Professional Documents
Culture Documents
Executive Summary
The domestic branded generics market, a critical cog in the growth wheel for most Indian
companies, is currently in spate. Unlike the apprehension of market participants about the
sustainability of growth, our survey findings indicate that growth is not only sustainable but
will move into the next orbit of 18-20% viz-a-viz current growth of 14-15%. Higher growth
in domestic market will not only improve growth prospects of pharma companies (c30-50%
to revenue), but will also improve overall profitability (margins are relatively higher).
Further, as is the norm, when all companies are in expansion mode, only a handful will
potentially emerge as winners. Hence, to understand these changing dynamics, we
commissioned an extensive and unique study across 27 cities in 11 states (all four zones—
North, South, East, and West), covering more than 100 distributors, representing notably 45-
50% of the total pharma market. These distributors, with more than 10-15 years of presence
in the market, ideally connect suppliers on one hand and consumers on the other.
We covered all tiers of geographies in each zone including metros, tier-I to IV cities. We
travelled across the length and breadth of the country to gain incisive insights into
the future of the domestic pharma market, performance of various Indian
companies, strategies adopted and ground level challenges impacting growth. We
have tied our observations to industry data from AIOCD to overcome individual distributor’s
bias over companies. We further highlight that views of distributors are restricted to their
coverage companies, which differ, but collectively represent 80% of the total market.
• What is the potential growth in domestic market and key drivers of this growth?
• How sustainable is the current market growth over next three-four years?
We conclude that, Sun Pharma and Lupin are ranked by 94% and 74% of coverage
distributors, respectively, as preferred players in the large–cap space, while IPCA and Torrent
Pharma are ranked by 86% and 70% of coverage distributors, respectively, as leading
players in the mid-cap space. Interestingly, Sanofi-Aventis, among MNCs, is ahead of peers
and is aggressively making its mark in tier III and IV cities. We also identified emerging new
players such as Mankind, Eris, and Macleods, which are gaining strong traction in various
markets.
Combining the takeaways from our distributors survey and the prospects of Indian companies
in emerging markets and US, we expect Lupin, Dr. Reddy’s, Cadila and Torrent Pharma to do
well over the next 12-18 months. We are positive on Sun Pharma, however, current
valuations do not leave much upside for investors.
Overall, through this report, we have attempted to identify trends, drivers, and challenges
faced in the ever-changing market scenario and effectiveness of current strategies adopted
by various companies.
Contents
At a Glance ................................................................................................................ 3
Metro, tier-I key markets; Semi urban and rural areas are new growth pockets ................ 13
Companies
Cipla.................................................................................................................. 71
Lupin ................................................................................................................. 89
Cadila Healthcare 844 844 204.7 172,767 Buy FY09 29,275 6,058 3,184 15.6 26.0 33.0 20.5 20.5 30.2 54.3 9.2 22.9 20.7
FY10 36,580 7,798 4,808 23.5 25.0 28.7 51.0 51.0 23.2 35.9 6.9 25.9 21.3
FY11E 44,991 9,856 6,462 31.6 23.0 26.4 34.4 34.4 18.2 26.7 7.5 30.7 21.9
FY12E 54,932 12,289 8,319 40.6 22.1 24.7 28.7 28.7 14.3 20.8 5.7 34.3 22.4
FY13E 65,929 15,001 10,345 50.5 20.0 22.1 24.4 24.4 11.4 16.7 4.4 37.8 22.8
Cipla 321 321 802.9 257,731 Hold FY09 52,343 12,411 9,705 12.1 23.7 45.5 50.4 50.4 21.5 26.6 5.7 22.4 23.7
FY10 56,057 13,795 10,050 12.5 7.1 11.2 3.6 3.6 18.6 25.6 4.4 21.6 24.6
FY11E 62,465 13,569 9,967 12.4 11.4 (1.6) (0.8) (0.8) 18.8 25.9 3.9 18.0 21.7
FY12E 71,260 16,128 12,195 15.2 14.1 18.9 22.4 22.4 15.7 21.1 3.4 19.1 22.6
FY13E 82,819 19,311 14,867 18.5 16.2 19.7 21.9 21.9 12.9 17.3 3.0 20.4 23.3
Dr Reddy's* 1656 1,562 168.9 279,726 Buy FY09 61,642 9,718 4,300 25.5 35.0 44.0 120.0 120.0 28.6 61.2 7.9 19.3 15.8
FY10 67,624 13,510 6,777 40.1 9.7 39.0 57.6 57.1 20.1 38.9 7.4 20.4 20.0
FY11E 72,724 15,297 10,539 62.4 7.5 13.2 55.5 55.5 17.3 25.0 6.0 23.4 21.0
FY12E 84,371 17,982 12,901 76.4 16.0 17.6 22.4 22.4 14.1 20.5 4.5 33.5 21.3
FY13E 97,459 21,186 14,926 88.4 15.5 17.8 15.7 15.7 11.4 17.7 3.7 28.4 21.7
Lupin Pharma 412 412 444.7 183,216 Buy FY09 38,523 7,541 5,266 12.7 40.0 49.0 18.7 17.6 23.5 32.4 12.0 24.9 19.6
FY10 48,359 9,728 6,841 15.4 25.5 29.0 29.9 21.0 19.2 26.8 7.1 25.7 20.1
FY11E 56,693 11,594 8,472 19.1 17.2 19.2 23.8 23.8 15.4 21.6 5.3 23.8 20.5
FY12E 64,939 13,710 9,608 21.6 14.5 18.3 13.4 13.4 12.3 19.1 4.2 24.5 21.1
FY13E 75,280 16,121 11,781 26.5 15.9 17.6 22.6 22.6 10.5 15.6 3.4 25.2 21.4
Ranbaxy* 468 374 421.0 197,047 Hold CY08 73,610 7,873 1,891 4.5 8.0 18.0 16.0 16.0 22.4 83.3 4.6 4.0 10.7
CY09 68,725 1,801 788 1.9 (6.6) (77.1) (58.4) (58.4) 100.5 200.0 4.5 6.7 2.6
CY10 72,273 6,108 3,583 8.5 5.2 239.1 354.9 354.9 27.5 44.0 3.5 22.4 8.5
CY11E 80,682 8,472 5,735 13.6 11.6 38.7 60.1 60.1 19.9 27.5 3.0 29.1 10.5
CY12E 90,331 11,291 7,104 16.9 12.0 33.3 23.9 23.9 14.0 22.2 2.5 26.2 12.5
Sun Pharma** 446 436 1,035.6 461,878 Hold FY09 35,141 12,190 13,340 12.9 31.0 31.0 30.0 30.0 35.8 33.8 6.4 29.6 34.7
FY10 32,546 8,545 9,084 8.8 (7.4) (29.9) (31.9) (31.9) 52.3 49.7 5.8 16.5 26.3
FY11E 50,623 15,186 13,377 12.9 55.5 77.7 47.3 47.2 28.7 33.7 4.9 27.2 30.0
FY12E 68,656 20,941 17,576 17.9 35.6 37.9 31.4 38.3 20.2 24.4 4.3 31.0 30.5
FY13E 78,642 24,504 20,658 21.2 14.5 17.0 17.5 18.7 16.7 20.5 3.7 34.3 31.2
Torrent Pharma 591 591 84.6 50,009 Buy FY09 16,307 2,999 2,154 25.5 20.4 43.5 63.1 63.1 17.5 23.2 7.7 32.6 18.4
FY10 19,040 4,087 2,687 31.8 16.8 36.3 24.8 24.8 12.6 18.6 6.0 42.5 21.5
FY11E 22,586 4,414 2,973 35.1 18.6 8.0 10.6 10.6 11.6 16.8 4.7 38.5 19.5
FY12E 26,616 5,323 3,608 42.6 17.8 20.6 21.3 21.3 9.4 13.9 3.7 38.7 20.0
FY13E 32,142 6,679 4,614 54.5 20.8 25.5 27.9 27.9 7.3 10.8 2.9 41.4 20.8
Note: * Financials (ex-ROCE) represent base business (Ex one-off from para IV)
**Financials for Sun pharma includes Taro but excludes one-off from Para-IV
3
Edel Pulse: Pharmaceuticals
India is projected to be the third-largest pharma market (after the US and China) in terms of
incremental growth. It is also evident that the sub-continent, with the highest population and
robust economic growth, offers attractive return to pharma companies due to its cost-
effective manufacturing capabilities and branded generics nature of the market. Historically,
the non-regulated structure of market has enabled Indian companies to build strong market
share, however, with changing market dynamics, companies have to adopt new strategic
approach to grow and compete. Therefore, to gain a deeper understanding of this
transformation, we set out to survey various markets, encompassing all zones and tiers. We
selected a sample of 27 cities, ideally representing a mix of all geographies within India, and
after meeting more than 100 distributors across cities, we gained the following insights:
We conclude that, Sun Pharma and Lupin are ranked by 94% and 74% of coverage
distributors, respectively, as preferred players in the large–cap space, while IPCA and
Torrent are ranked by 86% and 70% of coverage distributors, respectively, as leading
players in the mid-cap space. MNCs are adopting a more localised approach to build
market presence and are building infrastructure for the next leg of growth. Interestingly
Sanofi-Aventis, among MNC pharma, is ahead of peers and is aggressively coming up in
tier III–IV cities. Moreover, we also identified some key emerging small-mid size players,
such as Macleods, Aristo, Eris and Mankind, who are scaling up and capturing
incrementally higher market share.
Large Cap
Sun Pharma
Dr Reddy's
Cipla
Lupin
Cadila
Mid-cap
Torrent Pharma
IPCA
Glenmark
MNC
Ranbaxy
Sanofi-Aventis
GSK India
Pfizer India
Table 1: Top picks - Lupin and Torrent Pharma offer highest upside (INR)
CMP TP NPV of Reco Upside P/E (x)
Company
one-offs (%) FY11E FY12E FY13E
Cadila 844 960 BUY 14 26.7 20.8 16.7
Cipla 321 350 HOLD 9 25.9 21.1 17.3
Dr. Reddy's 1,656 1,950 94 BUY 18 25.0 20.5 17.7
Lupin 412 500 BUY 21 21.6 19.1 15.6
Ranbaxy 468 432 94 HOLD (8) 44.0 27.5 22.2
Sun pharma 446 477 10 HOLD 7 33.7 24.3 20.5
Torrent Pharma 591 760 BUY 29 16.8 13.9 10.9
Source: Edelweiss research
Note: * PE multiple for Dr Reddy’s, Sun Pharma. and Ranbaxy is based on CMP adjusted for NPV of one-off exclusivity sales
Chart 1: IPM growth has been robust over past two years
20.0
17.8
8.0
8.0 7.0
5.0 4.5
4.0
0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
(MAT
March)
Not
<13% sustainable
8% 5%
>15%
27%
Sustainable
95%
13-15%
65%
We believe, apart from strong macro economic growth and changing socio economic profile,
aggressive strategies adopted by pharma companies are also adding momentum. We, thus,
broadly classify growth drivers as pull factors and push factors (Chart 3 shows the major
drivers of growth as per distributors). Among pull factors, increase in health awareness and
higher prevalence of lifestyle-related disease is resulting in higher demand for
pharmaceuticals. Further, among push factors, field force expansion to cover larger masses,
focus on building brands, aggressive product introductions, and specialty-focused promotion
have been identified as major growth drivers. We have analysed each of these factors in
detail (Appendix A) and our study indicates that these macro factors will continue to drive
higher growth over the next decade.
Higher Changing
income lifestyle
level / 30%
Field force
Affordability Brand expansion
4% building 32%
Health
awareness 13%
30%
The chronic segment (also termed as life-style-related ailments), comprising three specialty
areas—cardiovascular, anti-diabetics and neuro-psychiatry—account for ~28% of the total
market and is growing at a faster clip of 18-19%, well above the average industry growth of
16% (Table 2). Among these specialties, cardiovascular is the largest therapy constituting
15% of total pharma market, while anti-diabetics, though relatively smaller in size (6%
contribution), is emerging as the fastest growing segment (chart 4). This is further
substantiated by our survey which shows that among various therapies, highest growth is
viewed in anti-diabetics, followed by cardiac and neuro-psychiatry segments.
Table 2: Chronic segment has out performed overall market growth (%)
FY09 FY10 Mar-11 % of total
Chronic 19.1 19.2 17.4 27.9
Acute 14.9 14.9 14.1 72.1
Overall market growth 16.1 16.2 15.0 100.0
Chart 4: Anti-diabetics is fastest growing segment Chart 5: Therapies depicting higher growth (survey)
24.0 60.0
Growth- (%)
18.0
40.0
12.0
20.0
6.0
0.0 0.0
vascular
Psychiatry
Oncology
Diabetics
Respiratory
Cosmetology
Infectives
Anti-Diabetes
Cardiac
Oncology
CNS
Cardio
Neuro-
Anti-
Anti-
While rising urbanisation and sedentary lifestyles are driving higher growth in lifestyle
diseases (Chart 6), the overall base of the market is also expanding. Increase in health
Base of chronic segment awareness and proliferation of various single specialty and multispecialty hospitals has led to
is expanding early diagnosis of chronic disease among people. As shown in chart 7, growth in the chronic
segment is led by higher prescription growth, rather than pricing, which implies higher
penetration of the market. Hence, companies focused on chronic segment are likely to post
higher and sustainable growth than overall market, in the long term.
Chart 6: Population with lifestyle disease will double Chart 7: Growth driven by higher prescriptions
6.0 100%
4.8
(% of population)
80%
3.6
60%
2.4
40%
1.2
20%
0.0
Coronary
Diabetes
Asthma
Obesity
Cancer
disease
0%
heart
Chart 8: Case 1 – Torrent Pharma has doubled field force and added sub-divisions and further subdivided existing
divisions to increase focus on each specialty
2,000 Divisions Divisions
1,797
Therapies FY09 FY10 Therapies FY11
1,600
577 Psycan,
Psycan,
1,170 Psycan, Delta,
49%
(No of reps.)
As shown in Case 1, focus on brand building is becoming vital for existing players, hence,
specialty promotion is emerging as the new and widely adopted strategy across markets
wherein companies, like Torrent, are adopting micro-focused approach to build brand loyalty
with doctors. Most companies are carving new divisions with dedicated field force to focus on
individual specialties like anti-diabetics, CVS, CNS, dermatology, etc. and even individual
Specialty focused
products or brands in a few cases (e.g., Sanofi Aventis). This helps field force to focus on few
marketing is gaining
products, leading to better promotion among doctors and higher market share. Sun Pharma
ground
(case 2) has been successful in building strong brand franchise through therapy-focused
marketing. The company has mapped three to four divisions within each of the key therapies
to focus on multiple product segments with dedicated field force (refer Fig. 2). This strategy
offers more depth in marketing, with multiple medical representatives covering a single
specialist, leading to higher prescription share and mind share. Sun Pharma’s multi-focused
marketing has rendered it the highest field force productivity among peers (INR 8.9 mn
versus industry average of INR 3.7 mn). Almost all distributors believe that specialty focus
improves brand positioning and creates high impact on growth.
Fig. 2: Case 2 - Sun Pharma has build strong franchise by creating higher specialty focus
CNS
SYNERGY SYMBIOSIS SIRIUS
(Psychiatry, Neurology)
SPECTRA INCA
Gynecology
Life Sciences
INCA
Fertility, Urology
Life Sciences
Gastroenterology
SUN SOLARES
Orthopedics
Rheumatology, ORTUS
Dermatology
RADIANT
Source: Company, Edelweiss research
We believe metros and tier-I markets will remain key drivers of industry growth, while the
base of semi-urban and rural markets will expand driven by higher affordability and improved
access to better healthcare. We have tried to analyse through our survey the changing
dynamics of various tiers or classes of geographies within the industry. We can divide, based
on the population parameter, the IPM into two major categories: (a) metros and tier–I cities
(population ranging from 500,000 to 1 mn and above); and (b) semi urban and rural markets
(population ranging from 5000 to < 500,000). Metros and tier-I cities account for 60% of the
total market, while semi-urban (tier II-IV) and rural markets account for the balance 40%.
The table, below, highlights cities covered through the survey and growth in various tiers of
the market, as perceived by distributors.
Table 3: Tier-I, III and IV cities are registering higher growth above industry average
Overall share No of retail Average
City Tier Population Cities covered through survey
of market (%) chemists Growth (%)
Metro 30% >1 mn Hyderabad, Chennai, Mumbai, 4,000 to 20,000 13-15%
Ahmedabad, Delhi, Kolkata
Tier-I 30% 500,000 to <1 Pune, Surat, Secunderabad 2,000 to 5,000 >15%
mn
Tier-II Gurgaon, Bhubaneshwar,Baroda, 1,000 to 3,000
300,000 to Cuttak, Howrah
20% >15%
Tier III 500,000 Karimnagar, Warangal, 1,000 to 2,000
Nashik, Noida
Tier IV
Vapi, Satara, Sangli, Abhore,
20% up to 300,000 Kolhapur, Miraj, Behrampur, Sikar, 250 to 700 25-30%
Rural/Micro Chomu etc.
Towns
Source: Edelweiss research
We highlight that metros are growing at an average rate of 13-15%, in line with the industry.
Acute therapy still constitute ~60-65% of volumes, while the share of chronic therapies is
increasing, which is driving higher number of specialty set ups. As a result, companies are
expanding field force in these markets to target larger doctor population. Most distributors
guide that growth in metros will sustain for the foreseeable future led by four key factors: (i)
urbanisation (due to migration of people from lower tiers) resulting in higher population; (ii)
rapid changes in lifestyle, leading to faulty eating habits, key driver of chronic disease; (iii)
higher growth of middle income levels group driving affordability; and (iv) increase in
diagnosis and treatment levels.
Increase in health awareness is also resulting in higher self medication, which is driving most
companies to switch leading brands from prescription to OTC (e.g., Pfizer is expanding its
brand franchise by promoting Gelusil syrup as an OTC product). This strategy enables
companies to get higher growth and return from established brands with lower investments.
Moreover, companies like IPCA and Cadila are entering into nutraceuticals segment driven by
higher demand for additional supplements to cope with rising stress levels. IPCA has
introduced Nutralite to venture into the nutraceutical segment.
Table 4: Dynamics of semi-urban and rural markets vary from metros and tier-I markets
Semi-urban & Rural
Metros & Tier -I towns Comments
markets
Chronic Chronic Acute therapies account for 80-90% of total
(10-20%) (35-40%) consumption in semi urban areas
Specialists (5-10%)
GPs and CPs
(50%) Nature of doctor population is largely GPs and
CPs (90-95% of total), while specialists
presence is limited to fewer class-II/III towns
Doctor population
which are seeing higher urbanization and
expansion of therapies like respiratory, neuro-
GPs (MBBS), RMPs Specialists (50%) psychiatry and diabetics
(90-95%)
Local competition Very high Not much impact Local playes have better relations with doctors,
low pricing strategy and incentivise retailers
with better schemes
We detail out three key strategies adopted by companies to penetrate tier III and IV
Local field force presence markets. First, most companies are appointing local staff or setting up a local headquarter to
is critical to gain market cater to these markets, which was earlier addressed by field force from tier I and II towns in
share in semi-urban and close proximity. As per distributors, local field force is essential to promote products
rural markets effectively to local GPs and CPs which leads to higher volume growth. Second, existing
players are expanding their coverage (field force is doubled in most regions) to address
larger pool of doctors and micro interiors, which were earlier not covered. For instance, to
increase penetration, Sanofi Aventis is doing taxi tours in micro interiors which have no
transport. Last, companies are organising more CMEs (medical education programmes by
inviting senior physicians for local doctors) as well as healthcare awareness camps which are
helping them reach targeted customers more effectively. Hence, by improving accessibility in
under-penetrated markets, companies are creating higher demand for pharmaceuticals. We
believe companies like Cipla, Cadila, IPCA, Ranbaxy, and Sanofi Aventis, which are adopting
a more localized approach, are well positioned to take advantage of growing demand.
Table 4, above, further depicts that the disease profile of tier III-IV cities is highly
Companies primarily focus concentrated on the acute segment. We believe companies in order to penetrate and build
on acute segment in tier base in tier III–IV markets, will have to initially tailor their product portfolios to the acute
III-IV and rural markets segment, while selectively positioning in the chronic segment. As per our analysis, chronic
segments like respiratory (anti-asthma), cardiac, and diabetes are also picking up in selective
markets which gives opportunities for growth to companies like Sun pharma, Torrent, and
USV, who have selectively focused on neuropsychiatry, cardiac and anti-diabetic segments,
respectively, in these markets.
Chart 9: Players becoming more active or expanding coverage in tier III-IV areas
75.0
60.0
(% of distributors)
45.0
30.0
15.0
0.0
Torrent
Glenmark
Ranbaxy
Aventis
Pfizer
Reddy's
IPCA
Lupin
Cipla
Cadila
Sanofi
GSK
Dr
As per our survey, larger players such as Cipla, Cadila, and Ranbaxy, with strong
concentration in the acute segment, are doing well in semi-urban and rural areas, while
players such as Lupin and IPCA are also expanding coverage and seeing positive traction
from these regions (Chart 10). Moreover, MNCs (GSK, Pfizer and Sanofi Aventis) are also
expanding field force, strengthening distribution networks, and launching economically priced
branded generics products (such as Rabeprazole by Pfizer). We highlight that these products
have initially not posted higher traction and will take longer gestation periods before building
market share.
80.0
60.0
(%)
40.0
20.0
0.0
Dr Reddy's
Glenmark
Ranbaxy
Torrent
Mankind
Macleods
Cadila
Aventis
Pfizer
IPCA
Lupin
Cipla
Sanofi
GSK
Gaining market share Losing market share
Source: Edelweiss research
Interestingly, Mankind and Macleods are prominently gaining market share, giving stiff
competition to other players in these markets. While most companies have been traditionally
focused on metros and tier-I towns, companies like Mankind and Macleods have expanded
Mankind, Macleods have penetration in smaller markets, thereby establishing strong hold in terms of prescription
strong foothold in semi- share of doctors. However, the positioning is different than other peers and hence do not
urban and rural markets directly compete with similar doctor population. To illustrate our point further, Mankind
strategy differentiates on two points: (a) lower prices; and (b) deeper penetration in doctors
with a larger coverage list. Moreover, they have relatively better promotional strategies for
retailers wherein the company offers schemes with higher incentives than other players.
Finally, Mankind’s field force largely comprises people with non-science backgrounds and
attrition is low due to higher incentive structure. We believe higher stability or lower attrition
is critical to build market share in these markets.
Mankind
Lupin
Ranbaxy
Cadila
Cipla
IPCA
MNC pharma companies are aggressively expanding with meaningful investments in the
domestic market. These investments, although at a nascent stage, will set up base for the
next leg of growth. Most leading MNC companies have set bold aspirations for their Indian
businesses and are adopting a more localised business model including pan-India
penetration, well spread out competent field force, strong distribution network and branded
generic presence. 65% of total distributors believe that MNCs are becoming aggressive in
terms of launching new products, therapies, and competitive pricing of products. MNCs such
as Aventis, MSD, and Abbott are transforming existing policies and aggressively building
channel relations with distributors. For instance, Sanofi Aventis has directly interacted with all
distributors across India (video conference call) to elucidate their business and future
strategies. Moreover, senior management and area heads from MNCs are directly meeting
key distributors to strengthen coverage.
80.0
(% of distributors)
60.0
40.0
20.0
0.0
New product Field force Brand promotion Building channel
launches (incl expasnion relations
branded generics)
Not much
change in
activity
35%
Higher activity
level
65%
Ranbaxy
180
(10 tablets)
Intas 125
(10 tablets)
43
Glaxo Atorvastatin CVS
(10 tablets) 110
Dr Reddy's (10 tablets)
157
Cipla (10 tablets)
Intas 55
(15 tablets)
Gastro- 24 64
Pfizer Rabeprazole Above 5 Cipla
intestinal (7 tablets) (15 tablets)
70
Dr Reddy's (10 tablets)
This, table, depicts that MNCs have entered into the branded generics segment with
extremely competitive prices versus Indian companies. However, sales from these brands
have not picked up due to lack of strategic bandwidth in promoting branded generics. Most
distributors believe that branded generics launches by MNCs will take longer to build traction
as there are cultural barriers which companies face while marketing a non-parent product.
Moreover, in licensing of off- patented/patented drugs from parent pipeline (over next two-
three years) are sought as key business drivers. For example, MSD has strong pipeline of in
licensed molecules which are gaining traction in the market.
3,500
43%
2,800
188%
MNCs have doubled field
(No. of reps.)
force to expand 64%
2,100
geographical reach
1,400
700
0
GSK Pfizer Aventis
2008 2010
80%
Sanofi-Aventis is leading
the MNC pack 60%
40%
20%
0%
Ranbaxy
Aventis
Piramal
Pfizer
Abbott
Sanofi
GSK
A strong and growing domestic market has opened floodgates of opportunities for Indian as
well as MNC players, who are targeting these with multi-pronged approach. While some
companies have been frontrunners in identifying future opportunities, others have lost
momentum. To differentiate the former from the latter, we have contemplated various
parameters which could be critical for growth. Further, we believe that historical execution is
a realistic measure to differentiate players, but it may not be indicative of future growth and
performance. Hence, these five key parameters (or critical success factors) could gauge the
strength of a company’s domestic business and act as an effective tool to differentiate good
from the bad (or winners from losers). These include:
On the basis of above mentioned parameters and through our analysis from the survey, we
have identified few highly effective companies which have strong execution and are growing
ahead of market.
Sun and Lupin emerge as favored plays in large cap; Torrent/IPCA score in mid cap
Sun pharma and Lupin were ranked by most distributors as outperformers among large caps,
We judge strength of
while Torrent and IPCA scored in mid caps. Among MNCs, Aventis scored over other players
domestic business of each
such as GSK and Pfizer. Players such as Cipla, Ranbaxy and Cadila are facing some pressures
player on the basis of five
in terms of growth and stability but are likely to turnaround, in our view.
key parameters
Sun pharma has emerged as the undisputed choice among distributors primarily because of
its ability to identify therapeutic gap areas and launch products ahead of competition,
resulting in better mind share and market share. Second, the company has focus on medical
colleges and has innovatively built its doctors franchise by engaging them at an early stage.
Lupin scores over peers due to its focus on key opinion leaders (KOLs). The company has
actively build a wider portfolio by entering into newer therapeutic areas and is growing ahead
of peers in chronic segments such as CVS, CNS, and respiratory. Moreover, its aggressive
and highly effective field force helps it sustain growth in a highly competitive market.
Cipla, despite deep penetration and high field force productivity, has seen slow growth in
domestic market. This is largely due to instability in the field force which has further
impacted its ability to build big brands. However, we believe that Cipla can surprise the
market positively due to its higher focus on tier II and IV markets, where the company has
started witnessing high growth traction, and addressing of structural issues with reference to
its mature and generic-generic portfolio in domestic market.
Other companies like Cadila, Dr. Reddy’s, and Ranbaxy are also gearing up which is
evident from the fact that they have ramped up their field force by 22%, 94%, and 72%,
respectively, over the past two years.
In the mid-cap space, Torrent is ahead of comparable peers on account of higher focus on
the chronic segment, better field force stability, and ability to build brands. However, it lags
in terms of launching new products. Moreover, IPCA is also gaining strong momentum in all
markets and has increased divisions (12 from earlier seven) to expand into newer therapies
and tier II to IV towns. We highlight that Torrent and IPCA have expanded field force
aggressively (by 64% and 58%, respectively) which has impacted their field force
productivity (Fig. 3).
In the MNC space, Sanofi-Aventis has a clear advantage over other MNCs because of high
focus on the chronic segment, strong brand building abilities, competent sales force, and
aggressive approach in metros as well as tier II to IV towns.
Large Cap
Sun Pharma
Dr Reddy's
C ipla
Lupin
C adila
Mid-cap
Torrent Pharma
IPC A
Glenmark
MNC
Ranbaxy
Sanofi-Aventis
GSK India
Pfizer India
The competitive score card, above, measures each company on the basis of its strength in
each of the parameters, which is key end driver of our survey. We now illustrate our findings
through discussion of each of these key parameters and substantiate our preferred plays over
others.
Companies which are largely focused on the acute segment such as Ranbaxy, Dr. Reddy’s,
Cipla, and IPCA, are posting higher growth in micro markets. The acute segment continues to
have larger share of IPM (~72% of total market) and has posted better growth in the past
two years due to increased penetration of companies in tier II-IV towns and rural areas.
Among MNCs, portfolio concentration is more skewed towards acute except Sanofi-Aventis
which has build strong presence in the chronic segment, where we see growth picking up
over the past six months.
Chart 16: Players with strong focus on chronic segment to outperform market
Torrent
Sun Pharma
Sanofi…
Lupin
Cipla
Dr Reddy's
Sun, Lupin and Torrent
Cadila
have high focus on
IPCA
chronic segment
Ranbaxy
Glenmark
Pfizer
Glaxo
We believe, within the chronic segment, companies with higher market share and ability to
build successful brands will grow ahead of peers. As seen in charts 17-19, Sun Pharma has
leading market share in most specialty segments, while Lupin has posted higher growth
among peers. We highlight that the cardiovascular segment has become extremely
competitive with older molecules facing pricing pressures. Cadila and Torrent have relatively
underperformed in CVS due to pricing pressures in older molecules and lack of new product
launches. As per our survey, Cadila is facing higher attrition among peers, leading to loss of
market share in few divisions.
22
24.0 20 7.2
Industry
(%)
(%)
16 growth
16.0 17 4.8
8.0 2.4
0.0 0.0
Pharma
Aventis
Piramal
Lupin
Sanofi-
USV
MSD
Torrent
Sun
Market share (RHS) Growth (LHS)
32.0 5.2
We prefer players with
higher market share and Industry
24.0 19 3.9
growth within chronic 19 growth
(%)
(%)
16
segment 14 14
16.0 12 2.6
8.0 1.3
0.0 0.0
Ranbaxy
Cadila
Pharma
Pharma
Intas
Torrent
Lupin
Cipla
Sun
(%)
13 growth
12.0 10 7.0
6.0 3.5
0.0 0.0
Torrent
Pharma
Aventis
Piramal
Abbott
Lupin
Sanofi-
GSK
Intas
Sun
We recognize brand building as future growth driver and have identified companies with
better track records in building brands. Our survey highlights that among domestic
companies, Sun pharma leads the pack, followed by Lupin with 68% and 59% of distributors,
respectively, gauging strong brand building capability. Among MNCs, respondents believe
Sanofi-Aventis has better brand building ability. Similarly, in mid caps, Torrent, IPCA and
Glenmark have better brand building ability compared to peers.
Chart 20: 68% respondents believe Sun Pharma has better brand building ability
75
(% coverage distriibutors)
60
45
30
15
Ranbaxy
Piramal
Torrent
Glenmark
Dr Reddy
Mankind
Cadila
Pharma
Aventis
Intas
Pfizer
IPCA
Lupin
Cipla
USV
Abbott
GSK
Sun
The table 6, below, further shows that the incremental growth in top 10 brands of most
players is higher or in line with the overall growth of respective domestic business, except for
Dr Reddy’s where growth is largely driven by new products. Sun pharma has shown highest
growth in top 10 brands which further supports our preference.
Table 6: Top 10 brands are growing in line or higher than overall domestic growth
Growth (MAT Mar 2011) (%)
Top - 10 brands
Cont. to sales Overall Relative
Relative outperformance of (%) Top 10 brands domestic performance
Top 10 brands reflects
higher focus on brand Glenmark 36.9 27.6 22.4 5
building by most players Ranbaxy 36.6 15.7 9.1 7
Torrent 30.4 24.0 22.1 2
Cipla 27.9 25.0 20.6 4
Cadila 28.3 17.9 14.9 3
Sun Pharma 19.6 32.5 22.9 10
GSK 38.7 12.4 13.2 -1
Sanofi Aventis 55.1 20.0 21.2 -1
IPCA 34.7 22.0 24.4 -2
Lupin 21.0 21.6 24.3 -3
Pfizer 63.9 21.0 23.7 -3
Dr Reddy's 39.9 8.2 11.5 -3
Source: AIOCD, Edelweiss research
The chart, below, indicates that companies like Sun Pharma and Lupin are equally successful
in building new products, as Top 10 brands contribution to growth is relatively lower than the
peers. However, companies like Ranbaxy and Glenmark still have high dependency on Top 10
brands. Ranbaxy’s Top 10 brands are driving ~50% of its incremental growth, primarily due
to slower pace of new launches over the past two three years. Similarly, MNCs dependency
on top 10 brands is relatively high due to fewer product launches compared to Indian peers.
Chart 21: Lower contribution from Top 10 brands indicates higher traction from new launches
Glenmark
42 58 Pfizer
Cipla
Sanofi
34 51 Aventis
Ranbaxy
growth)
growth)
Cadila Torrent
IPCA
Dr
26 44
Reddy's
Lupin
18 37 GSK
Sun
Pharma
10 30
10 20 30 40 50 10 30 50 70 90
Top 10 brands contribution to total domestic Top 10 brands contribution to total domestic
sales (%) sales (%)
Source: AIOCD, Edelweiss research
52.0
(% of distributors)
39.0
26.0
13.0
0.0
Ranbaxy
Torrent
Glenmark
Mankind
Pharma
Intas
Pfizer
IPCA
Lupin
Cipla
Sun
Most distributors view higher traction from new launches by Sun Pharma , Sanofi Aventis and
Lupin. Sun Pharma’s ability to identify therapeutic gap area and launch products ahead of the
market are key differentiating factors behind its success. Also differentiated R&D pipeline of
Sun Pharma and Dr Reddy’s clearly give them an edge over others. Dr. Reddy’s growth
contribution from new products (78%) is highest among peers and higher than industry
(40%).
Chart 23: Field force penetration has increased over past four years
5,500
CAGR (FY08-11)
2,200 9%
1,100
0
Glenmark
Ranbaxy
Reddy's
Torrent
Cadila
Pharma
IPCA
Lupin
Cipla
Sun
Dr.
As viewed in Chart 23, Cipla, IPCA, and Cadila have the largest field force, while Sun Pharma
has not expanded its field force due to its restricted focus on Metro’s and tier I towns.
Ranbaxy’s field force expansion, through its ‘Project Virat’, from 2,500 reps to 4,200 reps,
over the past six months, has been the largest. Further, Glenmark lags its peers in terms of
penetration, but expects to expand field force by 15-20% per annum over the next two
years.
Historically, MNCs were associated with better field force stability because of higher pay
scale. However, as per the survey, Lupin, Sanofi-Aventis and Sun pharma have been ranked
as companies possessing highly effective and stable field force compared to its large cap and
MNC peers. Cipla has the highest attrition followed by Ranbaxy, while field force stability of
Dr. Reddy’s and Cadila is above average. In the mid-cap space, Torrent and Glenmark have
more stability than IPCA, Unichem, and FDC. In the unlisted space, Mankind has a stable field
force because of its highly effective incentive policy.
Chart 24: Companies with highly stable and effective field force (Survey)
100%
80%
60%
40%
20%
0%
Dr Reddy's
Glenmark
Ranbaxy
Sun Pharma
Torrent
Unichem
Mankind
Sanofi Aventis
Abbott Piramal
Cadila
Pfizer
FDC
IPCA
Lupin
Cipla
USV
GSK
7.2
GSK
Ranbaxy Cipla
4.8 Aventis Lupin
Glenmark
DRRD Cadila
2.4 Torrent
IPCA
0.0
1,000 2,000 3,000 4,000 5,000 6,000
Chart 26: Companies with strong historical growth scored well in our survey
30.0
24.1 23.7
24.0 21.9
20.1 19.9
18.4
Growth (%)
18.0
14.5
11.6
12.0 10.0 9.3
7.2 6.8
6.0
0.0
Dr Reddy's
Glenmark
Ranbaxy
Sun Pharma
Pharma
Cadila
GSK
Aventis
Torrent
Pfizer
IPCA
Lupin
Sanofi
Cipla
12
(%)
6
0
2009 2020E
Market 13 26
Share (%)
Public Private
68 71
70.0
47 47
34
Recent 35.0 22
18
(%)
16
underperformance led
by correction from 0.0
peak multiples
(9) (5)
(35.0)
(32)
(51)
(70.0)
YTD CY10 CY09 CY08 CY07 CY06
BSE HC Sensex
Source: Edelweiss research
(20) 0 20 40 60 (20) 0 20 40 60
(%) (%)
Source: Edelweiss research
(Index)
240 1.1
160 0.7
80 0.4
0 0.0
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Pharma Sensex Relative premium
Top picks
We conclude, on the basis of our distributor survey, that Sun Pharma, Lupin, Cipla, and
Torrent have a strong franchise in the domestic market and robust growth outlook.
However, after considering incremental upsides from international markets, company-
specific issues and current valuations, we expect Lupin, Dr Reddy’s, Cadila, and
Torrent to be outperformers over the next 12-18 months.
Key Risks
<10%
10-15%
>30%
15-30%
We have identified three key reasons behind higher attrition: (a) increase in demand for
medical representatives and limited supply of talent pool with companies competing for
high quality people; (b) setting up challenging field force targets with mandate to
aggressively capture market share; and (c) shift to other sectors like IT and financial
services for better incentives and growth.
Sun pharma, Lupin, and Torrent have been ranked by distributors as companies
possessing highly effective and stable field force, while Cadila, IPCA, GSK, and Cipla are
companies facing higher attrition.
80.0
(% of distributors)
60.0
40.0
20.0
0.0
Ranbaxy
Reddy's
IPCA
Unichem
Cipla
Cadila
FDC
Dr
Source: Edelweiss research
Emerging competition from MNCs and new players could lead to price war
The domestic market is being targeted by both MNCs and Indian companies. This is
further brought out by our survey where most distributors are seeing aggressive
expansion by MNCs. As seen in chart 33, these high investments have started to yield
traction for MNC players like Aventis, AstraZeneca, and MSD. Further, new players such
as Macleods, Mankind, Aristo etc. are rapidly expanding market share, giving stiff
competition to Indian counterparts. We believe this emerging competition could lead to
higher investments by existing players, while price wars could potentially hurt their
profitability in the near term.
Chart 33: MNC growth has improved over past few months
35.0
28.0
(% Y-o-Y)
21.0
14.0
7.0
0.0
Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11
Aventis Pfizer GSK
Source: AIOCD, Edelweiss research
Appendix- I
India will emerge third largest country in terms of incremental growth
Industry sources project Indian pharma market to be worth USD 55 bn by 2020 (14.5% CAGR). Interestingly, this makes
the domestic market the third largest, next to US and China, in terms of incremental growth.
80
CAGR ~17% 70
70
60 CAGR ~14.5% 55
50
CAGR
40 ~10%
35
30
20 12.6
10
0
2009 Pessimistic case Base case Aggressive case
(2020) (2020) (2020)
1 US 1 US US 9%
2 Japan 2 Japan
China 11%
3 France 3 France
5 Italy 5 China
France 4%
6 UK 6 UK
8 China 8 Spain
UK 5%
9 Canada 9 Canada
11 Brazil 11 Brazil
8%
Brazil
12 South Korea 12 Mexico
13 13 South 2%
Turkey Germany
Korea
14 India 14 Turkey
• 46% of distributors believe that large and aging population coupled with increase in prevalence of chronic diseases is
key drivers of pharma growth.
• Also, increased prevalence of chronic diseases will sustain higher growth in domestic market (currently growing at
18-20% vs. 15% of industry) due to longevity of prescription generation.
• India is also home to the largest pediatric and geriatric population, which is an attractive market in healthcare
segment (consumes 66% higher drugs).
100 75
60
80
45
30
60
(%)
15
40 0
CHD Diabetes Asthma Obesity Cancer
20 Prevalence of disease areas (%)
0
2000 2005 2010 2015 2020 2025 2030 5.0 3.8 2.8 2.8 0.2
• Increased awareness and rising per capita income have emerged (34% of the respondents) as second key growth
drivers for pharma growth, as per our survey.
• The per capita pharma spend in India significantly lags other emerging markets.
• Healthcare spending has high beta on income. Rising income will drive 73 mn people into middle or upper income
segment, leading to higher affordability and as income grows, percentage spend on healthcare rises as well.
Chart 5: India has low /capita inc. (USD) Affordability drives growth Health spend has high beta on income
100% 30.0
Brazil 690
80% 24.0
Russia 613
60% 18.0
(%)
Thailand 40% 12.0
346
20% 6.0
China 148
0%
0.0
FY06 FY10 FY20
India 50 (P) 1960 1970 1980 1990 2000 2010
Growing healthcare infrastructure, higher access and increase in government spending are other macro drivers
• 20% of distributors believe that rapid penetration of insurance and growing healthcare infrastructure is another factor
driving higher growth in pharma spending.
• USD 200 bn projected investment for creating and upgrading the healthcare infrastructure which will add growth
momentum to the pharma industry. This spend will be largely through private sector.
• Healthcare insurance posted 25% CAGR over CY05-10 and currently over 300mn people are covered by various
healthcare policies. This is likely to go up to 655 mn people by 2020.
• Higher government spending on healthcare e.g. ‘Arogya Raksha Yojana (micro health insurance plan)’ has increased
health spend in Tier IV and other micro areas. Total government expenditure has increased by a healthy 18% CAGR
over CY06-09.
Chart 6: Growing healthcare infra. Rapid insurance penetration High spending on healthcare by Govt.
50 Growth 12.5
40
CAGR 18%
2
30 10.0
20 22
(USD bn)
10 7.5
8
0
5.0
Large Pvt.
Govt. hospital
Corp. chains
hospitals
Med. Pvt.
hospitals
hospitals
14
Mini
2010 2020
3 2.5
State insurance
RSBY
Growth rate (%)
ESIC
0.0
3 7 5 9 16 Pvt insurance
Govt. employee insurance 2006 2007 2008 2009
2009 2020
Source: Industry, Edelweiss research
Brand
building
21%
New product
launches
25%
Source: Edelweiss research
• Most pharma companies have ramped up their sales force over the past two-three years in order to extend their
marketing efforts to Tier II and rural markets.
• 79% of distributors believe that pace of field force expansion by both Indian as well as MNC pharma companies is
very aggressive. Chart 6:
• 35% of distributors believe that field force expansion is one of the key strategies adopted by pharma companies to
accelerate growth.
No change in
field force
7%
Normal
14%
High
79%
• Metro and tier-I towns will continue to remain significant growth drivers because of growing urbanization, while rural
and tier II markets are gaining importance because of high income growth and penetration.
• Rural markets have grown higher (25% CAGR) than the industry owing to better penetration and increase in
affordability.
• We expect this growth momentum to sustain, taking its share from 20% of total market in 2010 to 25% in 2020.
Chart 9: Rural markets have outperformed average domestic growth in the past
6,000 1,500
CAGR 13% CAGR 25%
4,800 1,200
(USD bn)
(USD bn)
3,600 900
2,400 600
1,200 300
0
0
Rural market
Urban market
2005 2007 2005 2007
Source: McKinsey, Edelweiss research
New product launches
• 25% of the respondents believe that new product introduction is another key strategy adopted by pharma companies
to step up the growth trajectory.
• 4-5% of the industry growth has been driven by new launches in the past. However, going forward, the pace of new
launches will moderate and focus will be on building brands.
• The average value per new launch has increased consistently despite lesser products being launched. This could be
due to brand building efforts by companies.
Table 1: Value contribution from new products (>INR 100mn) has increased multi fold
2007 2008 2009 2010
Domestic market (INR bn) 288 329 366 438
No. of new introduction (NI) 4,810 4,285 4,365 4,562
Value of NI (INR bn) 22 22 24 27
Value/ NI (INR mn) 6.0 7.7 8.4 9.6
Contribution to domestic market (%) 7.5 6.6 6.7 6.2
No. of NIs above INR 100 mn 10 10 15 20
Contribution of NIs above INR 100 mn to total NI value (%) 6.2 7.5 12.3 16.1
Value of largest NIs (INR mn) 233 309 521 814
Source: IMS, Edelweiss research
• 21% of our distributors believe that focus on brand building is a key strategy adopted by various pharma companies.
• Understanding the need of building brands, companies have already started focusing on specialty promotions as well as
multi-brand marketing strategies.
• Not only the number of new introductions above INR 100 mn has doubled over the past 4 years, but their value
contribution has also increased multifold.
• Mass therapies continue to remain largest segment (contributes 67% to the market), while specialty and super
specialty therapies have grown higher than the market.
• Increased awareness (higher rate of diagnosis) and affordability are key growth drivers of specialty therapies.
• Pharma companies are carving out separate marketing divisions to monetise growth opportunities in chronic
segments. Chart 8:
Appendix- II
Survey Methodology
Objective of the survey
We conducted an extensive field study by interviewing distributors/stockists, area
managers, and medical representatives across various geographies within India, to gain
comprehensive perspective of the domestic market. This exercise had four primary
objectives:
D) To gauge performance of key focus companies: The ultimate aim of our survey
was to identify, as per distributors’ preference, companies (among Top 30 players)
that have a strong domestic franchise in terms of growth relative to the market,
ability to build brands, success of new product launches and higher field force
stability. We tried to dwell into the reasons behind outperformance/
underperformance of these companies in terms of their marketing focus, therapeutic
focus, operational strategies, and supply-chain models.
Further, we also gained insights on the structure of the domestic market and key risks to
its current growth.
Methodology
We designed a questionnaire which covers the aforesaid objectives in a structured
manner for all markets. However, a few questions were customized for tier-III/IV
markets, where our objective was to identify trends which are driving higher focus of
pharma companies in these areas. We tried to understand the characteristics of these
markets, marketing strategies adopted by companies, and challenges faced by new
players.
We split the domestic market into four zones (North, West, East, and South) and
carefully selected cities in each zone which represent an ideal mix of large market
(metros , tier I), mid-size market (tier II) and smaller markets (tier III and IV) within
each zone. We targeted primarily large and mid size distributors in each of these cities to
get a broader perspective on the market. Our distributor sample has larger retail network
(at least 70-80% of retail chemists coverage within the region), distributorship of at least
20 companies and annual turnover in the INR 50 mn to INR 750 mn range. This ensured
that the survey findings reflect a larger coverage list of companies, which helps minimize
errors.
We also interacted with a few unlisted players, medical representatives, area managers,
and regional heads, with 10-15 years of experience in respective regions, who shared
their perspectives on the market. This helped us dwell into operational models of
companies, commercial approach adopted, and current strategic perspective.
Why distributors?
Distributors also called ‘stockists’, are a key link between manufacturers and consumers.
The domestic drug distribution system is multi-layered where stockists form the first
layer and represent primary sales. They distribute products, based on secondary sales
demand, to various retail chemists, hospitals, medical professionals, and other
consumers. They are also an important link, as they handle inventory in the supply
chain. There is a sub-layer of second level distributors called ‘sub-stockists’ which caters
to a smaller area within a region. The sub-stockists help to expand reach to retailers
which are not catered to by wholesale distributors.
We highlight that distributors are more a organized section of the channel with better
understanding of players in the market and hence, in our view, have a finger on the
pulse of market.
Stokists (65,000)
Sub-stockist
Consumers
Source: KPMG
• No of companies covered :
• Visiting card :
What is the average growth rate (please tick below)? What in your view is sustainable growth?
Which are the fast-growing companies in your region and which companies are losing market share?
(Please tick relevant column below)
Which are the upcoming local players in the region? Are local players increasing activity in your region of coverage?
THERAPEUTIC AREAS
Which therapeutic areas are growing at a rapid pace? Where do you see active competition among these fast growing TA?
PRICING
o <5%
o 5-10%
o <15%
o 15-30%
o 30-50%
Which therapeutic areas do you see price increases and pricing pressures (please tick relevant column)?
STRATEGIC FOCUS
Which of these is the key strategic focus of Indian companies in recent past?
Dos u think ‘specialty focused’ field force bring in better results (Y/N)?
Which companies are very aggressive in launching new products/brands in the market?
Cipla Unichem
Sun Pharma Alkem
Ranbaxy Intas Pharma
Dr Reddy’s FDC
Torrent Pharma USV
Cadila GSK Pharma
Lupin Pfizer
Abbott Piramal Sanofi – Aventis
Glenmark Others (Please specify)
IPCA
Cipla Unichem
Sun Pharma Alkem
Ranbaxy Intas Pharma
Dr Reddy’s FDC
Torrent Pharma USV
Cadila GSK Pharma
Lupin Pfizer
Abbott Piramal Sanofi – Aventis
Glenmark Others (Please specify)
IPCA
Therapeutic area
Anti-infectives CNS
Respiratory Anti-Diabetes
Pain management Gynecology
Gastrointestinal Dermatology
Cardiac Others (please mention)
Which are the key areas where you see increase in activity level by companies?
Which companies are becoming more active or expanding coverage (in terms of new products, new therapies) or recently
started coverage in your area?
Cipla Unichem
Sun Pharma Alkem
Ranbaxy Intas Pharma
Dr Reddy’s FDC
Torrent Pharma USV
Cadila GSK Pharma
Lupin Pfizer
IPCA Sanofi – Aventis
Abbott Piramal
Others (Please specify)
What in your view are the key challenges these companies (mentioned above) could face?
o Higher attrition
o Receivables loss
o Pricing of products
SUPPLY CHAIN
What are average inventory days (please tick)? Do you see increase in channel inventory (Y/N)?
o <7 days
o 7-15 days
o 15-30 days
o <15 days
o 15-30 days
What are the key risks that you feel could impact current growth momentum in the industry?
OTHERS
Which others companies, excluding your existing list, would you like to add?
Note:
US generics gearing for more profitable growth Please refer last page of the report for rating explanation
CDH has build USD 200 mn solid franchise (80% CAGR in FY06-11) in US on the
back of higher focus on quality and services. Its recent filings focus on niche or MARKET DATA
limited competition products (including Para IVs), encompass USD 160-180 bn CMP INR 844
:
innovator market, which supports next leg of growth. CDH has three Para IVs 52-week range (INR) 941 / 542
:
opportunities in its pipeline, which offer decent upsides over next two-three years, Share in issue (mn) 204.7
:
in our view. These products also offer higher margin than current plain-vanilla M cap (INR bn/USD mn) 172.7 / 3,891.5
:
generic portfolio. We expect CDH’s US sales to post 22% CAGR over FY11-13E. Avg. Daily Vol. BSE/NSE (‘000) : 110.4
JVs (18 mths), respectively. We expect sales from the Hospira JV to ramp-up to Others : 6.5
INR 3.5-4.0 bn at peak capacity utilisation by FY13E, with PAT contribution of * Promoters pledged shares
: Nil
(% of share in issue)
INR 875 mn to INR 1 bn (CDH’s share). The incremental earnings from Hospira
PRICE PERFORMANCE (%)
JV will offset lower earnings from Nycomed, with genericisation of Pantoprazole.
Stock Nifty EW Pharma
Index
Outlook and valuations: Strong execution; initiating coverage with ‘BUY’ 1 month 13.6 8.9 5.5
CDH’s one-year forward P/E has expanded from 9x to 17x, driven by consistent 3 months 1.2 2.5 (7.0)
outperformance and strong execution across markets. However, it still trades at 12 months 48.4 11.9 18.0
10% discount to larger peers. We note that CDH’s medium-term earnings growth
(29% CAGR over FY10-13E) is best among peers and its long-term vision to
attain USD 3 bn supports downside risks to valuation. We, thus, value the stock
at 19x FY13E EPS (TP INR 960) and expect gap to narrow down with larger
peers. We initiate coverage on CDH with ‘BUY/Sector Outperformer’.
Financials
Year to March FY10 FY11E FY12E FY13E
Revenues (INR mn) 36,580 44,991 54,932 65,929
Rev growth (%) 25.0 23.0 22.1 20.0
EBITDA (INR mn) 7,798 9,856 12,289 15,001 Manoj Garg
Adj. net profit (INR mn) 4,808 6,462 8,319 10,345 +91 22 6623 3302
Shares outstanding (mn) 204.7 204.7 204.7 204.7 manoj.garg@edelcap.com
Adj. Diluted EPS (INR) 23.5 31.6 40.6 50.5
EPS growth (%) 51.0 34.4 28.7 24.4 Peril Ali
P/E (x) 35.9 26.7 20.8 16.7 +91 22 6620 3032
EV/EBITDA (x) 23.3 18.2 14.3 11.4 perin.ali@edelcap.com
ROAE (%) 34.2 33.3 32.6 31.2
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities
EdelweissLimited 53
Securities Limited
Edel Pulse: Pharmaceuticals
Investment Rationale
Domestic formulations ramp-up to contribute to higher growth and profitability
We expect domestic branded formulations to post 15% CAGR over FY10-13E, in line with
average industry growth, viz-a-viz relative under performance during FY07-10 (growth of
11% versus average industry growth of 15-16%). Domestic growth suffered since the
company was re-organising various business units and had defocused on the generics
business (CAGR of 1% over FY07-10).
Table 1: Domestic formulations to ramp-up over FY10-13E, in line with industry (INR mn)
FY07 FY10 CAGR (%) FY11E FY12E FY13E CAGR (%)
Domestic formlations 10,602 14,458 10.9 16,511 19,001 21,899 14.8
Branded generics 9,790 13,625 11.6 15,587 17,974 20,760 15.1
Generic-generics 812 833 0.9 925 1,026 1,139 11.0
Source: Company, Edelweiss research
While re-structuring of the domestic business is now complete, the management has
renewed its focus on higher-growth chronic therapies such as cardiovascular (CVS),
respiratory, neuro-psychiatry (CNS) and rheumatology, which, coupled with expansion in
field force (from 3,400 reps. in FY07 to 4,500 in FY11), has resulted in relatively higher
growth over the past nine months (Chart 1). We believe that the company is now set to
attain industry level growth over FY13E.
4.8
5.0
0.0
Q1'09
Q2'09
Q3'09
Q4'09
Q1'10
Q2'10
Q3'10
Q4'10
Q1'11
Q2'11
Q3'11
As shown in the chart 1, 9mFY11 growth performance in the domestic business has been
in line with the industry. We highlight that this outperformance is largely from CVS,
respiratory, gastro-intestinal and gynecology segments, where the company has build a
formidable franchise. These segments contribute ~59% to its overall revenues and are
growing higher than the industry, which underpins CDH’s strong franchise in these
segments. Moreover, the company’s growth will be all inclusive of metros and tier-II-IV
towns, where it has inducted ~350 people under special rural task force. This is also
evident from the results of our survey, which indicates that all coverage distributors in
tier-II and tier-IV towns see strong growth traction for CDH.
2,900 2.4
2,200 1.2
1,500 0.0
FY06 FY07 FY08 FY09 FY10 FY11
(YTD)
Field force Productivity
Source: Company, Edelweiss research
Tie-up with Bayer improves future product pipeline for domestic market
CDH has formed a 50:50 JV with Bayer Schering (Bayer), Germany, where both partners
will shift some of their existing products to the JV. Bayer will further add future potential
off-patented/patented drugs that will be supplied through CDH’s distribution network.
The JV is likely to commence operation from H2 FY12. While the company has not
disclosed the detailed functioning of the JV, its focus is likely to be largely on CVS,
diabetes, women’s healthcare, oncology and diagnostic segments.
We view this development as win-win for both partners. Through this JV, CDH can access
Bayer’s strong domestic portfolio for diabetes (where CDH currently does not have much
presence) and also its future pipeline (Bayer’s key late stage pipelines are in oncology,
CVS and CNS). Bayer, on the other hand, could capitalise on CDH’s strong distribution
and reach.
8,000 160
(USD mn)
6,000 120
Built-up franchise of USD 200
(%)
mn over six years in US
4,000 80
2,000 40
0 0
FY06 FY07 FY08 FY09 FY10 FY11
Revenue Growth
Source: Company, Edelweiss research
As shown in Chart 3, CDH’s US generics business has ramped-up from modest revenue
of INR 500 mn from five products in FY06, to INR 9.3 bn revenue by FY11E (39
products).
Over the near term, we expect CDH to launch 10-12 products each year, driving 22-25%
growth over FY13E. Moreover, we expect CDH to also monetise its Para IV/limited
competition products opportunities such as Astelin (USD 100 mn opportunity), Prevacid-
ODT (limited competition product with sales of USD 400 mn with expiry in September
2012) and Lialda (USD 291 mn opportunity; FTF; expiry in October 2012) over the next
two years. While we have build INR 276 mn and INR 473 mn of sales from Astelin in our
FY12 and FY13 estimates, respectively (expect CDH to launch the product in Q2FY12),
we currently do not factor any upside from Prevacid ODT and Lialda due to lack of
clarity. However, successful launch of these could provide decent upsides to our FY13
estimates.
Prevacid Lanzoprazole Takeda 400 Expired Oct'2012 Y Teva (FTF) and Sandoz (AG) have
-ODT launched; Limited competition
CDH entered into a second JV with Mayne (later on acquired by Hospira) in 2005 to
manufacture and supply six oncology products for global markets, with an initial
investment of USD 11 mn (CDH’s contribution to total USD 22 mn investment). Supplies
to Hospira have started from Q1FY10 and in less than two years (18 months), CDH has
recouped its initial investment and made a profit of INR 602 mn (USD 13 mn), while the
JV is yet to reach its full potential.
Overall, we expect the JV to reach peak level by FY13 with potential sales of INR 3.5-4.0
bn (CDH’s share) and 25-30% sustainable PAT margins. We estimate INR 875 mn to INR
1 bn recurring PAT per annum from the JV for CDH.
3,200
2,400
(INR mn)
1,600
800
0
FY10 FY11 FY12E FY13E
Revenue PAT
Source: Company, Edelweiss research
We believe that incremental earnings from Hospira JV will offset lower profitability of
Nycomed JV and will be highly accretive to CDH’s overall earnings.
720
540
(INR mn)
360
180
0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
Nycomed - PAT Hospira -PAT
Source: Company, Edelweiss research
We try to summarize key growth drivers with focus on achieving the said objective.
First, the company’s investment in niche segments for US generics such as transdermal
patch, oncology, vaccines and pulmonary products, which have a market potential of
over USD 160-180 bn, will be highly accretive over next three to four years. Few of
these products are already off-patent and others still under patent. The company is also
developing new drug delivery system for some of these products to file them under 505
(b) 2 routes to enjoy exclusivity. The second driver is CDH’s focus on new drug
discovery research, to become a global research-driven company in the long term. The
company has been increasing its R&D expenditure over the years and currently has 12
molecules (including two from partners) in the pipeline addressing the therapeutic areas
of metabolic disorders (diabetes, obesity and dyslipidemia) and inflammation.
dis c o v e ry o pt im is a t io n de v e lo pm e nt
P P A R alpha:
ZYH1 Dyslipidemia
gamma
M ulti-
ZY11 P ain
mo del
CB -1 Obesity,
ZY01
antago nist Diabetes
P P A R alpha:
ZYH2 Diabetes
gamma
PPAR
ZYH7 Dystipldemie
alpha
TR beta
ZYT1 Dystipldemie
ago nist
GLP -1
ZYD1 Diabetes
ago nist
GLP -1
Diabetes
ago nist
As shown in chart 6 above, 12 NCE molecules are in various stages of development, with
Out of 12 NCEs, six are in over 425 scientists dedicated for new molecular entity research at Zydus Research
human clinical trial stage
Centre. Six of these programs are currently in human clinical trials in India and three
NCEs have already got IND approval from USFDA. The company has also entered into
strategic alliances with Eli Lilly and Co. (CVS drug), Prolong Pharmaceuticals of USA and
Karo Bio of Sweden to undertake joint drug discovery and development programs.
Commercialisation of molecules will take time; nevertheless, successful launch of any
molecule could be instrumental to the company attaining its vision.
1,120
(INR mn)
840
560
280
0
FY06 FY07 FY08 FY09 FY10
NCE Research Generic Markets API & Others
Source: Company, Edelweiss research
During FY10, expenditure on R&D was INR 2.1 bn (6% of total sales). Management has
indicated that it does not plan to de-merge its R&D entity, while monetising its R&D
assets are likely to take some time (18-24 months). However, we strongly feel that in
the long run, unlocking its R&D assets can provide significant upside. The company has a
stated objective to look for out-licensing partners only once it establishes the proof of
concept (post Phase II trial). We currently do not forecast any out-licensing income or
upside from NCE research owing to lack of visibility.
Valuation
20x
960
15x
720
(INR)
10x
480
240 5x
0
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Source: Edelweiss research
Moreover, valuations based on earnings before NCE R&D are highly attractive (Table 3).
CDH has been directing ~30-35% of its R&D expenditure on NCE, for which, it currently
does not accrue to its value.
We, thus, initiate our coverage on CDH with a ‘BUY/ Sector Outperformer’
recommendation/rating. We set a target price of INR 960, valuing the company at 19x
March FY13E EPS of INR 50.4, the average one year forward multiple for large cap peers.
Key Risks
24.0
18.0
(%)
12.0
6.0
0.0
Lupin Sun Dr Reddy's Cipla Ranbaxy Industry Cadila
Pharma
The underperformance can be further illustrated with its growth in top 10 brands (~28%
of total domestic sales), which has lagged industry (Table 4). The top two brands: ATEN
(Atenolol; 4.5% of domestic revenue) and DERIPHYLIN (Theophylin; 3.4% of domestic
revenue) have pulled down performance of the domestic formulation business. Further,
growth in unbranded generics has remain muted (8-9% of domestic formulation business
and 1% CAGR over FY07-10) negatively impacting overall growth.
While most of the restructuring is over, with domestic formulations reverting back to
industry level growth (9m FY11), CDH has resumed its plans of increasing depth and
Company Description
CDH, founded in 1952 and headed by second generation entrepreneur Pankaj R Patel, is the
sixth largest company in Indian pharma market with 3.9% market share. The domestic
franchise, with widespread field force (4,500) and pan-India presence, constitute 35-40% of
total sales. The chronic segment accounts for 26% of total domestic business with largest
contribution from cardio vascular therapy (CVS), where CDH has leading market share
(6.1%) after Sun Pharma and Ranbaxy. Apart from prescription products, CDH has built a
formidable presence in nutraceuticals through its listed entity Zydus Wellness (owns 72% of
total share holding).
CDH has successfully build its international operations, with presence in branded generics
emerging markets of Brazil, Asia-Pac and Africa and plain generics regulated markets of US,
EU and Japan, which together account for 39% of CDH’s total business. Moreover,
management’s strategic focus on building strong partnerships in the US through Hospira and
Nycomed JVs has been significantly accretive to business over the past five years.
Japan US
3% generics
53%
Export Europe
formulations (France/
India Spain)
39%
consumer 21%
8%
FIIs
5%
Promoters
75%
Source: NSE
Therapeutic growth versus industry (MAT) (%) Top 10 brand performance (%)
% of Market Cadila Industry Contrbution % of Market Growth Contrbution
Therapeutic area Brands Therapy
total share growth Growth to growth total share rate to growth
Cardiovasculars 20 6.0 14.2 16.5 19.3 ATEN Chronic 4.5 56.0 12 3.7
Gastrointestinal 17 6.2 16.0 14.1 17.9 DERIPHYLLIN Chronic 3.4 90.4 4 1.0
ATORVA Chronic 3.2 10.3 17 3.5
Respiratory 10 4.8 19.5 14.5 11.5
FALCIGO Acute 3.1 54.2 (5) (1.2)
Gyneacology 10 11.2 31.1 21.9 19.9
PANTODAC Acute 2.9 16.2 15 2.9
Anti-infectives 11 1.6 0.0 13.4 0.0
OCID Acute 2.8 26.5 8 1.6
Pain 7 3.9 16.1 13.8 6.1
t MIFEGEST KIT Acute 2.3 18.9 2,866 16.8
Neurologicals 3 2.6 12.8 14.1 3.8
PRIMOLUT N Acute 2.1 46.7 7 1.1
Dermatology 3 1.8 52.0 14.4 5.8
DEXONA Acute 2.0 42.8 21 2.8
Anti diabetic 1 0.8 10.9 21.0 0.8 AMLODAC Chronic 1.9 15.0 6 0.9
Chronic contribution to growth 35.4 Total 28.3 33.1
2% 20%
Biologicals 3,600 3.6
CNS
4%
3%
2,900 2.4
Pain mgmt. Respiratory
7% 2,200 1.2
10%
Dermatology 1,500 0.0
Gastrointesti 3%
nal Anti- FY06 FY07 FY08 FY09 FY10 FY11
17% infectives Gyneacology (YTD)
11% 10% Field force Productivity
15% 28 28
14.4
Sales (INR bn)
8 21 21
6
10.8 14 14
(%)
2 3 7 7
7.2
0 0
3.6 7 6
Ranbaxy
Sun pharma
Mankind
Cadila
GSK
Pfizer
Lupin
Cipla
Dr Reddy's
Piramal
0.0
Cadila Industry
Volume Price New product introductions
Source: AIOCD, Edelweiss research
Financial Outlook
29% earnings CAGR led by strong revenue growth and operating performance
We expect CDH to pose 22% CAGR over FY10-13E, driven by (a) 59% CAGR in Hospira
JV, (b) 28% CAGR from US business, and (c) 15% CAGR in the domestic formulation
business. Over the past five years, CDH’s EBIDTA margins (ex-other operating income)
has improved from 16.7% to 19.5% in FY10, driven by operating leverage and improved
product mix. We expect EBIDTA margins to continue to expand further over FY11-13E
(110 bps expansion) to 21.3% on the back of sustain improvement in product mix and
higher scale of operations in the US.
Overall, robust sales growth coupled with strong operating performance will lead to 29%
earnings growth over FY10-13E. Moreover, strong operating performance will also lead
to its ROCE catapulting from 26% in FY10 to 38% in FY13E.
Chart 13: ROCE likely to expand from 26% in FY10 to 38% n FY13E
40.0 38
34
32.0 31
26
24.0
(%)
16.0
8.0
0.0
FY10 FY11E FY12E FY13E
Financial Statements
Du pont analysis
Year to March FY09 FY10 FY11E FY12E FY13E
NP margin 11.1 13.5 14.5 15.4 16.0
Total assets turnover 1.2 1.3 1.5 1.6 1.7
Leverage multiplier 2.1 2.0 1.6 1.3 1.2
ROAE 28.3 34.2 33.3 32.6 31.2
Valuation parameters
Year to March FY09 FY10 FY11E FY12E FY13E
Adjusted EPS (INR) 15.6 23.5 31.6 40.6 50.5
EPS YoY growth (%) 20.5 51.0 34.4 28.7 24.4
CEPS (INR) 21.0 30.0 37.6 47.9 58.6
Diluted PE (x) 54.3 35.9 26.7 20.8 16.7
Price/BV(x) 14.5 10.7 7.8 6.0 4.6
EV/Sales (x) 6.2 5.0 4.0 3.2 2.6
EV/EBITDA (x) 30.2 23.3 18.2 14.3 11.4
Dividend yield (%) 0.5 0.6 0.6 0.8 0.9
CIPLA
Turning around
Cipla has broadly underperformed the domestic market (13% CAGR versus
Reuters: CIPL.BO Bloomberg: CIPLA IN
industry growth of 14-15%) over the past three years due to decline in its mature
(~20% of domestic) and generic portfolio (20% of total domestic sales declined by
EDELWEISS 4D RATINGS
10-15%), while its focus portfolio was growing ahead of the market (19-20%
Absolute Rating HOLD
growth). We believe the company’s domestic market growth can surprise positively
Rating Relative to Sector Performer
due to higher traction from tier II-IV towns, where it has a strong foothold (as per
Risk Rating Relative to Sector Medium
our survey), while its strategy to address decline in mature and generic-generic
Sector Relative to Market Equalweight
portfolio can give higher upside from a low base.
Note:
Please refer last page of the report for rating explanation
by Africa, Middle East, and Australia. We expect regulated markets’ contribution to 52-week range (INR) : 380 / 286
soar with ramp-up in supply contracts as the company will benefit from the patent Share in issue (mn) : 802.9
expiry in US and EU where it is one of the early filers of DMF/ANDA, through M cap (INR bn/USD mn) 257.7 / 5,801.2
:
partners, for some blockbuster drugs. We estimate 17% CAGR for ROW markets. Avg. Daily Vol. BSE/NSE (‘000): 1,625.9
forward. The combined addressable market (single and combination products) in * Promoters pledged shares
: NIL
(% of share in issue)
ROW/EU is USD 2.3 bn/USD 6 bn. We expect Cipla to get early approvals for ROW
PRICE PERFORMANCE (%)
markets, while launch of combination inhalers in EU will be a long term driver.
Stock Nifty EW Pharma
Index
Outlook and valuations: Positive growth catalyst; upgrade to ‘HOLD’ 1 month 9.9 8.9 5.5
We expect Cipla’s revenue (ex-tech income) to post 15% CAGR over FY10-13E, 3 months (8.3) 2.5 (7.0)
driven by growth in India and formulation exports. We believe, with higher growth 12 months (1.3) 11.9 18.0
in the domestic formulation business and lower base effect of licensing income,
EBIDTA margin is likely to expand 160 bps over FY10-13E. We value the company
at 19x FY13E, in line with the industry and set a 12 months price target of INR 350
per share. Hence, we upgrade our recommendation on the stock from ‘REDUCE’ to
‘HOLD’. We rate the stock ‘Sector Performer’ on relative returns basis.
Financials
Year to March FY10 FY11E FY12E FY13E
Revenues (INR mn) 56,057 62,465 71,260 82,819
Rev growth (%) 7.1 11.4 14.1 16.2
Manoj Garg
EBITDA (INR mn) 13,795 13,569 16,128 19,311
Adj Net profit (INR mn) 10,050 9,967 12,195 14,867 +91 22 6623 3302
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. EdelweissLimited
Edelweiss Securities Securities Limited
71
Edel Pulse: Pharmaceuticals
400 20x
300 16x
(INR)
12x
200
100
0
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Company Description
Owned and managed by Dr. Y.K. Hamied, a second generation entrepreneur, Cipla is India’s
third largest company by domestic sales. The company’s revenues (excluding tech fees) and
profits have posted 17% and 13% CAGR over FY06-10 to INR 65 bn and INR 12 bn in FY10,
respectively. Domestic formulations contributed 47% to total FY10 revenues (excluding tech
fees) and posted 14% CAGR over FY06-10. With a market share of ~5%, Cipla is the third
largest player in the domestic market, with leadership positions in ARTs, respiratory and
urology. The company’s export sales (excluding tech fees) posted 22% CAGR over FY06-10
to INR 28 bn in FY10. Africa, with 34% share, is the largest contributor to exports, followed
by the Americas (26%) and Europe (17%).
North/South Africa
America 42%
Domestic 21%
formulations
47%
ROW
43%
EU
14%
Australia
12%
Source: Edelweiss research
FII's
15%
MF & inst
19%
Source: NSE
Therapeutic growth versus industry (MAT) (%) Top 10 brand performance (%)
% of Market Cipla Industry Contrbution % of Market Growth Contrbution
Therapeutic area Brands Therapy
total share growth Growth to growth total share rate to growth
Respiratory 28 19.2 19.9 14.5 29.1 SEROFLO Chronic 3.8 62.4 18.4 3.7
Anti-infectives 25 7.1 16.1 13.4 22.1 ASTHALIN Chronic 3.2 88.7 19.1 3.3
Gyneacology 13 14.6 29.2 21.9 18.1 MTP KIT Acute 3.1 34.8 246.0 14.0
CVS 12 4.6 14.5 16.5 9.6 NOVAMOX Acute 3.1 32.0 9.7 1.7
FORACORT Chronic 2.9 54.2 34.8 4.8
Gastro-intestinal 8 3.7 14.1 14.1 6.1
AEROCORT Chronic 2.8 100.0 15.1 2.3
Pain mgmt. 2 2.1 11.0 13.8 1.5
MT PILL Acute 2.8 40.0 (4.4) (0.8)
CNS 2 1.8 26.7 14.1 3.1
CIPLOX Acute 2.3 23.2 14.1 1.8
Dermatology 2 1.9 18.3 14.4 1.6
BUDECORT Chronic 2.1 70.6 15.4 1.8
Anti - diabetics 1 0.6 18.7 21.0 0.6 AMLOPRES AT Chronic 1.8 18.6 5.2 0.6
Chronic contribution to growth 42.4 Total 27.9 33.1
FY07
FY08
FY09
FY10
8% Gyneacology Dermatolog
13% y diabetics
1.6% 0%
Field force Productivity
15% 28
16.0 6
Sales (INR bn)
21
12.0 1 6 Industry
(%)
14 growth
8.0 3 7
12
4.0 0
6
Ranbaxy
Cadila
Pharma
GSK
Pfizer
Lupin
Cipla
Reddy's
0.0
Sun
Dr
Cipla Industry
Volume Price New product introductions
Source: AIOCD, Edelweiss research
Key Risks
Financial Statements
Du pont analysis
Year to March FY09 FY10 FY11E FY12E FY13E
NP margin (%) 19.6 18.8 16.5 17.6 18.4
Total assets turnover 1.00 0.93 0.94 0.95 0.97
Leverage multiplier 1.22 1.13 1.03 1.03 1.02
ROAE (%) 23.95 19.59 15.88 17.19 18.37
Valuation parameters
Year to March FY09 FY10 FY11E FY12E FY13E
Adjusted diluted EPS (INR) 12.1 12.5 12.4 15.2 18.5
EPS YoY growth (%) 50.4 3.6 (0.8) 22.4 21.9
CEPS (INR) 14.4 14.6 15.4 18.5 22.1
Diluted PE (x) 26.6 25.6 25.9 21.1 17.3
Price/BV(x) 5.7 4.4 3.9 3.4 3.0
EV/Sales (x) 4.9 4.5 4.0 3.5 3.0
EV/EBITDA (x) 20.8 18.5 18.6 15.5 12.7
Dividend yield (%) 0.6 0.6 0.9 1.1 1.3
initiatives, which had impacted growth in FY09, are now contributing to better Rating Relative to Sector Outperformer
performance and incrementally higher returns as inventory in channel has dipped Risk Rating Relative to Sector High
to 7-8 days versus 15-21 days (best among peers). Sector Relative to Market Equalweight
Note:
Please refer last page of the report for rating explanation
US pipeline of limited competition products
DRRD has the most interesting pipeline of limited competition and Para IV
products (34 Para IV, 18 have FTF status), however execution of the same is
MARKET DATA
critical to attain the goal of USD 1bn revenue from current base of USD 350 mn
CMP : 1,656
(FY10) in the US. We expect US to post 27% CAGR over FY10-13E led by ramp-up
52-week range (INR) : 1,855 / 1,160
in sales from existing products such as Omeprazole OTC, Prevacid and Tacrolimus Share in issue (mn) : 168.9
and new product launches such as Fondaperinux, Finestride, Olanzapine, M cap (INR bn/USD mn) :279.7 / 6,314.2
Ziprasidon and Rivastigmin. Avg. Daily Vol. BSE/NSE (‘000) : 448.5
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities
EdelweissLimited 79
Securities Limited
Edel Pulse: Pharmaceuticals
1,600 14x
1,200
(INR)
10x
800
6x
400
0
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Company Description
ROW
17%
Biotech
2%
Germany
(Betapharm)
10% EU US
3% 24%
Promoters
26%
Retail & others
34%
MF & inst
13%
FII's
27%
Source: NSE
Domestic Snapshot
Growth versus industry (%)
Mar 2011 (Month) MAT (Mar-11)
CAGR (5yr)
Incl bonus Excl bonus Incl bonus Excl bonus
Company growth 13.5 13.5 10.6 10.5 18.4
Industry growth 13.8 13.1 15.0 14.3 14.4
Relative performance
Therapeutic growth versus industry (MAT) (%) Top 10 brand performance (%)
% of Market Dr Industry Contrbution
Therapeutic area % of Market Growth Contrbution
total share Reddy's Growth to growth Brands Therapy
total share rate to growth
Gastro 24 4.5 12.5 14.1 28.3
OMEZ Acute 9.9 53.1 9.8 9.3
CV 21 3.6 10.1 16.5 20.1
NISE Acute 6.9 48.3 (7.5) (5.8)
Pain mgmt. 12 4.1 (0.7) 13.8 (0.8) STAMLO Chronic 4.7 20.6 4.4 2.1
Anti-infectives 10 1.0 9.9 13.4 9.0 OMEZ D Acute 3.2 26.2 11.6 3.5
Anti - diabetics 6 2.3 17.0 21.0 9.2 STAMLO BETA Chronic 3.2 12.9 3.6 1.1
Respiratory 5 1.5 23.1 14.5 10.8 ATOCOR Chronic 2.9 5.2 7.2 2.0
RAZO Acute 2.8 13.7 8.2 2.2
Dermatology 5 2.4 30.5 14.4 13.4
MINTOP Acute 2.2 48.9 16.8 3.3
Gyneacology 4 0.1 7.7 21.9 3.2
CLAMP Acute 2.2 2.9 24.5 4.4
CNS 1 0.4 7.4 14.1 0.9
ECONORM Acute 2.1 10.3 28.4 4.8
Chronic contribution to growth 40.9
Total 39.9 26.8
10.6% 28
12.0 6
Sales (INR bn)
21
8.0 Industry
3 14 growth
8
(%)
4.0 7
6
3 0
0.0 (0)
Ranbaxy
Pharma
Pfizer
Lupin
Cipla
Cadila
GSK
Reddy's
Sun
Dr Reddy's Industry
Dr
(4.0)
Volume Price New product introductions
Source: AIOCD, Edelweiss research
Key Risks
Rupee appreciation
Rapid rupee appreciation could impact our sales estimate, especially on international
revenues which are currently based on a currency estimate of USD/INR of INR 46.
Regulatory issues
Regulatory issues including product approval delays, unfavorable litigation outcomes,
and potential future adverse inspections from USFDA are structural negatives for DRRD.
Financial Statements
Du Pont Analysis
Year to March FY09 FY10 FY11E FY12E FY13E
NP margin 10.3 14.0 15.8 18.7 17.1
Total assets turnover 1.1 1.3 1.3 1.5 1.4
Leverage multiplier 1.5 1.5 1.3 1.1 1.0
ROAE 17.4 26.3 27.0 31.4 25.1
Valuation parameters
Year to March FY09 FY10 FY11E FY12E FY13E
Adj. Diluted EPS (INR) 44.9 49.6 67.2 101.4 103.1
EPS YoY growth (%) 124.3 10.3 35.5 50.9 1.7
CEPS (INR) 71.0 81.2 94.6 130.9 135.1
Diluted PE (x) 36.8 33.4 24.6 16.3 16.1
Price/BV(x) 7.9 7.4 6.0 4.5 3.7
EV/Sales (x) 4.3 4.0 3.7 2.8 2.4
EV/EBITDA (x) 19.8 17.8 16.7 10.8 10.1
Dividend yield (%) 0.4 0.7 0.5 0.6 0.9
LUPIN PHARMA
Growth evident; strong outlook
24% (CAGR) over FY05-10. This is further evident through our extensive
distributor survey, which validates LPC’s strong domestic franchise led by wider EDELWEISS 4D RATINGS
therapy coverage (chronic 41% of total sales), strong traction from new Absolute Rating BUY
launches, and effective field force. We expect the company’s growth momentum Rating Relative to Sector Outperformer
to sustain in the domestic market and estimate 18% CAGR over FY11-13E. Risk Rating Relative to Sector Low
to expand 600 bps to 24-25% over FY13-14E. 52-week range (INR) : 519 / 324
LPC’s solid base in US generics (USD 350 mn) with a large pending pipeline of 90 Avg. Daily Vol. BSE/NSE (‘000) : 1,107.9
products (50-60 ANDA approvals expected in next 2-3 years) including niche
SHARE HOLDING PATTERN (%)
segments such as OC, ophthalmology as well as Para IV (13 FTFs with four being
exclusive), imparts long-term growth visibility. However, there could be some Promoters* : 47.0
pressures in the near term, largely due to genericization of Lotrel and delay in MFs, FIs & Banks : 20.1
Others : 11.0
Execution slippage in US branded formulations poses key risk * Promoters pledged shares
: NIL
(% of share in issue)
US branded formulations faces key challenge of possible genericization of Antara
and Suprax, although management is confident of mitigating these risks through PRICE PERFORMANCE (%)
effective product life cycle management. Further, with no visible product pipeline Stock Nifty EW Pharma
Index
and expected delay in launch of Allernaze (FY13E), we expect a moderate 11%
1 month 6.3 8.9 5.5
CAGR in US branded formulations over FY11-13E.
3 months (10.3) 2.5 (7.0)
500
16x
400
12x
(INR)
300
200 7x
100
0
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Multiple
Cymbalta Duloxitine Eli Lilly 2,500 June'13 Para-IV
players
Oracea Doxycycline Galderma 240 June'13
Niacin Niaspan Abbott 330 3 Sep'13 Para-IV
Multiple
Lyrica Pregabalin Pfizer 1,596 Oct'13 Para-IV
players
Lunesta Eszopiclone Sepracor 761 4 May'14 Para-IV
Ultram Tramedol 200 2 May'14
Loestrin 24 Norethindrone and Ethinyl Warner Chillcot 357 2 Julu'14
Multiple
Namenda Memantine Forest Labs 1,300 Jan'15 Para-IV
players
Welchol Daiichi Sankyo 30 3 2015 Para-IV
Company Description
Promoted by Dr. Desh Bandhu Gupta, a first generation entrepreneur, LPC is India’s fifth
largest company by domestic sales. The company’s revenue and profit (ex-IP related
revenues) have posted 29% and 40% CAGR over FY06-10 to INR 49 bn and INR 6.8 bn in
FY10, respectively. Its domestic formulations contributed 28% to total FY10 revenues and
posted 22% CAGR over FY06-10 to INR 13.3 bn in FY10. With a market share of ~2.8%, LPC
is the tenth largest player in the domestic market with six products in the top 300 pharma
brands in India. The company’s export sales posted 39% CAGR during FY06-10, growing to
INR 32 bn in FY10. US formulations contributed 35%, with Japan and Europe formulations
contributing 14% to FY10 sales.
Europe
6%
US
40%
FII's
Promoters
23%
47%
MF & inst
19%
Source: NSE
Therapeutic growth versus industry (MAT) (%) Top 10 brand performance (%)
% of Market Lupin Industry Contrbution % of Market Growth Contrbution
Therapeutic area Brands Therapy
total share growth growth to growth total share rate to growth
Anti infectives
34 4.6 15.4 13.4 20.4 TONACT Chronic 3.8 9.6 27.7 4.1
(incl TB)
RAMISTAR Chronic 2.1 16.5 20.4 1.8
CVS 22 4.3 35.2 16.5 31.1
GLUCONORM G Chronic 2.1 7.2 45.6 3.2
Respiratory 12 4.3 21.4 14.5 10.2
R-CINEX Acute 2.0 52.6 19.7 1.6
Gastrointestinal 7 1.7 23.8 14.1 6.5
BUDAMATE Chronic 2.0 19.4 30.9 2.3
Anti-diabetics 7 3.8 36.6 21.0 9.8
LUPENOX Chronic 2.0 13.9 12.9 1.1
CNS 5 2.2 30.6 14.1 6.1 L CIN Acute 1.8 13.6 11.9 0.9
Chronic contribution to growth 57.1 ESIFLO Chronic 1.8 15.4 23.7 1.7
TAZAR Acute 1.7 10.2 23.3 1.6
RABLET Acute 1.7 11.6 25.6 1.7
Total 21.0 20.1
12%
21% 3,100 4.6
Others Chronic
10% 41% 2,700 3.7
Anti-
Nsaids diabetics
2,300 2.8
2% 6%
Gastrointes 1,900 1.9
CNS
tinal
5%
6% 1,500 1.0
Respiratory FY11E
FY06
FY07
FY08
FY09
FY10
Antibiotoics 9%
18% Anti TB
11%
Field force Productivity
Growth composition (MAT Mar 2011) Relative performance to peers (MAT Mar 2011)
30.0 35
25%
24.0 28
Sales (INR bn)
12 21 Industry
18.0 15%
(%)
growth
14
12.0 2 6
7
3
6.0 11 0
6
Ranbaxy
Pharma
Pfizer
Lupin
Cipla
Cadila
GSK
Reddy's
0.0
Sun
Dr
Lupin Industry
Volume Price New product introductions
Source: AIOCD, Edelweiss research
Key Risks
Financial Statements
Income statement (INR Mn)
Year to March FY09 FY10 FY11E FY12E FY13E
Income from operations 38,523 48,359 56,693 64,939 75,280
Net revenues 37,761 47,405 55,747 63,956 74,227
Other operating income 762 954 946 983 1,053
Materials cost 16,043 19,694 22,968 26,286 30,359
Employee cost 4,871 5,872 6,968 7,995 9,130
R&D cost 2,228 3,438 3,958 4,477 5,196
Selling, admin and general expenses 7,839 9,627 11,205 12,471 14,474
Total operating expenses 30,981 38,631 45,099 51,229 59,159
EBITDA 7,541 9,728 11,594 13,710 16,121
Depreciation and amortisation 880 1,239 1,698 1,854 1,817
EBIT 6,661 8,489 9,896 11,856 14,303
Interest expense/(income) 499 385 337 255 270
Other income (incl. forex gain/(loss)) 192 282 325 730 1,086
Profit before tax 6,355 8,386 9,884 12,331 15,119
Provision for tax 983 1,360 1,186 2,466 3,024
Core profit 5,372 7,026 8,698 9,865 12,095
Extraordinary items (295) (29) - - -
Profit after tax 5,666 7,055 8,698 9,865 12,095
Minority interest & others 62 180 226 256 314
Reported profit after minority interest 5,604 6,875 8,472 9,608 11,781
Adjusted PAT after Minority interest 5,266 6,841 8,472 9,608 11,781
Equity shares outstanding (mn) 414 445 445 445 445
EPS (INR) basic 12.8 15.4 19.1 21.6 26.5
Diluted shares (mn) 414 445 445 445 445
Adjusted EPS (INR) diluted 12.7 15.4 19.1 21.6 26.5
CEPS (INR) 14.9 18.2 22.9 25.8 30.6
Dividend per share (INR) 2.6 2.9 3.9 4.4 5.5
Dividend payout (%) 20.1 18.6 20.6 20.6 20.6
Du pont analysis
Year to March FY09 FY10 FY11E FY12E FY13E
NP margin 14.1 14.4 15.2 15.0 15.9
Total assets turnover 1.4 1.4 1.3 1.3 1.3
Leverage multiplier 2.0 1.7 1.4 1.3 1.2
ROAE 39.3 34.3 28.0 24.4 23.9
Valuation parameters
Year to March FY09 FY10 FY11E FY12E FY13E
Adj. diluted EPS (INR) 12.7 15.4 19.1 21.6 26.5
EPS YoY growth (%) 17.6 21.0 23.8 13.4 22.6
CEPS (INR) 14.9 18.2 22.9 25.8 30.6
Diluted PE (x) 32.4 26.8 21.6 19.1 15.6
Price/BV(x) 12.0 7.1 5.3 4.2 3.4
EV/Sales (x) 4.7 4.0 3.2 2.7 2.3
EV/EBITDA (x) 24.1 19.8 15.8 12.9 10.5
Dividend yield (%) 0.6 0.7 1.0 1.1 1.3
Promoters* : 63.8
We estimate INR 74 per share upside from positive FDA-DOJ resolution MFs, FIs & Banks : 12.0
Positive resolution of the FDA-DOJ issue could be another positive trigger and
FIIs : 7.5
enable RBXY to cover lost ground in the US. We believe recovery in the US base
Others : 16.7
business sales, post resolution, is likely to be gradual and more accretive to
* Promoters pledged shares
: NIL
earnings than sales, as assets have been underutilized and fixed costs have (% of share in issue)
soared due to higher legal and consultation costs. We estimate incremental EPS PRICE PERFORMANCE (%)
of INR4.6 per share (option value of INR 74) on back of positive resolution. Stock Nifty EW Pharma
Index
Outlook and valuations: Fairly valued; initiating coverage with ‘HOLD’ 1 month (0.6) 8.9 5.5
Current valuations, in our view, already factor in potential upsides in the base 3 months (17.2) 2.5 (7.0)
business. However, positive resolution of the FDA-DOJ issue and/or clarity on 12 months 5.1 11.9 18.0
Lipitor launch could be potential triggers for the stock. We initiate coverage with
‘HOLD/Sector Performer’ recommendation/rating with SOTP-based value of
INR 432 per share, valuing the base business at INR 338 per share (20X one
year forward PE). NPV of Para IV is INR 94 per share. Our estimates on core
earnings fully reflect the benefits of revival in its base business operations.
Financials
Year to December CY09 CY10 CY11E CY12E
Revenues (INR mn) 74,529 87,106 102,450 111,900
Rev growth (%) 0.4 16.9 17.6 9.2
EBITDA (INR mn) 6,106 16,802 22,600 22,500 Manoj Garg
Adjusted net profit (INR mn) 3,586 12,929 14,989 14,548 +91 22 6623 3302
Shares outstanding (mn) 420.4 421.0 421.0 421.0 manoj.garg@edelcap.com
Adj. Diluted EPS (INR) 8.5 30.7 35.6 34.6
EPS growth (%) 60.5 260.6 15.9 (2.9) Peril Ali
P/E (x) 55.0 15.2 13.1 13.5 +91 22 6620 3032
EV/EBITDA (x) 35.3 12.1 9.0 8.6 perin.ali@edelcap.com
ROAE (%) 9.0 28.1 27.1 20.4
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities
EdelweissLimited
Securities99
Limited
Edel Pulse: Pharmaceuticals
Investment Rationale
1,800
1,700
business growth of 14% in
CY11E
1,600
1,500
1,400
CY10 CY11
Base Para IV
Source: Edelweiss research
RBXY has identified seven priority markets—India, Brazil, Mexico, South Africa, Nigeria,
CIS, and Romania—within EMs, which are currently contributing over USD 100 mn each
and will continue to drive strong organic growth, in our view. India is the key component
of the company’s EM strategy as it is committed to be No. 1 (in terms of market share)
through both organic as well as inorganic initiatives. Similarly, in other EMs, the focus
will be to grow profitably by leveraging Daiichi- Sankyo’s pipeline. Daiichi-Sankyo, in its
mid-term business plan, has guided to 23% CAGR from EMs over FY10-13 where RBXY
will be used as a front-end vehicle.
Table 2: Daiichi’s guidance implies 23% growth in EM through RBXY (Yen bn)
FY10 FY13E Growth (%)
Net sales 960.0 1150.0 6.2
Japan 470.4 494.5 1.7
US 220.8 310.5 12.0
EU 115.2 149.5 9.1
ASCA* 86.4 161.0 23.1
Others 67.2 34.5 (19.9)
Ranbaxy 148 270 22.2
Source: Company, Edelweiss research
Note: * ASCA is term used for emerging markets outside US, EU and Japan
9,600 12.0
(INR mn)
(%)
6,400 8.0
3,200 4.0
0 0.0
CY07 CY08 CY09 CY10
India sales (excl consumer) Ranbaxy growth IPM growth
Source: Company, Edelweiss research
Others
CVS
Urology 9% 15% Chronic
4% 28%
Dermatology
9%
Anti infective
35%
Source: AIOCD, Edelweiss research
In most therapeutic areas, except CVS, RBXY has lost market share (Table 3) which is
evident from the fact that growth in most therapies has been lower than industry.
Daiichi-Sankyo’s post acquisition strategy lays strong focus on growth from the domestic
market. Consequently, RBXY management has renewed its strategic focus with
significant investments over CY11 to regain leading market share in India. Management
has undertaken several initiatives under Project Viraat such as increasing reach (field
force has been expanded from 2,500 to 4,300), portfolio optimization, new launches (60
till date), hospital focus as well as shifting of the operational team from Delhi to Mumbai.
While the company is a leader in metros and tier-1 markets with more than 6.5% share,
the focus is to expand reach to tier II and IV towns to capitalize on the penetration-
driven growth opportunity.
Though it is early to estimate the impact of Project Viraat, growth over the past three
months (as seen in monthly growth trend) is a positive indicator, with initial signs of
turnaround in the domestic market. Over the past three months, RBXY has outpaced the
industry growth and grew by 26-28% in Dec-Feb 2011 (chart 4). Moreover, as per our
distributor survey, feedback is positive, especially from tier II and IV towns, which shows
off late quicker pick up of RBXY’s products. We expect its domestic business to post 15%
CAGR over CY10-12E.
24.0
Over last three months
(% Y-o-Y)
12.0
6.0
0.0
May-10
Jan-11
Mar-11
Oct-10
Dec-10
Sep-10
Apr-10
Jun-10
Jul-10
Aug-10
Nov-10
Feb-11
IPM Ranbaxy
Source: AIOCD, Edelweiss research
CY10
5.7 5.5
5.6
3.0
2.8
0.1
0.0
CY11E
CY12E
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
CY08
CY10
Source: Edelweiss research
RBXY is consolidating its position in EU by lowering the cost base. The company has also
closed its London marketing office as well as scaled down operations in many non-
profitable countries. Similarly, it has also divested its stake in China, Vietnam, and Japan
as part of the re-structuring exercise. It has further realigned its R&D strategy by
transferring NDDR (New Drug Discovery Research) unit to Daiichi-Sankyo, saving USD
20-25 mn annually.
Moreover, synergies with Daiichi-Sankyo for launching its patented products in India and
other EMs coupled with its recent initiatives on developing more profitable field force
franchises will further aid margin expansion.
Dewas and Paonta Sahib (under AIP). Post this ban, the revenue of the company
declined from USD 106 mn per quarter to USD 44 mn per quarter in Q4CY09. Although
base business revenue of US has picked up, off late, led by higher market share of
Valtrex post exclusivity, however, company is still incurring higher manufacturing and
legal costs in US. Positive resolution of the FDA-DOJ issue will enable RBXY to optimise
costs in the US generics business, wherein the company is currently manufacturing
products out of the US Ohm facility (at higher cost than India), while on other, it is also
incurring higher legal and consulting fees (USD 68 mn in CY09) to resolve the FDA issue.
We believe post resolution of import alert on Dewas and Ponta Sahib, utilisation of these
assets will be higher, resulting in positive operating leverage.
Table 6: Future Para IV pipeline addresses USD 18 bn innovator market (USD mn)
No. of
Launch market
Product generic CY11E CY12E CY13E CY14E
date size
players
Aricept Nov'10 2,300 2 99
Caduet Nov'11 300 1 18 35
Lipitor Nov'11 5,300 2 250
NPV of Para-IV pipeline is Provigil Apr'12 1,000 4 50
INR 94 per share
Oxycontin Apr'12 380 46
Actos Aug'12 3,100 3 124
Diovan Sep'12 2,492 2 150 75
Valcyte Mar'13 270 1 54 36
Rapamune Jan'14 211 2 19
Nexium FTF May'2014 2,675 1 321
Total Para IV 366 255 204 451
Source: Edelweiss research
Among the future Para IV pipeline, Lipitor is the most exciting PIV opportunity. It is a
blockbuster drug with US sales of USD 5.3 bn and RBXY is entitled to FTF exclusivity on
the product. Though the company’s success with all other Para IVs, post FDA import ban,
cannot be extrapolated to Lipitor launch, timely launch during the exclusivity period
(November 2011) could have a large bearing on valuations. We believe there is
uncertainty on RBXY’s ability to launch Lipitor by November 2011, given its current
import ban. Unlike earlier Para IVs, Lipitor application has been filed out of the Ponta
Sahib facility which is under serious allegation of fraudulent data and currently AIP
(Application Integrity Policy).
Although media reports suggest that validity assessment at the Ponta Sahib facility has
already begun, which is a step closure to the final inspection of the facility to revoke the
AIP, the timeline of the same cannot be ascertained. Moreover, Mylan’s suit against
USFDA seeks clarity on approval status of RBXY’s ANDA for Lipitor and has further raised
doubts in investors’ minds.
However, the FDA has filed an opposition to Mylan’s preliminary injunction and requested
the court dismiss the same. FDA has further stated that its determination of RBXY's
eligibility for exclusivity will necessarily be intensely fact-driven, entailing, among other
things, an evaluation of whether the data in the company’s atorvastatin application is
unreliable. FDA is currently engaged in ongoing and confidential discussions with RBXY to
resolve issues identified in the AIP letter.
Pfizer has recently introduced co-pay card system which allows 33% discount over the
current market price for a month’s supply. This will enable the company to retain market
share and dampen pricing for generic Lipitor, thereby lower revenue for RBXY and
Watson during exclusivity.
The scenario assumes limited competition post 180 days’ exclusivity (4-5 additional
players), which implies that price erosion will not be at commodity levels, resulting in
meaningful sales post exclusivity. We expect Teva and Mylan to launch by May 2012,
while the 30 months’ stay on Dr Reddy’s and Kudco expires on April 12 and they may
launch the product at risk. In either case, we believe competition should not exceed
beyond six-seven players until end CY12, which will help early entrants post decent
sales.
Overall, we have build NPV of INR 32 per share during exclusivity and INR 37 per share
as recurring earnings post exclusivity from Lipitor for RBXY, in this scenario.
While technically there is no limit on how long RBXY could park its exclusivity, we see a
number of swing factors such as: (i) RBXY will do this only in case it is sure that its
ANDA is approvable and FDA issues could be resolved in the near term; (ii) we believe
FDA will prefer multiple generics to come in to the market for such a large product and
hence could grant approval to other generic players; and (iii) Teva and Mylan can settle
with RBXY to launch during the exclusivity period
Fair value of base business (ex 338 338 338 338 338
Lipitor) (INR)
NPV of Para IV 73 73 73 73 73
(ex Lipitor) (INR)
Target price (INR) 480 448 432 432 411
% impact to our 11.1 3.7 0.0 (4.9)
target price
Source: Edelweiss research
Post FDA ban and import alert, RBXY’s US business sales plummeted from USD 106 mn
in Q2CY08 to USD 44 mn in Q4CY09 (ex one-offs; current run rate is USD65-70mn
USD). We believe post resolution, recovery in the US business will be gradual and is
likely to be more accretive to earnings than revenue. RBXY is currently manufacturing
products out of the Ohm facility in the US where manufacturing cost is higher than in
India, and on other hand the company has incurred high fixed costs on consultants and
legal resources to resolve the FDA-DOJ issue.
Moreover, positive resolution of the issue will also bring clarity on the monetization of its
FTF pipeline along with other niche opportunities such as Penems (potential USD 50-60
mn revenue in the first year of launch). RBXY is the second generic company (Orchid
Pharma was first) to file ANDAs for both Imipenem (base patent expired in September
2009 in US; no generic approval) and Meropenem (base patent will expire in September
2010 in US). Penems require dedicated manufacturing facilities and are, therefore,
expected to be limited competition products. Overall, there are just five players who
have filed DMFs for both these products, making it a lucrative opportunity for RBXY.
Currently, Hospira (through Orchid ANDA) and Sandoz are marketing Meropenem in the
US. Despite Imipenem base patent expiry in September 2009, no generic has been
approved in the US so far (most likely RBXY has FTF status on Imipenem). We believe
post resolution of the Dewas issue and approval for Penems, RBXY will be able to launch
these products in the market. We are of the view that Carbapenem launch can add USD
50-60 mn revenue for RBXY within the first year of launch.
Saving in manufacturing cost and export benefits 116 Assuming 50 bps expansion in EBIDTA due to
saving in manufacturing cost and 1% of export
benefits on incremental exports
We estimate the penalty to range from USD 200-400 mn (impact of INR 20-40 per
share). We believe the penalty could be a short-term negative for the stock; however,
complete resolution of the FDA issue is a long-term positive for the company.
24-05-10 Genzyme Allston (US) Manufacturing Genzyme agreed to pay Equivalent to 18.5% of the
violations USD175mn under consent revenue Genzyme received
decree from selling these products
Valuation
640
32x
480
24x
(INR)
320 16x
160 8x
0
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Source: Edelweiss research
Key Risks
Slower recovery in base business profitability
We have assumed 400 bps expansion in operating margins over the next two years in
the base business driven by change in product mix and cost optimization. Slower-than-
expected recovery in base business margins can impact our earnings estimate.
Company Description
RBXY, incorporated in 1961, is India’s largest pharma company with presence in domestic,
emerging, and regulated markets. The company has strong presence in the domestic market
and ranks No. 2 as per IMS. Over the years it has build a well diversified model with presence
in various international markets (including LATAM, Europe, Russia, Africa, Asia, US and
Canada) which renders sustainable growth to overall business. Also, the company,
historically, has been successful in developing a strong FTF/exclusivity product pipeline
(launched products such as Sumatriptan, Valacyclovir, Oxcarbazepine and Aricept in US over
past two years) and despite an overhang from AIP imposed by USFDA in 2008, has been
successful in monetising these opportunities. In 2008, the second generation promoters sold
their stake to Daiichi Sankyo, which now owns ~64% in the company.
Europe, CIS,
Africa
28%
US & Canada
35%
FII's
7%
MF & inst
12% Promoters
64%
Source: NSE
Therapeutic growth versus industry (MAT) (%) Top 10 brand performance (%)
Ranbax % of Market Growth Contrbution
% of Market Industry Contrbution Brands Therapy
Therapeutic area y total share rate to growth
total share growth to growth
growth
REVITAL Acute 5.7 87 17 8.2
Anti infective 35 8.1 6.8 13.4 21.7
STORVAS Chronic 5.5 22 17 7.8
CVS 16 4.9 20.2 16.5 25.5
MOX Acute 4.7 41 (1) (0.6)
Pain mgmt. 9 6.5 18.5 13.8 13.9 VOLINI Acute 4.6 49 49 14.8
Dermatology 9 8.1 12.1 14.4 9.1 CIFRAN Acute 4.0 34 (3) (1.2)
Gastro-intestinal 6 2.5 1.1 14.1 0.7 ZANOCIN Acute 2.6 20 8 1.9
CNS 6 3.6 5.0 14.1 2.6 CEPODEM Acute 2.6 13 25 5.0
9% 15% Chronic
3,900 7
16.0 15% 35 28
28 Industry21
Sales (INR bn)
11%
12.0 6 21 growth
14
14
(%)
8.0 6 7
3 7
0 0
2
4.0
Sun Pharma
Ranbaxy
Pfizer
Lupin
Cipla
Cadila
GSK
6
Dr Reddy's
4
0.0
Ranbaxy Industry
Volume Price New product introductions
Source: AIOCD, Edelweiss research
Financial Outlook
Financial Statements
Income statement (INR mn)
Year to December CY08 CY09 CY10 CY11E CY12E
Income from operations 74,214 74,529 87,106 102,450 111,900
Net revenues 72,414 73,294 85,355 100,387 109,587
Licensing income 237 688 799 799 799
Other operating income 1,562 547 951 1,265 1,514
Total operating expenses 69,213 68,423 70,303 79,850 89,400
Materials cost 27,704 31,657 30,978 36,240 41,039
Employee cost 9,670 14,175 15,060 18,070 20,164
R&D cost 4,314 4,875 4,577 4,519 4,745
Selling, admin and general expenses 16,543 9,285 11,577 12,682 14,246
Other expenses 10,982 8,431 8,111 8,340 9,205
EBITDA 5,001 6,106 16,802 22,600 22,500
Depreciation and amortisation 2,825 2,676 3,397 3,107 3,348
EBIT 2,176 3,430 13,405 19,493 19,153
Net interest expense/(income) 2,055 710 614 1,832 1,614
Other income 2,706 2,402 2,795 2,514 2,653
Profit before tax (excl extraordinaries) 2,827 5,123 15,586 20,175 20,191
Provision for tax 0 1,102 1,447 3,637 5,452
Core profit 2,827 4,020 14,139 16,538 14,740
Extraordinary items (17,827) 4,976 5,415 (5,628) 0
Minority interest & others 163 142 185 142 192
Reported profit after minority interest (15,163) 8,854 19,369 10,769 14,548
Adjusted PAT after minority interest 2,234 3,586 12,929 14,989 14,548
Equity shares outstanding (mn) 420 420 421 421 421
EPS (INR) basic (36.1) 21.1 46.0 25.6 34.6
Diluted shares (mn) 420.4 420.4 421.0 421.0 421.0
EPS (INR) adjusted 5.3 8.5 30.7 35.6 34.6
CEPS (INR) 13.1 15.6 41.2 46.3 42.5
Dividend per share (INR) 0.0 0.0 2.0 3.6 3.5
Dividend payout (%) 0.0 0.0 6.5 10.0 10.0
Du Pont Analysis
Year to December CY08 CY09 CY10 CY11E CY12E
NP margin 3.7 5.3 16.3 16.3 13.3
Total assets turnover 1.0 1.0 1.0 1.0 1.1
Leverage multiplier 2.1 1.7 1.8 1.6 1.3
ROAE 7.5 9.0 28.1 27.1 20.4
Valuation parameters
Year to December CY08 CY09 CY10 CY11E CY12E
Adjusted EPS (INR) 5.3 8.5 30.7 35.6 34.6
EPS YoY growth (%) (59.6) 60.5 260.6 15.9 (2.9)
CEPS (INR) 13.1 15.6 41.2 46.3 42.5
Diluted PE (x) 88.2 55.0 15.2 13.1 13.5
Price/BV(x) 4.6 4.5 3.5 3.0 2.5
EV/Sales (x) 2.8 2.9 2.3 2.0 1.7
EV/EBITDA (x) 42.2 35.3 12.1 9.0 8.6
Dividend yield (%) 0.0 0.0 0.4 0.8 0.7
Differentiated strategy in domestic market to render higher growth April 25, 2011
Sun Pharma (SUNP), with its unique ability to identify therapeutic gap areas and
launch products ahead of market, dominates the Indian chronic therapy segment Reuters: SUN.BO Bloomberg: SUNP IN
(62% of domestic sales). The company also tops our survey results and has
emerged an undisputed choice among distributors. SUNP has innovatively built its EDELWEISS 4D RATINGS
doctors franchise by engaging them at an early stage, which enables it to retain Absolute Rating Hold
market share. It is now focused on building a wider product portfolio in other Rating Relative to Sector Outperformer
therapies (such as respiratory) and plans to launch 15 products per annum. Recent Risk Rating Relative to Sector Low
tie-up with Merck for differentiated products is likely to further augment the Sector Relative to Market Equalweight
company’s product pipeline for domestic market, in our view. We expect the Note:
Please refer last page of the report for rating explanation
domestic business to grow at 20% CAGR over FY10-13E, higher than peers.
MARKET DATA
Margin upsides from core business CMP : INR 446
We expect Taro’s operating margin (27%) to remain under pressure due to lack of 52-week range (INR) : 511 / 303
new products in its R&D pipeline, pricing pressure on existing base of business and Share in issue (mn) : 1,035.6
integration risk. We expect SUNP’s core EBITDA margins (including Taro) to improve M cap (INR bn/USD mn) : 461.9 / 10,402.5
by 120 bps over FY12-13E, led by higher contribution from domestic and emerging Avg. Daily Vol. BSE/NSE (‘000) : 1,087.0
Promoters* : 63.7
Current pipeline offers upsides to US generics business
MFs, FIs & Banks : 6.7
SUNP currently has a large pipeline of 149 pending approvals (including 28
FIIs : 19.0
pending Taro and 29 pending Caraco), which will support sustainable growth in
US generics over the next three-four years. We expect the US base business Others : 10.6
(ex-taro) to post 15% CAGR over FY11-13E, while special products (Taxotere, * Promoters pledged shares
: 0.4
(% of share in issue)
Gemzar, Stalevo) would contribute USD 145-150 mn of sales.
PRICE PERFORMANCE (%)
The company expects ROW to post strong double-digit growth over the next 3-4 1 month 2.6 8.9 5.5
years and is, therefore, raising its localised therapeutic focus. Moreover, the 3 months (8.7) 2.5 (7.0)
current tie-up with Merck adds visibility for higher growth from these markets.
12 months 24.7 11.9 18.0
Operating profit (INR mn) 13,633 18,068 18,213 21,854 +91 22 6623 3302
Adj. Net profit (INR mn) 13,194 16,551 17,113 20,671 manoj.garg@edelcap.com
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss
Edelweiss Securities Securities119
Limited Limited
Edel Pulse: Pharmaceuticals
480
19x
360
(INR)
12x
240
120 5x
0
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Company Description
Promoted by Mr. Dilip S Shanghvi, a first generation entrepreneur, SUNP is India’s fourth
largest pharmaceutical company. It is also one of the fastest growing Indian pharmaceutical
companies with revenue and profit growth of 26% CAGR and 30% CAGR over FY05/10,
respectively. It also has one of the highest margins amongst its domestic peers. SUNP has
significant presence in the domestic formulation and the US generic market. Indian domestic
formulations sales, at INR 18 bn in FY10, constitute almost 45% of sales. With over 3,000
medical reps, SUNP has a market share of 3.7% and is a top five player in the Indian
domestic market. It has been consistently ranked #1 across leading therapeutic categories
like psychiatry, neurology and CVs. Taro’s acquisition in the US generics space augments its
ANDA pipeline with products differentiated in dermatology and pediatrics therapies.
FII's
19%
Promoters
MF & inst
64%
7%
Source: NSE
Therapeutic growth versus industry (MAT) (%) Top 10 brand performance (%)
% of Market Sun Contrbution
Therapeutic area Industry % of Market Growth Contrbution
total share growth to growth Brands Therapy
total share rate to growth
Neuro-psychiatry 27 16.4 19.5 14.1 25.5
Cardiology 19 6.2 19.6 16.5 19.5 PANTOCID Acute 3.1 19.2 17.7 2.7
Gastroentrology 14 4.9 23.2 14.1 14.1 SUSTEN Acute 2.5 26.1 14.0 1.8
GLUCORED Chronic 2.4 59.7 9.2 1.1
Diabetology 11 6.8 26.9 21.0 11.0
AZTOR Chronic 2.4 8.6 16.8 1.9
Gyneacology 7 6.8 19.1 21.9 7.1
GEMER Chronic 2.0 9.9 28.7 2.5
Pain 5 3.3 36.8 13.8 7.6
Respiratory 5 2.3 12.6 14.5 2.7 PANTOCID DSR Acute 1.6 14.7 22.0 1.7
Chronic contribution to growth 58.7 OXETOL Chronic 1.5 36.3 23.2 1.6
CLOPILET Chronic 1.4 20.6 16.7 1.1
ENCORATE
Chronic 1.4 57.7 9.6 0.7
CHRONO
STROCIT Chronic 1.4 22.7 6.9 0.5
Total 19.6 15.6
8% 5%
gy
FY07
FY08
FY09
FY10
FY11E
logy psychiatry
14% 27%
Field force Productivity
7 15% 21 Industry
15.0 growth
(%)
2 6 14
10.0
3 7
5.0 12
6 0
Ranbaxy
Pharma
Pfizer
Lupin
Cipla
Cadila
GSK
0.0
Reddy's
Sun
Dr
Key Risks
Rupee appreciation
Rapid rupee appreciation could impact our sales estimate, especially on international
revenues which are currently based on a currency estimate of USD/INR of INR 46 and
INR 45 for FY12E and FY13E, respectively.
Regulatory issues
Regulatory issues, including product approval delays, unfavourable litigation outcomes
and potential future adverse inspections from USFDA, are structural negatives for SUNP.
Du pont analysis
Year to March FY09 FY10 FY11E FY12E FY13E
NP margin 43.5 34.6 33.5 32.8 33.2
Total assets turnover 0.7 0.5 0.6 0.5 0.5
Leverage multiplier 1.1 1.0 1.0 1.0 1.0
ROAE 30.2 17.7 19.5 17.3 18.1
Valuation parameters
Year to March FY09 FY10 FY11E FY12E FY13E
Diluted EPS (INR) 17.6 12.7 16.0 16.5 20.0
EPS YoY growth (%) 22.2 (27.4) 25.4 3.4 20.8
CEPS (INR) 1.2 14.2 17.5 18.2 21.7
Diluted PE (x) 25.4 35.0 27.9 27.0 22.3
Price/BV(x) 6.6 5.9 5.0 4.4 3.8
EV/Sales (x) 10.3 10.7 8.4 7.8 6.3
EV/EBITDA (x) 23.1 31.5 23.1 22.3 18.0
Dividend yield (%) 0.7 0.7 0.6 0.7 0.8
TORRENT PHARMACEUTICALS
Strong play on branded generics
the past 12-14 months, which has impacted its operating performance. EBITDA
margins declined 170 bps from 21.5% in FY10 to 19.8% in 9m FY11, while
MARKET DATA
earnings growth has been mute. We expect margin pressure to continue in
CMP INR 591
:
H1FY12 with commissioning of the Sikkim facility; however, margins are likely to
52-week range (INR) 640 / 490
:
recover from H2FY11 as domestic field force ramp up and new launches in
Share in issue (mn) 84.6
:
Brazil/Mexico start attaining critical mass. We expect EBITDA margins to improve
M cap (INR bn/USD mn) 50.0 / 1,127.4
:
100-120 bps over FY13E.
Avg. Daily Vol. BSE/NSE (‘000): 76.9
start gaining traction. We estimate 19% revenue CAGR over FY11-13 driven by: MFs, FIs & Banks : 12.8
(a) strong growth in domestic business; (b) scaling up of Mexico; (c) new FIIs : 3.6
product launches in Brazil and Europe; and (d) ramp-up in US generics (USD 60 Others : 12.2
mn in FY13E from USD 30 mn in FY11E). Moreover, TRP’s strategic tie ups (AZN) * Promoters pledged shares
: NIL
(% of share in issue)
for emerging markets will add further momentum to earnings.
markets of India, Brazil, Mexico, and other emerging markets. Moreover, the 1 month 12.4 8.9 5.5
company has been consistently ramping up filings to establish a strong base in 3 months 0.5 2.5 (7.0)
US and Europe. We believe these investments should start gaining traction, 12 months 14.2 11.9 18.0
thereby contributing higher to overall growth and profits. We reiterate
‘BUY/Sector Outperformer’ recommendation/rating. Torrent offers higher
upside in our coverage universe.
Financials
Year to March FY10 FY11E FY12E FY13E
Revenues (INR mn) 19,040 22,586 26,616 32,142
Rev growth (%) 16.8 18.6 17.8 20.8
EBITDA (INR mn) 4,087 4,414 5,323 6,679
Manoj Garg
Adjusted net profit (INR mn) 2,687 2,973 3,608 4,614
+91 22 6623 3302
Shares outstanding (mn) 84.6 84.6 84.6 84.6
manoj.garg@edelcap.com
Adj. Diluted EPS (INR) 31.8 35.1 42.6 54.5
EPS growth (%) 24.8 10.6 21.3 27.9
Peril Ali
P/E (x) 18.6 16.8 13.9 10.8
+91 22 6620 3032
EV/EBITDA (x) 12.2 11.3 9.2 7.1
perin.ali@edelcap.com
ROAE (%) 36.3 31.3 29.7 29.9
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. EdelweissLimited
Edelweiss Securities Securities129
Limited
Edel Pulse: Pharmaceuticals
640 11x
480
8x
(INR)
320
5x
160
0
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Company Description
TRP, founded in 1959, is headed by Mr. Samir Mehta, a second generation entrepreneur. The
company is a leading player in the branded generics space in India and Brazil. Domestic
formulations is the largest segment contributing 39% to FY11 sales. It is the second largest
domestic player in the chronic segment (CNS, CV, and anti-diabetic) which contributes 62%
to its portfolio. The company’s branded generics business in Brazil is the second largest
segment and contributed 16% to total sales in FY10 and is one of the largest operations by
an Indian company in this crucial market. Apart from branded generics, the company is also
present in regulated markets of US/Europe. It is also involved in the contract manufacturing
business with Novo Nordisk for supplying insulin.
Germany
(Heumann)
14%
EU
6%
Russia Brazil
2% 17%
MF & inst
13%
Promoters
71%
Source: NSE
Therapeutic growth versus Industry (MAT) (%) Top 10 brand performance (%)
% of Market Torrent Industry Contrbution % of Market Growth Contrbution
Therapeutic area Brands Therapy
total share Growth Growth to growth total share rate to growth
CV 35.0 3.5 12.6 16.5 20.5 ALPRAX Chronic 4.3 25.8 15.3 3.3
CNS 20.0 4.4 17.0 14.1 16.9 TOPCEF Acute 4.1 4.7 66.3 9.2
DILZEM Chronic 3.8 45.4 13.0 2.5
Gastrointestinal 19.0 2.6 44.9 14.1 22.0
NIKORAN Chronic 3.7 45.7 10.4 2.0
Anti-infectives 11.0 1.1 14.4 13.4 25.5
DOMSTAL Acute 3.7 63.5 20.8 3.6
Anti-diabetics 7.0 1.5 23.3 21.0 4.0
DROXYL Acute 2.5 15.1 8.9 1.2
Pain mgmt. 4.0 0.8 21.4 13.8 3.5
NEBICARD Chronic 2.4 33.2 16.1 1.9
Chronic contribution to growth 41.4
AZULIX-MF Chronic 2.0 3.7 29.4 2.6
NEXPRO RD Acute 2.0 34.1 49.5 3.8
NEXPRO Acute 1.9 22.9 32.8 2.7
Total 30.4 32.6
Anti- CVS
3,000 1.5
infectives 35%
Chronic
11% 62% 2,500 1.0
20.0 28 24
6 Industry
Sales (INR bn)
21 18
15.0 0.4 growth
(%)
6 14 12
10.0
15 3 7 6
5.0 0 0
6
Reddy's
Cadila
Pharma
Pharma
Intas
Torrent
IPCA
Lupin
Cipla
0.0
Sun
Dr
Key Risks
Capacity constraints
TRP has been envisaging capacity constraints due to significant ramp-up in various
geographies and entry in new markets. The company has planned capital investments of
INR 10 bn over the next three-five years. Any delay in commissioning of facilities could
have a disproportionate impact on growth in various markets and could have long-term
implications on licensing contracts.
Financial Statements
Du Pont Analysis
Year to March FY09 FY10 FY11E FY12E FY13E
NP margin 13.6 14.7 13.7 13.9 14.7
Total assets turnover 1.49 1.41 1.45 1.53 1.62
Leverage multiplier 1.83 1.75 1.58 1.39 1.26
ROAE 37.12 36.27 31.30 29.74 29.92
Valuation parameters
Year to March FY09 FY10 FY11E FY12E FY13E
Adjusted EPS (INR) 25.5 31.8 35.1 42.6 54.5
EPS YoY growth (%) 63.1 24.8 10.6 21.3 27.9
CEPS (INR) 30.5 37.4 42.3 51.0 64.4
Diluted PE (x) 23.2 18.6 16.8 13.9 10.8
Price/BV(x) 7.7 6.0 4.7 3.7 2.9
EV/Sales (x) 3.1 2.6 2.2 1.8 1.5
EV/EBITDA (x) 17.1 12.2 11.3 9.2 7.1
Dividend yield (%) 0.7 1.0 1.0 1.2 1.6
300
400
500
600
700
400
525
650
775
900
150
270
390
510
630
Apr-10
500
875
1,250
1,625
2,000
May-10 Apr-10
May-10 Jun-10 Apr-10 May-10
Buy
Jun-10 May-10 Jun-10
Jul-10
Hold
Jul-10 Jun-10
Cadila Healthcare
Aug-10 Jul-10
Aug-10 Jul-10
Buy
Sep-10 Aug-10
Ranbaxy Laboratories
Sep-10 Aug-10
Hold
Oct-10 Sep-10
Oct-10 Sep-10
Torrent Pharmaceuticals
Dr. Reddy’s Laboratories
Nov-10 Oct-10 Oct-10
Nov-10
Hold
Dec-10 Nov-10
Buy
Dec-10 Nov-10
Jan-11 Jan-11 Dec-10 Dec-10
Feb-11 Feb-11 Jan-11 Jan-11
Buy
Mar-11 Mar-11 Feb-11 Feb-11
Hold
Apr-11 Mar-11 Mar-11
Apr-11
Apr-11 Apr-11
Lupin
100
200
300
400
500
200
275
350
425
500
200
250
300
350
400
Hold
Buy
Aug-10 Aug-10
Sun Pharmaceuticals
Hold Hold
Buy
Hold
Oct-10 Oct-10 Oct-10
Redc
Buy
Hold
Hold
Edel Pulse: Pharmaceuticals
137
Edel Pulse: Pharmaceuticals
NOTES:
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Sector return is market cap weighted average return for the coverage universe
within the sector
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021,
Board: (91-22) 2286 4400, Email: research@edelcap.com
Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved
140 Edelweiss
Edelweiss Research isSecurities Limited
also available on www.edelresearch.com ,Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Edelweiss Value Scanner