pharma sector formulations mosl

August 2011

Thematic Report | Sector: Pharmaceuticals

Domestic FormulationsDomestic Formulations

New peaksNew peaksNimish Desai ([email protected]); Tel: +91 22 3982 5406

Amit Shah ([email protected]); Tel: +91 22 3982 5423

Nimish Desai ([email protected]); Tel: +91 22 3982 5406

Amit Shah ([email protected]); Tel: +91 22 3982 5423

Domestic Formulations

Page No.

New peaks - USD21b opportunity by 2015 ...................................... 1-5

4 A's and 4 Ailments ............................................................................ 6-8

A #1 - Affordability ............................................................................. 9-11

A #2 - Access ...................................................................................12-13

A #3 - Awareness .................................................................................. 14

A #4 - Ailments .................................................................................15-17

4 Buys - Cipla, Lupin, Torrent and GSK Pharma..........................18-22

Ailments ...........................................................................................23-30

Infection ............................................................................. 24

CVS Disease .................................................................... 25

Diabetes ........................................................................... 26

CNS Diseases .................................................................. 27

Pain .................................................................................. 28

Gastro-intestinal (GI) Problems ......................................... 29

Respiratory Diseases ....................................................... 30

Annexure .........................................................................................31-36

Company .......................................................................................37-142

Cipla ............................................................................38-49

Lupin ............................................................................50-61

Torrent Pharma............................................................. 62-71

GSK Pharma................................................................ 72-79

Sun Pharma ................................................................. 80-91

Cadila ........................................................................92-103

Ranbaxy ................................................................... 104-115

Dr Reddy's Labs ...................................................... 116-127

Glenmark..................................................................128-142

Domestic Formulations | New Peaks

August 2011

4 BuysA#1: AffordabilityMedicines are becoming more affordable led by (1) Rising per capita income, (2) Urban-ization, and (3) Higher penetration of health insurance. This is driving the growth in thedomestic pharma market.

2015 Indian pharma market estimate: Affordability approachPer capita Per capita Multiplier Pharma

GDP pharma conspn. (x) market

INR CAGR (%) INR CAGR (%) INR b CAGR (%)

(1) (2) (3) (4) (5) = (4) / (2) (6) (7)

FY01 20,786 - 140 - - 151 -

FY06 33,827 10.2 212 8.7 0.8 230 8.9

FY11 60,048 12.2 390 12.9 1.1 465 15.1

FY16 105,668 12.0 784 15.0 1.3 983 15.0

A#2: AccessPeople's access to medicines is improving given (1) Rising government spend on healthcare,(2) India's improving medical infrastructure, and (3) Companies' thrust on increasingrural reach. All are combined to further expand the domestic pharma market.

India’s medical infrastructure among the weakest in the world

A#3: AwarenessHealth awareness in India is rising on the back of (1) Improving literacy, and (2) Risingpenetration of media. This serves as an undercurrent for sustaining pharma demand.

High correlation of literacy with per capita pharma consumption

A#4: AilmentsAs a trend, incidence of chronic/lifestyle ailments (cardiovascular, central nervous system,diabetes) is rising compared to acute ailments. Medicine demand from these segmentswill grow faster than the rest of the Indian pharma market.

Share of chronic ailments segment is on the rise (%)

Presence in high-potential segmentsThe chart below maps the positioning of pharmaceutical players in the key therapeuticsegments of CVS, Diabetes, anti-infectives and CNS. We have plotted the dominance ofeach player in these respective segments using prescription market share as the keymeasure of dominance.

Company mapping with respect to therapeutic classes

Attractiveness of international businessIt is imperative to map the domestic and the non-domestic businesses of companies totake an overall view on them, as depicted below.

Company mapping: Attractiveness of domestic and international business

Earnings growth v/s valuationWe plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR andFY11 P/E as depicted below. Based on the same, the top picks are Torrent, Cipla & Lupin.

Top picks: Cipla, Lupin, Torrent and GSKWe have identified nine key success factors (KSFs) for shortlisting Indian pharmacompanies and their stocks. These success factors correspond to the initials of the word"MEDICINES". We have rated the companies on these KSFs to arrive at a finalMEDICINES Score out of a maximum possible 100.

USD21b opportunity by 2015We estimate the 2015 Indian domestic market size at Rs960b (USD21b) i.e. a CAGR of16% over 2010-15 (FY11-16) founded on 4 pillars what we call as 4 A's viz. Affordability,Access, Awareness and Ailments.

Accelerating growth in domestic formulation market (USD b)

Acute larger, but chronic fasterHistorically, in the Indian pharma market, the acute ailments therapy segment was thelargest in terms of sales, although it experienced slower growth rates than some of thechronic therapies. Nevertheless, almost all therapy areas experienced double-digit growth.

Therapeutic mix - 2000 Therapeutic mix - 2010

40

55

70

85

100

Oris

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Raj

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Ass

am

Kar

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Mad

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Pra

desh

Wes

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And

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Pra

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Tam

il N

adu

Har

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Pun

jab

Ker

ala

Mah

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0

200

400

600

800Literacy rate (%) Per Capita Pharma spend (Rs)

84 78 77 70

16 22 23 30

2000 2005 2010 2015E

Acute segment Chronic segment

AIAF - 337

GIAF - 109

RespiratoryAF - 147

Vitamines Pain

CVSAF - 400

Gynaecology

Dematology

CNSAF - 215

DiabetesAF - 396

0

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40

0 20 40 60 80 100

Incremental mkt size (Rs b) 2010-15E

No

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Pla

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CVS, Anti-infectives, Diabetes and CNS: Key segments with relatively fewer players

13

14

24

38

45

53

9

9

10

11

11

11

2000

2001

2005

2008

2009

2010

Segment Size (INR b)

Contribution to Industry (%)

CVS (2001-10 CAGR - 15.9%) Diabetes (2001-10 CAGR - 17.8%)

CNS (2001-10 CAGR - 14.4%) Anti-infectives (2001-10 CAGR - 12.4%)

3024

39

3931

7283

3997

1112

2023

2526

3434

4243

139

9 5IndiaChina

BrazilJapan

UKAustralia

US

France Germany

ItalyRussia

Doctors/10,000 Hospital beds/10,000

5

6

10

18

22

27

6

5

5

4

4

32000

2001

2005

2008

2009

2010

Segment Size (INR b)


7

8

17

19

22

26

5

5

7

5

6

6

2000

2001

2005

2008

2009

2010

Segment Size (INR B)


17

17

18

20

18

1929

28

47

61

70

80

2000

2001

2005

2008

2009

2010

Segment Size (INR B)


Sun Pharma,

Torrent, Cadila,

Cipla, Unichem,

Ranbaxy, Lupin

Abbott, U S V,

Aventis, Sun

Pharma

Ranbaxy, Alkem,

Aristo, Cipla,

GSK, Piramal

Sun Pharma,

Intas, Torrent,

Abbott, Piramal

Cipla, GSK

Pharma

Aventis, U S V,

Emcure, Piramal,

Dr Reddy’s,

Intas, Micro Labs

Eli Lilly, Piramal,

Micro Labs,

Lupin

Alembic, Mankind,

FDC, Macleods,

Lupin

Aventis,

Ranbaxy,

Unichem,

Micro Labs

Cadila, Piramal,

Ranbaxy

Pfizer, Mankind,

Dr Reddy’s,

Sun Pharma,

Glenmark, Biocon

Others

IPCA Labs,

AstraZeneca,

Pfizer

Panacea,

Ranbaxy

Novartis, Cipla,

Lupin

CVS Diabetes Anti-infectives CNS

High

Medium

Low

Do

min

an

ce

Sun Pharma, Cipla,

Lupin, Cadila,

Torrent Pharma

Ranbaxy,

GSK Pharma

Dr ReddyFavourable

Neutral

Unfavourable

Unfavorable Neutral Favorable

Domestic Business

Glenmark Pharma

3.3 3.5 3.7 4.1 4.7 5.2 6.07.5 7.9 8.3

10.2

21.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

9.3% CAGR14.2% CAGR

15.6% CAGR

CVS, Diabetes, CNS and Anti-infectivesWe believe that CATS like Cardiovascular (CVS), Diabetes, Central Nervous System (CNS)will account for a major chunk of the incremental market over the next 5 years. Also, withrising income levels in the rural areas, anti-infectives will also record good growth overthe same period. We believe these four will be the key segments of the future.

2015 Indian pharma market estimate: Ailment approach (INR b)2010 2015E Incr. mkt

Mkt size Share (%) CAGR (%) Mkt size Share (%) CAGR (%) 2015 on 2009

Anti-diabetic 27 5.8 22.1 83 8.6 25 56

CVS 53 11.3 17.1 137 14.2 21 84

CNS 26 5.6 9.4 65 6.7 20 39

Gastrointestinal 51 11.1 16.2 103 10.8 15 52

Respiratory 41 8.8 13.5 82 8.5 15 41

Dermatology 25 5.4 15.1 51 5.3 15 26

Anti-infectives 80 17.2 11.2 147 15.3 13 67

Gynaecology 26 5.7 26.9 49 5.1 13 22

Pain/Analgesic 40 8.6 14.3 68 7.0 11 28

Vitamins/Minerals 36 7.7 5.4 58 6.0 10 22

Others 59 12.8 27.6 119 12.4 15 60

Total 465 100.0 15.1 962 100.0 15.6 496

Company mapping with respect to earnings growth and valuation

Indian domestic pharma players: The MEDICINES scorecardM E D I C I N E S Total

Sun 7 9 8 6 9 9 7 9 13 77

Cipla 6 7 8 6 6 7 5 7 14 66

GSK Pharma** 4 9 7 3 6 9 - 6 14 64

Lupin 5 6 6 6 8 5 6 6 14 62

Torrent Pharma 6 7 6 5 6 3 6 8 14 61

Cadila 6 7 7 5 6 5 6 6 12 60

Dr. Reddy's Labs 4 6 6 4 6 2 7 5 12 52

Glenmark 2 3 5 6 6 5 3 9 10 49

Ranbaxy 6 5 7 5 6 3 5 3 9 49

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

Respiratory

11%

Gastro intestinal

10%

Vitamins/M inerals

10%

Antiinfec-tives18%

Gynaecology6%

Cardiac9%

Pain/Analgesic

10%

Dermatology6%

CNS5% Others

12%

Antidiabetic

3%

Antiinfec-tives16%

Gastro in-testinal

11%

Respiratoy

9%

Vitamins/M inerals

8%

Pain/Analgesic

9%

Cardiac11%

Gynaecology6%

Dermato logy5%

CNS6%

Antidiabetic

6%

Others13%

The Indian Pharma Story4 A’s. 4 Ailments. 4 Buys

Domestic Formulations market will be USD21b in 2015, 2x over 2010. Buy Cipla, Lupin, Torrent, GSK PharmaThe India domestic pharma story is founded on 4 pillars, what we call the 4 A's - Affordability,Access, Awareness and Ailments. These 4 A's will enable the market to be 2x - from USD10bin 2010 to USD21b in 2015. A significant share of the market delta is explained by4 Ailments - CVS, Diabetes, CNS and Infection. These ailment segments rank high onwhat we call the Attractiveness Factor, measured as incremental market size divided by

the number of players who will share the pie. Companies with a strong presence in theseailment segments are therefore better placed. Most companies with a meaningful presencein Indian market will clock healthy growth in sales and profits. We have identified winningstocks based on a combined approach of conventional P/E-based valuation and our proprietaryMEDICINES Score. Our 4 Buys are Cipla, Lupin, Torrent and GSK Pharma.

4 A’s 4 Ailments

Indian pharma mkt size-INR bApproach 1 983Approach 2 936Approach 3 962Average 960

2015 Indian pharma market estimate: Access approachYear Pharmacies CAGR Mkt (INR b) Mkt/Pharmacy (INR) CAGR (%)

2000 322,023 - 151 467,420 -

2005 410,992 5.0 230 559,622 3.7

2010 550,000 6.0 465 846,018 8.6

2015 736,024 6.0 936 1,272,121 8.5

Note: AF=Incremental market size divided by number of players

Glenmark

Torrent

GSK

Lupin

CadilaDr Reddy

Cipla

Sun

10

20

30

40

10.0 14.0 18.0 22.0 26.0 30.0

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

FY11-13E EPS CAGR (%)

Note: Only companies

covered in this report

have been mapped

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Indian Power Sector: Story in Pictures

August 2011

The 4 AilmentsLifestyle ailments will grow faster than others

Attractiveness Factor - Our key test to check health of ailment segments Usually, size is considered as the key criteria for the attractiveness of any market

or market segment. But to arrive at the 4 key ailment segments, we have used the measure of

Attractiveness Factor (AF).

AF = Incremental market size / No. of players. Obviously, higher the AF, betterthe prospects of incumbents.

Thus, Gastro and Respiratory will have higher incremental market than CNS. Butthe same will be shared among a very large number of players, diluting thesegments' attractiveness.

The 4 BuysBased on detailed MEDICINES Score ranking

MEDICINES Score - Criteria, maximum score (in brackets) & rating methodology

Of the 4 key segments, the AF ranking is (1) CVS - 400, (2) Diabetes - 396, (3)Infection - 337, and (4) CNS - 215.

CVS, Infection and Diabetes (in that order) rank higher than all other segments,both in terms of incremental market size and AF.

Market share of the 4 key ailments set to rise from 40% in 2010 to 45% in 2015

M - Mix & Market share (10): Strong presence in lifestyle segments rated higherE - Equity with doctors (10): Higher prescription share and rankings rated higherD - Distribution & reach (10): Wider distribution and reach in relevant

geographies are rated higher

I - Introductions (10): Higher contribution from new launches are rated higherC - CAGR & scale-up (10): Consistent high growth is rated higherI - Improvement in MR productivity (10): Consistently high or improving Sales/

MR is rated higher

N - Non-domestic business (10): Attractive overseas opportunity (incl one-offs) israted higher

E - Earnings growth (10): High long-term earnings growth (FY05-13) is rated higherS - Stock attractiveness (20): Captures outlook, valuation, and our overall view.

Equity with doctors

Comment Score

Leader in CNS, Gynaec and 2nd in CVS, Anti-diabetics 9

Market leader in AI and Respiratory 7

Leader in Anti-TB segment 6

Ranks 2nd in CNS and 7th in CVS 7

Market leader in Derma, Vit and Pain Mgmt 9

Among top 3 players in CVS and GI 7

Ranks 3rd in GI and Pain Mgmt 6

Ranks 2nd in Dermatology 3

Among the leaders in AI and Dermatology 5

Distribution & reach

Metro/Tier I MR strength Score

(% of sales)

73 2,600 8

63 5,100 8

70 3,682 6

73 3,600 6

60 2,500 7

65 4,500 7

68 3,165 6

70 2,078 5

66 4,500 7

Introductions

In last Contbn to Score

4 years growth (%)

124 56 6

304 45 6

266 69 6

151 49 5

21 15 3

197 37 5

89 31 4

105 52 6

255 50 5

CAGR & Scale-up (%) - Sales

FY05-11 FY11-13 Score

23 18 9

14 13 6

22 19 8

19 18 6

8 14 6

12 15 6

18 16 6

19 17 6

10 16 6

Improvement in productivity

(Sales/MR, INR m)

2004 2010 Score

3.2 7.8 9

4.8 4.9 7

3.6 3.6 5

1.5 2.3 3

6.5 7.1 9

4.1 3.6 5

3.6 3.2 2

3.1 3.6 5

4.6 3.6 3

Non domestic

business

Favorability Score

High 7

Medium 5

High 6

High 6

Not applicable 0

High 6

High 7

Low 3

Medium 5

Earnings Growth

(FY11-13)

Comment (%) Score

22 9

21 7

13 6

22 8

16 6

21 6

12 5

24 9

55 3

Stock

attractiveness

Comment Score

Neutral 13

Top pick 14

Top pick 14

Top pick 14

Buy 14

Neutral 12

Neutral 12

Neutral 10

Sell 9

Mix

MEDICINES Chronic therapy Score

Score contribution (%)

Sun 77 61 7

Cipla 66 42 6

Lupin 62 43 5

Torrent Pharma 61 62 6

GSK Pharma ** 64 5 4

Cadila 60 31 6

Dr. Reddy's Labs 52 28 4

Glenmark 49 24 2

Ranbaxy 49 21 6

Domestic Formulations (DF) Index is an outperformer over 5 years ... ... and also in the last 1 year

80

90

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120

130

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-10

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Dec

-10

Feb

-11

Apr

-11

Jun-

11

Aug

-11

All indices re-based to 100

Sector performance vis-a-vis benchmarkOutperformer post the credit crisisThe DF index has consistently outperformed the Sensex and the BSEHealthcare index as well from Sep-2009 onwards. In fact the DF indexcommenced its outperformance vis-à-vis the BSE Healthcare indeximmediately post the credit crises of 2008.

We believe that the outperformance reflects the relatively defensivenature of the DF business coupled with reasonable growth and goodprofitability. The outperformance is also aided by the fact that the DFbusiness is relatively less capital intensive as compared to some of theother pharma businesses.

50

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Sensex BSE Healthcare Index DF Index

Domestic formulations companies - Comparative valuations (INR)Company Target Upside EPS (INR) P/E (X) EV/EBITDA (X) ROE (%)

(CMP) Price (%) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

Top Picks

Cipla (281) 361 28 12.0 13.4 16.4 23.3 21.0 17.1 17.4 14.5 12.1 14.5 14.4 15.6

Lupin (450) 514 14 19.3 22.3 25.7 23.3 20.2 17.5 19.5 16.8 13.8 29.3 27.1 25.7

Torrent (589) 762 29 31.9 40.1 47.6 18.4 14.7 12.4 12.4 9.6 8.0 29.2 29.3 27.7

GSK (2,155) 2,330 8 68.6 77.5 89.6 31.4 27.8 24.1 21.9 20.2 17.2 30.1 31.3 33.4

Others

Sun (464) 524 13 13.6 17.3 20.9 34.2 26.8 22.2 22.4 20.8 16.7 16.2 17.7 18.5

Cadila (824) 907 10 30.9 28.3 41.1 26.6 29.1 20.0 17.2 17.2 14.0 37.5 27.3 27.6

DRRD* (1,446) 1,670 15 65.6 68.6 81.1 21.6 20.7 17.5 16.7 17.1 14.4 24.1 22.5 23.5

Glenmark (318) 310 -3 12.5 16.1 19.7 25.5 19.7 16.1 17.7 10.4 11.1 17.4 17.0 17.1

Ranbaxy ## (468) 412 -12 25.8 11.9 16.7 15.2 33.0 23.3 11.1 23.0 18.5 19.4 11.4 10.4

* Dr. Reddy's

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


New peaks - USD21b opportunity by 20154 A's. 4 ailments. 4 buys

4 A's - Lead to USD21b opportunity by 2015The India domestic pharma story is founded on 4 pillars, what we call the 4 A's -

A #1 - Affordability

Medicines are becoming more affordable led by (1) Rising per capita income, (2)Urbanization, and (3) Higher penetration of health insurance. This is driving the growth inthe domestic pharma market.

A #2 - Access

People's access to medicines is improving given (1) Rising government spend on healthcare,(2) India's improving medical infrastructure, and (3) Companies' thrust on increasing ruralreach. All are combined to further expand the domestic pharma market.

A #3 - Awareness

Health awareness in India is rising on the back of (1) Improving literacy, and (2) Risingpenetration of media. This serves as an undercurrent for sustaining pharma demand.

A #4 - Ailments

As a trend, incidence of chronic/lifestyle ailments (cardiovascular, central nervous system,diabetes) is rising compared to acute ailments. Medicine demand from these segmentswill grow faster than the rest of the Indian pharma market.

Based on the past data and present trends, we have estimated the 2015 (FY16) Indianpharma market using three different approaches - Approach 1 (Affordability-based): Correlation between per capita GDP and per

capita pharma consumption Approach 2 (Access-based): Trend in pharmacies and sales per pharmacy Approach 3 (Ailment-based): Summation of various ailment segment sizes.

Averaging the figure using the three approaches, we estimate the 2015 Indian domesticmarket size at INR960b (USD21b) i.e. a CAGR of 16% over 2010-15 (FY11-FY16).

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

Indian pharma mkt (INR b)

Approach 1 (pg 5) 983



Average 960

USD b 21

Domestic Formulations

Companies coveredTop buys

Cipla

Lupin

Torrent Pharma

GSK Pharma

Others

Sun Pharma

Cadila

Ranbaxy

Dr. Reddy's Labs

Glenmark

Thematic Report | Sector: Pharmaceuticals

August 2011 1

Summary

August 2011 2


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

per player Source: Industry/MOSL

Our key conclusions from this chart:

1. As discussed before, CVS, Anti-infectives, Diabetes and CNS will record maximumshare of incremental market (the size of bubble indicates this).

2. We also note that the attractiveness factor (i.e. incremental segment market sizedivided by number of players) is most favorable for these segments.

3. Hence, companies which enjoy strong positioning in these segments will be able togenerate maximum value from their respective domestic formulations businesses.

4 buys - Cipla, Lupin, Torrent Pharma and GSK PharmaHaving identified the most attractive ailment segments, we have adopted two approachesto arrive at our top plays on India's domestic formulations opportunity: Approach 1: 3-screen shortlisting process as follows: Screen #1: Identify companies with dominating presence in high-potential ailment

segments Screen #2: Of the above, exclude companies with unfavorable non-domestic

business Screen #3: Juxtapose the Screen #2 surviving companies vis-à-vis earnings growth

and valuation Approach 2: MEDICINES score, based on nine key success factors for picking

domestic formulation stocks

Approach 1: 3-screen shortlisting process

Screen #1: Identify companies with dominating presence in high-potential ailmentsegments

The chart below maps the positioning of pharmaceutical players in the key therapeuticsegments of CVS, Diabetes, anti-infectives and CNS. We have plotted the dominance ofeach player in these respective segments using prescription market share as the keymeasure of dominance.

We juxtaposed the incremental opportunity of various therapeutic segments against thenumber of existing players in each of these segments, to arrive at the following plot.

CVS, Anti-infectives, Diabetes and CNS are large segments with relatively fewer players

DiabetesAF - 396CNS

AF - 215

Dermatology

Gynaecology

CVSAF - 400

PainVitamins

RespiratoryAF - 147

GIAF - 109

AIAF - 337

0

10

20

30

40

0 20 40 60 80 100

Incremental mkt size (INR b) 2010-15E

No

. of

Pla

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Top 4 ailmentsegments are

mainly based onAttractiveness Factor,which is highest forCVS, Diabetes, Anti-infectives and CNS

in that order

Valuation summaryEPS CAGR P/E (x)

(FY11-13) (FY13)

Cipla 16.7 17

Lupin 15.3 18

Torrent Pharma 22.1 12

GSK Pharma 14.2 24

Sun Pharma 24.1 22

Cadila 15.3 20

Ranbaxy 53.1 23

DRL 11.2 18

Glenmark 25.8 16

August 2011 3


Screen #2: Most Indian companies are not pure-plays; view on non-domesticbusiness is also important

It is imperative to map the domestic and the non-domestic businesses of companies totake an overall view on them, as depicted below.

Screen #3: Juxtapose the Screen #2 shortlisted companies vis-à-vis earningsgrowth and valuation

We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR andFY11 P/E as depicted below. Based on the same, the top picks are Cipla, Lupin andTorrent Pharma. We are also positive on GSK Pharma as we believe it deserves premiumvaluation due to strong parentage (giving access to large product pipeline), brand-buildingability, industry-best RoCE of over 45% and likely positioning in post patent era.

Company mapping relative to the attractiveness of domestic and international business

Source: MOSL

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Sun Pharma,

Cipla, Lupin,

Cadila,

Torrent Pharma

Ranbaxy,

GSK Pharma

Dr ReddyFavourable

Neutral

Unfavourable

Unfavourable Neutral Favourable

Domestic Business

Glenmark

Pharma3 of our 4

top picks arefavorably placed

in both theirdomestic andinternationalbusinesses

Companies in bold have been covered in this report Source: MOSL


Sun Pharma,

Torrent, Cadila,

Cipla, Unichem,

Ranbaxy, Lupin

Abbott, U S V,

Aventis,

Sun Pharma

Ranbaxy, Alkem,

Aristo, Cipla,

GSK Pharma,

Piramal

Sun Pharma, Intas,

Torrent, Abbott,

Piramal

Cipla, GSK Pharma

Aventis, U S V,

Emcure, Piramal,

Dr Reddy's, Intas,

Micro Labs

Eli Lilly, Piramal,

Micro Labs, Lupin

Alembic,Mankind,

FDC, Macleods,

Lupin

Aventis, Ranbaxy,

Unichem,

Micro Labs

Cadila, Piramal,

Ranbaxy

Pfizer, Mankind,

Dr Reddy's,

Sun Pharma,

Glenmark, Biocon

Others

IPCA Labs,

AstraZeneca,

Pfizer

Panacea,

Ranbaxy

Novartis, Cipla,

Lupin


High

Medium

Low

Do

min

an

ce


covered in this report have

been mapped

August 2011 4


Approach 2: The MEDICINES score

We have identified nine key success factors (KSFs) for shortlisting Indian pharmacompanies and their stocks. These success factors correspond to the initials of the word"MEDICINES". We have rated the companies on these KSFs to arrive at a final"MEDICINES Score" out of a maximum possible 100. The companies with the highestMEDICINES Score are the most attractive investment ideas.

We have considered the following KSFs for evaluating the domestic formulations business(see box on page 21 for explanation). Our MEDICINES Scorecard is given below.

M Mix & Market shareE Equity with doctorsD Distribution & reachI Introductions

C CAGR & scale-upI Improvement in MR productivity

N Non-domestic businessE Earnings growthS Stock attractiveness


Sun 7 9 8 6 9 9 7 9 13 77

Cipla 6 7 8 6 6 7 5 7 14 66

GSK Pharma ** 4 9 7 3 6 9 - 6 14 64

Lupin 5 6 6 6 8 5 6 6 14 62

Torrent Pharma 6 7 6 5 6 3 6 8 14 61

Cadila 6 7 7 5 6 5 6 6 12 60

Dr. Reddy's Labs 4 6 6 4 6 2 7 5 12 52

Glenmark 2 3 5 6 6 5 3 9 10 49

Ranbaxy 6 5 7 5 6 3 5 3 9 49

** GSK Pharma score pro-rated as rating for Non-domestic business is not applicable Source: MOSL

4 buys: Cipla, Lupin, Torrent, GSK Pharma

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

4 of the top 5MEDICINES score

companiescorrespond withApproach 1. We

are Neutral on Sunonly due to rich

valuations

MEDICINESMeasures

Glenmark

Torrent

GSK

Lupin

CadilaDr Reddy

Cipla

Sun

10

20

30

40

10.0 14.0 18.0 22.0 26.0 30.0

Ranbaxy (53%, 65x)

Earnings growth v/s Valuation: Cipla, Torrent, Lupin on top ... ... GSK merits rich valuation due to superior return ratios

Note - Adj. RoCE - RoCE adjusted for other income in P&L and Cash in Balance sheet Source: MOSL

RoCE and Adj. RoCE are average of FY11-13

22 17 16 13

28 2715

25

25

16 19

7

22 23

14

26

47

Sun

Cip

la

DR

L

Ran

baxy

Cad

ila

Lupi

n

GS

K

Gle

nmar

k

Tor

rent

RoCE Adj. RoCE Very high due

to -ve capital

employed

FY11 P/E (x)


(%) (%)

August 2011 5


Year Net Sales PAT EPS EPS P/E P/BV RoE RoCE EV/ EV/

End (INR M) (INR M) (INR) GR. (%) (X) (X) (%) (%) Sales EBITDA

03/11A 63,145 9,671 12.0 -3.7 23.3 3.4 14.5 15.8 3.6 17.4

03/12E 69,193 10,760 13.4 11.1 21.0 3.0 14.4 17.2 3.3 14.5

03/13E 79,041 13,177 16.4 22.2 17.1 2.7 15.6 18.8 2.8 12.1

03/11A 57,068 8,582 19.3 25.9 23.3 6.1 29.3 25.1 3.6 19.5

03/12E 64,784 9,913 22.3 15.5 20.2 5.0 27.1 28.2 3.2 16.8

03/13E 74,127 11,418 25.7 15.2 17.5 4.1 25.7 27.1 2.7 13.8

03/11A 22,265 2,702 31.9 0.8 18.4 4.9 29.2 24.1 2.3 12.4

03/12E 25,596 3,392 40.1 25.6 14.7 3.8 29.3 24.9 1.9 9.6

03/13E 29,817 4,029 47.6 18.8 12.4 3.1 27.7 25.1 1.6 8.0

12/10A 21,116 5,814 68.6 15.2 31.4 9.5 30.1 44.8 7.6 21.9

12/11E 23,740 6,567 77.5 12.9 27.8 8.7 31.3 46.3 6.8 20.2

12/12E 26,921 7,586 89.6 15.5 24.1 8.0 33.4 49.5 5.9 17.2

03/11A** 57,214 18,161 17.5 34.4 26.5

03/12E 65,601 17,952 17.3 27.9 26.8 4.4 17.7 20.5 6.6 20.8

03/13E 75,976 21,626 20.9 20.5 22.2 3.9 18.5 22.2 5.5 16.7

03/11A 46,302 6,334 30.9 26.4 26.6 7.8 37.5 30.5 3.8 17.2

03/12E 51,717 5,801 28.3 -8.4 29.1 6.2 27.3 25.4 3.4 17.2

03/13E 59,983 8,419 41.1 45.1 20.0 5.0 27.6 27.2 2.9 14.0

12/10A 89,608 10,855 25.8 467.1 15.2 2.9 19.4 15.9 2.3 11.1

12/11E 85,242 4,991 11.9 -54.0 33.0 2.7 11.4 10.7 2.4 23.0

12/12E 93,005 7,052 16.7 41.3 23.3 2.4 10.4 11.1 2.2 18.5

03/11A 74,693 11,099 65.6 - 21.6 5.3 24.1 16.7 3.5 16.7

03/12E 81,754 11,615 68.6 7.8 20.7 4.7 22.5 15.4 3.2 17.1

03/13E 90,323 13,725 81.1 18.2 17.5 4.2 23.5 17.0 2.9 14.4

03/11A 29,491 3,548 12.5 7.2 25.5 4.2 17.4 13.4 3.6 17.7

03/12E 37,007 4,584 16.1 29.2 19.7 3.2 17.0 15.3 2.8 10.4

03/13E 40,693 5,612 19.7 22.4 16.1 2.6 17.1 16.3 2.5 11.1

Financial & valuation summary

Company

Cipla

Lupin

Torrent

Pharma

GSK Pharma

Sun Pharma

Cadila

Ranbaxy

Dr. Reddy's

Glenmark

** IncludesPara-IV/one-off upsides

Domestic Formulations (DF) Index is an outperformer over 5 years ... ... and also in the last 1 year

80

90

100

110

120

130

Aug

-10

Oct

-10

Dec

-10

Feb

-11

Apr

-11

Jun-

11

Aug

-11

50

100

150

200

250

Aug

-06

Nov

-06

Feb

-07

May

-07

Aug

-07

Nov

-07

Feb

-08

May

-08

Aug

-08

Nov

-08

Feb

-09

May

-09

Aug

-09

Nov

-09

Feb

-10

May

-10

Aug

-10

Nov

-10

Feb

-11

May

-11

Aug

-11

Sensex BSE Healthcare Index DF Index

All indices re-based to 100

August 2011 6


4 A's and 4 AilmentsTo drive USD21b opportunity by 2015, 2x over 2010

The India domestic pharma story is founded on 4 pillars, what we call the 4 A's -

Affordability

Medicines are becoming more affordable led by (1) Rising per capita income, (2)Urbanization, and (3) Higher penetration of health insurance. This is driving the growth inthe domestic pharma market (see page 9).

Access

People's access to medicines is improving given (1) Rising government spend on healthcare,(2) India's improving medical infrastructure, and (3) Companies' thrust on increasing ruralreach. All are combined to further expand the domestic pharma market (see page 12).

Awareness

Health awareness in India is rising on the back of (1) Improving literacy, and (2) Risingpenetration of media. This serves as an undercurrent for sustaining pharma demand (seepage 14).

Ailments

As a trend, incidence of chronic/lifestyle ailments (cardiovascular, central nervous system,diabetes) is rising compared to acute ailments. Medicine demand from these segmentswill grow faster than the rest of the Indian pharma market (see page 15).

USD21b opportunity by 2015

Based on the past data and present trends, we have estimated the 2015 (FY16) Indianpharma market using three different approaches - Approach 1 (Affordability-based): Correlation between per capita GDP and per

capita pharma consumption Approach 2 (Access-based): Trend in pharmacies and sales per pharmacy Approach 3 (Ailment-based): Summation of various ailment segment sizes.

Averaging the market size arrived using each approach, we estimate the total India marketsize at USD21b by 2015. We discuss below the methodology under the three approaches.

Approach 1: Affordability-basedCorrelation between per capita GDP and per capita pharma consumption

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

A #1

A #2

A #3

A #4

Main Report

Approach 1: Affordability

Market size: INR983b

August 2011 7


We estimate FY11-16 per capita GDP CAGR of 12%. Applying a 1.3x multiplier, wearrive at FY16 per capita pharma spend of INR784. Multiplying by the then expectedpopulation, we estimate the pharma market size at INR983b, a CAGR of 15% from currentlevel of INR465b.

2015 Indian pharma market estimate: Affordability approachPer capita Per capita Multiplier Pharma

GDP pharma conspn. (x) market

INR CAGR (%) INR CAGR (%) INR b CAGR (%)

(1) (2) (3) (4) (5) = (4) / (2) (6) (7)

FY01 20,786 - 140 - - 151 -

FY06 33,827 10.2 212 8.7 0.8 230 8.9

FY11 60,048 12.2 390 12.9 1.1 465 15.1

FY16 105,668 12.0 784 15.0 1.3 983 15.0

Source: Industry/MOSL

Approach 2: Access-basedTrend in pharmacies and sales per pharmacy

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

2015 Indian pharma market estimate: Access approachYear Pharmacies CAGR Mkt Mkt/Pharmacy CAGR

(%) (INR b) (INR) (%)

2000 322,023 - 151 467,420 -

2005 410,992 5.0 230 559,622 3.7

2010 550,000 6.0 465 846,018 8.6

2015 736,024 6.0 936 1,272,121 8.5

Note: As precise data on pharmacies is not available, we have back calculated number of pharmacies for

2005 and 2000 based on the 2010 estimate of 550,000 pharmacies and long-term CAGR of 4.5%


Approach 3: Ailments-basedSummation of various ailment segment sizes

The Indian pharma market can be broken down into 10 major therapeutic segments. Wehave analyzed the 2000-2010 growth trend in each of these segments. Going forward, webelieve the growth will accelerate, especially in chronic ailment therapeutic segmentssuch as CVS, CNS and anti-diabetics.

Adding up the individual segments in 2015, we arrive at the total Indian pharma marketsize of INR962b.

Approach 2: Access


Approach 3: Ailments


August 2011 8


2015 Indian pharma market estimate: Ailment approach (INR b)Market CAGR Mkt Incremental

size (%) size mkt - 2015

2000 2005 2010 00-05 05-10 10-15E 2015E over 2010

Anti-diabetic 5 10 27 17.2 22.1 25 83 56

CVS 13 24 53 13.3 17.1 21 137 84

CNS 7 17 26 19.6 9.4 20 65 39

Gastrointestinal 17 24 51 8.0 16.2 15 103 52

Respiratory 16 22 41 6.5 13.5 15 82 41

Dermatology 8 13 25 8.7 15.1 15 51 26

Anti-infectives 29 47 80 10.5 11.2 13 147 67

Gynaecology 9 8 26 -2.3 26.9 13 49 22

Pain/Analgesic 14 21 40 7.6 14.3 11 68 28

Vitamins/Minerals 15 28 36 12.9 5.4 10 58 22

Others 19 18 59 -1.3 27.6 15 119 60

Total 151 212 406 7.1 13.8 15.7 962 436


2015 Indian domestic pharma market of USD21bAverage of the three approaches

Averaging the figure arrived using the three approaches, we estimate the 2015 Indiandomestic market size at INR960b (USD21b) i.e. a CAGR of 16% over 2010-15 (FY11-FY16).

Independently, McKinsey has also estimated the Indian domestic pharma market afterconsidering factors like income demographics, medical infrastructure, disease incidenceand penetration of health insurance. It estimates 2015 market size of USD20b (INR920b@ INR/USD of 46). In the process, India will improve its global rank in terms of valuefrom 14 currently to top 10 by year 2015.

Accelerating growth in domestic formulation market India will be among world's top 10 pharma markets by 2015

Source: Mckinsey/MOSL

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

3.3 3.5 3.7 4.1 4.7 5.2 6.07.5 7.9 8.3

10.2

21.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

9.3% CAGR

14.2% CAGR

15.6% CAGR

444

8246 38 25 32 25 25 38 19 20 15 15 20

3.3

1.8

1.21.4

1.2 1.31.7 1.8

1.9

2.9

1.92.2

1.92.1

US

Japa

n

Fra

nce

Ger

man

y

Italy

UK

Spa

in

Can

ada

Chi

na

Mex

ico

Bra

zil

Sou

th K

orea

Tur

key

Indi

a2015 market size (US$b) Grow th over 2005 (x)

Indian pharma mkt (INR b)

Approach 1 983

Approach 2 936

Approach 3 962

Average 960

USD b 21

(USD b)

August 2011 9


A #1 - AffordabilityRising per capita income, urbanization, and health insurance penetration will drive

pharma spend

India's NTD journey will steadily drive up per capita income

In 2007, we published our first note on the concept of NTD (next trillion dollar of India'sGDP). The core NTD thesis is this: It took India about 60 years post independence toclock the first trillion dollar of GDP. With nominal GDP growth of 14-15%, at constantexchange rates, India's next trillion dollar (NTD) will come in just 4-5 years.

Every successive trillion dollar GDP would take lesser time and by 2020 India wouldcomfortably reach a USD5t GDP assuming 8% real GDP growth coupled with 5% estimatedinflation.

India's NTD era — next trillion dollar of GDP getting added in successively lower time (USD b)

Source: MOSPI/MOSL

With population growing at a much lower rate than GDP, India's per capita GDP will keeprising steadily for the next several years.

India's per capita GDP is steadily rising (INR)

Source: MOSPI/MOSL

20,7

86

22,1

56

23,4

76

25,9

29

30,0

17

33,8

27

38,5

19

43,8

44

48,6

96

53,6

79

60,0

48

67,1

95

75,2

14

84,2

15

94,3

20

105,

668

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

11.5% CAGR

A #1

Affo

rdab

ility

By FY20India GDP would

triple from thecurrent level and

be almost ~5times the level of

FY08

India'srising per capitaGDP augurs well

for domesticpharma market

21 33 57 150

293

451

461

479

508

721

837

946 1,21

4

1,31

4

1,72

8

2,90

9 3,74

1 4,81

1

600 1,

230 1,

969

2,26

3

2,56

6 3,29

9 4,24

3

5,45

6

FY

51

FY

60

FY

70

FY

80

FY

90

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12E

FY

13E

FY

14E

FY

15E

FY

16E

FY

17E

FY

18E

FY

19E

FY

20E

1st USD tn

2nd USD tn4 years

58 years

3rd USD tn

4th USD tn2 years

3.5 years

5th USD tn1.5 years

August 2011 10


Large population with low healthcare penetration presents hugeopportunity

India has 16% of the world's population, yet only accounts for 1% of the total amountspent on health globally. India's expenditure on health amounted to 4% of GDP (2008),substantially lower than developed markets and even BRIC peers - Brazil (8.4%), Russia(5.2%) and China (4.3%).

Further, public health expenditure accounted for less than 30% of India's total healthcarecosts (2008), reflecting the very basic level of healthcare provided by the government,which is insufficient to meet the health needs of the entire population. In comparison,BRIC peer governments accounted for ~50% of their respective country's healthcarespend.

Going forward, economic growth coupled with improving government finances shouldnarrow the gap, implying growth in pharma demand.

Urbanization: a positive for pharma demand

Increasing urbanization leads to higher demand for pharma products based on factorssuch as (1) higher affordability, (2) better medical infrastructure, and (3) wider prevalenceof chronic diseases. Share of India's tier-1 markets has increased from 60% in 2006 to63% in 2010. Thus, the trend of rising urbanization in India is a key positive for growth inpharma demand.

Higher per capita income will boost spend on pharmaceuticals

There is a direct co-relation between per capita income and spend on healthcare, includingpharmaceuticals. Currently, India has one of the world's lowest per capita spend onpharmaceuticals. As India's per capita income grows going forward, healthcare spend isexpected to witness one of the highest growth rate among all categories over the next twodecades. Healthcare spend is expected to grow to 13% of GDP by 2025.

India has one of the lowest per capita spend on pharmaceuticals % of avg. household income spent on healthcare


700

620

490450 420

370

280220 200

130 12060 60

20 1055

8

US

A

Japa

n

Can

ada

Fra

nce

Ger

man

y

Spa

in

Italy

UK

Rom

ania

Rus

sia

Tur

key

Bra

zil

Mex

ico

Chi

na

Pak

ista

n

Indi

a

BR

ICS

(av

g)

4.3

5.4

8

8.4

8.4

8.7

8.9

10.1

10.4

11

15.7

4.1India

China

Russia

Japan

UK

Brazil

Italy

Australia

Canada

Germany

France

US(USD)

8.4

5.24.3 4.0

Brazil Russia China India

BRICs healthcare as % of GDP

India is the lowest

Share of tier-1 markets in

pharma demand (%)

Rising urbanization is a positive

60 60

61

6263

2006 2007 2008 2009 2010

August 2011 11


Rising health insurance penetration to improve affordability

Currently around 300 million people in India are covered under health insurance, and thisnumber is expected to double by 2020. Going forward, health insurance should get a boostby way of various regulatory reforms like non-life tariff deregulation, lower capitalrequirements for players, increase in FDI limit, etc.

Increasing penetration of health insurance over the next few years will spur demand forpharmaceuticals as it becomes possible for patients to afford more sophisticated and moreexpensive therapies.

Metro and Tier-1 cities market share up from India - population distribution60% in 2006 to 63% in 2010


Health insurance penetration in India is rising Per capita premium almost quadruples in 5 years (INR)

Source: IRDA/MOSL

28 29 29 30 31

33 31 32 32 32

19 19 19 19 20

21 21 20 18 17

CY2006 CY2007 CY2008 CY2009 CY2010

METROS CLASS I TOWNS CLASS II TO VI RURAL

5451474340

37343230302928 4649

535760

63666870707172

2000

2005

2009

2010

2015

2020

2025

2030

2035

2040

2045

2050

Urban population (%) Rural Population (%)

22.232.1

51.366.3

83.10.06%

0.07%

0.10%

0.12%

0.13%

FY06 FY07 FY08 FY09 FY10

Premium (Rs b) Premium (% of GDP)

20.3

28.9

45.4

57.9

71.5


(INR b)

}Tier-1

mkt

August 2011 12


A #2 - AccessRising government spend on healthcare, better infrastructure will improve

availability

Rising government spend on healthcare

Healthcare for all is high on the agenda of the present Indian government. This wasdemonstrated in the union budget for 2010-2011, when the healthcare expenditure outlaywas increased to USD5.95b from less than a USD5.17b allocated in 2009-10. The budgetallocation has been significantly increased for rural healthcare, with the government alsoannouncing plans to set up six "All India Institute of Medical Sciences "(AIIMS) institutionsacross the country.

Government spending on healthcare will play a major role in increasing the penetration ofpharmaceuticals especially in rural areas. Government spend has grown at 18% CAGRover FY06-09 and is translating into higher level of access in Tier II and rural markets.Under Rashtriya Swasthya Bima Yojna (National Health Insurance Scheme), thegovernment plans to create health cover for approximately 400m people; 19m familieshave already been covered and implementation seems to be on track.

Going forward, the government has announced plans to take its spending on healthcare to3% of GDP from the current level of about 1%. Rising government spend on healthcareimproves people's access to medicines, helping pharma demand.

Improving healthcare infrastructure

The healthcare infrastructure in India is likely to improve and will be a critical growthdriver for pharmaceuticals. Currently, India's healthcare infrastructure is at nascent stagecompared to western countries. India has only 9 hospital beds per 10,000 people comparedto 30-40 in US and Western Europe. Even other developing countries like Brazil, Chinaand Thailand fare much better than India with 24-30 beds per 10,000. Industry data suggeststhe number of hospital beds in India is likely to double by 2015.

Likewise, India's current doctor-population ratio at 5 per 10,000 is the lowest among majorcountries. However, with rising number of students gaining admission to medical colleges,this ratio is set to improve going forward. Further, diagnostic laboratory services market(estimated at USD750m) is expected to grow @ 20-25% p.a. over the next few years.

Rising government spend on healthcare Allocation under National Rural Health Mission (INR b)

Source: Economic Survey, Union Budget 2011 Source: Ministry of Health/MOSL

67.3

90

108.9119.3

140.5


A #2

- Acc

ess

280

315

348

415

454

521

632

739

907

997

286

9.510.0

22.7

16.9

21.3

14.7

19.3

10.510.1

2.1

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

Helathcare Exp (Rs b) Grow th (%)Healthcare Exp (INR b)

August 2011 13


Students entering medical colleges and number of No. of allopathic doctors registered with state medicalcolleges - rising trend councils - Rising trend here as well

Hospital beds per 10,000 - India among world's lowest Doctors per 10,000 people - India the lowest the amongworld majors

Source: National Health Profile

9

24

30

31

34

39

39

39

72

83

97

139

India

Braz il

China

US

Canada

UK

Italy

A us tralia

France

Germany

Russ ia

Japan

57

11

12

20

20

23

25

26

30

34

34

4243

India

Pakis tan

China

Braz il

Japan

Mex ic o

UK

A us tralia

US

A rgentina

Franc e

Germany

Italy

Rus s ia

660,856

682,080

708,043

736,743

757,377

2005 2006 2007 2008 2009

Source: WHO

189229 242 262 266 289 300

165

35333029

2625

18

7

FY96 FY01 FY05 FY06 FY07 FY08 FY09 FY10

No of medical colleges in India

No of students entering medical colleges ('000)

1815

18

26

8

16 16

21

11

18

13

23

14

9

2

17

CY2007 CY2008 CY2009 CY2010



Companies are focusing on increasing their rural reach

Currently around 67 per cent of India's population or 742 million people live in rural areas,but rural markets contribute to only 17 per cent of the overall pharmaceutical market'ssales. In the last few years both MNCs and Indian pharma companies are increasing theirattention to tier 2 markets. The above-mentioned factors, namely, increasing governmentspend on healthcare, improvement in healthcare infrastructure, and growing healthawareness etc is expected to drive pharma growth in these markets.

Growth in tier-2 markets showing signs of catching up (%)

August 2011 14


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

High correlation between literacy and per capita pharma consumption

We believe literacy is one of the key factors driving awareness about healthcare in generaland pharmaceuticals in particular. In fact, literacy also has an indirect impact on pharmaconsumption. Higher literacy typically leads to higher per capita income (i.e. A #1,affordability), which in turn drives pharma demand.

Our study of pharmaceutical consumption and literacy rates among various states of Indiaconfirms a strong correlation between literacy rate and pharma demand. As seen in thegraph below, states with high literacy rates like Kerala, Maharashtra, Punjab and Haryanahave higher per capita spend on pharmaceuticals compared to states with low literacyrates like Bihar, UP, Rajasthan and Assam.

Rising media penetration also leads to higher awareness

Penetration of all forms of media is rising in India - print, TV, radio and internet. Highermedia exposure leads to better awareness on a whole range of issues including healthcare,thus favourably influencing pharma demand.

High correlation of literacy with per capita pharma consumption Literacy rate in India is rising

Rising media penetration is a positive for healthcare awareness and pharma demand

Note: HH stands for Households Source: Industry/MOSL

40

55

70

85

100

Oris

sa

Bih

ar

Guj

arat UP

Raj

asth

an

Ass

am

Kar

nata

ka

Mad

hya

Wes

t Ben

gal

And

hra

Tam

il N

adu

Har

yana

Pun

jab

Ker

ala

Mah

aras

htra

0

200

400

600

800Literacy rate (%) Per Capita Pharma spend (Rs)


0

25

50

75

100

Oris

sa

Bih

ar

Guj

arat UP

Raj

asth

an

Ass

am

Kar

nata

ka

Mad

hya

Wes

t Ben

gal

And

hra

Tam

il N

adu

Har

yana

Pun

jab

Ker

ala

Mah

aras

htra

0

20,000

40,000

60,000

80,000

Literacy rate (%) Per CapitaGDP (Rs)

108 112 118 129 136 142

60.258.456.353.652.151.4

2005 2006 2007 2008 2009 2010

Total TV HH (m) TV penetration (%)

62 70 7894 105 115

5763 66

73 77 81

2005 2006 2007 2008 2009 2010

C&S HH (m) C&S penetration (% of TV Household)

A #3

- Awa

rene

ss

August 2011 15


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

India has so far been an acute ailments market

Ailments can be of two types - acute and chronic. An acute ailment can be described asa condition of rapid onset and severe symptoms of brief duration e.g. infectious diseaselike common cold, fever etc. Acute ailments may turn chronic if they remain unresolved.

Chronic ailments can be described as conditions that, with current medical knowledge,can be alleviated but not cured. Unlike acute ailments, chronic ailments (1) do not usuallyresolve of their own accord, and (2) are of longer duration e.g. diabetes, asthma, bloodpressure, etc.

Due to relatively poor sanitation conditions, drugs addressing infectious diseases arepredominant in most developing countries. Hence, the proportion of acute to chronic ishigher in developing countries compared with developed countries.

Changing disease profile to boost demand for chronic therapies

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

Source: McKinsey/MOSL

Therapeutic mix of major countries (%): Trend in India's therapeutic mix (%)India currently is an acute ailments market Share of chronic ailments segment is on the rise

65 58 55 55

3527

35 42 45 45

65 73

US Germany Japan UK China India

Chronic Acute

84 78 77 70

16 22 23 30

2000 2005 2010 2015E

Acute segment Chronic segment

A #4

- Ailm

ents

August 2011 16


Respiratory11%

Gastrointestinal10%

Vitamins/Minerals

10%

Antiinfec-tives18%

Gynaecology6%

Cardiac9%

Pain/Analgesic

10%

Dermatology6%

CNS5%

Others12%

Antidiabetic3%

India: Therapeutic trend (2000 to 2010)

Historically, in the Indian pharma market, the acute ailments therapy segment was the largest in terms of sales, althoughit experienced slower growth rates than some of the chronic therapies. Nevertheless, almost all therapy areas experienceddouble-digit growth over the 2000-10 period. This is attributed to the preceding three As - Affordability, Access andAwareness.

Among key therapies, anti-diabetics was the fastest growing in terms of sales with CY00-10 CAGR of 19.6% followedby CVS (cardiovasculsar system) at 15%. In terms of therapeutic segment market share, both anti-diabetics and CVSgained ~2.5% share each over CY00-10, whereas anti-infectives and vitamins & minerals lost 2% share each.

Trend in major therapeutic segments Indian pharma market therapeutic mix (2000)

Prevalence rates of key chronic ailments to rise Market sizes of major corresponding therapies (INR b)

Indian pharma market therapeutic mix (2005) Indian pharma market therapeutic mix (2010)



3.32.8

2.5

1.3

0.2

4.9

3.7

2.7 2.7

0.2

Coronaryheart

disease

Diabetes Asthma Obesity Cancer

2005 2015

2410

22

137

83 82

Coronary heartdisease

Diabetes Respiratory

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

51 41 36 40 53 26 25 26 2780

19.6

14.411.811.3

15.210.99.19.9

12.010.8

Ant

iinfe

ctiv

es

Gas

troi

ntes

tinal

Res

pira

tory

Vita

min

s/M

iner

als

Pai

n/A

nalg

esic

Car

diac

Gyn

aeco

logy

Der

mat

olog

y

CN

S

Ant

idia

betic

Market Size (Rs b) 2000-10 CAGR (%)

Dermatology5%

Gynaecology3%

Others8%CNS

7%

Antidiabetic4%

Respiratory9%Vitamins/

Minerals13%

Cardiac10%

Pain/Analgesic

9%

Gastrointes-tinal11%

Antiinfec-tives21%

CNS6%

Antidiabetic6%

Others13%

Gynaecology6%

Pain/Analgesic

9%

Vitamins/Minerals

8%

Respiratory9%

Gastroin-testinal11%

Antiinfec-tives16%

Dermatology5%

Cardiac11%

(% of population) 2005 2015

August 2011 17


CVS, Diabetes, CNS and Anti-infectives will be the high potential segments

We believe that CATS like Cardiovascular (CVS), Diabetes, Central Nervous System(CNS) will account for a major chunk of the incremental market over the next 5 years.Also, with rising income levels in the rural areas, anti-infectives will also record goodgrowth over the same period. We believe these four will be the key segments of thefuture, and garner more than 50% of the delta in the Indian formulations market, 2015over 2010.

We juxtaposed the incremental opportunity of various therapeutic segments against thenumber of existing players in each of these segments, to arrive at the following plot.

CVS, Anti-infectives, Diabetes and CNS are large segments with relatively fewer players

Note: AF is Attractiveness Factor of segment, which is defined by Source: Industry/MOSL

the incremental size of the opportunity per player

Our key conclusions from this chart:

1. As discussed before, CVS, Anti-infectives, Diabetes and CNS will record maximumshare of incremental market (the size of bubble indicates this).

2. We also note that the attractiveness factor (i.e. incremental segment market sizedivided by number of players) is most favorable for these segments.

3. Hence, companies which enjoy strong positioning in these segments will be able togenerate maximum value from their respective domestic formulations businesses.

DiabetesAF - 396CNS

AF - 215

Dermatology

Gynaecology

CVSAF - 400

PainVitamins

RespiratoryAF - 147

GIAF - 109

AIAF - 337

0

10

20

30

40

0 20 40 60 80 100

Incremental mkt size (INR b) 2010-15E

No

. of

Pla

yers

Top 4 ailmentsegments are

mainly based onAttractiveness Factor,which is highest forCVS, Diabetes, Anti-infectives and CNS

in that order

August 2011 18


4 BuysCipla, Lupin, Torrent and GSK Pharma

Having identified the most attractive ailment segments, we have adopted two approachesto arrive at our top plays on India's domestic formulations - Approach 1: 3-screen shortlisting process as follows: Screen #1 - Identify companies with dominating presence in high-potential ailment

segments Screen #2 - Of the above, exclude companies with unfavorable non-domestic

business Screen #3 - Juxtapose the Screen #2 surviving companies vis-à-vis earnings growth

and valuation Approach 2: MEDICINES score, based on nine key success factors for picking

domestic formulation stocks

The final list from both the approaches is - Cipla, Lupin, Torrent and GSK Pharma.

Approach 1: 3-Screen shortlisting process

Identify companies with dominating presence in high-potential ailmentsegments

The chart below maps the positioning of pharmaceutical players in the key therapeuticsegments of CVS, Diabetes, anti-infectives and CNS. We have plotted the dominance ofeach player in these respective segments using prescription market share as the keymeasure of dominance. Given the fragmented nature of the Indian formulations market,we have defined 5% as the minimum threshold market share which qualifies as highdominance while market share of between 3-5% qualifies as medium category.

Screen #1

Presence in highpotential segments

Companies in bold have been covered in this report Source: MOSL


Sun Pharma,

Torrent, Cadila,

Cipla, Unichem,

Ranbaxy, Lupin

Abbott, U S V,

Aventis,

Sun Pharma

Ranbaxy, Alkem,

Aristo, Cipla,

GSK Pharma,

Piramal

Sun Pharma, Intas,

Torrent, Abbott,

Piramal

Cipla, GSK Pharma

Aventis, U S V,

Emcure, Piramal,

Dr Reddy's, Intas,

Micro Labs

Eli Lilly, Piramal,

Micro Labs, Lupin

Alembic,Mankind,

FDC, Macleods,

Lupin

Aventis, Ranbaxy,

Unichem,

Micro Labs

Cadila, Piramal,

Ranbaxy

Pfizer, Mankind,

Dr Reddy's,

Sun Pharma,

Glenmark, Biocon

Others

IPCA Labs,

AstraZeneca,

Pfizer

Panacea,

Ranbaxy

Novartis, Cipla,

Lupin


High

Medium

Low

Do

min

an

ce

August 2011 19


Sun, Cipla, Lupin, Abbott, GSK best placed to capture the opportunityWe note that these companies are best placed to capture the incremental opportunity inthe high-growth life-style and anti-infectives segments by virtue of:1. Strong presence in these key segments2. High prescription market share of at least 5%3. Brand-building ability of these companies

Ranbaxy, Cadila and Aventis also reasonably well placedThese companies are also relatively well placed in the Indian formulations market andform the 2nd-tier of companies which should be focused on as participants in this largeopportunity.

Dr. Reddy's & Glenmark need to further strengthen their positioningThe chart above indicates that DRL and Glenmark have a lot of catching-up to do toqualify as companies which will be able to exploit the large opportunity in the domesticformulations business. These companies suffer from relatively lower prescription marketshare in the high growth therapeutic segments.

Most Indian companies are not pure-plays; view on non-domestic businessis also important

It is well-known that most Indian pharmaceutical companies are not pure-plays on thedomestic opportunity given their strong focus on international generic businesses. Hence,it becomes imperative to map the domestic and the non-domestic businesses of thesecompanies to take an overall view on these companies. The chart below depicts the matrixof these two businesses:

Juxtapose the Screen #2 shortlisted companies vis-à-vis earnings growthand valuation

We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR andFY11 P/E as depicted below. Based on the same, the top picks are Cipla, Lupin andTorrent.

Screen #2

Screen #3

Non-domestic business

Earnings growthv/s Valuation

Company mapping relative to the attractiveness of domestic and international business

Source: MOSL

Inte

rna

tio

na

l B

us

ine

ss

Sun Pharma,

Cipla, Lupin,

Cadila,

Torrent Pharma

Ranbaxy,

GSK Pharma

Dr ReddyFavourable

Neutral

Unfavourable

Unfavourable Neutral Favourable

Domestic Business

Glenmark

Pharma3 of our 4

top picks arefavorably placed

in both theirdomestic andinternationalbusinesses


covered in this report have

been mapped

August 2011 20


Approach 2: The MEDICINES score

We have identified nine key success factors (KSFs) for shortlisting Indian pharmacompanies and their stocks. These success factors correspond to the initials of the word"MEDICINES". We have rated the companies on these KSFs to arrive at a final"MEDICINES Score" out of a maximum possible 100. The companies with the highestMEDICINES Score are the most attractive investment ideas.

We have considered the following KSFs for evaluating the domestic formulations business(see box on page 21 for explanation). Our MEDICINES Scorecard is given below.

M Mix & Market shareE Equity with doctorsD Distribution & reachI Introductions

C CAGR & scale-upI Improvement in MR productivity

N Non-domestic businessE Earnings growthS Stock attractiveness


Sun 7 9 8 6 9 9 7 9 13 77

Cipla 6 7 8 6 6 7 5 7 14 66

GSK Pharma ** 4 9 7 3 6 9 - 6 14 64

Lupin 5 6 6 6 8 5 6 6 14 62

Torrent Pharma 6 7 6 5 6 3 6 8 14 61

Cadila 6 7 7 5 6 5 6 6 12 60

Dr. Reddy's Labs 4 6 6 4 6 2 7 5 12 52

Glenmark 2 3 5 6 6 5 3 9 10 49

Ranbaxy 6 5 7 5 6 3 5 3 9 49

** GSK Pharma score pro-rated as rating for Non-domestic business is not applicable Source: MOSL

4 buys: Cipla, Lupin, Torrent, GSK Pharma

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

4 of the top 5MEDICINES score

companiescorrespond withApproach 1. We

are Neutral on Sunonly due to rich

valuations

MEDICINESMeasures

Glenmark

Torrent

GSK

Lupin

CadilaDr Reddy

Cipla

Sun

10

20

30

40

10.0 14.0 18.0 22.0 26.0 30.0

Ranbaxy (53%, 65x)

Earnings growth v/s Valuation: Cipla, Torrent, Lupin on top ... ... GSK merits rich valuation due to superior return ratios

Note - Adj. RoCE - RoCE adjusted for other income in P&L and Cash in Balance sheet Source: MOSL

RoCE and Adj. RoCE are average of FY11-13

22 17 16 13

28 2715

25

25

16 19

7

22 23

14

26

47

Sun

Cip

la

DR

L

Ran

baxy

Cad

ila

Lupi

n

GS

K

Gle

nmar

k

Tor

rent

RoCE Adj. RoCE Very high due

to -ve capital

employed

FY11 P/E (x)


(%) (%)

August 2011 21


MEDICINES Score - Criteria & rating methodology

C - CAGR and scale-up Maximum score: 10

CAGR & scale-up captures the past and future growth in

the domestic formulations portfolio driven by various factors

like therapeutic mix, brand equity, productivity of sales

force, new launches, etc. Companies with consistent high

growth are rated higher.

I - Improvement in MR productivity Max. score: 10

MR (medical representative) productivity captures the ability

of a company to drive growth in its domestic formulations

portfolio through improvement in productivity of the sales

force (measured as Sales/MR). Companies with

consistently high or improving sales force productivity are

rated higher.

N - Non-domestic business Maximum score: 10

This captures our view on the other businesses of the

company including one-off option values. Companies

expected to do well in these businesses are rated higher.

E - Earnings growth Maximum score: 10

We have considered overall earnings growth, and not just

from the domestic business. Companies with high long-

term earnings growth (FY05-13) are rated higher.

S - Stock Attractiveness Maximum score: 20

Stock attractiveness has a higher weight of 20 compared

to others, and captures our view on the stock including

issues such as depth of management, corporate

governance, return ratios, and valuations. Companies with

favorable outlook are rated higher.

We briefly explain below the KSFs and the rating criteria.

M - Mix & Market share Maximum score: 10

Mix & Market share indicates the therapeutic mix for the

company in the domestic formulations market. We have

identified life-style segments (CVS, Diabetes & CNS) and

Anti-infectives as the most attractive segments for driving

future growth and profitability. Companies with strong

presence in these segments will be rated higher.

E - Equity with doctors Maximum score: 10

Equity with doctors implies the brand equity which the

company enjoys with doctors. We have used prescription

market share and prescription rankings as the proxy to

measure brand equity with doctors. Companies with higher

prescription share and better prescription rankings are rated

higher.

D - Distribution & reach Maximum score: 10

This measures the distribution strength of a company in

terms of its presence in metros, Tier-I cities, towns, and

rural areas. Companies with wider distribution reach in

relevant geographies are rated higher.

I - Introductions Maximum score: 10

Introductions measures the ability of a company to drive

sales from new launches in the Indian formulations market

(since this is an important growth contributor for most Indian

companies). Companies with higher contribution from new

launches are rated higher.

August 2011 22


Domestic formulations companies - Comparative valuations (INR)Company Target Upside EPS (INR) P/E (X) EV/EBITDA (X) ROE (%)

(CMP) Price (%) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

Top Picks

Cipla (281) 361 28 12.0 13.4 16.4 23.3 21.0 17.1 17.4 14.5 12.1 14.5 14.4 15.6

Lupin (450) 514 14 19.3 22.3 25.7 23.3 20.2 17.5 19.5 16.8 13.8 29.3 27.1 25.7

Torrent (589) 762 29 31.9 40.1 47.6 18.4 14.7 12.4 12.4 9.6 8.0 29.2 29.3 27.7

GSK (2,155) 2,330 8 68.6 77.5 89.6 31.4 27.8 24.1 21.9 20.2 17.2 30.1 31.3 33.4

Others

Sun (464) 524 13 13.6 17.3 20.9 34.2 26.8 22.2 22.4 20.8 16.7 16.2 17.7 18.5

Cadila (824) 907 10 30.9 28.3 41.1 26.6 29.1 20.0 17.2 17.2 14.0 37.5 27.3 27.6

DRRD* (1,446) 1,670 15 65.6 68.6 81.1 21.6 20.7 17.5 16.7 17.1 14.4 24.1 22.5 23.5

Glenmark (318) 310 -3 12.5 16.1 19.7 25.5 19.7 16.1 17.7 10.4 11.1 17.4 17.0 17.1

Ranbaxy ## (468) 412 -12 25.8 11.9 16.7 15.2 33.0 23.3 11.1 23.0 18.5 19.4 11.4 10.4

* Dr. Reddy's

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

Equity with doctors

Comment Score

Leader in CNS, Gynaec and 2nd in CVS, Anti-diabetics 9

Market leader in AI and Respiratory 7

Leader in Anti-TB segment 6

Ranks 2nd in CNS and 7th in CVS 7

Market leader in Derma, Vit and Pain Mgmt 9

Among top 3 players in CVS and GI 7

Ranks 3rd in GI and Pain Mgmt 6

Ranks 2nd in Dermatology 3

Among the leaders in AI and Dermatology 5

Mix

MEDICINES Chronic therapy Score

Score contribution (%)

Sun 77 61 7

Cipla 66 42 6

Lupin 62 43 5

Torrent Pharma 61 62 6

GSK Pharma ** 64 5 4

Cadila 60 31 6

Dr. Reddy's 52 28 4

Glenmark 49 24 2

Ranbaxy 49 21 6

Distribution & reach

Metro/Tier I MR strength Score

(% of sales)

73 2,600 8

63 5,100 8

70 3,682 6

73 3,600 6

60 2,500 7

65 4,500 7

68 3,165 6

70 2,078 5

66 4,500 7

Introductions

In last Contbn to Score

4 years growth (%)

124 56 6

304 45 6

266 69 6

151 49 5

21 15 3

197 37 5

89 31 4

105 52 6

255 50 5

CAGR & Scale-up (%) - Sales

FY05-11 FY11-13 Score

23 18 9

14 13 6

22 19 8

19 18 6

8 14 6

12 15 6

18 16 6

19 17 6

10 16 6

Improvement in productivity

(Sales/MR, INR m)

2004 2010 Score

3.2 7.8 9

4.8 4.9 7

3.6 3.6 5

1.5 2.3 3

6.5 7.1 9

4.1 3.6 5

3.6 3.2 2

3.1 3.6 5

4.6 3.6 3

Non domestic

business

Favorability Score

High 7

Medium 5

High 6

High 6

Not applicable N.A.

High 6

High 7

Low 3

Medium 5

Earnings Growth

(FY11-13)

Comment (%) Score

22 9

21 7

13 6

22 8

16 6

21 6

12 5

24 9

55 3

Stock

attractiveness

Comment Score

Neutral 13

Top pick 14

Top pick 14

Top pick 14

Buy 14

Neutral 12

Neutral 12

Neutral 10

Sell 9

Detailed MEDICINES Score

Sun

Cipla

Lupin

Torrent Pharma

GSK Pharma **

Cadila

Dr. Reddy's

Glenmark

Ranbaxy

Sun

Cipla

Lupin

Torrent Pharma

GSK Pharma **

Cadila

Dr. Reddy's

Glenmark

Ranbaxy


August 2011 23


Ailment Profiles

Ailments

Infection

CVS Disease

Diabetes

CNS Diseases

Pain

Gastro-intestinal (GI) Problems

Respiratory Diseases

August 2011 24


Therapy snapshot

Infection

Augmentin - GSK, Zifi - FDC, Taxim - Alkem, Mox - Ranbaxy

Azithral - Alembic

29 28

47

6170

80

1717

18

20

18

19

2000 2001 2005 2008 2009 2010

Segment Size (INR B) Contribution to Industry (%)

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

FDC, 5.1

Alembic, 5

Macleods, 4.8

Others, 32.5

Mankind, 5.6

Piramal (Abbott), 5.7

GSK, 6

Cipla, 6.7

Aristo, 7.3

Alkem, 10.5

Ranbaxy, 10.8

Others, 44.8

GSK, 2.9

Cipla, 8.4Mankind, 8.3

Ranbaxy, 7.8

Aristo, 2.8

Alembic, 4.0Alkem, 4.0

Macleods, 4.5


FDC, 7.1

Anti-infectives

An infection is the colonization of a host organism by a

parasite species. Infecting parasites seek to use the host's

resources to reproduce, often resulting in disease.

Colloquially, infections are usually considered to be caused

by microscopic organisms or microparasites like viruses,

prions, bacteria, and viroids, though larger organisms like

macroparasites and fungi can also infect.

Hosts normally fight infections themselves via their immune

system. Mammalian hosts react to infections with an

innate response, often involving inflammation, followed by

an adaptive response. Pharmaceuticals can also help fight

infections.

Ailment snapshot

Anti-infective drugs are used to suppress/cure the infection.

Four types of anti-infective or drugs exist: antibacterial

(antibiotic), antiviral, antitubercular, and antifungal.

Depending on the severity and the type of infection, the

antibiotic may be given by mouth, injection or may be

applied topically. Severe infections of the brain are usually

treated with intravenous antibiotics. Sometimes, multiple

antibiotics are used to decrease the risk of resistance

and increase efficacy. Antibiotics only work for bacteria

and do not affect viruses. Antibiotics work by slowing down

the multiplication of bacteria or killing the bacteria.

Key Brands

Penicillins, Cephalosporins, Aminoglycosides, Macrolides,Quinolones, Tetracyclines

Key Drugs

Ailment & Therapy profile

Company Jan-07 Jan-08 Jan-09 Jan-10 Oct-10

Cipla 1 1 1 1 1

Mankind 5 4 4 3 2

Ranbaxy 2 2 3 2 3

FDC 3 3 2 4 4

Piramal (Abbott) 7 7 5 5 5

Macleods 10 10 10 9 6

Unbranded 6 6 7 7 7

Alkem 8 8 8 8 8

Alembic 4 5 6 6 9

GSK 9 9 9 10 10


Anti-infectives Segment (2001-10 CAGR - 12.4%) Anti-infectives Segment - Prescription Rankings

August 2011 25


Therapy snapshot

CVS Disease

Storvas - Ranbaxy, Cardace - Sanofi, Aten - Cadila, Losar-H - Unichem, Minipress-XL - Pfizer

CVS Segment (2001-10 CAGR - 15.9%) CVS Segment - Prescription Rankings

CVS Segment - Value market share (%) - 2010 CVS Segment - Prescription market share (%) - 2010

CVS Drugs

Cardiovascular disease are the class of diseases that

involve the heart or blood vessels (arteries and veins).While

the term technically refers to any disease that affects the

cardiovascular system, it is usually used to refer to those

related to atherosclerosis (arterial disease). These

conditions usually have similar causes, mechanisms, and

treatments. In practice, cardiovascular disease is treated

by cardiologists, thoracic surgeons, vascular surgeons,

neurologists, and interventional radiologists, depending on

the organ system that is being treated.

Ailment snapshot

Cardiovascular medications are used as a means to control

or to prevent certain forms of heart disease. Many people

with advanced heart disease may take several of these

drugs. Types of cardiovascular drugs may be broken into

groups depending upon their action or what they treat.

Categories that might describe drug actions include the

following: statins (for cholesterol), diuretics (for blood

pressure), anticoagulants (for blood thinning), anti-platelet

(for removing bold clots), beta-blockers (for preserving

normal heart rhythm after a heart attack and for lowering

high blood pressure), digitalis drugs (for cardiac failure),

vasodilators (for facilitating blood supply to the heart),

calcium channel blockers (for angina & high blood pressure)

and ACE inhibitors (for high blood pressure).

Key Brands

Angiotensin II Receptor Blockers, Angiotensin-ConvertingEnzyme (ACE) Inhibitors, Antiarrhythmics, Antiplatelet

Key Drugs


13 1424

3845

53

111111

10

9 9

2000 2001 2005 2008 2009 2010


Sanofi, 5.1

Emcure, 4.8

Ranbaxy, 5.8

Lupin, 5.6USV, 5.1

Others, 41.1

Cipla, 5.9

Unichem, 6.2

Sun, 7.1Torrent, 6.8

Zydus-Cadila, 6.5

Sanofi, 4.0Micro Labs, 3.3

Unichem, 4.0

Zydus-Cadila, 4.5

Torrent, 4.6

Lupin, 5.0

Cipla, 5.1


Sun, 6.8

Others, 48.2

USV, 9.3


USV 1 1 1 1 1

Sun 2 2 2 2 2


Cipla 5 5 4 4 4

Lupin 9 7 7 6 5

Torrent 8 8 6 5 6

Zydus-Cadila 3 3 5 7 7

Sanofi 7 6 9 9 8

Unichem 6 9 8 8 9

Micro Labs 11 10 10 11 10


August 2011 26


Therapy snapshot

Diabetes

Human Mixtrad - Novo, Lantus - Sanofi, Glycomet GP -USV, Novomix - Novo, Amaryl - Sanofi

Diabetes Segment - Value market share (%) - 2010 Diabetes Segment - Prescription market share (%) - 2010

Anti-diabetic

Diabetes mellitus, often simply referred to as diabetes, is

a group of metabolic diseases in which a person has high

blood sugar, either because the body does not produce

enough insulin, or because cells do not respond to the

insulin that is produced.

There are three main types of diabetes: Type 1

diabetes: results from the body's failure to produce insulin,

and presently requires the person to inject insulin. Type 2

diabetes: results from insulin resistance, a condition in

which cells fail to use insulin properly, sometimes

combined with an absolute insulin deficiency. Gestational

diabetes: is when pregnant women, who have never had

diabetes before, have a high blood glucose level during

pregnancy. It may precede development of type 2 diabetes.

Ailment snapshot

Anti-diabetic medications treat diabetes mellitus by

lowering glucose levels in the blood. With the exceptions

of insulin, exenatide, and pramlintide, all are administered

orally. There are different classes of anti-diabetic drugs,

and their selection depends on the nature of the diabetes,

age and situation of the person, as well as other factors.

Type 1 diabetes can only be controlled with the help of

injected insulin. Type 2 diabetes treatments include (1)

agents which increase the amount of insulin secreted by

the pancreas (Secretagogues), (2) agents which increase

the sensitivity of target organs to insulin (Insulin

sensitizers), and (3) agents which decrease the rate at

which glucose is absorbed from the gastrointestinal tract

(Alpha-glucosidase inhibitors).

Key Brands

Insulin, Alpha-glucosidase inhibitors, Glimepiride, Insulinsensitizers, Secretagogues

Key Drugs


Lupin, 3.8 Micro Labs, 4

MSD, 3.2Piramal

(Abbott), 4.2

Sun, 7.8

Sanofi, 9.1

Abbott, 20

USV, 12.4

Wockhardt, 3.2

Franco, 2.7

Others, 29.6

Franco, 4.6

Lupin, 4.9

Micro Labs, 5.2

Sanofi, 5.2

Sun, 7.8

Abbott, 6.6


Eris, 3.3

Glenmark, 2.9

Others, 40.9

USV, 14.2


USV 1 1 1 1 1

Sun 2 2 2 2 2

Abbott 3 3 3 3 3

Sanofi 4 4 6 4 4

Micro Labs 5 7 7 6 5

Lupin 8 8 8 8 6

Franco 7 6 5 7 7


Eris NA NA NA 12 9

Glenmark 9 9 9 10 10

5 610

1822

27

5.85.45.3

4.34.03.3

2000 2001 2005 2008 2009 2010



Diabetes Segment (2001-10 CAGR - 17.8%) Diabetes Segment - Prescription Rankings

August 2011 27


Therapy snapshot

CNS Diseases

Eptoin - Abbott, Nurokind Plus - Mankind, Vertin - Solvay

Alprax - Torrent, Trika - Unichem

CNS Segment (2001-10 CAGR - 14.4%) CNS Segment - Prescription Rankings

CNS Segment - Value market share (%) - 2010 CNS Segment - Prescription market share (%) - 2010

CNS Drugs

A central nervous system disease can affect either the

spinal cord (myelopathy) or brain (encephalopathy), both

part of the central nervous system. The central nervous

system controls behaviors in the human body, so this can

be a fatal illness. Common CNS diseases include

Encephalitis, Meningitis, Alzheimer's disease, Parkinson's

disease, Multiple sclerosis and depression.

Ailment snapshot

The key central nervous system drugs obtainable in the

market are antidepressant, ergot derivative, sedative,

antipsychotic, benzodiazepine and antiemtic. Out of the

whole central nervous system drugs market;

antidepressants, antipsychotics and anti epileptics are

the largest growing segments.

Key BrandsKey Drugs



Sun 1 1 1 1 1

Intas 3 3 3 2 2

Torrent 2 2 2 3 3


UCB 6 6 5 5 5


Local companies NA NA 12 8 7

Unichem 4 5 6 7 8

Abbott 9 9 9 9 9

Wockhardt 10 10 10 11 10

Phenytoin sodium, Mecobalamin, Gabapentin, Citalopram,Alprazolam.

Pfizer, 4.2

Sanofi, 4.8

Unichem, 3.9

Ranbaxy, 3.8

Piramal (Abbott),

6.5

Abbott, 7.6

Torrent, 8.6

Intas, 12.2Micro Labs, 3.5

Others, 24.2 Sun, 20.7

Abbott, 3.5Unichem,

3.8Wockhardt,

3.1

Cipla, 2.9 Micro Labs, 4.2

UCB, 5.0


Torrent, 8.1

Intas, 8.2Sun, 12.1

Others, 43.7

5 610

1822

27

655

443

2000 2001 2005 2008 2009 2010



August 2011 28


Therapy snapshot

Pain

Voveran - Novartis, Calpol - GSK, Spamo-Proxyvon -Wockhardt, Combiflam - Sanofi, Volini - Ranbaxy

Pain/NSAIDS Segment (2001-10 CAGR - 11.2%) Pain/NSAIDS Segment - Prescription Rankings

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

Pain/NSAIDS Drugs

Ailment snapshot

The key pain management drugs obtainable in the market

are aSalicylates (like Aspirin), Propionic acid derivatives

(like Ibuprofen, Naproxen), Acetic acid derivatives (like

Diclofenac), Oxicam derivatives, Fenamates, Cox-2

Inhibitors, Sulphonanilides.

Key Brands

Salicylates, Propionic acid derivatives, Acetic acidderivatives, Oxicam derivatives, Fenamates, Cox-2Inhibitors, Sulphonanilides

Key Drugs



GSK 1 1 2 2 1

Generic-generics 2 2 1 1 2

Dr. Reddy's 3 3 3 3 3


Local Companies NA NA 11 4 5

Cipla 4 5 5 5 6

Ipca 11 11 12 10 7

Mankind 15 12 9 6 8

Alkem 7 8 10 12 9

Sanofi 6 4 4 9 10

Pain, by itself, is not a disease, but is an indicator of

temporary or long-lasting damage to the human body. It is

a major symptom in many medical conditions. Pain is

usually transitory, lasting only until the noxious stimulus

is removed or the underlying damage or pathology has

healed, but some painful conditions, such as rheumatoid

arthritis, peripheral neuropathy, cancer and idiopathic pain,

may persist for years. Pain that lasts a long time is called

chronic, and pain that resolves quickly is called acute.

Acute pain is usually managed with medications while

management of chronic pain, is much more difficult and

may require the coordinated efforts of doctors,

physiotherapists along with medicines.

14 16 21 30 35 40

8.68.78.79.0

10.0

9.3

2000 2001 2005 2008 2009 2010


Zydus-Cadila, 4

Ipca, 4.3

Dr. Reddy's, 4

Sanofi, 4.6

Piramal (Abbott),

5.5

Alkem, 5.8

GSK, 6.4

Elder, 3.7

Others, 47.5

Novartis, 7.2

Ranbaxy, 7

Ipca, 3.3

Mankind, 3.2

Sanofi, 3.0

Novartis, 2.7


Cipla, 3.4

Others, 63.5

Alkem, 3.1

Micro Labs, 3.9

Dr. Reddy's, 4.1

GSK, 7


August 2011 29


Therapy snapshot

Gastro-intestinal (GI) Problems

Zinetac - GSK, Omez - DRL, Digene - Abbott, Aciloc -Cadila, Gelusil MPS - Pfizer

GI Segment (2001-10 CAGR - 17.1%) GI Segment - Prescription Rankings

GI Segment - Value market share (%) - 2010 GI Segment - Prescription market share (%) - 2010

GI Drugs

Ailment snapshot

The key GI drugs obtainable in the market are Antacids,

Anti-reflux agents, Antiulcerants, GIT regulators,

Antiflatulents, Anti-inflammatories, Anti-spasmodics,

Laxatives, Purgatives, Digestives, Anti-emetics

Key Brands

Antacids, Anti-reflux agents, Antiulcerants, GIT regulators

Antiflatulents, Anti-spasmodics, Laxatives, Purgatives

Key Drugs



Mankind 2 1 1 1 1

Cadila 1 2 2 2 2

Dr. Reddy's 5 3 4 4 3

JB Chem 3 4 3 3 5

Torrent 7 6 5 6 6



Alkem 13 11 10 9 9


Diseases/problems related to the GI tract mainly affect

the stomach and the intestines in humans. While the most

common problems are acidity/ulcers, other more serious

diseases include Cancer, Cholera, Colorectal cancer,

Gastroenteritis, Inflammatory bowel disease, Irritable bowel

syndrome, Pancreatitis, Peptic ulcer disease,

Gastroesophageal reflux disease (GERD), etc. While some

of these problems are temporary in nature and can be

cured by medicines, diet alterations, etc., many of these

problems are chronic in nature and generally require long-

term treatments by way of medicines and

gastroenterologists consultations.

17 12 24 37 43 51

11.110.910.810.611.3

8.0

2000 2001 2005 2008 2009 2010


Mankind, 6.9

Sun, 2.7 FDC, 2.9

Torrent, 3.6

Zydus-Cadila, 4.2

Cadila Pharma, 4.5

Dr. Reddy's, 4.4

JB Chem, 4.0


Alkem, 3.4

Others, 60.1

Piramal (Abbott),

3.8Ranbaxy,

3.6Torrent, 3.6

Aristo, 4.6

Sun, 4.7

Mankind, 5.2

Alkem, 5.3

Zydus-Cadila, 6.5

Dr. Reddy's, 5.6

Abbott, 7.2

Others, 49.9


August 2011 30


Therapy snapshot

Respiratory Diseases

Corex - Pfizer, Phensedyl - Piramal (Abbott), Asthalin -Cipla, Seroflo - Cipla, Aerocort - Cipla

Respiratory Segment - Value market share (%) - 2010 Respiratory Segment - Prescription market share (%) - 2010

Respiratory Drugs

Ailment snapshot

The key Respiratory Drugs obtainable in the market are

Common cough & cold medicines, Corticosteroids,

Bronchodilators, Mechanical ventilation.

Key Brands

Common cough & cold medicines, Corticosteroids,Bronchodilators, Mechanical ventilation

Key Drugs



Cipla 1 1 1 1 1


Zydus-Cadila 3 3 2 2 3

GSK 2 2 3 3 4

Mankind 22 22 12 6 5


Centaur Labs 7 7 6 7 7

Indoco 8 8 7 8 8

Sanofi 9 10 9 11 9

Alembic 6 6 8 10 10

Respiratory disease is the term for diseases of the

respiratory system. These include diseases of the lung,

pleural cavity, bronchial tubes, trachea, upper respiratory

tract and of the nerves and muscles of breathing.

Respiratory diseases range from mild and self-limiting such

as the common cold to chronic diseases like asthma/

COPD and life-threatening such as bacterial pneumonia

or pulmonary embolism. They are a common and important

cause of illness and death.

Respiratory Segment (2001-10 CAGR - 11.4%) Respiratory Segment - Prescription Rankings

15 16 22 30 36 41

8.88.98.8

9.4

10.010.0

2000 2001 2005 2008 2009 2010


Wockhardt, 3.2

Alembic, 3.4

Glenmark, 2.8

Sanofi, 2.7

Lupin, 4.8 GSK, 5.1

Zydus-Cadila, 5.4

Pfizer, 7.8

Piramal (Abbott),

9.4

Others, 33.3

Cipla, 22.1

Others, 63.9

Centaur Labs, 3.0

Mankind, 3.6

GSK, 4.9

Zydus-Cadila, 4.9

Cipla, 6.1

Indoco, 3.0

Sanofi, 2.8

Alembic, 2.7

Dr. Reddy's, 2.6Piramal

(Abbott), 2.5


August 2011 31


Annexure 1: Evolution of the market and state of theindustry

Till 1970, due to product patent regime, multinational pharmaceutical companies dominatedthe domestic market and enjoyed 80% market share. However, with the introduction ofprocess patent law in 1970, the scenario changed dramatically in the last 4 decades.Today the domestic market is dominated by Indian companies with market share of ~80%.During the same period, in the absence of product patent, many multinational companiesexited the country while many others followed cautious approach in terms of new productlaunches.

Dominance of local companies

Domestic pharmaceutical companies are dominant in India. Due to strong chemistry skills,local companies have managed to garner ~80% market share in India. Currently, themarket is a fragmented market with the largest player holding 7% market share. Thepresence of small and regional players has increased significantly over the years. Due tointensified competition, prices of the drugs in India are one of the lowest in the world.However, with the introduction of new product patent law in 2005 as per WTO commitment,MNCs have started focusing on Indian operations. Many MNCs have shown interest inexpanding their presence in India through organic and inorganic growth means.

We believe that, in the coming years, MNCs will see their market share increasing graduallyon led by Patented product pipeline of parent, strong brand equity among physicians,strong financial muscles and increased focus of large MNCs on emerging markets as anext growth driver in light of dwindling revenues in developed countries.

Market share of MNCS in Emerging markets (%)

Source: McKinsey/MOSL

79 7764

26 22

21 2336

74 78

Poland Russia Brazil China India

MNCs Local

August 2011 32


Branded generic nature of the industry

Indian pharmaceutical market is largely a branded generic market where the same moleculeis sold by number of companies under different brand name. Nearly 80% of the Indianretail market is made up of branded generics while rest is distributed between OTC andgeneric drugs. Due to the branded generic nature of the business, trade power lies withthe physicians. Here, the relationship and brand equity of the pharmaceutical companieswith physicians is a key determinant of success. The share of branded generics is in Indiais higher that some of the other emerging markets. In Brazil and Russia, branded genericsaccount for 60% and 40% of the market.

We believe that, going forward the markets will be dominated by branded generic segmentwhile patented products will contribute 10% to the market demand in 2015. Indian companieshave large options for launch of new generics from the basket of pre-1995 drugs. (Thetotal no of such products is more than 200). Further, domestic players have opportunity todevelop new combination and formulation of the products that are already in the market.Also it is likely that a proportion of post 1995 molecules will not get full patent protectiondue to relatively narrow definition of patentability in the India patent act.

Low pricing levels

Prices of medicines in India are one of the lowest in the world. Prices of drugs in India areat around 10-12% of US prices and for some products, prices are lower than those inneighbouring countries such as Sri Lanka, Pakistan and Bangladesh. Severe competitionhas resulted in such low prices. On an average there are 50 brands for any major molecule.The level of specialization of molecule is important driver of pricing premium.We believe that with the reduction in competition going forward on back of consolidationin the industry and shift toward specialty therapy segments, prices are likely to stabilize atcurrent levels if not improve.

August 2011 33


Annexure 2: Regulatory framework of the Indianformulations industry

Product patent regime begun from 2005

India adopted product patent regime in 2005. Earlier, as per original Indian patent act1970, patents were granted on the basis of process and not products, which helped to buildthe basis of a strong and competitive domestic pharmaceutical industry. Indianpharmaceutical industry had price control mechanism that helped to deliver medicines ataffordable prices to patients in India. Further, the burden of proof in case of infringementwas on the patent holder.

However, due to WTO commitments, India made two important amendments to the patentact. The first amendment introduced the mailbox system to grant exclusive marketingrights to post 1995 patent holders in other markets. The second amendment extendedpatent term to 20 years and shifted the burden of proof to the patent infringer.

In 2005, the new Indian patent act was introduced to grant product patents topharmaceuticals. The act defines the scope of patentability and pre-grant, post-grantopposition provisions, compulsory licensing and regulatory data protection

Patentability: The patent act established product patent protection for the period of 20years. The act precludes salts, esters, isomers, polymorphs, metabolites, pure form, particlesize, combinations, derivatives of know substances etc. from patent protection unless theydiffer significantly in efficacy, thus effectively restricting patentability only to the NCEs

Pre and Post grant opposition: Both pre and post-grant opposition have been introducedallowing oral hearing. Opposition can be filed any time from the date of publication of thepatent to the date of grant. This could result into several pre-grant oppositions being filedcausing delay in patent granting process.

Pre-grant oppositions have proven to be a big impediment to patent issuance in India. Thisallows anyone to file opposition patents on any of 11 potential grounds for 6 months aftera patent application is published but before the patent is granted. India is the only countryin the world with such a system. Multinational companies claim that domestic companiesare using sequential filings to delay patents, and point to there being no mechanism todismiss even the most frivolous oppositions. PhRMA reports than 200 pre-grant oppositionswere pending as of early 2009 and most of these concerned pharmaceuticals (PhRMA,2009). In addition, there is no mechanism for the applicant to respond and this is likely tobe of significant concern to branded pharmaceutical companies.

August 2011 34


Compulsory licensing: Under Paragraph 6 of the DOHA Declaration on TRIPS andPublic Health (from 2001), India is permitted to use compulsory licenses under which thegovernment forces a patent holder to grant use of a given product to the state. The patentholder will be entitled for compensation from licensee. CL will be available for export todeveloping countries such as in Africa which have insufficient or no manufacturing capacityin cases of national health emergencies. Thus Indian generics industry has benefited fromcompulsory licenses issued in other developing markets. Scope of compulsory licensinghas been broadened to include affordability, non-working of patent etc. The Departmentof Industrial Policy and Promotion is considering developing new guidelines to enable theuse of compulsory licensing beyond emergencies, such as in view of anti-competition lawand high drug prices. This could threaten the companies in the long term, particularly iflicenses are used in situations other than emergencies, suggesting they could be usedmore liberally.

Regulatory data protection: Regulatory data protection is an integral part of IPR.Lack of the provision will be a disincentive to R&D based companies and innovators. Theissue is in active consideration.

Since the Patent Amendment Act of 2005, product in addition to process patents arerecognized in India. However, from the perspective of the research-based drug industry,there are several problems with the IP environment in India. Pharmaceuticals are fightingto enforce patent linkage in India and meanwhile a string of product patent rejections havereduced confidence in the Indian market. Despite improvements to the patent legislation,issues over ever-greening mean that some brands may not necessarily receive patentprotection in India - a move that is detrimental to branded players, but provides a significantopportunity for domestic generics manufacturers. So far certain drug classes, such asthose that are viewed as expensive life-saving drugs, including cancer and HIVmedication, have been most affected indicating for such drugs it may be more difficult topatent in India as the legal system is more likely to apply its discretion in the interpretationof the law and prevent those drugs from being patented.

Roche was the first company to have a patent granted in India under the new patentregime in February 2006, a patent for Pegasus (paginated interferon alpha-2a) was granted.However, since then several different product patent applications for other drugs havebeen refused. Most recently, the Indian Patent Office rejected Roche's product patent forits new formulation of the cytomegalovirus infection treatment Calcite (valganciclovir). InAugust 2009, India rejected patent applications for Viread (tenofovir, Gilead) - a frontlinedrug against human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS) in developing countries. Such patent rejections will undoubtedly lower confidencein the Indian market as such occurrences are no longer seen as isolated events.

This indicates that certain drug classes, such as those that are viewed as expensive life-saving drugs, including cancer and HIV medication, may be more difficult to patent inIndia as the legal system is more likely to apply its discretion in the interpretation of thelaw and prevent those drugs from being patented. This could have a significant impact onthe pharmaceutical companies' choice of products to be marketed in India. However, it isnot all bad news for pharmaceutical players, with some companies managing to emerge

August 2011 35


from the patent system triumphant. In February 2008, Johnson & Johnson secured a keypatent for its antiretroviral drug Intelence (etravirine), making it the second antiretroviraltherapy to attain exclusivity in India after Pfizer's Selzentry (maraviroc). This strengthenedthe company's position in the Indian market, and is likely to have given the pharmaceuticalindustry in general some hope.

Pricing regulations and role of NPPA

National Pharmaceutical Pricing Authority (NPPA) is responsible for pricing decisions inIndia. This body falls under the Ministry of Chemicals and Fertilizers and was establishedin 1997. The NPPA is responsible for setting and regulating the prices of bulk drugs andmonitoring the availability of treatments in the market to identify shortages and take remedialsteps. The body also maintains data on exports and imports as well as market shares andthe profitability of individual companies. NPPA regulates the prices of certain drugs/formulations known as 'controlled bulk drugs', while also keeping a tab on the prices ofdrugs not in this list so that they are maintained at reasonable levels. Two main criteria areused for identifying controlled drugs: the drug should be of a mass consumption nature andthere should be an absence of sufficient competition for the drug.

As per the Drugs Prices Control Order (DPCO) of 1997, the NPPA is responsible forfixing and revising the prices of certain controlled bulk drugs and formulations. In 1970,the first DPCO was introduced, bringing in direct controls on the profitability ofpharmaceutical businesses: a maximum of 15% pre-tax profit alongside an indirect controlon prices. A revision introduced in 1979 established a price ceiling for certain controlledbulk drugs and formulations. This revision tried to regulate the retail prices by permitting amark-up on ex-factory costs and around 370 drugs were implicated with direct pricecontrols, a measure that affected 80% of the companies in the market.The subsequent revisions to the legislation reduced the number of controlled drugs to 142in 1987, 76 in 1995 and 74 in 1997.

Pricing: The DPCO fixes ceiling price for some of the APIs and formulations. The APIsand formulations falling under the purview of the legislation are called scheduled drugs.The NPPA is responsible for the collection of data and study of pricing structures of APIsand formulations, and provides recommendation to the Ministry of Chemical and Fertilizers.Currently, 74 bulk drugs and the formulation thereof are under the preview of price control.

Pricing of scheduled bulk drugs: Scheduled bulk drugs are allowed prices (excludinglocal taxes) that results in post tax return of 14% on net worth (share capital + freereserves - value of investments not related to bulk drug business), or a 22% return oncapital employed (fixed asset + working capital). Vis-à-vis a new plant an internal rate ofreturn based on long term marginal costing is allowed. For a bulk drug produced from thebasic stage, a post tax return of 18% on net worth or a return of 26% of capital employedis allowed. The NPPA sanctions prices after reviewing detailed supporting calculations,and only when the approval is sanctions can players go ahead with the sale of the drug.Sanctioned prices can not be revised without prior approval. When there is one manufacturerof the bulk drug, the maximum sale price is fixed at 2/3rd of the cutoff level or weightedaverage price, depending upon the situation.

August 2011 36


Pricing of scheduled formulations manufactured in India: Scheduled formulations are basedon the formula:

RP = (MC+CC+PM+PC) x (1+MAPE/100) + ED

RP: Retail PriceMC: Material CostCC: Conversion CostPM: Packaging MaterialPC: Packaging ChargesMAPE: Maximum Allowable Post Manufacturing ExpensesED: Excise Duty

MAPE is intended to cover all the costs incurred by a manufacturer after packing - that is,transport, manufacturer's profit, dealer/retailer's profit etc. As per current order MAPEshould not exceed 100%. Local taxes are added on at the wholesaler/retailers level andare not part of retail price as above.

Further, the margins earned by distributors and retailers are also regulated. The maximummargin that a distributor can take is 8% of the maximum retail price; the highest permittedmargin is 16% for retailers. In the case of decontrolled drugs, the margin set for distributorsis 10%, while for retailers it is 20%. The NPPA further ensures that manufacturers do notremove the price-controlled brands from the market so that essential medicines are stillavailable for customers. In spite of these regulations, however, violations have been observedquite frequently. For instance, a study noted that companies market products with price-controlled ingredients without getting the price fixed by the NPPA, even though theoreticallythey are required to obtain an official price from the NPPA every time the price of thecontrolled ingredient is revised.

Proposed new pharmaceutical policy

The proposed pharmaceutical policy talks about bringing 354 essential drugs under thepurview of the DPCO. Reportedly, this account for ~50% of the industry sales. The newpolicy is likely to allow MAPE of 150% with an additional 50% margin for the companiesthat invest sufficient on new drug research.

Currently, there is lot of pressure being built on the government by players and keypharmaceutical associations to revoke the new draft, as the industry views this policy asregressive in nature. However, it is difficult to comment on the implications of the proposedprice control order before the final verdict is in place. If implemented in the current form,the new policy will have significant adverse impact on the domestic formulations players.

August 2011 37


Companies

CompaniesTop buys

Cipla

Lupin

Torrent Pharma

GSK Pharma

Others

Sun Pharma

Cadila

Ranbaxy

Dr. Reddy's Labs

Glenmark

CiplaMEDICINES

Score

CMP: INR281 CIPLA IN

TP: INR361 BuyImproving asset utilization

M: Mix 6/10

Cipla offers a balanced play on chronic and acute

therapeutic segments.

Cipla derives 42% revenue from chronic therapeutic

areas and has a dominant presence in large

segments like anti-infective and CVS.

It has leadership position in the respiratory

segment.

E: Equity with doctors 7/10

Cipla has strong brand equity in some of the largest

therapeutic segments in the industry and ranks

first in the respiratory segment, fourth in the anit-

infective and fifth in the CVS segments.

Based on prescription ranking, Cipla is the market

leader in the anti-infective and respiratory segments

and it is among the leaders in the pain management

and CVS segments.

D: Distribution & reach 8/10

Cipla derives 63% of its revenue from metros and

tier-I cities. Distribution in metros and tier-I towns

increased over time and Cipla is expanding its

reach in tier-II to tier-VI towns.

It has one of the largest field force in the industry

with an MR strength of 5,100.

I: Introductions 6/10

Cipla has been one of the most aggressive players

in launching new products.

It launched 76 new products a year over the past

four years.

The ramp-up in domestic formulations revenue has

been driven by existing products and new launches

over the past four years.


End (INR M) (INR M) (INR) GR. (%) (X) (X) (%) (%) Sales EBITDA

03/10A 56,057 10,050 12.5 25.0 22.4 3.8 17.0 20.6 4.0 16.4

03/11A 63,145 9,671 12.0 -3.7 23.3 3.4 14.5 15.8 3.6 17.4

03/12E 69,193 10,760 13.4 11.1 21.0 3.0 14.4 17.2 3.3 14.5

03/13E 79,041 13,177 16.4 22.2 17.1 2.7 15.6 18.8 2.8 12.1

Equity Shares (m) 802.9

52-Week Range (INR) 381/275

1,6,12 Rel. Perf. (%) 2/3/0

M.Cap. (INR b) 225.6

M.Cap. (USD b) 4.9

Stock info Financial & valuation summary

MEDICINES CAPSULE 66/100

Back

grou

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


August 2011 38

August 2011 39

Cipla

C: CAGR and scale-up 6/10

Cipla reported in line industry performance, posting

revenue CAGR of 14% over FY05-11. The company

scaled up the business rapidly over the years and

gained market share from competitors, in certain

key segments.

We expect Cipla to post revenue CAGR of 12%

over FY11-13, which is lower than the industry

average, mainly due to a high base and intensifying

competition in the anti-infection segment.

Rapid scale-up in revenue will be difficult given the

high base and sizable presence in highly

competitive and slow growing acute segments.

I: Improvement in productivity 7/10

Cipla did not improve its MR productivity over 2004-

10 as sales growth was in line with MR additions.

MR growth was 13.4% and revenue growth was

13.7% over 2004-10

Revenue per MR has been stagnant at INR4.9m

over 2004-10 years. However, even at this level,

productivity is above the industry average.

N: Non-domestic business 5/10

We are positive on Cipla's international business,

given its strong chemistry skills, large underutilized

capacities and strong generic pipeline.

Short-term performance may be muted until

international regulatory authorities approve the new

Indore SEZ.

We expect the international business to post 13%

revenue CAGR over FY11-13 led by 14% CAGR

for formulation exports.

Option values (approval for CFC-free inhalers and

potential MNC contracts) can upgrade FY13 EPS.

E: Earnings growth 7/10

We expect overall top-line CAGR of 12% over FY11-

13, leading to EPS CAGR of 17%.

EPS growth is higher than top-line growth mainly

due to our expectation of increased capacity

utilization at Indore SEZ leading to better cost

absorption.

Chairman Profile

S: Stock Attractiveness 14/20

Cipla has one of the most conservative

managements among Indian pharma companies.

Return ratios are muted pending utilization of

significant capex over the past 2-3 years.

Cipla is valued at 21.0x FY12E and 17.1x FY13E

consolidated earnings.

Reiterate Buy with a target price of INR361 (22x

FY13E EPS) excluding potential upsides.

Chai

rman Barring the past two years, Cipla has been one of the most consistent performers amongst the Indian

pharmaceutical companies. It was promoted by Dr K A Hamied and is currently managed byDr Yusuf Hamied, the founder's son. Establishing a strong presence in India and emerging marketsorganically coupled with a low-risk conservative approach is his key achievement.

Stock performance (1 year)

240

280

320

360

400

Aug-10 Nov-10 Feb-11 May-11 Aug-11

Cipla Sensex - Rebased

August 2011 40

Cipla

Improving asset utilizationBalanced play on chronic and acute therapeutic segments

Cipla, a leading company in the domestic formulations space, has a strong presence in

therapeutic segments such as AI, respiratory and CVS. Cipla has outperformed market

growth over the past four years and has consistently improved its market share. Cipla offers

a balanced play on lifestyle and acute therapeutic segments.

1. Mix: 6/10

Respiratory, AI, CVS, gynecology dominate sales

The top four therapeutic segments, the respiratory, AI, CVS and gynecology segments,contribute ~70% of Cipla's domestic formulation revenue. Cipla is the market leader intwo of the largest therapy segments, AI and respiratory segments, though dependence onAI has fallen over the years. Cipla derives 58% of its revenue from acute therapies andthe rest from chronic therapeutic areas. Cipla's sizable presence in these segments makesit an attractive play in the domestic formulations business.

Cipla: Therapeutic break-up

India formulationssnapshot

Domestic formulations the

largest business segment

for Cipla : The domestic

formulations business is the

leading revenue contributor to

Cipla's top-line though the

contribution has fallen from

75% in FY01 to 44% in FY11. It

is Cipla's most profitable

segment, with EBITDA

contribution estimated at 44%.

This business grew at 14%

CAGR over the past six years.

EBITDA Contribution

Source: Company/Industry/MOSL

2. Equity with doctors: 7/10

Good brand equity with physicians; strong positioning in respiratory, AI,CVS segments

Cipla has been a dominant player in the AI, respiratory and CVS segments, three of thelargest therapeutic segments of the industry. Cipla ranks first in the respiratory segmentand fourth in the AI segment with market shares of 22.1% and 6.7% respectively. It ranksfifth in the CVS segment with market share of 5.9%. In most of these segments, Cipla hasgrown in line with market growth over the past two years.

In terms of the number of prescriptions written, Cipla ranks first in the AI and respiratorysegments with a prescription market share of 8.4% and 6.1% respectively and it ranksfourth and sixth in the CVS and pain management segments with a prescription marketshare of 5.1% and 3.4% respectively. In the AI, respiratory and CVS segments Cipla hasmaintained or improved its market ranking but in the other therapeutic segments it has lostout on ranking.

Non-DF

EBITDA, 56%

DF

EBITDA,44%

5.1

5.1 5.

3

5.2

5.3

19.813.4

16.513.3

16.2

2006 2007 2008 2009 2010

Mkt Share (%)Grow th (%)

FY01Pain Mgmt6%

Gynaecology

2%

CVS15%

GI3% Respira

tory29%

AI45%

HIV 3%

Dermatology 3% CNS 3%

Others 8%

Ophthalmology

3%

Pain 4%

GI 6% Gynaec 7%

CVS 12%

AI 20%

Respiratory 31%

FY11

The largest Indian player in

the industry

Before Abbott took over

Piramal Healthcare's domestic

formulations business, Cipla

was the leader in the domestic

formulations market for a few

years. Although Cipla occupies

second position in the

pharmaceuticals industry, it is

the largest Indian company in

the domestic formulations

space. Cipla holds 5.24%

market share in the

pharmaceuticals industry ,

which has grown from 5.05%

in 2006. It posted revenue of

14% CAGR over the past six

years in line with the

industry's CAGR of 14%.

Market Share & growth

August 2011 41

Cipla

Cipla's prescription rankingJan-07 Jan-08 Jan-09 Jan-10 Oct-10

Anti-infectives 1 1 1 1 1

Respiratory 1 1 2 1 1

CVS 5 5 4 4 4

Pain Mgmt 4 5 5 4 5

CNS 8 8 8 10 11

GI 11 10 8 11 13

Derma 10 12 15 15 12

Vit 11 11 14 13 13

Gynaec - - 21 18 21


Top 10 brands contribute 30% of revenue

Cadila's top 10 brands contribute ~30% to total revenue, indicating lower brandconcentration. All Cipla's top 10 brands feature among the top 300 brands of the industry.Its No1 brand Asthalin (Salbulamol, in the respiratory segment) ranks fourteenth in theindustry and reported growth of 11.7% CAGR over the past four years . Cipla's top fourbrands belong to the respiratory segment.

Cipla's top 10 brandsBrand Drug Product Launch Sales (INR m) YoY Gr (%) CAGR (%)

Seroflo Salmeterol+Fluticasone 2000 925 7.0 8.2

Asthalin Salbutamol 1993 1,268 9.8 11.7

Aerocort Salbutamol+Beclomethasone 2008 836 12.4 -

Foracort Formoteral+Budesonide 2001 761 23.2 22.0

Mt pill Mifepriston 2002 654 -4.8 14.6

Novamox Amoxycillin 1980 878 14.2 9.3

Ciplox Ciprofloxacin 1989 818 11.4 8.9

Duolin Salbutamol+Ipratropium 2006 503 26.3 60.1

Amlopres-at Atenolol+Amlodipine 1996 439 4.1 8.4

Budecort Budesonide 1994 423 24.7 18.5

CAGR through 2006-10 Source: Industry/MOSL

3. Distribution and reach: 8/10Cipla derives 63% of its revenue from metros and class-I towns, in line with the industryaverage. Over the past four years, Cipla's revenue CAGR in rural and metro areas, hasbeen better than that of industry average.

Market share in key therapies (%) (2010) Growth comparison (%) (2010)

6.7 5.9

22.1

8.2

3.3

AI CVS Respiratory Gynaecology Dermatology

15.9 15.0

19.9

38.9

18.4 18.418.116.217.914.6

AI CVS Respiratory Gynaecology Dermatology

Avg Gr - Company Avg Gr - Industry

* Average growth over 2009-2010 Source: Industry/MOSL

August 2011 42

Cipla

4. Introductions: 6/10

Among the most aggressive players in the industry in product launches;revenue-per-new-launch rises

Over the past four years, Cipla launched 76 new products (including line extensions)annually and the average revenue per new launch almost doubled, suggesting betterpenetration of launched brands. Overall, revenue growth was driven by existing productsand new launches.

Cipla: Geographical distribution of revenues (%) Industry: Geographical distribution of revenues (%)

Cipla: Geography-wise growth rates (%) Industry: Geography-wise growth rates (%)


Cipla: New launches Cipla: Growth composition (%)


29.6 29.5 30.8 32.8 32.7

29.6 27.9 28.8 30.1 30.3

17.9 18.4 18.0 17.9 18.6

23.0 24.2 22.3 19.2 18.3

CY06 CY07 CY08 CY09 CY10


27.6 28.9 28.9 30.0 31.0

32.6 31.3 31.6 32.5 32.0

19.2 19.0 19.5 19.4 19.6

20.6 20.9 20.0 18.1 17.3



2.5

26.2

17.7

14.7

17.6

20.7

16.415.6

7.9

23.5

13.0

17.5

11.1

17.5

9.5

14.0

CY07 CY08 CY09 CY10

METROS CLASS I TOWNSCLASS II TO VI RURAL

14.4

19.5

20.721.6

13.0

20.5

18.620.3

7.0

25.0

12.314.2

16.5

-2.6

7.7

19.2

CY07 CY08 CY09 CY10


131 157 205 147

105.0

85.6

53.854.2

CY07 CY08 CY09 CY10

No. Of launches in last 2 yrs

Avg sales per launch (INR m)

5.3 5.69.9

7.7

8.011.0 3.4

12.1

CY07 CY08 CY09 CY10

New Launches Existing Brands

August 2011 43

Cipla

5. CAGR and scale up: 6/10We expect Cipla's domestic formulations business to post 12% CAGR over FY11-13, ledby one of the largest field forces and rapid new launches but partly tempered down by alarge base effect and increasing competition in some of the acute therapeutic segments.This is below our forecast of 15-16% CAGR for the industry. Cipla is likely to maintain itsleadership in the sector given its high market share in some of the largest therapeuticsegments. Although Cipla employs the largest field force in the industry, its focus onenhancing workforce productivity must be enhanced, for more profitable growth.

Cipla: Domestic formulations performance

Source: Company/MOSL

6. Improvement in MR productivity: 7/10

Sales force additions drive top-line growth

Over FY04-10, Cipla's domestic formulations business posted revenue CAGR of 13.7%while its sales force grew at a CAGR of 13.4%, implying marginal productivity improvementof the salesforce. In 2004, Cipla derived INR4.8m revenue per MR, which increasemarginally to INR4.9m in FY10, which is still above industry average.

Cipla: Sales force productivity (2004-10)

2,400 5,100

4.8

4.9

2004 2010

No. of MRs Revenue per MR (INR m)

0.31.9

13.4 11.5

Cipla Industry

Sales force addition CAGR (%)

Productivity Improvement CAGR (%)

Source: Industry/Company/MOSL

15,0

14

17,5

23

19,7

83

22,7

86

25,1

13

28,1

78

30,9

95

35,1

80

13.5

10.012.2

10.2

15.212.9

16.717.7

FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

DF Revenue (INR m) YoY Grow th (%)

August 2011 44

Cipla

7. Non-domestic business: 5/10

Cipla's non-domestic business

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

Risks and concerns Temporary mismatch between expenses on new SEZ without commensurate revenue

streams pending regulatory approval. Working capital intensive. Lack of succession planning. Delay in planning capacity expansions for future growth.

Key news flow/triggers Regulatory approvals for a new SEZ. Regulatory approvals for CFC-free inhalers in Europe. Signing of supply agreements with MNCs.

Impact assessment We are positive on Cipla's international business given its strong chemistry skills, large

underutilized capacities and strong generic pipeline. Short-term performance may be muted until international regulatory authorities approve

the new Indore SEZ. Expect international business to record 13% CAGR over FY11-13, led by 14% CAGR

of formulation exports. Option values (approval for CFC-free inhalers and potential MNC contracts) can

upgrade FY13 EPS.

Sales mix (INR m)FY09 FY10 FY11 FY12E FY13E FY11-13

CAGR (%)

Domestic 22,786 25,113 28,178 30,995 35,180 11.7

% of revenues 43.0 44.4 44.3 44.4 44.2

Exports 27,430 29,004 33,548 36,971 42,645 12.7

% of revenues 51.8 51.3 52.8 53.0 53.5

Formulations 21,635 23,188 26,756 29,431 34,729 13.9

APIs 5,795 5,816 6,792 7,539 7,916 8.0

Other Operating Income 2,737 2,462 1,842 1,775 1,838 -0.1

% of revenues 5.2 4.4 2.9 2.5 2.3

Total Revenues 52,953 56,579 63,567 69,741 79,663 11.9


EBITDA Contribution

DF EBITDA

44%

Non-DF EBITDA

56%


August 2011 45

Cipla

8-9. Earnings growth and stock attractiveness: 21/30We believe Cipla has one of the strongest generic pipelines among Indian companies.After a long delay, we believe Cipla's CFC-free inhaler pipeline is likely to be graduallycommercialized in Europe and upsides from high-margin opportunities like Seretide canpotentially come through over the next two years (our estimates do not include theseupsides).

Cipla's large manufacturing infrastructure, strong chemistry skills and huge inhaler capacitymake it a partner of choice for global MNCs that are ramping up their generics andpresence in emerging markets. This, along with its low-risk strategy and a strong capex(currently underutilized) should ensure good long-term potential.

Temporary slow-down in overall growth, increased expenses to maintain its Indore SEZwithout commensurate revenue and increasing working capital requirements are our keyconcerns.

We estimate base-case EPS CAGR at 17% over FY11-13 with potential upsides fromMNC supplies and CFC-free inhalers. The growth will be led by 13% CAGR for theinternational business, tempered by reducing technology licensing income.

We are positive on Cipla's long-term prospects (especially upsides from MNC contractsand commercialization of CFC-inhalers). Cipla's management has officially confirmedthat it is negotiating supply contracts with MNCs. However, it is taking time to consummatethe deal. When details of such contracts are made public, we expect an upgrade in earningsto take into account upsides from such contracts. Maintain Buy with a target price ofINR361 (22x FY13E EPS).

Cipla RoE & RoCE (%) Cipla one year forward P/E

19.1

22.8

29.5

15.4

12

17

22

27

32

Aug

-06

Mar

-07

Aug

-07

Feb

-08

Aug

-08

Feb

-09

Aug

-09

Feb

-10

Aug

-10

Feb

-11

Aug

-11

P/E (x) Avg(x) Peak(x) Min(x)

15.8

18.7

17.9

17.0

14.514.4

15.617.2

17.1

19.1

20.6

18.8

2008 2009 2010 2011 2012E 2013E

RoE RoCE

August 2011 46

Cipla


Strong capex…Over the past three years, Cipla invested INR18b in expanding its formulations, API andR&D capacities. A large portion is this capex is underutilized pending facility/productapprovals from international regulatory authorities.

Cipla's gross block (INR b)

Annexure: Cipla non-domestic business

Strong generic pipelineIn the US, Cipla entered into partnership for 118 products with 22 partners. The number ofpartners increased from 17 to 22 over the past 18 months. Of the pipeline of 110 ANDAsfiled so far, 64 have been approved and 46 are awaiting approval.

Strengthening US parnerships (nos)


…can lead to INR36b in revenue over the next few yearsGoing by Cipla's past asset-turnover ratios, we estimate this large capex can generateINR36b in revenue in the next few years. This compares favorably with reported revenueof INR56b in FY10 and revenue of INR63b in FY11. Cipla's management is known for itsconservative, low-risk strategy, which implies it would not have embarked on such a largecapex without reasonable revenue visibility.

Significant expenses on Indore SEZ; commensurate revenue to ramp-upCipla has invested significant amounts of money, on setting up facilities, over the past 2-3years. One of its large investments has been in the INR8b Indore SEZ, commissioned in1QFY11. This is one of the largest investments in an SEZ by a pharmaceutical company.

8

12

17

22

FY07 FY08 FY09 FY10

10.914.5

18.7

24.3

30.6

35.8

43.3

FY05 FY06 FY07 FY08 FY09 FY10 FY11

August 2011 47

Cipla

The company is incurring expenses of INR250m-300m per quarter on this SEZ withoutcommensurate revenue, pending regulatory approvals. We believe the company is facinga temporary mismatch between timing of such expenses and commensurate revenuestreams from this investment.

The Cipla management has indicated regulatory authorities from the UK, Australia andSouth Africa had recently inspected this facility. It expects exports to these markets toramp-up up gradually in forthcoming quarters. The US FDA inspection is yet to takeplace. The management also indicated it expected this SEZ to contribute 10-12% to overallsales by the end of FY12. This is a key factor impacting Cipla's operational performance.

Potential MNC contracts can upgrade earnings, negotiations ongoingCipla is negotiating with some MNCs like Pfizer, GSK and Boehringer for long-termsupply agreements. Generally, such deals span many products and multiple markets. Thesepotential contracts are likely to raise earnings for FY13 (not included in our estimates).We believe Cipla is well positioned to emerge as a key supplier of generic products toglobal MNC companies due to its large manufacturing infrastructure, strong chemistryskills and large capacity for inhalers.

Pfizer Partnership: Potential UpsidesPfizer's generic revenue (USD b) 10

Estimated mark up over outsourced products (%) 25

Outsourced products (percentage of total) - assumed 50

Cost of outsourced products for Pfizer (USD b) 4

Upside for Cipla Low Case Moderate Case High Case

Cipla's contribution to Pfizer's outsourcing (%) 1 5 10

Sales (USD m) 40 200 400

INR/USD - assumed 43 43 43

Sales (INR m) 1,720 8,600 17,200

PAT Margin (%) - assumed 15 15 15

PAT (INR m) 258 1290 2580

Incremental EPS 0.3 1.6 3.2


CFC-free inhalers a key long-term triggerCipla has the third largest global capacity for inhalers and has been the domestic marketleader in the segment over years. Cipla has the advantage of strong chemistry skills andlow-cost of production in this segment.

Inhaler capacity has increased... ... but utilization is at the lowest


4654

71 71

96 96

143


Aerosols/Inhalation Devices Capacity (m)

38

56

64

77

67

80

89


Aerosols/Inhalation Devices Capacity Utilization (%)

August 2011 48

Cipla

Cipla is developing eight inhalers and has the third largest inhaler manufacturing capacityglobally. It has commercialized some of its inhalers in the UK, Germany, Spain and Portugal.While the launch of these inhalers is a key long-term trigger, the visibility of launch time-lines is poor. The management expects its range of eight inhalers to be commercialized inEurope over the next 2-3 years and it expects 3-6 players for each product in this category,implying that this will be a low-competition, high-margin opportunity.

Through its partner, Neo Labs, Cipla filed for regulatory approval of a generic SeretideInhaler (GSK's US$6.5b global brand with US$250m sales in the UK) in September 2008in the UK, after the expiry of GSK's data exclusivity. We believe that approval for thisproduct is likely to come through over the next few quarters. Our estimates do not includethese upsides.

CFC-free Inhalers: Potential UpsideCurrent global market size of inhalers (USD b) 17

No of generic players including Cipla (assumed) 6

Price erosion (%) (assumed) 70%

Addressable market size (USD b) 5.1

Upside for Cipla Low Case Moderate Case High Case

Cipla's market share (%) 1 3 5

Sales (USD m) 51 153 255

INR/US dollar (assumed) 43 43 43

Sales (INR m) 2,193 6,579 10,965

PAT margin (%) (assumed) 20 20 20

PAT (INR m) 439 1,316 2,193

Incremental EPS 0.5 1.6 2.7


Reducing technology licensing incomeGiven Cipla's partnership model, it earns licensing income from its partners. This incomehas been a key contributor to Cipla's earnings and it recorded 26% CAGR to INR1.5bover FY07-10. However, this has fallen to INR637m by FY11, adversely impacting Cipla'searnings growth (licensing income has 100% contribution to the company's PBT).

Reducing licensing income


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

415 424

765

1,534

2,178

1,538

637510 510

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Tech Licensing Income (INR m)

August 2011 49

Cipla

Financials and valuations: Cipla

RatiosY/E March 2010 2011 2012E 2013E

Basic (INR)

EPS 12.5 12.0 13.4 16.4

Cash EPS 14.6 15.2 17.3 20.7

BV/Share 73.5 82.9 93.0 105.3

DPS 4.7 6.5 5.7 7.0

Payout (%) 19.8 30.8 25.0 25.0

Valuation (x)

P/E 23.0 20.7 16.9

PEG (x) -6.1 1.8 0.8

Cash P/E 18.2 16.0 13.4

P/BV 3.3 3.0 2.6

EV/Sales 3.6 3.2 2.8

EV/EBITDA 17.2 14.3 12.0

Dividend Yield (%) 2.4 2.1 2.5

Return Ratios (%)

RoE 17.0 14.5 14.4 15.6

RoCE 20.6 15.8 17.2 18.8

Working Capital Ratios

Fixed Asset Turnover (x) 2.8 2.5 2.2 2.4

Debtor (Days) 102 86 93 89

Inventory (Days) 98 110 107 103

Working Capital (Days) 201 195 191 183

Leverage Ratio (x)

Current Ratio 3.6 4.0 3.7 3.7

Debt/Equity 0.0 0.1 0.0 0.0

Cash Flow Statement (INR Million)Y/E March 2010 2011 2012E 2013E

Op. Profit/(Loss) before Tax 13,742 13,218 15,643 18,315

Interest/Dividends Recd. 469 1,122 1,234 1,357

Direct Taxes Paid -2,285 -1,614 -3,470 -3,375

(Inc)/Dec in WC -1,289 -2,889 -2,367 -3,359

CF from Operations 10,637 9,837 11,039 12,938

EO expense -950 0 0 0

CF from Oper. incl EO Exp. 11,587 9,837 11,039 12,938

(inc)/dec in FA -5,037 -9,386 -5,000 -4,500

(Pur)/Sale of Investments -1,651 -3,440 0 0

CF from Investments -6,688 -12,826 -5,000 -4,500

Issue of Shares 6,912 867 0 0

Inc/(Dec) in Debt -9,352 5,668 -2,000 -3,239

Interest Paid -230 -173 -283 -126

Dividend Paid -2,139 -2,983 -2,690 -3,294

CF from Fin. Activity -4,809 3,379 -4,973 -6,660

Inc/Dec of Cash 91 390 1,066 1,779

Add: Beginning Balance 530 621 1,010 2,077

Closing Balance 621 1,010 2,077 3,855

Income Statement (INR Million)Y/E March 2010 2011 2012E 2013E

Gross Sales 54,117 61,798 67,966 77,825

Change (%) 7.8 14.2 10.0 14.5

Exports 29,004 33,548 36,971 42,645

Net Domestic Sales 24,592 27,755 30,447 34,558

Other Operating Income 2,462 1,842 1,775 1,838

Net Income 56,057 63,145 69,193 79,041

Change (%) 7.1 12.6 9.6 14.2

Total Expenditure 42,315 49,927 53,550 60,726

EBITDA 13,742 13,218 15,643 18,315

Margin (%) 24.5 20.9 22.6 23.2

Depreciation 1,671 2,542 3,144 3,476

EBIT 12,071 10,677 12,499 14,839

Int. and Finance Charges 230 173 283 126

Other Income - Rec. 469 1,122 1,234 1,357

PBT before EO Items 12,311 11,625 13,450 16,070

Extra Ordinary Expense -950 0 0 0

PBT but after EO Exp. 13,261 11,625 13,450 16,070

Tax 2,435 1,954 2,690 2,893

Tax Rate (%) 18.4 16.8 20.0 18.0

Reported PAT 10,826 9,671 10,760 13,177

Adj PAT 10,050 9,671 10,760 13,177

Change (%) 29.4 -3.8 11.3 22.5

Margin (%) 17.9 15.3 15.6 16.7

Balance Sheet (INR Million)Y/E March 2010 2011 2012E 2013E

Equity Share Capital 1,606 1,606 1,606 1,606

Reserves 57,410 64,966 73,036 82,918

Revaluation Reserves 90 90 90 90

Net Worth 59,106 66,661 74,731 84,614

Loans 51 5,719 3,719 480

Deferred Liabilities 1792 2131 1351 869

Capital Employed 60,948 74,511 79,801 85,962

Gross Block 28,973 42,411 47,411 51,911

Less: Accum. Deprn. 8,861 11,465 14,609 18,085

Net Fixed Assets 20,112 30,946 32,802 33,826

Capital WIP 6,842 2,853 2,853 2,853

Investments 2,464 5,904 5,904 5,904

Curr. Assets 43,673 46,599 52,259 59,620

Inventory 15,126 19,062 20,318 22,209

Account Receivables 15,666 14,908 17,690 19,190

Cash and Bank Balance 621 1,010 2,077 3,855

Others 12,260 11,619 12,175 14,367

Curr. Liability & Prov. 12,144 11,791 14,017 16,241

Account Payables 12,144 11,791 14,017 16,241

Net Current Assets 31,530 34,808 38,242 43,380

Appl. of Funds 60,948 74,511 79,801 85,962

E: MOSL Estimates

LupinMEDICINES

Score

CMP: INR450 LPC IN

TP: INR514 BuyTransformed transnational

M: Mix 5/10

Lupin is a balanced play on the domestic chronic

and acute therapeutic segments.

The company derives 43% revenue from chronic

therapeutic areas. The respiratory, AI, CVS and

Anti-TB segments contribute 56% to Lupin's

domestic formulation revenue.


Lupin has moderate brand equity in the

pharmaceutical industry but good brand equity in

select segments like the anti-TB segment, in which

it ranks No1 in the industry.

Lupin has been gradually improving its brand equity

in the CVS and anti-diabetes segments and has

improved its prescription ranking in the segments

considerably over the past four years.

D: Distribution & reach 6/10 I: Introductions 6/10


End (INR m) (INR m) (INR) Gr. (%) (x) (x) (%) (%) Sales EBITDA

03/10A 47,405 6,816 15.3 34.8 29.4 7.8 34.1 27.5 4.4 24.6

03/11A 57,068 8,582 19.3 25.9 23.3 6.1 29.3 25.1 3.6 19.5

03/12E 64,784 9,913 22.3 15.5 20.2 5.0 27.1 28.2 3.2 16.8

03/13E 74,127 11,418 25.7 15.2 17.5 4.1 25.7 27.1 2.7 13.8



1,6,12 Rel. Perf. (%) 12/20/29


M.Cap. (USD b) 4.4



Back

grou

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

August 2011 50


Lupin has been aggressive in launching new

products over the past four years, compared with

its peers. It launched 67new products and line

extensions a year over the past four years.

New launches contributed significantly to Lupin's

revenue growth over the past few years.

Lupin derives 70% of its revenue from metros and

tier-I cities.

Distribution reach in metros and tier-I towns

increased significantly and the contribution of other

geographies to revenue has reduced over the past

four years.

Lupin has a field force of 3,682 MRs.

August 2011 51

LupinLupin


Lupin significantly outperformed the industry with

revenue CAGR of 21% over FY05-11. It has scaled

up the business rapidly though on a very low base.

However, the main growth driver was the tripling of

its field force and aggressive new launches, rather

than an increase in productivity.

We expect Lupin to post 18% revenue CAGR over

FY11-13 outperforming the industry, led by a rapidly

expanding presence in the fast growing chronic

therapeutic areas like CVS and anti-diabetes

segments, an increase in the field force and

aggressive new launches.


Lupin was not able to improve MR productivity over

2004-10.

Revenue per MR was stagnant at INR3.6m over

2004-10. At this level the productivity is in line with

the industry average.


We are positive about Lupin's international

business, given its strong and differentiated portfolio

in the US and its gradually expanding presence in

Japan.

We expect Lupin's international business to post

13% CAGR over FY11-13, excluding upsides from

Para-IV sales.

Option values include upsides from Para-IV

products in the US.



13 leading to EPS CAGR of 15.3%.

Regulated markets and India formulations will be

key growth drivers.

Chairman Profile


Cautious approach to international expansion

coupled with a highly profitable US business has

ensured good return ratios in the past. We expect

this to sustain in future.

Lupin is valued at 20.2x FY12E and 17.5x FY13E



FY13E EPS) excluding potential one-off upsides.

Chai

rman Lupin is promoted by Dr. D. B. Gupta (Chairman), a first generation entrepreneur supported by a team of

senior professionals including Dr. Kamal Sharma (MD). Rapid scale-up in the US market (despite beinga relatively late entrant), significant improvement in the product and geographical mix over the past 5 yearscoupled with strong backward integration skills are the key achievements.

300

355

410

465

520


Lupin Sensex - Rebased


August 2011 52

Lupin

Transformed transnationalTransiting from acute to chronic, generic to branded

Lupin is among the leading Indian companies in the domestic formulations segment. The

company holds a leading position in the anti-TB segment and is among the leaders in the CVS

and anti-diabetes segments. Lupin's revenue growth over the past few years has been

driven by an augmented sales force and new launches. Lupin derives a large part of its

revenue from metros and class-I towns. It is expected to sustain its out-performance to the

industry in future.

1. Mix: 5/10

Respiratory, AI, CVS, anti-TB dominate sales

The top four therapeutic segments, CVS, AI, respiratory and anti-TB contribute ~56% toLupin's domestic formulations revenue. Lupin derives ~43% of its domestic formulationsrevenue from chronic therapeutic segments. It used to derive about half its domesticformulations revenue from the Anti-TB segment 10 years ago. However, Lupin'sdependence on the segment has fallen considerably and it now contributes ~10% torevenues. Meanwhile, It has increased its presence in the CVS and respiratory segmentsover the past 10 years.

CVS, AI, Respiratory and Anti-TB dominates the therapy mix


Domestic formulations:

Meaningful contributor to

revenue, profitability

The domestic formulations

business is a meaningful

contributor to Lupin's revenue

and EBITDA with contribution

of ~25%. Unlike some leading

companies in the domestic

formulations space, we

believe Lupin's profitability in

this business is lower than its

peers due to a significant

presence in anti-TB segments

and rapid expansion of sales

force. The business posted

revenue CAGR of 21.5% over

the past six years.

EBITDA Contribution

Among the top 10 players

in the industry

Lupin ranks among the top 10

players in the domestic

formulations industry in terms

of revenues. It commands

2.69% market share, which

has grown from 2.32% in

2006. Lupin has outperformed

the industry over the past six

years with revenue CAGR of

21.5% against the industry

CAGR of 14%.

Lupin


DF EBITDA

25%

Non-DF

EBITDA, 75%

2.32

2.5

2.8

2.75

2.69

18.7

12.3

22.724.225.0

2006 2007 2008 2009 2010


FY01

Anti-TB48%

AI21%

CVS5%

CNS1%

GI1%

Respiratory0%

Others9%

Pain4%

VMN11%

FY05

CVS11%

Diabetes5%

GI3%

Anti-TB33%

AI23%

Respiratory2%

Others20%

Pain3%

FY11

GI6%

AI16%

Respiratory9%Anti-TB

10%

Diabetes7%

CVS21%

Others22%

Pain2%

Gynaecology3%

CNS4%

August 2011 53

Lupin


Brand equity among physicians strong in some therapeutic segments

Lupin's brand equity is strong in some therapeutic segments like anti-TB, in which it ranksNo1, but overall it has average brand equity. In CVS, respiratory and the anti-diabetessegment, Lupin ranks No. 7, No. 6 and No. 7 with market share of 5.6%, 4.8% and 3.8%respectively. It has been improving its market share in these segments over the past fewyears, outperforming the segments' growth.

In terms of the number of prescriptions written, Lupin has consistently led the anti-TBsegment with a prescription market share of 51%. It has been gradually improving itsbrand equity in the CVS and anti-diabetes segments and improved its prescription rankingin these segments over the past four years. It ranks fifth in the CVS segment with aprescription market share of 5% and ranks sixth in the anti-diabetes segment with a marketshare of 4.9%.

Lupin's prescription rankingJan-07 Jan-08 Jan-09 Jan-10 Oct-10

Anti-TB 1 1 1 1 1

CVS 9 7 7 6 5

Anti-diabetic 8 8 8 8 6

CNS 13 13 17 13 13




Top 10 brands contribute 20% of the revenues

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

Market share in key therapies (%) Growth comparison (%) (2010)


5.6

4.8

3.8

CVS Respiratory Anti-Diabetic

17.9

27.7

39.5

17.9 16.2

23.3

CVS Respiratory Anti-Diabetic


August 2011 54

Lupin

Lupin's top 10 brandsBrand Drug Product Launch Sales (INR m) YoY Gr (%) CAGR (%)

Tonact Atorvastatin 2000 476 18.4 19.1

Ramistar Ramipril 2001 273 13.5 11.0

Gluconorm-g Glimepiride+Metform. 2003 262 43.8 38.6

R-cinex Anti-TB 1986 257 -8.3 -6.6

Budamate Formoteral+Budesonide 2004 252 20.3 30.3

L-cin Levofloxacin 2002 245 2.1 9.2

Odoxil Cefadroxil oral 1989 214 -10.9 2.2

Esiflo Salmeterol+Fluticasone 2004 207 13.4 14.1

Rablet Rabeprazole 2002 197 18.6 20.4

Percin Other quino 2007 194 23.1 -


3. Distribution and reach: 6/10Lupin derives 70% of its revenue from metros and class-I towns compared with 63% ofthe industry average. Over the past four years, revenue CAGR for various geographieshas been much higher than that of industry average except for in rural areas. The out-performance is significant in metros and class-I towns. The contribution of the metroregion to the sales grew from 28% to 34% over the past five years.

27.8 29.5 29.5 31.9 34.2

35.5 34.7 35.9 36.7 36.3

19.3 18.9 19.2 18.2 17.6

17.3 17.0 15.4 13.3 11.9


Metros Class I Tow ns Class II to VI Rural

Lupin: Geographical distribution of revenues (%) Geographical distribution of revenues: Industry (%)

27.6 28.9 28.9 30.0 31.0

32.6 31.3 31.6 32.5 32.0

19.2 19.0 19.5 19.4 19.6

20.6 20.9 20.0 18.1 17.3



2.5

26.2

17.7

14.7

17.620.7

16.415.6

7.9

23.5

13.0

17.5

11.1

17.5

9.5

14.0

CY07 CY08 CY09 CY10


Lupin: Geography-wise growth rates (%) Industry: Geography-wise growth rates (%)

27.2

17.615.1

-3.0

6.2

31.4

22.7

21.721.2

27.2

14.721.0

25.2

6.0

22.2

10.6

CY07 CY08 CY09 CY10



August 2011 55

Lupin


Lupin has been among the most aggressive players in launching newproducts

Lupin has aggressively launched new products over the past four years, compared with itspeers. It launched 67 new products annually (including line extensions) over the past fouryears. However average revenue per new launches has been stable over the period. Newlaunches contributed significantly to Lupin's revenue growth over the past few years thoughaverage revenue per new launch declined from INR104m in CY07 to INR65m in CY10.

Lupin: New launches Lupin: Growth composition (%)


5. CAGR and scale up: 8/10We expect Lupin's domestic formulations to post revenue of 18% CAGR over FY11-13led by a rapidly expanding presence in fast growing chronic therapeutic areas like CVSand anti-diabetes, increase in its field force and new launches. We believe Lupin willcontinue its out-performance of the industry as historically it has grown much faster thanthe industry, clocking revenue of 21.5% CAGR over FY05-11.

Lupin: Domestic formulations revenue rampup


100 91 177 175

64.573.2

97.3104.4

CY07 CY08 CY09 CY10

No. Of launches in last 2 yrsAvg sales per launch (INR m)

17.211.7 14.0

10.8

7.0

11.0

-1.6

7.8

CY07 CY08 CY09 CY10


9,496 11,412 13,28115,863

18,71822,087

18.018.019.4

16.4

20.2

26.1

FY08 FY09 FY10 FY11 FY12E FY13E

India Formulation Sales (INR M) Grow th (%)

August 2011 56

Lupin


Lupin's top-line growth is driven by additions to its sales force, but has notbeen able to improve productivity

Lupin's domestic formulations business revenue posted 20.4% CAGR over FY04-10 andits sales force grew by 20.2% CAGR, implying stagnant MR productivity. In 2004, Lupinderived revenue of INR3.6m per MR, which was the same in FY10. Compared with theaverage of companies covered in this report, Lupin's performance was below average.

Lupin: Sales force productivity



Lupin's non-domestic business snapshot

Positives Lupin has demonstrated one of the fastest ramp-ups in the US, led by branded and

generic products, and gradually increasing precription share. Trying to build a differentiated portfolio in the US by targeting niche segments of oral

contraceptives and ophthalmology, coupled with some branded products. It is the only Indian player to have a branded presence in the US and has been an early

entrant in Japan through Kyowa acquisition. It is highly cost competitive due to backward integration for most of its products.

Risks & concerns Generic competition for Suprax (a key product) in US. Delays in receiving US FDA approval for oral contraceptives. No major progress on NCE research despite working on it for many years.

Key news flows/triggers Ramp-up in Antara sales in the US. US FDA approvals for oral contraceptives. Potential acquisitions in Japan and Latin America.

1,219

3,682

3.6 3.6

2004 2010


0.1 1.9

20.211.5

Lupin Industry

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

August 2011 57

Lupin

8-9. Earnings growth and stock attractiveness: 20/30Lupin is likely to gradually improve its fundamentals, led by an expanding US genericspipeline, niche/Para-IV opportunities in the US, strong performance in emerging markets(including India) and sustained traction in the Japanese business.

While our estimates factor in generic competition for Suprax from FY13 onwards, anyout-of-court settlement for Suprax patent litigation is likely to raise our earnings forecastfor FY13.

Lupin continues to target niche, low-competition opportunities to drive growth and improveprofitability. Its initiatives in the US oral contraception space are efforts in this direction.

The stock trades at, 19.7x FY12E and 17.1x FY13E EPS with a sustained ~25-30% RoE.Our estimates do not include one-time upsides for Lupin's FTF pipeline in the US. MaintainBuy with a target price of INR514 (20x FY13E EPS).

Impact assessment We are positive about Lupin's international business, given its strong and differentiated

portfolio in the US and its gradually expanding presence in Japan. We expect international business to record 12% CAGR over FY11-13, excluding

upsides from Para-IV sales. Our estimates factor in the potential competition forSuprax in US.

Option values include upsides from Para-IV products in the US.

Sales mix (INR m)FY09 FY10 FY11 FY12E FY13E FY11-13E

CAGR (%)

India

APIs 2,192 2,302 2,514 2,640 2,772 5.0

Formulations 11,412 13,281 15,863 18,718 22,087 18.0

Total 13,604 15,583 18,377 21,358 24,859 16.3

% of sales 35.6 32.7 32.0 32.8 33.3

Regulated

APIs 650 543 597 579 562 -3.0

Formulations 17,341 23,234 28,229 31,385 35,539 12.2

Total 17,991 23,777 28,826 31,965 36,101 11.9

% of sales 47.1 49.9 50.2 49.0 48.4

Un-regulated

APIs 4,296 4,565 5,477 5,751 6,039 5.0

Formulations 1,930 3,204 4,393 5,711 7,139 27.5

Total 6,226 7,769 9,870 11,462 13,177 15.5

% of sales 16.3 16.3 17.2 17.6 17.7

Others 417 550 348 390 437

Grand Total 38,238 47,678 57,422 65,175 74,574 14.0


EBITDA Contribution

DF EBITDA

25%

Non-DF EBITDA

75%

August 2011 58

Lupin

Lupin non-domestic business: key trends, triggers & risk

US generics: One of the fastest entries by an Indian playerLupin has the distinction of achieving the fastest ramp-up in the US by any Indian company.This was achieved through brand acquisition/in-licensing, focusing on niche, low-competitionproducts, supported by an aggressive pace of filings in the US market. Lupin, whichentered the US market in FY05, posted FY11 US revenues of INR20b, a growth of 9xover FY06-11.

Targeting niche opportunities resulted in better profitabilityLupin has differentiated itself from other Indian generic companies in the US by:1. Focusing on branded innovator products - it is the only Indian company to do so.2. Launching at least one low-competition/patent challenge product in the US every year

over the past few years.

A few years ago, Lupin in-licensed Suprax brand from Fujisawa (the latter had stoppedpromoting this brand in the US) and ramped-up sales of the product through price increases,volume growth and the launch of line extensions of the brand. While Lupin does notdisclose Suprax revenues separately, we estimate they contributed USD80m-90m to itsFY11 US revenues.

Expanding brand portfolio in the US through acquisitions/in-licensingAfter its success with Suprax, Lupin has attempted to expand its brand portfolio in the USby acquiring the Antara brand in FY10 and in-licensing a couple of brands from otherplayers. While it is yet to replicate the Suprax success for Antara, we believe the brandholds promise. The other two brands are likely to contribute to revenue in the long-term.

Lupin's niche initiatives in the US have helped it to achieve two main objectives.1. It rapidly ramped up US revenues with 9x growth CAGR over FY06-11 to INR20b.2. It significantly improved the profitability of its US operations since branded innovator

products and low-competition/patent challenge generic products enjoy higher profitabilitycompared with normal generic products.

Niche/patent challenge upsides in the US to continueThe trend of launching niche products in the US will continue. After the contribution fromgeneric Lotrel during FY11, Lupin has scheduled similar launches in FY12. Thecommercialization of its oral contraceptive (a US$4.5b market in the US) products willadd to its protfolio from FY13.

Lupin RoE & RoCE Lupin one year forward P/E

19.514.6

23.9

7.85

11

17

23

29

Aug

-06

Mar

-07

Aug

-07

Feb

-08

Aug

-08

Feb

-09

Aug

-09

Feb

-10

Aug

-10

Feb

-11

Aug

-11


27.1

25.727.129.3

34.137.1

28.227.525.125.6

2009 2010 2011 2012E 2013E

RoE (%) RoCE (%)

August 2011 59

Lupin

The management has guided for 12 new launches in the US in FY12 of which 3-4 areexpected to be oral contraceptives (with branded market size of USD300m-500m). Theremaining products will target a branded US market worth about USD5b.

Lupin has made 23 filings in the oral contraceptives segment as part of its strategy toexploit niche and low-competition segments. To strengthen this portfolio, it is focusing onfiling products in the ophthalmology and dermatology segments.

Given that Lupin will be a new player in the oral contraceptives market, we haveconservatively factored in upsides from this opportunity from FY13 despite the managementguidance of launching 3-4 products in FY12.

These potential low-competition launches along with a steady ramp-up in its brandedrevenue in the US (sales force strength increased from 70 to 160 MRs) will enable Lupinto sustain double-digit growth.

We factor in 9% revenue CAGR for Lupin's US operations (over FY11-13) after factoringin the slowdown in the US branded business and potential competition from generic Suprax.Our estimates exclude potential one-off opportunities.

Japan can be a large opportunity in the long termJapan is the new emerging opportunity in the global generics market with the Japanesegovernment trying to reduced overall healthcare costs in the US$70b Japanesepharmaceutical market. The government has, in the past two years, legislated to encouragethe use of generics.

However, given the Japanese market's concern for quality products and a brand-consciousmentality, progress has been gradual for generic products. We, however, believe the Japanesemarket holds huge long-term potential for generic players who can convince the Japanesepopulation about the quality of their products. A successful presence in such a market willrequire tie-ups/associations with known local names since Indian companies are stillunknown entities in Japan.

One of the few companies to access Japan's generics marketGiven Lupin's entry in the Japanese generic market through the Kyowa acquisition, it isbetter positioned to exploit the Japanese generics opportunity compared with its peers.Lupin acquired Kyowa in October 2007 and ramped-up the business to INR6.2b by FY11.We estimate 17% revenue CAGR for the Japanese operations, led mainly by new launches.

Gradually expanding profitability of Japanese operationsLupin expanded gross margins for Kyowa from 33% to 40% over the past two years andis shifting part of its manufacturing to its Indian facilities, which is likely augment margins.In FY12 Lupin will shift some of trhe API production to India and the formulationmanufacturing will be gradually shifted to India from FY13. These initiatives are likely togradually expand the profitability of Lupin's Japanese operations in the long-term.

August 2011 60

Lupin

Financials and valuations: Lupin


Basic (INR)

EPS (Fully Diluted) 15.3 19.3 22.3 25.7

Cash EPS (Fully Diluted) 18.1 23.2 26.7 30.7

BV/Share 57.7 73.5 90.5 108.6

DPS 2.8 3.2 6.0 6.4

Payout (%) 21.2 18.9 28.6 28.6

Valuation (x)

P/E (Fully Diluted) 23.3 20.2 17.5

Cash P/E (Fully Diluted) 19.4 16.9 14.6

P/BV 6.1 5.0 4.1

EV/Sales 3.6 3.2 2.7

EV/EBITDA 19.5 16.8 13.8


Return Ratios (%)

RoE 34.1 29.3 27.1 25.7

RoCE 27.5 25.1 28.2 27.1



Debtor (Days) 90 87 87 85


Wkg. Capital Turnover (Days) 122 131 127 125

Leverage Ratio

Debt/Equity (x) 0.4 0.4 0.2 0.1


Oper. Profit/(Loss) before Tax 8,536 10,659 12,194 14,605

Interest/Dividends Recd. 1,445 1,341 2,921 1,625


(Inc)/Dec in WC -4,478 -2,401 -1,497 -2,794

CF from Op. incl EO Exp. 4,414 8,405 11,690 11,374

(inc)/dec in FA -6,454 -4,996 -4,500 -4,500

(Pur)/Sale of Investments -49 233 0 0


Change in Net Worth 6,029 300 -250 -270

Inc/(Dec) in Debt -834 226 -3,000 -3,000

Interest Paid -385 -325 -304 -232

Dividend Paid -1,483 -1,658 -3,123 -3,340

CF from Fin. Activity 3,327 -1,457 -6,677 -6,841

Inc/Dec of Cash 1,238 2,186 513 33

Add: Beginning Balance 778 2,015 4,201 4,714

Closing Balance 2,015 4,201 4,714 4,747


Net Sales 47,405 57,068 64,784 74,127

Change (%) 25.5 20.4 13.5 14.4


EBITDA 8,536 10,659 12,194 14,605

Margin (%) 18.0 18.7 18.8 19.7

Depreciation 1,239 1,755 1,955 2,248

EBIT 7,297 8,903 10,239 12,357


Other Income - Rec. 1,445 1,341 2,921 1,625

PBT before EO item 8,357 9,920 12,857 13,750

PBT after EO item 8,357 9,920 12,857 13,750

Tax 1,360 1,169 1,928 2,063

Tax Rate (%) 16.3 11.8 15.0 15.0

Reported PAT 6,997 8,750 10,928 11,688

PAT Adj for EO items 6,997 8,750 10,163 11,688

Change (%) 37.8 25.1 16.1 15.0

Margin (%) 14.8 15.3 15.7 15.8

Less: Minority Interest 180 168 250 270

Adj Net Profit 6,816 8,582 9,913 11,418

Consolidated Balance Sheet (INR Million)Y/E March 2010 2011 2012E 2013E

Equity Share Capital 889 892 892 892

Fully Diluted Equity Capital 889 889 889 889

Other Reserves 24,789 31,918 39,473 47,551

Total Reserves 24,789 31,918 39,473 47,551

Net Worth 25,678 32,811 40,366 48,444

Minority Interest 255 515 515 515

Deferred liabilities 1,435 1,411 1,411 1,411

Total Loans 11,399 11,624 8,624 5,624


Gross Block 22,937 26,389 30,889 35,389

Less: Accum. Deprn. 7,072 9,075 11,030 13,278

Net Fixed Assets 15,865 17,313 19,859 22,110

Capital WIP 3,579 5,312 5,312 5,312

Investments 264 32 32 32

Goodwill & Intangibles 3,197 3,255 3,255 3,255

Curr. Assets 27,755 34,967 39,049 44,034

Inventory 9,715 12,000 13,605 15,567


Cash and Bank Balance 2,015 4,201 4,714 4,747

Others 4,759 6,208 6,478 7,413



Provisions 2,243 2,718 3,634 3,923


Appl. of Funds 38,767 46,361 50,916 55,994

E: MOSL Estimates

This page is

left blank

intentionally

August 2011 61


August 2011 62

Torrent PharmaMEDICINES

Score

CMP: INR589 TRP INTP: INR762 BuyAll's in place

M: Mix 6/10

Torrent is one of the better plays on remedies for

high-growth lifestyle segments of CNS, CVS and

diabetes. It derives 59% of its revenue from chroniclifestyle segments.

CVS is the highest contributor with 35% contribution

followed by CNS (21%) and Gastro Intestinal (17%).


Torrent enjoys good brand equity with specialist in

the CNS and CVS segments.

In the CNS segment, Torrent Pharma ranks 3rd

with a prescription market share of 8.1% and in

the CVS segment its ranks seventh with aprescription market share of 4.6%.

Torrent Pharma has either maintained or improved

its prescription ranking in the most of the

therapeutic segments in which it operates.


Torrent Pharma's new product launch rate has been

good compared with its peers in the industry. It

launched 38 new products a year (including lineextensions) over the past four years.

It's revenue growth is driven by its existing products

as well as new launches.



03/10A 19,040 2,680 31.7 9.9 18.6 6.0 36.2 28.7 2.7 12.5

03/11A 22,265 2,702 31.9 0.8 18.4 4.9 29.2 24.1 2.3 12.4

03/12E 25,596 3,392 40.1 25.6 14.7 3.8 29.3 24.9 1.9 9.6

03/13E 29,817 4,029 47.6 18.8 12.4 3.1 27.7 25.1 1.6 8.0



1,6,12 Rel. Perf. (%) 3/19/18

M.Cap. (INR b) 54.6

M.Cap. (USD b) 1.2



Back

grou

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

Torrent Pharma derives 73% of its revenue frommetros and tier-I cities.

The contribution of rural areas to revenue has fallen

over the past five years from 18.2% to 12.8%.

Over the past four years, revenue CAGR for allgeographies has been below the industry average

except in Metro's.

Torrent Pharma has a field force of 3,600


August 2011 63

Torrent Pharma

C: CAGR and scale-up 6/10 I: Improvement in productivity 3/10

N: Non-domestic business 6/10 E: Earnings growth 8/10

Chairman Profile


Chai

rman Torrent Pharma was set-up by Late U N Mehta. Mr Mehta started his career as a clerk with the government.

Later, he took a job as a medical representative for Sandoz. Post which he started his own business inpharmaceutical and eventually established the company. Currently, his son Mr. Sudhir Mehta andMr. Sameer Mehta handle the operations of the company.


500

550

600

650

700


Torrent Pharma Sensex - Rebased

A focused and cautious approach to international

expansion along with a highly profitable domestic

business has ensured good return ratios, RoIC isestimated at 40% over the next two years.

Torrent Pharma is valued at 14.7x FY12E and 12.4x

FY13E consolidated earnings.


FY13E EPS).

We expect overall top-line CAGR of 16% over FY11-13 leading to EPS CAGR of 22.1%.

Earnings growth will be driven by the domestic

formulation business and increase in profitabilityof international operations.

Torrent Pharma ranks very low compared to itslarger peers when it comes to field force

productivity.

However the company has managed to improve

the productivity over the last 6 years. Revenue perMR improved from Rs1.5m in 2004 to Rs2.2m in

2010

Torrent Pharma has significantly outperformed theindustry with revenue CAGR of 19% over FY05-11.

The company has scaled up the business rapidly

albeit on a low base and growth has been achievedlargely because of a favorable therapeutic mix,

improvement in brand equity and increase in field

force productivity.

We expect Torrent Pharma to post 16% CAGRover FY11-13, outperforming the industry, led by a

strong presence in fast growing chronic therapeutic

areas like CVS, CNS and anti-diabetes andimprovement in brand equity.

We are positive about Torrent Pharma's non-domestic business given it's has strong presence

in Latin America and expanding its reach in various

regulated and emerging markets.

We expect the international business to post

15.7% CAGR over FY11-13 mainly led by the US

and Latin American markets.

The company has tie-up with 3 global innovators

for supplying various products. We expect these

supplies to grow at 16.5% CAGR over FY11-13.

Option values include upsides from NCE business.

August 2011 64

All's in placeStrong profitable growth, robust balance sheet, attractive valuation

Torrent derives its strength from its strong positioning in some of the most lucrative and

fastest growing chronic therapy segments. It has consistently maintained its leadership in

these therapeutic classes, with strong brands and new product launches. Torrent has 6

brands in the industry's top 300 brands, and has 37 brands in leadership positions in their

respective molecule segments. The company has a field force of 3,600 medical

representatives (MRs). Domestic business has grown at a CAGR of 19% over the last 6 years

through FY11. Torrent derived 40% of its revenue from the domestic formulations business

in FY11, down from 85% in FY04 due to relatively higher growth in its international business.

1. Mix: 6/10

Lifestyle segments like CVS, CNS, anti-diabetes dominate sales

Torrent Pharma derives 59% of its revenue from chronic therapeutic segments, whichdominate the company's revenue mix. The top five therapeutic segments including CNS,CVS, GI, AI and anti-diabetes contribute ~91% to Torrent's domestic formulations revenue.Torrent is among the market leader in two of the fastest growing therapeutic segments,CNS and CVS. Torrent's sizable presence in the chronic therapy segments makes it anattractive play in the domestic formulations business.

Therapeutic break-up (FY05) Therapeutic break-up (FY11)

India formulationssnapshotDomestic formulations -

major contributor to

revenue, profits


business contributes ~40% to

Torrent Pharma's revenue. The

segment is the most profitable

for Torrent and contributes

~70% to consolidated EBITDA.

Revenue/PBT Contribution

The leading player in the

chronic therapeutic

segment

Torrent Pharma has grown its

market share over the years due

to a significant presence in fast

growing chronic therapeutic

areas. It is among the largest

companies in the chronic

segments. The company's

market share has gone up from

1.9% in 2006 to 2% in 2010. The

company posted 19% CAGR

over the past five years against

14% CAGR for the industry.

Market share has increased

marginally



Strong brand equity among specialists, among leaders in the CVS and CNS

Torrent has been a dominant player in two of the industry's fastest growing therapeuticsegments i.e CNS and CVS. Torrent ranks No2 in the CVS and No.3 in CNS segmentswith a value market share of 6.8% and 8.6% respectively.

Torrent Pharma

1.9

1.9

2.0

2.0

2.1

2.1

2006

2007

2008

2009

2010

0

5

10

15

20

25

Mkt Share (%)

Grow th (%)

others2%

Anti-diabetic

3%

Pain6%

Anti-infec-tives14%

CNS17% GI

22%

Cardiac36%

Torrent Pharma

DF EBITDA

70%

Non-DF EBITDA

30%

5%

19%

4%

13%21%

5%

33%

Cardiac Anti-diabeticCNS Anti-infectivesPain GIothers

August 2011 65


6.8

3.6

8.6

CVS GI CNS

16.815.1

18.017.9 17.118.7

CVS GI CNS



In terms of prescriptions Torrent Pharma has been one of the leading players in two of theindustry's fastest growing therapeutic segments viz. CNS and CVS. Torrent Pharma ranksNo3 in the CNS and No. 7 in CVS segments with a prescription market share of 8.1% and4.6% respectively. It ranks sixth in the GI segment. Over the last 4 years, the companyhas either maintained or improved its ranking in almost all the therapeutic areas it operatesin.

Torrent's Prescription ranking has improved across therapy segmentsJan-07 Jan-08 Jan-09 Jan-10 Oct-10

CVS 8 8 6 5 7

CNS 2 2 2 3 3

Anti Diabetics 17 10 13 13 14

Anti infectives 14 14 14 15 14

GI 7 6 5 6 6



Torrent Pharma's top 10 brands contribute ~30% to total revenue, which shows low brandconcentration compared with other leading companies. Four brands of the company featureamong the top 300 brands of the industry. Torrent Pharma's No1 brand, Dilzem, (Diltiazem,CVS) ranks 102nd in the industry and it posted revenue CAGR of 13% over the past fouryears. Seven of its top 10 brands have grown at double digit CAGR over past 4 years.

Top 10 brands of the companyBrand Drug Product Product Sales YoY Gr. CAGR

Category Launch (INRm) (%) (%)

Dilzem Diltiazem CVS 1987 475 5.7 13.0

Nikoran Nicorandil CVS 1997 410 17.6 19.2

Alprax Alprazolam CNS 1988 396 0.0 5.4

Nebicard Nebivolol CVS 2003 252 14.5 19.8

Topcef Cefixime Anti-infective 1994 235 18.7 16.0

Domstal Domperidone Gastro-intestinal 1988 229 5.5 5.4

Droxyl Cefadroxil Anti-infective 1989 213 3.3 3.5

Azulix-mf Glimepiride+Metformin Diabetes 2002 197 27.5 33.2

Deplatt-a Aspirin + Clopidogrel CVS 2002 191 11.8 24.3

Lamitor Lamotrigine CNS 1998 170 17.0 18.5


Torrent Pharma

August 2011 66

3. Distribution and reach: 6/10Torrent Pharma derives 73% of its revenue from metros and class-I towns, comparedwith 63% of the industry average, suggesting a focus on these geographies. In the pastfour years, revenue CAGR for all geographies has been lower than that of the industryaverage except for Metros. The contribution of rural areas to revenue has fallen over thepast five years from 18.2% in 2006 to 12.8% in 2010.

Geographical distribution of revenues - Torrent Pharma (%) Geographical distribution of revenues - Industry (%)

35.5 38.1 37.4 44.3 44.5

30.6 28.7 29.927.8 28.5

15.7 15.6 15.8 14.2 14.218.2 17.6 16.9 13.8 12.8



27.6 28.9 28.9 30.0 31.0

32.6 31.3 31.6 32.5 32.0

19.2 19.0 19.5 19.4 19.6

20.6 20.9 20.0 18.1 17.3



Geography-wise growth rates - Torrent Pharma (%) Geography-wise growth rates - Industry (%)


6.3

41.1

9.7 7.9

16.4

26.6

19.0

10.712.7

10.6 6.7

16.0

16.8

-3.03.8

14.1

CY07 CY08 CY09 CY10


7.9

20.7

2.5

26.2

17.7

14.7

17.6

15.616.4

23.5

13.0

17.5

11.117.5

9.5

14.0

CY07 CY08 CY09 CY10


4. Introduction: 5/10

Torrent Pharma's pace of new product launches has been moderatecompared with its peers in the industry. There has been significantimprovement in revenue per new product launched

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

Torrent Pharma

August 2011 67

5. CAGR and scale-up: 6/10

We expect 16% CAGR from Torrent Pharma's domestic formulations business led by astrong presence in the fastest growing chronic therapeutic segments. We believe thecompany will continue to outperform the industry and its peers over the foreseeable future.Historically the company has outperformed industry in this segment with FY05-11 revenueCAGR of 19% versus that of 14% for the industry during the same period. We believethat, Torrent is likely to strengthen its presence in key therapeutic areas, improving itsranking in the industry.

Torrent Pharma: Domestic formulations revenue ramp-up

Torrent Pharma's - new launches Torrent Pharma's growth compositions (%)


126

73

43 39

118.3137.2

57.1

32.7

CY07 CY08 CY09 CY10


8.1 6.99.1

5.9

9.8

1.3

10.1

9.9

CY07 CY08 CY09 CY10



6. Improved MR productivity: 3/10

Torrent's topline growth is driven by both addition to the MR strength andimprovement in the MR productivity. However MR productivity is lowcompared to large peers

Torrent Pharma has done a good job over the past six years with a improvement in workforceproductivity. Over FY04-10, Torrent Pharma's domestic formulations business revenueposted 19.3% CAGR and its sales force expanded by just 10.7% CAGR, implyingsignificant productivity improvement of the workforce. In 2004, Torrent derived revenueof Rs1.5m per MR, which rose to Rs2.3m in 2010. However the MR productivity is stillvery low compared to large peers.

Torrent Pharma

11,285

9,5638,389

7,2546,2405,8135,444

3,9212,9042,848

7.3

38.835.0

2.0

18.014.015.616.3

6.8

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Revenues (INR m) Grow th (%)

August 2011 68

7. Non-domestic business snapshot: 6/10

Positives Strong presence in emerging markets like Brazil and RoW markets. Increasing presence

in other emerging markets Increasing presence in US market with healthy product pipeline Strong chemistry skills and backward integrated low-cost operations. Improving profitability of international subsidiaries.

Risks & concerns Delay in getting regulatory approvals for the products Worsening of pricing environment in key markets like Germany and US. Rupee appreciation vs US$ may have negative impact on earnings. Continued losses at Russian subsidiaries will impact overall profits.

Key news flows/triggers Ramp up in US revenue in FY12-13 Begining of supplies to AstraZeneca Improvement in profitability of international business

Impact assessment Expect the international business to post 15% CAGR over FY11-13 led mainly by US

and CRAMS supplies to AstraZeneca We expect the international business to record 16% CAGR over FY11-13 excluding

low-competition and Para-IV products in the US. Option values include upsides from future inorganic initiatives.

Torrent: Salesforce productivity


Torrent Pharma

7.8

1.9

10.7

11.5

Torrent Industry



1,959

3,600

2.3

1.5

2004 2010


August 2011 69

8-9. Earnings growth and stock attractiveness: 22/30

Over the past five years Torrent posted earnings CAGR of 34% and CAGR of capitalemployed in the business was 17%. Torrent consistently improved its profitability, withRoCE increasing from 14.5% in FY05 to 24.1% in FY11. Torrent is likely to post earningsof 22% CAGR over FY11-13, in line with strong operating performance. It is likely tosustain high return ratios despite large capex and growing cash on its books. We believecurrent valuations do not reflect the improvement in business profitability, turnaround ofinternational operations and Torrent's strong positioning in the domestic formulations segment.Torrent should trade at a premium to most mid-cap pharmaceutical companies, and itsvaluation gap vis-à-vis frontline pharmaceutical companies should fall, going forward. Thestock trades at 14.7x FY12E and 12.4x FY13E earnings. We believe Torrent's superiorfinancial performance will drive re-rating. Maintain Buy with a target price of INR762(16x FY13E EPS), an upside of 26%.

Torrent Pharma


CAGR (%)

Domestic formulation 6,240 7,254 8,389 9,563 11,285 16.0

YoY Growth (%) 7.3 16.3 15.6 14.0 18.0

International formulation7,970 9,157 10,702 12,421 14,331 15.7

YoY Growth (%) 37.8 14.9 16.9 16.1 15.4

Latin America 2,566 3,006 3,519 4,223 4,983 19.0

Russia/CIS 658 391 583 525 577 -0.5

Europe (ex-Germany) 1,011 1,163 1,245 1,469 1,704 17.0

Germany (Heumann) 2,573 2,547 2,986 3,135 3,292 5.0

RoW 885 1,141 1,276 1,429 1,643 13.5

US 278 909 1,093 1,640 2,131 39.6

CRAMS 1,601 1,849 2,096 2,431 2,845 16.5

YoY Growth (%) 7.4 15.5 13.4 16.0 17.0

Others 53 69 33 36 40 10.0

YoY Growth (%) 64.8 29.7 -52.8 10.0 10.0

Net Sales 15,864 18,329 21,220 24,451 28,500 15.9

YoY Growth (%) 20.9 15.5 15.8 15.2 16.6

Other operating income 441 710 1,045 1,145 1,317 12.2

YoY Growth (%) 3.7 61.0 47.1 9.6 15.0

Income from op. 16,306 19,040 22,265 25,596 29,817 15.7

YoY Growth (%) 20.4 16.8 16.9 15.0 16.5


EBITDA Contribution

Torrent Pharma

DF

EBITDA

70%

Non-DF

EBITDA

30%

Torrent Pharma RoE & RoCE Torrent Pharma one year forward P/E

13.4

11.9

21.4

3.90

6

12

18

24

Mar

-05

Dec

-05

Aug

-06

May

-07

Jan-

08

Oct

-08

Jul-0

9

Mar

-10

Dec

-10

Aug

-11


25.1

42.0

36.2

29.229.3

27.7

24.9

28.1

24.1

28.7

FY09 FY10 FY11 FY12E FY13E

RoE (%) RoCE (%)

August 2011 70

Financials and valuations: Torrent Pharma

Torrent Pharma


Basic (INR)

EPS (INR) 31.7 31.9 40.1 47.6

Cash EPS 35.1 39.3 51.6 61.1

BV/Share 98.2 120.8 153.1 191.2

DPS 7.0 9.3 8.1 9.5

Payout (%) 25.6 29.1 20.0 20.0

Valuation (x)

P/E 18.4 14.7 12.4

Cash P/E 15.0 11.4 9.6

P/BV 4.9 3.8 3.1

EV/Sales 2.3 1.9 1.6

EV/EBITDA 12.4 9.6 8.0


Return Ratios (%)

EBITDA Margins (%) 18.5 14.4 16.4 16.7

Net Profit Margins (%) 14.1 12.1 13.3 13.5

RoE 36.2 29.2 29.3 27.7

RoCE 28.7 24.1 24.9 25.1


Asset Turnover (x) 1.4 1.4 1.3 1.3



Leverage Ratio (x)


Interest Cover Ratio 13.7 28.7 24.5 28.7

Debt/Equity 0.6 0.6 0.4 0.4


Oper. P/L before Tax 4,096 4,092 5,151 6,069

Interest/Dividends Recd. 127 81 109 153

Direct Taxes Paid -717 -744 -745 -884

(Inc)/Dec in WC 349 577 -598 -611


EO Expense / (Income) 368 0 -21 0


(inc)/dec in FA -1,487 -2,657 -2,000 -2,500

(Pur)/Sale of Investments -17 -48 0 0


(Inc)/Dec in Debt 398 513 -16 0

Interest Paid -251 -121 -172 -172

Dividend Paid -592 -787 -683 -806

Others 44 -1 0 0

CF from Fin. Activity -401 -395 -870 -977

Inc/Dec of Cash 1,583 905 1,068 1,249

Add: Beginning Balance 2,300 3,883 4,788 5,856

Closing Balance 3,883 4,788 5,856 7,105


Net Revenues 19,040 22,265 25,596 29,817

Change (%) 16.8 16.9 15.0 16.5


% of Sales 78.5 81.6 79.9 79.6

EBITDA 4,096 4,092 5,151 6,069

Margin (%) 18.5 14.4 16.4 16.7

Depreciation 661 626 952 1,137

EBIT 3,435 3,466 4,199 4,932


Other Income - Rec. 127 81 109 153

PBT before EO Expense 3,312 3,427 4,137 4,913

Extra Ordinary Exp./(Inc.) 368 0 -21 0

PBT after EO Expense 2,944 3,427 4,158 4,913

Current Tax 705 720 745 884

Deferred Tax -74 5 0 0

Tax 632 725 745 884

Tax Rate (%) 19.1 21.2 18.0 18.0

Reported PAT 2,312 2,702 3,413 4,029

Adj PAT 2,680 2,702 3,392 4,029



Total Reserves 7,887 9,801 12,531 15,755

Net Worth 8,310 10,224 12,955 16,178

Deferred liabilities 499 480 480 480

Total Loans 5,224 5,721 5,721 5,721


Gross Block 8,129 10,385 12,685 14,885

Less: Accum. Deprn. 2,718 3,343 4,295 5,432

Net Fixed Assets 5,411 7,041 8,390 9,452

Capital WIP 1,098 1,500 1,200 1,500

Investments 1,412 1,460 1,460 1,460

Curr. Assets 11,607 15,346 17,990 21,490

Inventory 3,236 5,048 5,794 6,676



Loans & Advances 1,506 2,106 2,250 2,782



Provisions 1,280 1,427 2,045 2,384


Appl. of Funds 14,033 16,441 19,155 22,378

E: MOSt Estimates

This page is

left blank

intentionally

August 2011 71


GSK PharmaMEDICINES

Score

CMP: INR2,155 GLXO IN

TP: INR2,330 BuyOf patent and parent

M: Mix 4/10

GSK derives majority of its revenue from the acute

therapeutic segments and has very little presence

in the chronic segments.

GSK derives 95% of its revenues from acute

therapeutic segments with dominant presence in

Anti-infcetives, dermatology, pain management and

Vitamins.

It also enjoys leadership position in the

Dermatology segment.


Enjoys strong brand equity in its some of the largest

therapeutic segments in the industry. It ranks no.1

in dermatology segment, no.3 in Pain management

and Vi tamins segments and no5 in AI and

respiratory segments.

Based on prescription ranking, GSK Pharma is the

market leader in Dermatology, vitamins and pain

managements segment while ranks no.4 in

respiratory segment.


Derives 60% of the revenues from Metro and Tier I

cities.

Contribution of Tier II and rural area to total

revenues has remained stagnant over the last 5

years.

It has field force of 3000MRs which is on a lower

side compared to other Indian companies of similar

size.


GSK is among the laggards when it comes to

launch of new products.

GSK has launched very few new products over the

last 4 years compared to its peers. It has launched

5 new products (including line extensions) annually

over the last 4 years.

Ramp-up in domestic formulations revenues is

driven largely by existing products.



12/09A 18,708 5,049 59.6 12.6 - - 28.7 43.0 - -

12/10A 21,116 5,814 68.6 15.2 31.4 9.5 30.1 44.8 7.6 21.9

12/11E 23,740 6,567 77.5 12.9 27.8 8.7 31.3 46.3 6.8 20.2

12/12E 26,921 7,586 89.6 15.5 24.1 8.0 33.4 49.5 5.9 17.2


52-Week Range (INR) 2,475/1,850

1,6,12 Rel. Perf. (%) 5/7/22


M.Cap. (USD b) 4.0



Back

grou

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


August 2011 72

August 2011 73

GSK Pharma


GSK has significantly underperformed the industry

with revenue CAGR of 8.1% over CY04-10 versus

industry revenue CAGR of 14.8% over the same

period. The company has gradually lost its market

share and slipped through the ranking.

We expect it to grow at 13-14% CAGR over CY10-

12 which is slightly lower than the industry average,

mainly due to high base and intensifying

competition in acute segment.


GSK enjoys one of the highest MR productivity in

the industry with annual revenue per MR at

INR7.7m.

MR growth was at 5.9% compared to revenue

growth of 8.1% for CY04-10

The company has reported an improvement in

workforce productivity over CY04-10. At this level

the productivity is amongst the best in the industry.

N: Non-domestic business NA

N A


Expect overall topline CAGR of 13% for CY10-12

leading to EPS CAGR of 14.2%

" EPS growth is higher than topline growth mainly

due to expanding EBITDA margins.

CEO Profile


One of the most conservative managements

amongst Indian pharmaceutical companies

Return ratios are amongst the best in the industry

with ROCE in excess of 40% and RoEs in excess

of 30%. GSK is currently valued at 27.8x CY11E

and 24.1x CY12E

Maintain Buy with TP of INR 2,330 (26x CY12E

EPS)

CEO

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


1,600

1,850

2,100

2,350

2,600


GSK Pharma Sensex - Rebased

August 2011 74

GSK Pharma

Of patent and parentSolid play on new patent regime

GSK Pharma is among the best performing MNCs in the domestic formulation space with its

strong parentage and brand equity among doctors. It leads the industry in profitability despite

its meager presence in highly profitable chronic segments. GSK's MR productivity is the best

among the leading companies. We believe GSK's growth trajectory will increase from CY13

as it gets meaningful revenue from new launches.

1. Mix: 4/10

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


Second largest Pharma MNC in

India. Before Abbott took over

Piramal Healthcare's domestic

formulation business, GSK

was the largest pharma MNC

in India. We believe GSK is one

of the best plays on the IPR

regime in India with aggressive

plans to launch new products

in the high-growth lifestyle

segments. These launches are

expected to bring long-term

benefits.

EBITDA Contribution

4.5

4.9

5.2

4.3

4.3

3.62.9

19.2

9.36.8

2006 2007 2008 2009 2010


GSK Pharma: Therapeutic mix

CY 2000

Pain

5%

Dermatology/Ster

oids2%

VMN26%

GI7%

AI21%

Respiratory

24%

Others15%

CY 2004

Pain

11%

Dermatology/Ster

oids18%

VMN

15%

GI6%

AI25%

Respiratory10%

Others15%


DF EBITDA 100%

AI 21%Anti-Parasitic 3%

Gynaec 3% CVS 3%Others 6%

GI 7%

Hormones 8%

Respiratory 9%

VMN 10% Pain 11%

Dermatology 19%

March 2011

Among the leading players

in the industry

GSK has maintained

leadership in the industry

though its ranking has slipped

from No1 to No4 over the past

few years. However, GSK

has maintained its strong

position despite few new

launches. Its market share fell

from 5.23% in 2006 to 4.26%

in 2010 due to low growth

stemming from very few new

launches and stiffer

competition. GSK's business

posted CAGR of 8.1% over

the past six years against

14% CAGR for industry.

Market share and growth

August 2011 75

GSK Pharma


GSK leads the industry in AI, Dermatology, Pain Management

GSK ranks first in the Dermatology space in India with market share of 20% and ranksthird in the Pain Management and Vitamins segments with market share of 6.4% and7.3% respectively. It ranks fifth in two of the industry's largest therapeutic segments, AIand Respiratory, with market share of 6% and 5.1% respectively. However over the pasttwo years, the company lagged the industry growth rate in almost all therapeutic segmentsdue to very few new launches.

GSK Pharma: Market share in key therapies (%) GSK Pharma: Growth composition (%) (2010)


6 5.16.4

7.3

20.3

AI Respiratory Pain/Analgesic VMN Dermatology

7.1

17.4

9.8

13.9

16.018.4

16.416.716.214.6

AI Respiratory Pain/Analgesic VMN Dermatology


GSK has strong brand equity among physicians, which is visible from its market share andprescriptions rankings. GSK ranks first in the Dermatology, Vitamins and Pain Managementsegments with prescription market share of 10.4%, 8.7% and 7% respectively. GSK ranksfourth in the Respiratory segment and sixth in the Gynecology segment.

Prescription ranking of GSKJan-07 Jan-08 Jan-09 Jan-10 Oct-10

Derma 1 1 1 1 1

Vit 1 1 1 1 1

Pain Mgmt 1 1 2 2 1


Gynaec 1 4 6 6 6


GI 10 9 13 15 15

CVS 16 18 18 19 20


Top 10 brands contribute 45% to GSK revenue

GSK's top 10 brands contribute ~45% to its total revenue. The brand concentration isamong the highest in the industry. It shows GSK's brand building ability and its strongbrand recall among physicians. GSK's top 10 brands feature among the industry's top 100brands. Its No1 brand, Augmentin (Amoxycillin, AI), ranks fifth in the industry and posted18% growth over the past four years. Eight of the 10 brands posted double-digit CAGRover the past four years.

August 2011 76

GSK Pharma

Top 10 brandsBrand Drug Product Launch Sales (INR m) YoY Gr (%) CAGR (%)

Zinetac Ranitidine 1986 1,032 12.5 12.6

Augmentin Amoxy. & Clav. 1994 1,704 27.7 18.0

Ceftum Cefuroxime 1991 798 23.8 14.0

Calpol Paracetamol 1995 1,101 16.6 15.5

Phexin Cephalexin 1989 813 10.2 6.4

Eltroxin Levothyroxine 2000 638 19.2 17.0

Betnovate-c Betameth.+Chinoform. 1996 633 31.7 13.7

Betnovate-n Betameth.+Neom. 1996 631 29.3 10.9

Neosporin Antibio. Comb. 1996 630 18.8 15.5

Betnesol Betamethasone injectables 1971 822 11.3 7.2


3. Distribution and reach: 7/10GSK derives 60% of its revenue from metros and Class-I towns compared with an industryaverage of 63%. Over the past four years revenue CAGR for all geographies has laggedthe industry average. However, GSK's CY10 growth in all geographies was in higherdouble digits.

GSK: Geographical distribution of revenues (%) Geographical distribution of revenues: Industry (%)

GSK: Geography-wise growth rates (%) Industry: Geography-wise growth rates (%)


27.4 27.0 25.6 26.6 28.2

31.7 30.7 31.4 32.3 32.0

19.0 19.4 20.6 20.4 20.1

21.9 22.9 22.4 20.7 19.7



27.6 28.9 28.9 30.0 31.0

32.6 31.3 31.6 32.5 32.0

19.2 19.0 19.5 19.4 19.6

20.6 20.9 20.0 18.1 17.3



2.5

26.2

17.7

14.7

17.6

20.7

16.415.6

7.9

23.5

13.0

17.5

11.1

17.5

9.5

14.0

CY07 CY08 CY09 CY10

METROS CLASS I TOWNS

CLASS II TO VI RURAL

0.81.3

-1.8

13.3

26.7

-0.5

6.0

12.7

17.7

5.2

9.7

8.3

17.7

7.5

1.6

13.3

CY07 CY08 CY09 CY10


August 2011 77

GSK Pharma


Existing products lead revenue growth over the past four years

Over the past four years, GSK launched very few new products-22 new products includingline extensions-compared with its peers. The average revenue per new launch has improvedmarginaly from been virtually stagnant from INR71m in CY07 to INR81m in CY10. Top-line growth over the past four years has been almost entirely driven by existing products,which reflects GSK's ability to leverage existing brands.

GSK Pharma: New launches GSK Pharma: Growth composition (%)


5. CAGR and scale up: 6/10We expect 13-14% CAGR for GSK's domestic formulations business over the next fewyears. GSK's top-line growth will be led by a focus on priority products, which will sustaindouble-digit growth. This will be driven by expanding therapeutic and geographic coverageand with incremental contribution from new launches. We believe the growth trajectorywill improve in the long term as new launches contribute meaningfully to the top-line.


GSK's sales force productivity increases

GSK's revenue posted CAGR of 8.7% over CY04-10 and its sales force posted CAGR of5.9% over CY04-10, implying improvement in salesforce productivity. In 2004, GSK derivedINR6.5m revenue per MR, which rose to INR7.7m in CY10. GSK's current MR productivityis arguably one of the best in the industry.

13 15 23 36

71.481.6

124.5

81.3

CY07 CY08 CY09 CY10


0.7 0.8 1.9 1.82.2 2.8

7.4

17.4

CY07 CY08 CY09 CY10

New Launches Exis ting Brands

August 2011 78

GSK Pharma

GSK Pharma: Salesforce productivity


8-9. Earnings growth and stock attractiveness: 20/30We believe GSK is one of the best plays on the IPR regime in India with aggressive plansto launch new products in the high growth lifestyle segments. These launches are expectedto bring it long-term benefits. We believe GSK is likely to sustain double-digit toplinegrowth over the next few years. We believe this growth trajectory will improve afterCY13, as new launches contribute meaningfully to the top-line. Given the high profitabilityof operations, we expect this growth to lead to sustainable double-digit earnings growthand RoE of ~30%. This growth is likely to be funded through miniscule capex and negativenet working capital. GSK deserves premium valuations due to strong parentage (givingaccess to a large product pipeline), brand-building ability and likely positioning in the postpatent era. GSK is one of the very few companies with the ability to drive reasonablegrowth without major capital requirement, leading to high RoCE of over 45%. We expectGSK to record CY11E EPS of INR77.5 (up 12.9%) and CY12E EPS of INR89.6 (up15.5%). The stock is valued at 27.8x CY11E and 24.1x CY12E earnings. Maintain Buywith a target price of INR2,330 (26x CY11E).

1,775 2,500

7.7

6.5

2004 2010


1.5 1.9

5.9

11.5

GSK Industry



29.1 28.7 30.1 31.333.4

49.546.3

44.0 44.843.0

2008 2009 2010 2011E 2012E

RoE RoCE

24.623.1

30.2

14.8

10

16

22

28

34

Au

g-06

Ma

r-07

Au

g-07

Feb

-08

Au

g-08

Feb

-09

Au

g-09

Feb

-10

Au

g-10

Feb

-11

Au

g-11


GSK RoE & RoCE (%) GSK one year forward P/E

August 2011 79

GSK Pharma

Financials and valuations: GSK Pharma

Income Statement (INR Million)Y/E December 2009 2010 2011E 2012E

Net Sales 18,708 21,116 23,740 26,921

Change (%) 12.7 12.9 12.4 13.4

Materials Consumed 6,922 7,770 8,784 9,961

Personnel Expenses 2,094 2,409 2,842 3,212

Other Expenses 3,146 3,560 4,163 4,525


EBITDA 6,546 7,378 7,951 9,223

Change (%) 13.3 12.7 7.8 16.0

Margin (%) 35.0 34.9 33.5 34.3

Depreciation 164 176 202 231


Other Income - Rec. 1,206 1,477 1,969 2,234

PBT & EO Expense 7,585 8,673 9,718 11,226

Tax 2,536 2,859 3,152 3,641

Tax Rate (%) 33.4 33.0 32.4 32.4

Adj PAT 5,049 5,814 6,567 7,586

EO Expense (net of tax) -74 177 1,859 0

Reported PAT 5,123 5,637 4,708 7,586

Change (%) 12.6 15.2 12.9 15.5

Margin (%) 27.4 26.7 19.8 28.2

Balance Sheet (INR Million)Y/E December 2009 2010 2011E 2012E


Reserves 16,728 18,445 20,115 21,826

Capital Reserve 17 17 17 17

Net Worth 17,591 19,308 20,979 22,689

Loans 54 52 0 0


Gross Block 2,892 3,184 3,784 4,184

Less: Accum. Deprn. 1,964 2,095 2,297 2,528

Net Fixed Assets 928 1,089 1,487 1,656

Capital WIP 214 87 214 214

Investments 1,909 1,604 20,566 22,194

Curr . Assets 21,144 24,483 6,932 7,834

Inventory 2,530 2,815 3,157 3,580

Account Receivables 537 470 665 727


Others 1,351 1,717 1,923 2,181



Provisions 3,830 4,900 4,748 5,250

Net Current Assets 14,148 16,016 -1,852 -1,938

Deferred Tax Assets 447 564 564 564

Appl. of Funds 17,646 19,360 20,979 22,689

E: MOSL Estimates; ^Standalone results

RatiosY/E December 2009 2010 2011E 2012E

Basic (INR)

EPS 59.6 68.6 77.5 89.6

Cash EPS 61.5 70.7 79.9 92.3

BV/Share 207.7 228.0 247.7 267.9

DPS 30.0 40.0 50.0 60.0

Payout (%) 58.9 66.5 73.5 76.4

Valuation

P/E 31.4 27.8 24.1

Cash P/E 30.5 27.0 23.4

P/BV 9.5 8.7 8.0

EV/Sales 7.6 6.8 5.9

EV/EBITDA 21.9 20.2 17.2


Return Ratios (%)

RoE 28.7 30.1 31.3 33.4

RoCE 43.0 44.8 46.3 49.5





Working Capital (Days) -50 -60 -47 -45

Leverage Ratio

Debt/Equity 0.0 0.0 0.0 0.0

Cash Flow Statement (INR Million)Y/E December 2009 2010 2011E 2012E

Oper. Profit/(Loss) bef. Tax 6,546 7,378 7,951 9,223



(Inc)/Dec in WC 1,153 -3 -1,392 -720


EO expense -74 177 1,859 0

CF frm Op. incl EO exp. 6,292 5,699 3,518 7,096

(inc)/dec in FA -184 -166 -726 -400

(Pur)/Sale of Investments 5,535 216 -17,204 -1,729

CF from investments 5,350 50 -17,931 -2,129

Change in Net Worth 0 0 53 21

Inc/(Dec) in Debt -2 -3 -52 0

Interest Paid -4 -6 0 0

Dividend Paid -3,976 -2,985 -3,863 -4,829

CF from Fin. Activity -3,982 -2,994 -3,862 -4,808

Inc/Dec of Cash 7,660 2,755 -18,274 159


Closing Balance 16,726 19,481 1,187 1,346

E: MOSL Estimates ^ - Standalone results

Sun PharmaMEDICINES

Score

CMP: INR464 SUNP INTP: INR524 NeutralThe Sun shines bright !

M: Mix 7/10 E: Equity with doctors 9/10


Equity Shares (m) 1,035.6


1,6,12 Rel. Perf. (%) 2/22/41


M.Cap. (USD b) 10.4



Back

grou

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


Derives 73% of the revenues from Metro and TierI cities.

The contribution of rural areas to revenues hascome down over the last 5 years.

Further, in last 4 year, revenue CAGR for allgeographies has been in-line or better than industryaverage

It has field force strength of 2,600

Sun Pharma's new product launch rate has beenmoderate compared to its peers in the industry. Ithas launched 31 new products annually (includingline extensions) over the last 4 years.

The revenue growth is driven by both existingproducts as well as new launches.

Sun pharma enjoys strong brand equity in CNS,Gynaecology, CVS and Anti-diabetic segments.

In CNS and Gynaecology segments, Sun Pharmaranks No.1 with prescription market share of 12%and 4.2% respectively while in CVS and Anti-diabetics segment it ranks no 2 with prescriptionmarket share of 6.8% and 7.8% respectively.

Further, it has either maintained or improved itsprescription ranking in the therapeutic areas whereit is present.

Sun is the best play on the high-growth life-stylesegments of CNS, CVS and Diabetes. It derives 61%of its revenues from lifestyle chronic segments

Sun is one of the very few companies which hasfocussed on the life-style from its inception.



03/11A 52,066 14,041 13.6 47.8 34.2 5.1 16.2 22.9 7.7 22.4

03/11A* 57,214 18,161 17.5 34.4 26.5

03/12E 65,601 17,952 17.3 27.9 26.8 4.4 17.7 20.5 6.6 20.8

03/13E 75,976 21,626 20.9 20.5 22.2 3.9 18.5 22.2 5.5 16.7

* Including Para-IV/one-off upsides

August 2011 80

August 2011 81

Sun PharmaSun Pharma

C: CAGR and scale-up 9/10 I: Improvement in productivity 9/10

Sun ranks the best in the industry in terms of MRproductivity. Revenue per MR has improvedsignificantly from INR3.2m in 2004 to INR7.8m in2010.

The current field force productivity is one of thebest in the industry.

N: Non-domestic business 7/10 E: Earnings growth 9/10

CEO Profile


CEO

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

Remain positive on Sun's US business given itsstrong chemistry skills, strong generic pipeline andmonetization of some of the niche, low-competitionopportunities

Expect international business to record 15.2% CAGRfor FY11-13 mainly led by the Taro acquisition. Coreinternational business (excluding one-offs in US)to record 34% CAGR

Option values includes upsides from one-offopportunities in US.

Sun Pharma has significantly outperformed theindustry with revenue CAGR of 23% over FY05-11.The company has scaled up the business rapidlyalbeit on a low base. The growth is achieved largelybecause of favorable therapeutic mix, improvementin brand equity and increase in field forceproductivity.

We expect it to grow domestic formulations at18.5% CAGR over FY11-13 outperforming theindustry led by strong presence in fast growingchronic therapeutic areas like CVS, CNS and Anti-diabetics, and improvement in brand equity.

Expect overall topline CAGR of 15.2% for FY11-13leading to EPS CAGR of 24%

Earnings growth will be driven by the Taroacquisition, sustained momentum in the Indiaformulations business and gradual improvement inCaraco

Focused and cautious approach to internationalexpansion coupled with highly profitable domesticbusiness has ensured good return ratios which,partly muted due to significant cash of USD1b.

Sun is currently valued at 26.8x FY12E and 22.2xFY13E consolidated earnings

We maintain Neutral with TP of INR524 (25x FY13EEPS) excluding Para-IV upsides

300

360

420

480

540


Sun Pharma Sensex - Rebased


August 2011 82

Sun Pharma

The Sun shines bright !But dazzling valuation merits caution

Sun Pharma is one of the largest Indian companies in the domestic formulations space with

a significant presence and leadership in fast growing chronic therapeutic areas like CVS,

diabetes and CNS. Over the years, Sun Pharma out-performed industry growth and increased

its market share and brand equity in its major segments. Sun Pharma is arguably the best

company in the industry in terms of improvement in workforce productivity and the best play

on fast growing and the lucrative lifestyle therapeutic segments.

1. Mix: 7/10

Lifestyle segments like CVS, CNS, anti-diabetes dominate sales

Sun Pharma derives 61% of its revenue from lifestyle therapeutic segments, which dominatethe company's revenue mix. The top four therapeutic segments including CNS, CVS, GIand anti-diabetes contribute ~70% to Sun Pharma's domestic formulations revenue. It isthe market leader in two of the fastest growing therapy segments, CNS and CVS. SunPharma's sizable presence on the chronic therapy segments makes it the most attractiveplay in the domestic formulations business.

CNS, CVS, Diabetes dominates the therapy mix


Domestic formulations -

major contributor to

revenue, profits


business contributes 42% to

Sun Pharma's revenue, a

contribution that is the highest

among leading Indian generic

companies. The segment is the

most profitable for Sun Pharma

and contributed almost 72% to

EBITDA in FY11.

EBITDA Contribution



Strong brand equity among specialists, leader in the CVS, CNS, GI andanti-diabetes segments

Sun Pharma has been a dominant player in three of the industry's fastest growing therapeuticsegments, CNS, CVS and anti-diabetes. Sun Pharma ranks No1 in the CNS and CVSsegments with a value market share of 20.7% and 7.1% respectively. It ranks fourth inthe anti-diabetes segment with market share of 7.8% and sixth in the GI and gynecologysegments with market share of 4.7% and 5.5% respectively. Except in the anti-diabetessegment, in all other segments the average growth rate over the past two years has beenhigher than the industry's.3.

21

3.3

3.4

3.58

3.66

17.513.7

17.5 18.2

23.9

2006 2007 2008 2009 2010


The largest player in the

chronic therapeutic

segment

Sun Pharma is one of the

largest players in the industry

and has grown its market

share over the years due to

significant presence in fast

growing chronic therapeutic

areas. Sun Pharma is the

largest company in the chronic

segments, in which it

commands 3.66% market

share, which grew from

3.21% in 2006. The company

posted 23.2% CAGR over the

past six years against 14%

CAGR for the industry.

Sun Pharma

FY01

CNS32%

CVS21%

Pain10%

Gynaecology2%

GI6%

Respiratory6%

Others23%

Sun Pharma

DF EBITDA 72%

Non-DF EBITDA 28%

Ophthalmology 5%

Pain 6%

Gynaec 7%

Diabetes 10%

GI 12%

CVS 21%

Respiratory 4%

Others 8%

CNS 27%

FY11

August 2011 83

Sun Pharma



Sun Pharma has strong brand equity in the CNS, gynaecology, CVS and anti-diabetessegments, in terms of the number of prescriptions written in the segments. In the CNS andgynaecology segments, Sun Pharma ranks No1 with a prescription market share of 12%and 4.2 respectively while in the CVS and anti-diabetes segments it ranks second and itsprescription market share is 6.8% and 7.8% respectively. Over the past few years SunPharma has either maintained or improved its prescription ranking in the therapeutic areasin which it is present.

Sun Pharma's prescription rankingJan-07 Jan-08 Jan-09 Jan-10 Oct-10

CNS 1 1 1 1 1

Gynaec 5 2 2 1 1

CVS 2 2 2 2 2


GI 15 14 15 12 12




Sun Pharma's top 10 brands contribute ~20% to total revenue, which shows low brandconcentration compared with other leading companies. Seven of its brands feature amongthe top 300 brands of the industry. Sun Pharma's No1 brand, Pantocid, (Pantoprazole, GI)ranks 87th in the industry and has posted revenue CAGR of 19% over the past four years.This is the only company among the companies covered in this report to post double-digitrevenue CAGR in all its top 10 brands.

Top 10 brands of the companyBrand Drug Product Product Sales YoY Gr. CAGR

Category Launch (INR m) (%) (%)

Pantocid Pantoprazole Solids Gastro-intestinal 1999 479 20.2 19.5

Glucored Glibenclamide + Metformin Anti-diabetics 2000 457 11.2 11.3

Susten Progesterone Gynaecology 2000 430 16.9 14.3

Aztor Atorvastatin CVS 2000 400 11.6 24.1

Pantocid-D Pantopr.+ Domperidone Gastro-intestinal 2003 355 22.4 28.2

Gemer Glimepiride+Metformin Anti-diabetics 2002 287 20.3 32.6

Strocit Citocholine - 2004 253 2.7 17.7

Repace Losartan CVS 1998 243 8.9 12.3

Encorate Chrono Sodium Valproate CNS 1999 234 10.3 13.9

Clopilet Clopidogrel CVS 2001 230 17.7 25.0


7.1

4.7 5.5

20.7

7.8

CVS GI Gynaecology CNS Anti Diabetic

20.725.8

20.2 18.8 21.2

17.9 17.1 18.1 23.318.7

CVS GI Gynaecology CNS Anti Diabetic


August 2011 84

Sun Pharma

3. Distribution and reach: 8/10Sun Pharma derives 73% of its revenue from metros and class-I towns, compared with63% of the industry average, suggesting a focus on these geographies. In the past fouryears, revenue CAGR for all geographies has been in line/better than the than that of theindustry average. The contribution of rural areas to revenue has fallen over the past fiveyears.

Geographical distribution of revenues - Sun Pharma (%) Geographical distribution of revenues - Industry (%)

Geography-wise growth rates - Sun Pharma (%) Geography-wise growth rates - Industry (%)


37.1 38.8 38.2 39.9 39.5

34.0 32.6 34.1 32.8 33.2

14.3 14.5 14.2 15.2 16.3

14.6 14.1 13.6 12.2 11.0


Metros Class I Tow ns Class II TO VI Rural

15.7

23.4 22.622.7

13.6

25.8

14.9

13.1

19.0

9.2

14.9

32.9

26.4

12.2

6.29.5

CY07 CY08 CY09 CY10

Metros Class I Tow ns Class II To VI Rural


Sun Pharma's new product launches have been moderate compared withits peers in the industry. There has been significant improvement in revenueper new product launched

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

August 2011 85

Sun Pharma

Sun Pharma's - new launches Sun Pharma's growth compositions (%) (2010)


5. CAGR and scale up: 9/10We expect 18.5% CAGR from Sun Pharma's domestic formulations business led by astrong presence in the fastest growing chronic therapeutic segments. We believe that thecompany will continue to outperform the industry and its peers over the foreseeable futuredespite a sizable revenue base. We believe that, Sun is likely to strengthen its presence inkey therapeutic areas, improving its ranking in the industry.

Sun Pharma: Domestic formulations revenue ramp-up

86 64 64 60

163.2

95.8103.5

112.3

CY07 CY08 CY09 CY10

No. Of launches in last 2 yrs

Avg sales per launch (INR m)

12.29.1 11.3

8.3

1.5 8.46.9

15.6

CY07 CY08 CY09 CY10

New Launches Exis ting Brands



Unlike other leading companies covered in this report, Sun Pharma's top-line growth was driven by a significant improvement in MR productivity.The company leads the pack in productivity improvement

Sun Pharma has done a stellar job over the past six years with a significant improvementin workforce productivity. Over FY04-10, Sun Pharma's domestic formulations revenuesposted 23.3% CAGR and its sales force expanded by just 6.3% CAGR, implying significantproductivity improvement of the workforce. In 2004, Sun Pharma derived revenue ofINR3.2m per MR, which rose to INR7.8m in 2010. The productivity was among the bestin the industry.

6,800

11,81014,762

19,597 18,301

26,383

31,132

23,801

18.0

10.9

30.1

-6.6

32.7

25.023.117.7


Revenue (INR m) Growth (%)

August 2011 86

Sun Pharma

Sun Pharma: Sales force productivity


1,799 2,600

7.8

3.2

2004 2010


1.9

6.3

11.516.0

Sun Pharma Industry



Positives Strong presence in the US through its own supplies, Taro and Caraco. Strong chemistry skills and backward integrated low-cost operations. Pragmatic mix of low-competition, Para-IV and normal products for the US market. Targets niche opportunities in the US market. One of the most profitable domestic business with strong presence in high growth

segments

Risks & concerns Slow progress in resolving cGMP issues at Caraco Potential damages for "at-risk" launch of generic Protonix in the US. Integration of Taro and sustaining the improvement in its profitability will be a key

challenge. Gradual ramp-up in emerging market portfolio. Astute tax planning results in very low taxes - tax can increase significantly if tax laws

are changed.

Key news flows/triggers Update on generic Eloxatin. Launch of generic Prandin in US under exclusivity. US Federal Circuit Court ruling on Protonix patent litigation. Ramp-up in generic Effexor XR sales. Steps to sustain profitability of Taro and to improve its R&D productivity.

Impact assessment Positive on Sun Pharma's US business given its strong chemistry skills, generic pipeline

and monetization of some niche, low-competition opportunities. Expect the international business to post 15.2% CAGR over FY11-13 led mainly by

the Taro acquisition. Core international business (excluding one-offs in the US) willpost 34% CAGR over FY11-13.

Option values include upsides from future inorganic initiatives - the company has cashof ~USD1b.

August 2011 87

Sun Pharma

Sun Pharma


CAGR (%)

Domestic Sales

Formulations 19,597 18,301 23,801 26,383 31,132 14.4

API 1,042 1,021 1,130 1,186 1,234 4.5

Others 11 11 17 17 17 14.4

Total Domestic Sales 20,650 19,334 24,948 27,586 32,383 13.9

% of total sales 47.2 47.4 43.0 41.4 41.9

International sales

Formulations 19,256 16,892 28,982 34,607 39,922 17.4

Taro 0 0 9,962 17,357 19,008

Caraco-Generics15,409 11,076 13,042 4,882 6,072 -31.8

Branded 3,847 5,816 5,978 12,368 14,842 57.6

API 3,804 4,470 4,083 4,409 4,850 2.8

Others 41 66 54 60 66 11.0

Total International sales 23,101 21,428 33,119 39,076 44,839 16.4

% of total sales 52.8 52.6 57.0 58.6 58.1

Gross Sales 43,751 40,761 58,066 66,662 77,221 15.3

Less: Indirect Taxes 1,917 1,728 852 1,061 1,245

Net Sales 41,833 39,033 57,214 65,601 75,976 15.2


EBITDA Contribution

DF EBITDA

72%

Non-DF

EBITDA

28%

8-9. Earnings growth and stock attractiveness: 21/30

We expect overall top-line CAGR of 15% over FY11-13, leading to EPS CAGR of 24%.Earnings growth will be driven by the Taro acquisition, sustained momentum in the Indiaformulations business and gradual improvement in Caraco.

Sun Pharma has been one of the most consistent performers among Indian pharmaceuticalcompanies over the past decade. Its profitability is one of the highest among its peers. Ithas been able to achieve this despite being a late entrant in the domestic formulations andthe US generic markets, compared with peers like Ranbaxy, Dr Reddy's Labs and Cipla.

Key USPs of the company include:

1. Ability to scale up its operations in India and the US without sacrificing profitability,i.e., ability to strike an optimum balance between growth and profitability.

2. Has established a very strong and profitable domestic formulations business which,given its predictable nature, offers a strong foundation to scale-up its internationalinitiatives.

3. A focused approach by the management - Unlike some of its peers it has not spreaditself very thin by expanding across the globe. Its key markets continue to be India andthe US with expanding presence in some of the emerging markets. It has been able toavoid the temptation to expand in regulated European markets wherein most of itspeers have got adversely impacted over the past few years due to regulatory changes.

August 2011 88

Sun Pharma

An expanding generic portfolio coupled with sustained double-digit growth in high-marginlife-style segments in India is likely to bring in long-term benefits for Sun Pharma. Itsability to sustain superior margins even on a high base is a clear positive.

Key drivers for future include:

1. Ramp-up in US business and resolution of Caraco's cGMP issues2. Monetization of the Para-IV pipeline in the US3. Taro integration with potential for improvement in its profitability4. Launch of controlled substances in the US.

While we are positive about SUNP's business outlook, rich valuations have tempered ourbullishness. We maintain Neutral with a target price of INR524 (25x FY13E EPS).Inorganic initiatives (Sun has cash of ~USD1b) are a key risk to our rating. However, webelieve that given the recent acquisition of Taro, Sun is unlikely to make a largeacquisition.

Sun Pharma non-domestic business: key trends, triggers & risk

Building a strong and focused US businessSun has been able to establish itself as a key Indian player in the US generics marketthrough a combination of:1. Strong chemistry skills which has enabled it to develop a strong generic pipeline for

the US market.2. Good product selection in building presence in the US market - Rather than

targeting all the large products, Sun has focused on building a pragmatic mix of niche,low-competition products along with other normal products.

3. Identifying key opportunities - This capability is clearly visible in the Taro acquisitionwherein, despite a 3-year delay, Sun has been able to acquire the company andconsequently a profitable portfolio of dermatology and paediatric products.

Over the past few years, Sun has been able to build a very strong pipeline of genericproducts for the US market. It currently has 149 ANDAs pending US FDA approval - oneof the strongest pipelines amongst Indian companies.

Sun Pharma RoE & RoCE (%) Sun Pharma one year forward PE

25.0

20.2

29.6

11.9

6

13

20

27

34

Aug

-06

Mar

-07

Aug

-07

Feb

-08

Aug

-08

Feb

-09

Aug

-09

Feb

-10

Aug

-10

Feb

-11

Aug

-11


August 2011 89

Sun Pharma

215180

204

383

109152138

104138

232

69 5177 76 66

151

40

101

Aurobindo Dr. Reddy's Ranbaxy Sun Glenmark Lupin

Filed Approved Pending Approval

Key Indian companies - ANDA pipeline


Taro acquisition - fills a key gap and complements Sun's US presenceAbout 90% of Taro's sales come from the US markets. It has expertise in the dermatologyand paediatric segments and has about 170 scientists involved in product development.One of the key attractions is Taro's capabilities of developing and manufacturing ofointments, creams, lotions in the semi-solids category. The acquisition fills-in a key gap inSun's US portfolio and complements its existing presence in this important market.

Taro enjoys relatively high profitability compared to peersGiven its strengths in the low-competition therapeutic segment, Taro has traditionally enjoyedrelatively higher profitability in the US generics market. We believe that this is sustainableand in fact, under the control of a capable management like Sun, the profitability is likely toimprove in the future, albeit gradually.

TARO - Key financials(USD M) CY08 CY09 CY10 2QCY10 2QCY11 1HCY10 1HCY11

Sales 337 359 393 98 112 187 219

Growth (%) 6.6 9.4 14.2 17.4

EBITDA 55 67 85 19 34 39 68

EBITDA Margins (%) 16.4 18.8 21.7 19.9 30.6 20.8 30.8

PBT 56 51 71 20 38 31 71

Tax 12 (70) 18 4 2 6 8

PAT 44 121 52 17 36 25 62

Growth (%) 173.2 (56.8) 119.6 147.9


Taro - Good acquisition at reasonable valuationsUnlike some of its other Indian peers, Sun has been extremely cautious in paying forinorganic growth. The Taro acquisition is a case in point. It has paid ~USD280m for a66% economic interest in Taro valuing the company at 1x EV/Sales and 4.6x EV/EBITDAwhich, we believe is a reasonable valuation compared to some of the other acquisitionsmade by a few Indian players.

August 2011 90

Sun Pharma

Caraco - US FDA resolution is likely to be long-drawnWhile there is no fresh update on the US FDA resolution at Caraco, the company has, inthe past, indicated that the process will be very gradual. We estimate part-recovery inCaraco's core US revenue from FY13, based on the assumption that the US FDA issueswill get resolved in FY12. The ongoing US FDA issues have adversely impacted Caraco'score revenue (excluding distributed products revenue) for the past two years.

Caraco - revenue trend (USD m)

117 108138

112 125 112

22 2345

65

288

234

337350

FY07 FY08 FY09 FY10 FY11E FY12E FY13E

Caraco Revenue - Total Caraco Revenue - Mfgd Products

Note: Caraco's FY11 financials not given separately; hence, our estimates Source: Company / MOSL

Guidance - topline growth of 28-30% for FY12Sun Pharma management has guided 28-30% topline growth for FY12. The strong growthwill be partly driven by full-year consolidation of Taro financials as compared to a littleover two quarters for FY11. Sun had recorded significant one-off upsides, which weestimate at INR8.4b for FY11 (the company has not disclosed these numbers separately)and at INR5b for FY12. The guidance includes one-offs for both these years. Based onthese upsides for one-offs, the implied growth guidance for core revenue (ex-Taro) is 18-19% for FY12. The company intends to file ~25 ANDAs for FY12, R&D expenses areestimated at 6% of sales, and capex is estimated at INR4.5b.

One-offs to continue in FY12 as well albeit with lower magnitudeWe believe SUNP will try to capitalize on some of the Para-IV/low-competition opportunitiesin the US in FY12. This will be in line with its past trend of exploiting a few such opportunitiesevery year. However, we also believe that one-off upsides are likely to decline YoY inFY12 due to the absence of large opportunities like generic Eloxatin which was a keycontributor in FY11.

FTF/low-competition Upsides in US (INR m)FY11 FY12E

Eloxatin 4,530 -

Exelon 1,076 1,404

Keppra Inj 704 918

Effexor-XR 1,342 -

Protonix 760 -

Taxotere - 1,181

Prandin - 1,553

Total one-off revenues 8,412 5,056

Total one-off PAT 4,119 2,378

Source: Company / MOSL

August 2011 91

Sun Pharma

Financials and valuations: Sun Pharma


Basic (INR)

EPS 13.0 17.5 19.6 20.9

Fully Diluted EPS 13.0 13.6 17.3 20.9

Cash EPS 14.5 19.5 22.3 23.8

BV/Share 75.6 91.6 104.7 120.4

DPS 2.8 3.5 3.6 4.5

Payout (%) 24.7 22.2 21.2 22.2

Valuation (x)

P/E 35.6 34.2 26.8 22.2

Cash P/E 31.9 23.8 20.9 19.5

P/BV 6.1 5.1 4.4 3.9

EV/Sales 10.9 7.7 6.6 5.5

EV/EBITDA 32.7 22.4 20.8 16.7

Dividend Yield (%) 0.6 0.8 0.8 1.0

Return Ratios (%)

RoE 12.8 16.2 17.7 18.5

RoCE 18.7 22.9 20.5 22.2



Debtor (Days) 105 75 75 75


Working Capital T/O (Days) 263 293 319 360

Leverage Ratio

Debt/Equity (x) 0.0 0.0 0.0 0.0




Direct Taxes Paid -890 -4,046 -1,069 -1,835

(Inc)/Dec in WC -4,675 -533 -5,097 -2,637


(inc)/dec in FA -2,920 -16,864 -4,500 -4,500

(Pur)/Sale of Investments -12,069 8,354 0 0

CF from investments -14,989 -8,510 -4,500 -4,500

Change in networth -2,348 8,251 0 0

(Inc)/Dec in Debt -78 2,545 -2,756 0

Interest Paid -62 -149 -56 -60

Dividend Paid -3,321 -4,241 -4,308 -5,407


Inc/Dec of Cash -10,618 15,864 6,357 14,864


Closing Balance 6,072 21,936 28,293 43,157

Note: Cashflows do not tally due to acquisition

Consolidated Income Statement (INR Million)Y/E March 2010 2011 2012E 2013E

Net Sales 41,028 57,214 65,601 75,976

Change (%) -1.9 39.5 14.7 15.8


% of Sales 66.8 65.6 68.3 67.1

EBITDA 13,633 19,672 20,791 24,968

Margin (%) 33.2 34.4 31.7 32.9

Depreciation 1,533 2,041 2,716 3,031

EBIT 12,100 17,631 18,075 21,938


Other Income - Rec. 2,111 2,876 3,351 4,333

PBT 14,149 20,358 21,370 26,211

Tax 679 1,284 1,069 1,835

Tax Rate (%) 4.8 6.3 5.0 7.0

Profit After Tax 13,471 19,074 20,302 24,376

Change (%) -28.3 41.6 6.4 20.1

Margin (%) 33 33 31 32

Less: Mionrity Interest -40 913 2350 2750

Net Profit 13,511 18,161 20,330 21,626

Adj. PAT 9,501 14,041 17,952 21,626

Consolidated Balance Sheet (INR Million)Y/E March 2010 2011 2012E 2013E


Total Reserves 77,254 93,798 107,441 123,661

Net Worth 78,289 94,833 108,477 124,696

Minority Interest 1,932 8,472 10,822 13,571

Deferred Liabilities -890 -3652 -3652 -3652

Secured Loan 1,003 0 0 0

Unsecured Laon 708 4,256 1,500 1,500

Total Loans 1,711 4,256 1,500 1,500


Gross Block 23,340 36,545 41,045 45,545

Less: Accum. Deprn. 8,013 10,053 12,769 15,799

Net Fixed Assets 15,328 26,492 28,276 29,746

Capital WIP 1,448 1,448 1,448 1,448

Goodwill 4,060 7,720 7,720 7,720

Investments 30,664 22,310 22,310 22,310

Curr. Assets 37,121 60,172 71,981 93,114

Inventory 10,739 14,794 16,728 18,734



L & A and Others 8,562 11,726 13,480 15,612



Provisions 3,484 5,030 5,377 7,241


Appl. of Funds 81,042 103,908 117,146 136,116

E: MOSL Estimates

Cadila HealthcareMEDICINES

Score

CMP: INR824 CDH IN

TP: INR907 NeutralGuts and glory!

M: Mix 6/10

Cadila's relatively small presence in the fast growing

segments of Diabetes, CNS & CVS (contributes

~24% to sales) will make it difficult for the company

to outpace the market growth.

The CVS and GI segments' contribution to revenue

has risen over the past 10 years from 24% to 37%

while that of respiratory and anti-infectives has fallen

from 32% to 21%.


Enjoys good brand equity in a couple of therapeutic

segments.

Cadila is among the top three players in two of the

largest therapeutic segments, CVS and GI. The

company ranks first in the fast growing gynecology

segment.

Cadila has a good prescription market share in the

GI, respiratory and CVS segments.


Cadila derives 65% of its revenue from metro and

tier-I cities and is expanding its presence in tier-II

to tier-VI towns.

The company's growth rate in all geographies has

accelerated from CY09.

It employs one of the larger field forces in the

industry with MR strength of 4,000.


Cadila has few new introductions compared with

its peers and this is one reason why it has not

been able to outperform the market in the past.

Revenue growth has been driven largely by its

existing products over the past four years.


End (INR M) (INR M) (INR) GR. (%) (X) (X) (%) (%) sales EBITDA

03/10A 36,868 5,011 24.5 55.2 33.7 10.4 35.4 26.4 4.8 22.1

03/11A 46,302 6,334 30.9 26.4 26.6 7.8 37.5 30.5 3.8 17.2

03/12E 51,717 5,801 28.3 -8.4 29.1 6.2 27.3 25.4 3.4 17.2

03/13E 59,983 8,419 41.1 45.1 20.0 5.0 27.6 27.2 2.9 14.0



1,6,12 Rel. Perf. (%) 5/18/44


M.Cap. (USD b) 3.7



Back

grou

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


August 2011 92

August 2011 93

Cadila


Cadila's domestic formulations business posted

revenue CAGR of 12.4% over FY05-11, which is

slightly below market growth during the same

period.

We expect Cadila to post revenue CAGR of 13-

14% over FY11-13, which is slightly below

compared to 15-16% CAGR for the industry.

Rapid scale-up in revenue would be difficult given

Cadila's high base and small presence in fast-

growing chronic segments.


Cadila's is MR productivity has declined at 2%

CAGR over 2004-10.

MR growth was 11.3% and revenue growth was

9.2%, indicating a fall in sales force productivity.

Revenue per MR declined from INR4.1m in 2004 to

INR3.6m in 2010, which however, is in line with the

industry average.


We are positive on Cadila's international business,

given its strong chemistry skills and pragmatic mix

of its geographic presence and partnerships.

A cautious approach to establishing international

presence has ensured sustained higher return

ratios for investors.

Cadila has a good track record of forging

partnerships with global players.

We expect Cadila's international business to post

revenue CAGR of 16% over FY11-13, led by 18%

CAGR for formulation exports.


Cadila is one of the most consistently performing

Indian pharmaceutical companies.


13 leading to EPS CAGR of 15%.

Earnings growth will be led by traction in the

international business and steady growth in the

domestic portfolio.

Chairman Profile


We expect RoE of 25-30% over the next two years,

driven by a cautious approach towards international

expansion and a profitable domestic business.

Cadila is valued at 29.1x FY12E and 20.0x FY13E


Reiterate Neutral with a target price of INR907(22x

FY13E EPS plus INR3 upside from Taxotere).

Chai

rman Cadila is one of the most consistent performers amongst the Indian pharmaceutical companies. It is

promoted by Mr. Pankaj Patel. Sustaining strong growth and return ratios coupled with a very conservative,low-risk management style is his key achievement.

400

550

700

850

1,000


Cadila Health Sensex - Rebased


August 2011 94

Cadila

Guts and glory!Strong in GI, CVS; maintains market share amidst rising competition

Cadila is among the leading companies in the domestic formulations business and has

maintained its market share over the years despite growing competition. Some of Cadila's

brands lead in their segments and the company has strong brand equity in therapeutic

segments like CVS and GI. Besides, Cadila is the largest player in the gynecology segment.

The company has been expanding its presence in all geographies, which is visible from its

growth in 2009 and 2010. We believe Cadila is likely to post a top-line of 13-14% CAGR over

FY11-13, which is slightly below compared to the industry growth.

1. Mix: 6/10

CVS, GI, gynecology dominate salesThe top 3 therapeutic segments, CVS, GI and gynecology, contribute about half of Cadila'sdomestic formulations revenue. Other large segments, such as respiratory and anti-infective,contribute 11% and 10% respectively to total revenue. Over the past 10 years, thecontribution of CVS and GI segments to revenue rose from 24% to 37% while that ofrespiratory and anti-infective segments fell from over 32% in FY01 to less than 21% inFY10.

CVS, GI and Gynaecology dominates the therapy mix


Domestic formulations

contribute most to revenue


business is a major contributor

to Cadila's revenue and

EBITDA. In FY11 the segment

contributed 40% to Cadila's

revenue and we estimate

EBITDA contribution was

~45%, since it is one of

Cadila's most profitable

businesses. We believe

despite strong contribution to

profitability, capital employed in

the business is proportionately

lower.

EBITDA Contribution

Among the leading players

in the industry

Cadila leads in the highly

competitive domestic

formulations market and is

among the top five companies

in the industry with market

share of 3.7%. Cadila's market

share rose to 3.74% in 2010

from 3.46% in 2006. Cadila's

domestic formulations

business grew at 12.4%

CAGR over the last 6 years

versus 14% CAGR for

industry.

Cadila has maintained it

market share over the

years despite growing

competition

CVS, GI and Gynaecology dominates the therapy mix


Non-DF

EBITDA 55%

DF EBITDA

45%

3.5

3.7

3.6

3.7

3.7

24.2

14.88.6

16.913.6

2006 2007 2008 2009 2010

Mkt Share (%)Gr. (%)

FY01

GI

11%

Gynae

cology12%

AI16%

Pain

Mgmt9%

VMN9%

CNS

2%

Others

13%CVS

13%

Respiratory

15%

FY05

Respira

tory10%

CNS

2%

Pain

Mgmt

9%AI

11%

GI

16%Gynae

cology

10%

CVS

22%

Others20%

FY11

Anti-Malaria0%

VMN2%

Dermatology3%

CNS

3%

Others16%

Pain Mgmt

7%AI

10%Gynaecology

10%

GI17%

CVS21%

Respiratory11%

August 2011 95

Cadila


Good brand equity; among leaders in CVS, GI, gynecology segments

Cadila has been a dominant player in two of the largest therapeutic segments of theindustry, CVS and GI. Cadila ranks first in the gynecology segment with value marketshare of 10.4%. It ranks second in the GI segment with value market share of 6.5% andit ranks third in the fast growing and second largest, CVS segment with value marketshare of 6.5%. Cadila has either grown in line with or above the industry average in its top4-5 therapeutic segments. In the pain management and dermatology segments, Cadila'shas outperformed the respective segment growth.

Value market share in key therapies (%) (2010) Value growth comparison (%) (2010)


In terms of the number of prescriptions written, Cadila ranks second in the GI segmentwith a prescription market share of 4.5%. It ranks third in the respiratory segment withmarket share of 4.9% and seventh in the CVS segment with a prescription market shareof 4.5%. Cadila has improved its ranking in the gynecology and respiratory segments andits ranking in CVS deteriorated a bit.

Cadila's prescription rankingJan-07 Jan-08 Jan-09 Jan-10 Oct-10

GI 1.0 2.0 2.0 2.0 2.0

Gynaec 3.0 3.0 1.0 2.0 2.0

Respiratory 2.0 2.0 1.0 2.0 2.0

CVS 3.0 3.0 5.0 7.0 6.0

Pain Mgmt - - 24.0 24.0 20.0


Top 10 brands contribute 30% of revenue

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

6.5 6.55.4

4.0

10.4

3.7

CV

S GI

Re

spira

tory

Pa

in/A

nal

gesi

c

Gyn

aeco

logy

De

rma

tolo

gy

24.8

66.2

16.718.418.915.8 18.418.116.716.217.117.9

CV

S GI

Re

spira

tory

Pa

in/A

nal

gesi

c

Gyn

aeco

logy

De

rma

tolo

gy


August 2011 96

Cadila

Cadila's top 10 brandsBrand Drug Product Launch Sales (INR m) YoY Gr (%) CAGR (%)

Aten Atenolol 1993 865 19.2 12.5

Atorva Atorvastatin 2000 585 16.2 19.5

Ocid Omeprazole 1991 517 6.6 10.2

Falcigo Artesunate 1996 484 10.7 30.6

Deriphyllin Etophylline+Theophylline 1981 637 8.4 2.9

Primolut-n Norethisterone 1969 432 5.3 4.1

Amlodac Amlodipine 1995 379 16.1 8.4

Dulcolax Bisacodyl 1983 352 18.7 11.5

Mifegest Mifepriston 2002 346 -5.7 1.6

Pantodac Pantoprazole 1999 456 13.0 11.3


3. Distribution and reach: 7/10Cadila derives 65% of its revenue from metros and class-I towns compared with 63% ofthe industry average. In the past four years, revenue CAGR for all geographies exceptmetros were in line or marginally better than that of the industry average.

Cadila: Geographical distribution of revenues (%) Industry: Geographical distribution of revenues (%)

Cadila: geography-wise growth rates (%) Industry: geography-wise growth rates (%)


30.5 32.4 31.8 32.2 32.7

32.5 30.5 31.3 32.4 32.4

18.7 18.5 18.9 18.8 19.1

18.3 18.5 18.1 16.5 15.9

CY 06 CY07 CY08 CY09 CY10

METROS CLASS I TOWNS CLASS II TO VI RURA L

27.6 28.9 28.9 30.0 31.0

32.6 31.3 31.6 32.5 32.0

19.2 19.0 19.5 19.4 19.6

20.6 20.9 20.0 18.1 17.3



25.9

19.3

6.5

16.3

24.424.0

19.0

11.3

10.0

25.9

14.510.8

15.6

5.05.8

18.2

CY07 CY08 CY09 CY10


2.5

26.2

17.7

14.7

17.620.7

16.415.6

7.9

23.5

13.0

17.5

11.1

17.5

9.5

14.0

CY07 CY08 CY09 CY10

Metros Class I Towns Class II to VI Rural

August 2011 97

Cadila


Cadila's growth over the past four years has been led by existing productsand new launchesOver the past four years Cadila launched 49 new products (including line extensions)annually which is in line with its peers. Average revenue per new launches has grownfrom INR42m in CY07 to INR94m in CY10. Cadila's revenue growth is driven by existingproducts and new launches.

Cadila - new launches Cadila growth compositions (%)


4.0 5.7 6.2 7.7

13.0

2.9

8.5

16.5

CY07 CY08 CY09 CY10


5. CAGR and scale up: 6/10We expect 13-14% CAGR for Cadila's domestic formulations business led by existingproducts, increasing geographical penetration and incremental contribution from newlaunches. This is below our estimated forecast of 15-16% CAGR for the industry. Out-performance of the industry seems difficult due to a lower prescription share in high-growth lifestyle segments and the anti-infective segment. It's absence in fast growinglifestyle segments except CVS, will make it difficult for it to outpace industry growth. Itsfocus on improving workforce productivity needs to be enhanced for it to grow its businessmore profitably.

Cadila - domestic formulations performance


90 84 101 113

94.4

74.475.6

41.7

CY07 CY08 CY09 CY10


9,7

93

10,6

03

11,7

63

12,8

89

14,4

58

17,1

46

19,3

47

22,1

97

14.712.8

18.6

12.2

9.610.9

8.3

15.4


DF Revenues (INR m) YoY Growth (%)

August 2011 98

Cadila


Cadila's top-line growth is driven by sales force additions; fares poorlywhen compared with the industry productivityCadila's domestic formulations business revenue posted 9.2% CAGR over FY04-10 andits sales force posted 11.3% CAGR, implying negative productivity of the workforce. In2004, Cadila derived sales of INR4.1m per MR, which fell to INR3.6m in FY10. Cadila'sperformance was below average, compared with the average of performances coveredin the report.

Cadila - Sales force productivity (2004-10)

Source: Industry/Company/MOSL

2,100

4,000

3.6

4.1

2004 2010


-1.91.9

11.3

11.5

Cadila Industry


7. Non-domestic business — Snapshot: 6/10

Non-domestic business: Snapshot

Positives Expanding presence in emerging and regulated markets through a mix of its own

presence and front-end acquisitions. Strong chemistry skills and fully backward integrated low-cost operations help in making

the US business viable despite being a late entrant. Low-risk strategy to access international markets through its own presence and

partnerships. Supplies of injectables to Hospira to ramp-up in the next 1-2 years while the Abbott

tie-up for emerging markets is likely to contribute from FY13 onwards.

Risks and concerns Needs to build a differentiated portfolio in the US to access low-competition

opportunities. The company has initiated steps in this directions. NCE research yet to deliver desired returns for investors. Slow progress in accessing the Japanese generic opportunity.

News flow/triggers Ramp-up in supplies to Hospira and Abbott. Signing of supply agreements with MNCs.

August 2011 99

Cadila

8-9. Earnings growth and stock attractiveness: 18/30Cadila's growth will be led by increased traction in its international businesses, ramp-up insupplies to Hospira and sustained double-digit growth in domestic formulations and consumerbusinesses. We estimate 15% revenue and EPS CAGR for FY11-13 for core operationsexcluding one-offs and RoE of 27-28% over the next two years. Sustaining double-digitgrowth without diluting return ratios has been the company's USP and has led to a significantre-rating of the stock.

We believe that this track record would be subjected to many challenges, as Cadila tries toaggressively scale-up to achieve its revenue target of USD3b by FY16. This target impliesa topline CAGR of 25% for FY11-16, which we believe is very aggressive. The companywill have to invest significant resources to achieve this target, which can raise its riskprofile.

Given the disappointing core performance for the last two quarters and likely impact ofthe Nesher acquisition, the strong earnings upgrade cycle of the past two years couldbreak. Cadila trades at 29.1x FY12E and 20.0x FY13E consolidated EPS. We believe thatvaluations are rich and leave little scope for further re-rating. We maintain Neutral. Ourtarget price is INR907 (22x FY13E EPS + INR3/share DCF value of earnings fromTaxotere).

Impact assessment We are positive on Cadila's international business given its strong chemistry skills and

pragmatic mix of own presence and partnerships. Cautious approach to establishing an international presence has ensured sustained

higher return ratios for investors. Has a good track record of forging partnerships with global players. Expect 16% CAGR for the international business over FY11-13 led by 18.3% CAGR

for formulation exports.

Sales mix (INR M)FY09 FY10 FY11 FY12E FY13E FY11-13

CAGR (%)

Domestic Sales

Formulations 12,889 14,458 17,146 19,347 22,197 13.8

APIs 426 318 352 317 348 -0.5

Consumer & Others 3,120 3,948 4,827 5,458 6,372 14.9

Gross Domestic sales16,435 18,724 22,325 25,121 28,917 13.8

% to sales 56.3 51.8 49.4 49.5 48.6

Export Formulations 9,676 14,018 19,214 22,170 26,838 18.2

Export APIs 3,060 3,400 3,672 3,472 3,712 0.5

Total Exports 12,736 17,418 22,886 25,642 30,550 15.5

% to sales 43.7 48.2 50.6 50.5 51.4

Gross Sales 29,172 36,142 45,211 50,763 59,467 14.7

Note:Estimates exclude Nesher acquisition pending availability of more details from

Cadila management.

Non-DF EBITDA

55%

DF EBITDA

45%

EBITDA Contribution


August 2011 100

Cadila

Annexure: Cadila non-domestic business

New launches to drive growth in the USCadila has a pipeline of 65 ANDAs pending approval and has received 65 ANDA approvalsso far (including tentative approvals). The company filed 24 ANDAs in FY11 and launched11 products in the US. It expects to file 15-20 ANDAs with the US FDA every year andget about 8-10 approvals a year. Cadila's US business is witnessing increased traction dueto the absence of some of the competitors (due to US FDA issues) and new productlaunches. The company is also improving its market share in already launched products.We expect Cadila to post sales of INR11.9b in FY12 against INR9.7b in FY11. We expectthis business to grow by 20% CAGR over FY11-13. Cadila has also commenced developmentand filing of potential low-competition products with delivery advantages (trans-dermalpatches and respiratory products) and is focusing on developing a pipeline of such nicheproducts (likely to be commercialized after FY12).

Nesher acquisition - long-term positive, but may pressurize P&L in shortterm

Cadila recently entered into an agreement to acquire certain assets and liabilities of NesherPharma in the US (a subsidiary of KV Pharma) for ~USD60m. It has acquired Nesher'sexisting and future product pipeline, its manufacturing facility and R&D lab. Cadila willalso take over certain liabilities. The transaction is likely to close by August/September2011 and Cadila will be consolidating Nesher's financials with effect from August/September.

With this acquisition, Cadila gets access to Nesher's controlled substances pipeline (besidesother products) as well as access to its manufacturing facility for these controlled substances.Nesher's ANDA pipeline includes 8 filings and another 5 products under development,which address a potential on-patent market of USD2.1b. We note that given the possibilityof controlled substances being abused as drugs, the US government has put stringent rulesin place for monitoring the manufacturing and sale of such products. This includes a pre-requirement of a local manufacturing facility with DEA license to manufacture and supplysuch products in the US. Through the Nesher acquisition, Cadila gets access to a DEA-licensed facility.

Cadila RoE & RoCE (%) Cadila one year forward P/E

24.6

15.8

30.2

6.52

9

15

22

28

35

Au

g-06

Ma

r-07

Au

g-07

Feb

-08

Au

g-08

Feb

-09

Au

g-09

Feb

-10

Au

g-10

Feb

-11

Au

g-11


27.2

27.3 27.626.7 26.9

35.437.5

25.4

30.5

26.4

23.623.1

2008 2009 2010 2011 2012E 2013E

RoE RoCE

August 2011 101

Cadila

Given the entry barriers, we believe that the controlled substances market will be a low-competition market for generics players. Currently, Nesher is making net losses, whichmay pressurize Cadila's P&L till it is able to turn around Nesher's operations. Cadilamanagement has guided that Nesher is likely to contribute ~USD15m in revenue forFY12. It expects Nesher to report a minor net loss for FY12 and a positive bottomline forFY13. We are awaiting further clarity from Cadila on the plans for achieving this turnaround.We also note that Cadila management has a track record of being conservative in itsinorganic initiatives and has not made any acquisitions in the past which have diluted thereturn ratios for investors.

Hospira supplies to ramp up in FY12 led by Taxotere, new launchesCadila's supplies to Hospira commenced in FY10, recording INR839m in revenues forsupplies to Europe. It posted FY11 revenue of INR2.15b led by the launch of exclusivityproduct generic Taxotere in the US. We expect a ramp-up in this business in FY11 led bycommercialization of more products and revenue from limited competition product Taxoterefor some more time. We expect FY12 revenue of INR803m to Cadila from Taxotere.However we have not included it in our FY12 estimates. We are valuing the upside basedon the DCF method (INR3/share) since this is a limited period opportunity.

French operations to record 14% CAGRWhile Cadila's French operations are completely aligned to a low-cost generic market, weexpect only 14% CAGR for this business over FY11-13 driven mainly by the slow marketgrowth.

Emerging market revenue to grow by double-digitsAmong emerging markets, Cadila is present mainly in Latin America. We expect Cadila'semerging market revenue to record 17% CAGR over FY11-13 driven by new launchesand favorable demographics.

Abbott tie-up: Supplies to start from FY13In FY10, Cadila entered into a supply agreement with Abbott to supply 24 branded genericproducts to meet Abbott's requirements in 15 emerging markets (names not disclosed).The agreement also includes an option for 40 additional products to be included over theterm of the collaboration.

Cadila will make the products at its facilities in India. The products selected fall in categoriesof pain, cancer, CVS, neurology and respiratory illnesses. Product names have not beendisclosed.

The supplies will enable Cadila to capture a part of the upsides in some emerging marketswhere it does not have a presence. We believe this is a long-term positive for Cadila, giventhe possibility that such arrangements tend to include a larger product basket over time.We expect the supplies to start from FY13.

August 2011 102

Cadila

Financials and valuations : Cadila


Net Sales 36,868 46,302 51,717 59,983

Change (%) 25.9 25.6 11.7 16.0


EBITDA 8,006 10,262 10,291 12,483

Margin (%) 21.7 22.2 19.9 20.8

Depreciation 1,339 1,269 1,569 1,779

EBIT 6,667 8,993 8,721 10,704


Other Income - Rec. 159 131 207 272


Extra Ordinary Exp./(Inc.) 46 0 0 0


Current Tax 741 1,064 1,230 1,549

Tax 741 1,064 1,230 1,549

Tax Rate (%) 12.4 12.6 15.0 15.0

Reported PAT 5,217 7,361 6,968 8,777

Less: Mionrity Interest 247 251 301 358

Net Profit 4,970 7,110 6,667 8,419

PAT Adj for EO Items 5,011 6,334 5,801 8,419


Equity Share Capital 682 1,024 1,024 1,024

Total Reserves 15,501 20,691 26,154 32,841

Net Worth 16,183 21,715 27,178 33,865


Deferred liabilities 1141 1127 1127 1127

Total Loans 10,905 10,973 10,442 9,286


Gross Block 25,578 28,320 33,320 36,320

Less: Accum. Deprn. 8,734 9,994 11,563 13,342

Net Fixed Assets 16,844 18,326 21,757 22,978

Capital WIP 2,482 4,310 4,310 4,310


Curr . Assets 17,749 22,829 26,084 33,719

Inventory 7,504 8,119 10,025 12,924



Loans & Advances 3,070 4,106 4,762 5,581



Provisions 1,951 2,233 2,834 3,719


Appl. of Funds 28,621 34,484 38,746 44,290

E: MOSL Estimates


Basic (INR)

EPS 24.5 30.9 28.3 41.1

Cash EPS 30.8 40.9 40.2 49.8

BV/Share 79.0 106.1 132.7 165.4

DPS 5.0 6.3 6.3 8.7

Payout (%) 23.7 20.8 21.6 23.8

Valuation (x)

P/E 33.7 26.6 29.1 20.0

Cash P/E 26.7 20.1 20.5 16.5

P/BV 10.4 7.8 6.2 5.0

EV/Sales 4.8 3.8 3.4 2.9

EV/EBITDA 22.1 17.2 17.2 14.0

Dividend Yield (%) 0.6 0.8 0.8 1.1

Return Ratios (%)

RoE 35.4 37.5 27.3 27.6

RoCE 26.4 30.5 25.4 27.2





Working Cap. Turnover (Days) 65 68 76 85

Leverage Ratio (x)


Debt/Equity 0.5 0.4 0.3 0.2

* Ratios adjusted for bonus issue



Interest/Dividends Recd. 159 131 207 272


(Inc)/Dec in WC -402 -2,108 -2,011 -3,206



(inc)/dec in FA -3,478 -4,579 -5,000 -3,000

(Pur)/Sale of Investments 42 0 0 0


Change in Networth 289 -301 0 0

Inc/(Dec) in Debt -1,605 345 -1,200 -1,156

Interest Paid -821 -699 -731 -650

Dividend Paid -1,237 -1,529 -1,505 -2,090

Others -175 -14

CF from Fin. Activity -3,550 -2,198 -3,436 -3,896

Inc/Dec of Cash -10 445 -1,179 1,105


Closing Balance 2,507 2,952 1,773 2,878

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left blank

intentionally

August 2011 103


RanbaxyMEDICINES

Score

CMP: INR468 RBXY IN

TP: INR412 SellSayonara, unless ...

M: Mix 6/10

Ranbaxy operates mainly in acute therapeutic

segments, deriving 76% of its revenue from the

segment. It is yet to strengthen its presence in the

chronic segment.

Ranbaxy is a dominant player in large therapy

segments like AI, CVS and pain management. The

segments, along with the sex stimulant segment,

contribute ~68% to Ranbaxy's domestic

formulations revenue.


Ranbaxy enjoys low brand equity with doctors

except in the AI and dermatology segments. Some

of its brands like Storvas have good brand equity in

the CVS segment.

Ranbaxy is ranked at No3 position in the AI

segment with a prescription market share of 7.8%

and it ranks No4 in the dermatology segment with

a prescription market share of 5.4%.

Over the past five years, Ranbaxy's brand equity

has taken a beating in almost all therapy areas.


Ranbaxy derives 66% of its revenues from metros

and tier-I cities.

Distribution reach in metros has increased over

time but the contribution of rural geographies to

revenue has fallen over the past four years.

Ranbaxy's field force has been recently expanded

by 50% to 4,500 MRs.


Ranbaxy has been aggressive in launching new

products over the past four years compared with

its peers. It launched 65 products (including line

extensions) a year over the past four years.

Revenue growth has been driven by existing

products and new launches.


End (INR m) (INR m) (INR ) Gr. (%) (x) (x) (%) (%) Sales EBITDA

12/09A 75,970 1,911 4.5 -38.2 - - 4.4 9.8 - -

12/10A 89,608 10,855 25.8 467.1 15.2 2.9 19.4 15.9 2.3 11.1

12/11E 85,242 4,991 11.9 -54.0 33.0 2.7 11.4 10.7 2.4 23.0

12/12E 93,005 7,052 16.7 41.3 23.3 2.4 10.4 11.1 2.2 18.5



1,6,12 Rel. Perf. (%) 0/6/6


M.Cap. (USD b) 4.3



Back

grou

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


August 2011 104

August 2011 105

Ranbaxy


Ranbaxy posted revenue CAGR of 10.2% in the

domestic formulations market over CY04-10,

underperforming market's growth.

We expect CAGR of 14% for Ranbaxy's domestic

formulations business led by its recent field-force

expansion and rapid new launches. This slightly

lower than our forecast CAGR of 15-16% for the

industry.

Ranbaxy is likely to maintain its leading position

in the sector given its strong position and market

share in some of the largest therapeutic segments.


Ranbaxy's domestic formulation revenue posted

10.2% CAGR and its sales force posted 15%

CAGR over 2004-10 implying negative MR

productivity.

The current productivity of INR3.6m per MR is in

line with the industry average.


We are neutral on Ranbaxy's international

business despite its strong presence in the US

and in emerging markets due to ongoing US FDA

issues and moderate profitability of its international

operations.

We expect the international business to post 13%

CAGR over CY10-12 excluding low-competition and

Para-IV products in the US.

Option values (Para-IV products) will make a one-

time contribution to PAT of INR38.2b over CY11-

14, leading to DCF value of INR77/share.


We expect overall core top-line CAGR of 14.4%

over CY10-12, leading to EPS CAGR of 53%, albeit

on a very low base.

Cost reductions leading to improved profitability and

gradual recovery in the US business will be key

growth drivers.

CEO Profile


Aggressive international expansion, high cost

acquisitions and on-going US FDA issues have

adversely impacted overall return ratios. While we

expect some improvement in return ratios by CY12,

they will still remain sub-optimal.

Ranbaxy is valued at 33.0x CY11E and 23.3x

CY12E consolidated earnings. Reiterate Sell with

a target price of INR412 (20x CY12E EPS)

excluding Para-IV upsides.

CEO

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


400

460

520

580

640


Ranbaxy Labs Sensex - Rebased

August 2011 106

Ranbaxy

Sayonara, unless ...Key challenges are resolved at the earliest

Ranbaxy is the second largest Indian company by revenue in the domestic formulations

space after Cipla and ranks third in the overall ranking. Ranbaxy's strength lies in its strength

in the acute therapeutic segments. However, it has underperformed the market over the

past four years and has been losing market share.

1. Mix: 6/10

AI, CVS, pain management dominate sales

The top four therapeutic segments including AI, CVS, pain management and sex stimulantscontribute ~68% to Ranbaxy's domestic formulations revenue. Ranbaxy is among themarket leaders in three of the largest therapy segments, AI, CVS and pain management.Ranbaxy derives ~76% of its revenue from acute therapies. Ranbaxy's dependence onthe AI segment has fallen over the past 10 years while the contribution of CVS, pain andGI improved over the years.

Ranbaxy: Therapeutic mix


Domestic formulations -

significant PAT contribution


business is a leading

contributor to Ranbaxy's

revenue and contributes ~98%

to its EBITDA excluding one off

upsides. Ranbaxy has been

posting large losses in its core

US business because of

ongoing US FDA issues.

EBITDA Contribution

The second largest Indian

player in the industry

Ranbaxy has consistently

ranked among the top three

players in the industry due to

its strong presence in two of

the largest therapeutic

segments in the industry.

Ranbaxy holds 4.69% market

share, which has fallen from

5.1% in 2006. The company

grew its business at 10.2%

CAGR over the past six years

while the industry posted 14%

CAGR. This under

performances can be

attributed to the fact that

Ranbaxy derives most of its

revenue from highly

competitive acute therapeutic

segment.

Ranbaxy is among top three

players in the industry



Good brand equity in AI, CVS, pain management, dermatology segments

Ranbaxy has been a dominant player in three of the largest therapeutic segments of theindustry, AI, CVS and pain management. Ranbaxy ranks first in AI, with market share of10.8%, it ranks sixth in the CVS segment with market share of 5.8%, second in the painmanagement segment with market share of 7% and third in the dermatology segment withmarket share of 8.9%. However Ranbaxy's growth has been sluggish compared with thesegments' growth over the past two years.

5.09

5.02

5.2

4.97

4.69

7.114.617.0

7.8

21.4

2006 2007 2008 2009 2010


CY 2000

CVS6%

Pain8%

GI4%

Derma3%

CNS5%

Respiratory2%

Vitamins14% Others

7% AI51%

Non-DF EBITDA, 2%

DF EBITDA, 98%

CVS 13%

Derma 8%

GI 7%

Sex

stimulants

9%Pain 11%

Respiratory 4%

CNS 4%

Diabetes 2%

Others 7%

AI 35%

March 2011

August 2011 107

Ranbaxy

In terms of the number of prescriptions written, Ranbaxy's brand equity with physicians ishigh only in the AI and dermatology segments. Ranbaxy is ranked third in the AI segmentwith a prescription market share of 7.8% and it ranks fourth in the dermatology segmentwith a prescription market share of 5.4%. Over the past five years, Ranbaxy's brandequity has taken a beating in almost all therapy areas.

Ranbaxy's prescription rankingJan-07 Jan-08 Jan-09 Jan-10 Oct-10


Derma 3 3 3 4 4

GI 12 13 9 14 14

CNS 11 11 11 14 14

Pain Mgmt 12 13 13 13 14

CVS 13 15 13 17 15





Ranbaxy's top 10 brands contribute ~40% to its revenue and they feature among theindustry's top 300 brands. Its No1 brand Revital (Vitamins) ranks sixth in the industry andit posted revenue CAGR of 30% over 2006-10. Most of Ranbaxy's top 10 brands recordeddouble-digit CAGR over the past four years.

Ranbaxy's top 10 brandsBrand Drug Product Launch Sales (INR m) YoY Gr (%) CAGR (%)

Revital Ginseng products 1989 1,607 29.4 30.4

Mox Amoxycillin 1997 1,346 14.6 15.3

Storvas Atorvastatin 1999 996 13.4 22.3

Volini Nsaids 1994 924 36.0 33.2

Cifran Ciprofloxacin injectables 1989 863 -1.6 2.4

Sporidex Cephalexin 1980 904 5.0 5.1

Zanocin Ofloxacin 1990 660 4.1 9.0

Cepodem Cefpodoxime 1999 646 17.4 20.9

Rosuvas Rosuvastatin 2003 346 57.4 56.1

Fortwin Injectables 1975 341 26.0 26.2


10.8

5.8

3.6

7

8.9

3.8

AI

CV

S GI

Pai

n/A

nalg

esic

Der

mat

olog

y

CN

S

17.9

7.610.9

20.0

12.813.8

9.0

18.718.416.717.114.6

AI

CV

S GI

Pai

n/A

nalg

esic

Der

mat

olog

y

CN

S




August 2011 108

Ranbaxy

3. Distribution & reach: 7/10Ranbaxy derives 66% of its revenue from the metros and class-I towns, compared with63% of the industry average. Over the past four years, revenue CAGR for all geographieshas been below the industry average. The contribution of metros to revenue has risenover the past five years, in line with the industry trend.

Ranbaxy: Geographical distribution of revenues (%) Geographical distribution of revenues: Industry (%)

Ranbaxy: Geography-wise growth rates (%) Geography-wise growth rates



Ranbaxy has been one of the most aggressive players in the industry inlaunching new products

Ranbaxy has aggressively launched new products over the past four years. It launched 65new products (including line extensions) annually over the past four years. However, theaverage revenue per new launch has declined from INR94m in CY07 to INR60m inCY10. Revenue growth is driven by existing products and new launches.

Ranbaxy: New launches (INR m) Ranbaxy: Growth composition (%)


27.6 28.9 28.9 30.0 31.0

32.6 31.3 31.6 32.5 32.0

19.2 19.0 19.5 19.4 19.6

20.6 20.9 20.0 18.1 17.3



2.5

26.2

17.7

14.7

17.620.7

16.415.6

7.9

23.5

13.0

17.5

11.1

17.5

9.5

14.0

CY07 CY08 CY09 CY10

Metros Class I Tow nsClass II to VI Rural

30.9 32.3 33.7 35.6 36.1

31.6 30.9 30.0 30.4 30.3

17.9 17.1 17.7 17.7 17.7

19.6 19.6 18.6 16.3 16.0



21.8

14.2

-6.0

16.013.412.7

8.2

13.6

5.5

14.2

7.1

21.5

3.112.410.7

8.0

CY07 CY08 CY09 CY10


104 104 114 154

60.573.1

92.494.0

CY07 CY08 CY09 CY10

No. Of launches in last 2yrsAvg sales per launch (INR m)

7.0 6.4 4.8 5.0

0.8

10.6

2.4

9.6

CY07 CY08 CY09 CY10


August 2011 109

Ranbaxy

5. CAGR amd scale-up: 5/10We expect Ranbaxy's domestic formulations revenue to post 14% CAGR over CY10-12,led by a large field force and rapid new launches. This is lower than our forecast of 15-16% CAGR for the industry. Ranbaxy is likely to maintain its leading position in the sectorgiven its strong position and market share in some of the largest therapeutic segments.Though Ranbaxy employs one of the largest field forces in the industry the company'sfocus on improving productivity of the salesforce needs to be enhanced for it to grow thebusiness more profitably.

Ranbaxy: Domestic formulations revenue ramp-up

Sales force productivity




Top-line growth driven by sale force additions; MR productivity declines

Ranbaxy's domestic formulations revenue posted 10.2% CAGR over FY04-10 and itssales force posted 15% CAGR, implying negative productivity of the salesforce. In CY04Ranbaxy derived INR4.6m revenue per MR, which fell to INR3.6m in CY10. This ispartially attributed to recent additions to the sale force.

1,950

4,500

3.6

4.6

2004 2010

No. of MR Revenue per MR (INR m)

August 2011 110

Ranbaxy

7. Non-domestic business snapshot 5/10

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

Risks & concerns Resolution of US FDA issues imperative to monetize large Para-IV opportunities in

the US. This can result in a large one-time penalty payment. Needs to reduce fixed costs. Yet to initiate steps to exploit the bio-similars space. Acquisitions have not delivered desired results, impacting return ratios.

Key news flows/triggers US FDA resolution for Paonta and Dewas facility. Launch of generic Lipitor with 180-day exclusivity in November 2011. Further visibility on exploiting synergies with Daiichi.

Impact assessment We are neutral on Ranbaxy's international business despite its strong presence in the

US and emerging markets, due to ongoing US FDA issues and high fixed cost in someof the European markets

We expect the international business to record 14.5% CAGR over CY10-12 excludinglow-competition and Para-IV products in the US.

Option values (Para-IV products) to contribute INR38.2b in one-time PAT over CY11-14 with DCF value of INR77/share.

Sales mix (INR m)2008 2009 2010 2011E 2012E CY10-12

CAGR (%)

Dosage Form

India 368 359 387 438 519 15.9

Growth (%) 8.9 -2.5 7.7 13.2 18.6

Europe, CIS and Africa 571 480 527 621 697 15.0

Growth (%) -1.9 -15.9 9.8 17.8 12.2

Japan,Asia Pacific 100 100 93 102 133 19.4

& Middle East

Growth (%) -9.1 0.0 -7.0 10.0 29.7

Latin America 74 71 83 80 102 10.9

Growth (%) 15.6 -4.1 16.9 -3.6 27.7

USA 448 397 660 467 473 -15.4

Growth (%) 6.9 -11.4 66.2 -29.3 1.2

Total dosage 1,561 1,407 1,750 1,708 1,924 4.9

Growth (%) 3.2 -9.9 24.4 -2.4 12.6

API 117 112 114 143 143 11.8

Growth (%) 12 -5 2 25 0

Allied business 4 0 0 0 0 -

Growth (%) 0 -100 -99 -99 -99

Total sales 1,682 1,519 1,864 1,851 2,066 5.3

Note - Estimates exclude Para-IV/low-competition opportunities in US except for CY11

EBITDA Contribution

DF EBITDA

98%

Non-DF EBITDA

2%


August 2011 111

Ranbaxy

8. Earnings growth and stock attractiveness: 6/30We expect overall top-line CAGR of 14.4% over CY10-12, leading to EPS CAGR of53%, albeit on a very low base. Cost cuts, leading to improved profitability and gradualrecovery in the US business, will be key growth drivers.

The key near term determinant for Ranbaxy's valuations will be the expected resolution ofthe US FDA and DoJ issues. Ranbaxy management has been trying to resolve theseissues. However, time-lines for such a solution are not known.

Valuations imply market attaching sustainable P/E multiples to Para-IVupsides

Current valuations implies that market is attaching sustainable P/E multiplesto Para-IV upsides: Given the potential recurrence of Para-IV upsides every yearfor the CY11-12 period, Para-IV upsides are attracting P/E based valuations. Webelieve that these are one-off upsides and hence continue to value them on DCFbasis. Our current DCF value of all potential Para-IV upsides is INR77/sh.

US FDA resolution imperative: Since sustaining current valuations is dependent onupsides from Lipitor & Nexium, it is imperative for RBXY to resolve outstanding USFDA issues and salvage the upsides from these two opportunities which account for80% of overall Para-IV upsides.

Valuations discount best-case scenario: Ranbaxy is currently valued at 33.0xCY11E and 23.3x CY12E core EPS. Our estimates exclude MTM forex gains andone-off upsides from Para-IV opportunities. Our current DCF value of all potentialPara-IV upsides is INR77/sh. We believe that current valuations are discounting thebest-case scenario for both the core business as well as for the Para-IV upsides. Wemaintain Sell with target price of INR412 (20x CY12E EPS + FTF DCF value ofINR77/sh).

Ranbaxy RoE & RoCE (%) Ranbaxy one year forward P/E

10.411.4

19.4

4.47.2 11.110.7

9.815.9

9.8

2008 2009 2010 2011 2012E

RoE RoCE

30.7

37.7

94.6

14.30

30

60

90

120

Aug

-06

Mar

-07

Aug

-07

Feb

-08

Aug

-08

Feb

-09

Aug

-09

Feb

-10

Aug

-10

Feb

-11

Aug

-11


August 2011 112

Ranbaxy

Ranbaxy non-domestic business: key trends, triggers & risk

Getting the US business on track is key: Over the past 3-4 years, Ranbaxy has beenfacing cGMP issues, which have gradually aggravated. The problems started with a warningletter for the Paonta facility and gradually aggravated into an import alert for the Paontaand Dewas facilities and culminated in the Application of Integrity Policy (AIP) beinginvoked for the Paonta facility.

The US FDA's steps resulted in the stopping of exports of US formulations from both thefacilities. Ranbaxy's US facility is the only facility that supplies products in the US, pendingthe resolution of the US FDA issues at its India facilities. We believe getting the USbusiness back on track through the clearance of the Paonta and Dewas facilities is crucialfor the Ranbaxy management in the near-term.

Resolution of US FDA issues imperative: We believe it is imperative for Ranbaxy toresolve its long-pending US FDA cGMP problems, without which the significantly largeupsides for its US business are at a risk. The management has been attempting to resolvethe issues and is trying to obtain a comprehensive solution with the US FDA and the DoJfor all outstanding issues. While the time-lines for such a resolution are not predictable, wenote that, given past precedence, Ranbaxy may be required to pay a one-time penalty forthe resolution.

Risks to Para-IV opportunities: Given the seriousness of the US FDA issues, webelieve there are risks to high value FTF opportunities like generic Lipitor and Nexium(cumulative one-time PAT of INR38.2b over CY11-14). Ranbaxy must demonstrate thatthese high-value Para-IV opportunities are not at risk.

Para-IV upsides: Ranbaxy: One-time PAT from Para-IV upsides (INR m)Brand Innovator Launch CY09 CY10 CY11E CY12E CY13E CY14E Total % of total

Sales

(USD m)

Valtrex 1500 25-Nov-09 2,724 5,893 - - - - 8,616 18

Flomax 1452 Mar-10 - 1,561 - - - - 1,561 3

Aricept 1900 30-Nov-10 - 393 1,993 - - - 2,386 5

Lipitor 5000 Nov-11 - - 2,250 6,750 - - 9,000 18

Caduet 304 Nov-11 - - 247 740 - - 986 2

Diovan 1300 Sep-12 - - - 2,683 1,342 - 4,025 8

Valcyte 300 Mar-13 - - - - 2,007 - 2,007 4

Nexium 2800 May-14 - - - - - 20,168 20,168 41

Total 17,956 2,724 7,846 4,489 10,173 3,348 20,168 48,749 100

One-Time EPS 6.5 18.7 10.7 24.2 8.0 48.0

Ranbaxy - Para-IV Upsides in US (INR M) Ranbaxy - Core & Para-IV Profits (INR M)

2,724

7,846

4,489

10,173

3,348

20,168

CY09 CY10 CY11E CY12E CY13E CY14E

3,008 4,991 7,052 8,437 9,7027,846 4,489

3,348

20,168

10,173

CY10 CY11E CY12E CY13E CY14E

Core PAT Para-IV PAT

August 2011 113

Ranbaxy

Key FTF upsides: Nexium at risk

Nexium account for a major portion of Ranbaxy's FTF upsides. We believe there arepotential risks to the monetization of these opportunities due to ongoing US FDA issues.

Settlements for Nexium raise uncertaintyAstraZeneca entered into an out-of-court settlement with Teva and recently with DrReddy's Labs for the potential launch of their respective generic versions in May 2014.This raises uncertainty over Ranbaxy's FTF status and an out-of-court settlement withAstraZeneca since Ranbaxy's 180-day exclusivity on Nexium is likely to commence fromMay 2014.

Teva and Dr Reddy's indicated that if Ranbaxy got final US FDA approval, they wouldlaunch their generic versions after the expiry of Ranbaxy's exclusivity. However, thematching launch time-lines for the three settlements (May 2014) and the fact that Ranbaxyis yet to receive even tentative approval, raises uncertainty over upsides for Ranbaxy. Thetable highlights the upsides for Ranbaxy in both cases:

NEXIUM UPSIDE (USD m) - Sensitivity AnalysisOnly Ranbaxy Ranbaxy along with

on market DRL and Teva

Innovator Sales (USD mn) 2,800 2,800

Sales period (mths) 6 6

Price discount (%) 30 70

Potential Mkt for generics 980 420

No. of players in mkt 2 4

Ranbaxy Mkt Share (%) 70 30

Ranbaxy Sales (USD mn) 686 126

Assumed exchange rate (INR/USD) 42 42

Ranbaxy Sales (INR mn) 28,812 5,292

PAT Margin (%) 70 40

PAT (INR mn) 20,168 2,117

WACC (%) 14 14

PV Factor 1 0.6

PV of cash flow 11,941 1,253

NPV (INR/share) 28.4 3.0


August 2011 114

Ranbaxy

Long-term plan to exploit synergies with Daiichi

Ranbaxy formulated a three-year plan (2010-12) to exploit synergies with Daiichi. Thisplan straddles multiple areas in which the partners can leverage each other's strengths.The areas include:1. Accessing the Japanese generic market through Daiichi;2. Leveraging Ranbaxy's distribution network to launch Daiichi's products, with the key

target markets including India, Africa, Latin America and parts of Europe.3. Synergies for NCE research: Daiichi has bought Ranbaxy's NCE operations.4. Accessing Ranbaxy's low-cost manufacturing facilities in India as a sourcing base for

Daiichi.

Accessing the Japanese generic market

The USD70b Japanese pharmaceutical market (with 5% generic penetration at ~USD3.5b)is undergoing a change with the government planning to reduce health care costs byencouraging generics. The Japanese government aims to double the generic penetrationover the next five years.

Ranbaxy plans to become a strong player in this market by accessing Daiichi's presenceand brand-equity in this market as well as its own product pipeline. We do not expectmajor upsides from this initiative in the short- to medium term as Ranbaxy will have to fileproducts with the Japanese authorities and get them approved, which will be time-consuming.

Leveraging Ranbaxy's distribution network to launch Daiichi products

Key target markets include India, Africa, Latin America and parts of Europe, in whichRanbaxy's front-end presence will be leveraged to distribute Daiichi's products (can alsoinclude patented products). A beginning has been made with Ranbaxy starting marketingof a few products in India, Mexico and Romania. We believe this could result in incrementalupsides to Ranbaxy in the medium term.

Cost savings for NCE research division

In July 2010, Ranbaxy transferred its NCE research operations to Daiichi along with all itsNCE assets and ~150 employees. In return, it received some upfront consideration (notquantified) from Daiichi. The transfer of NCE research to Daiichi will result in cost savingsfor Ranbaxy besides the upfront cash inflow. We estimate Ranbaxy spends ~20% of itsannual R&D expenditure on NCE research, which has now been transferred to Daiichi,leading to cost savings. Our estimates take into account the savings in R&D cost due tothe sale of NCE research operation to Daiichi.

Shifting manufacturing to Ranbaxy's Indian facilities

Ranbaxy can supply some products to Daiichi (especially APIs) from its Indian facilities,resulting in upsides for both partners. However, this may be a time-consuming exercise asit will require changing Daiichi's filings for these products.

August 2011 115

Ranbaxy

Financials and valuations: Ranbaxy

Income Statement (INR Million)Y/E December 2009 2010 2011E 2012E

Net Sales 73,294 85,355 83,111 90,736

Change (%) 1.5 16.5 -2.6 9.2

Other Operating Income 2,676 4,253 2,132 2,268


EBITDA 7,124 18,652 9,033 11,035

Change (%) -15.1 161.8 -51.6 22.2

Margin (%) 9.4 20.8 10.6 11.9

Depreciation 2,676 5,533 3,210 3,894

EBIT 4,448 13,120 5,823 7,141

Int. and Forex loss -783 -793 1,063 204

Other Income - Rec. 2,935 2,795 3,290 1,862

PBT pre EO Expense 8,166 16,708 8,050 8,800

Change (%) -459.2 104.6 -51.8 9.3

Extra Ordinary Expense -1,931 -4,293 -1,138 -700

PBT after EO Exp. 10,098 21,001 9,188 9,500

Tax 6,991 5,849 1,516 1,615

Tax Rate (%) 69.2 27.8 16.5 17.0

Reported PAT 3,107 15,152 7,672 7,885


Adj PAT after Min. Int. 1,911 10,855 6,984 7,052

Change (%) -38.2 467.9 -35.7 1.0

Margin (%) 2.6 12.7 8.4 7.8

Adj PAT excl one-offs -812 3,008 4,991 7,052

Balance Sheet (INR Million)Y/E December 2009 2010 2011E 2012E


Fully Diluted Eq Cap 2,102 2,105 2,105 2,105

Reserves 41,261 53,871 59,241 65,549

Revaluation Reserves 71 71 71 71

Net Worth 43,434 56,047 61,417 67,725


Loans 36,295 43,348 23,328 13,328

Deferred liabilities -4746 -227 -227 -227


Gross Block 62,786 67,050 69,550 72,050

Less: Accum. Deprn. 17,880 21,571 24,781 28,675

Net Fixed Assets 44,905 45,479 44,769 43,375

Capital WIP 6,231 3,818 6,231 6,231

Investments 5,407 4,985 4,985 4,985

Goodwill/Intangibles 21,446 19,009 19,009 19,009

Curr. Assets 60,086 86,932 64,226 61,286

Inventory 18,407 21,926 21,632 23,616



Others 10,863 16,309 14,117 14,170



Provisions 8,602 9,534 4,350 4,733


Appl. of Funds 75,517 99,815 85,085 81,393

E: MOSL Estimates

RatiosY/E December 2009 2010 2011E 2012E

Basic (INR)

EPS (Fully diluted)* 4.5 25.8 11.9 16.7

Cash EPS 10.9 38.9 24.2 26.0

BV/Share 103.1 132.9 145.7 160.7

DPS 0.0 2.0 4.7 3.2

Payout (%) 0.0 6.5 30.0 20.0

Valuation (x)

P/E (Fully diluted) 15.2 33.0 23.3

PEG (x) 0.0 -0.9 23.9

Cash P/E 10.0 16.1 15.0

P/BV 2.9 2.7 2.4

EV/Sales 2.3 2.4 2.2

EV/EBITDA 11.1 23.0 18.5


Return Ratios (%)

RoE 4.4 19.4 11.4 10.4

RoCE 9.8 15.9 10.7 11.1






Leverage Ratio (x)


Debt/Equity 0.8 0.8 0.4 0.2

Cash Flow Statement (INR Million)Y/E December 2009 2010 2011E 2012E

Op.Profit/(Loss) bef. Tax 7,124 18,652 9,033 11,035


Direct Taxes Paid 493 -1,331 -1,516 -1,615

(Inc)/Dec in WC -11,296 -6,332 -3,706 -4,144

CF from Operations -743 13,785 7,101 7,138

CF frm Op.incl EO Exp. -743 13,785 7,101 7,138

(Inc)/Dec in FA -4,205 -3,694 -4,913 -2,500

(Pur)/Sale of Investments 24 423 0 0


Change in networth -704 2,736 1,138 700

Inc/(Dec) in Debt -6,695 7,167 -20,100 -10,000

Interest Paid 783 793 -1,063 -204

Dividend Paid 0 -982 -2,302 -1,577


Inc/Dec of Cash -11,540 20,228 -20,139 -6,442


Closing Balance 12,416 32,644 12,506 6,063

Dr Reddy'sMEDICINES

Score

CMP: INR1,446 DRRD IN

TP: INR1,670 NeutralThe homecoming

M: Mix 4/10

Dr Reddy's Laboratories (DRL) derives 72% revenue

from the acute therapy segment and has small

presence in chronic therapy segments through the

CVS segment.

GI, CVS, pain management and AI contribute ~64%

to DRL's domestic formulation revenue.


DRL has good brand equity in the GI and pain

management segments but is not a market leader

in these therapeutic segments.

DRL ranks third in the GI and pain management

segments with a prescription market share of 4.4%

and 4.1% respectively. In other major segments

its brand equity is not very strong. DRL has not

been able to improve its brand equity in most after

therapeutic areas in which it is present.


DRL launched fewer new products over the past

four years than its peers. It launched 22 new

products (including line extensions) annually over

the past four years.

Over the past two years DRL's revenue growth has

been driven largely by old products rather than new

launches.

Year Net Sales PAT EPS EPS P/E Adj P/E P/BV RoE RoCE EV/ EV/

End (INR M) (INR M) (INR) GR. (%) (X) (X) (X) (%) (%) Sales EBITDA

03/10A 68,179 334 2.0 729.7 716.2 5.7 2.5 2.6 3.5 17.4

03/11A 74,693 11,099 65.6 22.0 21.6 5.3 24.1 16.7 3.5 16.7

03/12E 81,754 11,615 68.6 7.8 21.1 20.7 4.7 22.5 15.4 3.2 17.1

03/13E 90,323 13,725 81.1 18.2 17.8 17.5 4.2 23.5 17.0 2.9 14.4


52-Week Range (INR) 1,855/1,320

1,6,12 Rel. Perf. (%) 5/4/20


M.Cap. (USD b) 5.3



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grou

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

August 116


DRL derives 68% of its revenue from metros and

tier-I cities.

The company's distribution in metros has increased

significantly over time and the contribution of other

geographies to revenue has fallen over the past

four years.

DRL has a large field force with 3,165 MRs which

helps it to tap both the urban and semi-urban

market.

August 2011 117

Dr Reddy's


DRL outperformed the industry with revenue CAGR

of 18% over FY05-11. The company scaled up its

business rapidly albeit on a low base.

We expect DRL to post revenue CAGR of 15%

over FY11-13, in line with the industry, given its

small base, recent additions to field force and

considering the management's increased focus on

the business.


DRL posted negative MR productivity over 2004-

10. The number of MRs grew 16% against revenue

growth of 13.6%, indicating a fall in sales force

productivity.

Revenue per MR declined from INR3.6m in 2004 to

INR3.2m in 2010. At this level, productivity is the

lowest among peers.


We are positive on DRL's international business

given its strong US and emerging markets portfolio,

backed by a strong API portfolio.

We expect non domestic business to record 15.2%

CAGR over FY11-13, excluding low-competition and

Para-IV products in the US.

Option values (low-competition and Para-IV

products in US) will contribute INR12.9b to sales

and INR5.4b to PAT in FY12.


We expect DRL to post top-line of 15% CAGR over

FY11-13, leading to EPS CAGR of 11%, excluding

Para-IV upsides.

DRL's core earnings growth will be driven by

sustained double-digit growth in the branded

formulations business but will be partly tempered

down by higher taxes.

Chairman Profile


Return ratios are muted due to a high cost German

acquisition, which is not yielding desired returns.

DRL is valued at 20.7x FY12E and 17.5x FY13E


We had placed our recommendation "Under

Review" for a potential downgrade (from Buy earlier)

some time back. We now rate the stock Neutral

with TP of INR1,670.

Chai

rman Dr. Reddy's Labs was promoted by Dr. Anji Reddy, a first generation entrepreneur. The day-to-day operations

of the company are currently managed by Mr. G.V. Prasad (Vice Chairman & CEO) and Mr. Satish Reddy(MD & COO). Building a strong business in US and Russia coupled with global scale in the API businessare the key achievements of the company.


1,000

1,250

1,500

1,750

2,000


Dr Reddy’ s Labs Sensex - Rebased

August 2011 118

Dr Reddy's

The homecomingBalancing focus between overseas and domestic markets

Despite being one of the largest Indian generic companies, Dr Reddy's Laboratories (DRL)

has been lagging its peers in the domestic formulations business. DRL, ranked a distant

thirteenth in the industry with 2.17% market share, has strong brand equity in the

gastrointestinal and pain management segments. DRL lagged the industry average growth

rate over the past four years in all geographies except metros. However, of late, it has been

expanding in the domestic market, which is visible from its growth up-tick in 2009 and 2010.

1. Mix: 4/10

Acute therapeutic segments dominate sales

The top four therapeutic segments, GI, CVS, pain management and AI contribute ~63%to DRL's domestic formulations revenue. Overall, the acute therapeutic segments contribute~72% to sales. Over the past 10 years, the GI and respiratory segments increased theircontribution from 19% in FY01 to 29% in FY11 while contributions from pain managementand anti-infective segments fell from more than 32% in FY01 to 20.6% in FY11.

Dr. Reddy's: Therapeutic breakup


Domestic formulations:

Revenue contribution

marginal, sizable

contribution to profits


business contributes just

~15% to DRL's revenue but is

one of its most profitable

businesses. We estimate

contribution of 23% to EBITDA.

EBITDA Contribution

Among laggards in the

segment compared with

peers

DRL ranks thirteenth in the

industry and has a market

share of 2.17%. Over the past

five years DRL's market share

dropped from 2.31% in 2006 to

2.17% in 2010. DRL's focus on

growing the international

generic business had resulted

in low focus on the domestic

formulations business in the

past which has impacted

overall business growth. DRL

posted revenue CAGR of 18%

over the past six years,

against the industry's 14%

CAGR.

DRL market share and

growth

2.31

2.4

2.3

2.2

2.2

20.6

8.010.5

18.6

14.7

2006

2007

2008

2009

2010



DF EBITDA

23%

Non-DF

EBITDA

77%

FY01Dermatology

3%

Pain17%

CVS19%

GI18%

AI15%

Diabetes5%

Others13%

VMN9%

Respiratory

1%

FY05

GI22%

CVS22%

Pain17%

AI8%

Diabetes7%

Dermatology

5%

Others9%

VMN6%

Respiratory4%

Respiratory 5%

Stomatologicals 5%

VMN 5% Others 10%

Dermatology 6%

Diabetes 6%

AI 8% Pain 13%

CVS 19%

GI 23%

FY11

August 2011 119

Dr Reddy's


Good brand equity in GI, pain management segments

DRL is not a market leader in any therapeutic segment. It ranks third in the GI segmentwith market share of 5.6%, eighth in the pain management segment with market share of4% and tenth in the dermatology segment with market share of 3%. A major drawback inDRLs portfolio is that it is not among the top 10 players in any major chronic therapeuticsegment. Over the past two years, DRL's growth in key segments like the GI and painmanagement segments has been lower than that of industry.

Market share in key therapies (%) (2010) Growth comparison (%) (2010)


DRL does not have high brand equity except in the GI and pain management segments interms of the number of prescriptions written. DRL ranks at third position in the GI andpain management segments with prescription market shares of 4.4% and 4.1% respectively.In other major segments the brand equity is not very strong. DRL has not improved itsbrand equity in most therapeutic areas in which it is present.

DRL's prescription rankingJan-07 Jan-08 Jan-09 Jan-10 Oct-10

Pain Mgmt 3 3 3 3 3

GI 5 3 4 4 3


Vit 9 8 11 14 11

CVS 10 11 12 12 13



Derma 23 19 22 19 21


Higher brand concentration

DRL's top 10 brands contribute ~37% to its total revenue and seven of its top 10 brandsfeature among the industry's top 300 brands. Its No1 brand Omez (Omeprazole in the GIsegment) ranks twenty-seventh in the industry and has been posting revenue CAGR of17% over the past two years. Six out of the top 10 brands reported double-digit revenueCAGR over the past two years.

5.6

4

3

GI Pain/Analgesic Dermatology

18.4

23.0

4.4

15.516.717.1

GI Pain/Analgesic Dermatology


August 2011 120

Dr Reddy's

DRL's top 10 brandsBrand Drug Product Launch Sales (INR m) YoY Gr (%) CAGR (%)

Omez Omeprazole 1992 1,065 14.8 17.2

Nise Nimesulide 1996 700 1.4 7.6

Stamlo Amlodipine 1994 507 7.2 9.6

Reditux Rituximab 405 74.6 42.7

Omez-D Omeprazole & Domperidone 2005 377 21.6 34.0

Stamlo Beta Atenelol & Amlodipine 1996 328 0.6 4.4

Razo Rabeprazole 2002 285 15.4 15.4

Atocor Atorvastatin 2000 278 1.5 1.7

Mintop Minoxidil 1989 209 6.6 10.2

Razo-D Rabeprazole & Domperidone 2005 200 19.0 20.4

CAGR through 2009-2011 Source: Company/MOSL

3. Distribution and reach: 6/10DRL derives 68% of its revenue from metros and class-I towns, against an industryaverage of 63%. Over the past four years revenue CAGR for all geographies have beeneither in line or below the industry average.

DRL: Geographical distribution of revenues (%) Industry: Geographical distribution of revenues (%)

DRL: Geography-wise growth rates (%) Industry: Geography-wise growth rates (%)


30.5 31.1 30.5 33.9 37.8

31.9 31.5 32.4 32.1 30.6

17.1 16.5 16.3 16.1 15.6

20.5 20.9 20.8 17.9 16.0



27.6 28.9 28.9 30.0 31.0

32.6 31.3 31.6 32.5 32.0

19.2 19.0 19.5 19.4 19.6

20.6 20.9 20.0 18.1 17.3



2.5

26.2

17.7

14.7

17.6

20.7

16.415.6

7.9

23.5

13.0

17.5

11.1

17.5

9.5

14.0

CY07 CY08 CY09 CY10


34.3

15.1

7.7

20.1

8.3

17.2

6.8

13.613.2

6.7

17.2

9.410.5

-7.0

9.8

17.2

CY07 CY08 CY09 CY10


August 2011 121

Dr Reddy's


DRL's growth over the past four years has been led by existing productsas It launched fewer new products compared with the industry

Over the past four years DRL launched 22 new products (including line extensions),annually which is less than its peers. The average revenue per new launch has fallen overthe past four years, indicating a sharp decline in value derived out of new launches. Overthe past two years, DRL's revenue growth has been largely driven by existing productsrather than new launches.

DRL: New launches DRL: Growth composition (%)


34 26 54 63

138.8 142.2

19.4 28.3

CY07 CY08 CY09 CY10


7.75.3

1.4 2.1

7.0

5.2

6.6

18.5

CY07 CY08 CY09 CY10


5. CAGR and scale-up: 6/10DRL is aggressively targeting strong growth in the domestic formulations business andexpects double-digit growth, led by new launches and strengthening of its field force (600MRs added over the past few quarters to total ~3,000). We expect DRL's domesticformulations business to post revenue CAGR of 15% over FY11-13. We expect DRL toreport in line industry growth over the next two years, considering the management'sincreased thrust on the business and relatively low base.

Dometic formulation revenues


5,526 6,964 8,060 8,478 10,158 11,690 13,210 15,323

16.013.0

15.1

19.8

5.2

15.7

26.026.7


DF Revenue (INR m) YoY Grow th (%)

August 2011 122

Dr Reddy's


DRL's sales force productivity fairs poorly compared with the industry

DRL's domestic formulations business posted revenue of 13.6% CAGR over FY04-10and its sales force grew 16% CAGR, implying negative productivity of the salesforce. In2004, DRL derived INR3.6m revenue per MR, which fell to INR3.2m in FY10. Comparedwith the companies covered in this report, DRL's performance was below average.

7. Non-domestic business snapshot: 7/10Positives DRL has a strong presence in the US and emerging markets. It has strong chemistry skills and fully backward integrated, low-cost operations. It has a pragmatic mix of low-competition, Para-IV and normal products for the US

market. It is one of the few Indian players to target the bio-similar opportunity. It is among the top three global API players.

Risks and concerns Further write-offs for DRL's German operations cannot be ruled out. They are related

to potential price erosions in the tender market. DRL has yet to tie up with a global player to capitalize on the bio-similar opportunity in

regulated markets. DRL's CRAMS business may not scale-up due to a conflict of interest with a strong

generic business. DRL's past acquisitions have not delivered the desired results, which has impacted

return ratios.

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

DRL: Sales force productivity (2004-10)


1,300

3,165

3.2

3.6

2004 2010


-2.11.9

16.0 11.5

DRL Industry



August 2011 123

Dr Reddy's

Impact assessment We are positive on DRL's international business given its strong US and emerging

markets portfolio backed by a strong API portfolio. We expect the non-domestic business to record 15.2% CAGR over FY11-13 excluding

low-competition and Para-IV products in the US. Option values (low-competition and Para-IV products) will contribute INR12.9b to

DRL's sales and INR5.4b to PAT in FY12.

8-9. Earnings growth and stock attractiveness: 17/30Traction in the branded formulations and US businesses will be key growth drivers forDRL over the next two years. We estimate core EPS of INR68.6 in FY12 and INR81.1in FY13, adjusting for the interest cost of the bonus debentures and factoring-in the impactof likely withdrawal of DEPB scheme. Our core estimates exclude upsides from patentchallenges/low-competition opportunities in the US. The stock trades at 20.7x FY12E and17.5x FY13E core earnings. While current valuations are supported by large potentialone-time opportunities in the US, they do not fully discount the slowdown in DRL's corebusiness. We had placed our recommendation "Under Review" for a potential downgrade(from Buy earlier) some time back. We now rate the stock Neutral with TP of INR1,670(20x FY13E core EPS + INR47/sh of DCF value).


CAGR (%)

PSAI 18,758 20,404 19,648 20,655 22,427 6.8

India 2,383 2,646 2,619 2,750 2,887 5.0

International 16,375 17,758 17,029 17,905 19,540 7.1

Branded Formulations 18,060 22,145 25,913 29,708 34,627 15.6

India 8,478 10,158 11,690 13,210 15,323 14.5

International 9,582 11,987 14,223 16,499 19,303 16.5

Generics 31,730 26,460 27,427 29,220 30,638 5.7

US 19,844 16,817 18,996 20,532 21,354 6.0

EU 11,886 9,643 8,431 8,688 9,284 4.9

Others 893 1,268 1,705 2,171 2,631 24.2

Total 69,441 70,277 74,693 81,754 90,323 10.0

Note - Estimates exclude Para-IV/low-competition opportunities in the US

DF EBITDA

23%

Non-DF EBITDA

77%

EBITDA Contribution

Source: Company/MoSL

Dr Reddy's RoE & RoCE (%) Dr Reddy's one year forward PE

19.7

25.4

77.2

16.44

24

44

64

84

Aug

-06

Mar

-07

Aug

-07

Feb

-08

Aug

-08

Feb

-09

Aug

-09

Feb

-10

Aug

-10

Feb

-11

Aug

-11


Negative Earnings

Cycle

23.522.524.1

2.5

-12.3

9.9 15.416.7

-2.9

17.0

2.64.0

2008 2009 2010 2011 2012E 2013E

RoE RoCE

August 2011 124

Dr Reddy's

DRL non-domestic business: key trends, triggers & risk

Revenue target of USD2.7b by FY13 implies 27% CAGRDRL aims at a top-line of USD3b by FY13 implying 27% revenue CAGR over FY11-13.We believe this is a slightly aggressive target given that most of its businesses are growingat much lower than 27% CAGR.

Hence, we estimate DRL's core revenue will grow at 15% CAGR to USD2.1b. One-offand low-competition opportunities in the US are likely to contribute ~USD286m in FY12and ~USD173m for FY13. We expect revenues of USD2.2b in FY13 including the upsidefrom low competition opportunities. We believe that without some inorganic initiative, itwill be difficult for DRL to achieve USD2.7b in revenue by FY13.

Strong positioning in emerging markets led by a focused approachWe expect DRL's formulation exports to emerging markets to record 18% CAGR overFY11-13 led by a ramp-up in its Russian operations and the start of supplies to otheremerging markets under the GSK supply agreement.

The main target markets for the company's emerging market initiative include Russia andthe CIS region, Venezuela and Brazil.

Russia, CIS key marketsWith 76 percentage contribution to DRL's emerging market exports, Russia and the CISregion is a key market for the company. To sustain double-digit growth in this region, DRLhas begun to focus on the Russian OTC market (with the addition of more products andexpansion of the field force) and has in-licensing arrangements to expand its productportfolio in the region.

US business to ramp-up significantly over the next two yearsDRL's revenue target of US$1b in the US implies 55% CAGR over FY11-13, led mainlyby its FTF pipeline of 12 products and contribution from other low-competition opportunities.Such opportunities are likely to contribute ~INR12.9b and ~INR7.6b in sales and INR5.4band INR2.3b to PAT in FY12 and FY13 respectively. We have excluded such opportunitiesfrom our core estimates and forecast that DRL will post core US revenue of 27.5%CAGR over FY11-13.

Low-competition/patent challenge opportunities in the US gain momentumDRL management has guided for launch of at least one patent challenge/low-competitionproduct in the US every year over the next few years. DRL has a pipeline of 11 FTFs. Acombination of scale-up in existing patent challenge/low-competition products and newopportunities will help the company to achieve its revenue guidance of USD1b by FY13 inthe US.

August 2011 125

Dr Reddy's

Import alert for Mexico facility to temper core performanceDRL's Mexico facility recently received a warning letter and subsequently an import alertfrom the US FDA. This is the fallout of the US FDA inspection done in November 2010wherein it issued 12 observations. Of these, DRL was able to resolve 8. However, the USFDA has issued a warning letter for the remaining four deviations.

The warning letter has identified the following cGMP lapses at this facility: non-validationof analytical methods to test APIs, incomplete cleaning validation for some manufacturingequipment, out-of-specification investigations data did not include analysis of all availabledata, and lack of responsibility of the quality unit to ensure API manufactured were incompliance with GMP.

This facility generates annual revenue of ~USD65m, of which ~USD30m is from Naproxen,which is not included in the import alert. DRL can continue to supply this product to itscustomers. Supply of remaining products (contributing ~USD35m in revenue) will have tobe suspended till the import alert is resolved. These are low-margin products for DRL,with gross margins of 25-30%, implying EBITDA hit of USD8m-10m on annual basis.Our estimates factor in the impact of this development for DRL.

Germany: Cost structure aligned for a pure generic modelOver the past three years, DRL has significantly altered its German operations throughcost cutting to align it with the low-margin pure generic market. While the high costacquisition of Betapharm seems to have been mistimed, we believe that, contrary to pasttrend, the German operations will not be a drag on the company's PAT in the comingyears.

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

Product Launch Status FY12E FY13E

Generic Arixtra Launched in Jul-2011 310 1,122

Generic Accolate Launched 366 358

Generic Zyprexa Likely launch on 23-Oct-2011 3,503 -

Generic Prevacid Launched on 15-Oct-2010 1,063 -

Generic Exelon Expected in August 2012 - 60

Generic Clarinex Expected in January 2012 101 124

Generic Geodon Expected in Mar 2012 79 385

Generic Lipitor Expected in May 2012 229

Total 5,421 2,277

DRL US portfolio - one-time revenue contribution (INR m)Product Launch Status FY12E FY13E

Generic Arixtra Launched in Jul-2011 1,721 4,488

Generic Accolate Launched 731 715

Generic Zyprexa Likely launch on 23-Oct-2011 7,005 -

Generic Prevacid Launched on 15-Oct-2010 3,038 -

Generic Exelon Expected in August 2012 - 172

Generic Clarinex Expected in january 2012 169 206

Generic Geodon Expected in Mar 2012 225 1,100

Generic Lipitor Expected in June 2012 917

Total 12,889 7,598


August 2011 126

Dr Reddy's

Financials and valuations : Dr Reddy's


Basic (INR)

EPS 6.3 65.6 68.6 81.1

Cash EPS 81.9 89.9 95.6 109.7

BV/Share 254.2 271.8 304.7 345.9

DPS 0.8 8.2 8.6 10.1

Payout (%) 28.2 29.2 29.2 29.2

Valuation (x)

P/E 22.0 21.1 17.8

Cash P/E 16.1 15.1 13.2

P/BV 5.3 4.7 4.2

EV/Sales 3.5 3.2 2.9

EV/EBITDA 16.7 17.1 14.4


Return Ratios (%)

RoE 2.5 24.1 22.5 23.5

RoCE 2.6 16.7 15.4 17.0






Leverage Ratio

Current Ratio (x) 1.9 2.0 2.1 2.2

Debt/Equity (x) 0.3 0.5 0.5 0.4



Interest/Dividends Recd. 614 926 -155 -163


(Inc)/Dec in WC 3,629 -6,531 1,650 -853


CF from Oper. incl EO Exp.17,460 8,612 15,159 14,959

(inc)/dec in FA -6,182 -12,566 -13,355 -9,245

(Pur)/Sale of Investments -3,113 3,534 1,500 0


Change in networth 103 -4,726 0 0

(Inc)/Dec in Debt -5,006 8,877 0 0

Other Items -1,973 0 0 0

Dividend Paid -301 -3,235 -3,386 -4,001

CF from Fin. Activity -7,177 916 -3,386 -4,001

Inc/Dec of Cash 988 496 -82 1,713


Closing Balance 6,584 7,080 5,647 7,360

Note: Reported cashflow differs due to acquisitions & change to IFRS

reporting from FY09 onwards


Net Sales 70,277 74,693 81,754 90,323

Change (%) 1.2 6.3 9.5 10.5

Other Income 617 1,115 493 549


EBITDA 14,202 15,620 15,370 18,065

Margin (%) 20.2 20.9 18.8 20.0

Deprec. & Amortization 12,763 4,107 4,555 4,845

EBIT 1,439 11,513 10,814 13,220

Net Interest Exp 75 132 806 712

Forex (Gains)/Losses -72 57 -158 0

PBT & EO Expense 2,053 12,439 10,659 13,057

Change (%) -151.4 505.9 -14.3 22.5


Tax 985 1,403 1,706 2,089

Tax Rate (%) 48.0 11.3 16.0 16.0

Reported PAT 1,068 11,036 8,953 10,968

Adjusted Net Profit 1,068 11,099 11,615 13,725

Change (%) -120.7 939.2 4.6 18.2

Margin (%) 1.5 14.9 14.2 15.2


Equity Share Capital * 844 846 846 846

Reserves 42,071 45,144 50,712 57,679

Net Worth 42,915 45,990 51,558 58,525

Loans 14,695 23,572 23,572 23,572

Deferred Liabilities/Tax 1,438 87 87 87


Net Fixed Assets 22,769 29,955 38,755 43,155

Investments 3,843 309 -1,191 -1,191

Goodwill/Intangible Assets 13,973 15,246 15,246 15,246

Curr. Assets 38,463 47,560 42,028 45,748

Inventory 13,371 16,059 15,533 16,258



Others 6,548 8,157 6,132 6,774



Other Current Liabilities 10,678 14,941 10,628 10,839


Appl. of Funds 59,048 69,649 75,217 82,184

* IFRS reporting from FY09 onwards. Financials prior to FY09 are as

per US GAAP E: MOSL Estimates

This page is

left blank

intentionally

August 2011 127


Glenmark PharmaMEDICINES

Score

CMP: INR318 GNP IN

TP: INR310 NeutralNeeds to improve returns ratios

M: Mix 2/10

Acute therapeutic segments such as dermatology,

AI and respiratory segments dominate the sales

mix, contributing 76% of the company's revenue.

Glenmark has been trying to expand its presence

in chronic therapy segments.

Over the past 10 years, Glenmark has tried to

diversify its therapeutic mix as the contribution to

revenue from the respiratory, gastro and

dermatology segments has fallen significantly.


Glenmark lags other leading companies when it

comes to brand equity among doctors.

The only therapeutic segment in which Glenmark

has made its mark is dermatology, in which it ranks

second in the industry, with market share of 11.5%.

However, Glenmark has gradually improved its

prescription ranking in the gynecology and CVS

segments over the past four years.


Glenmark has better distribution in metros and tier-

I cities as it derives 70% of the revenue from such

areas, which is above average compared with the

industry.

Distribution in metros has increased significantly

over time while the contribution of other geographies

to revenue has fallen.

Glenmark has a field force of 2,078 MRs.


Glenmark has launched fewer new products

compared with some of its peers.

It launched 26 new products annually over the past

four years.

Glenmark's revenue growth is led by both existing

products new launches over the past four years.



03/10A 24,616 3,310 11.6 174.9 27.3 3.6 14.1 12.7 4.2 17.3

03/11A 29,491 3,548 12.5 7.2 25.5 4.2 17.4 13.4 3.6 17.7

03/12E 37,007 4,584 16.1 29.2 19.7 3.2 17.0 15.3 2.8 10.4

03/13E 40,693 5,612 19.7 22.4 16.1 2.6 17.1 16.3 2.5 11.1



1,6,12 Rel. Perf. (%) 10/22/20

M.Cap. (INR b) 85.8

M.Cap. (USD b) 1.9



Back

grou

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


August 2011 128

August 2011 129

Glenmark Pharma


Glenmark has outperformed the average industry

growth with revenue CAGR of 18.6% over FY05-

11. The company scaled up its business rapidly

albeit on a very low base.

We expect Glenmark to post revenue CAGR of

17% over FY11-13, outperforming the industry, given

its low base and aggressive focus on driving growth

in this business.


Glenmark has shown marginal increase in MR

productivity over the past six years.

Glenmark's MR growth was 14.2% compared with

revenue growth of 17.3%, indicating improved

productivity.

Revenue per MR improved from INR3.1m in 2004

to INR3.6m in 2010. At this level productivity is in

line with average.


We are neutral on Glenmark's international

business despite its ramp-up in emerging markets

due to the low return ratios in these markets.

We expect international formulation business to

record 17% CAGR over FY11-13.

Option values include potential NCE out-licensing

and the launch of Crofelemer in some emerging

markets.


We expect topline of 18.3% CAGR over FY11-13leading to EPS CAGR of 25.8%.

Reduction in interest costs in the long-term willpartly drive earnings growth.

CEO Profile


Return ratios have been muted due to the working-

capital intensive nature of Glenmark's operations.

Glenmark is valued at 19.7x FY12E and 16.1x

FY13E consolidated earnings.

Maintain Neutral with a target price of INR310 (15x

FY13E EPS plus DCF value of Crofelmer and Para

IV products).

CEO

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


200

250

300

350

400


Glenmark Pharma Sensex - Rebased

August 2011 130

Glenmark Pharma

Needs to improve return ratiosRanks 25th in the domestic market

Glenmark is a niche player in the domestic formulations segment with strong presence in a

few niche therapeutic areas like dermatology. It ranks twenty-fifth in the industry with market

share of 1.53%. The company has been gradually increasing its presence in chronic therapy

areas. Glenmark is among the few companies to have improved the productivity of its

workforce over the years.

1. Mix: 2/10

Acute therapeutic segments account for 76% of revenue; dermatology, CVS,AI, respiratory segments dominate sales

Acute therapeutic segments, in which Glenmark has 76% market share, dominateGlenmark's sales mix. The top four therapeutic segments, including dermatology, CVS, AIand respiratory segments, account for about 76% of Glenmark's domestic formulationrevenue. Its top therapy segment, dermatology, contributes 29% to total revenue. Overthe past 10 years, the contribution of CVS and AI segments increased while that ofrespiratory, gastro and dermatology segments fell. Glenmark has been trying to expand itspresence in chronic segments.

Acute segments contributes 76% to the revenue


Domestic formulations

contribute ~30% to revenue


business, which contributed

30% to Glenmark's revenue in

FY11 and an estimated 27% to

EBITDA, is a leading

contributor to Glenmark's top-

line and profitability.

Interestingly, unlike other

leading generic companies,

Glenmark's profitability from


business is lower than from its

regulated market generics

business.

EBITDA Contribution

Glenmark ranks twenty-

fifth in the domestic

formulations segment

Glenmark ranks twenty-fifth in


market and has a market share

of 1.53%. However, over the

past five years, the company

improved its market share from

1.26% in 2006 to 1.53%

currently. Over the past six

years, Glenmark's revenue

posted 19% CAGR and the

industry posted 14% CAGR.

Glenmark has improved

market share over the last

5 years


DF EBITDA

27%

Non-DF

EBITDA 73%

1.26

1.3

1.4

1.5

1.5

25.9

1718.520.121.8

2006 2007 2008 2009 2010


FY01Others7%

GI10%

Gynaecology

9%

Dermatology37%

AI11%

CVS0%

Respiratory22%

Diabetes0%

Pain4%

FY05

Diabetes8%

CVS5%AI

11%

Respiratory15%

Pain13%

Dermatology33%

Others3%

GI7%

Gynaecology5%

Gynaec 5%GI 3%

Others 6%

Pain 6%

Diabetes 6%

AI 14%

Respiratory 15%CVS 17%

Dermatology 28%

FY11

August 2011 131

Glenmark Pharma


Glenmark lags in terms of brand equity except in dermatology

Glenmark lags leading companies covered in this report in terms of brand equity. The onlytherapeutic segment in which Glenmark made its mark is dermatology, in which it rankssecond in the industry with market share of 11.5%. In the respiratory segment, Glenmarkranks ninth with market share of 2.8%.

Glenmark has maintained its strong brand equity in the dermatology segment over theyears with prescription ranking of No2 and 8% of the prescription market share. It hasimproved its prescription ranking in the gynecology and CVS segments over the past fouryears.

Glenmark's prescription rankingJan-07 Jan-08 Jan-09 Jan-10 Oct-10

Derma 2 2 2 2 2


Gynaec 16 12 9 11 8


CVS - 24 21 20 17

Anti-infectives - 23 23 20 23




2.8

11.5

Respiratory Dermatology

18.3

25.4

16.218.4

Respiratory Dermatology


August 2011 132

Glenmark Pharma

3. Distribution and reach: 5/10Glenmark derives 70% of its revenue from metros and class-I towns against the industryaverage of 63%. Over the past four years revenue CAGR for all geographies except ruralareas has been better than that of the industry average.

Glenmark: Geographical distribution of revenues (%) Geographical distribution of revenues: Industry (%)

Glenmark: Geography-wise growth rates (%) Industry: Geography-wise growth rates (%)



Glenmark's revenue growth from new launches has been graduallydeclining over the past few years

Glenmark's revenue growth was led mainly by new launches in CY07, CY08 and CY09but in CY10 the contribution of existing brands to revenue growth was higher than that ofnew launches. Glenmark launched 26 new products annually on average over the pastfour years. Average revenue per new launch has risen over the past four years fromINR66m to INR90m.

32.2 34.2 40.0 43.6 43.5

30.2 28.3 25.7 25.5 26.7

18.3 17.2 16.0 15.4 15.6

19.3 20.3 18.3 15.5 14.3



27.6 28.9 28.9 30.0 31.0

32.6 31.3 31.6 32.5 32.0

19.2 19.0 19.5 19.4 19.6

20.6 20.9 20.0 18.1 17.3



25.7

27.538.4

27.731.5

16.3

7.512.5

12.7

27.1

10.5

12.5

15.8

-1.1

7.1

26.4

CY07 CY08 CY09 CY10


2.5

26.2

17.7

14.7

17.6

20.7

16.415.6

7.9

23.5

13.0

17.5

11.1

17.5

9.5

14.0

CY07 CY08 CY09 CY10


August 2011 133

Glenmark Pharma

5. CAGR and scale up: 8/10Glenmark posted domestic formulation revenue CAGR of 19% over FY05-11, much fasterthan the industry average. We believe the company can sustain its out-performance of theindustry by changing its therapeutic mix in favor of chronic therapeutics segments andconsistent improvement in workforce productivity. We expect Glenmark's domesticformulations business to post 17% CAGR over FY11-13 against the industry's 15-16%CAGR.

Glenmark: domestic formulations performance

Glenmark: New launches Glenmark: Growth composition (%)




Glenmark's above-average MR productivity leads growth

Glenmark's revenue from the domestic formulations business grew at 17.3% CAGR overFY04-10 and its sales force strength increased by 14.2% CAGR, implying improvementin salesforce productivity. Glenmark's MR productivity improvement is visible from thefact that, in 2004, Glenmark derived sales of INR3.1m per MR, which went up to INR3.6min FY10.

57 52 46 53

90.396.798.3

65.7

CY07 CY08 CY09 CY10


11.4 12.99.5 8.7

8.7 5.67.5

17.2

CY07 CY08 CY09 CY10


3,93

7

4,29

0

5,45

4

6,37

2

7,52

9

8,44

7

9,96

7

11,5

62

16.018.0

12.2

18.116.8

9.0

27.1


DF revenue (INR m) Grow th (%)

August 2011 134

Glenmark Pharma

7. Non-domestic business snapshot: 3/10Positives Trying to build a differentiated portfolio in the US by targeting niche segments of

dermatology, oral contraceptive and controlled substances. One of the most successful NCE players from India despite setbacks on some NCEs.

Glenmark has generated upfront and milestone income of USD187m from NCEs sofar.

Glenmark is gradually ramping up its presence in emerging markets.

Risks and concerns Working capital intensive operations, especially in emerging markets NCE out-licensing has become difficult and time-consuming, which may lead to higher

R&D expenses in coming years.

Key news flows/triggers Stoppage of Oxycodone supplies by other generic players in the US will make Glenmark

the sole player. Launch of Calcipotriene ointment in the US makes Glenmark the sole supplier. Launch of generic Malarone in the US under agreement with GSK. Signing of NCE out-licensing deals with MNCs.

Impact assessment We are neutral on Glenmark's international business given the working capital

intensiveness of its emerging market business. We expect the international formlation business to record 17% CAGR for FY11-13. Option values include potential NCE out-licensing and the launch of Crofelemer in

some emerging markets.

Glenmark: Salesforce productivity


936 2,078

3.1

3.6

2004 2010


1.9

14.211.5

2.7

Glenmark Industry



August 2011 135

Glenmark Pharma

8-9. Earnings growth and stock attractiveness: 17/30Sustaining growth in existing businesses and funding of NCE research expenses has resultedin high leverage for Glenmark. Debt has particularly increased after the credit crisis ofFY09 and has not reduced significantly since. We believe the key determinant for Glenmark'svaluations will be its ability to de-leverage without sacrificing growth traction. High debtand high working capital are our key concerns for Glenmark.

Expect 26% EPS CAGR over FY11-13: We expect Glenmark to record 18.3% top-line CAGR over FY11-13 led by 17.1% CAGR in the generic business and 18% CAGR inbranded generic business. EPS CAGR is estimated at 26% over FY11-13. Glenmark hasdifferentiated itself among Indian pharmaceutical companies through its success in NCEresearch (resulting in licensing income of USD187m so far). Given this success, Glenmarkhas been aggressive in adding new NCEs to its pipeline, which will put pressure on itsoperations in the short to medium term as it will have to fund R&D expenses for theseNCEs on its own until they are out-licensed. High interest costs and likely absence ofstrong forex gains will temper down the strong operational performance for FY12. Lowreturn ratios is our main concern. The stock is valued at 19.7x FY12E and 16.1x FY13Eearnings. Maintain Neutral with a target price of INR310 (15x FY13E EPS+ DCF valueof INR14 for Para-IV pipeline and crofelemer).

Sales mix (INR m)FY09 FY10 FY11 FY12E FY13E FY11-13E

CAGR (%)

Formulations 19,188 21,989 25,259 30,821 35,907 19.2

Branded 11,303 14,116 15,963 19,163 22,188 17.9

India 6,372 7,529 8,447 9,967 11,562 17.0

Europe-branded 996 1,363 1,528 1,669 1,795 8.4

Latam-branded 1,580 1,361 1,919 2,478 2,908 23.1

Semi-regulated mkts 2,355 3,864 4,070 5,048 5,923 20.6

Generics 7,885 7,873 9,296 11,658 13,719 21.5

Latin America 400 343 401 478 561 18.3

North America 7,338 7,230 8,352 10,370 12,168 20.7

Europe 147 299 544 810 990 35.0

API 1,972 2,627 3,337 3,610 4,026 9.8

NCE Income 0 0 895 2,475 660

Gross Sales 21,160 24,616 29,491 36,906 40,592 17.3

EBITDA Contribution

Source: Company/MoSL

DF EBITDA

27%

Non-DF EBITDA

73%

Glenmark Pharma RoE & RoCE (%) Glenmark Pharma one year forward PE

18.4

37.4

137.7

13.10

40

80

120

160

Aug

-06

Mar

-07

Aug

-07

Feb

-08

Aug

-08

Feb

-09

Aug

-09

Feb

-10

Aug

-10

Feb

-11

Aug

-11


17.117.017.4

14.1

7.0

16.315.3

12.7 13.4

8.0

2009 2010 2011 2012E 2013E

RoE RoCE

August 2011 136

Glenmark Pharma

Glenmark non-domestic business: key trends, triggers & risk

Trying to build a differentiated portfolio in the USGlenmark is focusing on filing products in the niche segments of dermatology, controlledsubstances and hormones for the US market. This coupled with a few FTF filings areexpected to be key growth drivers for the US business. However, we are cautious aboutthese product categories given the complexities of manufacturing and the stretched USFDA approval time-lines for ANDA approvals. We estimate Glenmark's US portfolio (ex-upsides from one-off FTF opportunities) to post revenue of 21% CAGR over FY11-13.

ANDAs filed/marketed (includes partner filings)As of 31 March 2009 As of 31 March 2010 As of 31 March 2011

Dermatology 18 20 21

Controlled substance 6 9 3

Modified release 2 6 9

Hormones 7 15 15

Para-IV FTF 9 9 13

Normal generics 45 46 48

Total 87 105 109


Para-IV pipeline not significantUnlike some of its peers, Glenmark has not focused on developing a strong patent challengepipeline for the US. It has a pipeline of six Para-IV products (of which five are FTFs)targeting an innovator market size of USD2.3b.

Glenmark: Para IV pipelineProduct Indication Brand Innovator Market Status

Size

(USD m)

Ezetimibe Cholesterol Zetia Schering 1500 Has tentative approval with FTF. Sued on 22-Mar-07. 30-month

(Merck) stay period expired in Oct-2010. Court case started in May-10. Signed

licensing & cost-sharing deal with Par Pharma on 04-May-10 for small

upfront payment. Par to share risks/costs of litigation as well as profits.

Settled out-of-court with innovator. Launch scheduled on 12-Dec-2016

Tradolapril + Anti- Tarka Abbott/ 58 Glenmark is FTF and was sued on 07-Dec-07. 30-month stay expired in

Verapamil hypertensive Sanofi May-2010. Received final approval on 10-May-2010. Innovator's summary

motion rejected. Glenmark launched "at-risk" in Jun-10; Federal Jury ruled

against Glenmark in Jan-2011 and awarded Abbott USD16m in damages

post which Glenmark has stopped further sales. District Court Judge's ruling

will determine the final outcome with losing party having right to appeal to

the Federal Circuit Court

Fluticasone Dermatology Cutivate Nycomed 48 Glenmark seems the FTF. Sued on 12-Dec-08. Received final approval

lotion 0.005% on 02-May-2011. Settled out-of-court with Nycomed for potential launch

in Mar-2012. Glenmark will pay mid-teens royalty to Nycomed. Only one

other generic filing till date

Atovaquone Anti-malarial Malarone GSK 58 Glenmark has FTF. GSK sued Glenmark on 17-Aug-09. Settled out-of-court

Proguanil HCl on 12-Apr-10. Launch scheduled in Sep-2011 with 180-day exclusivity. No

250mg/100mg tablets AzG. Glenmark seems to be the only filer till and date

Oxycodone NA Pre-1938 13 Not an FTF product. Glenmark's partner Lehigh Valley Tech (LVT)

Hydrochloride product has filed NDA with US FDA since it is a pre-1938 product. NDA

Capsules & approval awaited. If successfully approved all other generic players

Liquid Solution will have to file ANDAs referencing Glenmark's product & hence

could give Glenmark ~18 months of indirect exclusivity. Product has

to be manufactured in the US as it is a controlled substance

August 2011 137

Glenmark Pharma

Glenmark: Para IV pipelineProduct Indication Brand Innovator Market Status

Size

(USD m)

Calcipotriene Dermatology Dovonex Leo Pharma 93 Leo Pharma discontinued marketing in 2007 when annual revenues were

ointment USD93m as it planned to shift prescriptions to a combination but has not

been successful. Glenmark currently is the only approved product on the

market. It has tied up with Taro exclusively for branding & promoting the

product. Current revenue run-rate will be much lower than USD93m (likely to

be USD25m for FY11) as the product has not been promoted for the past 3

years. Glenmark to receive small milestone income prior to launch & then

royalty on Taro's sales. Royalty will be minimum 30%

Eszopiclone Insomnia Lunesta Sunovion 787 Settled with Sepracor on 9th Aug 2010. As per settlement Glenmark

tablets can launch after 30-Nov-2013, which is 2.5months prior to the expiry of '673

patent, or after 30-May-2014 if Sepracor obtains pediatric exclusivity. Other

Para IV filers are Teva, DRL, Cobalt, Orchid, Lupin, Roxane, Wockhardt and

Sun. Settled with Lupin, Wockhardt, Cobalt and Teva. Received tentative

approval on 22- Dec-10

Hydrocortisone Eczema Locoid Astellas 38 Glenmark has FTF. Sued on 04-Nov-10. The 30-month stay expires in May-

Butyrate (Dermatology) Lipo- /Triax 2013. Patent expires on 03-Jun-2014. Settled out-of-court on 25-May-2011

cream with launch scheduled in 3QFY12. There will be no AzG, but Glenmark will

have to pay royalty to the innovator. Royalty amount/ percentage not disclosed

Rosuvastatin Cholesterol Crestor AstraZeneca 3600 Glenmark not sued till date. The '314 patent expiring in 2016 has been upheld

Calcium by court. Astra sued 8 generic players in Apr-10 for the '152 patent expiring

on 02-apr-2018 and '618 patent expiring on 17-Dec- 2021. Glenmark's 30-

month stay expires in Nov-2012. Patent litigation is on. No timelines known

Atomoxetine Attention- Strattera Eli Lilly 530 9 generic players have FTF status alongwith Glenmark. Many generic filings

HCl Deficit/ with Para-IV status - Teva, Sandoz, Actavis, Mylan, Glenmark, Cadila, Apotex,

Hyperactivity Aurobindo, Synthon. DRL has tentative approval

(ADHD)

Fluocinonide Dermatology Vanos Medicis 30 Perriogo seems to be the FTF. Other generic players with Para-IV filings

include Glenmark, Taro & Nycomed. Perrigo has settled with launch scheduled

in Dec-2013. Glenmark & Taro have also settled with launch scheduled in

Dec-2013. Glenmark's 30-month stay expires in Nov-2011


Tarka has witnessed negative news flowOn 15 January 2011, a US jury ruled against Glenmark on one of the contentions of thepatent litigation for generic Tarka (a USD58m brand) at a US District Court (lower court).The federal jury rejected Glenmark's challenge to the validity of a Sanofi patent thatexpires in February 2015. Glenmark had argued that the patent covered an invention thatwas protected by an expired patent.

Abbott markets the drug in the US and sought USD25m as compensation from Glenmarkand the US jury awarded damages of USD16m. The District Court judge will now have toeither accept or reject the jury ruling on this aspect of invalidation and give a ruling onother aspects of the case. The final outcome of the case will depend on what the judgerules on all the aspects of the case (the ruling is expected in next few weeks).

August 2011 138

Glenmark Pharma

Glenmark undertook an "at-risk" launch of generic Tarka in the US in June 2010. Glenmarkgenerates US$5m in revenue per quarter from generic Tarka with about 55% PAT marginsresulting in USD2.75m PAT per quarter. For FY11, we estimated one-time PAT of USD8mfrom this opportunity for Glenmark. The jury ruling implies potential damages of USD16mwhich Glenmark will have to pay Abbott if it loses the case. Glenmark has temporarilyhalted sales of generic Tarka until the District Court judge gives a ruling.

Identifying niche opportunities in the USBesides Para-IV filings, identifying niche, low-competition opportunities in the US is a keyfocus area of Glenmark's US strategy. It has met with some success in this strategy withOxycodone and Calcipotriene.

(A) OxycodoneGlenmark's US partner, Lehigh Valley Technologies (LVT), received NDA approval forOxycodone 5mg capsule and 100mg/5mL oral solution in June 2010. LVT will make theproduct and while Glenmark will have exclusive distribution rights for these dosages in theUS (market size of USD13m/year).

Background to the NDA filingSince Oxycodone is a pre-1938 product all generic players launched their generic versionsin the US without US FDA approvals. The US FDA has been gradually trying to get theproducts approved. As part of this process, LVT filed an NDA for the 5mg capsules and100mg/5mL oral solution with the US FDA, which has been approved.

As per US FDA guidelines, a successful NDA approval will force the remaining genericcompanies to withdraw from the market and re-file their products with reference to LVT'sapproved NDA. The US FDA will issue a warning letter to the remaining generic playersto withdraw their versions from the market after it is convinced that it will not lead to drugshortages and that Glenmark/LVT will be able to meet the demand.

US FDA approval time-lines for ANDAs is approximately for 18-24 months. This willresult in Glenmark/LVT being the only approved Oxycodone player in the market for thenext 24 months.

Sole player - may be able to raise pricesBeing the sole player in the market, Glenmark/LVT will enjoy indirect exclusivity for thedosages until other generic players receive new approvals. This product will qualify as aniche (high margin) opportunity targeted by Glenmark in the US market. Absence of othergeneric players (for ~24 months) will give it an opportunity to raise prices of Oxycodone,enhancing the size of the opportunity to US$25m-30m over the next 12 months.

(B) CalcipotrieneGlenmark is the only US FDA approved player in the Calcipotriene ointment market. LeoPharma discontinued marketing in 2007 when annual revenue was USD93m as it plannedto shift prescriptions to a combination of Calcipotriene & Betamethasone but has not beensuccessful.

Glenmark is the only approved product on the market. It has tied up with Taro exclusivelyto brand and promote the product. Current revenue run-rate will be lower than US$93m(likely to be USD25m) as the product has not been promoted over the past three years.

August 2011 139

Glenmark Pharma

We expect Glenmark/Taro to launch this product in FY12. It will receive a small milestoneincome prior to launch and then royalty on Taro's sales. While Glenmark has not disclosedfinancial details of its tie-up with Taro, we believe the royalty will be fairly remunerative.

Most successful NCE company from India so farGlenmark has been one of the most successful NCE companies from India, generating~USD202m in upfront and licensing income over the past decade. This is despite its beinga relatively late entrant in this segment compared with the likes of Ranbaxy and Dr Reddy's.

Glenmark - NCE Pipeline SnapshotMolecule Indication Clinical Trials Out-licensing Licensing Income (USD m)

Partner Upfront Mile- Total Estimated

stones Deal Value

Melogliptin Diabetes - DPP IV Phase-IIb completed Initially Merck KgA 31 - Partner returned

(GRC 8200) Inhibitor but molecule returned molecule

to Glenmark

Revamilast Rheumatoid Arthritis, Initiated Phase-II - - - -

(GRC 4039) Asthma trials in UK, Poland,

India, Czech

Republic and Philippines

in Aug-2011

Tedalinab Neuropathic pain, Phase-I completed. - - - -

(GRC 10693) Osteoarthritis and To initiate Phase-II

Inflammatory pain. in FY12

Initially targeted for

Neuropathic pain

GRC 15300 Osteoarthritis, Phase I completed Sanofi 20 - 325

Neuropathic pain in UK

GBR 500 Crohn's disease & Phase I completed Sanofi 50 - 613

Multiple Sclerosis in US

GBR 600 Acute Stroke/ To initiate Phase-I - -

Coronary Syndrome, in UK

Thrombosis

Cardiovascular Disorders

GRC 17536 Osteoarthritis, Phase I in - - -

Neuropathic pain & Netherlands

Respiratory disorders

Oglemilast Asthma, COPD Partner stopped Forest/Teijin 16 25 Clinical development

clinical development stopped

post Phase-IIb

GRC 6211 Osteoarthritis, Partner stopped Eli Lilly 45 Clinical development

Neuropathic pain, clinical development stopped

Dental pain, post Phase-IIb

Incontinence

Crofelemer Adult acute Completed Phase III In-licensed from 15 Glenmark holds rights

infectious diarrhoea, in US and Phase IIb Napo Pharma only for 140 RoW

HIV-related diarrhoea in India markets and not for

regulated markets

Total 177 25


August 2011 140

Glenmark Pharma

Out-licensing of NCEs imperative to control R&D costsGlenmark has a pipeline of Eight NCEs undergoing clinical development. Since NCEresearch has been a differentiating factor for Glenmark compared with its peers, andsince it is the most successful NCE research company from India so far, the company hasbeen prompted to aggressively add new NCEs to its pipeline. As these NCEs progress inclinical trials, they will put pressure on Glenmark's P&L in the short to medium term as itwill have to fund R&D expenses for these NCEs on its own. Hence, we believe, out-licensing of some of these NCEs is imperative to control the expected increase in R&Dcosts.

Crofelemer: Not a big opportunityGlenmark has in-licensed this NCE from Napo and holds distribution and marketing rightsfor 140 emerging markets. It does not hold rights for the product in regulated markets. Alaunch across 140 emerging markets will be phased.

Glenmark has, in the past, indicated peak revenue of USD80m from this product (acrossunregulated markets that Glenmark will target). Revenue ramp-up will be phased fromFY13/14 and is likely to take a few years.

We believe the profitability of this product for Glenmark will not be very high due to:1. Relatively low profitability (compared with other NCEs) given the difficulty in

manufacturing such products and lower flexibility in pricing the product since it isrelated to HIV.

2. Payment of single-digit royalty on sales by Glenmark to Napo.3. We do not expect a big upside for Glenmark from this opportunity. We estimate the

DCF value of this opportunity at INR9/share for Glenmark.

Glenmark - Crofelemer DCF Valuation(USD m) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22

Total Market Size 0 0 15 75 150 255 380 380 380 80 80 80

Regulated Markets 0 50 100 175 300 300 300 0 0 0

Semi-regulated Markets (SRM) 15 25 50 80 80 80 80 80 80 80

Glenmark - Upside from SRM

Revenues 15 25 50 80 80 80 80 80 80 80

EBITDA Margin (%) 30 30 30 30 30 30 30 30 30 30

EBITDA 5 8 15 24 24 24 24 24 24 24

Royalty to Napo at 8% of

revenues (assumed) 1 2 4 6 6 6 6 6 6 6

PAT 3 6 11 18 18 18 18 18 18 18

Glenmark - Upside from Regulated Markets

Salix/Napo's revenues 50 100 175 300 300 300

Cost of API (%) 10 10 10 10 10 10

Glenmark's revenue from API supplies 5 10 18 30 30 30

PAT margin (%) 15 15 15 15 15 15

PAT from API supplies 0.8 2 3 5 5 5

Total upside for Glenmark 3 6 13 20 22 22 22 18 18 18

WACC (%) 14 14 14 14 14 14 14 14 14 14

Year 0 1 2 3 4 5 6 7 8 9 10 11

PV of cash inflow 0 0 3 4 7 11 10 9 8 5 5 4

Exchange Rate (INR/USD) 45.0 44.5 43.0 42.0 40.7 39.5 38.3 37.2 36.1 35.0 33.9 32.9

PV (INR m) 0 0 109 177 302 415 386 328 279 189 161 137

Total PV (INR m) 2,484

Total PV per share (INR) 9


Patent Expiry

August 2011 141

Glenmark Pharma

Strong growth in emerging markets but working capital intensiveGlenmark's revenue in emerging markets have grown 4x over FY05-11, albeit on a lowbase. These include markets like Latin America, Australasia, Africa, Russia and the CISand parts of eastern and central Europe. Barring a slowdown in FY09, due to the creditcrisis, the portfolio has been growing steadily over the years.

However, we believe this growth traction has been partly achieved by expanding workingcapital in the business leading to increased borrowings. We believe Glenmark must strikean optimum balance between growth and working capital in these markets. We expectthis portfolio to record 19% revenue CAGR over FY11-13, partly impacted by a potentialrupee appreciation against the US dollar.

High debt, working capital key concernsHigh net debt of over INR18b and net working capital of ~INR18b are key concernareas. While Glenmark is attempting to reduce its working capital requirements, we believeit may not be easy for it to reduce it significantly without sacrificing growth, resulting inslower progress on this front.

Sales ramp-up v/s net working capital (INR b)

20.924.6

28.6

34.5

40.0

16.418.8

21.1

17.4

10.8

6.8

18.015.5

11.7

7.64.6


Revenue (Ex-NCE income) Non Cash WC


August 2011 142

Glenmark Pharma

Financials and valuations: Glenmark Pharma


Basic (INR)

EPS (Fully diluted)* 11.6 12.5 16.1 19.7

Cash EPS 15.9 15.8 19.9 23.9

BV/Share 87.6 75.4 99.7 121.4

DPS 2.0 3.7 3.7 5.0

Payout (%) 3.8 5.2 3.5 5.1

Valuation (x)

P/E (Fully diluted) 25.5 19.7 16.1

PEG (x) 3.5 0.7 0.7

Cash P/E 20.1 15.9 13.3

P/BV 4.2 3.2 2.6

EV/Sales 3.6 2.8 2.5

EV/EBITDA 17.7 10.4 11.1


Return Ratios (%)

RoE 14.1 17.4 17.0 17.1

RoCE 12.7 13.4 15.3 16.3



Debtor (Days) 160 140 126 125



Leverage Ratio (x)


Debt/Equity 0.8 1.0 0.7 0.5



Interest/Dividends Recd. 722 1,405 562 646

Direct Taxes Paid -388 -2,029 -994 -976

(Inc)/Dec in WC -2,441 1,530 -2,368 -2,275


CF frm Op.incl EO Exp. 3,857 6,829 7,012 6,373

(Inc)/Dec in FA -3,970 810 -2,500 -2,500

CF from Investments -3,970 682 -2,500 -2,500

Change in Networth 4,386 -7,521 0 0

Inc/(Dec) in Debt -2,151 2,701 -3,000 -2,500

Interest Paid -1,640 -1,566 -1,482 -1,276

Dividend Paid -126 -236 -236 -315

CF from Fin. Activity 468 -6,621 -4,718 -4,090

Inc/Dec of Cash 354 890 -207 -217

Add: Beginning Balance 715 1,069 1,959 1,752

Closing Balance 1,069 1,959 1,752 1,535

Note: Reported cashflow differs due to acquisitions & change to IFRS

reporting from FY09 onwards


Net Sales 24,616 29,491 37,007 40,693

Change (%) 18.0 19.8 25.5 10.0

Materials Consumed 8,061 9,918 11,396 13,211

Personnel Expenses 3,425 5,103 5,613 6,455

R&D Expenses 1,200 1,386 1,899 2,442

Other Expenses 5,966 7,161 8,288 9,608


EBITDA 5,963 5,923 9,811 8,977

Change (%) 76.4 -0.7 65.7 -8.5

Margin (%) 24.2 20.1 26.5 22.1

Adjusted EBITDA 5,963 5,028 7,336 8,317

Margin (%) 24.2 17.6 21.2 20.8

Depreciation 1,206 947 1,086 1,186

EBIT 4,757 4,976 8,725 7,791

Interest 1,640 1,566 1,482 1,276

OI & forex gains/losses 722 1,405 562 646


Change (%) 42.8 25.4 62.1 -8.2

PBT after EO Exp. 3,839 4,816 7,805 7,162

Tax 529 237 994 976

Tax Rate (%) 13.8 4.9 12.7 13.6

Reported PAT 3,310 4,578 6,812 6,186

Adj PAT** 3,310 3,548 4,584 5,612

Change (%) 194.3 7.2 29.2 22.4

Margin (%) 13.4 12.4 13.3 14.0

** - Excl NCE upsides & incl adjustment for R&D exp capitalization



Fully Diluted Eq Cap 284 284 284 284

Reserves 23,282 20,102 26,678 32,549

Net Worth 23,551 20,372 26,948 32,819


Loans 18,693 21,258 18,258 15,758

Deferred liabilities 710 -1081 -1081 -1081


Gross Block 21,586 25,899 28,399 30,899

Less: Accum. Deprn. 3,929 4,876 5,962 7,148

Net Fixed Assets 17,656 21,023 22,437 23,751

Capital WIP 6,224 1,100 1,100 1,100


Intangibles (net) 7,259 10,329 9,606 8,934

Curr. Assets 24,210 25,988 30,608 33,643

Inventory 7,085 8,070 10,407 11,483



Others 5,273 4,651 5,676 6,689



Provisions 200 44 400 450


Appl. of Funds 43,085 40,816 44,391 47,763

E: MOSL Estimates

N O T E S

August 2011 143


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