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Sector update | July 2012

Healthcare

Health is wealth
Nimish Desai (NimishDesai@MotilalOswal.com); +91 22 3982 5406 Amit Shah (Amit.Shah@MotilalOswal.com); +91 22 3982 5423 July 2012 1

Health is wealth
Key arguments .... 3-14 Expect 28% EPS CAGR . 4-6 Base US business to report healthy growth .. 5 US product pipeline getting stronger . 6 Strong backward integration .. 7 Generics: Patent expiries to drive growth .... 8 India formulations Sustained growth ... 9 Strong/Improving return ratios ........ 10-11 Our top picks to grow PAT at 28% .......................... 12 Companies at inflexion point ... 13-14 Our estimates v/s Mgmt guidance . 15 FY13 guidance management quotes ... 16 Our top picks ....... 17 FY12 performance & guidance highlights . 18-19 Forex impact on key companies ... 20

Healthcare

NPPP 2011: Impact .. 21 Companies ..... 22-84 Dr. Reddys Labs .23 Divis Labs ..29 Lupin .34 Cadila Healthcare ....40 Glenmark ...46 IPCA Labs 54 Torrent Pharma ..60 Sun Pharma .....66 Cipla ..72 Ranbaxy Labs .....79 ANNEXURES ... 85-91 CRAMS ...... 92-96

July 2012

Healthcare

July 2012

Healthcare

Strong earnings growth ahead Expect 28% EPS CAGR


Health is wealth

US & India businesses to be the key growth & profitability drivers Return ratios to remain strong for most companies Our top picks basket to clock 28% core PAT CAGR over FY12-14 Many companies are at inflexion point Most managements guiding for strong growth street is in disbelief mode valuations will look cheap if managements achieve their guidances Top picks: Dr Reddys, Lupin, Cadila, Divis. In mid-caps we like Glenmark, Ipca and Torrent; our target returns on these stocks range from 20-50%

Core US business to report healthy growth

We expect core US revenues to grow by 15-20% for key companies in USD-terms led by: 1) Strong pipeline of products pending US FDA approval 2) Large number of patent expiries USD74b worth of drugs going offpatent in 2012-15 3) Strong and differentiated US pipeline to help counter patent cliff with leading Indian companies having invested significant resources over the past few years to build capabilities/pipeline in this area. Growth in INR-terms could be higher if currency remains favorable Our current estimates are based on INR52.5/USD for FY13 and INR50/USD for FY14. 4

July 2012

Base US business to report healthy growth (USD M)

Healthcare

July 2012

US product pipeline getting stronger

Healthcare

July 2012

Strong backward integration


India has strong DMF pipeline

Healthcare

India accounts for about 30-40% of global DMF filings with the US FDA. Strong backward integration enables cost-competitiveness Indian companies have thrived in the US despite an intensely competitive business environment. Strong positioning led by a unique combination of: 1) Superior chemistry skills By virtue of having significant presence in India (a low-cost & competitive market), Indian companies chemistry skills are honed to exploit the generics market. 2) Regulatory capabilities With 100+ US FDA approved facilities, India has the highest number of US FDA compliant facilities outside the US. 7

July 2012

Healthcare

Generics Patent expiries to drive growth in regulated markets

USD74b worth of products going off-patent by 2015 in the US Strong pipeline of Indian companies should help them exploit this opportunity. Incidentally, most large companies are guiding for 20-30 new launches per year for next two years. Strong Indian pipeline Companies like Lupin (109 ANDAs pending approval), Dr. Reddys (80 ANDAs) and Sun Pharma (147 ANDAs) have a fairly strong pipeline targeted at the US market. Generic penetration in many markets still in single digits Penetration likely to increase over the next 5 years as various governments are trying to reduce their healthcare budgets resulting in encouraging of generic penetration.

July 2012

India formulations Sustained growth


India Growth for the domestic formulations market is likely to improve in FY13 led by:

Healthcare

Most companies have enhanced their sales force in the past 18 months & focus will now shift to productivity improvement for this sales force over the next two years. Attrition rates for MRs has also come down which will favorably impact the productivity. Low base effect 1HFY12 saw the industry growth at muted levels due to low incidence of infectious diseases. Chronic segments like CVS, Diabetology, etc continue to record strong double-digit growth given the changing lifestyle of the populations, especially in large cities.

July 2012

Strong/Improving return ratios


Healthcare

Dr Reddy's: Higher contribution from one-off upsides led to higher return ratios in FY12 Lupin: Better profitability & working capital to improve return ratios Divis Labs: Improvement led by improving utilization at new SEZ Cadila: Improved operational performance & reversal of forex losses to improve RoCE Glenmark: Debt reduction & reversal of forex losses to improve return ratios.

July 2012

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Strong/Improving return ratios


Healthcare

IPCA: Better Op performance & reversal of forex losses to improve return ratios Torrent: Improvement led by better profitability & increasing other income Sun Pharma: Expected decline in Taro profitability to impact return ratios Cipla: Underutilization of large capex impacting return ratios Ranbaxy: Core RoCE continues to be muted due to low profitability.

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Our top picks to report PAT CAGR of 28% (FY12-14)


Healthcare

We have upgraded ratings for Dr. Reddys, Cadila and Glenmark to BUY. We continue to be positive on Divis Labs, Lupin, IPCA & Torrent Pharma Our basket of these 7 companies likely to report 28% PAT CAGR for FY12-14E excluding one-off upsides Currency assumption INR52.5/USD for FY13E and INR50/USD for FY14E is conservative Many managements are guiding for strong growth not fully captured in consensus estimates street is in disbelief mode Most managements enjoy good credibility with strong track record Past forex hedges has prevented any major benefit of depreciating currency. But gradually, future hedges will be at better rates if INR remains at current levels Our top picks consists of companies at inflexion point in terms of growth and/or companies whose valuations have corrected/become reasonable.

July 2012

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Companies at inflexion point


Healthcare

Dr. Reddys Labs: One year forward P/E is 17% below the average P/E of last five years Lupin: Valuations at premium to 5-year average Divis Labs: One year forward P/E at 12% discount to 5-year average Cadila: Valuations at premium to 5-year average Glenmark: One year forward P/E at 25% discount to 5-year average.

July 2012

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Healthcare

Companies at inflexion point


IPCA: 1-year forward P/E is in-line with average P/E of last five years Torrent: Valuations at slight premium to 5-year average Sun Pharma: One year forward P/E at 25% premium to 5-year average & near to peak valuations Cipla: One year forward P/E at 12% discount to 5-year average Ranbaxy: One year forward P/E at significant discount to 5-year average may not be correct due to US FDA issues in past.

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Our estimates v/s management guidance


Healthcare

Guidance given by the companies (our buys) is significantly above our current estimates. Consensus estimates also not fully capturing management guidance Dr Reddys Significant variance in consensus estimates v/s guidance due to a few US opportunities which are not reflected in estimates due to lower visibility Lupin & Cadila Both these companies aspire to reach USD3b topline with implied CAGR of 25-27% which street finds aggressive. However, both these managements have delivered on their past aggressive guidances. If the companies manage to achieve the guidance, it will lead to significant upgrade in our estimates.

July 2012

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FY13 guidance management quotes

Healthcare

Glenmark: Topline growth targeted at 22-25% (ex-NCE), EBITDA at INR9-9.25b, US business to grow by 20%, Expect ~12 ANDA approvals with 3-4 OCs, India formulations to grow by 18-20%, To launch 20-25 products in India, Interest cost to average INR390m/qtr, Central & Eastern European markets will continue to be challenging, Will target some debt reduction, working capital to remain at FY12 levels. Cadila: Targeting USD3b revenues by FY16, Will grow India formulations business in-line with average industry growth, Consumer business to grow in double-digits, Positive US FDA response for its Gujarat facility can lead to clearance of back-log of pending approvals and drive growth, Targets 30 filings in US, Brazil to do well while France may not. Dr. Reddys: Expect overall 30% topline growth, Will be able to record moderate growth in FY14 despite the high base of FY13, Patent cliff may impact FY15 performance, Planning to launch generic Lipitor in US subject to US FDA approval, In discussion with potential partners for biosimilars business, Expects some delay in scale-up of the GSK alliance, Expect India formulations to grow in-line with industry & momentum in PSAI business to sustain. Lupin: Targeting USD3b revenues by FY15, Planning to launch 120 products in US over next 3 years with over 20 targeted in FY13 of which 50% will be OCs, Generic Tricor launch likely in FY13, Does not expect Suprax generic over next 9-12 months, Expect EBITDA margins to improve by 50-75bps. Divis: Strong growth visibility; to grow topline by 25% and maintain EBITDA margins at 37%. Capex guidance raised based on better revenue visibility.

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Our top picks


Comparative valuation table with target price

Healthcare

July 2012

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Healthcare

FY12 performance & guidance highlights

Dr Reddys Lab: Higher tax (22.8% v/s 11.3%) & INR 1b impairment for Germany Lupin: Lower margins (Irom), higher tax (25.8% v/s 11.8%) Cadila: High base (extra sales booked in 4QFY11, increased interest cost due to acquisition & forex losses Glenmark: MTM forex losses of INR1.75b Divis Lab: Tax rate increased to 21.7% from 9% Torrent Pharma: Provision of INR654m for date expired products & lower other income IPCA Labs: Forex losses of INR527m Sun: Profitability mainly driven by Taro extra sales of INR1.8b in India but tempered by higher tax rate at 11% v/s 6%

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Healthcare

FY12 performance & guidance highlights


Guidance highlights - Strong guidance & aspirations

Sun expects 18-20% topline growth for FY13 on a high base. Divis has guided for 25% topline growth for FY13 on a high base. DRL expects 30% topline growth for FY13. Lupin targets USD3b topline over next three years with implied CAGR of 24%. Cadila targets USD3b topline by FY16 with implied CAGR of 27%. Glenmark has guided for 22-25% topline growth for FY13 and INR9-9.25b EBITDA. Cipla has given a muted guidance of 10% topline growth for FY13. EBITDA Margins - Most of the companies target to either sustain or improve EBITDA margins in FY13. Tax rate guidance for many companies is higher and most companies are now near to MAT rate.

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Forex impact on key companies

Healthcare

We feel that Divis Lab and Cipla will be the leading beneficiary of the depreciation of INR v/s USD and other currencies given low hedges, limited expenses in foreign currency and absence of forex denominated debt on the books. Ranbaxy and Jubilant will get adversely impacted as INR depreciates given the high forex denominated debt and forex hedges on the books. For remaining companies, the positive impact of a depreciating currency will be visible only after a year when existing forex hedges run out and new hedges come in at better rates. Existing hedges have been taken at an average of INR46-49/USD.

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NPPP 2011: Impact


National Pharma Pricing Policy (NPPP), 2011 Key proposals and impact

Healthcare

Significant increase in span of price control: All 348 drugs in the NLEM will come under price control as compared to the current 74 drugs. Span of price control will increase from current 20% to 60% Market-based pricing: Govt notified ceiling price to be the wt average prices of top 3 brands by value. Inflation-linked prices: Price increases up to the Wholesale Price Index (WPI) to be allowed every year Exemptions: Drugs with ceiling price up to INR3/unit exempted from NPPP coverage. Imported drugs: NPPP to apply to imported drugs also. No separate price calculations Patented drugs: NPPP will not cover patented drugs as a separate pricing mechanism is being worked out GoM decision awaited: Multiple feedbacks have been made to the NPPP.

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Healthcare

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Dr. Reddys Labs Buy [DRRD IN; CMP: INR1,610; MCap:USD4.8B]


Entering a high-growth year, Valuations have corrected
Traction in the US, branded formulations and PSAI businesses will be the key growth drivers for DRRD over next two years. We believe that DRRD is entering FY13 with strong growth traction. Management has guided for ~30% topline growth for FY13E. Significant gap between guidance and consensus implies some product opportunities in US not visible to investors as of now. The stock price has remained almost flat for the last 12 months, thus undergoing a reasonable time-correction. We believe that with strong growth visibility for FY13, the stock is poised to give reasonable returns for investors in a risk-averse market sentiment. DRRD stock trades at 17.4x FY13E and 15.7x FY14E core earnings. BUY with TP of INR2,056. Core sales to record 15% CAGR for FY12-14E despite on-set of patent cliff US business to record 17% core CAGR Company has a track record of at least one Para-IV/low competition upside every year for past few years. Branded formulation business to record 18% CAGR PSAI business to record 15% CAGR led by new API launches linked to patent expiries Core earnings to grow at 19% CAGR for FY12-14 excluding one-offs and MTM forex gains Valued at 17.4x FY13E and 15.7x FY14E core earnings. Including oneoffs, stock is valued at 13.5x FY13E earnings. July 2012 23

US core revenues to grow by 18% CAGR


Dr. Reddys Labs

US business to record 17% CAGR for core portfolio. Core US business growth will be led primarily by OTC segment on the back of new launches and market share gain in other product categories. We expect market share ramp-up in for Omeprazole OTC and the recently launched Lansoprazole OTC. Full ramp-up in sales from the ex-GSK facilities is also likely to drive growth. We estimates USD220m in revenues from one-off/low competition product opportunities during FY13 led by generic Arixtra, Geodon, Propecia etc. Few more low competition product opportunities are likely to be commercialized in FY13 which are not visible as of now.

- FY13

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Branded formulations sales to grow at 17% CAGR


Dr. Reddys Labs

Expanding presence in Russian OTC biz. along with other growth drivers like in-licensed products Ramp-up in the biogeneric portfolio in emerging markets management expects revenues of USD100m in the next 2-3 years v/s the current USD30m. Ramp-up in revenues from the companys GSK partnership arrangement in emerging markets In India, the company redeployed its experienced urban sales force in rural areas, which resulted in a decline in urban doctor coverage and loss of business in the metros. Management has taken corrective action and the results should be visible in the next few quarters

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Dr. Reddys Labs Buy [DRRD IN; CMP: INR1,610; MCap:USD4.8B]

Dr. Reddys Labs

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Dr. Reddys Labs Financials


Income Statement Y/E March Net Sales Cha nge (%) Other Income Tota l Expendi ture EBITDA Ma rgi n (%) Depreci a ti on & Amorti za ti on EBIT Net Interes t Exp Forex (Ga i ns )/Los s es PBT & EO Expense Cha nge (%) PBT after EO Expense Ta x Ta x Ra te (%) Adjusted Net Profit Cha nge (%) Ma rgi n (%) 2011 74,693 6.3 1,115 59,073 15,620 20.9 4,107 11,513 132 57 12,439 505.9 12,439 1,403 11.3 11,099 939.2 14.9 (INR Million) 2012 2013E 2014E 96,737 101,638 113,965 29.5 5.1 12.1 768 842 980 72,997 79,379 89,007 23,740 24.5 6,254 17,486 529 -689 18,414 48.0 18,414 4,204 22.8 16,911 52.4 17.5 22,259 21.9 6,093 16,166 685 -114 16,437 -10.7 16,437 3,616 22.0 15,700 -7.2 15.4 24,958 21.9 6,592 18,367 785 228 18,334 11.5 18,334 4,022 21.9 17,365 10.6 15.2
Balance Sheet Y/E March Equi ty Sha re Ca pi ta l * Res erves Net Worth Loa ns Deferred Li a bi l i ti es /Ta x Capital Employed Net Fixed Assets Inves tments Goodwi l l /Inta ngi bl e As s ets Curr. Assets Inventory Account Recei va bl es Ca s h a nd Ba nk Ba l a nce Others Curr. Liability & Prov. Account Pa ya bl es Other Current Li a bi l i ti es Net Current Assets Appl. of Funds E: MOSL Es ti ma tes 2011 846 45,144 45,990 23,572 87 69,649 29,955 309 15,246 47,560 16,059 17,615 5,729 8,157 23,421 8,480 14,941 24,139 69,649

Dr. Reddys Labs

2012 848 56,595 57,443 34,401 0 91,844 35,628 368 13,529 69,952 19,352 25,339 18,152 7,109 27,633 25,660 1,973 42,320 91,844

(INR Million) 2013E 2014E 848 848 64,839 74,090 65,687 74,937 30,401 30,401 0 0 96,089 105,339 43,128 368 13,529 62,441 20,328 25,409 9,081 7,623 48,128 368 13,529 67,247 22,793 28,491 7,415 8,547

23,377 23,933 11,180 11,396 12,197 12,536 39,064 43,314 96,089 105,339

* IFRS reporting from FY09 onwards. Financials prior to FY09 are as per US GAAP

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Dr. Reddys Labs Financials


Ratios Y/E March Basic (INR) EPS Ca s h EPS BV/Sha re DPS Pa yout (%) Valuation (x) P/E Ca s h P/E P/BV EV/Sa l es EV/EBITDA Di vi dend Yi el d (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fi xed As s et Turnover (x) Debtor (Da ys ) Inventory (Da ys ) Worki ng Ca pi ta l (Da ys ) Leverage Ratio Current Ra ti o (x) Debt/Equi ty (x) 2011 65.6 89.9 271.8 8.2 29.2 24.5 17.9 5.9 3.9 18.6 0.5 24.1 16.7 2.8 86 78 90 1 1.03754 2012 2013E 99.7 136.6 338.8 12.4 29.2 16.1 11.8 4.8 3.0 12.1 0.8 29.4 19.6 3.0 96 73 91 92.6 128.5 387.4 11.5 29.2 17.4 12.5 4.2 2.9 13.2 0.7 23.9 17.5 2.6 91 73 108 2014E 102.4 141.3 442.0 12.8 29.2 15.7 11.4 3.6 2.6 11.8 0.8 23.2 18.2 2.5 91 73 115
Cash Flow Statement Y/E March Op. Profi t/(Los s ) before Ta x Interes t/Di vi dends Recd. Di rect Ta xes Pa i d (Inc)/Dec i n WC CF from Operations CF from Operating incl EO Expe (i nc)/dec i n FA (Pur)/Sa l e of Inves tments CF from Investments Cha nge i n networth (Inc)/Dec i n Debt Other Items Di vi dend Pa i d CF from Fin. Activity Inc/Dec of Cash Add: Begi nni ng Ba l a nce Closing Balance
from FY09 onwards

Dr. Reddys Labs

2011 15,620 926 -1,403 -6,531 8,612 8,612

2012 23,740 928 -4,204 -5,758 14,707 14,707

(INR Million) 2013E 2014E 22,259 24,958 271 -33 -3,616 -4,022 -5,815 -5,916 13,098 14,988 13,098 14,988

-12,566 -10,210 -13,593 -11,592 3,534 -59 0 0 -9,032 -10,269 -13,593 -11,592 -4,726 8,877 -1,351 -3,235 -435 -855 6,584 5,729 2,172 10,829 -87 -4,930 7,985 12,423 5,729 18,152 0 -4,000 0 -4,576 -8,576 -9,071 18,152 9,081 0 0 0 -5,062 -5,062 -1,666 9,081 7,415

Note: Reported cashflow differs due to acquisitions & change to IFRS reporting

2.0 0.5

2.5 0.6

2.7 0.5

2.8 0.4

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Divis Labs Buy [DIVI IN; CMP: INR991; MCap:USD2.3B]


Best CRAMS play - Entering a high-growth phase
Divi's is well positioned in the CRAMS space, given its strong relationships with innovators, presence across the CRAMS value chain, and its ability to support the innovator in late life-cycle strategies. Divi's earns strong margins in API business due to its global cost and market leadership in some APIs, its ability to increase prices, and strong backward integration. It has undertaken a large capex at its new SEZ, implying positive prospects for outsourcing business. We estimate 22% revenue & EPS CAGR for FY1214 led by both Generics and CRAMS business segments and ramp-up in Neutraceutical revenues. The stock trades at 19.4x FY13E and 16.5x FY14E earnings. Reiterate Strong Buy, with TP of INR1,202 (20x FY14E EPS). Topline & EPS to record 22% CAGR over FY12-14 CRAMS business to grow at 24% CAGR led by execution of new contracts Generic API business to record 18% CAGR led by new launches Carotenoids to record 57% CAGR albeit on a low base Strong topline guidance of 25% growth for FY13 led by execution of new CRAMS contracts, launch of new APIs and improving utilization of the strong capex done in the past 2 years. Increase in capex guidance to INR1.5-2b for FY13 is a positive as Divis does not undertake capex without revenue visibility Will benefit from depreciated currency Valued at 19.4x FY13E and 16.5x FY14E earnings. Reiterate Strong Buy, with TP of INR1,202 (20x FY14E EPS). July 2012 29

Strong capex lends growth visibility

Divis Labs

Divis is amidst a strong capex cycle. After incurring capex of INR4.b over past 2 years, the company has guided for another INR1.5-2b capex for FY13 Past trends indicate management does not undertake capex without commensurate revenue visibility. This Lends visibility of revenue ramp-up We believe that Divis is ramping up capacity for the next phase of growth driven by new customer orders, proposed launches in the API segment and expected ramp-up in Carotenoid supplies. We note that the company is likely to fund the entire capex through internal accruals. It has funded past capex by internal accruals (the company has never diluted equity post its IPO) . 30

July 2012

Divis Labs Buy [DIVI IN; CMP: INR991; MCap:USD2.3B]

Divis Labs

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Divis Labs Financials


Income Statement
Y/E March Net Sales Cha nge (%) EBITDA Ma rgi n (%) Depreci a ti on EBIT Int. a nd Fi na nce Cha rges Other Income - Rec. PBT before EO Expens e PBT a fter EO Expens e Current Ta x Deferred Ta x Ta x Ra te (%) Reported PAT PAT Adj for EO Items Cha nge (%) Ma rgi n (%) 2011 13,071 38.8 4,915 37.6 534 4,381 22 365 4,724 4,724 405 26 9.1 4,293 4,293 26.1 32.8 2012 18,586 42.2 6,850 36.9 621 6,229 37 615 6,806 6,806 1,474 0 21.7 5,333 5,333 24.2 28.7

Divis Labs

(INR Million)
2013E 23,708 27.6 8,849 37.3 742 8,106 49 617 8,675 8,675 1,908 0 22.0 6,766 6,766 26.9 28.5 2014E 28,019 18.2 10,431 37.2 836 9,594 49 680 10,225 10,225 2,250 0 22.0 7,976 7,976 17.9 28.5

Balance Sheet
Y/E March Equi ty Sha re Ca pi ta l Tota l Res erves Net Worth Deferred l i a bi l i ti es Tota l Loa ns Capital Employed Gros s Bl ock Les s : Accum. Deprn. Net Fixed Assets Ca pi ta l WIP Inves tments Curr. Assets Inventory Account Recei va bl es Ca s h a nd Ba nk Ba l a nce Loa ns & Adva nces Curr. Liability & Prov. Account Pa ya bl es Provi s i ons Net Current Assets Appl. of Funds E: MOSL Es ti ma tes 2011 265 17,710 17,975 500 230 18,706 8,857 2,958 5,899 1,293 5,256 10,299 5,717 3,674 177 731 4,042 2,424 1,618 6,257 18,706 2012 266 21,050 21,315 609 590 22,514 11,519 3,569 7,950 1,293 4,770 13,553 6,790 4,956 309 1,498 5,052 2,954 2,099 8,501 22,514

(INR Million)
2013E 266 25,150 25,416 609 590 26,615 13,519 4,311 9,208 1,293 4,770 17,993 9,483 6,401 213 1,897 6,650 3,793 2,857 11,343 26,615 2014E 266 29,990 30,255 609 590 31,454 14,519 5,147 9,371 1,293 7,170 21,463 11,208 7,565 449 2,242 7,844 4,483 3,361 13,619 31,454

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Divis Labs Financials


Ratios
Y/E March Basic (INR) EPS Ca s h EPS BV/Sha re DPS Pa yout (%) Valuation (x) P/E Ca s h P/E P/BV EV/Sa l es EV/EBITDA Di vi dend Yi el d (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fi xed As s et Turnover (x) Debtor (Da ys ) Inventory (Da ys ) Worki ng Ca pi ta l Turnover (D Leverage Ratio (x) Current Ra ti o Debt/Equi ty 2011 32.4 36.4 135.6 10.0 36.2 30.6 27.2 7.3 10.1 26.8 1.0 25.9 28.2 2.2 104 160 170 2.5 0.0 2012 40.2 44.8 160.6 13.0 37.8 24.7 22.1 6.2 7.1 19.3 1.3 27.1 34.1 2.7 98 133 161 2.7 0.0 2013E 51.0 56.6 191.5 17.2 39.4 19.4 17.5 5.2 5.6 14.9 1.7 29.0 36.4 2.8 99 146 171 2.7 0.0 2014E 60.1 66.4 227.9 20.2 39.3 16.5 14.9 4.3 4.7 12.6 2.0 28.7 36.1 3.0 99 146 172 2.7 0.0

Divis Labs

Cash Flow Statement


Y/E March Op.Profi t/(Los s ) bef. Ta x Interes t/Di vi dends Recd. Di rect Ta xes Pa i d (Inc)/Dec i n WC CF from Operations EO Expens e / (Income) CF from Operations incl EO Exp (i nc)/dec i n FA (Pur)/Sa l e of Inves tments CF from Investments Cha nge i n networth Inc/(Dec) i n Debt Interes t Pa i d Di vi dend Pa i d CF from Fin. Activity Inc/Dec of Cash Add: Begi nni ng Ba l a nce Closing Balance 2011 4,915 365 -405 -813 4,062 0 4,062 -1,591 -844 -2,434 57 -98 -22 -1,553 -1,616 12 165 177 2012 6,850 615 -1,474 -2,111 3,880 0 3,880 -2,563 486 -2,077 25 360 -37 -2,017 -1,670 133 177 310

(INR Million)
2013E 8,849 617 -1,908 -2,940 4,618 0 4,618 -2,000 0 -2,000 0 0 -49 -2,666 -2,715 -97 309 213 2014E 10,431 680 -2,250 -2,039 6,821 0 6,821 -1,000 -2,400 -3,400 0 0 -49 -3,136 -3,185 236 213 449

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Lupin Buy [LPC IN; CMP: INR523; MCap:USD4.1B]


Strong growth traction ahead led by US, India & Japan
Key growth drivers for future will be: (1) Increased traction in India formulations and emerging markets, (2) Strong launch pipeline for US, and (3) contribution from oral contraceptives in US. We expect Lupins core operations (ex one-off upsides) to record 20% revenue CAGR and 27% EPS CAGR over FY12-14. Significant internationalization of operations without dilution of return ratios has been Lupins key achievement over the past 45 years. We expect it to sustain this in future as well. The stock is valued at 20.6x FY13 and 16.7x FY14 EPS. BUY with TP of INR600 (20x FY14 EPS). EPS to record 27% CAGR over FY12-14 US growth at 18% CAGR despite potential Suprax generic competition led by strong pace of new launches. Planning to launch 120 products over next 3 years. Our estimates budget only 60 launches over next 3 years. Lupins US portfolio has a pragmatic mix of normal, niche (OCs, Ophthalmology) and para-IV filings which are likely to get commercialized over the next 3 years. Best positioned to exploit Japanese generics opportunity - to grow at 27% CAGR partly aided by Irom acquisition Core growth is 14% Expect 28% CAGR for formulations exports to emerging markets & 18% for India formulations Valued at 20.6x FY13E and 16.7x FY14E earnings. BUY with TP of INR628 (20x FY14 EPS). July 2012 34

US core revenues to grow at 18% CAGR for FY12-14

Lupin

US growth at 18% CAGR despite Suprax generic competition led by strong pace of new launches. Planning to launch 120 products over next 3 years. We are budgeting for 20-25 launches per year hence there is upside risk to our estimates. We also budget for generic competition for Suprax in FY14 despite which Lupins US business is expected to record 18% CAGR. Pragmatic mix of normal, niche (OCs, Ophthalmology) and paraIV filings for US operations. Branded portfolio Antara acquisition yet to deliver results. As per the management, generic competition is not visible at least for next one year in Suprax. Further, Suprax prescriptions being shifted to new dosages to counter potential generic competition. 35

July 2012

Lupin

India & Japan are other key growth drivers


India Expect 18% CAGR for India formulations Aggressive new launches - 30 in FY12. Includes few in-licensed products Increasing geographical penetration and Field force addition - total MR strength at 4,800 660 added in FY12 Japan Best positioned to exploit Japanese generics opportunity to grow at 27% CAGR partly aided by Irom acquisition Japanese govt targeting to double generic penetration over next few years to reduce healthcare costs Imperative to have local presence Lupin has acquired two companies over last two years Best positioned amongst Indian companies July 2012 36

Lupin Buy [LPC IN; CMP: INR523; MCap: USD4.1B]

Lupin

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37

Lupin Financials
Income Statement Y/E March Net Sales Cha nge (%) Tota l Expendi ture EBITDA Ma rgi n (%) Depreci a ti on EBIT Int. a nd Fi na nce Cha rges Other Income - Rec. PBT before EO i tem PBT after EO item Ta x Ta x Ra te (%) Reported PAT PAT Adj for EO items Cha nge (%) Ma rgi n (%) Les s : Mi nori ty Interes t Adj Net Profit 2011 57,068 20.4 46,410 10,659 18.7 1,755 8,903 325 1,341 9,920 9,920 1,169 11.8 8,750 8,750 25.1 15.3 168 8,582 2012 69,597 22.0 56,382 13,215 19.0 2,275 10,940 355 1,376 11,961 11,961 3,086 20.0 9,817 8,875 1.4 12.8 199 8,676 (INR Million) 2013E 2014E 86,287 98,574 24.0 14.2 69,652 78,669 16,635 19,905 19.3 20.2 2,639 2,976 13,996 16,928 407 320 1,468 1,753 15,057 15,057 3,463 23.0 11,594 11,594 30.6 13.4 270 11,324 18,361 18,361 4,040 22.0 14,322 14,322 23.5 14.5 300 14,022
Consolidated Balance Sheet Y/E March Equi ty Sha re Ca pi ta l Ful l y Di l uted Equi ty Ca pi ta l Other Res erves Tota l Res erves Net Worth Mi nori ty Interes t Deferred l i a bi l i ti es Tota l Loa ns Capital Employed Gros s Bl ock Les s : Accum. Deprn. Net Fixed Assets Ca pi ta l WIP Inves tments Goodwi l l & Inta ngi bl es Curr. Assets Inventory Account Recei va bl es Ca s h a nd Ba nk Ba l a nce Others Curr. Liability & Prov. Account Pa ya bl es Provi s i ons Net Current Assets Appl. of Funds E: MOSL Es ti ma tes 2011 892 889 31,918 31,918 32,811 515 1,411 11,624 46,361 26,389 9,075 17,313 5,312 32 3,255 34,967 12,000 12,558 4,201 6,208 14,518 11,800 2,718 20,449 46,361 2012 893 893 39,236 39,236 40,129 723 1,442 15,542 57,836 32,932 11,350 21,582 5,312 28 5,040 46,911 17,327 17,318 4,025 8,241 21,037 17,750 3,287 25,874 57,836

Lupin

(INR Million) 2013E 2014E 893 893 893 893 47,247 57,168 47,247 57,168 48,141 58,061 723 723 1,442 1,442 12,542 9,542 62,847 69,768 37,432 13,989 23,443 5,312 28 5,040 51,958 18,983 19,846 4,500 8,629 22,934 18,983 3,950 29,024 62,847 41,932 16,965 24,967 5,312 28 5,040 58,967 21,686 22,672 4,751 9,857 24,546 19,715 4,832 34,421 69,768

July 2012

38

Lupin Financials
Ratios Y/E March Basic (INR) EPS (Fully Diluted) Ca s h EPS (Ful l y Di l uted) BV/Sha re DPS Pa yout (%) Valuation (x) P/E (Ful l y Di l uted) Ca s h P/E (Ful l y Di l uted) P/BV EV/Sa l es EV/EBITDA Di vi dend Yi el d (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fi xed As s et Turnover (x) Debtor (Da ys ) Inventory (Da ys ) Wkg. Ca pi ta l Turnover (Da ys ) Leverage Ratio Debt/Equi ty (x) 2011 19.3 23.2 73.5 3.2 18.9 27.1 22.5 7.1 4.2 22.6 0.6 29.3 25.1 2.3 87 77 131 0.4 2012 19.4 24.5 89.8 4.9 25.9 26.9 21.3 5.8 3.5 18.5 0.9 23.8 24.6 2.3 105 91 136 0.4 2013E 25.4 31.3 107.8 6.3 28.6 20.6 16.7 4.9 2.8 14.5 1.2 25.7 26.6 2.5 103 80 123 0.3 2014E 31.4 38.1 130.0 7.8 28.6 16.7 13.8 4.0 2.4 12.0 1.5 26.4 29.1 2.5 100 80 127 0.2
Cash Flow Statement Y/E March Oper. P/(L) before Ta x Interes t/Di vi dends Recd. Di rect Ta xes Pa i d (Inc)/Dec i n WC CF from Op. incl EO Exp. (i nc)/dec i n FA (Pur)/Sa l e of Inves tments CF from Investments Cha nge i n Net Worth Inc/(Dec) i n Debt Interes t Pa i d Di vi dend Pa i d CF from Fin. Activity Inc/Dec of Cash Add: Begi nni ng Ba l a nce Closing Balance 2011 10,659 1,341 -1,193 -2,401 8,405 -4,996 233 -4,763 300 226 -325 -1,658 -1,457 2,186 2,015 4,201 2012 13,215 1,376 -3,055 -5,601 5,935 -7,386 4 -7,383 247 3,917 -355 -2,538 1,272 -176 4,201 4,025

Lupin

(INR Million) 2013E 2014E 16,635 19,905 1,468 1,753 -3,463 -4,040 -2,675 -5,145 11,965 12,473 -4,500 0 -4,500 -270 -3,000 -407 -3,312 -6,989 475 4,025 4,500 -4,500 0 -4,500 -300 -3,000 -320 -4,101 -7,722 252 4,500 4,751

July 2012

39

Cadila Healthcare Buy [CDH IN; CMP: INR765; MCap: USD2.8B]


Strong growth traction ahead led by US, India, emerging markets
Cadilas future growth will be led by increased traction in its international businesses and sustained double-digit growth in domestic formulations and consumer businesses. We estimate strong 18% revenue CAGR and 37% EPS CAGR for FY12-14 for the core operations (excluding one-offs) and RoE of ~27% over the next two years. Sustaining strong growth without diluting return ratios has been the key USP of the company over the past few years. The company has chalked out a detailed plan to achieve USD3b in revenues in FY16 (implying topline CAGR of 27%). The stock trades at 19.1x FY13E and 14.8x FY14E consolidated EPS. BUY with TP of INR1037 (20x FY14E EPS). EPS to record 37% CAGR over FY12-14 led by: Expect 20% CAGR for domestic formulations partly helped by the Biochem acquisition, 23% growth for formulation exports to emerging markets and 27% for Japanese operations (albeit on a low base) US business to grow at 20% CAGR; Growth can be faster if USFDA issues resolved Management expects resolution in near future Management confident of achieving annual revenue of USD3b by FY16 implying topline CAGR of 27% - street estimates not aligned with this. Could lead to significant upgrades if consensus estimates start factoringin this target. Valued at 19.1x FY13E and 14.8x FY14E earnings. BUY with TP of INR1037 (20x FY14 EPS). July 2012 40

US core revenues to grow at 20% CAGR for FY12-14

Cadila Healthcare

US growth at 20% CAGR despite Suprax generic competition led by strong pace of new launches. Building niche product pipeline but early resolution of USFDA issues imperative Commenced development and filing of potential lowcompetition products with delivery advantages (e.g. transdermal patches, nasal, injectable and respiratory products) and is focusing on developing a pipeline of such niche products. Acquisition of Nesher Pharma opens up opportunities in niche area of controlled substance. Management has guided for resolution of USFDA Warning Letter in the near future reinspection of facility already completed. 41

July 2012

India & emerging markets to grow at 20%+ CAGR


Cadila Healthcare

Branded formulations will be key growth driver; India growth back on track After reporting muted growth rate for last few quarters, Cadilas domestic formulation business seems to be coming back on growth track. With the acquisition of Biochem, the company has strengthened its positioning in acute therapeutic segments as well. We expect 20% CAGR for this business over FY12-14. Emerging markets likely to do well led by Brazil and RoW markets led by new product launches and geographic expansion to key emerging markets which the company has identified. We expect the emerging markets portfolio to record 23% CAGR over FY12-14 42

July 2012

Cadila Healthcare Buy [CDH IN; CMP: INR765; MCap: USD2.8B]

Cadila Healthcare

July 2012

43

Cadila Financials
Income Statement Y/E March Net Sales Cha nge (%) Tota l Expendi ture EBITDA Ma rgi n (%) Depreci a ti on EBIT Int. a nd Fi na nce Cha rges Other Income - Rec. PBT before EO Expense PBT after EO Expense Current Ta x Ta x Ta x Ra te (%) Reported PAT Les s : Mi onri ty Interes t Net Profit PAT Adj for EO Items 2011 46,302 25.6 36,040 10,262 22.2 1,269 8,993 699 131 8,425 8,425 1,064 1,064 12.6 7,361 251 7,110 6,334 2012 52,633 13.7 41,385 11,248 21.4 1,579 9,670 1,069 -658 7,942 7,942 1,130 1,130 14.2 6,812 286 6,526 5,660 (INR Million) 2013E 2014E 63,618 73,258 20.9 15.2 50,084 13,535 21.3 1,904 11,631 1,129 152 10,654 10,654 2,131 2,131 20.0 8,523 340 8,183 8,183 57,145 16,114 22.0 2,154 13,960 1,026 809 13,743 13,743 2,749 2,749 20.0 10,994 408 10,586 10,586
Balance Sheet Y/E March Equi ty Sha re Ca pi ta l Tota l Res erves Net Worth Mi nori ty Interes t Deferred l i a bi l i ti es Tota l Loa ns Capital Employed Gros s Bl ock Les s : Accum. Deprn. Net Fixed Assets Ca pi ta l WIP Inves tments Curr. Assets Inventory Account Recei va bl es Ca s h a nd Ba nk Ba l a nce Loa ns & Adva nces Curr. Liability & Prov. Account Pa ya bl es Provi s i ons Net Current Assets Appl. of Funds 2011 1,024 20,691 21,715 669 1127 10,973 34,484 28,320 9,994 18,326 4,310 207 22,829 8,119 7,652 2,952 4,106 11,188 8,955 2,233 11,641 34,484

Cadila Healthcare

2012 1,024 24,743 25,767 904 1185 20,520 48,376 40,835 11,826 29,008 4,310 242 30,232 10,905 8,863 4,666 5,798 15,416 12,379 3,037 14,816 48,376

(INR Million) 2013E 2014E 1,024 1,024 31,237 39,436 32,261 40,460 904 904 1185 1185 20,520 20,520 54,870 63,069 47,335 13,730 33,605 4,310 1,707 33,981 13,095 11,848 2,801 6,236 18,732 14,966 3,766 15,249 54,870 52,335 15,884 36,451 4,310 1,707 41,903 15,099 14,380 5,593 6,831 21,301 16,537 4,764 20,601 63,069

July 2012

44

Cadila Financials
Ratios Y/E March Basic (INR) EPS Ca s h EPS BV/Sha re DPS Pa yout (%) Valuation (x) P/E Ca s h P/E P/BV EV/Sa l es EV/EBITDA Di vi dend Yi el d (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fi xed As s et Turnover (x) Debtor (Da ys ) Inventory (Da ys ) Worki ng Ca pi ta l Turnover (Da 2011 30.9 40.9 106.1 6.3 20.8 24.7 18.7 7.2 3.5 16.0 0.8 37.5 30.5 2.6 60 64 68 2012 27.6 39.6 125.9 6.1 21.6 27.7 19.3 6.1 3.3 15.3 0.8 27.5 22.8 2.2 60 76 70 2.0 0.6 2013E 40.0 49.3 157.6 8.5 23.8 19.1 15.5 4.9 2.7 12.7 1.1 28.2 23.8 2.0 67 75 71 1.8 0.6 2014E 51.7 62.2 197.6 11.7 25.4 14.8 12.3 3.9 2.3 10.5 1.5 29.1 26.0 2.1 71 75 75 2.0 0.4
Cash Flow Statement Y/E March 2011 Oper. Profi t/(Los s ) before Ta x 10,262 Interes t/Di vi dends Recd. 131 Di rect Ta xes Pa i d -1,064 (Inc)/Dec i n WC -2,108 CF from Operations 7,222 CF from Operating incl EO Expe (i nc)/dec i n FA (Pur)/Sa l e of Inves tments CF from Investments Cha nge i n Networth Inc/(Dec) i n Debt Interes t Pa i d Di vi dend Pa i d Others CF from Fin. Activity Inc/Dec of Cash Add: Begi nni ng Ba l a nce Closing Balance 7,222

Cadila Healthcare

2012 11,248 -658 -1,130 -1,461 7,999 7,999

(INR Million) 2013E 2014E 13,535 16,114 152 809 -2,131 -2,749 -2,298 -2,561 9,258 11,613 9,258 -6,500 -1,465 -7,965 0 0 -1,129 -2,029 -3,158 -1,865 4,666 2,801 11,613 -5,000 0 -5,000 0 0 -1,026 -2,795 -3,821 2,792 2,801 5,593

-4,579 -12,261 0 -35 -4,579 -12,296 -301 345 -699 -1,529 -14 -2,198 445 2,507 2,952 -1,288 9,783 -1,069 -1,471 58 6,012 1,714 2,952 4,666

Leverage Ratio (x) Current Ra ti o 2.0 Debt/Equi ty 0.4 * Ra ti os a djus ted for bonus i s s ue

July 2012

45

Glenmark Buy [GNP IN; CMP: INR366; MCap: USD1.8B]


Trying to build a differentiated business model
Glenmark is the most successful NCE research company from India having out-licensed 5 NCEs & generating upfront & milestone income of US$207m till date. Requirement of higher working capital to fund strong growth had led to significant increase in debt in the past which now seems to be correcting. A differentiated US pipeline coupled with improved working capital and moderate capex will give the management flexibility to target debt reduction. The stock trades at 17.7x FY13E and 13.6x FY14E EPS. BUY with TP of INR442 (16x FY14E EPS + INR12 DCF value for Crofelemer and Para-IV upsides). EPS to record 54% CAGR over FY12-14 on a low base led by: Expect overall topline to grow at 16% CAGR (19% CAGR excl NCE licensing income) led by 22% CAGR for emerging market revenues, 18% for India formulations and 18% for core US business. EPS CAGR of 54% driven by EBITDA margin expansion and reversal of forex losses. Management has guided for 22-25% topline growth for FY13 and EBITDA at INR9-9.25b We believe this is achievable. Over FY12-14, we expect RoCE to increase from 12.1% to 20.1%, and RoE from 13.5% to 20.5% led by improved working capital and gradual debt reduction. Our estimates exclude NCE licensing income. Valued at 17.7x FY13E and 13.6x FY14E earnings. BUY with TP of INR442 (16x FY14E EPS + INR12 DCF value for Crofelemer and Para-IV upsides). July 2012 46

US core revenues to grow at 18% CAGR for FY12-14

Glenmark

GNP currently has ~38 ANDAs pending US FDA approval. It has already launched 7 oral contraceptives (OCs) in the US over the past few quarters but is yet to record meaningful revenues from them. It expects 3-4 more OC approvals over the next 12 months. The company has commenced filings for niche opportunities in the Dermatology, Controlled Substances and Hormones categories and has also started receiving some approvals in these categories, which is a long-term positive. The management has, in the past, guided that ~75% of the pending ANDAs are in the niche/low-competition category, and will thus, result in a differentiated portfolio in the long-term. 47

July 2012

India & emerging markets to grow at 20%+ CAGR

Glenmark

Glenmark has recorded a strong 18% CAGR for its India formulations (DF) business in the last five years. We believe that the company will be able to sustain the growth momentum into FY13 as well, although higher base effect may become visible from FY14 onwards. However, we expect the company to outperform the average industry growth of 1415% over the next two years. We expect the emerging markets portfolio to record 22% CAGR over FY12-14 led by Latam, Russia & Africa regions.

July 2012

48

Balance sheet concerns receding


Glenmark

High working capital required to fund past growth had led to increase in debt for Glenmark. We believe that the balance sheet concerns are now receding with the company managing to reduce working capital substantially in FY12 compared to past years. Current working capital days stand at 128days v/s 203 days in FY11 Further net debt has gone down YoY by INR2b to INR17.5b in FY12. We estimate further debt reduction of INR4b over next 2 years. Return ratios are likely to gradually improve over the next two years. Over FY12-14, we expect RoCE to increase from 12.1% to 20.1%, and RoE from 13.5% to 20.5%. 49

July 2012

Most successful NCE operations from India

Glenmark

Glenmark remains the frontrunner in NCE Research in India

July 2012

50

Glenmark Buy [GNP IN; CMP: INR366; MCap: USD1.8B]

Glenmark

July 2012

51

Glenmark Financials
Income Statement
Y/E March Net Sales Cha nge (%) Ma teri a l s Cons umed Pers onnel Expens es R&D Expens es Other Expens es Tota l Expendi ture EBITDA Cha nge (%) Ma rgi n (%) Adjusted EBITDA Ma rgi n (%) Depreci a ti on EBIT Interes t OI & forex ga i ns /l os s es PBT before EO Expense Cha nge (%) PBT after EO Exp. Ta x Ta x Ra te (%) Reported PAT Adj PAT** Cha nge (%) Ma rgi n (%) 2011 29,491 19.8 9,918 5,103 1,386 7,161 23,568 5,923 -0.7 20.1 5,028 17.6 947 4,976 1,566 1,405 4,816 25.4 4,816 237 4.9 4,578 3,548 7.2 12.4 2012 40,206 36.3 13,454 6,289 2,637 7,966 30,346 9,860 66.5 24.5 7,325 19.4 979 8,882 1,466 -1,218 6,198 28.7 4,881 238 4.9 4,643 3,244 -8.6 8.6

Glenmark

(INR Million)
2013E 47,905 19.1 16,541 7,673 3,353 10,725 38,292 9,613 -2.5 20.1 9,376 19.7 1,112 8,500 1,462 10 7,049 13.7 7,049 977 13.9 6,071 5,866 80.8 12.3 2014E 53,854 12.4 18,234 9,207 3,285 11,798 42,524 11,330 17.9 21.0 11,105 20.7 1,236 10,094 1,280 300 9,114 29.3 9,114 1,276 14.0 7,838 7,642 30.3 14.3

Balance Sheet
Y/E March Equi ty Sha re Ca pi ta l Ful l y Di l uted Eq Ca p Res erves Net Worth Mi nori ty Interes t Loa ns Deferred l i a bi l i ti es Capital Employed Gros s Bl ock Les s : Accum. Deprn. Net Fixed Assets Ca pi ta l WIP Inves tments Inta ngi bl es (net) Curr. Assets Inventory Account Recei va bl es Ca s h a nd Ba nk Ba l a nce Others Curr. Liability & Prov. Account Pa ya bl es Provi s i ons Net Current Assets Appl. of Funds E: MOSL Es ti ma tes 2011 270 284 20,102 20,372 267 21,258 -1081 40,816 25,899 4,876 21,023 1,100 309 10,329 25,988 8,070 11,308 1,959 4,651 7,605 7,560 44 18,384 40,816 2012 271 284 23,746 24,016 250 20,779 -2674 42,371 29,645 5,855 23,790 1,100 181 9,606 29,588 7,877 12,436 3,201 6,075 12,289 11,780 509 17,300 42,371

(INR Million)
2013E 271 284 29,500 29,770 250 19,279 -2674 46,626 32,145 6,967 25,178 1,100 181 8,934 33,741 9,843 15,093 2,242 6,562 13,575 13,125 450 20,166 46,626 2014E 271 284 36,975 37,246 250 15,779 -2674 50,601 34,645 8,203 26,443 1,100 181 8,308 38,132 11,066 16,968 2,721 7,377 15,254 14,754 500 22,877 50,601

**Excl NCE upsides & incl adjustment for R&D exp capitalization

July 2012

52

Glenmark Financials
Ratios
Y/E March Basic (INR) EPS (Fully diluted)* Ca s h EPS BV/Sha re DPS Pa yout (%) Valuation (x) P/E (Ful l y di l uted) PEG (x) Ca s h P/E P/BV EV/Sa l es EV/EBITDA Di vi dend Yi el d (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fi xed As s et Turnover (x) Debtor (Da ys ) Inventory (Da ys ) Worki ng Ca pi ta l (Da ys ) Leverage Ratio (x) Current Ra ti o Debt/Equi ty 2011 12.5 15.8 75.4 3.7 5.2 29.3 4.1 23.1 4.9 4.0 19.9 1.0 17.4 13.4 1.5 140 100 203 3.4 1.0 2012 11.4 14.9 88.8 10.0 13.6 32.1 -3.7 24.6 4.1 2.9 11.8 2.7 13.5 12.1 1.8 113 72 128 2.4 0.9 2013E 20.6 24.6 110.0 5.0 5.2 17.7 0.2 14.9 3.3 2.4 12.0 1.4 19.7 17.7 2.0 115 75 137 2.5 0.6 2014E 26.9 31.2 137.7 5.7 4.6 13.6 0.4 11.7 2.7 2.1 9.9 1.6 20.5 20.1 2.1 115 75 137 2.5 0.4

Glenmark

Cash Flow Statement


Y/E March Op. Profi t/(Los s ) before Ta x Interes t/Di vi dends Recd. Di rect Ta xes Pa i d (Inc)/Dec i n WC CF from Operations CF frm Op.incl EO Exp. (Inc)/Dec i n FA CF from Investments Cha nge i n Networth Inc/(Dec) i n Debt Interes t Pa i d Di vi dend Pa i d CF from Fin. Activity Inc/Dec of Cash Add: Begi nni ng Ba l a nce Closing Balance 2011 5,923 1,405 -2,029 1,530 6,829 6,829 810 682 -7,521 2,701 -1,566 -236 -6,621 890 1,069 1,959 2012 9,860 -1,218 -1,830 2,326 9,138 7,821 -3,746 -3,618 -366 -496 -1,466 -633 -2,961 1,242 1,959 3,201

(INR Million)
2013E 9,613 10 -977 -3,825 4,820 4,820 -2,500 -2,500 0 -1,500 -1,462 -317 -3,279 -959 3,201 2,242 2014E 11,330 300 -1,276 -2,232 8,121 8,121 -2,500 -2,500 0 -3,500 -1,280 -363 -5,142 479 2,242 2,721

July 2012

53

IPCA Labs Buy [IPCA IN; CMP: INR348; MCap: USD0.8B]


Sustained exports growth, domestic business recovery augur well
IPCA is amongst the better managed mid-cap companies which has transitioned from a predominantly anti-malaria player to a diversified company. Diversification and scale-up of operations without dilution of return ratios is a key positive. We expect IPCA to maintain this capital discipline in coming years as well. We estimate 31% earnings CAGR over FY12-14 on the back of 17% revenue CAGR and 20% EBITDA CAGR. The stock is currently valued at 11.3x FY13E EPS and 9.2x FY14E EPS. BUY with TP of INR528 (14x FY14E EPS). EPS to record 31% CAGR over FY12-14 led by: Expect overall topline to grow at 17% CAGR led by sustained growth for international formulations and recovery of growth for India formulations. The expected US FDA approval for Indore SEZ will address a key capacity constraint to drive 35% CAGR for the US business. EPS CAGR of 31% is driven by EBITDA margin expansion and partly due to reversal of forex losses. Expect 22% CAGR for international formulation business led by both generic and branded formulation businesses. India formulations growth to recover in FY13 post a muted FY12. We estimate 16.5% CAGR for this business over FY12-14. Valued at 11.3x FY13E and 9.2x FY14E earnings. BUY with TP of INR528 (14x FY14E EPS). July 2012 54

IPCA Labs

US generic & branded exports to drive intl revenues

US market will be the key growth driver for the future with likely USFDA approval for the companys Indore SEZ. Currently the company is not able to ramp up supplies to US due to severe capacity constraint. Expect 35% revenue CAGR for US over FY12-14. Institutional business is scaling up strongly with revenue expected to move up from INR1.22b in FY11 to INR4b in FY14. IPCA is set to become one of the largest players in antimalaria tender business and this is the most profitable business for the company. Branded formulation markets are expected to grow at 25% CAGR led by increasing geographic penetration and new product launches.

July 2012

55

IPCA Labs

India business growth to recover from FY13 onwards

The company has consistently outperformed the average industry in the past led by rising share of chronic segments, product selection, increase in field force and brand building ability Contribution from lucrative and fast growing chronic business segments on the rise; Currently contributes 65% to domestic formulation business. The recent expansion in field force to 4500MRs to drive growth and start contributing to the bottom-line The performance in FY12 was impacted by lower incidences of Malaria, high attrition in the field force and restructuring of marketing divisions; Corrective measures are in place. Management guides for doubledigit growth going forward. 56

July 2012

IPCA Labs

IPCA Labs Buy [IPCA IN; CMP: INR344; MCap: USD0.8B]

July 2012

57

IPCA Labs

IPCA Labs Financials


Income Statement
Y/E March Net Revenues Cha nge (%) EBITDA Ma rgi n (%) Depreci a ti on EBIT Int. a nd Fi na nce Cha rges Other Income - Rec. PBT before EO Expense EO Expens e/(Income) PBT after EO Expense Current Ta x Deferred Ta x Ta x Ta x Ra te (%) Reported PAT Les s : Mi nori ty Interes t Net Profit Adj PAT 2011 18,969 21.4 3,761 19.8 558 3,203 314 518 3,407 3,407 770 14 784 23.0 2,623 -5 2,628 2,628 2012 23,587 24.3 5,135 21.8 671 4,464 413 -408 3,643 0 3,643 881 0 881 24.2 2,762 0 2,762 2,762

(INR Million)
2013E 27,948 18.5 6,352 22.7 834 5,518 426 70 5,161 0 5,161 1,032 258 1,290 25.0 3,871 0 3,871 3,871 2014E 32,278 15.5 7,371 22.8 984 6,387 426 380 6,341 0 6,341 1,268 317 1,585 25.0 4,756 0 4,756 4,756

Balance Sheet
Y/E March Equi ty Sha re Ca pi ta l Tota l Res erves Net Worth Deferred l i a bi l i ti es Tota l Loa ns Capital Employed Gros s Bl ock Les s : Accum. Deprn. Net Fixed Assets Ca pi ta l WIP Inves tments Curr. Assets Inventory Account Recei va bl es Ca s h a nd Ba nk Ba l a nce Loa ns & Adva nces Curr. Liability & Prov. Account Pa ya bl es Provi s i ons Net Current Assets Appl. of Funds E: MOSL Es ti ma tes 2011 251 10,265 10,516 807 5,308 16,625 9,884 2,892 6,992 1,132 408 10,586 4,664 4,637 104 1,182 2,493 2,073 420 8,093 16,625 2012 252 12,288 12,540 932 5,326 18,798 12,890 3,563 9,326 1,132 341 12,475 6,699 3,491 122 2,163 4,475 4,099 377 7,999 18,798

(INR Million)
2013E 252 15,385 15,637 1190 5,326 22,153 15,390 4,398 10,992 1,132 341 15,061 6,810 5,296 382 2,573 5,372 4,842 530 9,688 22,153 2014E 252 19,189 19,442 1507 5,326 26,275 17,890 5,382 12,508 1,132 341 18,494 8,034 6,113 1,379 2,969 6,200 5,589 611 12,294 26,275

July 2012

58

IPCA Labs

IPCA Labs Financials


Ratios
Y/E March EPS (INR) Ca s h EPS BV/Sha re Valuation (x) P/E Ca s h P/E P/BV EV/Sa l es EV/EBITDA Di vi dend Yi el d (%) FCF per Sha re Return Ratios (%) EBITDA Ma rgi ns (%) Net Profi t Ma rgi ns (%) RoE RoCE Working Capital Ratios As s et Turnover (x) Fi xed As s et Turnover (x) Debtor (Da ys ) Inventory (Da ys ) Worki ng Ca pi ta l Turnover Growth (%) Sa l es EBITDA PAT Leverage Ratio (x) Current Ra ti o Interes t Cover Ra ti o Debt/Equi ty 2011 20.9 25.3 83.7 16.6 13.7 4.2 2.6 13.0 1.1 3.9 19.8 13.9 27.4 25.6 1.9 2.8 87 90 154 21.4 12.8 26.2 4.2 10.2 0.5 2012 21.9 27.2 99.4 15.9 12.8 3.5 2.1 9.5 1.3 8.5 21.8 11.7 24.0 24.1 1.8 2.9 54 104 122 24.3 36.5 5.1 2.8 10.8 0.4 2013E 30.7 37.3 124.0 11.3 9.3 2.8 1.7 7.7 1.8 11.6 22.7 13.9 27.5 28.8 1.8 2.8 69 89 122 18.5 23.7 40.2 2.8 12.9 0.3 2014E 37.7 45.5 154.1 9.2 7.6 2.3 1.5 6.5 2.2 18.8 22.8 14.7 27.1 29.6 1.8 2.7 69 91 123 15.5 16.0 22.8 3.0 15.0 0.3

Cash Flow Statement


Y/E March Oper. Profi t/(Los s ) before Interes t/Di vi dends Recd. Di rect Ta xes Pa i d (Inc)/Dec i n WC CF from Operations EO Expens e / (Income) CF from Operating incl EO Ex (i nc)/dec i n FA (Pur)/Sa l e of Inves tments CF from Investments Is s ue of s ha res (Inc)/Dec i n Debt Interes t Pa i d Di vi dend Pa i d Others CF from Fin. Activity Inc/Dec of Cash Add: Begi nni ng Ba l a nce Closing Balance 2011 3,761 518 -770 -1,203 2,307 0 2,307 -1,821 -83 -1,904 1 762 -314 -468 -388 -407 -4 108 104 2012 5,135 -408 -757 111 4,082 0 4,082 -3,006 68 -2,938 1 25 -413 -554 -185 -1,126 18 104 122

(INR Million)
2013E 6,352 70 -1,032 -1,429 3,961 0 3,961 -2,500 0 -2,500 0 0 -426 -774 0 -1,200 260 122 382 2014E 7,371 380 -1,268 -1,609 4,874 0 4,874 -2,500 0 -2,500 0 0 -426 -951 0 -1,377 997 382 1,379

July 2012

59

Torrent Pharma Buy [TRP IN; CMP: INR587; MCap: USD0.9B]


A play on chronic segments in India and emerging markets
Over the last seven years , Torrent has delivered 33% EPS CAGR and has consistently improved its profitability, with RoCE increasing from 14.5% in FY05 to 28.5% in FY12. We believe that current valuations do not reflect the improvement in business profitability, the turnaround of international operations, and Torrent's strong positioning in the domestic formulations business particularly in chronic therapeutic segments. We expect 25% EPS CAGR over FY12-14, led by strong operational performance. The stock trades at 11.7x FY13E and 9.8x FY14E earnings estimates. BUY with TP of INR895 (15x FY14E EPS). EPS to record 25% CAGR over FY12-14 led by: TRP is a play on highly profitable and fast growing lifestyle segments in domestic formulation business. It enjoys strong positioning in some of the most lucrative and fastest growing chronic therapy segments of CVS and CNS. Expect 15% CAGR in India formulation revenue over FY12-14. International formulations business to record 20% CAGR led mainly by US generics as the company scales-up its presence in US. Latam operations to record 18.5% CAGR Investments in international operations have started paying off and we expect profit margins to expand as operations scale up. Valued at 11.7x FY13E and 9.8x FY14E earnings. BUY with TP of INR895 (15x FY14E EPS). July 2012 60

Torrent Pharma

Intl business to lead growth and improvement in profitability

Investments in international operations have started paying off and we expect profit margins to expand as operations scale up. Healthy revenue growth expected in markets like US (35% CAGR over FY12-14), Europe (21.5% CAGR exGermany), Latam (18.5% CAGR). Entry into some of the large branded generics markets like Mexico, will also drive revenue growth in the coming years. Next phase of growth will be driven by regulated markets like US and Europe (ex-Germany). Expect revenue from regulated markets (ex-Germany) to grow at a CAGR of 28% over FY12-14, led by the US market. 61

July 2012

Torrent Pharma

India business growth to recover from FY13 onwards

A Play on highly profitable and fast growing lifestyle segments in domestic formulation business. TRP derives its strength from being the leader in some of the most lucrative and fastest growing chronic therapy segments of CVS and CNS It has consistently maintained strong positioning in these therapeutic classes, with strong brands and new launches We believe that the recent slowdown in business in FY12 is transitory with corrective measures in place. We expect growth to come back on track from 2HFY13 onwards Has the potential to grow better than industry in the coming years on the back of strong therapeutic portfolio. 62

July 2012

Torrent Pharma

Torrent Pharma Buy [TRP IN; CMP: INR585; MCap: USD0.9B]

July 2012

63

Torrent Pharma

Torrent Pharma Financials


Income Statement
Y/E March Net Sales Cha nge (%) Tota l Expendi ture % of Sa l es EBITDA Ma rgi n (%) Depreci a ti on EBIT Int. a nd Fi na nce Cha rges Other Income - Rec. PBT before EO Expense EO Expens e/(Income) PBT after EO Expense Current Ta x Deferred Ta x Ta x Ta x Ra te (%) Reported PAT Adj PAT 2011 22,049 15.8 18,173 82.4 3,876 14.4 626 3,251 387 562 3,427 0 3,427 740 -15 725 21.2 2,702 2,702 2012 26,959 22.3 21,953 81.4 5,007 15.4 817 4,189 395 445 4,240 654 3,586 723 0 723 17.1 2,863 3,251

(INR Million) Balance Sheet 2013E 2014E Y/E March 32,208 37,425 Equi ty Sha re Ca pi ta l 19.5 16.2 Tota l Res erves 25,907 29,963 Net Worth 80.4 80.1 Deferred l i a bi l i ti es 6,300 7,462 Tota l Loa ns 16.6 17.0 Capital Employed
985 5,316 348 534 5,502 0 5,502 1,265 0 1,265 23.0 4,236 4,236 1,198 6,264 348 641 6,557 0 6,557 1,508 0 1,508 23.0 5,049 5,049

(INR Million)
2011 423 9,801 10,224 480 5,721 16,440 9,643 3,287 6,355 2,186 1,460 15,346 5,048 3,404 4,788 2,106 8,907 7,479 1,427 6,439 16,440 2012 423 11,515 11,938 514 4,640 17,127 11,538 4,105 7,433 2,186 1,240 19,620 5,316 5,228 6,743 2,333 13,352 11,545 1,807 6,268 17,127 2013E 423 14,777 15,200 514 4,640 20,354 14,724 5,089 9,634 1,500 1,240 23,747 6,477 6,392 7,980 2,898 15,767 13,210 2,557 7,980 20,354 2014E 423 18,665 19,088 514 4,640 24,242 17,224 6,287 10,936 1,500 1,240 28,899 7,928 7,433 9,971 3,568 18,334 15,361 2,973 10,565 24,242

Gros s Bl ock Les s : Accum. Deprn. Net Fixed Assets Ca pi ta l WIP Inves tments Curr. Assets Inventory Account Recei va bl es Ca s h a nd Ba nk Ba l a nce Loa ns & Adva nces Curr. Liability & Prov. Account Pa ya bl es Provi s i ons Net Current Assets Appl. of Funds E: MOSL Es ti ma tes

July 2012

64

Torrent Pharma

Torrent Pharma Financials


Ratios Y/E March Basic EPS (INR) EPS Ca s h EPS BV/Sha re DPS Pa yout (%) Valuation (x) P/E Ca s h P/E P/BV EV/Sa l es EV/EBITDA Di vi dend Yi el d (%) FCF per Sha re Return Ratios (%) EBITDA Ma rgi ns (%) Net Profi t Ma rgi ns (%) RoE RoCE Working Capital Ratios As s et Turnover (x) Fi xed As s et Turnover (x) Debtor (Da ys ) Inventory (Da ys ) Worki ng Ca pi ta l Turnover Leverage Ratio (x) Current Ra ti o Interes t Cover Ra ti o Debt/Equi ty 2011 31.9 39.3 120.8 9.3 29.1 18.4 14.9 4.9 2.3 13.0 1.6 0.0 14.4 12.3 29.2 25.9 1.3 3.7 55 84 27 1.7 8.4 0.6 2012 38.4 43.5 141.1 7.4 21.8 15.3 13.5 4.2 1.8 9.5 1.3 0.0 15.4 12.1 29.3 28.5 1.6 3.9 71 72 -6 1.5 10.6 0.4 2013E 50.1 61.7 179.6 11.5 23.0 11.7 9.5 3.3 1.4 7.3 2.0 0.0 16.6 13.2 31.2 32.1 1.6 3.8 72 73 0 1.5 15.3 0.3 2014E 59.7 73.8 225.6 13.7 23.0 9.8 7.9 2.6 1.2 5.9 2.3 0.0 17.0 13.5 29.4 31.7 1.5 3.6 72 77 6 1.6 18.0 0.2

Cash Flow Statement Y/E March Oper. Profi t/(Los s ) before Interes t/Di vi dends Recd. Di rect Ta xes Pa i d (Inc)/Dec i n WC CF from Operations EO Expens e / (Income) CF from Operating incl EO E (i nc)/dec i n FA (Pur)/Sa l e of Inves tments CF from Investments (Inc)/Dec i n Debt Interes t Pa i d Di vi dend Pa i d Others CF from Fin. Activity Inc/Dec of Cash Add: Begi nni ng Ba l a nce Closing Balance

2011 3,876 562 -744 577 4,271 0 4,271 -2,601 -48 -2,649 513 -387 -787 -57 -717 905 3,883 4,788

2012 5,007 445 -689 2,126 6,889 654 6,235 -1,895 219 -1,676 -1,062 -395 -625 -524 -2,605 1,955 4,788 6,743

(INR Million) 2013E 2014E 6,300 7,462 534 641 -1,265 -1,508 -475 -595 5,094 6,000 0 5,094 -2,500 0 -2,500 -35 -348 -974 0 -1,357 1,237 6,743 7,980 0 6,000 -2,500 0 -2,500 0 -348 -1,161 0 -1,509 1,991 7,980 9,971

July 2012

65

Sun Pharma Neutral [SUNP IN; CMP: INR623; MCap: USD11.6B]


Best play on India & US generics but fairly valued
An expanding US generic portfolio coupled with sustained double-digit growth in high-margin life-style segments in India is likely to bring in longterm benefits for SUNP. Its ability to sustain superior margins even on a high base is a clear positive. Key drivers for future include: (a) Ramp-up in US business and resolution of Caraco's cGMP issues; (b) Monetization of the Para-IV pipeline in the US; (c) Launch of controlled substances in the US; (d) Sustaining Taro's high profitability. The stock is valued at 25.9x FY13E and 24.1x FY14E core earnings. While we are positive on SUNP's business outlook, rich valuations have tempered down our bullishness. We maintain Neutral with target price of INR647 (25x FY14 EPS). Inorganic initiatives (SUNP has cash of ~USD1b) are a key risk to our rating. Muted core EPS growth led by lower Taro profitability & higher tax: Taros profitability in US has improved significantly over past 6 quarters (EBITDA margins have doubled to 45%) due to price increases for some derma products due to temporary reduction in competitive pressures. We believe that this is not sustainable in the long-term. Expect 15% CAGR for India formulations business driven by strong positioning in high-growth chronic segments and 32% CAGR in emerging markets led by increased penetration in key markets. Expect core topline and PAT growth at 16% and 7% respectively over FY12-14. Estimates budget for potential decline in Taro profitability and higher tax rate. Valued at 25.9x FY13E and 24.1x FY14E core earnings. Maintain Neutral with TP of INR647 (25x FY14E EPS). July 2012 66

US business high profitability is at risk


Sun Pharmaceuticals

Post Taros acquisition, Sun becomes largest Indian generic company in US Successful acquisition of Taro has given it significant leverage in niche therapeutic segment of Dermatology in US Across Sun Pharma, Taro and Caraco 148 products awaiting approval one of the strongest pipelines globally Signed consent decree with US FDA with respect to cGMP issues at Caraco. Resolution and sales ramp-up will be gradual. Taros profitability in US has improved significantly over past 6 quarters (EBITDA margins have doubled to 45%) due to price increases for some derma products due to temporary reduction in competitive pressures. We believe that this is not sustainable in the longterm. 67

July 2012

Sun Pharmaceuticals

India & emerging mkts business on a strong footing

Sun Pharma is the 4th largest company in domestic formulation space. It is also among the fastest growing companies with CAGR of 24% over the past few years. Quality of portfolio is the best with leadership in key, fast growing and highly profitable therapeutic segments like CVS, CNS, GI, Diabetology, Orthopedics, Gynecology, Oncology. Its ability to sustain superior margins even on a high base is a clear positive driven by strong doctor relationships. We factor in 15% CAGR for this business over FY12-14 partly impacted by extra sales of INR1.8b booked in 4QFY12 Emerging market business is also expected to record a strong 32% CAGR driven by increased penetration into key markets 68

July 2012

Sun Pharmaceuticals

Sun Pharma Neutral [SUNP IN; CMP: INR623; MCap: USD11.6B]

July 2012

69

Sun Pharmaceuticals

Sun Pharma Financials


Consolidated Income Statement
Y/E March Net Sales Cha nge (%) Tota l Expendi ture % of Sa l es EBITDA Ma rgi n (%) Depreci a ti on EBIT Int. a nd Fi na nce Cha rges Other Income - Rec. PBT Ta x Ta x Ra te (%) Profit after Tax Cha nge (%) Ma rgi n (%) Les s : Mi onri ty Interes t Net Profit Adj. PAT 2011 57,214 39.5 37,514 65.6 19,700 34.4 2,041 17,659 577 3,276 20,358 1,284 6.3 19,074 41.6 33 913 18,161 14,041 2012 80,057 39.9 47,550 59.4 32,507 40.6 2,912 29,595 282 4,240 33,554 3,826 11.4 29,727 55.9 37 3855 25,873 23,228

(INR Million)
2013E 89,407 11.7 57,021 63.8 32,386 36.2 3,354 29,031 164 5,506 34,373 6,187 18.0 28,186 -5.2 32 3315 24,871 24,871 2014E 99,762 11.6 66,087 66.2 33,674 33.8 3,639 30,035 164 7,285 37,155 7,431 20.0 29,724 5.5 30 2984 26,741 26,741

Consolidated Balance Sheet


Y/E March Equi ty Sha re Ca pi ta l Tota l Res erves Net Worth Mi nori ty Interes t Deferred Li a bi l i ti es Secured Loa n Uns ecured La on Tota l Loa ns Capital Employed Gros s Bl ock Les s : Accum. Deprn. Net Fixed Assets Ca pi ta l WIP Goodwi l l Inves tments Curr. Assets Inventory Account Recei va bl es Ca s h a nd Ba nk Ba l a nce L & A a nd Others Curr. Liability & Prov. Account Pa ya bl es Provi s i ons Net Current Assets Appl. of Funds

(INR Million)
2011 2012 2013E 2014E 1,036 1,036 1,036 1,036 93,798 120,628 139,281 158,802 94,833 121,664 140,317 159,837 8,472 11,615 14,930 17,913 -3652 -5199 -5199 -5199 1,804 1,644 1,644 1,644 2,452 1,096 1,096 1,096 4,256 2,739 2,739 2,739 103,908 130,818 152,787 175,291 45,520 20,286 25,234 2,706 7,720 22,310 53,407 23,198 30,210 2,706 10,218 22,129 58,407 26,552 31,855 2,706 10,218 22,129 62,907 30,192 32,716 2,706 10,218 22,129

60,172 90,506 114,621 142,672 14,794 20,870 21,521 26,102 11,716 19,261 19,596 21,866 21,936 33,672 55,133 74,206 11,726 16,703 18,371 20,499 14,234 24,950 28,743 35,150 9,203 14,410 16,338 20,499 5,030 10,541 12,405 14,651 45,939 65,556 85,878 107,522 103,908 130,819 152,787 175,291

July 2012

70

Sun Pharmaceuticals

Sun Pharma Financials


Ratios
Y/E March Basic (INR) EPS Fully Diluted EPS Ca s h EPS BV/Sha re DPS Pa yout (%) Valuation (x) P/E Ca s h P/E P/BV EV/Sa l es EV/EBITDA Di vi dend Yi el d (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fi xed As s et Turnover (x) Debtor (Da ys ) Inventory (Da ys ) Worki ng Ca pi ta l T/O (Da ys ) Leverage Ratio Debt/Equi ty (x) 2011 13.6 13.6 19.5 91.6 3.5 22.1 45.9 31.9 6.8 10.6 30.7 0.6 16.2 23.4 2.8 75 94 293 0.0 2012 22.4 22.4 27.8 117.5 4.2 17.3 27.8 22.4 5.3 7.4 18.2 0.7 21.5 30.3 2.9 88 95 299 0.0 2013E 24.0 24.0 27.3 135.5 5.1 22.1 25.9 22.9 4.6 6.4 17.6 0.8 19.0 25.8 2.9 80 88 351 0.0 2014E 25.8 25.8 29.3 154.3 6.0 24.3 24.1 21.2 4.0 5.5 16.4 1.0 17.8 24.4 3.1 80 96 393 0.0

Cash Flow Statement


Y/E March OP/(Los s ) bef. Ta x Int./Di vi dends Recd. Di rect Ta xes Pa i d (Inc)/Dec i n WC CF from Operations (i nc)/dec i n FA (Pur)/Sa l e of Inves t. CF from investments Cha nge i n networth (Inc)/Dec i n Debt Interes t Pa i d Di vi dend Pa i d CF from Fin. Activity 2011 19,700 3,276 -4,046 -533 18,397 2012 32,507 4,240 -5,373 -7,882 23,493

(INR Million)
2013E 32,386 5,506 -6,187 1,138 32,843 -5,000 0 -5,000 0 0 -164 -6,218 -6,382 2014E 33,674 7,285 -7,431 -2,571 30,957 -4,500 0 -4,500 0 0 -164 -7,220 -7,384 19,073 55,133 74,206

-16,864 -10,386 8,354 181 -8,510 -10,205 8,223 2,545 -577 -4,213 5,977 5,395 -1,517 -282 -5,149 -1,553

Inc/Dec of Cash 15,864 11,736 21,461 Add: Begi nni ng Ba l a nce 6,072 21,936 33,672 Closing Balance 21,936 33,672 55,133 Note: Ca s hfl ows do not ta l l y due to a cqui s i ti on

July 2012

71

Cipla Neutral [CIPLA IN; CMP: INR308; MCap: USD4.4B]


Large capex is long-term positive but export visibility still poor
Cipla continues to face short-term headwinds in ramping up its formulation exports business despite a favorable currency. Its muted growth guidance for overall business raises uncertainty on the timelines of ramp-up at Indore SEZ. While large capex (for past few years) is a longterm positive, we believe it is imperative for the company to improve asset utilization at Indore to drive future growth and derive benefits of operating leverage (overhead expenses continue to adversely impact performance). The stock trades at 19.2x FY13E and 16.9x FY14E core earnings. Maintain Neutral with target price of INR365 (20x FY14E EPS). Expect core EPS to record 15% CAGR led by: Core topline to record 12% CAGR for FY12-14 led by 14% CAGR for India formulations business but impacted by a muted 11% CAGR for exports. Cipla continues to face short-term headwinds in ramping up its formulation exports business despite a favorable currency mainly due to rationalization of ARV exports. Management has guided for topline growth guidance of 10% and PAT growth guidance of 10-15% for FY13E. Improvement in asset utilization is imperative to enhance return ratios Expect core EPS growth at 16% over FY12-14 driven by slight margin improvement and lower interest costs.

July 2012

72

Cipla

Domestic formulations Outperforming industry growth is a challenge

Cipla is a dominant player in domestic formulations (DF) market and enjoys No 2 ranking in the industry. This business contributes ~45% of Cipla's overall revenues and is a key earnings driver. The company has reported 14%YoY growth in this business in FY12, post muted performance in FY10 and FY11. Given the high base and increasing competition in acute therapy segments, we believe it will be challenging for Cipla to sustain 15-16% growth in this business We think that the company is likely to underperform industry growth rate in next couple of years and hence, we model in a more moderate 14% CAGR over FY12-14. 73

July 2012

Cipla

Export visibility remains poor

Cipla's formulation exports performed below expectations with growth of ~7% in FY12. This was particularly disappointing given favorable currency in FY12. Management indicated that it has not benefited from the currency, and that it has also undertaken a product-cumgeographical rationalization of this business to ensure focus only on profitable products/ geographies. This rationalization will last for the next 2-3 quarters. We believe that it is imperative for Cipla to get regulatory clearances for products from Indore SEZ to record higher growth in exports. We estimate 11% CAGR for export revenues as the visibility on increased utilization at Indore remains poor 74

July 2012

Cipla

Inhalers Large underutilized capacities but poor growth visibility

Cipla is a dominant player in domestic inhaler market with more than 50% market share Large global-sized capacities Over 140m inhaler devices per annum. Developing 9 different inhalers Expect these inhalers to be commercialized in Europe in phases over next 2-3 years. Visibility on launch-time lines is still poor. We dont expect any significant upside from supplies to Meda in short term for its product approval of Azelastine & Fluticasone nasal spray in US. Can become partner of choice for large MNCs given the strong expertise and capacities in the inhalers space.

July 2012

75

Cipla

Cipla Neutral [CIPLA IN; CMP: INR310; MCap: USD4.5B]

July 2012

76

Cipla

Cipla Financials
Income Statement
Y/E March Gross Sales Cha nge (%) Exports Net Domes ti c Sa l es Other Opera ti ng Income Net Income Cha nge (%) Tota l Expendi ture EBITDA Ma rgi n (%) Depreci a ti on EBIT Int. a nd Fi na nce Cha rges Other Income - Rec. PBT before EO Items Extra Ordi na ry Expens e PBT but after EO Exp. Ta x Ta x Ra te (%) Reported PAT Adj PAT Cha nge (%) Ma rgi n (%) 2011 61,798 14.2 33,548 27,755 1,842 63,145 12.6 49,927 13,218 20.9 2,542 10,677 173 1,122 11,625 0 11,625 1,954 16.8 9,671 9,671 -3.8 15.3 2012 69,049 11.7 36,920 31,157 1,698 69,775 10.5 53,956 15,819 22.7 2,821 12,998 266 1,483 14,215 0 14,215 2,975 20.9 11,240 10,821 11.9 15.5

(INR Million)
2013E 76,573 10.9 39,946 35,560 1,828 77,334 10.8 59,328 18,006 23.3 3,194 14,812 111 1,422 16,124 0 16,124 3,225 20.0 12,899 12,899 19.2 16.7 2014E 87,061 13.7 45,307 40,539 1,936 87,781 13.5 67,570 20,211 23.0 3,444 16,767 29 1,565 18,303 0 18,303 3,661 20.0 14,642 14,642 13.5 16.7

Balance Sheet
Y/E March Equi ty Sha re Ca pi ta l Res erves Reva l ua ti on Res erves Net Worth Loa ns Deferred Li a bi l i ti es Capital Employed Gros s Bl ock Les s : Accum. Deprn. Net Fixed Assets Ca pi ta l WIP Inves tments Curr. Assets Inventory Account Recei va bl es Ca s h a nd Ba nk Ba l a nce Others Curr. Liability & Prov. Account Pa ya bl es Net Current Assets Appl. of Funds 2011 1,606 64,966 90 66,661 5,719 2131 74,511 42,411 11,465 30,946 2,853 5,904 46,599 19,062 14,908 1,010 11,619 11,791 11,791 34,808 74,511 2012 1,606 73,500 90 75,196 3,219 2131 80,546 47,411 14,286 33,125 2,853 5,904 53,800 20,143 17,593 1,666 14,398 15,137 15,137 38,663 80,546

(INR Million)
2013E 1,606 83,174 90 84,870 480 1325 86,674 52,411 17,480 34,931 2,853 5,904 59,178 21,928 18,881 3,161 15,208 16,192 16,192 42,986 86,674 2014E 1,606 94,156 90 95,851 480 410 96,741 56,911 20,924 35,987 2,853 10,904 65,435 23,990 20,752 3,419 17,274 18,438 18,438 46,997 96,741

July 2012

77

Cipla

Cipla Financials
Ratios
Y/E March Basic (INR) EPS Ca s h EPS BV/Sha re DPS Pa yout (%)
Valuation (x) P/E PEG (x) Ca s h P/E P/BV EV/Sa l es EV/EBITDA Di vi dend Yi el d (%)

2011
12.0 15.2 82.9 6.5 30.8 25.6 -6.8 20.3 3.7 4.0 19.1 2.1

2012
13.5 17.0 93.5 5.8 24.1 22.9 1.9 18.2 3.3 3.6 15.8 1.9

2013E
16.1 20.0 105.6 6.9 25.0 19.2 1.0 15.4 2.9 3.2 13.6 2.2

2014E 18.2 22.5 119.3 7.8 25.0 16.9 1.3 13.7 2.6 2.8 12.1 2.5 15.3 18.9 2.5 86 100 181 3.5 0.0

Cash Flow Statement


Y/E March 2011 Op. Profi t/(Los s ) before T 13,218 Interes t/Di vi dends Recd. 1,122 Di rect Ta xes Pa i d -1,614 (Inc)/Dec i n WC -2,889 CF from Operations 9,837 EO expens e 0 CF from Oper. incl EO Expen 9,837 (i nc)/dec i n FA -9,386 (Pur)/Sa l e of Inves tments -3,440 CF from Investments -12,826 Is s ue of Sha res Inc/(Dec) i n Debt Interes t Pa i d Di vi dend Pa i d CF from Fin. Activity Inc/Dec of Cash Add: Begi nni ng Ba l a nce Closing Balance 867 5,668 -173 -2,983 3,379 390 621 1,010 2012 15,819 1,483 -2,975 -3,199 11,127 0 11,127 -5,000 0 -5,000 0 -2,500 -266 -2,705 -5,472 656 1,010 1,666

(INR Million)
2013E 18,006 1,422 -4,031 -2,828 12,570 0 12,570 -5,000 0 -5,000 0 -2,739 -111 -3,225 -6,075 1,495 1,666 3,161 2014E 20,211 1,565 -4,576 -3,752 13,447 0 13,447 -4,500 -5,000 -9,500 0 0 -29 -3,661 -3,689 258 3,161 3,419

Return Ratios (%) RoE RoCE


Working Capital Ratios Fi xed As s et Turnover (x) Debtor (Da ys ) Inventory (Da ys ) Worki ng Ca pi ta l (Da ys ) Leverage Ratio (x) Current Ra ti o Debt/Equi ty

14.5 15.8
2.5 86 110 195 4.0 0.1

14.4 18.0
2.2 92 105 194 3.6 0.0

15.2 18.7
2.3 89 103 188 3.7 0.0

July 2012

78

Ranbaxy Neutral [RBXY IN; CMP: INR487; MCap: USD3.7B]


Imperative to improve core business profitability
Ranbaxys core business profitability continues to be under pressure due to higher fixed costs (partly due to US FDA issues at its two India sites) and high front-end expenses in various markets. The US FDA/DoJ settlement and subsequent filing of the consent decree in the US court is a positive development but the penalty of USD500m seems to be fairly high. Signing of the consent decree is likely to delay the full recovery of supplies from India into CY13 compared to our previous assumption of the benefits coming through in CY12. We believe that current valuations already factorin a potential improvement in core profitability for CY13E. The stock is valued at 19.4x CY13E core EPS (ex-one offs). Maintain Neutral with TP of INR495 (20x CY13E EPS + INR61/sh DCF value of Para-IV pipeline). EPS CAGR of 25% due to margin improvement & reversal of forex losses Core topline to record 16% CAGR for CY11-13 led by recovery of the US business (25% CAGR), few emerging markets to grow at 15% CAGR and 14% CAGR for India formulations business. We expect the US core business to fully recover based on our assumption that Ranbaxy will be able to adhere to the terms of the consent decree by then. Expect core EPS CAGR at 24% over CY11-13 which will be driven by gradual margin improvement (partly driven by expected improvement in core US business) and reversal of forex losses. Valued at 19.4x CY13E core earnings. Maintain Neutral with TP of INR495 (20x CY13E EPS + INR61/sh DCF value of Para-IV pipeline). July 2012 79

US business expected to recover

Ranbaxy

Resolution of US FDA compliance issues Signing consent decree is positive but delays recovery to CY13. Penalty of USD500m seems to be on the higher side and could potentially lead to lower other income as cash gets utilized for funding the penalty We expect core US business to fully recover by CY13 (leading to revenue CAGR of 25% for CY1113) based on our assumption that Ranbaxy will be able to adhere to the conditions imposed in the consent decree. Upside from FTFs We estimate DCF value of FTFs at INR61/sh assuming that none of the large FTF opportunities are lost under the consent decree.

July 2012

80

Ranbaxy

Domestic formulations Outperforming industry growth is a challenge

Ranbaxy is a dominant player in domestic formulations (DF) market. Given the high base and increasing competition in acute therapy segments, we believe it will be challenging for Ranbaxy to outperform the average industry growth in this business Project Viraat progress is slower than expected hence growth in domestic formulation business continues to remain muted We think that the company is likely to underperform industry growth rate in next couple of years and hence, we model in a more moderate 14% CAGR over FY12-14.

July 2012

81

Ranbaxy

Ranbaxy Neutral [RBXY IN; CMP: INR490; MCap: USD3.7B]

July 2012

82

Ranbaxy

Ranbaxy Financials
Income Statement
Y/E December Net Sales Cha nge (%) Other Opera ti ng Income Tota l Expendi ture EBITDA Cha nge (%) Ma rgi n (%) Depreci a ti on EBIT Int. a nd Forex l os s Other Income - Rec. PBT pre EO Expense Cha nge (%) Extra Ordi na ry Expens e PBT after EO Exp. Ta x Ta x Ra te (%) Reported PAT Mi nori ty Interes t Adj PAT after Min. Int. Cha nge (%) Ma rgi n (%) Adj PAT excl one-offs 2010 85,355 16.5 4,253 70,955 18,652 161.8 20.8 5,533 13,120 -793 2,795 16,708 104.6 -4,293 21,001 5,849 27.8 15,152 185 10,855 467.9 12.7 3,008

(INR Million)
2011 2012E 2013E 99,578 115,499 106,807 16.7 16.0 -7.5 2,036 2,611 2,382 85,425 98,766 94,670 16,189 -13.2 15.9 3,940 12,249 6,109 4,340 10,480 -37.3 37,345 -26,865 1,969 -7.3 -28,834 -163 -28,997 -367.1 -29.1 5,955 19,343 19.5 16.4 3,623 15,721 1,006 1,886 16,600 58.4 -2,027 18,627 2,515 13.5 16,113 600 13,353 -146.0 11.6 13,353 14,519 -24.9 13.3 4,113 10,405 111 2,192 12,487 -24.8 -2,850 15,337 3,067 20.0 12,269 0 9,153 -31.5 8.6 9,153

Balance Sheet
Y/E December Equi ty Sha re Ca pi ta l Ful l y Di l uted Eq Ca p Res erves Reva l ua ti on Res erves Net Worth Mi nori ty Interes t Loa ns Deferred l i a bi l i ti es Capital Employed Gros s Bl ock Les s : Accum. Deprn. Net Fixed Assets Ca pi ta l WIP Inves tments Goodwi l l /Inta ngi bl es Curr. Assets Inventory Account Recei va bl es Ca s h a nd Ba nk Ba l a nce Others Curr. Liability & Prov. Account Pa ya bl es Provi s i ons Net Current Assets P&L Account Appl. of Funds 2010 2011 2,105 2,110 2,105 2,110 53,871 38,178 71 71 56,047 40,359 647 810 43,348 44,907 -227 -375 99,815 85,701 67,050 73,266 21,571 24,680 45,479 48,587 3,818 2,641 4,985 982 19,009 19,009 86,932 104,582 21,926 26,107 16,052 30,065 32,644 30,681 16,309 17,729 41,398 82,757 31,865 53,189 9,534 29,568 45,534 21,826 11,666 99,815 85,701

(INR Million)
2012E 2,110 2,110 51,068 71 53,250 210 36,907 -375 89,991 79,266 28,303 50,964 6,231 982 19,009 80,166 29,745 21,876 8,294 20,252 48,351 42,719 5,633 31,815 89,991 2013E 2,110 2,110 60,270 71 62,452 210 28,907 -375 91,193 85,266 32,416 52,851 6,231 982 19,009 77,131 27,507 20,229 10,667 18,728 46,001 39,504 6,497 31,130 91,193

July 2012

83

Ranbaxy

Ranbaxy Financials
Ratios
Y/E December Basic (INR) EPS (Fully diluted)* Ca s h EPS BV/Sha re DPS Pa yout (%) Valuation (x) P/E (Ful l y di l uted) PEG (x) Ca s h P/E P/BV EV/Sa l es EV/EBITDA Di vi dend Yi el d (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fi xed As s et Turnover (x) Debtor (Da ys ) Inventory (Da ys ) Worki ng Ca pi ta l (Da ys ) Leverage Ratio (x) Current Ra ti o Debt/Equi ty 2010 25.8 38.9 132.9 2.0 6.5 16.4 0.0 10.8 3.2 2.4 11.5 0.5 19.4 15.9 1.9 69 94 55 2.1 0.8 2011 14.1 -59.4 95.5 0.0 0.0 29.9 -0.1 -7.1 4.4 2.1 13.4 0.0 -72.0 19.4 2.1 110 96 -32 1.3 1.1 2012E 31.6 40.2 126.0 6.5 20.0 13.3 -0.1 10.5 3.3 2.0 12.0 1.5 25.1 19.6 2.3 69 94 74 1.7 0.7 2013E 21.7 31.4 147.8 6.2 25.0 19.4 -0.6 13.4 2.9 2.0 15.2 1.5 14.7 13.8 2.1 69 94 70 1.7 0.5

Cash Flow Statement


Y/E December Op.Profi t/(Los s ) bef. Ta x Interes t/Di vi dends Recd. Di rect Ta xes Pa i d (Inc)/Dec i n WC CF from Operations EO Expens e CF frm Op.incl EO Exp. (Inc)/Dec i n FA (Pur)/Sa l e of Inves tments CF from Investments Cha nge i n networth Inc/(Dec) i n Debt Interes t Pa i d Di vi dend Pa i d CF from Fin. Activity Inc/Dec of Cash Add: Begi nni ng Ba l a nce Closing Balance 2010 18,652 2,795 -1,331 -6,332 13,785 0 13,785 -3,694 423 -3,271 2,736 7,167 793 -982 9,714 20,228 12,416 32,644 2011 16,189 4,340 -2,117 21,745 40,157 0 40,157 -5,871 4,002 -1,869 -35,864 1,722 -6,109 0 -40,252 -1,963 32,644 30,681

(INR Million)
2012E 19,343 1,886 -2,515 -32,377 -13,662 0 -13,662 -9,589 0 -9,589 13,693 -8,600 -1,006 -3,223 864 -22,388 30,681 8,294 2013E 14,519 2,192 -3,067 3,058 16,702 0 16,702 -6,000 0 -6,000 2,850 -8,000 -111 -3,067 -8,328 2,374 8,294 10,667

July 2012

84

Healthcare

July 2012

85

Healthcare

Sector themes

Generics: Multiple Opportunities

July 2012

86

Healthcare

Generics Innovators entering generics space


Consolidation in the generic space Emerging Trends

Growth challenges in developed world leading many large innovator companies to evaluate strong generic presence in order to improve growth rates. Have significant cash to fund acquisitions

Acquire scale and expand product offerings. Exploit backward-integration synergies in manufacturing Prevent competitors from entering/strengthening presence in key markets Barring Teva, Sandoz & Mylan, rankings of other generic companies likely to undergo significant change over the next few years

Ranbaxy Daiichi, Abbott Piramal, Sanofi-Zentiva, GSK Aspen/Dr. Reddys, Pfizer Aurobindo/Strides deals are the initial signs of an innovator companies becoming aggressive in generics space

Novartis Sandoz business model has been running successfully for many years

July 2012

87

Generics/Emerging Markets Consolidation


Consolidation in the generic space major deals

Healthcare

July 2012

88

Healthcare

Generics Significant polarization

July 2012

89

Generics Differentiation is the key


Generics Differentiation is becoming imperative

Healthcare

Generic players are adopting varying strategies to achieve this differentiation Low-competition products DRL, Sun Pharma, Glenmark, Lupin, Cipla Proprietary Products Glenmark, Lupin (branded portfolio in US) Low-risk partnership model Cipla High-risk Para-IVs Ranbaxy, DRL
PRODUCT/ THERAPEUTIC SEGMENTS Control l ed s ubs ta nce products , NDDS products Control l ed s ubs ta nces , Hormones - for US ma rket Strengtheni ng bra nded portfol i o i n the US Control l ed s ubs ta nces , Derma Products a nd Hormones - for US ma rket Out-l i cens i ng of NCEs Inha l ers opportuni ty i n Europe Strong pi pel i ne of FTFs STATUS Yet to be commerci a l i zed Yet to be commerci a l i zed Acqui red Anta ra bra nd. Ha s entered i nto mktg a rra ngement for Aerocha mber Yet to be ful l y commerci a l i zed Ha s genera ted US$202m ti l l da te from out-l i cens i ng but ha s met wi th fa i l ures a l s o Ha s a bout 8 i nha l ers under devel opment/regul a tory fi l i ngs . Expect gra dua l l a unch over next 2 yea rs Mos t of the pi pel i ne moneti zed. Ca s h-fl ows yet to commence. US FDA cl ea ra nce i mpera ti ve for unl ocki ng va l ue Yet to be commerci a l i zed Yet to be commerci a l i zed. DRL i s ta rgeti ng a t l ea s t one l ow-competi ti on l a unch every yea r i n US for next few yea rs

COMPANY Sun Pha rma Lupi n

Gl enma rk

Ci pl a Ra nba xy

DRL

Penems , Immunos uppres s a nts , Bi ol ogi cs Fonda pa ri nux, Zyprexa , Other FTFs , Bi ogeneri cs

Source: Companies/MOSL

July 2012

90

Healthcare

Generics Differentiation is the key


Generics Differentiation is becoming imperative

Generic players are adopting varying strategies to achieve this differentiation

DIFFERENTIATION - VALUE GENERATED TILL DATE (US$ M) COMPANY DIFFERENTIATING FACTOR Commerci a l i za ti on/Moneti za ti on of pa tent Sun Pha rma cha l l enge pi pel i ne ti l l da te Lupi n Ups i de from l ow-competi ti on products Sa l e of technol ogy Gl enma rk NCE mi l es tones recei ved ti l l da te Ups i de from l ow-competi ti on products Ra nba xy** Commerci a l i za ti on/Moneti za ti on of pa tent cha l l enge pi pel i ne ti l l da te NCE mi l es tones recei ved ti l l da te DRL Ups i de from l ow-competi ti on products

NCE mi l es tones recei ved ti l l da te Commerci a l i za ti on/Moneti za ti on of pa tent cha l l enge pi pel i ne ti l l da te ** Includes patent settlements which will contribute over the next 6 years (NPV); Above figures are MOSL estimates

PRODUCTS Oxca rba zepi ne, Pa ntopra zol e, Ami fos ti ne, El oxa ti n, Exel on, EffexorXR, Keppra Inj. Ceftri a xone, Cefdi ni r, Ra mi pri l , Lotrel , Supra x Peri ndopri l & Ri fa xi mi n Ogl emi l a s t, Mel ogl i pti n, GRC6211, GRC15300, GBR500 Oxca rba zepi ne, Ta rka Generi c vers i ons of Cefti n, Zocor, Va l trex, Nexi um, Li pi tor, Fl oma x, Ca duet, Di ova n, Ari cept RBx2258, RBx10558 Fexofena di ne. Omepra zol e OTC, Ta crol i mus , Lotrel & others DRF2593, DRF2725, DRF4158 Generi c vers i ons of Proza c, Zofra n, Imi trex, Zyprexa

ONE-TIME PAT ~430 150-200 69 202 30-40 848 14 75 15 241

July 2012

91

Healthcare

July 2012

92

Healthcare

CRAMS - Opportunity

Outsourcing likely to gain steam as innovators start focusing on their core competencies i.e. R&D and marketing due to rising cost pressures & low R&D productivity. MNCs to outsource manufacturing Unique combination of superior chemistry and regulatory skills, as well as good quality at low costs augurs well for India as a preferred outsourcing destination The contract manufacturing opportunity alone is likely to grow 3.7x to US$3b between 2007-2012 (i.e. 7% of global market opportunity) Given the high entry barriers, very few players in India are prepared to exploit this opportunity. We expect the top-5 players to get disproportionate share of business initially. Invest in companies that have established MNC relationships & can undertake the requisite front-ended capex and can deliver scale Investors should take long-term view on the CRAMS opportunity as gestation periods are likely to be longer and at times accompanied by phases of lower visibility Valuation and view CRAMS opportunity is too large to ignore despite initial teething problems, which will be taken care of as Indian players strengthen their pipelines Inventory reductions and liquidity crunch impacted performance in last 6-8 quarters. Expect gradual recovery from FY12 onwards

July 2012

93

Healthcare

CRAMS - Why outsource?


New drug development has become extremely time consuming taking at least 10-12 years Rate of new drug approvals is declining Cost of drug development is increasing (R&D investment CAGR is 11%) Fewer blockbuster drugs, competition from other patented products and intensifying generic competition, is leading to more drugs under development Hence, innovator pharmaceutical companies have started focusing on their core competencies (i.e. R&D and marketing) and are likely to out-source manufacturing
Declining R&D productivity
Global R&D Spend (US$b) - LHS 53 39 30 23 8 26 25 13 28 15 17 19 30 21 35 23 27 26 30 24 17 31 37 40 43 NME Approvals (Nos) - RHS 48 35 21 47 46

22 13

31

10 11

18

18

16

17

19

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: Companies/ MOSL

July 2012

94

2009

Healthcare

CRAMS: What do MNC companies think about outsourcing


AstraZeneca Pfizer GSK Merck BMS Novo Nordisk Takeda Planning to outsource all its API manufacturing activities within ten years. Aiming to become a pure research, development and marketing organization. Looking to access China and India in a much more meaningful way Aiming to outsource 30% of its manufacturing capabilities . Thinks Asia as major outsourcing destination Operational Excellence program designed to achieve savings of Euro1b by 2010. 40% of which will come from manufacturing rationalization including outsourcing Planning to outsource about 30% of the manufacturing . Entered into a five-year master supply agreement with Patheon Planning to divest/shut down manufacturing sites. Aggressively outsource manufacturing of mature products Continue to use third-party suppliers for back-up production of newer drugs Planning to outsource about one-third of its global research and development activities to India Would invest heavily in India besides trebling headcount from 600 to 2,000 by 2012 Expects to raise the ratio of outsourced production to 80% of its overall output

July 2012

95

Increasing outsourcing to India


Healthcare

China is not a threat yet as pharma out-sourcing is not just about labor arbitrage, but also about chemistry and regulatory skills as well as good quality MNCs have commenced outsourcing from India Most of the products being outsourced are off-patent products Recently MNCs have shown a willingness to outsource patented products as well

July 2012

96

Notes

July 2012

97

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