in USD m)
FY08 FY13 933 676 322 59 Aurobi ndo Pharma 64 Ca di l a Hea l thcare Dr Reddy's 310 200 141 179 0.5 Gl enmark Pharma Lupi n Ranbaxy* Sun Pha rma 65 692 387 350 1,129
277
Torrent Pha rma
*Y/E December
Indian companies are increasingly filing products backed by their own DMF
Backward integration capabilities a strong competitive advantage in a crowded market Indian companies are developing strong backend capabilities, which would give them a strong competitive advantage in a crowded market. The contribution of API to sales is declining and Indian companies are increasingly using their API capacities for captive consumption and to file their own finished products. Some of the Indian companies with a strong backward integration are Dr Reddys, Ipca Labs and Lupin.
18 October 2013
DMF filings by Indian companies (no. of filings)

FY08 172 122 62 32 37 30 114 106 60 74 46 48 FY09 184 138 89 125 70 6 Aurobi ndo Ca di l a Di vi 's La bs Pharma Hea l thca re Dr Reddy's Gl enmark Pharma IPCA La bs Lupi n Ranbaxy* Sun Pha rma 24 147 FY10 FY11 FY12 FY13
Torrent Pharma
*Y/E December
ANDA filings backed by own DMF

145.5 DMFs /ANDAs fi l ed
95.3 78.4 64.8 63.9 57.3
44.1
36.5
35.8
IPCA La bs Dr Reddy's
Lupi n
Cadi l a Aurobi ndo Ra nba xy* Gl enma rk Sun Heal thca re Pha rma Pha rma Pha rma
Torrent Pha rma
In the initial years of US operations, filings were more geared towards crowded market products
Product pipelines have matured over the last five years We have segregated the product filing and approval trends into two for Indian companies: (1) Years 2003-08, and (2) Years 2008-13. 2003-08 were the initial years of scale up in the US for most companies except Dr Reddys and Ranbaxy. During these years, Indian companies filings and approvals were more geared towards the crowded market products, with few exclusive filings and launches.
Key drug launches over 2003-08
Company Dr Reddy's Year 2006 2006 2006 2006 2008 2007 2006 2007 2007 2008 2008 Brand Allegra Proscar Zocor Zofran Imitrex Trileptal Zocor Pravachol Trileptal Protonix Ethyol Molecule Size (USDm) launch type Fexofenadine 1400 Limited competition Finasteride 406 Authorised generic Simvastatin 3100 Authorised generic Ondansetron 639 180 day exclusivity Sumatriptan succinate 1290 180 day exclusivity Oxacrbazepine Simvastatin Pravastatin (80mg) Oxacrbazepine Pantoprazole Amifostine 643 4200 209 643 2300 80 Shared 180 day exclusivity 180 day exclusivity 180 day exclusivity Shared 180 day exclusivity At risk launch At risk launch Source: Company, MOSL 10
Glenmark Pharma Ranbaxy* Sun Pharma
18 October 2013
Indian companies constitute ~50% of the global generic filings globally
Starting 2008, Indian companies have collectively made over 800 filings with the US FDA, which constitute ~50% of the global generic filings. These are geared towards more complex products than those filed earlier. Besides, Indian companies are aggressively targeting Para IV opportunities and companies like Sun Pharma and Glenmark have also chosen to introduce products at risk. Several Indian companies have started identifying niche areas for presence and have started developing their product pipelines to add depth in their chosen areas.
Cumulative ANDA approvals over 2008-2013 (no. of approvals)

2009 2010 2011 2012 142 83 45 9 Cadi l a Hea lthca re Dr Reddy's Gl enmark Pharma 14 32 78 2013 261
128 76 45 70
138 69 11 43
IPCA La bs
Lupi n
Ra nba xy*
Sun Pha rma
Torrent Pharma
Trend in ANDA approvals: Changing product profile Cadila Healthcare: Changing Product profile
Ta bs ./Ca ps ./Sus p./Sol n. 20% 23% 100% 71% Modi fi ed Rel eas e 29% 13% Injecti ons 25% 25% 88% 50% 2012 2013
Dr. Reddy's: Changing Product profile

Ta bs ./Ca ps ./Sus p./Sol n. 25% 8% 67% 18% 9% 36% 82% 55% 57% Modi fi ed Rel ea s e 21% 21% 74% 26% 55% 9% 36% 2012 2013 Injecti ons
80%
77%
2008
2009
2010
2011
2008
2009
2010
2011
Glenmark: Changing Product profile

Ta bs ./Ca ps ./Sus p./Soln. Ora l Contra cepti ves 33% 11% 56% 2009 21% 16% 26% 37% 2010 Modified Releas e Topica ls 18% 18% 18% 45% 2011 20% 50% 30% 2012 29% 14% 57% 2013
Lupin: Changing Product profile

Ta bs ./Ca ps ./Sus p./Sol n. Oral Contra cepti ves 25% 75% 100% 100% 56% 2009 2010 2011 64% Modi fi ed Rel eas e Ophtha l mi cs 13% 31% 6% 36% 44% 13% 38% 2013
60% 40% 2008
2008
2012
Ranbaxy: Changing Product profile

Ta bs ./Ca ps ./Sus p./Sol n. Modi fi ed Rel ea s e
Sun Pharma: Changing Product profile

Ta bs ./Ca ps ./Sus p./Sol n. Injecti ons Nas al 6% 8% 8% 36% 31% 25% 4% 60% 2008 63% 2009 58% 2010 Modi fi ed Rel eas e Ophtha l mi cs 6% 18% 41% 77% 35% 2011 2012 15% 8% 32% 14% 55% 2013
2008
2009
2010
2011
2012
2013
18 October 2013
11
High impact launches over 2009-13

Company Cadila Healthcare Dr Reddy's Year 2011 2009 2010 2010 2010 2011 2011 2012 2012 2013 2013 2013 2013 2013 2010 2011 2013 2010 2010 2011 2012 2012 2012 2013 2009 2011 2011 2012 2012 2010 2011 2011 2012 2012 2013 Brand Taxotere Omeprazole Mg OTC Lotrel Prograf Prevacid Arixtra Zyprexa Geodon Toprol Propecia 1mg Reclast Dacogen Vidaza Depakote Tarka Malarone Bactroban Lotrel Prograf Fortamet Geodon Combivir Tricor Yasmin Valtrex Aricept Lipitor Actos Absorica Eloxatin Imitrex Uroxatral ER Astelin Doxil Prandin Molecule Docetaxel Size (USDm) 1200 Launch type Launched by partner Hospira with 180 day exclusivity Limited competition Limited competition Limited competition Limited competition Limited competition 180 day exclusivity Shared exclusivity Limited competition 180 day exclusivity Limited competition Limited competition Limited competition Limited competition 180 day exclusivity 180 day exclusivity Limited competition Limited competition Limited competition Limited competition Shared exclusivity Limited competition Limited competition Limited competition 180 day exclusivity 180 day exclusivity 180 day exclusivity Authorised generic Limited competition Limited competition Limited competition Shared exclusivity Limited competition Limited competition 180 day exclusivity Source: Industry; Company, MOSL
Glenmark Pharma
Lupin
Ranbaxy
Sun Pharma
Omeprazole NA Amlodipine Besylate 800 Tacrolimus 955 Lansoprazole 300 Fondaparinux 340 Olanzapine 20mg 1100 Ziprasidone 1340 Metoprol Succinate 1130 Finasteride 136 Zoledronic acid 355 Decitabine 260 Azacitidine 380 Divalproex Sodium 194 Trandolapril; Verapamil 60 Hydrochloride Atovaquone and 56 proguanil hydrochloride Mupirocin 56 Amlodipine Besylate 800 Tacrolimus 955 Metformin 70 Ziprasidone 1340 Lamivudine and Zidovudine 275 Fenofibrate 1260 Drospirenone; Ethinyl Estradiol 100 Valaciclovir 2200 Donepezil 3000 Atorvastatin 6100 Pioglitazone 2700 Isotretinoin 450 Oxaliplatin 2300 Sumatriptan Succinate Injection 190 Alfuzosin 250 Azelastine HCL 144 Doxorubicin HCl Liposome injection250 Repaglinide 200
18 October 2013
12
Niche opportunities identified in US

Company Ranbaxy Dr Reddy's Focus area Dermatology Penems Biosimilars Market Size Status of the filings (USD b) 19 N/A N/A N/A 100 Current focus is India and emerging markets. Partnered with Merck Serono for US and EU markets 7 Eight products approved by US FDA 19 Presence through acquisition of Taro, 92 products approved by US FDA 55 16 products approved by US FDA 4 Over 25 with US FDA 15 Filed seven products with US FDA 19 Filed one product with the US FDA 20 Launches beyond 2015 7 Presence through acquisition of Nesher 10 Three products with US FDA 20 Seven products with US FDA 55 21 products with US FDA Source: MOSL
Sun Pharma
Controlled substances Derma Oncology Oral Contraceptives Ophthalmology Derma Respiratory Controlled substances Transdermal Nasals Oncology
Lupin
Cadila Healthcare
Indian companies are well placed to sustain their growth momentum in the US with an improving margin profile
Strong pipeline and execution can lead to positive surprises We acknowledge the threat of a patent cliff in the US; product opportunities might start to decline over the next few years. However, in the medium term, we believe Indian companies are well placed to sustain their growth momentum in the US. We expect their margin profile to improve in the US on the back of improving product mix. Stricter regulatory compliance, timely approvals and stronger execution may even lead to positive surprises in US growth over the medium term.
Trend in US sales for companies under coverage universe (USD m)

FY11 FY12 FY13 FY14E FY15E 1,848
933 360 417 184 413 25 105 Lupi n 443
930 553
774 494 25 Ra nba xy* Sun Pha rma 116 Torrent Pharma
212
Cadi l a Hea lthca re
Dr Reddy's
Gl enmark Pharma
IPCA La bs
*Y/E December
Scenario analysis of US growth

Company Cadila Healthcare Dr Reddy's Glenmark Pharma IPCA Labs Lupin Ranbaxy* Sun Pharma Torrent Pharma Revenue CAGR FY08-FY13 (%) 34.1 27.6 17.4 65.4 31.0 19.3 26.3 81.1 Base case gr. (%) FY14E FY15E 10.2 18.0 20.5 14.6 12.2 18.5 30.2 101.2 27.9 15.0 -34.7 27.0 42.9 19.8 36.6 30.0 Bull case gr. (%) FY14E FY15E 15.5 24.5 25.0 20.0 18.2 22.3 38.5 125.0 35.0 22.0 -20.0 37.5 45.0 25.5 50.0 38.0 Source: Company, MOSL 13
18 October 2013
In this section, we analyze the key products for each company from its filings. Some of these products are assured launch with 180 day exclusivity while other products are limited competition in nature due to the complexity in product development and manufacturing. Although focus has been on complex products/Para IV opportunities which constitute 20% of sales, the balance 80% is yet to be analysed which could be the surprise factor The products discussed below account for less than 20% of the pending ANDA approvals for each of these companies. The balance portfolio will continue to play a critical role in driving growth in the US in the medium to longer term. For example, Dr Reddys has ~50 ANDAs pending approval with the US FDA, which are not part of the above discussion. Assuming that the company is able to introduce 80% of these products over the next 34 years and further assuming that it is able to sustain the current rate of USD5.3m/ product in the US, its revenue CAGR in the US would comfortably exceed 15%.
US surprise factor
Company Pending ANDAs No Mkt size USD b) Cadila Healthcare Dr Reddy's Glenmark Pharma Lupin Ranbaxy* Sun Pharma 100 65 53 98 20 142 25 32 23 48 6 50 Known opportunities Mkt size No (USD b) 10 13 15 45 3 30 5 8 6 24 4.9 23 Potential contribution Unknown over FY13opportunities FY18 Mkt size Sales No (USD b) (USD m) 90 52 38 53 17 112 Source: 20 24 17 24 1.1 27 Company, 160 192 136 192 8.8 216 MOSL
Fourth wave of Indian companies are entering the US but they may take time to build scale and regulatory compliance could be more challenging for them then the established players
Competition increasing, but will take many years to develop product depth Given that the US is the worlds largest market for generics, we expect competition to intensify further, as the third wave of Indian generic companies starts to make a meaningful impact in the US. Intas Labs (privately held) is already a strong player in the US (crossed sales of USD120m in FY13). We expect companies like Indoco Remedies (INDR IN, Not Rated), Unichem Labs (UL IN, Not Rated) and privately held companies like Macleods, Hetero Labs, Emcure Pharma, Alkem and Micro Labs to increasingly focus on US generics. Given that near-term growth in India is likely to be subdued on account of the recently implemented Drug Pricing Policy, these companies might feel the urge to enter the US even more.
Strategy of the third wave of Indian companies entering the US
Company Unichem Labs Intas Pharma Alkem Macleods Hetero DMF filed 40 45 7 33 139 ANDAs approved 10 27 8 11 15 Strategy Para III products with focus on chronic products, developing 25 products for the US Focus on injectables, extended release and oral solids, already crossed sales of USD100m in US Partnership model for the US Focus on oral solids Filings include Injectables and extended release technology Source: MOSL, US FDA, Company 14
18 October 2013
Sun Pharma, Dr Reddys and Lupin can surprise positively Among the companies under our coverage, we believe Sun Pharma, Dr Reddys and Lupin have a strong pipeline for the US market. There is a high probability of these companies sustaining their US growth momentum and generating positive surprises. The following table highlights the potential high impact launches for these companies.
Potential high impact launches over the next three years
Company Cadila Healthcare Timeline FY15 FY15 FY16 FY16 Mar-14 Nov-14 Jan 15 Apr-15 End 2015 July 16 End 2013 Dec 13 Feb 15 Dec-16 Feb-14 Feb-14 FY14 FY14 May-14 July-14 Aug-14 Sept-14 Nov-14 Feb-15 Feb-16 FY17 Delayed Delayed Delayed May- 14 Feb-14 May-14 May-14 Nov-15 Dec-15 Brand Molecule Size (USD m) Nature of launch 700 1120 380 1222 350 2272 600 450 200 40 38 40 70 1350 900 449 330 65 780 20 400 400 2272 80 140 125 2087 700 300 2272 400 800 15 210 1800 Source: Limited competition Competitive Potential FTF Limited competition Limited competition Post exclusivity launch Shared exclusivity Limited competition Limited competition OTC launch FTF launch Limited competition Limited competition Settlement Limited competition Limited competition Limited competition Limited competition Shared exclusivity FTF opportunity Limited competition FTF on suspension Post exclusivity launch FTF opportunity FTF opportunity FTF opportunity FTF opportunity Limited competition FTF opportunity FTF opportunity Limited competition Shared exclusivity FTF opportunity Limited competition Potential FTF opportunity US FDA, Industry; Company, MOSL Toprol XL Metoprolo Succinate Niaspan Niacin Lialda Mesalamine Lidoderm Lidocaine topical patch Avelox Moxifloxacin Nexium Esomeprazole Namenda Memantine Aloxi Palonosteron Diprivan Propofol Zegerid Omeprazole+sodium bicarbonate Locoid Hydrocortisone Butyrate Vanos Fluocinonide Tarka Trandolapril + verapamil Zetia Ezetimibe Niaspan Niacin ER Renagel Sevelamer hydrochloride Yaz Drospirenone + Ethinyl estradiol Zymaxid Gatifloxacin Lunesta Eszopiclione Lo Loestrin Fe Estradiol, norethindrone Lumigan Bimatoprost Renvela Sevelamer carbonate Nexium Esomeprazole Apriso Mesalamine ER Glumetza Metformin ER Trizivir Abacavir + lamivudine +zidovudine Diovan Valsartan Tricor Fenofibrate Valcyte Valganciclovir Nexium Esomeprazole Temodar Temozolomide Lunesta Eszopiclone Ryzolt Tramadol ER Coreg CR Carvedilol CR Gleevec Imatinib
Dr Reddy's
Glenmark Pharma
Lupin
Ranbaxy
Sun Pharma
18 October 2013
15
2. Russia: Market dynamics favor Indian generics companies

Russia is the 10th largest pharmaceuticals market in the world and is worth RUB818b (USD26b). Having grown at a CAGR of 20% for the last seven years, it is one of the fastest growing markets in the world. It is projected to almost triple to USD75b by 2020.
Russian pharma market: Growing fast
Pha rma Ma rket (RUB b) 41% 27% 12% 26% 6% 13% 150 158 224 283 321 409 506 647 698 818 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2330 2020 24% 28% 8% 17%
1% 11% 16% -11% 31% 28% -1% 1% 13% 27%
Russian pharma market: Break-up of growth

Ma rket growth
Pri ce Growth 11% 3% 21% 28% 10% -2% 6% 11% Volume Growth
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Pharmstandard Annual Report 2012, MOSL
Oil and natural gas exports constitute ~60% of the Russian Federations exports and ~14% of its GDP. Per capita income in Russia has grown at a CAGR of 15% over 20072012. With a financially strong economy, high per capita income and aging population, we expect the Russian pharmaceuticals market to maintain its growth trajectory.
High per capita income
Per ca pi ta i ncome (USD '000) 38 25 30 30 32 28 8.6 Growth (%)
An ageing population
Medi a n a ge (i n yea rs ) 38.8
24 24 6
Popul a tion a bove 55 yea rs (%)
37.2 26.2 30.3 15.5 29.4 16.6 26.7 12.6
26.6
-26 3.0 4.1 5.3 6.9 9.1 11.7 10.7 13.3 14.0
Rus s i a
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Uni ted States
Bra zi l
Worl d
Indi a
Source: Pharmstandard Annual Report 2012, CIA, MOSL
According to industry reports, ~72% of the Russian market in value terms comprises of imported drugs Consequently, 75% of market growth over the last five years has come from price increases
18 October 2013
High dependence on imports It is the unique dynamics of the Russian market that render it attractive for Indian generics companies. Due to the lack of local manufacturing base, Russias dependence on imported drugs is very high. According to industry reports, ~72% of the Russian market in value terms comprises of imported drugs. The high dependence on imports bestows bargaining power to foreign drug suppliers, who are able to take healthy price increases. Consequently, 75% of market growth over the last five years has come from price increases. The government has taken measures to increase the affordability of drugs (discussed in detail in the subsequent
16
chapter). As the first set of price control measures was implemented in 2010, we do not expect a significant incrementally negative impact in this regard over the foreseeable future. Only 3% of imported drugs in Russia are from India of which Dr Reddy's contributes 1% At the same time, there is huge scope for Indian companies to monetize on this market. According to industry estimates, only ~3% of these imported drugs are from India. The largest Indian company supplying to Russia, Dr Reddys, constitutes ~1% of the market. Given their low cost advantage, Indian companies are better placed to capitalize on this fast-growing market.
High dependence on imports

Imported drugs (%) 21 22 26 Loca ll y produced (%) 27 28
Miniscule share of Indian companies

6.3% 5.0% 3.4% 3.2% 3.0% 1.0% 2.0% Novarti s Sanofi -Aventi s Pha rms ta nda rd Bayer Hea l thcare Teva Dr. Reddy's Other Indi a n cos . Res t of the ma rket
79
78
74
73
72
2008
2009
2010
2011
2012
76.1%
Share of Indian Cos
Source: Pharmstandard Annual Reports, Company, MOSL
We believe Dr Reddys and Glenmark are better placed to capitalize on the Russian market over the next few years
We are bullish on companies that have already spent time and capital in establishing their front-end in Russia. Presence in the OTC market is also an important criterion for this brand conscious market. We believe Dr Reddys and Glenmark are better placed to capitalize on the Russian market over the next few years.
Presence of major Indian companies in Russia
Company Dr. Reddy's Glenmark Ranbaxy IPCA Labs Torrent Pharma Sales Russia business (USD m) as % of total sales 258 70 83 25 10 12% 8% 5% 5% 2% OTC presence OTC constitutes 35% of the business Just started OTC in FY13 OTC constitutes 30% of sales None None Source: Company, MOSL
18 October 2013
17
3. India: Short term hiccups; longer term story intact

The Indian pharmaceuticals market showed all-round growth over 2002-12, clocking a revenue CAGR of 12% to INR550b (USD12b). As at the end of 2012, India was the 14th largest pharmaceuticals market in the world by revenue, a long way from being the 20th largest in 2002. Key reasons for the strong growth in India were (a) strong volume growth and contribution from new launches, coupled with modest contribution from price increases, and (b) evolution in therapy mix, increasing drug penetration and rising income levels.
Indian pharmaceuticals market growth
Indi a Pharma ma rket (In INR b) Growth (%) 20.6 15.4 11.7 6.2 181 2002 8.3 4.1 196 2003 204 2004 4.4 213 2005 246 2006 274 2007 310 2008 340 2009 410 2010 480 2011 552 2012 17.1 13.0 9.7 15.0
Source: Industry, MOSL
The structural growth drivers witnessed in the last decade are leading growth this decade too. While McKinsey expects India to witness sales CAGR of 14.5% to USD55b through 2020 in a base-case scenario, PWC estimates a market size of USD48.8b by 2020. We remain positive on the longer term story of the Indian pharmaceuticals market. However, in the near term, the impact of the ongoing implementation of the Drug Pricing Policy is likely to lead to slower growth for the industry. Key long-term growth drivers An under-penetrated market; increasing penetration to drive volume growth Despite strong growth over the last decade, the Indian pharmaceuticals market remains underpenetrated. According to media reports, the reach of modern medicine is restricted to just 60% of Indias 1.2b population today. The lack of primary-care facilities due to the absence of road connectivity is a major factor for under-penetration. We expect penetration to increase, as the Indian government has been building basic infrastructure and increasing spend on healthcare over the past few years.
Urban development
Urba n popul ati on (m) Non urban popul a ti on (m) Urba ni zati on ra te (%) 26 28 30 10 2 220 636 1991 290 750 2001 340 815 2008 590 880 2030E 10
Rising spend on healthcare

Heal thca re expendi ture (INR b) 40 19 15 9 10 21 17 Growth (%) 23
286 315 348 2003 2004
415 2005
454 2006
521 2007
632 2008
739 2009
907 2010
997 2011
2002
Source: McKinsey, Union Budget document 18 October 2013 18
Other potential drivers of volume growth are: More people coming under the healthcare age bracket over the next few years Increase in the number of medical students and medical colleges, which should result in greater prescription generation
More people coming under the healthcare age bracket (% of population)
0-14 57 59 37 19 7 4 1995 33 19 8 5 2005 60 62 15-24 15-59 62 66 15-64 60 or over 64 68 65 or over 65 69 80 or over 63 68
29 19 9 6 2015E
25
17
21 12 8
16
14
19 10
14
18
13
2025E
2035E
2045E
Source: NCAER, MOSL Higher volume growth could be a function of more people coming under the healthcare age bracket and rising literacy rates
Increasing number of students entering medical colleges

No of medi cal col l eges i n Indi a No of s tudents enteri ng medi ca l col l eges ('000) 262 266 289 300
229 165 189
242
7 FY96
28 FY01
25 FY05
26 FY06
29
30
33
35
FY07
FY08
FY09
FY10
Source: National Health Profile, MOSL
Rising literacy rate, along with healthcare awareness through growing mobile and media penetration, is likely to drive demand for better healthcare over the next few years.
Rising literacy rate
Source: Census of India 2011, MOSL 18 October 2013 19
Rising income levels driving need for better healthcare An increasing proportion of population in the working age group means a rise in average income levels and affluence. The NCAER estimates that the proportion of low income households in India has declined from 32.5% to 14.6% and that of lowermiddle households (Aspirants in NCAERs terminology) has declined from 48% to 41% in the last 10 years.
Rising income levels in India (% of total households)

Low Income ($0-3000) Middl e Cla s s ($6000-30000) 2 18 48 3 23 48 27 2001-02 4 30 46 21 2004-05 As pi ra nts ($3000-6000) Hi gh Income (>$30000) 5 40 56 41 15 2007-08 25 6 2015-16E 13
33 1998-99
Source: NCAER, MOSL Rising prevalence of chronic diseases Increasing urbanization, stressful lifestyles and improper food habits are likely to lead to growing incidence of chronic diseases. The incidence of lifestyle diseases such as diabetes and cardiovascular ailments will increase over the next few years. Most notable among these ailments will be those under the broad umbrella of metabolic disorders. India has the largest diabetic population in the world. The prevalence of diabetes is likely to rise to 3.7% in 2015 while coronary heart diseases and obesity are likely to rise to 4.9% and 2.7%, respectively, according to McKinsey.
The prevalence of diabetes is likely to rise to 3.7% in 2015 while coronary heart diseases and obesity are likely to rise to 4.9% and 2.7%
Prevalence of chronic disease (% of population)

2005 4.9 3.3 3.7 2.8 2.5 2.7 1.3 0.2 0.2 Coronary heart di s eas e Di a betes As thma Obes i ty Ca ncer 2.7 2015
Disease profile undergoing material change (in millions)

62 46 36 31 27 34 14 2 Corona ry hea rt di s ea s e Di a betes As thma Obes i ty 2.5 34 2005 2025
Ca ncer
Source: McKinsey
18 October 2013
20
Growing insurance penetration Penetration of life insurance is as low as 7% in India today. This is likely to double over the next five years. Growing insurance penetration is one of the key drivers of growth for the industry. The IRDA estimates that health insurance penetration will double by 2015 to cover 220m people.
Per capita premium has grown 5x
Per capi ta premi um (INR)
13%
Rising health insurance penetration in India

Premi um (INRb) Premi um (% of GDP) 12% 10% 6% 7%
22.2 FY06
32.1 FY07
51.3 FY08
66.3 FY09
83.1 FY10
20.3 FY06
28.9 FY07
45.4 FY08
57.9 FY09
71.5 FY10
Source: IRDA
18 October 2013
21
M&A in India to gain thrust over the next few years

We believe M&A in India will be an important focus area for investors and can unlock value. Not only would foreign companies look at buyouts in India, Indian companies too would consider acquisitions to consolidate their position. We believe the following factors could lead to increasing M&A: Tougher regulatory standards making operating environment difficult for small/ medium-sized companies Business interests outside healthcare Attractive valuations Succession issues
M&A/partnerships for the domestic market
Year 2008 2010 2011 2012 *Not verified Acquirer Daiichi Sankyo Abbott Ltd Sanofi India Zydus Cadila by the company Target Deal size (USDm) EV/Sales (x) 4.5 9.0 4.5 2.5 MOSL Ranbaxy Piramal Healthcare Universal Healthcare Biochem 4600 3200 100 120* Source: Company;
Indian markets could be entering a consolidation phase over the next few years. Torrent Pharma and Unichem Labs could be potential acquisition candidates as they have good presence in fast growing chronic areas and trade at inexpensive valuations
Who can be a good acquisition candidate?

Mid-size companies in domestic market, with presence in emerging markets: Companies falling in the top 25-50 rankings may be potential targets or select brands of these companies may be good acquisition targets. Eg: Torrent Pharma, Unichem Labs Companies with strong market positioning in at least one high growth/high margin chronic therapy or niche offering: Companies present in fast growing therapy areas like CVS, CNS or niche offerings like NDDS products may be potential targets. Eg: Lupin, Torrent Pharma, Unichem Labs Companies whose owners have alternate business interests outside pharmaceuticals: Several Indian promoters have diversified business operations. Given that competitive intensity is likely to increase, promoters may want to focus on other business interests and move away from pharmaceuticals. Companies facing succession issues: One of the most important challenges facing many Indian companies is succession planning. Most of them are family-owned businesses and do not have a professional running the business. Our study shows that many Indian companies neither have a succession plan so far and neither are they prepared to appoint a professional to head the company. This is particularly true for small/medium-sized Indian companies. These are vulnerable to M&A. Eg: Biocon, Unichem.
18 October 2013
22
Indian companies succession planning

Company Biocon Cadila Healthcare Cipla Dishman Pharma Divi's Labs Dr Reddy's FDC Glenmark Pharma Indoco Remedies IPCA Labs Jubilant Lifesciences Lupin Sun Pharma Torrent Pharma Unichem Labs Chairman/MD/CEO Ms. Kiran Shaw Mr. Pankaj Patel Dr Y K Hamied Mr J R Vyas Dr Murali Divi Mr. G. V. Prasad Mr. Mohan Chandavarkar Mr. Glenn Saldanha Mr. Suresh Kare Mr. Premchand Godha Mr. Shyam Bhartia Mr. Hari Bhartia Dr. D B Gupta Mr. Dilip Shanghavi Mr. Sudhir Mehta Mr. Samir Mehta Dr. Prakash Mody Promoter stake (%) 60.9 74.8 36.8 61.2 52.2 25.6 66.5 48.3 61.0 46.1 47.2 46.9 63.7 71.5 48.6 Successor in place Not known Y Y Y Y Y Y Not known Y Y Not known Y Y Not known Professional appointed N N Y N N N N N N N N Y Y Not known
Not known N Source: MOSL, Company, Industry
Potential acquisition candidates

Company India sales Acute/ (% of total) Chronic India rank No of Promoter EV/ brands shareholding sales in top (%) (x) 300 NA 6 1 2 61 72 66 45 2.0 1.7 1.2 2.0 Presence Promoter in group BRICS companies None Russia, Brazil None None None Power, cables None Glass, Real Estate None
Biocon Torrent Pharma FDC Alembic
40 34 90 50
35/65 40/60 90/10 85/15
48 20 25 24
Unichem Labs
75
40/60
27
Indoco Remedies
75
10/90
30
Russia, Brazil, South Africa 60 1.7 None None Source: MOSL, Company, Industry
48
1.8
18 October 2013
23
4. Brazil: Government intervention diluting potential

The Brazilian healthcare market is worth USD29b and is the sixth largest in the world in terms of value. It is likely to grow to USD47b by 2016, becoming the fourth largest. With a large portion of this market being out-of-pocket, Brazil is a very lucrative market for Indian generics companies.
Largest pharmaceuticals market in Latin America (USD b)
10.9 Brazi l 4.1 5.7 Mexi co 29.0 Venezuel a Argenti na Col ombi a 6.6 12.2 Col ombi a Argenti na Mexi co Venezuel a Ecua dor Brazi l Other LatAm 40% 56% 84% 66% 85% 89% 60%
Majority of healthcare expenditure is out-of-pocket

Out-of-pocket 44% 34% Publi c fundi ng 16% 15% 11%
Source: Sanofi Aventis IR presentation, MOSL
However, there are a number of obstacles that need to be overcome to capitalize on this opportunity. The greatest obstacle at the moment for major Indian companies present in the market is the Farmacia Popular government program aimed at increasing the affordability of essential drugs. Farmacia Popular program aimed at increasing affordability of essential drugs is a key hindrance to the Brazil pharma market growth Though this program began in 2004, its reach and scope has expanded over the years. The latest development was a provision to supply drugs in the anti-hypertension, anti-diabetic and anti-asthma categories free of cost. This has slowed down the overall market growth and is likely to impact companies present in these chronic therapies. Given the populist nature of this program, we expect it to remain in force at least till the next presidential election (to be held in October 2014).
Presence of major Indian companies in Brazil
Company Sales (USD m) Brazil business as % of total sales 15.6% 4.3% Therapeutic presence 65%+ portfolio of CVS and anti-diabetics Focus on developing products in oncology, dermatology and respiratory products with limited competition Targest to be the leading player in 'cardiovascular, diabetes and neuro psychiatry' Diversified presence Source: Company, MOSL
Torrent Pharma Glenmark
92 40
Cadila Ranbaxy
44 41
3.8% 2.5%
Further, the ANVISA has been delaying new product approvals over the last two years, impacting the pace of new launches. Given the lack of clarity on the approval timelines, we believe that the outlook for this market would remain subdued over the next 2-3 years. Having said that, we expect companies like Glenmark, which are focusing on fast growing therapies like derma, oral contraceptives, etc, to grow faster than peers.
18 October 2013 24
Greater FDA vigilance, government interference in pricing here to stay

Ability to withstand regulatory risks essential
The US FDA has issued more than twice as many warning letters in the year till date compared to the same period last year. While there has been an increase in enforcement actions against Indian companies, our analysis suggests that there is no bias towards India. Indian companies like Cipla, Glenmark, Divis Labs and Torrent Pharma have had no issues with FDA so far, which is a tremendous achievement. However, some companies like Sun Pharma, Dr. Reddys, Lupin and Cadila Healthcare have proactively dealt with the US FDA issues in the past and thus are well placed to counteract any future challenges in our view. Our analysis of the manufacturing facilities of the companies supplying products to the US brings out interesting trends. For emerging markets, companies with the ability to develop products with high entry barriers or companies with strong geographical spread, depth in product mix and presence in free-priced markets like OTC are relatively insulated from government intervention.
Increasing regulatory vigilance of the US FDA

The US FDA is known for enforcing the most stringent regulatory yardsticks in the pharmaceuticals business. Also, the pace of enforcement at the US FDA has increased over the last three years, which is evident in the increasing number of warning letters issued.
Number of FDA enforcement actions: Country-wise data
2011 2012 So fa r i n 2013 23 17 8 1 India Chi na -1 Other Countri es Tota l 2010 2011 2012 2013 YTD 18 12 5 4 4 4 8 4 4 4 4 1 3 0 25 16 11 6
Increasing number of warning letters issued

Indi a Chi na 19 Others 18 11 Total 22 17
Indian companies relatively better than others in quality compliance
The US FDA has issued more than twice as many warning letters in the year till date compared to the same period last year
18 October 2013
Source: US FDA, MOSL
The US FDA has issued more than twice as many warning letters in the year till date compared to the same period last year. We believe the vigilance at US FDA is only going to increase due to the implementation of the GDUFA. The agency estimates that the fees paid by ANDA and DMF filers will enable it to hire and train at least 25%
25
of incremental staff in FY13, 50% in FY14, and complete its hiring goals in FY15. This added strength will only increase the frequency of inspections and pace of ANDA approvals.
Snapshot of some enforcement actions taken by the FDA in the past
Time MOSL Comments taken for resolution (in months) CASES OF PRO-ACTIVE TURNAROUND Cipla Form Bangalore 20-Apr-09 31-Aug-09 4.4 Minor observations raised which were resolved '483 without any major issues Aurobindo Warning Unit III 23-May-11 4-Jun-12 12.6 GMP violations relating to packaging procedures Letter which were resolved eventually. Sun Pharma Warning Able Labs 31-Aug-10 19-Sep-11 12.8 Observations included failure to comply with GMP Letter guidelines. Hired consultants to resolve issues. Cadila Warning Moraiya 6-Jun-11 17-Jul-12 13.6 Pre-inspection warning letter for the injectable plant Letter but affected approvals from the oral solids plant too. Resolved subsequently. Lupin Warning Mandideep 14-May-09 20-Jan-10 8.4 FDA observed 15 manufacturing deficiencies, which Letter were successfully resolved. Dr. Reddy's Import Alert Mexico 6-Jul-11 27-Jul-12 12.9 Impacted USD30m of sales p.a. until resolution CASES WHERE RESOLUTION HAS BEEN DIFFICULT Ranbaxy Warning Batamandi 17-Sep-08 x NA Significant deviations from GMP. Facility stopped Letter supplies to USA. Ranbaxy Warning Ohm Labs 24-Dec-09 x NA Significant deviations from GMP for the unit Letter manufacturing liquid products. Unit subsequently closed down. Jubilant Life Warning Canada 27-Feb-13 x NA Significant deviations from GMP. sales impact of USD Letter 10m, EBITDA impact of USD 2-3m. Responded in 15 days. Awaiting FDA's response. Strides Warning Bangalore 11-Sep-13 x NA Contributes 25% of Agila sales. Unclear about the Arcolab Letter impact on Agila-Mylan deal. Ranbaxy Import Dewas 17-Sep-08 x NA Significant deviations from GMP despite repeated Alert warnings. Sales impact from Dewas + Paonta Sahib is USD 400m. Signed consent decree and agreed to pay fine of USD500m. Ranbaxy AIP Paonta Sahib26-Feb-09 x NA Data integrity issues, AIP invoked by US FDA/DoJ Ranbaxy Import Alert Mohali 13-Sep-13 x NA ~17-18 ANDAs filed from this plant. Will dent outlook for topline growth and margin improvement. This unit was setup after Daiichi Sankyo took over. Taro Pharma Warning Brampton, 5-Feb-09 25-Apr-11 27.0 Observations included failure to complete Letter Canada investigations of quality issues in a timely manner. Hired consultants to resolve issues. Aurobindo Import Unit VI 27-Feb-11 28-Mar-13 25.3 GMP violations relating to packaging procedures. Alert Impacted sales of USD35m p.a. until resolution. Sun Pharma Product Michigan, 26-Jun-09 28-Aug-12 38.6 Significant deviations from GMP despite repeated Seizure Caraco warnings. Impacted sales of USD100m p.a. and key product Prandin. Resolution reached; 3 products being manufactured. Wockhardt Import Waluj, 24-May-13 x NA Significant GMP violations, allegations that the Alert India company withheld truthful information, delayed and limited the inspection. Sales impact of USD100m, 23 pending ANDAs affected. Source: US FDA, Industry, MOSL 18 October 2013 26 Company FDA Action Unit Date of Date of action resolution
Analysis of US FDA inspections in the past

We tried to analyze the facilities of Indian companies inspected by US FDA in the past. Our observations reveals interesting trends: Unpredictable frequency of re-inspection: As per guidelines, the US FDA typically works on a 2-year inspection cycle for formulation facilities and 3-year cycle for API facilities. However, it has been noticed that the re-inspections have taken place at much shorter intervals as well. Caraco is one such example, wherein there have been at least three inspections within a span of 10 months (between August 2012 and May 2013), as it is currently under the consent decree. However, there are instances where FDA re-inspections aren't as frequent. Therefore one cannot say with certainty that a plant re-inspected today may not be inspected before two or three years (as the case may be). Most observations are BAU: The US FDA investigators issue 483s immediately after an inspection, outlining any observed deviations from GMP. Based on the data analyzed and our discussions with companies,
Plant locations SUN PHARMA In last 12 months Chattanooga, USA Bryan, Ohio, USA Detroit, USA Type Last inspected 483s issued Comments
apparently the issuance of a form 483 is very common in these inspections. Not all of these observations cumulate to an enforcement action (import alert/ warning letter/drug seizure). Companies like Glenmark and Torrent Pharma have also been issued 483s in the past, but they have stayed free of any FDA action till date; a tremendous achievement. On the other hand, companies like Sun Pharma, Lupin and Dr. Reddy's have faced enforcement action in the past but have managed to resolve them effectively. We believe this puts them in a better position to prevent such occurrences in future and tackle them when needed. Duration between 483s and enforcement actions unclear: There is no regularity seen in the time taken by the FDA to escalate a form 483 to an enforcement action. We have observed instances where the regulator has taken as short as 2 months (Aurobindo Pharma; import alert on Unit VI) to as long as 9 months (Ranbaxy; import alert on Mohali) to do so.
API Formulations Formulations
Jul 2013 Jun 2013 May 2013 Jan 2013 Aug 2012 Apr 2013 Dec-12 Sep-12 Sep-12 Jun 2012 Jan 2012 Feb 2011 May 2010 Jun 2011 N/A N/A N/A N/A N/A
N Y Y Y Y Y N Y Y Y Y Y Y Y N/A N/A N/A N/A N/A
New York, USA Tandalja, Gujrat Ahmednagar, Maharashtra Halol, Gujarat Inspections in the past Panoli, Gujrat Philadelphia, USA Brampton, Canada
Formulations Research centre API Formulations API Formulations Formulations
Controlled substance facility of Chattem Chemicals acquired in 2008 for controlled substances Able Labs facility acquired in 2005, received a warning letter in Aug-10, got a clearance in Sep-11 Caraco facility: Received 483s in Jun 2008 and May 2009; drugs seized by FDA marshals in Jun 2009; received approval for supply of two products in 2012. Taro Pharmas facility
Haifa Israel API+Formulations Cranbury, NJ, USA Formulations Other facilities Karkhadi, Gujarat API+Formulations Dadra, Dadra Nagar Haveli Formulations Hungary API+Formulations Chicago, USA Formulations Wilmington, USA Formulations 18 October 2013
URL Pharma facility Taro plant in Canada, received a warning letter in Feb 2009, got a clearance in April 2011 Taro facility
Valeant Pharma facility acquired in 2005 URL Pharma facility DUSA Facility 27

Plant locations DR. REDDY'S In last 12 months Vishakapatanam Shreveport, USA Bristol, USA New York, USA Inspections in the past Nalgonda District, AP IDA Jeedimetla IDA Bollaram, AP, India Cuernavaca Plant, Mexico Bachupally, RRD, API IDA Bollaram, AP, India Other facilities Srikakulam, AP, India Srikakulam, AP, India API Mirfield plant, UK Pondicherry, AP Baddi, India Baddi, India Jiangsu Province, China LUPIN Inspections in the past Pithampur, Indore, India Baltimore, USA Mandideep, MP, India Thane, India Goa, India Kyowa, Japan Other facilities Chikalthana, Aurangabad Ankleshwar, Gujrat RANBAXY In last 12 months Mohali Ohm Labs Toansa New Delhi Noida Ohm Labs, Brunswick Inspections in the past Paonta Sahib Dewas Type Last inspected 483s issued Comments
Formulations Formulations Formulations Formulations API API Formulations API Formulations API+Formulations API API+Formulations API Formulations Formulations Formulations N/A
Jan 2013 Sep 2012 Oct 2012 Oct 2012 May 2012 Apr 2012 Jun 2012 Mar 2012 Nov 2011 Sept 2010 N/A N/A N/A N/A N/A N/A N/A
N Y N N Y Y Y Y Y Y N/A N/A N/A N/A N/A N/A N/A
Passed inspection
API Plant 1 + Formulation Plant 1 Inspected in Nov 2010; received an import alert in June 2011; cleared in July 2012 API Plant 3
API+Formulations API+Formulations API Formulations N/A Formulations API
Jun 2012 Sep 2011 Sep 2011 Feb 2009 Feb 2010 Nov 2012 N/A N/A
Y Y Y Y Y Y N/A N/A
Inspected in Nov 2008; received a warning letter in May 2009; resolved in Dec 2009
API + Formulations Formulations API Research Research Formulations API + Formulations API + Formulations
Dec 2012 Sep 2012 Dec 2012 Dec Dec Dec Aug 2012 2012 2012 2012
Y Y Y N Y N Y Y Under import alert from the US FDA since 2008 Under import alert from the US FDA since 2008 Received 483s in Dec 2012, company says it has received a closing letter from US FDA last week
March 2008 Feb 2008
18 October 2013
28

Plant locations CIPLA In last 12 months Goa, India Indore SEZ, India Inspections in the past Bangalore, India Kurkumbh, India GLENMARK In last 12 months Mahwah, NJ, USA Baddi, India Ankleshwar Goa, India Inspections in the past MIDC, Navi Mumbai Other facilities Argentina CADILA HEALTHCARE In last 12 months Nesher Pharma, USA Baddi, Himachal Pradesh SEZ, Ahmedabad Zydus Hospira, India Moraiya, Ahmedabad Inspections in the past Moraiya, Ahmedabad Ankleshwar, India New Jersey, USA Sanand, Gujrat Vadodra, Gujrat TORRENT PHARMA Ahmedabad IPCA LABS In last 12 months Pithampur, Indore SEZ Inspections in the past Silvasa Ratlam, India DIVI'S LABS In last 12 months Vizag Nalgoanda, Hyderabad Other facilities DSN SEZ, Vizag Type Last inspected 483s issued Comments
Formulations Formulations API API
May 2013 Nov 2012 Jun 2012 Dec 2011
Y N Y Y
API Formulations API Formulations R&D Centres Formulations
Nov-2012 Aug 2012 Oct-2011 Oct-2011 Sep 2008 N/A
N N Y Y Y N/A
Formulations Formulations Formulations Formulations Transdermals Formulations API N/A Toplical APIs
6-Dec-2012 Nov 2012 Oct 2012 2Q FY13 Aug-13 Feb 2012 Feb 2011 Feb-2011 Nov 2008 Dec 2009
Y Y Y Y Y Y Y Y Y Y
Acquired by Cadila Healthcare in June 2011
Completed US FDA inspection in 2Q FY13 Nasal facility inspected in FY13 Nasal facility inspected in FY13, transdermals in August 2013
Formulations
May 2013
Formulations Formulations API
April 2013 July 2012 Sept 2011
N/A N/A N/A
July 2012 Jul 2011 N/A
Y Y N/A Source: FDAZilla.com, US FDA, Company, MOSL
18 October 2013
29
GNP, CIPLA and TRP have never come under the US FDA scanner. SUNP, LPC, DRRD and CDH have successfully resolved US FDA issues in the past and are well placed to overcome regulatory challenges in the future
We do not view this as a game changer for Indian generics companies for two main reasons: Quality compliance has always been an integral part of their business requirements. Most Indian companies understand the need for such compliance and have not let negligence on this front hinder their operations. Notably, Glenmark, Cipla and Torrent Pharma have never come under the US FDA scanner. Sun Pharma, Lupin, Dr Reddys and Cadila Healthcare have successfully resolved US FDA issues in the past and are well placed to overcome regulatory challenges in the future. India is the largest supplier of generic medicines to the US. For an economy that spends ~18% of its GDP on healthcare, increasing penetration of generics is of great importance to the US. Currently, of the USD300b of market size, generics constitute only 15%. With over 800 ANDAs pending approval for Indian companies (half of the total ANDA filings with US FDA), they are expected to play an important role in genericizing this market.
Pending ANDA approvals for Indian companies
133 90 101 65 91 53 18
40 24
Aurobi ndo Ca di l a Dr Reddy's Gl enma rk IPCA La bs Hea l thca re
Lupi n
Ranba xy
Sun Pha rma
Torrent Pha rma
We believe that all companies need to be prepared for greater scrutiny by the regulator and make continued investments in quality control. This phase must be observed attentively, as it would differentiate the winners from the losers on a very important aspect of drug making quality. It is not possible to predict which companies can remain consistently untainted by the FDA. However, some companies have ensured consistent quality compliance above others over a period of time. We remain positive on these companies and believe Divis Labs, Glenmark, Sun Pharma and Lupin are better prepared for the increasing FDA vigilance.
18 October 2013
30
Government intervention in pharmerging markets

Affordability is a key issue in the pharmerging markets of Russia, Brazil and India, as majority of the population is below the poverty line or is fast-aging. These economies are also characterized by high fiscal deficit, which makes it difficult for them to fund the healthcare needs of the nation. As a result, an imminent risk of doing business in these markets is government measures that increase the affordability of drugs but at the cost of industry profitability. Russia: Increasing thrust on price control Imported drugs constitute 70-75% of the Russian pharmaceuticals market in value terms. The sharp depreciation of the Russian Rouble against the US Dollar in late 2008-early 2009 was followed by a sharp increase in drug prices in Russia, drawing the governments attention to price regulation.
Russian Rouble currency trend

RUB Curncy Px Las t 40 35 30 25
Growth largely price-led

Average pri ce per pa ck (RUB) 31% 28% 27% 21% 13% 10% 0% 11% Pri ce growth (%)
20 Aug-06 Feb-07 Sep-07 Mar-08 Oct-08 May-09 Nov-09 Jun-10 Jan-11 Jul-11 Feb-12 Aug-12 Mar-13 Oct-13 Dec-04 Jun-05 Jan-06
49.6 2005
63.3 2006
71.3 2007
90.9 2008
110.1 2009
110 2010
121 2011
134 2012
Source: Bloomberg, Pharmstandard Annual Report 2012, MOSL
Expansion of VED list in Russia which currently covers 30% of the market is a key risk for companies in Russia
Vital and essential list of drugs: Low impact from risk of expansion To control prices of important drugs, the Russian government, like in India, drew up a list of vital and essential drugs (VED). The drugs under the list contribute roughly 30% of the market in value terms. Thus, a key risk, similar to what recently happened in India, is the expansion of the VED list. Our discussions with the Indian companies indicate that prevalent high pricing together with Indian manufacturing base still make Russia a profitable market. The risk will be further offset by presence in the OTC segment, which is relatively unregulated and difficult to break into. We are bullish on Dr Reddys due to its established presence in the OTC segment and limited incrementally negative impact from the VED expansion. Other Indian companies like Glenmark, Torrent and IPCA face these risks to a larger extent.
18 October 2013
31
Pharma 2020: Still some time away

The Russian Federation has charted out a plan, Pharma 2020, to promote the development of local drug manufacturing base. Foreign companies wishing to supply to the Russian market will need to set up manufacturing plants there. The aim is to have 50% of the domestic demand (in value terms) manufactured locally. Currently, there is no clarity with respect to the extent of manufacturing setup last stage packaging or end-to-end production plant. Depending on the scale of production, market incumbents will take a decision on the way forward. MNCs have already started setting up shops in Russia, as they will enjoy some cost advantage in Russia. If Indian companies are required to set up end-to-end shops, it will increase their recurring manufacturing costs, taking away their low cost advantage. On the positive side, small players will have no choice but to exit, leaving room for large players like Dr Reddys to increase their market share; i.e. if they choose to invest and participate in the market. Brazil: Government programs diluting the market potential The Brazilian government has been praised for its initiatives to provide affordable healthcare to its citizens. It has been providing free anti-retroviral drugs to HIV/AIDS patients since 1996. The existing Farmacia Popular program (Popular Pharmacies translated in English) was first started in June 2004, with the aim to provide medicines at as high as 90% discount to all patients with a doctors prescription. Over the years, the program has picked up in popularity and covers approximately 1.5 million patients every month. The number of stores under the program and their volume offtake is on the rise.
The Farmacia Popular program has gained in prominence and its impact on fiscal deficit means the program is unlikely to get discontinued
An important amendment to the program was made in February 2011, wherein the government promised to provide certain drugs in the anti-hypertension, anti-diabetic and anti-asthma space free of cost. As per the data on website of the Brazilian Ministry of Health, the number of patients enrolled with program saw a whopping 67% growth within a short span of two months of the amendment. This was a critical development from the perspective of major companies that have been focused on these therapeutic categories. Our discussions with the industry incumbents indicate that there has been a drastic shift in prescriptions in these therapeutic areas towards generics provided under the government programs. Our view: Given the populist nature of the program and low impact on the fiscal deficit, we expect this trend to continue at least till the current presidential term (which expires in October 2014). Indian players focusing on therapeutic areas other than CVS and anti-diabetics should outperform their peers over the next 2-3 years. We are thus bullish on Glenmark and Sun Pharma for this market.
18 October 2013
32
Drugs offered for free under the 'Farmacia Popular' Program

Hypertension Captopril Enalapril Maleate Propranolol Hydrochloride Atenolol Hydrochlorothiazide Losartan Anti-diabetic Glibenclamide Metformin Hydrochloride Human Insulin Asthma Salbutamol Ipratropium Bromide Beclomethasone Dipropionate
Source: Brazil Ministry Of Health
Presence of major Indian companies in Brazil

Company Sales (USD m) 92 40 Brazil business Therapeutic presence as % of total sales 15.6% 65%+ portfolio of CVS and anti-diabetics Pipeline
Torrent Pharma Glenmark
Cadila
44
Ranbaxy
41
4.3% Focus on developing products in oncology, dermatology and respiratory products with limited competition 3.8% Targest to be the leading player in About 60 product filings are 'cardiovascular, diabetes and neuro awaiting approval psychiatry' 2.5% Diversified presence More than 60 products approved, with 20+ pending approval. Source: Company, MOSL
19 products in the branded space; 24 in the generic-generic space N/A
India: The Drug Price Control Order 2013 The Ministry of Chemicals and Fertilizers issued the Drug Price Control Order (2013) on 15 May 2013. Below are the key features: Pricing methodology: All strengths and dosages specified in the National List of Essential Medicines (NLEM) 2011 will be under price control. Ceiling Prices (CP) will be fixed on the basis of market-based data (MBD). Formula for computing CP is the simple average price of all brands having MS (Moving Annual Turnover) of 1% or more. Manufacturers will be free to fix any price for their products equal to or below CP. Annual price increases: Automatic annual price adjustment (up or down) linked to WPI for NLEM products is allowed. CP will be revised every five years or as and when the NLEM is updated / revised. However, if there is a significant change in the market structure of a product, the government will revise the CP even earlier. CP will also apply to imported drugs under the NLEM. Annual price increase of up to 10% for non-NLEM drugs is allowed. Combinations outside the purview of price control: From the policy documents, we believe that combination drugs have been kept outside the purview of price control, as the policy states that the Span of Price Control shall be as per the dosages and strengths as listed in NLEM 2011. This implies that all combinations that are outside the NLEM will not be subjected to price controls. We await final confirmation of this from the industry. Existing DPCO drugs: Prices of existing DPCO products not in NLEM 2011 would be frozen for one year, and thereafter, an increase of up to 10% per annum will be allowed. This will be a key positive for MNCs over the long term.
18 October 2013 33
The trade and companies are likely to take time to adjust to products with revised prices and hence growth in India could be slower in the near term
New combinations: Any new combination of NLEM+NLEM or NLEM+Non-NLEM will require price approval by the government. Any addition to NLEM 2011 by the Ministry of Health will come under price control. The Department of Pharmaceuticals will monitor production and availability of NLEM products. Original research products having product/process patents and NDDS products are exempted from price control for five years. As of September 2013, the National Pharmaceutical Pricing Authority (NPPA) has notified prices of some 350 drugs of the total 650. Based on the pricing methodology, companies have indicated the potential impact the policy would have on their Indian formulations sales.
Impact of DPCO 2013: A snapshot

Company India as % Revenue Revenue EPS of overall sales impact (%) loss (INR m) impact (%) 37 45 13 100 4 3 3 5 929 1104 437 1300 11 5 2 17 Comments by the management
Cadila Healthcare Cipla Dr. Reddy's Labs GSK Pharma
Glenmark Pharma IPCA Labs
26 31
0 2
0 150
0 3
Lupin Ranbaxy Sun Pharma Torrent Pharma
25 18 26 32
2 7 2 2
500 1516 500 205
2 21 1 3
Estimate a 4% impact on domestic formulations Estimate a 3% impact on domestic formulations Expects 2% impact on domestic formulations Expects 5% impact on domestic formulations, assuming price increase on certain drugs coming out of price control and volume increase on exisiting brands. Negligible impact due to low exposure to NLEM 2011 Expect INR100-150m impact on domestic formulations; as price reduction on NLEM 2011 drugs will be offset by price increases to be taken on non price-regulated drugs. Estimate INR400-450m impact on domestic formulations Expect 7% revenue impact from the policy Does not expect more than INR450-500m revenue impact Will have negligible impact Source: Company, MOSL
Given the relatively low impact from the policy, we believe that Glenmark, Divis Labs, Lupin and Dr Reddys are better placed than their peers. Indian government has also decelerated the pace of new drug approvals it is asking for more clinical data before approving products, particularly combination drugs Contribution from product launches to slow further: Product launches have been one of the key contributors to the pharmaceuticals sectors growth over the last decade. However, the pace of launches has slowed over the past few years due to the lack of innovative ideas, as most of the pre-1995 products have been introduced in the market and there is intense competition. The Indian government has also decelerated the pace of new drug approvals it is asking for more clinical data before approving products, particularly combination drugs (this comes post negative news flow in the media that certain drugs were approved without proper clinical trials). Slower contribution from product launches this decade is likely to stunt the sectors growth prospects.
18 October 2013
34
India pharmaceuticals growth split (%)

IPM Vol ume growth 1.8 3.0 New l aunches Pri ce i ncrea s e 2.2 2.3 2.6 9.1 2.0 5.1 7.0
11.5
6.9
6.8
FY09
FY10
FY11
FY12
Source: Industry, MOSL
Regulatory challenges code of conduct on marketing, greater scrutiny of new drugs: We see regulatory challenges as another major hurdle to the industrys growth. These could be in the form of: (1) introduction of a marketing code of conduct related to distribution of drugs to prescribers, (2) greater scrutiny of new drugs ready for launch, (3) price regulation of patented drugs in India, and (4) reduction in the quantum of sub-standard drugs in the market. Rajasthan has taken a lead in the unbranded generic market in India Increasing preference for unbranded generic drugs: There is an increasing preference for unbranded generic drugs in a few Indian states, led by Tamil Nadu and Rajasthan. The government of Rajasthan is distributing free unbranded medicines in state-run hospitals and clinics. Although this model may be negative for branded drugs, it would increase drug penetration levels in the country.
18 October 2013
35
Valuations leave room for reasonable returns

Advocate basket approach
We estimate the companies covered in this report to deliver a core earnings growth of 24% over FY13-15E, which is stronger than the 20% growth achieved over FY08-13. This would be driven by an improving product mix and favorable currency. Based on our valuations screen, we believe current valuations still leave room for reasonable returns. However, given the risks associated with greater scrutiny by US FDA and possibility of increase in span of price controls for key emerging markets like India, Brazil and Russia, we recommend a basket approach to pharma sector allocation. Our top large-cap picks are Dr. Reddys, Lupin and Sun Pharma, while our best mid-cap picks are IPCA Labs and Divis Labs.
Sector outperformance led by strong earnings growth over last two years
Strong outperformance of the pharma sector is led by a strong earnings growth and not just PE re-rating Over the last two years, the India pharmaceuticals sector has outperformed the broader markets by 26%. While the popular investor perception might be that the outperformance was driven by a sharp re-rating of the sector, strong earnings growth has played a more important role. We believe the US geography has played a key role in the earnings outperformance of the large companies in our coverage universe. The strong earnings growth for companies like Sun Pharma, Lupin, Dr Reddys and Glenmark was driven by robust performance in the US and favorable currency. Mid-size companies like Ipca Labs have demonstrated all-round growth over this period.
Sensex v/s BSE Healthcare
210 170 130 90 50 Oct-11 Oct-12 Apr-12 Aug-12 Apr-13 Aug-13 Dec-11 Dec-12 Feb-12 Feb-13 Jun-12 Jun-13 Oct-13 BSE SENSEX BSE Heal thca re 164 120
Five-year P/E band
Ten-year P/E band
25.9 23.2
16.0
18 October 2013
36
Consistent upgrade in consensus EPS estimates

Sun Pharma
Hi s tori ca l Mea n for FY14E Hi s tori ca l Mea n for FY15E 32 24 16 8 0 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13
Dr Reddy's
Hi s torical Mea n FY14E Hi s torical Mea n FY15E
128 113 98 83 68 Jul 09 Ma y10
Mar11
Ja n 12
Nov12
Sep 13
Lupin
Hi s tori ca l Mea n FY14E Hi s tori ca l Mea n FY15E
IPCA
Hi s tori ca l Mea n FY14E Hi s tori ca l Mea n FY15E
47 39 31 23 15 Sep 09
47 39 31 23 15
Sep 10
Sep 11
Sep 12
Sep 13
Oct09
Oct10
Oct11
Oct12
Oct13
Source: Bloomberg
Growth in earnings for our coverage universe

Sector Aggregate Ea rni ngs * (INR b) Earni ngs growth for the covera ge uni vers e (%) 55.8 15.8 7.2 37 FY09 43 FY10 68 FY11 81 FY12 100 FY13 129 FY14E 154 FY15E 19.5 23.5
Free cash flows continue to get stronger

Sector Aggregate FCF* (INR b) 116
29.4
68
18.9
29 12 29
59 40
FY09
FY10
FY11
FY12
FY13
FY14E
FY15E
Strong earnings growth is well reflected in the improving RoE and RoCE profile for the sector. We expect return ratios to increase further, as the product/geographical mix continues to improve for the sector.
18 October 2013
37
Aggregate RoE (%) for the companies in the report

ROE 21.9 22.8 23.5 24.6
Aggregate RoCE (%) for the companies in the report

ROCE 20.7 19.2 17.9 19.3 21.4
19.5
FY11
FY12
FY13
FY14E
FY15E
FY11
FY12
FY13
FY14E
FY15E
Advocating basket approach to buying pharmaceuticals stocks

Based on our valuations screen, we believe current valuations still leave room for reasonable returns. However, given the risks associated with greater scrutiny by US FDA and possibility of increase in span of price controls for key emerging markets like India, Brazil and Russia, we recommend a basket approach to pharma sector allocation. Our top large-cap picks are Dr. Reddys, Lupin and Sun Pharma, while our best mid-cap picks are IPCA Labs and Divis Labs.
Valuation matrix
Company MCap USD b TP INR Upside/ Rating EPS Downside CAGR (%) (%) FY13E 14 17 17 7 -30 11 25 29 24 24 Buy Buy Buy Neutral Sell Buy Buy Buy Buy Buy 29.9 34.7 18.9 19.5 3.3 31.6 13.9 21.1 41.1 11.6 P/E (x) FY14E FY15E 28.9 28.6 22.5 20.9 29.6 22.0 18.5 18.8 22.0 13.8 25.0 21.5 18.9 18.7 27.8 17.5 16.0 15.5 13.7 12.0 EV/EBITDA Div. Yield (x) (%) FY14E FY15E FY15E 18.9 16.7 15.1 13.2 15.4 14.1 13.0 14.3 12.5 9.4 15.8 13.8 12.8 11.7 8.2 11.9 11.1 11.4 9.4 8.2 0.6 0.9 0.6 0.9 1.3 0.7 1.6 2.5 1.5 2.1 Source: RoE (%) FY14E FY15E 27.9 23.8 20.3 15.6 -4.7 26.5 25.4 20.0 15.0 28.8
Market cap >USD2.5b Sun Pharma 20.8 Lupin 6.5 Dr. Reddy's Labs 6.5 Cipla 5.5 Ranbaxy 2.6 Market cap <USD2.5b Glenmark Pharma 2.4 Cadila Healthcare 2.2 Divi's Labs 2.2 IPCA Labs 1.4 Torrent Pharma 1.1 *Prices as on 15 October 2013
710 1,049 2,808 452 270 623 828 1,329 870 519
20.5 21.1 22.8 22.3 26.7 27.7 23.5 30.3 31.2 28.6 Company, MOSL
18 October 2013
38
Annexure-I
Consent decree related past instances
Year 1989 1993 1993 Company Eli Lilly American Red Cross Warner Lambert Issues GMP Penalty (USD m) N/A 53 10 Time spent under consent decree Yet to be resolved Yet to be resolved 12 years Comments Eli Lilly's Puerto Rico plant faced a significant delay in product approvals Product quality issues yet to be resolved Consent decree resulted from a number of inspections at its plants in Vega Baja and Fajardo. Certain medically necessary drugs continued to be manufactured and sold under FDA approval Facilities in Northvale, NJ and Pomona, NY involved Alpha was forced to cease drugmanufacturing operations twice before it resumed manufacturing and distribution in 2001 Non-conformance to the Quality System Regulations after an independent consultant made 256 audit observations. GMP violations in methods, facilities and controls of an influenza vaccine Sites involved are Marietta, PA and Pearl River, NY. Inspections in 1995, 1996, and 1998 found several GMP deviations and resulted in warning letters. Inadequate equipment maintenance and lack of testing and final validation Four plants and 125 products impacted. Manufacturing for 73 products suspended later Two warning letters issued to the Corona, California plant The plant at Puerto Rico was eventually closed Plant in California, US impacted The controlled substance plant ay New Jersey was eventually shut down Significant deviations from GMP despite repeated warnings. Impacted sales of USD100m p.a. and key product Prandin. Resolution reached; 3 products being manufactured. First product was approved after 18 months of signing the consent decree. Seven other products awaiting approval Plant was shut down completely Two plants in Pennsylvania and one in Puerto Rico had significant manufacturing issues. J&J expects consent decree to last for five years Signed a consent decree in December 2011, 3.5 years after the import alert was announced on the two sites Source: Industry, US FDA, MOSL 39
GMP
1994 1998
Barr Alpha Therapeutics
GMP GMP
N/A N/A
N/A Three years
1999
Abbott Labs
Quality
100
Yet to be resolved
2000 2000
Parkedale Pharma Wyeth
GMP GMP
N/A 297 + 18% of sales
Five years Yet to be resolved
2001 2002 2002 2005 2005 2008 2009
Elan Schering Plough Watson GSK MBI Pharma Actavis Caraco
Non N/A compliance GMP 500 GMP Quality N/A N/A
Five years Five years Yet to be resolved Yet to be resolved Yet to be resolved Yet to be resolved Three years
Non N/A compliance GMP N/A GMP N/A
2009
KV Pharma
GMP
26
Yet to be resolved
2010 2011
Genzyme J&J
GMP GMP
175 N/A
Yet to be resolved Yet to be resolved
2011
Ranbaxy
GMP
N/A
Yet to be resolved
18 October 2013
Annexure-II
Company snapshot - India formulations
Company India Sales Acute/ Mkt sh. Key therapies formln % (INR m) Chronic (%) (%) of total sales Cadila Healthcare 38 23,232 73/37 4.5 CVS: 16%, GI: 15% Anti-infective: 13%, Gynaec: 12% Respiratory: 9% Cipla 44 36,813 61/39 5.0 Respiratory: 30%, Anti-infective: 25%, CVS: 12%, Gynaec: 10% GI: 8% Dr Reddy's 13 14,560 71/29 2.2 GI: 22%, CVS: 17%, Anti-neoplastics: 13%, Pain: 9%, Anti-infectives: 6% Glaxo Pharma 100 25,999 91/9 4.4 Anti-infective: 30%, Derma: 17% Pain: 11%, Vitamins: 8%, Hormones: 7% Glenmark 26 13,096 67/33 2.0 Derma: 30%, CVS: 22%, Respiratory: 16%, Anti-infective: 15%, Anti-diabetic: 5% IPCA Labs 32 8,781 73/27 1.6 Anti-malaria: 24%, Pain: 21%, CVS: 17%, GI: 9%, Anti-infectives: 8% Lupin 25 23,644 56/44 3.0 Anti-infective: 27%, CVS: 24%, Respiratory: 11%, Anti-diabetic: 8%, GI: 6% Ranbaxy 18 21,661 82/18 4.1 Anti-infective: 31%, Pain: 12%, Derma: 12% CVS: 11%, Vitamins: 11% Sanofi India 100 14,939 46/54 Portfolio concentration (%) MR Field strength force (nos.) productivity (INRm/MR) 5,200 4.5
Top 10 brands: 25.1% 11-25 brands: 18.7% 26-50 brands: 14.9% Above 50 brands: 41.2% Top 10 brands: 26.3% 11-25 7,500 brands: 18.0%, 26-50 brands: 15.9%, Above 50 brands: 39.8% Top 10 brands: 32.6%, 11-25 brands: 20.6%, 26-50 brands: 15.6%, Above 50 brands: 31.1% Top 10 brands: 43.5%, 11-25 brands: 21.2%, 26-50 brands: 17.1%, Above 50 brands: 18.2% Top 10 brands: 36.5%, 11-25 brands: 18.3%, 26-50 brands: 16.2%, Above 50 brands: 29.0% Top 10 brands: 35.2% 11-25 brands: 23.3% 26-50 brands: 18.6% Above 50 brands: 22.9% Top 10 brands: 21.0%, 11-25 brands: 17.9%, 26-50 brands: 18.4%, Above 50 brands: 40.5%
4.9
3,600
4.0
3,300
7.9
3,200
4.1
4,500
2.0
4,800
4.9
Sun Pharma
26
29,657
43/57
Torrent Pharma
34
10,240
40/60
Top 10 brands: 33.6%, 5,200 11-25 brands: 17.5%, 26-50 brands: 13.6%, Above 50 brands: 35.3% 2.1 CVS: 23%, Top 10 brands: 50.4%, 3,500 Anti-diabetic: 21%, 11-25 brands: 26.4%, Pain: 12%, CNS: 10% 26-50 brands: 12.5%, Respiratory: 9% Above 50 brands: 10.7% 5.1 CNS: 26%, CVS:20%,GI:14%, Top 10 brands: 19.5%, 4,000 Anti-diabetic: 11%, 11-25 brands: 15.5%, Gynaec: 8% 26-50 brands: 15.2% Above 50 brands: 49.8% 1.7 CVS: 36%, CNS: 20% Top 10 brands: 27.3%, 3,700 GI: 18%, 11-25 brands: 18.8%, Anti-infective: 11% 26-50 brands: 17.7%, Anti-diabetic: 6% Above 50 brands: 36.3% Source: Industry, Company,
4.2
4.3
7.4
2.8
MOSL
18 October 2013
40
Companies
BSE Sensex: 20,548
Company Name
Market cap >USD2.5b Sun Pharma Lupin Dr. Reddy's Labs Cipla Ranbaxy Market cap <USD2.5b Glenmark Pharma Cadila Healthcare Divi's Labs IPCA Labs Torrent Pharma 62 66 70 74 78 42 46 50 54 58
S&P CNX: 6,089

Pg.
18 October 2013
18 October 2013
41
18 October 2013 Sector Update | Healthcare
Sun Pharmaceuticals
BSE SENSEX S&P CNX
20,548 Bloomberg Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%)
6,089 SUNP IN 2,071.2 650/328 6/26/65
CMP: INR623
TP: INR710
Buy
Master at work
Valuations reasonable in the light of strong US pipeline

M.Cap.(INR b)/(USD b) 1,290/ 20.9
Valuation summary (INR b)

Y/E March Sales EBITDA PAT* EPS (INR)* Core PAT EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) Div. Yield (%) * Reported 42.2 8.6 0.7 28.9 7.6 15.3 0.7 25.0 5.9 15.3 0.7 2013 2014E 2015E 112.4 156.4 48.4 29.8 14.4 30.5 31.3 72.4 22.5 31.5 17.5 66.0 26.0 12.5 44.6 21.6 46.1 27.9 25.5 23.9 183.7 76.7 58.9 28.4 51.6 24.9 15.5 26.5 39.8 13.4
Potential of SUNP's US pipeline continues to be under appreciated. SUNP's US revenue estimated to witness a robust CAGR of 25% over FY13-15E. Acquisition track record has been superb; past FDA issues make SUNP more vigilant towards future challenges. Valuations reasonable in the light of strong core earnings growth of 30% over FY1315E. Maintain Buy.
Potential of US pipeline continues to be under appreciated

SUNP's US pipeline is shaping up well, with an interesting mix of complex products, branded generics and me-too products. We believe that SUNP's strong pipeline in the US is well placed to deliver revenue CAGR of 25% to USD1.8b. While a meaningful contribution to this growth is being led by Doxil and recently acquired URL Pharma, we estimate that SUNP's own pipeline is set to witness revenue CAGR of 40% to USD620m. We build flat sales growth for Taro as we expect incremental competition to impact the market share for key Taro products. If competition is delayed, our estimates may have room for positive surprise.
Core EPS (INR) 14.8
81.9 106.2
Acquisition track record has been superb, past FDA issues make SUNP more vigilant towards future challenges
SUNP's acquisition track record and payback period have by far been the best among Indian companies. Over the last decade, company acquired 16 assets, majority of which have been turned around successfully. Also, SUNP has never overpaid for inorganic growth, its turnaround time and value creation from acquisitions are commendable. This shows managerial vision and bandwidth for which we believe SUNP will continue to trade at premium valuations to its peers. Over the past few years, company has faced three major issues with the US FDA and resolved those successfully. Its ability to successfully resolve past issues makes it well placed to counteract any future challenges.
EV/EBITDA (x) 15.3
Shareholding pattern (%)

As on Jun-13 Mar-13 Jun-12 Promoter 63.7 63.7 63.7 Dom. Inst Foreign Others 3.2 22.9 10.2 3.4 22.7 10.2 5.3 20.6 10.4
Promising outlook with proven track record; valuations reasonable

Stock performance (1 year)
Su n Ph a rma Se n s ex - Re b as e d
700 600 500 400 300
Strong US pipeline, superior India positioning and an excellent management track record translate into core earnings growth of 30% over FY13-15E. We value SUNP on a SOTP basis and value its base business at 27x FY15E (25% premium to the sector valuations and its historic trading average) to arrive at a fair value of INR672/share. We add INR28/share for the Doxil opportunity and INR10/share for other Para IV opportunities to arrive at a target price of INR710/share.
Apr-13
Oct-12
Jan-13
Oct-13
Jul-13
42
Sun Pharmaceuticals
Story in charts
US Generic Sales; driven by acquisitions and new launches
USD m
1,569 1,129 719 494 337 234 1,848
Key generics expected timeline

Brand Cymbalta Temodar Niaspan Reclast Yaz Lunesta Zemplar Namenda Actonel Abilify Coreg CR Gleevec OrthoTricyclen Lo Crestor Focalin Strattera Alimta Lyrica Angiomax Lexapro Brand Sales 3,918 403 911 350 330 783 310 600 800 2,102 211 1,800 450 3,164 500 384 1,122 1,672 400 2,259 Timeline Dec-13 Feb-13 Mar-13 FY14 FY14 May-13 Dec-13 Jan-13 FY15 Apr-13 Nov-13 Dec-15 Dec-15 Jul-16 >FY15 May-17 Jul-17 Dec-18 Dec-19 Delayed
FY09
FY10
FY11
FY12
FY13
FY14E
FY15E
History of successful acquisitions

Company Caraco Facility/Products Detroit formulations facility 3 brands in US Cost (USDm) 52 Date Aug-97 Sep-04 Sep-05 Dec-05 May-07
W omen's 5.4 Health Brands Va l ea n t Formulations facility 10 Pharma in Ohio (USA) Able Labs Formulations facility 23 in NJ (USA) & IP Taro Pharma API & formulations facility 454 in Israel & Canda; US operations Chattem Controlled facility in NA Tennessee, Inwood Select products DUSA Novel derma product; . 230 mfg unit URL Pharma Generic product portfolio. 71 Source: Comp any, MOSL; Note: Acquisition costs are approximate
US FDA Track rec ord

Nov-08 3QFY10 3QFY13 3QFY13 Plant locations Last inspected 483s issued? In last 12 months Chattanooga, USA Jul 2013 N Bryan, Ohio, USA Jun 2013 Y Detroit, USA May 2013, Jan 2013, Aug 2012 Y, Y ,Y Ne w York, US A Apr 2013 Y Tandalja, Gujr at Dec-12 N Ahme dnagar, Maharashtra Sep-12 Y Halol, Gujarat Sep-12 Y Inspections in the past Panoli, Gujrat Jun 2012 Y Philadelphia, USA Jan 2012 Y Brampton, Canada Feb 2011 Y Haifa Israel May 2010 Y Cranbur y, NJ , USA Jun 2011 Y Other facilities Karkhadi, Gujarat N/A N/A Dadra, Dadra Nagar Haveli N/A N/A Hungary N/A N/A Chicago, USA N/A N/A Wilmington, USA N/A N/A
PE Chart
30 26 22 18 17.3 14 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 May-07 Oct-13 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 P/E (x) Avg(x) Peak(x) 27.1 21.3 Mi n(x) 26.8
18 October 2013
43
Sun Pharmaceuticals
Financials and Valuation

Consoliated Income Statement
Y/E March Net Sales Change (%) Total Expenditur e % of Sales EBITDA Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. Extra-ordinary Exp PBT Tax Tax Ra te (%) Profit after Tax Change (%) Margin (%) Less: Mionrity Interest Net Profit Adj. PAT 2011 57,214 42.8 37,648 65.8 19,566 34.2 2,049 17,518 739 3,611 32 20,357 1,286 6.3 19,072 41.6 33 913 18,158 14,039 2012 80,095 40.0 48,152 60.1 31,944 39.9 2,912 29,032 282 4,856 11 33,595 3,826 11.4 29,769 56.1 37 3855 25,914 23,270 2013 112,388 40.3 64,036 57.0 48,352 43.0 3,362 44,991 432 4,491 5,901 43,148 8,456 19.6 34,693 16.5 31 4863 29,830 30,550 2014E 156,374 39.1 90,386 57.8 65,988 42.2 4,107 61,880 876 4,469 25,174 40,299 9,847 24.4 30,452 -12.2 19 4476 25,976 44,644
(INR Million)
2015E 183,672 17.5 106,994 58.3 76,678 41.7 4,406 72,272 876 5,881 0 77,277 13,910 18.0 63,367 108.1 35 4476 58,891 51,554
Balance Sheet
Y/E March Equity Share Capital Tot al Reser ves Net Worth Minority Interest Deferred Liabilities Tot al 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 2011 1,036 93,798 94,833 8,472 -3652 3,717 103,370 39,128 16,794 22,334 2,355 10,599 22,297 61,146 14,895 11,049 22,046 13,156 15,361 10,078 5,283 45,785 103,371 2012 1,036 120,628 121,663 11,616 -5199 2,739 130,820 46,542 20,406 26,136 3,447 13,378 22,129 90,681 20,870 19,261 33,672 16,878 24,950 14,410 10,541 65,730 130,820 2013 1,036 148,862 149,897 16,351 -7122 2,072 161,197 56,026 24,421 31,604 5,626 24,870 24,116 113,420 25,778 27,108 40,587 19,948 38,439 15,752 22,687 74,981 161,198 2014E 2,071 167,568 169,639 20,826 -7122 1,343 184,686 63,839 28,529 35,310 3,313 24,870 26,116 143,511 35,957 37,566 47,132 22,857 48,434 25,007 23,427 95,077 184,686
(INR Million)
2015E 2,071 217,978 220,049 25,302 -7122 1,343 239,572 70,495 32,935 37,560 2,157 24,870 28,116 195,656 43,448 44,089 81,926 26,193 48,787 23,742 25,045 146,869 239,572
18 October 2013
44
Sun Pharmaceuticals

Ratios
Y/E March Basic (INR) EPS Fully Diluted EPS Cash EPS BV/Shar e DPS Payout (%) Valuation (x) P/E P/BV EV/Sale s EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fix ed Asset Turno ver (x) Debtor (Days) Inventory (Days) Working Capital T/O (Day s) Leverage Ratio Interest Cover Ratio Debt/Equity (x) 2011 6.8 6.8 9.8 45.8 0.9 12.6 2012 11.2 11.2 13.9 58.7 2.1 17.2 2013 14.8 14.7 16.0 72.4 2.5 17.5 2014E 21.6 21.6 14.5 81.9 3.0 23.9 2015E 24.9 24.9 30.6 106.2 3.5 13.4
42.2 8.6 10.9 25.4 0.4
28.9 7.6 7.8 18.5 0.5
25.0 5.9 6.4 15.4 0.6
16.2 23.6
21.5 30.4
22.5 31.5
27.9 25.5
26.5 39.8
3.2 70 95 151
3.3 88 95 146
3.9 88 84 112
4.7 88 84 112
5.0 88 86 129
23.7 0.0
103.0 0.0
104.2 0.0
70.6 0.0
82.5 0.0
Cash Flow Statement

Y/E March OP/(Loss) bef. Tax Int./Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations (inc)/dec in FA (Pur)/Sale of Invest. 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 E: MOSL Estimates 2011 19,534 3,611 -4,048 -286 18,811 -16,500 9,367 -7,134 6,413 2,006 -739 -2,400 5,280 16,957 5,089 22,046 2012 31,933 4,856 -5,373 -8,319 23,096 -10,585 169 -10,416 5,321 -978 -282 -5,115 -1,055 11,626 22,046 33,672 2013 42,451 4,491 -10,379 -2,336 34,227 -22,501 -1,987 -24,488 4,334 -668 -432 -6,058 -2,824 6,915 33,672 40,587 2014E 40,814 4,469 -9,847 -13,551 21,884 -5,500 -2,000 -7,500 1,036 -729 -876 -7,270 -7,839 6,545 40,587 47,132
(INR Million)
2015E 76,678 5,881 -13,910 -16,998 51,651 -5,500 -2,000 -7,500 0 0 -876 -8,481 -9,357 34,794 47,132 81,926
18 October 2013
45
Lupin
BSE SENSEX S&P CNX
6,089 LPC IN 447.5 946/552 0/24/50
CMP: INR901
TP: INR1,049
Buy
Optimum geography mix

US generics to lead core earnings CAGR of 19% over FY13-15E

M.Cap. (INR b)/(USD b) 403.0/6.5
Most optimum geography mix among Indian companies. Adequate risk management strategy in place for Suprax. US generics to lead core earnings CAGR of 19% over FY13-15E. Maintain Buy. What if the company achieves the vision of USD5b sales by 2018?

Y/E March Sales EBITDA Net Profit EPS Gr. (%) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) Div. Yield (%) 39.0 7.7 0.4 28.6 6.1 16.7 0.7 21.5 4.9 13.9 0.9 2013 2014E 2015E 93.7 112.6 20.0 10.3 30.4 22.5 33.3 15.6 24.2 14.1 31.5 36.3 23.8 33.5 18.4 128.6 28.9 18.8 41.9 33.1 182.9 25.4 33.1 21.9
Most optimum geography mix among Indian companies

Lupin's sales mix comprises of US (40%), India (30%) and Japan (12%), which in our view is the most optimum mix among Indian companies, thus well placing Lupin to capitalize on all three exciting generic markets in the world. Over the next two years, niche launches in the US are expected to be the biggest contributor to sales growth for the company. We attribute LPC's US success to judicious product mix, developing strong customer relationships and investment in supply chain. In India, LPC is among the very few companies which has made a successful transition from acute to more sticky chronic business. Over FY1315E, we expect LPC to grow ahead of the Indian pharma market comfortably. While Japan continues to be the most promising generic market globally, its pace of generic expansion continues to be slow, which has impacted LPC's growth rates as well and the pace of margin expansion in Japan. We expect Japan to play an important role in driving company's margins in the long run.
Adj. EPS (INR) 23.1
BV/Sh. (INR) 116.3 148.0
EV/EBITDA (x) 20.5
Adequate risk management strategy in place for Suprax

In our view, LPC derives ~6% sales and ~12% profits from Suprax, its leading branded generic drug in the US. Suprax has been under constant threat from entry of a generic competitor and hence it has been an ongoing area of concern for investors. While LPC does not see a generic competitor on the horizon for the next 12-18 months, to be prepared for a competing generic in Suprax, it has diversified the franchisee by launching various line extensions for Suprax. We believe even if a generic competitor were to enter, it will take the player some time to destabilize a strong brand like Suprax, as it may not have the depth in product offering like LPC.

As on Sep-13 Jun-13 Sep-12 Promoter 46.8 46.8 46.9 Dom. Inst Foreign Others 12.1 31.7 9.5 12.4 31.0 9.9 15.4 28.3 9.5

Lu pi n Sen s ex - R eb as e d 1,000 850 700 550 400 Apr-13 Oct-12 Jan-13 Oct-13 Jul-13
US generics to lead core earnings CAGR of 19% over FY13-15E

We believe US generics will continue to lead core earnings CAGR of 19% over FY13-15E, with support drivers being India and Japan. We would expect LPC to target a large acquisition in emerging market with it strong cash flows and low gearing. We value LPC at 25x FY15E (15% premium to the sector valuations and its historic trading average) to arrive at a target price of INR1,049. We maintain a Buy rating on the stock.
46
Lupin
Story in charts
US business has room for positive surprise Sustained improvement in EBITDA margins
Domestic Formulations - Growth traction to recover
M&A History
Target Multicare Pharma Pharma Dynamics Hormosan Pharma Gereric Health Kyowa I'rom Market Philippines South Africa Germany Australia Japan Japan Year Mar-09 Sept-08 Aug-08 Aug-08 Oct-07 Nov-11 Price (USD m) 6 20 7 7 55 73
US pipeline
Brand Cymbalta Asacol Niaspan Renagel Yaz Lunesta Celebrex TriLipix Loestrin 24 Fe Renvela Nexium Namenda Welchol Prezista Coreg CR OrthoTricyclen Lo Nuvigil Seroquel XR Viread Truv ad a Lyrica Ranexa Trizivir Brand Sales 3,918 500 911 377 330 783 1887 300 250 330 2397 600 300 400 300 450 200 800 500 2000 1424 160 114 Timeline Dec-13 Dec-13 Feb-14 Mar-14 FY14 May-14 May-14 Jul-14 Jul-14 Sep-14 Nov-14 Jan-15 Jun-15 Dec-15 Apr-16 May-16 Jan-17 May-17 Jul-17 Jul-17 Dec-18 May-19 FY17 47
PE band
18 October 2013
Lupin

Income Statement
Y/E March Net Sales Change (%) Total Expenditur e EBITDA Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT before EO item EO Expense/(Income) PBT after EO item Tax Tax Ra te (%) Reported PAT PAT Adj for EO items Change (%) Margin (%) Less: Minority Interest Adj Net Profit 2011 56,478 18.3 46,410 10,068 17.8 1,712 8,356 345 1,934 9,944 0 9,944 1,149 11.6 8,795 8,795 25.7 15.6 148 8,646 2012 68,204 20.8 56,383 11,821 17.3 2,275 9,546 355 2,768 11,960 0 11,960 3,086 25.8 8,874 8,113 -7.8 11.9 196 7,917 2013 93,694 37.4 73,713 19,981 21.3 3,322 16,659 410 2,997 19,246 0 19,246 5,842 30.4 13,404 10,610 30.8 11.3 263 10,347 2014E 112,582 20.2 88,352 24,230 21.5 2,725 21,505 215 1,734 23,024 -1,000 24,024 6,907 28.8 17,117 14,400 35.7 12.8 300 14,100
(INR Million)
2015E 128,630 14.3 99,687 28,942 22.5 3,048 25,894 215 2,000 27,679 0 27,679 8,581 31.0 19,099 19,099 32.6 14.8 325 18,774
Balance Sheet
Y/E March Equity Share Capital Tot al Reser ves Net Worth Minority Interest Deferred liabilities Tot al 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 2011 892 31,919 32,811 515 1,412 11,463 46,200 25,835 9,075 16,760 4,904 32 3,810 35,359 12,000 12,556 4,202 6,601 14,663 11,941 2,723 20,696 46,200 2012 893 39,236 40,129 723 1,442 15,557 57,852 36,274 14,422 21,852 4,437 28 5,644 47,393 17,327 17,800 4,025 8,241 21,503 17,565 3,939 25,889 57,851 2013 895 51,147 52,042 595 1,632 10,240 64,509 41,138 16,840 24,298 3,107 21 5,704 55,305 19,489 21,870 4,349 9,597 23,926 19,241 4,684 31,379 64,509 2014E 895 65,345 66,240 895 1,632 10,240 79,007 47,692 19,565 28,126 1,804 21 5,704 66,559 24,515 25,322 7,835 8,886 23,205 18,858 4,347 43,353 79,008
(INR Million)
2015E 895 80,977 81,873 1,220 1,632 10,240 94,964 53,594 22,613 30,980 1,152 21 5,704 83,452 27,697 34,141 12,353 9,260 26,344 21,306 5,038 57,108 94,965
18 October 2013
48
Lupin

Ratios
Y/E March Basic (INR) EPS (Fully Diluted) Cash EPS (Fully Diluted) BV/Shar e DPS Payout (%) Valuation (x) P/E (Fully Diluted) P/BV EV/Sale s EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fix ed Asset Turno ver (x) Debtor (Days) Inventory (Days) Wkg. Capital Turno ver (Da ys) Leverage Ratio Current Ratio Interest Cover Ratio Debt/Equity (x) 2011 19.4 23.3 73.5 3.0 17.9 2012 17.7 22.8 89.9 3.4 20.0 2013 23.1 30.5 116.3 4.0 15.6 2014E 31.5 37.6 148.0 6.0 18.4 2015E 41.9 48.8 182.9 8.0 21.9
39.0 7.7 4.4 20.5 0.4
28.6 6.1 3.6 16.7 0.7
21.5 4.9 3.1 13.9 0.9
29.6 25.3
21.7 24.6
22.5 33.3
23.8 33.5
25.4 33.1
3.5 81 78 107
3.5 95 93 117
4.1 85 76 105
4.3 82 79 115
4.4 97 79 127
2.4 24.2 0.4
2.2 26.9 0.4
2.3 40.6 0.2
2.9 100.0 0.2
3.2 120.4 0.1
Cash Flow Statement

Y/E March Oper. Profit be fore Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations (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 E: MOSL Estimates 2011 10,068 1,934 -1,173 -2,647 8,181 -4,545 233 -4,312 174 64 -345 -1,575 -1,682 2,187 2,015 4,202 2012 11,821 2,768 -3,055 -5,370 6,164 -8,736 4 -8,733 430 4,094 -355 -1,777 2,392 -177 4,202 4,025 2013 19,981 2,997 -5,652 -5,166 12,160 -4,497 7 -4,490 475 -5,317 -410 -2,095 -7,348 323 4,025 4,348 2014E 24,230 1,734 -6,907 -8,487 10,569 -5,250 0 -5,250 524 0 -215 -3,142 -2,833 3,486 4,349 7,835
(INR Million)
2015E 28,942 2,000 -8,581 -9,237 13,125 -5,250 0 -5,250 1,047 0 -215 -4,189 -3,357 4,518 7,835 12,353
18 October 2013
49
Dr Reddy's Laboratories
BSE SENSEX S&P CNX
20,548 Bloomberg Equity Shares (m)
6,089 DRRD IN 169.2
CMP: INR2,410
TP: INR2,808
Buy
Business model getting more predictable

US, Russia set to deliver strong earnings CAGR of 19% over FY13-15E

M.Cap. (INR b)/(USD b) 404.7/6.5 52-Week Range (INR)2,472/1,662 1,6,12 Rel. Perf. (%) 3/17/32
Recent US approvals and strong chemistry provide good visibility for US growth. DRRD is building a strong base in Russia. Shaping towards a business model with more consistent earnings growth trajectory. US, Russia set to deliver strong e arnings CAGR of 19% over FY13-15E. Maintain Buy.

Y/E March Sales EBITDA Net Profit EPS Gr. (%) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) Div. Yield (%) 26.7 5.5 0.6 22.5 4.6 14.4 0.6 18.9 3.8 12.2 0.6 2013 2014E 2015E 116.3 24.8 15.1 21.9 20.7 17.2 16.3 136.0 151.8 28.8 18.0 18.7 20.3 18.0 14.9 33.4 21.4 19.2 20.0 18.5 12.8
Recent US approvals, strong chemistry provide good visibility for US growth; DRRD is building a strong base in Russia
Over FY08-13, DRRD's US business witnessed revenue CAGR of 28% to USD676m. Company's strong chemistry skills are evident from the launch of complex products like Fondaparinux, Dacogen etc. We believe that DRRD's US pipeline continues to remain healthy and is well placed to deliver revenue CAGR of 17% to USD933m over FY13-15E, with room for positive surprise. DRRD has capitalized well on its first mover advantage in Russia. Indian companies have just 3% market share in Russia, of which DRRD has 1%. Over the last few years, company has diversified its presence in the OTC segment too, thus de-risking the business model significantly. We believe DRRD is well placed to achieve revenue CAGR of 15% to USD330m over FY13-15E from Russia.
Adj. EPS (INR) 90.2 107.1 127.7 BV/Sh. (INR) 435.4 528.2 639.5
EV/EBITDA (x) 16.9
Shaping towards a business model with more consistent earnings growth trajectory
Over the past few years, DRRD's earnings growth profile has been mixed, with some years witnessing very strong growth followed by years of muted growth, due to the base effect. We expect DRRD's business model to shape up towards a more consistent and predictable earnings growth trajectory led by strong US pipeline (not dependent on FTF opportunities), Russia and India, while contribution from low margin API is set to decline further.

US, Russia set to deliver strong earnings CAGR of 19% over FY13-15E
We believe US generics and Russia will continue to be the key growth driver over the next two years, with support from India and PSAI. DRRD's strong pipeline in the US is well placed to deliver revenue CAGR of 18% to USD933m. We estimate Russia to witness revenue CAGR of 15% to USD320m, while we expect India to witness a revenue CAGR of 9% to INR17.3b over the same period. We assume a core PAT CAGR of 19% over FY13-15E for the company. We value DRRD at 22x FY15E (10% premium to the sector valuations and its historic trading average) to arrive at a target price of INR2,808.

Dr R eddy s Lab s Sens ex - Re bas ed
2,500 2,250 2,000 1,750 1,500
Apr-13
Oct-12
Jan-13
Oct-13
Jul-13
50
Story in charts
Strong US sales growth; room for positive surprise
Core US sal es (INR m) One offs (INR m)
Russia to maintain high growth trajectory

44.6 Russ i a (INR m) Yo Y Gro wth (%)
559 2711.8 6667.5 7165 2454.7 5,570 FY08 12,678 14,106 15,038 FY09 F Y10 FY11 2711 3957.8 24,709 48,847 35,134
23.6
55,991
23.6
24.3
26.7 19.7 18.7
5,823
FY12 F Y13 FY14E FY15E
7,200 FY10
8,901 FY11
11,060 FY12
14,008 FY13
16,764 FY14E
19,893 FY15E
FY09
Increasing free cash flow generation

Free cashfl ow gen era ti on (INR m) 11,147 8,298 1,814 10,050 5,319
PE Band
84 64 44 P/E (x) Avg(x) Peak (x) 76.8 Mi n (x)
Nega ti ve Earni n gs Cycl e 16.5
24.0
4,890
3,918
24 4 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 May-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12
20.2
FY09
FY10
FY11
FY12
FY13
FY14E
FY15E
Key product launches in pipeline

Brand Aciphex Avelox Valcy te Lunesta Nexium Namenda Aloxi Avandia Diprivan Zemplar Pristiq Ixempra Mozobil Angiomax Dexilant Trexime t Allegra D12/OTC Antara Vimovo Intermezzo 18 October 2013 Brand Sales 372 350 561 783 2272 600 500 300 200 120 493 150 73 400 300 78 100 25 40 10 Timeline Nov-13 Mar-14 FY15 May-14 Nov-14 Jan-15 Apr-15 Oct-15 Oct-15 Jan-16 FY16 Nov-18 Jun-19 Dec-19 Jun-20 2025 N/A N/A N/A N/A
US FDA compliance track record

Plant locations Last inspected In last 12 months Vishakapatanam Jan 2013 Shreveport, USA Sep 2012 Bristol, USA Oct 2012 Ne w York, US A Oct 2012 Inspections in the past Nalgonda District, AP May 2012 IDA Jeedimetla Apr 2012 ID A Bollaram, AP, India Jun 2012 Cuernavaca Plant, Mexico Mar 2012 Bachupally, RRD, API Nov 2011 ID A Bollaram, AP, India Sept 2010 Other facilities Sri kak ulam, AP, India N/A Sri kak ulam, AP, India N/A API Mirfield plant, UK N/A Pondicherry, AP N/A Baddi, India N/A Baddi, India N/A Jiangsu Province, China N/A 483s issued? N Y N N Y Y Y Y Y Y N/A N/A N/A N/A N/A N/A N/A 51
Apr-13
Oct-13

Income Statement
Y/E March Net Sales Change (%) Other Income Total Expenditur e EBITDA Change (%) Margin (%) Depreciation & Amortization EBIT Net Interest Exp Forex (Gains)/Losses PBT after EO Expense Tax Tax Ra te (%) Reported PAT Adjusted Net Profit Change (%) Margin (%) 2011 74,693 6.3 1,118 59,033 15,660 10.3 21.0 4,147 11,513 189 0 12,442 1,403 11.3 11,039 11,099 939.2 14.9 2012 96,738 29.5 1,669 72,996 23,742 51.6 24.5 6,254 17,488 0 19,157 4,204 21.9 14,953 12,428 12.0 12.8 2013 116,266 20.2 3,634 91,503 24,763 4.3 21.3 6,237 18,526 118 365 21,677 4,900 22.6 16,777 15,150 21.9 13.0 2014E 135,998 17.0 1,484 107,237 28,761 16.1 21.1 6,712 22,049 188 0 23,345 5,028 21.5 18,317 17,981 18.7 13.2
(INR Million)
2015E 151,845 11.7 1,483 118,439 33,406 16.1 22.0 7,440 25,965 315 0 27,133 5,698 21.0 21,435 21,435 19.2 14.1
Balance Sheet
Y/E March Equity Share Capital * Reserves Net Worth Loans D eferred Liabi litie s/Tax Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Investments Goodwill/Intangible Assets Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. Account Payables Other Current Liabilities Net Current Assets Appl. of Funds E: MOSL Estimates 2011 840 45,150 45,990 23,503 87 69,580 38,359 14,714 29,642 622 15,246 47,560 16,059 17,615 5,729 8,157 23,490 8,480 15,010 24,070 69,580 2012 840 56,604 57,444 32,210 -833 88,821 44,064 18,086 33,246 11,558 13,529 59,179 19,352 25,339 7,379 7,109 28,691 9,502 19,189 30,488 88,821 2013 840 72,265 73,105 36,678 -1,669 108,114 52,958 21,213 37,814 18,131 14,021 68,751 21,600 31,972 5,136 10,043 30,603 11,862 18,741 38,148 108,114 2014E 840 87,847 88,686 36,678 -1,669 123,695 62,493 25,341 41,086 18,131 14,021 84,519 27,836 37,573 7,719 11,391 34,062 13,756 20,306 50,457 123,695
(INR Million)
2015E 840 106,546 107,385 36,678 -1,669 142,394 70,960 29,903 43,924 18,131 14,021 103,888 30,926 44,988 15,033 12,940 37,570 15,283 22,287 66,318 142,395
18 October 2013
52

Ratios
Y/E March Basic (INR) EPS Cash EPS BV/Shar e DPS Payout (%) Valuation (x) P/E P/BV EV/Sale s EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fix ed Asset Turno ver (x) Debtor (Days) Inventory (Days) Working Capital (Day s) Leverage Ratio Current Ratio (x) Debt/Equity (x) 2011 66.1 90.8 273.9 11.3 20.2 2012 74.0 111.3 342.1 13.8 18.2 2013 90.2 127.4 435.4 13.9 16.3 2014E 107.1 147.1 528.2 13.9 14.9 2015E 127.7 172.0 639.5 13.9 12.8
26.7 5.5 3.6 16.9 0.6
22.5 4.6 3.1 14.4 0.6
18.9 3.8 2.7 12.2 0.6
24.1 16.8
21.6 19.7
20.7 17.2
20.3 18.0
20.0 18.5
2.2 86 78 90
2.3 96 73 87
2.4 100 68 104
2.4 101 75 115
2.3 108 74 123
2.0 0.5
2.1 0.6
2.2 0.5
2.5 0.4
2.8 0.3
Cash Flow Statement

Y/E March Op. Profit/(Loss) befor e Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations EO Expense CF from Oper. incl EO Expense (inc)/dec in FA (Pur)/Sale of Investments CF from Investments Change in networth (Inc)/Dec in Debt Other Items Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance E: MOSL Estimates 18 October 2013 2011 15,660 929 -1,403 -6,501 8,685 0 8,685 -12,603 3,531 -9,072 -5,740 8,847 -1,351 -2,224 -468 -855 6,584 5,729 2012 23,742 1,669 -4,204 -4,768 16,439 0 16,439 -8,141 -10,936 -19,077 -780 8,707 -920 -2,719 4,288 1,650 5,729 7,379 2013 24,763 3,151 -4,900 -9,903 13,111 0 13,111 -11,297 -6,573 -17,870 1,620 4,468 -836 -2,736 2,516 -2,243 7,379 5,136 2014E 28,761 1,296 -5,028 -9,726 15,303 0 15,303 -9,984 0 -9,984 0 0 0 -2,736 -2,736 2,583 5,136 7,719
(INR Million)
2015E 33,406 1,168 -5,698 -8,547 20,329 0 20,329 -10,279 0 -10,279 0 0 0 -2,736 -2,736 7,314 7,719 15,034
53
Cipla
BSE SENSEX S&P CNX
6,089 CIPLA IN 802.9 450/353 -8/-4/5
CMP: INR423
TP: INR452
Neutral
In transition phase
Limited near term triggers exist

M.Cap. (INR b)/(USD b) 339.7 /5.5
Business in a transition phase, see near term pressure on margins. Inhaler opportunities in EU and the US many years away. Limited near term triggers for the stock, maintain Neutral.
Financials & Valuation (INR b)

Y/E March Sales EBITDA Net Profit Adj. EPS (INR) EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) EV/EBITDA (x) Div. Yield (%) 2013 2014E 2015E 82.8 106.1 121.9 22.0 12.7 15.8 16.4 14.1 19.4 12.1 26.7 3.8 15.8 0.5 24.7 16.3 20.2 27.8 15.6 19.2 17.3 20.9 3.3 14.1 0.7 27.3 18.2 22.6 11.7 15.0 18.9 20.7 18.7 2.8 12.7 0.9
Business in a transition phase, see near term pressure on margins

Cipla is undergoing a significant transition in its business model. Company is looking at setting up front-ends in key markets (recently acquired Cipla Medpro in South Africa for USD510m), filing own ANDAs in the US and a more aggressive approach in its India operations. These changes are happening under the new CEO. While Cipla is heading in the right direction, we believe the impact of these changes is likely to result in near term margin pressure for the company as it reinvests some of the profits in establishing front-end activities and R&D expenses for product filings in the US. We model a margin contraction of ~200bp over FY13-15E for the company.
112.2 130.1 150.4
Inhaler opportunities in EU, US many years away

The market has started to assign an option value to Cipla's inhaler pipeline in the US and EU. In our view, each of these opportunities is many years away. Cipla stated it has 10 inhaler products for the EU of which five are approved, two are pending approval while three are under development. Pertinently, Cipla has not yet filed combination inhalers in the EU so far which means the upside is at least three years away. We believe the US upside is even beyond that.

Cipla Medpro (CMSA) acquisition to provide front-end in South Africa, accretive by 6-8%.
CMSA is one of South Africa's top 10 pharmaceutical groups. For CY12, it reported revenue of USD280m, EBITDA of USD45m (EBITDA margins of 16.3%) and PAT of USD20m. The deal values Cipla Medpro at 9x CY13 EV/EBITDA. Though we await some clarity on the accounting intricacies of this consolidation, we have factored the upside from this acquisition in our estimates. The CMSA acquisition is accretive by 6-8% in our estimates.

Ci pl a Sen sex - Reba sed 445 415 385 355 325 Apr-13 Aug-13 Oct-12 Dec-12 Feb-13 Jun-13 Oct-13
Limited near term triggers for the stock, maintain Neutral

In the near term, Cipla is likely to feel the impact of drug pricing policy (estimated hit of INR900m-1.2b) but it is likely to be partially offset by a favorable currency. The recently-concluded Cipla Medpro acquisition is likely to play a key role in earnings growth of 20% over FY13-15E. We value Cipla at 20x FY15E earnings to arrive at a target price of INR452/share. We see limited near term triggers for the stock. We maintain a Neutral rating.
54
Cipla
Story in charts
Domestic formulations to grow in line with industry
DF Revenue (INR m) 12.9% 15.2% 12.2% 10.2% 14.0% YoY Growth (%) 14.6% 14.0%
21.0% 15.4% 23,188 10.9% 26,756 37,723 49,716 29,677 59,339
High growth in export formulations to be driven by CMSA

Export Fo rmul ati ons (INR m) 37.8% 31.8% 27.1% 19.4% YoY Growth (%)
13.0%
19,783
22,786
25,113
28,178
32,129
36,813
41,599
47,422
15,703
21,635 FY09
7.2% FY10
FY08
FY09
FY10
FY11
FY12
FY13
FY14E
FY15E
FY08
FY11
FY12
FY13
FY14E FY15E
EBITDA margins to come under pressure going forward

EBITDA (INR m) 23.4% 24.1% 21.7% 23.6% EBITDA Margi n 26.5% 23.3% 22.4%
Geographical spread (%)

North, Ce ntral & South Ameri ca 33% 34% Europe Mid dl e Eas t
19.7%
12,220
13,532
13,692
16,589
21,979
24,730
27,311
8,317
Aus tral i a 13% 14% 6% Afri ca
FY08
FY09
FY10
FY11
FY12
FY13
FY14E FY15E
Management profile
Name Subhanu Saxena Designation Previous Organization Novartis AG Dr. Reddy's
PE band
P/E (x) 32 27 22
Teva Shoppers Stop Wockhardt Lupin
Avg(x)
Peak(x) 29.5
Mi n(x)
Chief Executive Officer Raman Head - International Wattamwar Business, LATAM Frank Peters Head - EU Businesss Arun Gupta Chief Information Office VS Mani Chief Financial Officer Chandru Chawla International Business, Corporate Strategy & Development Sanjay Bhanushali International Business Development
21.3
19.9
17 12 Oct-06 Oct-07 Oct-08 May-07 Apr-08 Apr-09 14.3 Oct-09 Oct-10 Oct-11 Oct-12 Apr-10 Apr-11 Apr-12 Apr-13 Oct-13
55
Dr. Reddy's
18 October 2013
Cipla

Income Statement
Y/E March Net Income Change (%) Total Expenditur e EBITDA Change (%) Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT before EO Items Extra Ordinary Expense PBT but after EO Exp. Tax Tax Ra te (%) Reported PAT Adj PAT Change (%) Margin (%) 2011 63,238 12.4 49,546 13,692 1.2 21.7 2,733 10,959 173 711 11,497 -90 11,586 1,914 16.5 9,673 9,598 -5.4 15.2 2012 70,207 11.0 53,619 16,589 21.2 23.6 3,122 13,466 238 722 13,950 -369 14,319 2,907 20.3 11,412 10,927 13.9 15.6 2013 82,793 17.9 60,815 21,979 32.5 26.5 3,305 18,674 276 1,323 19,721 -1,233 20,954 5,443 26.0 15,511 12,719 16.4 15.4 2014E 106,136 28.2 81,407 24,730 12.5 23.3 3,716 21,014 1,138 1,800 21,676 0 21,676 5,419 25.0 16,257 16,257 27.8 15.3
(INR Million)
2015E 121,922 14.9 94,611 27,311 10.4 22.4 3,848 23,462 1,251 2,000 24,211 0 24,211 6,053 25.0 18,158 18,158 11.7 14.9
Balance Sheet
Y/E March Equity Share Capital 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 Provisions Net Current Assets Appl. of Funds E: MOSL Estimates 2011 1,606 64,966 66,661 5,410 2131 74,202 42,406 11,464 30,942 2,853 5,908 46,263 19,061 14,908 960 11,334 11,764 9,562 2,203 34,499 74,202 2012 1,606 74,694 76,389 135 2332 78,856 46,269 14,111 32,158 3,712 12,688 44,945 18,501 15,536 905 10,003 14,646 12,214 2,432 30,299 78,856 2013 1,606 88,491 90,187 9,971 2805 102,963 53,279 17,076 36,203 3,674 25,324 51,376 23,871 16,688 1,430 9,387 13,615 10,791 2,824 37,761 102,963 2014E 1,606 102,870 104,565 11,376 2805 118,746 79,012 20,792 58,221 2,837 22,688 65,607 28,927 25,154 1,563 9,962 30,606 25,154 5,452 35,000 118,746
(INR Million)
2015E 1,606 119,149 120,844 11,376 2805 135,026 84,931 24,640 60,291 2,419 28,688 75,683 31,209 30,115 3,764 10,596 32,055 26,286 5,769 43,628 135,026
18 October 2013
56
Cipla

Ratios
Y/E March Basic (INR) EPS Cash EPS BV/Shar e DPS Payout (%) Valuation (x) P/E PEG (x) Cash P/E P/BV EV/Sale s EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fix ed Asset Turno ver (x) Debtor (Days) Inventory (Days) Working Capital (Day s) Leverage Ratio (x) Current Ratio Debt/Equity 2011 12.0 15.4 82.9 3.3 30.8 2012 13.6 17.5 95.0 1.7 14.3 2013 15.8 20.0 112.2 2.0 12.1 2014E 20.2 24.9 130.1 3.0 17.3 2015E 22.6 27.4 150.4 4.0 20.7
26.7 1.6 21.2 3.8 4.2 15.8 0.5
20.9 0.8 17.0 3.3 3.3 14.1 0.7
18.7 1.6 15.4 2.8 2.8 12.7 0.9
14.4 15.7
14.3 18.0
14.1 19.4
15.6 19.2
15.0 18.9
2.5 86 110 194
2.2 81 96 153
2.4 74 105 160
2.2 87 99 113
2.1 90 93 118
3.9 0.1
3.1 0.0
3.8 0.1
2.1 0.1
2.4 0.1
Cash Flow Statement

Y/E March Op. Profit/(Loss) befor e Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations EO expense CF from Oper. incl EO Expense (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 E: MOSL Estimates 18 October 2013 2011 13,692 711 -1,574 -2,630 10,199 -90 10,289 -9,574 -3,444 -13,018 866 5,359 -173 -2,983 3,068 339 621 960 2012 16,589 722 -2,706 4,145 18,750 -369 19,119 -5,197 -6,780 -11,977 -51 -5,275 -238 -1,633 -7,197 -55 960 905 2013 21,979 1,323 -4,970 -6,937 11,395 -1,233 12,627 -7,313 -12,636 -19,949 166 9,836 -276 -1,879 7,847 525 905 1,430 2014E 24,730 1,800 -5,419 2,893 24,004 0 24,004 -24,897 2,636 -22,260 940 1,405 -1,138 -2,818 -1,611 133 1,430 1,563
(INR Million)
2015E 27,311 2,000 -6,053 -6,426 16,831 0 16,831 -5,500 -6,000 -11,500 1,879 0 -1,251 -3,758 -3,130 2,201 1,563 3,764 57
18 October 2013 Sector Update |Healthcare
Ranbaxy Laboratories
BSE SENSEX S&P CNX
6,089 RBXY IN 422.9 560/254
CMP: INR385
TP: INR270
Sell
Consolidation phase continues

US FDA issues affect growth visibility

M.Cap. (INR b)/(USD b) 162.7 /2.6 -20/-23/-39

Y/E Dec Sales EBITDA Net Profit 2012 2013E 2014E 124.6 115.8 19.4 5.5 13.5 5.5 -4.3 13.0 0.0 -4.7 12.6 18.0 25.9 3.7 15.3 138.2 23.7 5.9 33.9 13.9 6.7 28.8 20.1 42.2 24.3 2.9 8.2
US growth lacks visibility due to ongoing US FDA issues. India to feel the impact of price controls. Operating margin expansion to industry levels a difficult task with ongoing US FDA issues. Consolidation phase continues, expensive valuations, maintain Sell.
US growth lacks visibility due to ongoing US FDA issues; India to feel the impact of price controls
RBXY's business mix in the US is being driven by: a) Para IV opportunities, b) branded generics and c) difficult to manufacture generics. The ongoing US FDA issues, where three of the four plants are under import alert, have resulted in lack of clarity on the US pipeline, including monetization of Para IV opportunities like Diovan, Valcyte and Nexium. However, these continue to be a part of our estimates. RBXY has exceeded our expectations in its only branded generic drug launched so far (Absorica through partner Cipher) and it is early days for this segment to scale up. Although Absorica has captured 17% share in the USD500550m Isotretinoin market in less than 12 months, its premium pricing due to superior efficacy may not be sustainable once the product enters the reimbursement list. India growth continues to get impacted due to execution challenges and key products coming under price control.
Rep. EPS (INR) 30.2 Adj. EPS (INR) 13.0 EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) EV/EBITDA (x) 25.9 3.5 8.5 -7.7 96.4 31.4 21.0 0.0
89.8 117.9
Div. Yield (%) 0.0 0.6 1.5 Note: Estimates include upside from FTF opportunities
Operating margin expansion to industry levels - a difficult task with ongoing US FDA issues
RBXY's operating margins are in single digits currently, with the company planning to scale them up to industry standards over the next three years. One of the key levers of margins expansion was a reduction in remediation costs from endCY14. With US FDA issues unlikely to resolve in the near term, we believe scaling up margins to industry standards may be a challenging proposition.

As on Sep-13 Jun-13 Sep-12 Promoter 63.5 63.5 63.6 Dom. Inst 9.0 10.4 10.6 Foreign Others 13.7 13.7 13.1 13.1 13.1 12.6
Consolidation phase continues, maintain Sell

R a nb axy Lab s Se ns e x - Re ba s ed
680 560 440 320 200
We continue to see RBXY's operations in a consolidation phase over the next 1218 months. We estimate core earnings growth of less than 10% over CY12-14E. The stock trades at 27.0x CY13 and 25.3x CY14 estimates, which are at a significant premium to the sector and not justified with the mid teens growth forecast. We value RBXY's base business at 18x CY14E to arrive at a fair value of INR249/share and add INR21/share as the DCF value of the Para IV opportunities for a target price of INR270/share. We maintain a Sell rating due to expensive valuations.
Apr-13
Oct-12
Jan-13
Oct-13
Jul-13
58
Story in charts
US sales growth led by Para IV opportunities (USD m)
Core US s al es One offs
9%
India sales will be affected by DPCO 2013 in the short run

Indi a sal es (INR m) 13% Growth YoY (%) 12%
594 406 163 230 CY09 307 246 CY10 306 CY11 350 CY12
235 97
8%
9% 4%
513
590
16,300 17,593 CY10 19,154 CY11 21,661 CY12 22,591 CY13E 25,291 CY14E
CY13E
CY14E
CY09
US FDA track record

Plant locations Last inspected In last 12 months Mohali Dec 2012, Sep 2012 Ohm Labs Dec 2012 Toansa Dec 2012 New Delhi Dec 2012 Noida Dec 2012 Ohm Labs, Brunswick Aug 2012 Inspections in the past Paonta Sahib March 2008 Dewas Feb 2008 483s issued? Y Y Y N Y N Y Y
SG&A expenses (% of sales) higher than industry average

Ra nbaxy Lupi n Torrent Pharma 40.0 35.0 30.0 25.0 20.0 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13ECY14E Sun Pha rma Gl e nma rk Pharma

Brand Avalide/Avapro Diovan TriCor Clarinex Actoplus met Valcyte Nexium Hepsera Namenda OrthoTricyclen Opana ER Oxycontin Rapamune Uroxatral Levaquin Solodyn Brand Sales 124 2,087 1,578 200 478 400 2,272 140 600 450 450 3,150 200 200 1,312 370 Timeline Delayed Delayed Delayed Delayed Delayed Delayed May-14 Sep-14 Jan-15 Dec-15 Unknown Unknown Unknown Unknown Unknown Unknown
PE Band
P/E (x) 120 90 60 30 0 Oct06 Oct07 May07 Apr08 13.3 Oct08 Oct09 Oct10 Oct11 Oct12 Apr09 Apr10 Apr11 Apr12 Apr13 30.8 Oct13 37.4 108.1 Avg(x) Pe ak(x) Mi n(x)
18 October 2013
59

Income Statement
Y/E December Net Sales Other Operating Income Total Expenditur e EBITDA Margin (%) Depreciation EBIT Int. and Forex loss Other Income - Rec. PBT pre EO Expense Change (%) Extra Ordinary Expense PBT after EO Exp. Tax Tax Ra te (%) Reported PAT Minority Interest Adj PAT after Min. Int. Change (%) Margin (%) Adj PAT excl one-offs 2010 85,354 4,253 70,954 18,653 20.8 5,532 13,121 614 5,200 17,707 165.4 -1,647 19,353 4,201 21.7 15,152 184 12,577 695.6 14.7 4,731 2011 99,673 2,621 85,294 17,000 16.6 3,940 13,060 795 1,444 13,709 -22.6 40,573 -26,863 1,969 -7.3 -28,832 163 -28,995 -330.5 -29.1 5,955 2012 121,663 2,934 105,218 19,379 15.6 3,202 16,176 1,796 2,732 17,112 24.8 4,662 12,450 2,939 23.6 9,510 282 12,789 -144.1 10.5 5,496 2013E 113,439 2,355 102,301 13,493 11.7 3,187 10,306 2,012 1,682 9,977 -41.7 9,658 319 1,916 601.1 -1,597 203 -1,800 -114.1 -1.6 5,496
(INR Million)
2014E 135,570 2,596 114,422 23,744 17.2 3,641 20,103 2,136 1,416 19,383 94.3 0 19,383 5,040 26.0 14,344 5 14,339 -896.6 10.6 5,865
Balance Sheet
Y/E December 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 18 October 2013 2010 2,105 53,870 71 56,047 645 43,349 -228 99,813 67,050 21,571 45,479 3,818 4,985 21,323 86,931 21,925 16,052 32,645 16,309 41,399 31,865 9,534 45,532 99,813 2011 2,110 26,509 71 28,690 810 40,328 -375 69,453 72,234 23,930 48,304 2,270 982 21,548 105,190 26,106 30,053 30,634 18,397 87,294 56,525 30,769 17,896 69,453 2012 2,115 38,658 71 40,843 890 48,462 -357 89,838 76,146 26,069 50,078 2,079 790 21,616 111,217 27,314 20,368 46,003 17,532 74,325 41,596 32,729 36,892 89,838 2013E 2,115 35,868 71 38,054 1,003 56,243 -357 94,943 82,185 29,256 52,930 2,039 790 21,616 84,787 27,324 25,475 11,934 20,056 45,604 40,389 5,215 39,184 94,943
(INR Million)
2014E 2,115 47,733 71 49,919 1,118 56,243 -357 106,922 88,205 32,896 55,309 2,020 790 21,616 103,075 30,396 26,251 23,480 22,947 54,271 47,258 7,013 48,804 106,922
60

Ratios
Y/E December Basic (INR) EPS (Fully diluted)* Cash EPS BV/Shar e DPS Payout (%) Valuation (x) P/E (Fully di luted) Cash P/E P/BV EV/Sale s EV/EBITDA Dividend Yield (%) FCF per share Return Ratios (%) RoE RoCE Working Capital Ratios Fix ed Asset Turno ver (x) Debtor (Days) Inventory (Days) Working Capital (Day s) Leverage Ratio (x) Current Ratio Debt/Equity 2010 29.9 43.0 132.9 2.0 20.8 2011 14.1 -59.4 67.8 2.0 16.6 2012 13.0 37.8 96.4 0.0 0.0 2013E 13.0 3.3 89.8 2.0 18.0 2014E 13.9 42.5 117.9 5.0 42.2
25.9 8.9 3.5 1.3 8.5 0.0 19.8
25.9 102.6 3.7 1.8 15.3 0.6 -91.6
24.3 7.9 2.9 1.4 8.2 1.5 37.9
22.5 18.4
-101.3 20.9
31.4 21.0
-4.7 12.6
28.8 20.1
1.9 69 94 55
2.1 110 96 -47
2.5 61 82 -27
2.2 82 88 88
2.5 71 82 68
2.1 0.8
1.2 1.4
1.5 1.2
1.9 1.5
1.9 1.1
Cash Flow Statement

Y/E December Op.Profit/(Loss) bef. Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations EO Expense 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 E: MOSL Estimates 18 October 2013 2010 18,653 5,200 316 -6,330 17,838 2,646 15,192 -3,693 422 -3,271 2,736 7,167 -614 -982 8,307 20,229 12,416 32,644 2011 17,000 1,444 -2,116 25,625 41,953 3,228 38,725 -5,218 4,002 -1,215 -34,881 -2,857 -795 -987 -39,520 -2,010 32,644 30,634 2012 19,379 2,732 -2,921 -3,627 15,563 2,391 13,172 -4,784 193 -4,591 371 8,214 -1,796 0 6,789 15,369 30,634 46,003 2013E 13,493 1,682 -1,916 -36,361 -23,101 9,658 -32,759 -6,000 0 -6,000 -203 7,894 -2,012 -990 4,690 -34,070 46,003 11,934
(INR Million)
2014E 23,744 1,416 -5,040 1,926 22,047 0 22,047 -6,000 0 -6,000 -5 115 -2,136 -2,474 -4,500 11,547 11,934 23,480 61
Glenmark Pharmaceuticals
BSE SENSEX S&P CNX
6,089 GNP IN 269.8 612/393 0/6/26
CMP: INR559
TP: INR623
Buy
NCE research, a forte

Stronger balance sheet key to stock's re-rating

M.Cap. (INR b)/(USD b) 151.5 /2.4
US and emerging markets continue to shine, India potential being realized. Longer term focus on NCE research and building depth in hormones, derma and oncology areas. Stronger balance sheet key to further re-rating of the stock.

GNP expects to achieve sales CAGR of 20% over the next few years; US, emerging markets and India hold the key
Company has guided to achieve sales CAGR of 20% over the next few years, with an improving margin profile. GNP is banking on the US, emerging markets and revival in the India business to achieve this growth, where it has already done the necessary groundwork. Analyzing the pipeline of US market, we estimate GNP to achieve sales CAGR of 15% to USD413m over FY13-15E, while new approvals in emerging markets are expected to drive sales CAGR of 15% to USD315m over the same period. Revival in India growth over the last two years and no impact from the drug pricing policy is expected to lead to sales CAGR of 16% to INR17.6b over FY13-15E.
Adj. EPS (INR) 18.4
BV/Sh. (INR) 102.0 123.9
EV/EBITDA (x) 16.4
Longer term focus on NCE research and building depth in hormones, derma and oncology areas
GNP's longer term focus is on NCE research (it has five molecules under development) and is particularly excited about its biologic molecules currently in early stages of development. GNP has been the most successful Indian company in NCE research (has earned licensing income of USD205m till date). It expects R&D costs to be in the range of 9% of sales, with 4-4.5% allocated towards NCE/NBE development. Also, company is working on building its product portfolio in high margin/low competition therapies like hormones (full basket of OCs to be introduced over the next 12-15 months), derma and oncology (four products filed) areas.

Stronger balance sheet key to further re-rating of the stock

G l en mark Pha rma Se ns ex - R e ba se d
650 575 500 425 350
GNP's PE valuation has seen a material re-rating from 13x one-year forward earnings to 16x one-year forward earnings over the last 12 months. While we are confident on strong earnings growth for the company over the next two years, we believe strengthening the balance sheet from free cash flow would be critical for further re-rating of the stock. We value GNP's base business at INR606/share (19x FY15E earnings) and add INR17/share as DCF value of Crofelemer and other FTF opportunities to arrive at a target price of INR623/ share. Maintain Buy.
Apr-13
Oct-12
Jan-13
Oct-13
Jul-13
62
Story in charts
US Revenue ramp-up (USD m)
413 350 310 253 161 153 184 16.8 18.1 12.2 10,021 13,096 15,060 17,620 FY15E 6,372 7,529 8,447 18.6 15.0 17.0
Sustained growth in India formulations business

DF revenu e (INR m) 30.7 Growth (%)
FY09
FY10
FY11
FY12
FY13
FY14E
FY15E
FY09
FY10
FY11
FY12
FY13
FY14E
Strong growth seen in semi-regulated markets (INRb)

Se mi regul ated Ma rkets (INR m) Yo Y Gro wth (%) 64.1 45.6 37.1 15.4 2,355 FY09 3,864 FY10 4,070 5.3 5,926 FY11 FY12 8,122 FY13 24.3 18.1 10,093 FY14E FY15E
PE Band
150 100 P/E (x) Avg(x) Peak (x) 138.5 Mi n(x)
11,918
50 0 Oct-06 Oct-07 Oct-08 May-07 Apr-08
32.7 19.4 12.5 Oct-09 Oct-10 Oct-11 Oct-12 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Oct-13
63
R&D Pipeline
Molecule Clinical trial progress Revamilast (GRC 4039) Undergoing Phase-IIb for Asthma in Europe and Asia GRC 17536 Ph-I completed in Netherlands. To initiate Ph-II in Europe and India GRC 15300 Phase II in UK mPGES-1 inhibitors Pre-clinical phase GBR 500 Commenced Ph-II for ulcerative colitis in US & EU in Sep-12 GBR 900 Pre-clinical phase; will initiate Ph-1 in FY14 GBR 830 Pre-clinical phase; will initiate Ph-1 in FY14 Crofelemer NDA approved in USA; Phase IIb in India Partner None

Brand Locoid Vanos Clarinex Lunesta Tark a Welchol OrthoTricyclen Lo Zetia Crestor Strattera Finacea Bystolic Brand Sales 38 40 200 783 70 300 450 1350 3,164 384 95 400 Timeline End 2013 Dec-13 FY14 May-14 Feb-15 Apr-15 Dec-15 Dec-16 Jul-16 May-17 Nov-18 Sep-21
None
Sanofi Forest labs Sanofi
None None Salix
18 October 2013

Income Statement
Y/E March 2011 2012 Net Sales 29,491 40,206 Change (%) 19.8 36.3 EBITDA 5,923 9,860 Change (%) -0.7 66.5 Margin (%) 20.1 24.5 Adjusted EBITDA 5,028 7,325 Margin (%) 17.6 19.4 Depreciation 947 979 EBIT 4,976 8,882 Interest 1,566 1,466 OI & forex gains/losses 1,405 -1,218 PBT before EO Expense 4,816 6,198 Change (%) 25.4 28.7 PBT after EO Exp. 4,816 4,881 Tax 237 238 Tax Ra te (%) 4.9 4.9 Reported PAT 4,578 4,643 Adj PAT** 3,548 3,244 Change (%) 7.2 -8.6 Margin (%) 12.4 8.6 **Excl upside from NCE out-licensing and FTFs 2013 50,123 24.7 10,610 7.6 21.2 10,117 20.4 1,270 9,340 1,600 -403 7,337 18.4 7,337 1,107 15.1 6,230 4,992 53.9 10.1 2014E 60,095 19.9 12,018 13.3 20.0 12,018 20.0 1,384 10,634 1,995 168 8,807 20.0 8,807 1,673 19.0 7,134 6,871 37.6 11.4
(INR Million)
2015E 70,162 16.8 14,087 17.2 20.1 14,087 20.1 1,660 12,428 1,839 202 10,790 22.5 10,790 2,050 19.0 8,740 8,640 25.8 12.3
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 18 October 2013 2011 270 271 20,102 20,372 267 21,258 -1081 40,816 25,899 4,876 21,023 1,100 309 9,723 25,988 8,070 11,308 1,959 4,651 7,605 7,560 44 18,384 40,816 2012 271 271 23,746 24,016 250 23,225 -2674 44,817 28,384 4,137 24,235 656 298 11,253 29,472 7,877 12,436 3,201 5,958 9,843 9,334 509 19,629 44,817 2013 271 271 27,359 27,630 244 28,500 -3803 52,571 32,968 5,286 26,634 1,689 323 12,136 37,493 8,435 16,400 6,052 6,605 13,568 12,557 1,011 23,925 52,571 2014E 271 271 33,279 33,550 244 28,500 -3803 58,491 36,218 6,670 29,548 1,689 323 11,286 48,711 10,702 19,757 10,019 8,232 21,781 20,581 1,200 26,930 58,491
(INR Million)
2015E 271 271 40,652 40,923 244 26,000 -3803 63,363 39,218 8,330 30,889 1,689 323 10,496 55,840 12,687 23,451 10,091 9,611 25,378 24,028 1,350 30,462 63,363
64

Ratios
Y/E March Basic (INR) EPS (Fully diluted)* Cash EPS BV/Shar e DPS Payout (%) Valuation (x) P/E (Fully di luted) PEG (x) Cash P/E P/BV EV/Sale s EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fix ed Asset Turno ver (x) Debtor (Days) Inventory (Days) Working Capital (Day s) Leverage Ratio (x) Current Ratio Debt/Equity 2011 13.1 16.6 75.4 0.7 5.2 2012 12.0 15.6 88.8 2.0 13.6 2013 18.4 23.1 102.0 2.0 10.2 2014E 25.4 30.5 123.9 3.0 13.3 2015E 31.9 38.0 151.1 4.0 14.5
30.3 0.6 24.2 5.5 3.5 16.4 0.4
22.0 0.6 18.4 4.5 2.8 14.1 0.5
17.5 0.7 14.7 3.7 2.4 11.9 0.7
17.4 13.4
13.5 11.4
18.1 16.1
20.5 18.5
21.1 19.9
1.5 140 100 203
1.8 113 72 149
2.0 119 61 130
2.1 120 65 103
2.3 122 66 106
3.4 1.0
3.0 1.0
2.8 1.0
2.2 0.8
2.2 0.6
Cash Flow Statement

Y/E March Op. Profit/(Loss) befor e Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations 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 Inc/Dec of Cash Add: Beginning Balance Closing Balance E: MOSL Estimates 18 October 2013 2011 5,923 1,405 -2,029 1,530 6,829 6,829 810 682 -7,521 2,701 -1,566 -236 -6,621 890 1,069 1,959 2012 9,860 -1,218 -1,830 -3 6,809 5,492 -3,746 -3,735 -366 1,950 -1,466 -633 -515 1,242 1,959 3,201 2013 10,610 -403 -2,236 -1,445 6,527 6,527 -4,703 -4,728 -1,982 5,268 -1,600 -634 1,052 2,851 3,201 6,052 2014E 12,018 168 -1,673 962 11,474 11,474 -4,298 -4,298 -263 0 -1,995 -951 -3,209 3,968 6,052 10,019
(INR Million)
2015E 14,087 202 -2,050 -3,461 8,778 8,778 -3,000 -3,000 -100 -2,500 -1,839 -1,268 -5,707 72 10,019 10,091
65
Cadila Healthcare
BSE SENSEX S&P CNX
6,089 CDH IN 204.7 925/631 -4 /-22/-32
CMP: INR664
TP: INR828
Buy
In a prolonged consolidation phase

Revival in quality US approvals holds the key

M.Cap. (INR b)/(USD b) 136.0/2.2
Business mix has reached a point where diversification is hurting growth, while ongoing investments and capex are hurting the balance sheet. Revival in quality US approvals is a key trigger for a spurt in earnings growth, which have failed to move over the last three years. Stock trades at 18.5x FY14E of INR35.8 and 16.0x FY15E of INR41.4. Maintain Buy.
Financials & Valuation (INR b)

Y/E March Sales EBITDA Net Profit EPS Gr. (%) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) Div. Yield (%) 2013 2014E 2015E 63.6 11.3 6.5 15.5 23.7 17.9 30.5 20.8 4.6 1.0 71.2 12.4 7.3 35.8 12.2 22.8 17.6 25.3 18.5 3.9 13.0 1.3 81.3 14.4 8.5 41.4 15.6 22.3 18.6 24.8 16.0 3.3 11.0 1.6
Business mix undergoing prolonged consolidation phase

CDH's business mix consists of presence across diversified fields like formulations, APIs and contract manufacturing, with presence in major markets across the globe either directly or through a partner. CDH is now feeling the pinch of this over diversification as key verticals are growing slow, while its investments and capex in areas like vaccines, transdermal, biosimilars are unlikely to generate cash flows in the near term. We believe the company is likely to feel the impact of this situation in the medium term.
Adj. EPS (INR) 31.9 BV/Sh. (INR) 143.8
170.0 200.6
Revival in quality FDA approvals is a key near term trigger; India likely to grow slower as effect of price control kicks in
Over the last 15 months, CDH received 20 approvals from the US FDA. But the approvals have been for products with high competitive intesnsity and hence it is not resulting in growth in the US market. Revival in quality approvals holds the key as India's performance is likely to slow down in the medium term due to the impact of drug price controls, while other businesses are unlikely to bridge this gap. Hence, operating margins are unlikely to expand significantly unless quality US approvals flow through.
EV/EBITDA (x) 13.9

FY14E seen as a lackluster year, all eyes on FY15E performance

We expect FY14E to be yet another lackluster year impacted by lack of quality FDA approvals and price controls in India. Thus, the company is expected to report a muted 5% growth in FY14E earnings YoY. We believe FY15E could be the start of a turnaround year for CDH as we expect some key approvals to flow in and the impact of the drug policy would be fully realized. We thus expect 15% earnings growth in FY15E over FY14E. The stock trades at 18.5x FY14E of INR35.8 and 16.0x FY15E of INR41.4. The stock is trading at the lower end of its five years trading range. We value CDH at 20x FY15E earnings, which is in line with the sector valuations, to arrive at a target price of INR828.

Cad i l a H ea l th Sen s ex - R eb as e d 1,000 900 800 700 600 Oct-12 Apr-13 Jan-13 Oct-13 Jul-13
66
Cadila Healthcare
Story in charts
India and US formulations contribute >60% to revenue US revenue growth trend (INR m)
Domestic formulations to witness ramp-up in FY15E
Key US launches for the next two years

Product Astelin Catapres-TTS Duragesic Estraderm/Vivelle Exelon Gralise Lialda Lidoderm Niaspan Toprol XL Market size (USD m) 100 230 900 350 450 200 550 1,200 1,100 900 Timeline 1H FY14 1Q FY14 FY16 FY15 FY16 FY15 FY15 FY16 Mar-14 Q4 FY14
EBITDA margin trend
PE Band
18 October 2013
67
Cadila Healthcare

Income Statement
Y/E March Net Sales Change (%) Total Expenditur e % of Sales EBITDA Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT before EO Expense PBT after EO Expense Curren t Tax Tax Tax Ra te (%) Reported PAT Less: Mionrity Interest Net Profit PAT Adj for EO Items 2011 46,306 25.6 36,044 77.8 10,262 22.2 1,269 8,993 699 131 8,425 8,425 1,064 1,064 12.6 7,361 251 7,110 6,333 2012 52,633 13.7 41,795 79.4 10,838 20.6 1,579 9,259 1,211 -107 7,941 7,941 1,130 1,130 14.2 6,811 286 6,525 5,660 2013 63,579 20.8 52,327 82.3 11,252 17.7 1,847 9,405 1,262 -55 8,088 8,088 1,188 1,188 14.7 6,900 364 6,536 6,536 2014E 71,161 11.9 58,756 82.6 12,405 17.4 1,966 10,439 1,439 415 9,415 9,415 1,648 1,648 17.5 7,767 433 7,334 7,334
(INR Million)
2015E 81,301 14.2 66,856 82.2 14,445 17.8 2,340 12,105 1,442 499 11,162 11,162 2,232 2,232 20.0 8,930 450 8,480 8,480
Balance Sheet
Y/E March Equity Share Capital Tot al Reser ves Net Worth Minority Interest Deferred liabilities Tot al 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 2011 1,024 20,691 21,715 669 1127 11,034 34,545 24,004 5,331 18,673 3,963 207 23,263 8,119 7,652 2,952 4,540 11,561 9,379 2,182 11,702 34,545 2012 1,024 24,712 25,736 904 1185 21,307 49,132 35,612 6,786 28,826 4,492 242 30,232 10,905 8,863 4,666 5,798 14,660 12,379 2,281 15,572 49,132 2013 1,024 28,421 29,445 1193 1005 27,946 59,589 38,726 8,470 30,256 7,356 1,145 34,965 12,136 9,551 5,838 7,440 14,133 11,660 2,473 20,832 59,589 2014E 1,024 33,787 34,811 1626 1005 30,946 68,388 48,904 10,436 38,468 4,178 371 42,490 16,544 13,022 5,204 7,719 17,120 14,126 2,994 25,370 68,388
(INR Million)
2015E 1,024 40,053 41,077 2076 1005 28,946 73,104 56,493 12,776 43,717 2,589 371 46,693 18,763 14,878 5,026 8,026 20,267 16,851 3,416 26,426 73,103
18 October 2013
68
Cadila Healthcare

Ratios
Y/E March Basic (INR) EPS Cash EPS BV/Shar e DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sale s EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE 2011 30.9 40.9 106.1 6.3 20.8 2012 27.6 39.6 125.7 6.1 27.1 2013 31.9 40.9 143.8 6.9 30.5 2014E 35.8 45.4 170.0 8.7 25.3 2015E 41.4 52.8 200.6 10.9 24.8
20.8 16.2 4.6 2.5 13.9 1.0
18.5 14.6 3.9 2.3 13.0 1.3
16.0 12.6 3.3 2.0 11.0 1.6
37.4 30.4
27.5 22.9
23.7 17.9
22.8 17.6
22.3 18.6
Working Capital Ratios Asset Turno ver (x) 1.3 Fix ed Asset Turno ver (x) 2.6 Debtor (Days) 60 Inventory (Days) 64 Working Capital Turnov er (Days) 69 Leverage Ratio (x) Current Ratio Interest Cover Ratio Debt/Equity
1.1 2.2 60 76 76
1.1 2.2 54 70 86
1.0 2.1 65 85 103
1.1 2.0 66 84 96
2.0 12.9 0.4
2.1 7.6 0.7
2.5 7.5 0.8
2.5 7.3 0.8
2.3 8.4 0.6
Cash Flow Statement

Y/E March 2011 Oper. Pr ofit/(Loss) before Tax 10,262 Interest/Dividends Recd. 131 Direct Taxes Paid -1,064 (Inc)/Dec in WC -2,067 CF from Operations 7,262 (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 E: MOSL Estimates 18 October 2013 -4,460 0 -4,460 -401 406 -699 -1,530 -132 -2,356 445 2,507 2,952 2012 10,838 -107 -1,130 -2,156 7,445 -12,261 -35 -12,296 -945 10,508 -1,211 -1,845 58 6,565 1,714 2,952 4,666 2013 11,252 -55 -1,188 -4,088 5,921 -6,141 -903 -7,044 -1,086 6,928 -1,262 -2,105 -180 2,294 1,172 4,666 5,838 2014E 12,405 415 -1,648 -5,172 6,000 -7,000 774 -6,226 -433 3,433 -1,439 -1,968 -1 -408 -634 5,838 5,204
(INR Million)
2015E 14,445 499 -2,232 -1,234 11,477 -6,000 0 -6,000 -450 -1,550 -1,442 -2,214 0 -5,656 -178 5,204 5,026
69
Divi's Laboratories
BSE SENSEX S&P CNX
20,548 Bloomberg Equity Shares (m)
6,089 DIVI IN 132.7
CMP: INR1,032
TP: INR1,329
Buy
Strong track record; Poised for high growth

Stock trades at attractive valuations

M.Cap. (INR b)/(USD b) 136.9/2.2 52-Week Range (INR) 1,233/905 1,6,12 Rel. Perf. (%) -1/-12/-19
An opaque business model but strong track record gives us confidence. Confident of growing at least 15% revenue over the forecast period but option value from a molecule commercializing could be huge. Stock is trading at a material discount to its historic valuations, despite strong earnings growth.

An opaque business model but strong track record gives us confidence

Divi's Labs is India's number one CRAMS company based on almost all parameters. The business mix is equally divided between custom syntheses (CCS) and API. Of the two, CCS is a high margin business but highly opaque as DIVI does not share its product pipeline nor does it give its customer profile. In such a scenario, why should the stock's long term PE of 20x be in line with the sector average? The answer lies in strong management track record and ability to develop complex molecules, thus creating an entry barrier for competition. Company has a consistent dividend payout history, has not diluted equity in the last 20 years and there has been no unwarranted capex by the management, which resulted in a near zero debt company unlike peers. Pertinently, DIVI has developed a strong relationship with 20 of the top 25 innovators and is working at an early stage of product development with them, which has created a significant entry barrier for competitors.
Adj. EPS (INR) 45.4
BV/Sh. (INR) 188.4 221.3
EV/EBITDA (x) 16.9
Confident of growing at least 15% revenue over the forecast period but option value from a molecule commercializing could be huge

Di vi s Lab s Sen s ex - R eb as e d
DIVI has guided for a 15% sales growth for FY14, over FY13, and is confident of maintaining margins at current levels of 38%. It has invested INR5b in its SEZ in Vizag, which is yet to be fully commercialized. With full commercialization expected in FY15, we believe DIVI has the potential to grow faster than the current fiscal, next year. Moreover, it continues to develop products in clinical stages with innovator partners. While we do not have details about the products and at its current stage of development, a molecule commercializing in the future can create huge upside as DIVI is likely to be the preferred partner to supply adequate quantities of the product. This, we believe, is a significant option value in the stock.
1,300 1,200 1,100 1,000 900
Stock trading at material discount to its historic valuations; strong earnings growth, comfortable valuations, Buy
DIVI is trading at 16x one-year forward earnings, which is at 20% discount to its historic valuations. With strong earnings CAGR of 21% over FY13-15E and trading at the lower end of the PE band, we believe valuations are extremely comforting. Maintain Buy.
Apr-13
Oct-12
Jan-13
Oct-13
Jul-13
70
Divi's Laboratories
Story in charts
Increasing dividend payout trend
Di vi dend (INR m) 38 Di vi d end Payout (%) 39 40 45
Declining product/customer concentration (%)

FY09 FY10 61% 48% 51% 45% FY11 FY12 FY13
36 27
19%
17%
11 456 FY09 925 FY10 1,549 FY11 2,006 FY12 2,329 FY13 2,908 FY14E 3,970 FY15E
Con tri buti on from Co ntri buti o n from Co ntri buti o n from top produ ct (%) top 5 produ cts (%) top 5 cl i ents (%)
Revenue mix (INR m)

Gen eri cs CRAMS Ne utraceuti cal s 1,333 810 200 621 14,286 11,710 10,272 910 1,680
EBITDA margins expected to expand going forward

EBITDA (INR m) 43.9 43.0 Margi n (%)
37.6
8,921 358 6,100 3,074 5,072 5,580 14,211 4,454 849 10,218 11,648 6,023 4,604 6,350 8,855 2,761 4,074 5,100
36.9
37.9
38.7
5,178 FY09
4,053 FY10
4,915 FY11
6,850 FY12
8,102 FY13
9,556 FY14E
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
Free cash flow to increase FY14E onwards (INR m)

Cash flow impacted due to customer inventory de-stocking & large capex
PE Band
7,580
34 27 20 19.3 16.8 11.2 6 Oct06 Oct07 Oct08 Oct09 Oct10 Oct11 Oct12 May07 Apr08 Apr09 Apr10 Apr11 Apr12 Apr13 Oct13 71 P/E (x) Avg(x) 30.3 Pea k(x) Mi n (x)
5,749
3 ,5 76 1 ,9 42
2 ,4 72 1,290
2 ,04 0
13
FY0 9
FY1 0
FY1 1
FY1 2
FY13
FY1 4E FY1 4E
18 October 2013
Divi's Laboratories

Income Statement
Y/E March Net Sales Change (%) EBITDA Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT after EO Expense Curren t Tax Deferred Tax Tax Ra te (%) Reported PAT PAT Adj for EO Items Change (%) Margin (%) Less: Mionrity Interest Net Profit No of Shares (Mn - FV: Rs5) Adj EPS 2011 13,071 38.8 4,915 37.6 534 4,381 22 365 4,724 405 26 9.1 4,293 4,293 26.1 32.8 4,293 132.6 32.4 2012 18,586 42.2 6,850 36.9 621 6,229 37 615 6,806 1,474 0 21.7 5,333 5,333 24.2 28.7 5,333 132.7 40.2 2013 21,399 15.1 8,102 37.9 769 7,333 18 497 7,812 1,792 0 22.9 6,020 6,020 12.9 28.1 6,020 132.7 45.4 2014E 24,692 15.4 9,556 38.7 958 8,598 27 995 9,566 2,296 0 24.0 7,270 7,270 20.8 29.4 7,270 132.7 54.8
(INR Million)
2015E 30,177 22.2 11,926 39.5 1,071 10,855 27 629 11,456 2,635 0 23.0 8,821 8,821 21.3 29.2 8,821 132.7 66.5
Balance Sheet
Y/E March Equity Share Capital Tot al Reser ves Net Worth Deferred liabilities Tot al 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 2011 265 17,710 17,975 500 230 18,706 8,857 2,958 5,899 1,293 5,256 10,299 5,717 3,674 177 731 4,042 2,424 1,618 6,257 18,706 2012 265 21,050 21,315 609 617 22,541 10,921 3,536 7,384 1,820 4,770 13,592 6,790 4,951 309 1,542 5,025 2,927 2,099 8,567 22,541 2013 265 24,740 25,006 792 331 26,129 13,383 4,296 9,087 3,034 4,078 15,188 8,357 5,120 409 1,302 5,259 2,901 2,358 9,929 26,129 2014E 265 29,103 29,368 792 331 30,491 16,568 5,308 11,260 500 6,478 18,848 9,877 6,173 823 1,975 6,594 3,457 3,138 12,253 30,491
(INR Million)
2015E 265 33,954 34,220 792 331 35,343 17,068 6,379 10,689 500 9,478 23,436 12,071 7,544 1,406 2,414 8,760 4,527 4,233 14,676 35,343
18 October 2013
72
Divi's Laboratories

Ratios
Y/E March Basic (INR) EPS Cash EPS BV/Shar e DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sale s EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fix ed Asset Turno ver (x) Debtor (Days) Inventory (Days) Working Capital Turnov er (Days) Leverage Ratio (x) Current Ratio Debt/Equity 2011 32.4 36.4 135.6 10.0 36.1 2012 40.2 44.9 160.6 13.0 37.6 2013 45.4 51.2 188.4 15.0 38.7 2014E 54.8 62.0 221.3 18.7 40.0 2015E 66.5 74.5 257.8 25.6 45.0
22.7 20.2 5.5 6.4 16.9 1.5
18.8 16.6 4.7 5.5 14.3 1.8
15.5 13.8 4.0 4.5 11.4 2.5
25.9 28.2
27.1 34.1
26.0 33.1
26.7 34.9
27.7 35.7
2.2 104 160 170
2.8 98 133 162
2.6 88 143 162
2.4 93 146 169
2.7 93 146 160
2.5 0.0
2.7 0.0
2.9 0.0
2.9 0.0
2.7 0.0
Cash Flow Statement

Y/E March Op.Profit/(Loss) bef. Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations EO Expense / (Income) CF from Oper. incl EO Expense (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 E: MOSL Estimates 18 October 2013 2011 4,915 365 -405 -813 4,062 0 4,062 -1,591 -844 -2,434 53 -98 -22 -1,549 -1,616 12 165 177 2012 6,850 615 -1,474 -2,177 3,813 0 3,813 -2,523 486 -2,037 14 387 -37 -2,006 -1,643 133 177 310 2013 8,102 497 -1,792 -1,263 5,544 0 5,544 -3,504 692 -2,811 0 -286 -18 -2,329 -2,633 99 309 409 2014E 9,556 995 -2,296 -1,910 6,345 0 6,345 -596 -2,400 -2,996 0 0 -27 -2,908 -2,935 414 409 823
(INR Million)
2015E 11,926 629 -2,635 -1,839 8,080 0 8,080 -500 -3,000 -3,500 0 0 -27 -3,970 -3,997 583 823 1,406
73
Ipca Laboratories
BSE SENSEX S&P CNX
20,548 Bloomberg Equity Shares (m) M.Cap. (INR b)/(USD b) 52-Week Range (INR) 1,6,12 Rel Perf. (%)
6,089 IPCA IN 126.2 88.3/1.4 744/401 -4/28/43
CMP: INR700
TP: INR870
Buy
High earnings growth to sustain

Export formulations expected to witness robust growth

IPCA's recipe for growth has been the deep vertical integration. Strong 30% CAGR in export formulations will be led by US generics and institutional business. We believe that increasing contribution from these high margin businesses can result in 160bp margin expansion over FY13-15E.

Deep vertical integration: Recipe for success

IPCA's focus on backward integration has been its key differentiator. This equipped it with cost competitive abilities that allow to attain higher share in markets it enters and maintain high profit margins. Simultaneously, management believes that there is huge scope to reduce the production cost in APIs through technological enhancement, as opposed to the limited scope in formulations.
Adj. EPS (INR) 25.7
BV/Sh. (INR) 123.1 148.6
US formulations: Capacity constraints removed

Strategy for the US market is to target old, mature products, wherein if the costing is right, IPCA believes it can achieve high growth through market share gains. The recent approval for its Indore SEZ unit resolves capacity constraints and paves way for commercialization of at least 8 ANDAs filed from this facility. We expect the company to report 70% revenue CAGR in US generics over FY1315E, thereby the segment will constitute 15% of total sales (7% currently).
EV/EBITDA (x) 14.9
Institutional tender business: Significant potential for ramp-up

IPCA has WHO's pre-qualification to supply Artemether-Lumefantrine (antimalaria), which is a USD400m market with only four other players. It currently holds 20% share in this market, with Novartis leading. Besides, IPCA also has approval for Artesunate-Amodiaquine, which is a fast growing market. With funding for next two years already tied in, we believe this segment could report over 17% CAGR over FY13-15E. Moreover, company plans to launch the injection format of Artemether-Lumefantrine in FY15, which could present a positive surprise to our estimates.

IPCA La b s Se ns e x - R e ba s ed 760 640 520 400 Oct-12 Aug-13 Dec-12 Feb-13 Oct-13 Apr-13 Jun-13
Valuations and view: Strong long term structural story

We view IPCA as a long term structural growth story and expect the earnings growth to sustain. Our estimates reflect 21% CAGR in sales over FY13-15E led by export formulation. Domestic formulation is likely to grow 15%, while API growth will be 12% due to high captive consumption. We expect 160bp EBITDA margin expansion on improving sales mix and capacity ramp-up. High growth coupled with strong return ratios (between 25-30%) makes IPCA our top pick among mid caps. Maintain Buy with a target price of INR870 (17x FY15E).
74
Ipca Laboratories
Story in charts
Most vertically integrated ANDA filings (%)
DMFs/ANDAs Fi l e d 145 95 64 65 44 78 57 36 36 174 IPCA Labs Lupin R anbaxy* Dr R eddy's Sun Torrent Aurobindo Glenmark Cadila 242 FY09 664 FY10 1,159 75 FY11 FY12 FY13 FY14E FY15E 1,780 54 2,152 21 45 99 3,119
High growth in US led by Indore SEZ approval

Revenue (INR m) 674 Gro wth (%) 6,212
Potential for significant ramp-up in Institutional business

Revenu es (INR M) 352 3,916 2,996 Growth (%) 5,314 4,621
Domestic formulation market expected to post 15% CAGR

DF Reven ues (INR m ) 25.4 16.5 10.4 8.2 5,978 F Y10 6,964 F Y11 7,534 FY12 8,781 FY13 10,010 F Y14E 11,612 F Y15E 16.6 16.0 14.0 Growth (%)
1,220 270 FY10 FY11
146 31 FY12 FY13 18 FY14E 15 FY15E

4,766 FY09
Margin expansion led by improving sales mix

EBITDA (INR m) EBITDA Ma rgi n (%) 22.2 22.5 23.8
PE band
22 18 14 10 13.0 16.3 P/E (x) Avg(x) Pe a k(x) 18.9 Mi n(x)
20.6 17.1
21.3
19.8
21.8
9,787 1,817 FY08 2,653 FY09 3,335 FY10 3,761 FY11 5,135 6,232 7,482
6 2 Oct06 Oct07 Oct08 May07 Apr08 4.0 Oct09 Oct10 Oct11 Oct12 Apr09 Apr10 Apr11 Apr12 Apr13 Oct13
FY12
FY13
FY14E FY15E
18 October 2013
75
Ipca Laboratories

Consoliated Income Statement
Y/E March Net Revenues Change (%) EBITDA Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT before EO Expense EO Expense/(Income) PBT after EO Expense Curren t Tax Deferred Tax Tax Tax Ra te (%) Reported PAT Less: Minority Interest Net Profit Adj PAT 2011 18,969 21.4 3,761 19.8 558 3,203 314 518 3,407 3,407 770 14 784 23.0 2,623 -5 2,628 2,628 2012 23,587 24.3 5,135 21.8 671 4,464 413 -408 3,643 0 3,643 754 127 881 24.2 2,762 0 2,762 2,762 2013 28,131 19.3 6,232 22.2 867 5,365 334 -488 4,543 0 4,543 927 372 1,299 28.6 3,243 0 3,243 3,243 2014E 33,203 18.0 7,482 22.5 1,023 6,459 356 -812 5,291 0 5,291 1,164 106 1,270 24.0 4,021 0 4,021 4,021
(INR Million)
2015E 41,098 23.8 9,787 23.8 1,188 8,599 340 132 8,390 0 8,390 1,762 168 1,930 23.0 6,461 0 6,461 6,461
Balance Sheet
Y/E March Equity Share Capital Tot al Reser ves Net Worth Deferred liabilities Tot al 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 2011 251 10,265 10,516 807 5,308 16,625 9,884 2,892 6,992 1,132 408 10,586 4,664 4,637 104 1,182 2,493 2,073 420 8,093 16,625 2012 252 12,288 12,540 932 5,326 18,798 13,386 3,945 9,441 945 341 12,547 6,699 3,491 122 2,235 4,475 4,099 377 8,071 18,798 2013 252 15,285 15,538 1304 5,234 22,075 15,791 4,748 11,042 1,292 90 14,545 7,410 4,178 582 2,374 4,894 4,351 544 9,651 22,075 2014E 252 18,502 18,754 1410 5,734 25,898 18,791 5,772 13,019 1,292 90 17,682 8,964 5,199 471 3,048 6,185 5,558 627 11,497 25,898
(INR Million)
2015E 252 23,671 23,923 1578 4,734 30,234 21,291 6,960 14,331 1,292 90 22,178 11,097 6,658 651 3,773 7,657 6,880 777 14,521 30,234
18 October 2013
76
Ipca Laboratories

Ratios
Y/E March EPS (INR) Cash EPS BV/Shar e DPS Payout (%) Valuation (x) P/E P/BV EV/Sale s EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE 2011 20.9 25.3 83.7 3.7 17.9 2012 21.9 27.2 99.4 3.7 17.0 2013 25.7 32.6 123.1 4.7 18.1 2014E 31.9 40.0 148.6 6.4 20.0 2015E 51.2 60.6 189.6 10.3 20.0
27.2 5.7 3.3 14.9 0.7
22.0 4.7 2.8 12.5 0.9
13.7 3.7 2.2 9.4 1.5
27.4 25.6
24.0 24.1
23.1 25.2
23.5 25.0
30.3 32.9
Working Capital Ratios Fix ed Asset Turno ver (x) 2.8 Debtor (Days) 87 Inventory (Days) 90 Working Capital Turnov er (Days) 154 Leverage Ratio (x) Interest Cover Ratio Debt/Equity
2.9 54 104 123
2.7 54 96 118
2.8 57 99 121
3.0 59 99 123
10.2 0.5
10.8 0.4
16.1 0.3
18.1 0.3
25.3 0.2
Cash Flow Statement

Y/E March 2011 Oper. Pr ofit/(Loss) before Tax 3,761 Interest/Dividends Recd. 518 Direct Taxes Paid -770 (Inc)/Dec in WC -1,203 CF from Operations 2,307 CF from Oper. incl EO Expense 2,307 (inc)/dec in FA (Pur)/Sale of Investments CF from Investments Issue of shares (Inc)/Dec in Debt Interest Paid Dividend Paid Others CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance E: MOSL Estimates -1,821 -83 -1,904 1 762 -314 -468 -388 -407 -4 108 104 2012 5,135 -408 -757 39 4,010 4,010 -3,315 68 -3,247 1 25 -413 -468 111 -744 18 104 122 2013 6,232 -488 -927 -1,119 3,698 3,698 -2,752 251 -2,501 0 -93 -334 -589 279 -736 461 122 582 2014E 7,482 -812 -1,164 -1,957 3,549 3,549 -3,000 0 -3,000 0 500 -356 -804 0 -661 -111 582 471
(INR Million)
2015E 9,787 132 -1,762 -2,845 5,312 5,312 -2,500 0 -2,500 0 -1,000 -340 -1,292 0 -2,632 179 471 651
18 October 2013
77
Torrent Pharma
BSE SENSEX S&P CNX
20,548 Bloomberg Equity Shares (m) M.Cap. (INR b)/(USD b) 52-Week Range (INR) 1,6,12 Rel. Perf. (%)
6,089 TRP IN 169.2 70.6/1.1 465/311 -9/13/16
CMP: INR417
TP: INR519
Buy
India growth back on track

Strong presence in the chronic space in India makes it a good M&A candidate

India growth back on track but potential to achieve more. US, Europe grow strongly in exports; outlook for Brazil appears challenging. Reasonable valuations; potential acquisition candidate, due to its presence in emerging markets, makes TRP an attractive bet. Maintain Buy.

Y/E March Sales EBITDA Net Profit EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) Div. Yield (%) 15.0 4.9 5.5 13.8 3.8 9.4 1.8 12.1 3.1 8.2 2.1 2013 2014E 2015E 32.1 6.9 4.7 43.1 35.8 33.5 52.3 38.8 7.4 5.1 30.2 8.7 31.2 30.0 28.1 43.9 8.5 5.9 34.6 14.5 133.3 28.6 29.0 29.3
India growth back on track but potential to achieve more

TRP's India portfolio comprises of 60% sales from chronic products. Despite this strong positioning, TRP's growth has lagged industry growth rate for a prolonged period. With the appointment of a new India head last year and greater focus on field force productivity, company's India growth over the last two quarters has turned out to be better-than-expected. We expect this trend to sustain and estimate revenue CAGR of 11.5% over FY13-15E, ahead of the 9.5% revenue CAGR witnessed over the last five years.
Adj. EPS (INR) 27.8
84.9 108.8
US, Europe expected to lead exports growth, outlook for Brazil appears challenging
TRP's US business has 28 products awaiting ANDA approvals, which are expected to lead revenue CAGR of 33% to USD116m over FY13-15E. EU has reported over 40% YoY growth over the last two quarters led by Germany and Dossier business. Brazilian division however is expected to continue to face difficulty in the near term on account of (1) slowdown in product approvals by ANVISA and (2) TRP's concentration in the CVS and anti-diabetic therapies, which are being impacted by the local government's initiative to provide free medication in these areas.
EV/EBITDA (x) 10.3

Strong presence in India, emerging markets make TRP a good acquisition candidate
With over 70% sales coming from emerging markets, being a mid-sized company in India, strong positioning in fast growing chronic segment and reasonable valuations make TRP a good acquisition candidate for a player seeking presence in emerging markets. We believe this may lead to potential value unlocking in the future.

To rre n t Ph a rma Se ns e x - R e ba s ed 470 420 370 320 270 Oct-12 Aug-13 Dec-12 Feb-13 Oct-13 Apr-13 Jun-13
Reasonable valuations in the light of mid teens earnings growth over FY13-15E
TRP trades at a significant discount to its nearest peer IPCA Labs and the overall pharma sector. With reasonable valuations supported by earnings CAGR of 12% over the next two years and being a potential acquisition candidate, TRP looks attractive from current levels. Maintain Buy with a target price of INR519.
78
Torrent Pharma
Story in charts
Chronic products account for over 60% of sales
11 Ca rd i ac 18 36 Anti di abe tic CNS Anti i nfecti ve s 9 8 18 GI others
India to build on FY13 growth momentum

Revenu es (INR m) 15.5 15.5 12.7 8.5 7.0 10,240 11,389 12,474 FY15E
28.4 2,162 F Y12 3,550 FY13 5,410 F Y14E 6,947 FY15E
Growth (%)
11.2
9.5
6,282
7,254
8,377
FY09
FY10
FY11
FY12
9,090
FY13
FY14E
Outlook for Brazil looks subdued

B razi l (INR m ) 50% 3,612 2,566 3,012 17% 20% 5% 11% 2% F Y14E FY15E 4,770 32% Growth YoY (%) 5,689 5,020 5,113
US revenues growth trend - High growth to continue

US reve nues (USD m) 89.2 64.2 52.4 Growth (%)
25.7 909 FY10 1,143 F Y11
FY09
F Y10
FY11
F Y12
FY13
US pipeline-28 ANDAs await approval

Brand Seroquel Diovan HCT Cymbalta Luvox CR Avelox Exforge HCT Nexium Detrol LA Crestor Seroquel XR Bystolic Brand Sales 2,900 1,700 3,918 50 350 110 2,272 590 3,164 800 450 Timeline Not launched Delayed Dec-13 Aug-13 Sep-14 Oct-14 Nov-14 FY15 Jul-16 May-17 Sep-21
PE Band Chart
18 14 10 6 2 Oct-06 Oct-07 Oct-08 May-07 Apr-08 3.9 Oct-09 Oct-10 Oct-11 Oct-12 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Oct-13 11.0 P/E (x) Avg(x) Pe ak(x) 17.1 Mi n (x) 12.9
18 October 2013
79
Torrent Pharma

Income Statement
Y/E March Net Sales Change (%) Total Expenditur e % of Sales EBITDA Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT before EO Expense EO Expense/(Income) PBT after EO Expense Curren t Tax Deferred Tax Tax Tax Ra te (%) Reported PAT Less: Minority Interest Net Profit Adj PAT 2011 21,978 15.4 18,100 82.4 3,878 17.6 626 3,252 391 347 3,208 -168 3,376 751 -15 736 22.9 2,640 0 2,640 2,702 2012 26,961 22.7 21,743 80.6 5,218 19.4 817 4,400 395 445 4,451 863 3,588 690 40 730 16.4 2,858 23 2,835 3,287 2013 32,120 19.1 25,190 78.4 6,930 21.6 830 6,100 340 430 6,190 370 5,820 1,470 0 1,470 23.7 4,350 20 4,330 4,705 2014E 38,774 20.7 31,329 80.8 7,445 19.2 898 6,547 354 450 6,642 -200 6,842 1,528 0 1,528 23.0 5,315 0 5,315 5,115
(INR Million)
2015E 43,880 13.2 35,411 80.7 8,469 19.3 1,003 7,465 354 495 7,606 0 7,606 1,749 0 1,749 23.0 5,857 0 5,857 5,857
Balance Sheet
Y/E March Equity Share Capital Tot al Reser ves Net Worth Minority Interest Deferred liabilities Tot al 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 18 October 2013 2011 423 9,801 10,224 16 480 5,720 16,440 9,643 3,287 6,355 1,799 1,460 15,742 5,048 3,404 4,788 2,502 8,916 7,490 1,427 6,826 16,440 2012 423 11,515 11,938 35 514 5,786 18,274 11,990 4,022 7,968 1,188 1,240 20,081 5,315 5,228 6,743 2,795 12,202 10,395 1,807 7,878 18,274 2013 423 13,947 14,370 4 258 6,930 21,561 14,960 4,852 10,108 1,094 605 25,861 9,239 6,878 6,270 3,475 16,107 12,387 3,720 9,755 21,561 2014E 846 17,566 18,412 4 369 6,931 25,715 17,560 5,750 11,811 1,047 605 27,210 7,984 8,142 7,261 3,822 14,957 11,764 3,193 12,253 25,715
(INR Million)
2015E 846 21,709 22,556 4 369 6,931 29,859 20,322 6,753 13,569 1,023 605 31,446 10,026 9,215 8,001 4,204 16,784 13,352 3,432 14,662 29,859
80
Torrent Pharma

Ratios
Y/E March Basic (INR) EPS Cash EPS BV/Shar e DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sale s EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE 2011 16.0 19.3 60.4 8.0 29.8 2012 19.4 21.6 70.5 8.5 29.2 2013 27.8 30.5 84.9 23.0 52.3 2014E 30.2 36.7 108.8 7.6 28.1 2015E 34.6 40.5 133.3 8.7 29.3
26.1 21.6 6.9 3.3 18.5 1.9
21.5 19.3 5.9 2.6 13.4 2.0
15.0 13.7 4.9 2.2 10.3 5.5
13.8 11.4 3.8 1.8 9.4 1.8
12.1 10.3 3.1 1.6 8.2 2.1
29.2 24.4
29.7 28.8
35.8 33.5
31.2 30.0
28.6 29.0
Working Capital Ratios Asset Turno ver (x) 1.3 Fix ed Asset Turno ver (x) 3.7 Debtor (Days) 55 Inventory (Days) 84 Working Capital Turnov er (Days) 34 Leverage Ratio (x) Current Ratio Interest Cover Ratio Debt/Equity
1.5 3.8 71 72 15
1.5 3.6 78 105 40
1.5 3.5 76 75 47
1.5 3.5 75 83 55
1.8 8.3 0.6
1.6 11.2 0.5
1.6 17.9 0.5
1.8 18.5 0.4
1.9 21.1 0.3
Cash Flow Statement

Y/E March Oper. Pr ofit/(Loss) before Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations EO Expense / (Income) CF from Oper. incl EO Expense (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 E: MOSL Estimates 18 October 2013 2011 3,878 347 -755 190 3,660 -168 3,828 -2,214 -48 -2,262 512 -391 -787 5 -661 905 3,883 4,788 2012 5,218 445 -696 902 5,869 863 5,006 -1,736 220 -1,516 85 -395 -836 -390 -1,535 1,955 4,788 6,743 2013 6,930 430 -1,727 -2,349 3,284 370 2,914 -2,876 636 -2,241 1,112 -340 -2,273 354 -1,146 -473 6,743 6,270 2014E 7,445 450 -1,416 -1,507 4,972 -200 5,172 -2,554 0 -2,554 1 -354 -1,496 -200 -1,626 991 6,270 7,261
(INR Million)
2015E 8,469 495 -1,749 -1,669 5,545 0 5,545 -2,738 0 -2,738 0 -354 -1,713 0 -2,067 740 7,261 8,001 81
Torrent Pharma
N O T E S
18 October 2013
82
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 af filiates 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 None 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.
Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons. 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. 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., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement. 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, MOSIPL, 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.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Kadambari Balachandran Email : kadambari.balachandran@motilaloswal.com Contact: (+65) 68189233 / 65249115 Office address: 21 (Suite 31), 16 Collyer Quay, Singapore 049318
Motilal Oswal Securities Ltd

Motilal Oswal Tower, Level 9, Sa yani R oad, Prabha devi, Mumbai 400 025 Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
Sector Gallery

MO Healthcare Oct 2013

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

MO Healthcare Oct 2013

Uploaded by

Copyright:

Available Formats

Sector Update | October 2013

Only the fittest thrive!

Healthcare | Only the fittest thrive!

Only the fittest thrive!

Sustainable businesses have three attributes

Right geographic mix essential to effectively monetize strengths

Greater FDA vigilance, government interference in pricing here to stay

Healthcare | Only the fittest thrive!

Valuations leave room for reasonable returns; Advocate basket approach

Healthcare | Only the fittest thrive!

Sustainable businesses have three attributes

Depth in product mix

CVS CNS Gasto Anti infectives

21 7 3 11 11 7 0 1 8 4 3 6 11 6 3 5 51 24 9 23 Source: Company, Industry, MOSL

Healthcare | Only the fittest thrive!

Continuous improvement in product mix

Trend in ANDA approvals - Improving prodcut mix in US generic market

Source: US FDA, Company, MOSL

Improving prodcut mix in India formulations business

CVS a nd anti di abeti c NSAID Anti ma l ari a Anti bacteri a

GI CNS 17% 23% Others

Source: Company, MOSL 18 October 2013 6

Healthcare | Only the fittest thrive!

Trend in cost structure: Large companies

Trend in cost structure: Mid-sized companies

95.3 78.4 64.8 63.9 57.3

Torrent Pha rma

Source: US FDA, Company, MOSL 18 October 2013 7

Healthcare | Only the fittest thrive!

Right geographic mix essential to effectively monetize strengths

Aggregate sales break-up

The four largest markets

35%: REST 65%: INDIA, US, BRAZIL & RUSSIA

Source: Company, MOSL

1. US: Strong pipeline and execution can lead to positive surprises

Healthcare | Only the fittest thrive!

Source: US FDA, Industry, Company, MOSL

Torrent Pha rma

Source: Company, MOSL

Healthcare | Only the fittest thrive!

DMF filings by Indian companies (no. of filings)

Source: Company, MOSL

ANDA filings backed by own DMF

95.3 78.4 64.8 63.9 57.3

Torrent Pha rma

Source: Company, MOSL

Glenmark Pharma Ranbaxy* Sun Pharma

Healthcare | Only the fittest thrive!

Indian companies constitute ~50% of the global generic filings globally

Cumulative ANDA approvals over 2008-2013 (no. of approvals)

Sun Pha rma

Source: Company, MOSL

Dr. Reddy's: Changing Product profile

Glenmark: Changing Product profile

Lupin: Changing Product profile

60% 40% 2008

Ranbaxy: Changing Product profile

Sun Pharma: Changing Product profile

Healthcare | Only the fittest thrive!

High impact launches over 2009-13

Healthcare | Only the fittest thrive!

Niche opportunities identified in US

Trend in US sales for companies under coverage universe (USD m)

933 360 417 184 413 25 105 Lupi n 443