FINAL PROJECT REPORT

ON

“FINDING OF SAFE ISLAND IN THE SEA OF RISK(Fundamental Analysis of stocks of Pharma sector) ”

Submitted to AMITY UNIVERSITY in Partial Fulfillment of the Requirements for the Degree of

Masters of Business Administration

FACULTY GUIDE: Mr. Sanker Sen

SUBMITTED BY: Tuhin Das 10th May 2010

2008-2010
AMITY GLOBAL BUSINESS SCHOOL
Kolkata

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CERTIFICATE OF APPROVAL
This is to certify that the dissertation work entitled “Fundamental Analysis of stocks of Pharma sector” is a bonafide work carried out by Tuhin Das in partial fulfillment for the degree of Master of Business Administration (Finance $ Marketing) from Amity Global Business School, Amity University, Noida.

Faculty Guide Prof. Sankersan Sarkar Amity Global Business School, Amity University, Noida

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DECLARATION
I hereby declare that the report on “Fundamental Analysis of stocks of Pharma sector” is submitted to Amity Global Business School for the partial fulfillment of the continuous evaluation of the dissertation work, MBA (Finance &Marketing) class of 2010. I further declare that this report has not been submitted to other university or organization for any purposes whatsoever.

Tuhin Das Enroll No: AGV30901908099 Amity Global Business School, Amity University, Noida

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Sankersan Sarkar for their guidance and moral support. Head of Department ( Amity Global Business School. yet nobody can do everything all by himself without some help and guidance. Kolkata) and to my Project Guide Mr. I sincerely thank to Mr.ACKNOWLEDGEMENT No matter how much enterprising and entrepreneurial one’s thinking is. It is inhumane if the concerned person’s assistance goes without appreciation and thanks. I deem it my privilege to have carried out my Dissertation work under their able guidance. (TUHIN DAS) Enrolment No. I would like to thank all those who have helped me in successful completion of the project. Finally. Johar Bagchi. AGV30901908099 MBA (Finance & Marketing) 4 .

with people of India getting more and more disposable income in their kitty. Thus in nutshell this project would give comprehensive report to the investors which will aid investors in designing their portfolio. After study I came to know that with increasing talent pool in India and masses getting more aware of need of new patents. In later part of the report I have done valuations of few stocks of pharmaceutical sector namelyBiocon. Dishman Pharmaceuticals and Chemicals Ltd. For this a report from Deutsche Bank has been used by me. 5 . Apart from this unlike any other industry it is recession proof and are thus least affected by up and downs of disposable income of individuals. After valuations I came to conclusions that some of these stocks are hugely underpriced while some are moderately underpriced there giving opportunity to the investors to get some return out from this stocks. In this project I have done comprehensive study on pharmaceutical sector of India to find out its growth prospects in the near future. their sector is poised to contribute a lot in years to come. Orchid Chemicals and Pharmaceuticals Ltd.EXECUTIVE SUMMARY The project is all about finding stocks in pharmaceutical sectors which are worth investing. I have also derived target price and time horizon of investments in these stocks.

3 4 5 7 7 8 8 9 13 28 51 62 71 72 73 6 .TABLE OF CONTENTS CERTIFICATE OF APPROVAL DECLARATION ACKNOWLEDGEMENT EXECUTIVE SUMMARY CHAPTER 1 Abstract Scope of the project CHAPTER 2 Introduction Objective of the study Methodology used CHAPTER 3 Excerpts from the research report on Indian pharma Sector CHAPTER 4 Fundamental analysis of stock # 1(Biocon) CHAPTER 5 Fundamental analysis of stock # 2(Dishman) CHAPTER 6 Fundamental analysis of stock #3 (Orchid) CHAPTER 7 Conclusions Limitations of the study References PAGE NO.

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SCOPE OF THE PROJECT: Following are the main features of the project: 1. 3.CHAPTER 1: Abstract and the Scope of the Project I worked on the project “FINDING OF SAFE ISLANDS IN THE SEA OF RISKS”(finding healthy pharma stocks through fundamental analysis) as a part of my dissertation module in 4th semester. DISHMAN PHARMACEUTICALS AND CHEMICALS LTD. 2. This project will give better insights to about choosing pharma stocks which are fundamentally strong and are capable of giving defined return to certain extent. Fundamental analysis on the individual stocks will help the investors ➢ To design their portfolio ➢ To get time horizon of investment on each stocks 8 . BIOCON 2. Precise excerpts from the research reports on the pharma sector of India will help individuals (investors) to understand the scope of huge untapped market (pharma) in India. ORCHID CHEMICALS AND PHARMACEUTICALS LTD. Followings are objective of my project: ➢ Finding the growth prospects of Indian pharmaceutical sector using insights from research report published by various market & corporate research organizations. STOCKS COVERED: 1. ➢ Fundamental analysis of pharma stocks which are underweight and are thus avenues for investment which are certain.

This statement may seem logical and obvious. What is surprising. sentiments and moves of the big investors and FIIs. The study focuses on finding the stability of return in pharma sectors and finding of attractive stocks with potential of giving satisfactory return for long time. which argues that the value of an asset is irrelevant as long as there is a 'bigger fool' willing to buy the asset from them. it is a dangerous game to play. has a value. A. Introduction: B. i.CHAPTER 2: Stock market which is considered to be the place for getting high return at the cost of the high risk. Every asset. since there is no guarantee that such an investor will still be around when the time to sell comes.e it is recession proof or in other words it is less impacted by recession. A philosophical basis for valuation It was Oscar Wilde who described a cynic as one who “knows the price of everything. financial as well as real. There is undeniably uncertainty associated with valuation. though the valuation model may add to that uncertainty. He could very well have been describing some equity research analysts and many investors. but the degree of similarity in basic principles. Thus. but some assets are easier to value than others and the details of valuation will vary from case to case. However it is not considered to be the reliable source of income for majority of investors in India. a surprising number of whom subscribe to the 'bigger fool' theory of investing. ➢ Finding out pharma stocks which are fundamentally strong for investment purpose by using various valuation models. as irrespective of whatever may be the income it is by human nature that they will spend on drugs if they are required or prescribed to do so sometime even at the cost of some other needs. About pharma sector there is one thing unique . Any asset can be valued. but the value of nothing”. but it is forgotten and rediscovered at some time in every generation and in every market. however. the valuation of a share of a real estate property will require different information and follow a different format than the valuation of a publicly traded stock. Objectives of the study: ➢ To find out the growing prospects of pharmaceuticals sector in India. is not the differences in valuation techniques across assets. The key to successfully investing in and managing these assets lies in understanding not only what the value is but also the sources of the value. Often that uncertainty comes from the asset being valued. A. There are those who are disingenuous enough to argue Literature Review: 9 . Indian stock market is considered as weak form of market where market run on. In this report various pharma stocks are valued using various valuation models to find out its capability of giving returns in the long run. A postulate of sound investing is that an investor does not pay more for an asset than its worth. While this may provide a basis for some profits.

1985) Peter Fortune also developed a study on. Financial assets are acquired for the cashflows expected on them. Asset prices cannot be justified by merely using the argument that there will be other investors around willing to pay a higher price in the future. we're not smart enough to predict future cash flows. But there is one point on which there can be no disagreement. which implies that the price paid for any asset should reflect the cashflows that it is expected to generate. and that any price can be justified if there are other investors willing to pay that price. B. The models of valuation described in this book attempt to relate value to the level and expected growth in these cashflows. “A Assesment of Financial Market Volatility: Bills. Apart from all this invest policy by Charles D. Buffett's letter to stockholders in Berkshire Hathaway for 1993 revealsThe philosophy of a franchise buyer is best expressed by an investor who has been very successful at it – Warren Buffet "We try to stick to businesses we believe we understand. Consequently. Buffett writes3. The extract from Mr.Ellis(Homewood.that value is in the eyes of the beholder. Perceptions may be all that matter when the asset is a painting or a sculpture. That is patently absurd." Mr. perceptions of value have to be backed up by reality. "That means they must be relatively simple and stable in character.IL:Dow Jones-Irwin. but investors do not (and should not) buy most assets for aesthetic or emotional reasons. If a business is complex and subject to constant change. including how to estimate true value and how long it will take for prices to adjust to true value.Stocks and Bonds’ give some insights in finding the volatility of the stocks in regard to market movements. Methodology Used: Liquidation Adjusted Comparable Discount Capitalizati Asset Income Market Approaches to Value Method Book Value Company ed Cash on Method Approach Method Valuation Flow 10 . There are many areas in valuation where there is room for disagreement.

but that it makes errors on the pricing of individual stocks. but those who use multiples and comparables to pick stocks argue. on average. we assume that the market is correct in the way it prices stocks. that errors made by mistakes in pricing individual stocks in a sector are more 11 . This assumes that the other firms in the industry are comparable to the firm being valued and that the market. The assumption that markets correct their mistakes over time is common to both discounted cash flow and relative valuation. the value of an asset is derived from the pricing of 'comparable' assets. which we described as a search for intrinsic value. book value or revenues. on average. with firms selling at a discount on book value. In other words. Underpinnings of Relative Valuation Unlike discounted cash flow valuation.Flow diagram above show various approaches to valuation. 10 analysis . We also assume that a comparison of multiples will allow us to identify these errors. we are much more reliant on the market when we use relative valuation.price to cashflows. with some basis. standardized using a common variable such as earnings. The multiple of price to sales is also used to value firms. While these three multiples are among the most widely used. and that these errors will be corrected over time. being considered undervalued. EV/EBIDTA multiple. with the average price-sales ratios of firms with similar characteristics being used for comparison. Another multiple in wide use is the price to book value ratio. price to dividends and market value to replacement value (Tobin's Q). cashflows. One illustration of this approach is the use of an industry-average price-earnings ratio to value a firm. there are others that also play a role in estimated. relative to comparable firms. In my study I have used usedcombinatrion of market approach and relative valuation approach using earning multiples like PE multiple. prices these firms correctly. Basis for Relative Valuation In relative valuation. to name a few.

I. is clearly under valued and that the correction towards the sector average should occur sooner rather than latter. Some compare multiples across companies. or in some cases. Using Comparables The more common approach to using multiples is to compare how a firm is valued with how similar firms are priced by the market. requiring the same information and yielding the same results. Its primary advantage is to show the relationship between multiples and firm characteristics. While most relative valuations are based upon comparables. Some analysts who use multiples go back to these discounted cash flow models to extract multiples. higher cash flows. As we will see in the later chapters. Definitions of PE ratio The price earnings ratio is the ratio of the market price per share to the earnings per share. Using Fundamentals The first approach relates multiples to fundamentals about the firm being valued – growth rates in earnings and cashflows. payout ratios and risk. PE = Market Price Per Share/Earnings per share 12 . the value of a firm is determined by its expected cash flows. what will be the effect of changing profit margins on the price/sales ratio? What will happen to price-earnings ratios as growth rates decrease? What is the relationship between price-book value ratios and return on equity? 2. Fundamentals versus Comparables In discounted cash flow valuation. and make explicit or implicit assumptions about how firms are similar or vary on fundamentals. they would argue that a software firm that trades at a price earnings ratio of 10. there are some relative valuations that are based upon fundamentals. This approach to estimating multiples is equivalent to using discounted cashflow models.noticeable and more likely to be corrected quickly. we have to either explicitly or implicitly control for differences across firms on growth. For instance. When this is the case. when the rest of the sector trades at 25 times earnings. controlling for these variables can range from the naïve (using industry averages) to the sophisticated (multivariate regression models where the relevant variables are identified and we control for differences. and allows us to explore how multiples change as these characteristics change. Other things remaining equal. Proponents of discounted cash flow valuation would counter that this is small consolation if the entire sector is over priced by 50%. For instance.). Categorizing Relative Valuation Models Analysts and investors are endlessly inventive when it comes to using relative valuation. In practice. risk and cash flow measures. finding similar and comparable firms is often a challenge and we have to often accept firms that are different from the firm being valued on one dimension or the other. lower risk and higher growth should yield higher value. while others compare the multiple of a company to the multiples it used to trade in the past. 1. Other analysts compare multiples 11 across firms or time. with how the firm was valued in prior periods.

Especially with high growth firms. can be significantly different from current earnings per share. the differences between diluted and primary earnings per share tend to be large. 13 .The PE ratio is consistently defined. trailing earnings per share. The biggest problem with PE ratios is the variations on earnings per share used in computing the multiple. Some do only stock-based acquisitions and use only pooling. ➢ Firm often have discretion in whether they expense or capitalize items. the PE ratio can be very different depending upon which measure of earnings per share is used. The expensing of a capital expense gives firms a way of shifting earnings from period to period and penalizes those firms that are reinvesting more. both of which is a measure of equity earnings. This can be explained by two factors. with the numerator being the value of equity per share and the denominator measuring earnings per share. at least for reporting purposes. For instance. which. still others use purchase accounting and write of all or a portion of the goodwill as in-process R&D. but they treat options that are deep in-the-money or only slightly in-the-money as equivalent. Firms often grow by acquiring other firms and they do not account for with acquisitions the same way. ➢ Management Options: Since high growth firms tend to have far more employee options outstanding. In Chapter 17. relative to the number of shares. we saw that PE ratios could be computed using current earnings per share. forward earnings per share. ➢ The high growth in earnings per share at these firms: Forward earnings per share can be substantially higher (or lower) than trailing earnings per share. others use a mixture of pooling and purchase accounting. in turn. fully diluted earnings per share and primary earnings per share. Using diluted earnings per share in estimating PE ratios might bring the shares that are covered by management options into the multiple. technology firms that account for acquisitions with pooling and do not invest in R&D can have much lower PE ratios than technology firms that use purchase accounting in acquisitions and invest substantial amounts in R&D. When the PE ratios of firms are compared. These different approaches lead to different measures of earnings per share and different PE ratios. it is difficult to ensure that the earnings per share are uniformly estimated across the firms for the following reasons.

14 . the country is benefiting from its wage cost advantages over western competitors also when it comes to producing medicines.CHAPTER 3 :Excerpts from the research report Booming Sales India is gaining in importance as a manufacturer of pharmaceuticals. the export ratio was about twice as high as in 1996 and will likely rise further in the coming years (Germany: 55% at present). Foreign pharmaceuticals. Hence. qualitative and quantitative shortcomings in the energy and transport sectors. India Has Discovered The World market: Since the end of the 1980s India has been exporting more pharmaceuticals than it imports. Demand in India is growing markedly due to rising population figures. nominal sales of pharmaceuticals were up 9% per annum and thus expanded much faster than the global pharmaceutical market as a whole (+7% p. These are. At 32% in 2006. It now focuses on drugs developed in-house and contract research or contract production for western drug makers. Considerable impact of hampering factor The sector’s development is slowed by major infrastructure problems. above all.a. a reorientation was required in India’s pharmaceutical industry. As a production location. which enjoy 20 years of patent protection. Over the last ten years the export surplus has widened from EUR 370 m to EUR 2 bn. can no longer be copied by means of alternative production procedures and sold in the domestic market. the increasing number of old people and the development of incomes. Between 1996 and 2006.). New patent law necessitated reorientation Legal changes in India in 2005 made it considerably more difficult to produce “new” generics.

But even then. This kind of production is much more difficult in other countries as the patents are held by three different companies. India’s share in the world pharmaceutical market would only come to slightly over 2% (Germany: 7%).Strong growth continues Up until 2015. In addition. while the same preparation cost USD 12.a. so India’s pharmaceutical sector had to adjust. India's pharmaceutical industry in the spotlight In 2001. India’s pharmaceutical industry became the focus of public debate when Cipla. This was possible because the Indian company produced an all-inone generic pill which contains all three substances required in the treatment of AIDS. the country's second-largest pharmaceuticals company.000 in the US. These state-run firms provided the foundation for the sector’s growth since the 1970s. 1. compared with an increase of 6% in the world as a whole and 5% in Germany. offered an AIDS drug to African countries for the price of USD 300. to just under EUR 20 bn. the price slump was a result of India's lax patent legislation. In the final analysis. India looks set to lose market share. Development of India’s pharmaceutical industry Up until the 1970s India’s pharmaceuticals market was mainly supplied by large international corporations. patent legislation was tightened. it introduced high tariffs and limits on 15 . In Asia. Only cheap bulk drugs were produced domestically by state-owned companies founded in the 1950s and 60s with the help of the World Health Organisation (WHO). In 2005. as other Asian countries are registering even stronger growth. India’s government aimed to reduce the country’s strong dependence on pharmaceutical imports by flexible patent legislation and to create a selfreliant sector. we expect pharmaceutical sales to rise by 8% p. Back then.

By contrast. India’s pharmaceutical companies gained know-how in the manufacture of generic drugs. (IDPL) is credited with speeding up the development of a national pharmaceutical industry. This proved more cost-efficient than the expensive development of original preparations as no funds were required for research. This is of significance not least for the domestic market as disposable income is as little as EUR 1.900 per year for roughly 140 million of the total of 192 million Indian households1. This became necessary following the signing by India's government of the TRIPS Agreement (Agreement on TradeRelated Aspects of Intellectual Property Rights). The competitiveness of generics producers is based on cost-efficient production. not the substance itself but merely the manufacturing process was protected for a period of seven years. there are no (entirely) state-owned pharmaceutical companies left. which made it possible to provide the population with a large number of drugs. India’s patent legislation had frequently been the reason for legal disputes with large western drug firms. Hence the name “pharmacy of the poor” which is frequently applied to India. the sector is now subject to product and process patents valid for a period of 20 years. the weakening of the patent system and numerous protectionist measures sped up the development of a major national pharmaceutical industry on a private-sector basis. which means the majority of Indians cannot afford expensive western preparations. Large market share for generic drugs As there was no efficient patent protection between 1970 and 2005. In the 1980s. Several IDPL staff have successfully founded their own firms. which contained the financial risks. Today. which now belong to the top group among India’s pharmaceutical companies. Current situation India’s pharmaceutical industry has been in transition for several years now. many of which left the country as a consequence. Especially India Drugs and Pharmaceutical Ltd. This spending block may come to as much as EUR 600 m for only one drug. So Indian drug firms could no longer simply copy medicines with foreign patents by using alternative manufacturing processes and offer them on the domestic market. however. 2%). India’s share in the global market for generic drugs is considerably higher than its share in the overall pharmaceuticals market (approx.imported medicines and demanded that foreign pharmaceutical companies reduce their shares in their Indian subsidiaries to twofifths. This made India a less attractive location for international companies. Indian companies are currently in top position. 16 . many Indian drug producers copied expensive original preparations by foreign firms and produced these generics by means of alternative production procedures. In line with international standards. especially from the US. This kind of money could previously only be raised by large corporations in the industrial countries. In this field. This is the result mainly of the changes to drug patent legislation in 2005. Indian companies seeking to copy drugs before the patent expires are forced to pay high licence fees. the decline of state-run companies began − among other things because of increasing central government bureaucracy and insufficient corporate governance. Prior to the Patent Amendment Bill. At the same time. At one-fifth.

nominal sales of pharmaceuticals on the Indian subcontinent were up 9% per annum and thus expanded much faster than the global pharmaceutical market as a whole (+7% p. Belgium and Mexico. 17 . Nonetheless.a.). the country’s pharmaceutical industry is undergoing a process of re-orientation.As a consequence of these major changes to India’s drug patent legislation. Indian companies strongly expanded their capacities. Disproportionately high sales growth Between 1996 and 2006. Spain and Ireland and before Brazil. Its new focus is increasingly on self developed drugs and contract research and/or production for western drug companies. India commands a less than 2% share in the world’s pharmaceutical market (1966: 1. This puts the country in twelfth place internationally. as sales growth there was nearly twice as high and sales volumes nearly four times higher than in India. but has lost market share to China.5%). Among the Asian countries. India’s pharmaceuticals industry ranks fourth at 8%. making the country by and large self-sufficient. with total sector sales of roughly EUR 10 bn. even behind Korea.

pharma sales are fourteen times higher. Southeast Asia. Currently the most important segment on the domestic market is anti-infectives. too. Korea. Compliance with FDA standards is the precondition for selling products on the important US market. India has exported more pharmaceutical products than it imports. and accounting for one-tenth each. At 22%. above all in the US. which is higher than the number produced in Germany (60.000 staff. Malaysia. up from only EUR 650 m in 1996. Besides many very small firms these also include internationally wellknown companies such as Ranbaxy. Ranbaxy is currently the world’s seventh largest generics manufacturer. this is forty times higher than in India. Cipla or Dr. with pharma sales amounting to EUR 14 bn. Europe and Japan. they account for one-quarter of total turnover. The gap with India is even more obvious when comparing per-capita sales. To be sure. Pharmaceuticals one of the export-driven sectors In 2006. India cannot match the sales achieved by its two major competitors in ex-Japan Asia. Reddy’s. which implies they comply with the strict quality standards imposed by the US Food and Drug Administration (FDA). India’s export ratio has reached 32% – about double the figure registered ten years ago.India’s pharmaceutical industry currently comprises about 20. 18 . By contrast. In the western industrial countries. China and Korea. the export surplus has risen from about EUR 370 m to currently just under EUR 2 bn. asthma and obesity) or so-called lifestyle drugs (anti-depressants. Africa and Latin America have lost in importance. export growth in 2006 was even twice as high as the global average and in Germany (roughly 11% each). In the US. China is clearly the leader in the pharmaceuticals market. Over the last ten years. outstrips India. How does this compare with China and western industrial countries? Despite its high turnover growth rates. where India’s companies are benefiting from the population’s purchasing power as well as regulatory changes (greater cost-consciousness). which was due to the fact that demand for low-cost generic drugs is strongly on the rise. High growth rates are also being registered in the pharmaceuticals markets of Singapore. traditional sales markets such as Russia. India’s pharma industry exported products worth EUR 3 bn. For some time now. Next in line. are cardio-vascular preparations. sales in these countries are relatively low at EUR 1-7 bn. cold remedies and pain-killers.000 licensed companies employing approx.000 different drugs. All in all. 500. medicines against civilisation diseases (such as diabetes. Compared with the large industrial countries. Thailand and Indonesia.000). With sales to the tune of EUR 36 bn or four times as much as India’s. the Indian pharma industry produces about 70. only 60 production locations of India’s pharma sector have been certified by the World Health Organisation. With sales of roughly EUR 1 bn. Slightly over 80% of the drugs are sold to the US and Europe. India’s pharmaceutical industry is still relatively unimportant – despite its high growth rates. per-capita sales of pharmaceuticals amount to a good EUR 400 per year. By contrast. in Japan five times and in Germany four times. However. drugs to help smokers to quit and anti-wrinkle formulations) are of little significance at present. Meanwhile.

the share of people over the age of 65 in the total population will rise from 5% currently to 8% in 2025.2. the population total looks set to rise from 1. The ageing of the population in India offers considerable market opportunities. According to UN estimates.1 bn at present to 1. According to a UN estimate. as a result. among other things. life expectancy in Germany is 76 years for men and 82 years for women. As a result. to improved preventive healthcare. By 2025. rising population numbers and.4 bn in 2020. Of course. a growing middle class are the drivers of India's pharmaceutical market. India will probably have overtaken China as the world's most populous country. While the figure is 64 years for men and 66 years for women in India. France. 19 . typical age-related illnesses such as cancer and cardio-vascular diseases will be more wide-spread. though. Boost from population growth India’s pharma sector is receiving a major boost from population growth. This is attributable. Medium-term outlook High GDP growth rates. Its population growth results not least from higher life expectancy. average life expectancy in India is still markedly lower than in western countries. This would mean roughly 55 million more people aged 65 and over than today. the UK and Italy together. Up until 2020 India will see as many children being born as there are people living in Germany.

the number of Indians with diabetes will reach approx. People’s improved income situation has also led to a growing desire to insure against illness. but this share should rise strongly over the medium term. According to PricewaterhouseCoopers (PwC).a. At this juncture.). 580 m (+12% p. nearly 60 m people in India’s middle class. this is roughly the population of Turkey today. This will have a positive impact on the demand for drugs as people with health insurance are usually more likely to obtain prescriptions than those without cover. a four-member middle-class family has seen spending on pharmaceuticals grow five times over.2 Strong income growth will broaden the middle class. only 4% of all Indians have health insurance. Already today. At present the population especially in rural areas still sees western medicine as a stop-gap cure which is unlikely. as it has considerably higher incomes at its disposal than average Indians. Today. 20 . 74 m in 2025 (currently 34 m). about 70% of the population on the Indian subcontinent depend entirely or at least in part on traditional Indian medicine which is cheaper and more easily available than western drugs. with disposable incomes of EUR 3.000 p. to approx.a.500 to EUR 17. can afford western-produced medicines.a. EUR 170 p. rising income and a change in lifestyle. to provide a lasting solution to health problems. Globalisation has not caused traditional medicine to be abandoned but with higher education. according to McKinsey estimates. In the developing countries as a whole.The pharmaceutical sector will also receive a boost from the gradual spreading of civilisation diseases such as obesity and diabetes. though. western medical treatment is gaining in importance. Until 2025 their number looks set to rise to approx.. an important group for foreign drugs manufacturers. Over a space of ten years. This development should benefit India’s generics manufacturers. Support from rising household incomes For the next 15 years we expect average annual growth in India of 6-7%. there could be just under 230 m diabetes patients.

they do not want to limit themselves to the production of low-cost generics. R&D expenditure comes to 20%. 40% of turnover at drugs manufacturer Ranbaxy stems from drugs developed in-house. However.Changes in drug patent law lead to development of “original” drugs Since 2005 India’s pharma sector has no longer been protected by the country’s lax patent legislation. they are facing fierce international competition in this segment. as many as twelve companies engaged in research for new pharmaceutical substances. On a long-term horizon. In order to increase the speed of development and share the financial risk. many of them are seeking to turn into research-based firms. Already in 1994. Even though a number of companies are well positioned in the generics market. Reddy’s launched a basic research programme and was followed by Ranbaxy and Wockhardt in 1997. At the large western companies. however. Dr. Last year. Malaria is the 21 . India’s leading pharmaceutical companies are currently spending nearly one-tenth of their revenues on research and development. So it will take many years for India to become a serious competitor for western pharmaceuticals companies in the field of patent-protected drugs. approx. According to the company’s own information. Hence innovation must come before imitation now. as demand potential in these segments is particularly high. which would still be about one-tenth lower than at similarly large western companies. there are likely to be more strategic alliances between Indian and foreign companies. Large manufacturers already began to adjust their business models some time ago and put greater emphasis on drugs research. The focus here is on drugs against malaria and AIDS.

Indian companies may also be listed on foreign stock exchanges. However. which began at the start of the 1990s and is not yet completed.000 and 1. Since the beginning of the 1990s. with interest focussing mostly on the equity market. However. After many chemists from 22 . compared with the large international players. roughly 115. Average R&D spending of Indian pharmaceutical companies comes to just under 4% of total turnover.000 with a PhD. compared with 9% in Germany. the volume of research at Indian pharmaceutical companies – especially basic research – is still very small.most common tropical disease. The loosening of financial market regulations has until recently led to an increasing presence of foreign investors. according to the WHO. one must bear in mind the different sizes of the pharmaceutical industries in the two countries.000 chemists graduate from Indian universities with a master’s degree and roughly 12. The number of people infected with HIV adds up to about 40 million worldwide. In this context.4 The corresponding figures for Germany – just under 3. High level of education benefits pharma sector The fact that despite the low level of unit labour costs India boasts a highly skilled workforce has enabled the country's pharmaceutical industry at a relatively early stage to offer quality products at competitive prices. respectively – are considerably lower. with about 300 m to 500 m new infections per year. Each year. Indian companies are likely to benefit from the liberalisation process on the domestic capital market.500.

roughly 40 to 70% 23 . As a result. India is attractive as a location for research primarily because of its low development costs.India migrated to foreign countries over the last few years. some may even return. Thanks to higher population numbers. a smaller number is expected to go abroad in the coming years. Competitive advantages over traditional manufacturers Irrespective of the disadvantages in some areas. companies usually need several thousand persons per drug. Clinical tests may be conducted more easily and often even yield more precise results. Overall drugs manufacturing in India is up to 50% cheaper than in western industrial countries. This means that roughly 100. Moreover. clinical tests by drug manufacturers in the west failed because their test persons had already taken a number of other medicines so the effect of the new drug could not be proven. there are considerably more suitable persons to be found who can take part in tests than in the west. In many cases. Wage costs in the Indian drugs industry come to only about 30% of the European level or 20% of the US level. Approval for drugs to go on the market will only be granted if they have passed several tests on humans. For international pharmaceutical firms.000 volunteers must be subjected to initial examinations. In order to achieve this. India's pharmaceutical companies make use of their competitive advantages over traditional drugs manufacturers in western industrial countries. they now consider their chances of employment in India to have improved.

and Pfizer (US) is carrying out clinical tests for malaria drugs there. Building a pharmaceutical plant in India is about 40% cheaper than in Europe or the US. However. total contract production worldwide has a volume of approx. employees’ good qualifications and expectations of strong growth in the market. Indian pharmaceutical companies increasing investment abroad In the coming years. According to the German-Indian Chamber of Commerce. A case in point is the Contract Research Agreement between an Indian and a British company. it is not altogether easy for western firms to relocate their clinical tests to emerging markets. whereas less than 20% of their Chinese competitors pursue 24 . up from EUR 600 m in 2006. So the formerly distant relationship between Indian and international companies is beginning to turn increasingly towards cooperation. Sales to the US recently amounted to just under 30% of Ranbaxy’s total sales. participants pay too little attention to potential side effects. The US has become its most important sales market. Manufacture for foreign pharmaceutical groups more important Indian companies also see profitable business opportunities in contract production for international pharma groups.of all drug trial persons will fail to complete the test phase. In many cases. By contrast. Ranbaxy exports its products to 125 countries. local hospitals must make large-scale investments and train their staff. 90% of all probands in India complete the tests. twenty German drugs companies have already started operations in India. Given the improvements in patent law and capital protection. has subsidiaries in nearly 50 countries and production plants in more than 10 countries. Ranbaxy for instance produces drugs for Germany’s Hexal and Ratiopharm. which lays down a limited number of previously agreed steps to develop a new drug in laboratories in India. the US pharmaceutical company. Currently. while sales to Europe came to nearly 20%. Eli Lilly. According to an analysis by IBEF (India Brand Equity Foundation). which looks set to rise further to EUR 40 bn by 2010. EUR 25 bn. An example for the global orientation of Indian pharmaceutical companies is Ranbaxy. The market for contract research in India could reach a volume of nearly EUR 2 bn by 2010. Already today. Indian drug makers will likely continue to look to foreign countries to expand their operations. and manufacturing costs for pharmaceuticals are markedly lower. This cost advantage provides a strong incentive to move production also for western firms. currently has several projects in India. This could cause a problem if ethical aspects gain in importance. the Indian market has become attractive again for western drugs manufacturers. the global market volume for contract research is likely to rise from EUR 8 bn recently to EUR 20 bn by 2020. There are sufficient production capacities available following the massive expansion of plants for generics manufacture. Add to this the relatively low wage costs. in light of the relatively high financial incentive. about half of all larger Indian drug makers are looking to expand abroad through take-overs. not least because they seek to improve their income situation by participating. All in all. According to PwC. Despite these difficulties several large international companies have chosen India as their location for clinical tests. Growth is driven mainly by the relocation of production for preparations whose patent protection will expire soon. Overall. 80% of the manufacturer’s total sales are generated abroad. approx.

there are also a number of adverse factors. These include. Targeted markets are still the US and Europe. Hexal and Stand-alone. This would mean a more than 100 GW. as is Cadila in France. the hot and humid climate makes high demands on climate technology at production plants and on the refrigeration of finished products. and intends to become the world’s fifth largest manufacturer of generics by 2012.3 million kilometres. serious shortcomings in infrastructure. Of the total road network covering just over 3. for almost EUR 500 m. The German market is particularly attractive for Indian companies as generics prices there are relatively high by international standards. there are institutional obstacles to overcome first. Insufficient energy supply also leads to a situation where production hours must be handled very flexibly. For this reason. Wockhardt is operating in Germany and the UK. More often than not. However. But the government has launched an extensive investment programme entitled the National Highway Development Programme. Ranbaxy has bought companies in Romania. At the beginning of 2006. There is a tendency to favour locally/nationally produced drugs. only about 6% are relatively well built National and State Highways. above all. In many cases. India’s government intends to expand power generation capacities to roughly 240 GW by the end of the 11th five-year plan in 2012. for instance. Italy and France. Over the past few years.that strategy. Belgium. Reddy’s bought Betapharm. So it cannot come as a surprise that Indian producers are loath to leave the lucrative German market to the large German generics companies such as Ratiopharm. the country’s lacking transport infrastructure is increasingly turning into a major obstacle. to be implemented by the middle of the next decade. This shortage can only be eliminated in the medium term and will require maximum effort. a German generics manufacturer. or nearly 90%. Indian medicines fail because doctors and pharmacists in other countries are reluctant to prescribe or hand out drugs produced in India. The pharmaceuticals industry is especially dependent on road transport. However. Factors weighing on the pharmaceuticals industry Besides the positive outlook for India’s drugs industry. drug companies from India are finding it hard to gain a foothold in western markets. In many areas. increase on today's total. Compared with western industrial nations. In many cases. Moreover. a generic drug costs nearly 50% more in Germany. Compared with the UK. there are no paved surfaces or there is only one lane for all traffic. Dr. energy prices are low but companies must expect repeated power cuts and offset fluctuations in the electricity network with the help of emergency power generators. 25 . the major transport links are chronically congested and many are in a poor state of repair.

For the world as a whole. These firms will expand their capacities in India – mostly in the sector’s clusters surrounding Delhi and Mumbai – but will also take over firms in the industrial countries. India’s total 26 . large pharmaceutical companies with sales volumes of over EUR 50 m will be able to increase their sales as they will be better equipped to adjust their product ranges to the demands of international markets. By contrast. To be sure. Growth of India’s pharmaceutical industry and thus its share in global drugs manufacturing could even be slightly higher if the infrastructure problems could be remedied quickly. At EUR 1. Nonetheless. Mainly affected by this development are smaller Indian companies with sales of up to EUR 10 m which focus on traditional Indian medicines. India looks set to even lose market share in Asia. compared with 28% in Germany (from 24% in 2006). Although India’s pharmaceutical sector is growing strongly. this growth rate is higher than that seen for Germany (+5% p. the population’s demand for drugs cannot be met by the country’s own production in all segments.a.) and the entirevworld (+6%). the ratio will likely be only slightly lower than the German level (25%). Medium-sized businesses will benefit from increasing contract production for western firms. All in all. It is likely that many of these companies will merge or disappear from the market altogether. While the pharmaceutical industries of China and Singapore will likely continue to show much higher growth.5 bn. the share of pharmaceuticals in the total chemicals industry in India will come to roughly 17% in 2015 (2006: 18%).Outlook for India’s pharmaceutical industry up to 2015 All in all we expect India to see drugs sales rise by an annual 8% to nearly EUR 20 bn between 2006 and 2015. India’s share in world pharmaceutical sales will rise only marginally to a good 2%.

However. In addition. On a medium-term horizon. A positive impact on exports is expected from foreign investment in India. patents for high-turnover drugs with a volume of EUR 100 bn will expire in the next few years. In this context. one-fifth of the world’s pharma sales will be accounted for by the emerging markets. China will then be among the group of the five largest manufacturers. The generics market will grow in both the developed countries and in the emerging markets.drugs imports are comparable in size to Norway’s entire pharmaceuticals market. exports are expected to receive a major boost in future. High export growth of Indian drugs makers In the course of increasing contract production and low-cost manufacture of proprietary medicines. it should be considered that take-overs of foreign companies will lead to a strong increase in foreign production by Indian manufacturers. The manufacture of generic drugs in that segment is growing strongly. Most vital medicines are already exempt from patent protection today. which will have a dampening effect on exports. Germany's very high export ratio of currently 55% will hardly be achieved by 2015. Of these drugs. while India will join the group of the ten largest suppliers. 27 . roughly one-third will likely be produced by Indian companies. though. Competition between Indian firms and western drug makers will probably be much fiercer as the companies from Asia are increasingly seeking to tap the global markets. Imports look set to continue to rise strongly. as this would imply more than a trebling of total exports.

Drivers of growth are the growing population. the country’s pharmaceutical industry is reorienting itself and focussing on self-developed medicines and/or contract research and production for western drugs companies. of approvals like FDA. For some years now. more and more companies started entering into this segment which constitutes both domestic as well as foreign players. of DMF holdings. 28 . Finding investment avenues for this sectors: Criteria While choosing stocks in this segment investors should look at following in the companies for investment: ➢ No. As a result of the new patent legislation. ASSOCHAM etc. ➢ No. Also the expansion of Indian firms abroad looks set to continue – preferred target markets are the US and European countries. For a long time large sized pharma stocks were popularly picked by the investors because of the very reason that they were capable of conducting complex reactions and research and thus were having monopoly in the market for quite sometime. Despite the positive outlook India will lose market share in the Asian market in future. ➢ No. qualified staff and extensive production and research units India is becoming more and more of a major pharmaceutical location. as well as the larger number of older people with markedly higher demand for medicines. the higher growth will be in the country’s pharmaceutical industry. But with the opening of the economy. which at 1. Thanks to low costs. of patents hold by the companies. The sooner India manages to close the infrastructure gap. Annual growth rates are also impressive in Singapore. It is not only the markets in China and India that register high growth rates. Malaysia. Thailand and Indonesia. will be China. first and foremost.5 bn should exceed that of China already in 2025. which will remain the No 1 thanks to its expected higher sales growth and volume. Add to this the increase in middle-class households which have considerably higher incomes at their disposal than the population on average. it has been benefiting from the particular dynamics of the Asian economies as both purchasers and producers. ➢ No. The winner.India's pharmaceutical industry in reorientation process The pharmaceutical industry is expanding worldwide. ➢ Prudence of Board of Directors of the company. of generic v/s OTCs. as Indian companies' strategic reorientation away from generics to original preparation is still in its infancy.

CHAPTER 4: FUNDAMENTAL ANALYSIS OF STOCK #1 29 .

In 1999.Status: Underweight Call : Buy Target Price: 350 Time Horizon: 12 to 18 Months COMPANY BACKGROUND Biocon was incorporated in 1978 to manufacture select enzymes for the breweries industry. the company began its transformation to an innovation-led biopharmaceuticals company. The evolution … 30 .

the company is a fully vertically-integrated biotech company with innovative research to commercialization. Its 51:49 JV with CIMAB. Syngene. In 1995. The company started with statins and evolved as a significant player in statins API globally including regulated markets. the company also started contract and clinical research services. provides clinical research for the molecules aspiring to get commercialized. this was also up for transfer.In 1978. provides contract research for the molecules in pre-clinical stage and Clinigene. While Biocon houses the biopharmaceutical manufacturing. In 2006. which it exploited later to make a foray in the fermentation-based pharmaceutical products. Simultaneously. which led to a 100% holding of the Indian promoters in the company. the company moved from enzymes to fermentation-based pharmaceutical (Biopharma) products. another 100% subsidiary. Indian promoters used their first right of refusal and bought Quest’s 23% stake. Cuba. …the transformation Post acquisition. Biocon was to supply enzymes to Quest of international standards. its 100% subsidiary. Unilever’s Food & Breweries subsidiary. Biopharmaceutical business took off with identification and production of APIs (active pharmaceutical ingredients). its brand of recombinant human insulin for diabetes in the Indian market. Current status Biocon is now focused on its biopharma verticals that include APIs. In a major breakthrough. Currently. biologicals and proprietary molecules both commercialized and under development. which required advanced fermentation and had significant market potential in the regulated markets. immunosuppressant and bio-similars and launched Insugen. under partnership with CIMAB. the company diversified to other products including insulin. This led Biocon to invest heavily in creating world-class fermentation assets. Unilever sold Quest to ICI. which has now become the mainstay of Biocon. At this point in time. the company bought the assets of Nobex IP. Looking at the significant pricing pressure on statins during 2004-05. Cuba provides manufacturing services for the Biomab EGFR to Biocon. Unilever acquired Biocon Biochemical’s stake in the JV and merged with Quest. In 1999. As Quest had 23% stake in Biocon. The interesting part is that Biocon has worked for each level of drug life cycle. Biocon was promoted as a 70:30 joint venture (JV) between Indian promoters (70% stake) and an Ireland-based Biocon Biochemicals (30% stake) to manufacture and export few enzymes for breweries. the company launched a novel cancer drug. Biomab EGFR in September 2006. which boosted its patent assets greatly. Exhibit: Biocon’s Business Model 31 .

Source: Companay Exhibit: Biocon’s Corporate Structure Source: Company 32 .

in a SEZ (special economic zone). These facilities were inspected and approved by the US FDA. The company has built additional capacity by commissioning the multiproduct microbial fermentation and synthetic conversion facilities at Biocon Park.Exhibit: Biocon’s fully integrated business model Source: Company Manufacturing capabilities In 2006. 33 . the company established Biocon Park. India’s largest integrated biotech hub spread over a 90 acre of land.

34 .

35 .

Big triggers: Barely 12-24 months away Biocon could generate windfall gains in next 12-24 months through the outlicensing of its innovative oral insulin. Biocon may generate windfall revenues through this out-licensing. it plans to list its contract research arm. These events are expected to trigger a re-rating on the counter. the potential market size of oral insulin is US$1-3 billion. which may take 15 to 24 months. The business model based on discovery focus entails higher risk and long gestation. The company plans to out-license oral insulin to other companies for further investigation and commercialization in certain geographies in return for a fee and royalty on commercialization after the proof-of-concept phase of clinical trials (phase II clinical trial). however the revenue generation and margins are phenomenal.INVESTMENT RATIONALE Biocon is emerging as a biopharmaceutical major in India with a strong focus on innovation in niche areas of oncology. Syngene.15 months. Increasing proportion of formulations in the product mix and increased revenue flow on account of licensing in coming years makes us optimistic. Further. We have constructed two matrices. The molecule is entering phase II trials now. one for FY09E EPS sensitivity. and the second for FY10E EPS 36 . Moreover. The out-licensing deal may happen any time either during FY09E or FY10E. According to estimates. The commercialization of discovery-led Biomab EGFR for head and neck cancer and strong focus on discovery-led biotechnology assets such as noninjectable oral) insulin differentiate it from its Indian peers. in a bid to unlock value. cardiovascular. Biocon is moving up the value chain to include formulations in its product basket. which has a potential to become a blockbuster drug. in the next 12. diabetes. We have assumed the deal size to be between US$100 to 300 million with upfront payment in the range of 10 % to 25% and have worked out the EPS sensitivity (Exhibit 6). I) Windfall gains from out-licensing of oral insulin Biocon is working on a non-injectable oral insulin.

If the out-licensing deal happens in FY10E, the upfront payment would impact the FY10E EPS as follows.

II) Value unlocking through listing of CRO business In order to unlock value, Biocon plans to list its contract research business in coming 12 to 15 months. We believe that the contract research business of Biocon would command better valuations after the imminent IPO (initial public offer) of TCG Lifesciences. TCG Lifesciences has filed draft red herring prospectus with SEBI in October 2007 and it is expected the IPO to come in next few months. The listing could act as a benchmark valuation for the CRO business of Biocon. I expect a 29% CAGR in top line of Biocon’s CRO business over FY07-10E to Rs 308 crore, while net profit would witness a 33% CAGR to Rs 106.10 crore. We expect a handsome ramp up in Syngene operations on the back of Bristol Myers Squibb (BMS) deal and turnaround in the operations of Clinigene.

37

Valued the business at 20X FY10 EPS GROWTH ENGINE ON A ROLL – BIOPHARMACEUTICALS Strong discovery pipeline – a goldmine for future Strong product pipeline-the future growth driver Biocon has a very rich pipeline of bio generics, which includes both insulin and biosimilar monoclonal antibodies. We are quite optimistic about the recent Research and Development progress of Biocon and strongly believe that these products having good market size will definitely offer them a short, medium, and long term opportunity.
Drug Preclinical Phase-I Phase-II Phase-III On market

PEG-GCSF Bmab 100 Bmab 200 BVX-20

Oncology Oncology Oncology Oncology

IN-105 T1h BIOMAb EGFR Oncology (Inflammation)

Diabetes (oral insulin)

Oncology

Insulin Glargine BIOMAb EGFR Insulin

Diabetes (H&N) cancer Diabetes

38

GCSF Streptokinase EPO

Oncology Cardiology Nephrology/Oncology

Faster growth in formulations revenue We expect revenue growth in biopharmaceuticals, the largest revenue grosser, to pick up now. We expect a 16.88% CAGR in biopharmaceutical revenues to Rs 1173.63 crore over FY07-10E on the back of (I) growth in formulation revenue in the subsequent years of launch, (II) entry into regulated markets with immunosuppressants after patent expiry, (III) double digit growth in licensing and royalty income (IV) start of marketing of Abraxane from Q1FY09E and (V) commissioning of large capacity in the H2FY07. While we expect flat sales growth in statins due to pricing pressure, other products in the biopharmaceutical space are likely to grow strongly at 26.37% CAGR over FY07-10E. Formulations revenue are expected to grow at a faster pace vis-à-vis the API revenue as the formulations would be entering the growth curve after launch. New products such as novel cancer drug Biomab EGFR (launched in September 2006), immunosuppressants (launched in March 2007) and GCSF would be entering the second year of launch and are likely to see good growth. The management has indicated that the formulations contribution to the total biopharmaceuticals revenue is expected to increase to 35% in next 3-4 years from the current 6% on the back of the company’s entry into regulated markets and new launches get matured. Launch of insulin and GCSF in regulated markets: Key growth driver It is believed that recombinant DNA insulin would become the largest value driver for Biocon for the next few years. The strategy of the company is to grow via generics (injectable insulin) in the short to medium-term and launch its patent protected oral insulin in the long run. We expect the injectable insulin revenue growth to pick up now on launch of the insulin in the Chinese market by its licensing partner, Bayer, in FY09E. We expect supplies to the Chinese market would increase the penetration of Biocon to the overall unregulated countries’ market size of around US$2 billion. We expect supplies to regulated markets to start from FY10E (the drug is likely to be launched in the US and Canada in FY10 by its licensing partner). FY10E would be a key insulin revenue-driving year for the company. Moreover, Biocon also signed an agreement with Invitrogen for supplying its high quality insulin for cell culture on a global basis, which is a very attractive business. Biocon launched GCSF in the domestic market in FY08 and out-licensed it to Abrexis for the US and EU markets. Abrexis is likely to start marketing GCSF in these markets from 2011. Immunosuppressant: Long-term strategy to enter regulated markets In our view, the medium to long-term revenue outlook for Biocon from this segment is much brighter than in the short-term. The company is likely to enter the regulated markets only in the medium to long term after patents for different immunosuppressants expire, starting from the end

39

The company is targeting a 25% market share in the domestic market from immunosuppressants in next five years. Monoclonal antibody falls under oncology segment. which is Biocon’s proprietary product. Biocon is the largest manufacturer of immunosuppressants. immunosuppressants and insulin contribute around 25% of the biopharmaceutical revenue. the company launched a division focusing on nephrology drugs in March 2007 in domestic market.3 billion. The company has already filed DMFs for immunosuppressants and has approvals in place. where the competition is lower due to complexity in manufacturing. accounting for around 34% of biopharmaceuticals revenue. Immunosuppressants are used in nephrology ailments. To capture the growth in the segment. Immunosuppressant is a fast growing class of nephrology drugs.of the current calendar year. The company has plans to enter the regulated markets but that will happen once the products are off patent. The company is currently marketing its product in India. The current size of the domestic markets for Immunosuppressants is estimated at around Rs 125 crore (total market for nephrology products in India is estimated at Rs 300 crore) which is likely to witness a 26% CAGR. We expect the company to achieve the target market share as Biocon provides competitive quality immunosuppressant products at 35 – 40% cheaper price than the existing drugs in the market. Most of the immunosuppressants are currently on-patent and are slated to go off patent during 2008-10. Revenues in immunosuppressant and insulin (Rs Crore) Monoclonal antibody Biomab EGFR likely to grow at 69% The monoclonal antibody Biomab EGFR. is likely to grow at a CAGR of 69% over FY07-10E on a lower base. the GCC (Gulf Cooperation Council) region and neighboring countries. Globally this product has a 30% CAGR. We are expecting higher sales as the product is in initial years of launch in India and would be launched in other geographies in neighbouring countries. and in the first year of launch the product generated Rs 20 crore in revenue. 40 . The global market for nephrology products is estimated at US $3. We expect this segment to grow at a CAGR of around 25% over FY07-10E to Rs 400 crore. The company launched the product in September 2006. In the domestic market. Immunosuppressant and insulin to become largest revenue contributors Currently.

After commissioning of the facility the capacity of Biocon would improve multifold. Syngene provides contract research for the molecules in pre clinical stage and Clinigene provides clinical research services. the company provides end-to-end services in drug discovery exercise. Saudi Arabia. Bangladesh. In FY07. The combined top line of Syngene and Clinigene is likely to see a 29% CAGR over FY07-10E to Rs 308 crore. In this in-licensing agreement. 41 . US. In CRO operations. and countries in the Gulf. UAE.10 crore through FY10E. the company received Rs 27 crore from outlicensing of insulin rights for six markets including US. As part of this deal. The management has indicated a similar y-o-y growth in the out-licensing income based on milestone payments. Pakistan. from pre-clinical stage to clinical trials.Exhibit: Biomab EGFR to grow at a 69% CAGR (revenue in Rs crore) Launching Abraxane in Q1FY09 In July 2007. for the commercialization of Abraxane in India. Abraxane is a breast cancer drug and Biocon targets a market potential of Rs 25 crore from the geographies where the company has marketing license. We expect he out-licensing revenue of Biocon to grow at a CAGR of 23% over FY0710E to Rs 51 crore. Biocon will pay royalties to Abraxis based on the Abraxane sales. The high-margin CRO business is gradually gathering lot of significance in Biocon’s overall business as top line growth has a multiplier effect on the bottom line. Sri Lanka. but the bottom-line contribution is likely to be around onethird. Biocon received upfront payments and will receive milestones based on the progress of product registration in regulated markets. Double-digit growth in licensing income Biocon out-licensed GCSF to Abraxis Bioscience for the US and EU markets. CRO business: Fulcrum of growth We expect the CRO business to contribute around 20% to consolidated revenue in FY10E. while the combined bottom line is set to witness a CAGR of 33% to Rs 106. Commissioning of new facility Biocon commissioned its new facility in the Biocon Park. This further validates effectiveness of Biocon’s strategy to generate significant licensing income through monetization of IP assets. Kuwait. which would lead the revenue to grow faster. Biocon signed an in-licensing agreement with Abraxis BioScience.

Syngene: To contribute around 1/3rd of bottom-line We believe BMS (Bristol Myers Squibb) deal would be the main growth driver in the medium term.85 crore over this period. while bottom line is likely to increase at a CAGR of over 42% to Rs 96. Under the BMS deal. which the company would be ramping up to 1200 in next two years (addition of 400 scientists under BMS deal). Exhibit: Robust revenue growth estimates (Rs crore) FY06 FY07 FY08 FY09 FY10E 42 . However. We expect Syngene’s operating revenue to grow at a CAGR of 29% over FY06-10E to Rs 267. the company would be employing 400 scientists. Currently the company has strength of800 scientists. the long term growth would depend upon the regular ramp up in number of scientists. while another 150 would be added in Q1CY10. the company would employ 250 scientists. From Q1CY09.60 crore.

EXHIBIT: Asuumptions for revenue model Biopharmaceuticals FY07 FY08 FY09 FY10E ENZYMES DIVESTED FY07 FY08 FY09 FY10E 43 .

50 crore in FY10E.95 crore. In FY10E. We expect the bottom-line of Rs 3. Top line of Clinigene is likely to grow at a CAGR of 65% over FY07-10E to Rs 40. This business has higher proportion of fixed cost. We expect a good ramp up in Clinigene operations and the top-line to move up at a steady growth rate.CONTRACT AND CLINICAL RESEARCH FY07 FY08 FY09 FY10E BBPL(51:49 JV FOR MANUFACTURING BIOMAB EGFR) FY07 FY08 FY09 FY10E Clinigene: Likely turnaround in FY09E We expect Biocon’s clinical research business to turnaround in FY09.33 crore in FY09E. 44 . which allows it to turn around the operations with increase in volume of business. we expect the bottom-line to be Rs 8. We expect the bottom line to follow the top line movement at turn black in FY09E.

The company is likely to start supplies to European Union from FY10E (CY09). Being a proprietary product the variable production cost of Biomab EGFR is very low while most of the costs are fixed in nature. With increase in sales we expect the margins to improve substantially. The company is currently supplying to only Biocon for India and neighbouring countries. Revenue from EU is likely to be Rs 20 crore while that from the US and Japan is likely to be Rs 70 crore.EXHIBIT: TURNING AROUND IN FY09 (Rs crore) MAR’06 MAR’07 MAR’08 MAR’09 MAR’10E BBPL: Dark horse Biocon Biopharmaceuticals Private Limited (BBPL) is 51:49 JV between Biocon and CIMAB of Cuba. in which Biocon holds 51% stake. BBPL has a right to manufacture Biomab EGFR for other geographies also. We expect the JV to make 45 . and US and Japan from FY11E.

We expect the bottom-line of Biocon to grow at a robust CAGR of 17. increased selling expenditure on formulations and rising tax expenditure after FY09E due one of its plant exiting EOU (export-oriented unit) status. the company is set to generate more revenues through monetization of IP assets to fund its increased R&D expenses on its discovery pipe line advancing to higher stages of investigation. Margins are likely to improve on account of rise in such revenues (out-licensing revenue. FINANCIALS Biocon has just completed a huge capex where it increased its capacity multifold.47% CAGR over FY07-10E largely on the back of improvement in formulation revenue and monetization of IP assets. other revenue stream such as lease income on account of leasing out of the facility related enzymes business to Novozymes A/S. Despite that we expect sales growth momentum to continue as the company is likely to start earning revenue from new geographies. we expect the operating and net margins to improve over FY07-10E. Biocon is likely to launch the in-licensed cancer drug Abraxane in Indian markets in FY09E. BBPL is likely to start adding meaningful revenue to the consolidated P&L from FY10E. Moreover.losses till FY09 and turnaround in FY10E with a profit of Rs 9. In addition. the concerns such as higher depreciation cost due to initial years of commercialization of large expansion. However. higher R&D cost on oral insulin in phase II of clinical trials. which does not require large recurring expenditure.56 crore in FY10E. 46 .79% over FY07-10E. Post the sell-off. Revenue mix is enriched Biocon sold its enzymes business in the H1FY08. We believe the company would reap the benefit from these expansions in the years to come. the company which bought the enzymes business of Biocon. Syngene would start generating revenue from the BMS deal from FY09E. Biocon is likely to start revenues from new streams such as its licensing partner in China is likely to launch Insugen in Chinese market in FY09E. are there. We expect top-line of the company to rise at a 15. leasing revenue).15 crore on sales of Rs 41.

Exhibit: Revenue mix of Biocon business in FY07 Exhibit: Revenue mix of Biocon business in FY10E Rising revenue from CRO business. 47 . out-licensing business (monetization of IPassets) and BBPL suggests that the high-margin business revenuecontribution is increasing.

we expect a good ramp up in better margin CRO business. revenue from new streams and an increase in the formulations revenue in biopharmaceuticals space. the power & fuel expense (as % of top-line) is also likely to decline. Moreover. Exhibit: Margins are likely to increase FY09 onwards Mar’07 Mar’08 Mar’09 Mar’10E Exhibit: Higher contribution from better margin business 48 .5% We believe that the consolidated revenue of the company would rise despite the non-existence of enzymes’ revenue. Moreover. The overall revenue growth is likely to be on account of higher revenue growth in CRO business (Syngene and Clinigene). revenue contribution from BBPL.Consolidated revenue to rise at 15. Margins likely to improve FY09E onwards We expect the margin pressure to ease FY09E onwards as the R&D and selling expenditures as a percent of revenue will decline on account on growth in revenue. BBPL and formulations.

Mar’07 Mar’08 Mar’09 Mar’10E Exhibit: R & D expenditure to remain high (Rs in crore) Mar’07 Mar’08 Mar’09 Mar'10E Exhibit: Selling expenses rising with increasing sales 49 .

The company commercialized a new plant built on an investment of around Rs 500 crore. Moreover.Mar’07 Mar’08 Mar’09 Mar’10E Capital cost likely to keep pressure on net margin The higher capital cost is likely keep pressure on net margin. Mar’06 Mar’07 Mar’08 Mar’09 Mar10E 50 . Rising other income is likely to subdue the pressure. the tax expenses are likely to zoom in the FY10E as one of the plants is getting out of the EOU status and the tax rate is likely to increase FY10E onwards. the depreciation cost is likely to remain high.

Moreover. 2006 2007 2008 2009 2010E Exhibit: Substantial cash generations from operations. in FY08E & FY09E. Dupont analysis for RoNW FY07 FY08 FY09 FY10E 51 . due to lower bottomline growth on account of lower asset utilization and debt repayment. Return ratios to recover FY09E onwards It is expected to have return on net worth (RoNW) excluding inflow from sale of enzyme business. to improve from 18. However.40% in FY10E. Asset utilization to improve in FY10E but on lower leverage. respectively. sell off enzymes business. RoNW may see a decline by 80bps and 72 bps year-on-year. We expect cash and cash equivalents to be ~Rs 770 crore.Exhibit: Expenses line likely to put pressre on NPM(%) Healthy cash generation provides fillip for inorganic growth Healthy cash generation from operations provides fillip to follow an inorganic growth avenue. Huge cash balance in the books gives the company the flexibility to adopt inorganic route of growth aggressively. We expect traction in operations and higher depreciation is would generate substantial cash from operations. the recent selloff of enzymes business to Novozymes for US$115 million adds substantially to the cash.12% in FY07 to 18.

we expect the interest cost as a percent of PBIT to decline on account of better utilization of borrowed fund and increase in revenue from BBPL. Almost 50% expected y-o-y rise in profits on the back of turnaround in Clinigene and good bottom-line contribution by BBPL in FY10E is likely to lead the RoNW to improve to 18.40% in FY10E. Improvement in RoNW is also due to improvement in margins from 21% in FY08E to 24% in FY10E as Clinigene and BBPL are expected to contribute to nearly 1/3rd of the overall profit of the company. During FY08E to FY10E.Dupont ratio analysis indicates that the overall tax rate would go up in Y09E and FY10E as one of Biocon’s plants would lose its EOU (Export Oriented Unit) status leading to an increase in overall tax rate. Mar’06 Mar’07 Mar’08 Mar’09 Mar’10E Exhibit: Return ratios on strong footing after midterm hiccups 52 .

there would not be any out-licensing income and will have a great bearing on the valuations. the risk may emanate from day-to-day business operations. Moreover. In estimating revenue and profits for BBPL it is assumed revenues at high EBIDTA (due to lower raw material and production cost) to flow in from European market from FY10E any change in cost structure or delay in revenue flow from that market would impinge estimates. In CRO operations.Net profit is likely to see good growth in FY10E The net profit growth of the company to increase by over 63% during next two years. Syngene provides contract research for the molecules in pre-clinical stage and Clinigene provides clinical research services. We expect the CRO business to add around 20% to the consolidated revenue in FY10E but the bottom-line contribution is likely to be around onethird in FY10E. 53 . from pre-clinical stage to clinical trials. if the rates decline or change or there is a delay in execution of BMS deal. In addition if in the deal the up-front payment is lower and milestone payments are higher. Delay in out-licensing. if the molecule fails in the proof of concept level (phase II of clinical trials). The combined top line of Syngene and Clinigene is likely to grow at a CAGR of 29% over FY07-10E to Rs 308 crore while the combined bottom line is set to grow at a CAGR of 33% over this period to Rs 106. lower deal size or different payment schedule under the deal have bearing on the valuation. Any change in the schedule or the failure on the part of the company to launch the product in that geography may impact our earning estimates and valuations. estimates would change accordingly.it is assumed that the similar rate of revenue per scientist in the years to follow. the net profit is likely to remain subdued in FY08E & FY09E as most of the investments in the subsidiaries and joint ventures would start adding meaningfully to the bottom-line only from FY10E. the company provides end-to-end services in drug discovery exercise. The JV BBPL will yield good revenue and profit growth in FY10E. However.10 crore in FY10E. We expect all the segment of Biocon’s business to turn profitable with good contribution to the bottom-line Risks & Concerns The discovery focus in itself is a very risky business proposition due to large gestation period. For Syngene. While formulating the revenue model. CRO business (P/E valuations) The high margin CRO business is gradually gathering lot of significance in Biocon’s overall business as a driver of bottom-line mover. large investment and lower chances of success. The delay in turnaround may have bearing on the financials and valuations. we have assumed various time lines for the launch of different product in different geographies based on the schedule defined by the company. when it is likely to start supplies to European Union. Moreover. It is assumed that operations of Clinigene would turnaround in FY09E. this will impact the immediate cash flow.

the company has few exciting products such as non-injectable (oral) insulin. Currently. And in a risk-averse environment. The MTM losses will continue upto the next quarter due to hedging of export revenue at Rs 41. analytical. the monetization of which has been generating good revenue with handsome revenue fetching out-look. We believe the business-improvement efforts of the management should become visible in quarters to come.The CRO business is valued on comparable business method and compared the business with WuXi PharmaTech. (WuXi) is a China-based pharmaceutical and biotechnology research and development outsourcing company. Its core operations are grouped into two segments: laboratory services and manufacturing. We expect top line and bottom line to grow at a CAGR of 15% & 18% over FY07-10E respectively while return on net worth to improve in the range of 18%. margins are under pressure. The Company provides a portfolio of chemistry. Besides discovery research. The manufacturing segment focuses on manufacturing of advanced intermediates and active pharmaceutical ingredients (APIs). Though the IN-105 and T1-H programme is progressing well but the market impact of the recently introduced drugs is yet to be ascertained. The company’s laboratory services segment consists of discovery chemistry. In the pharma sector. a NASDAQ listed Chinese CRO company. the company differentiates itself from most of its peers by virtue of its focus on discovery research and commercialization of one of its discovery research product in the market. pharmaceutical development and process development services. Non-injectable (oral) insulin is likely to enter the phase II of clinical trials (proof-of-concept level) in March 2008 after which the company plans to out-license it. Moreover. service biology. the company also works on biosimilars in innovating new processes. In the discovery pipeline. Outlicensing may generate windfall revenue to the company. big mark-to-market losses on the forex front and lower contributions from high-margin licensing income has dragged net profit down for the Biocon.5 per dollar. the company is no longer a ‘statin-only’ play rather the product portfolio is diversifying. decreasing the product specific risk. the stock 54 . we think margins would improve. biology and manufacturing services in the drug discovery and development process to pharmaceutical and biotechnology companies. The integration with low-margin Axicorp. The revenue contribution from statin is decreasing and high margin contract research revenue is increasing in the overall revenue of the company. But starting FY10E onwards. which targets the potential global market size of US$1-3 billion. WuXi PharmaTech (Cayman) Inc. In this category also the company has created a good library of IP (intellectual property) assets. Valuation and recommendation Biocon is becoming a pure pharma play after the sell-off of the enzymes vbusiness to Novozymes during H1FY08.

52 x FY09E and 7.44 x FY10E. CHAPTER 5: FUNDAMENTAL ANALYSIS OF STOCK #2 Dishman Pharmaceuticals and Chemicals Ltd. At CMP of Rs 113 the stock is currently trading at a PE multiple of 9.market and investors will not ascribe value to such a programme. hence we maintain “underweight” position on the stock. Status: Underweight 55 .

➢ Now they have established themselves as recognized supplier of intermediates.APIs and recently acquired VitaminD business of Solvay. the marketable molecules segment comprises Quats.Call: Buy Target Price: Rs 243 Time Horizon: 12 to 18 months Business Profile of Dishman ➢ Established in 1989 basically with production of quats. actives. 56 . ➢ Broadly its business model consists of two segmentsCRAMS (Contract Research And Manufacturing Services) MM (Marketable Molecules) CRAMS: INDIAN PERSPECTIVE➢ The CRAM segment market in India is worth about $500mn and has annual growth rate of 25%. and after five year of their commencement they achieved leadership in the field of PTC-quats. ➢ Under CRAMS it produce APIs and few drug intermediates. speciality chemicals to various MNCs. Investment Rationale ➢ Dishman’s business model has two major segment-CRAMS and Marketable molecules. ➢ There are around 150 dedicated contract manufacturing units in India that are contributing to 60% of the total contract manufacturing business in India.

➢ The company’s excellent execution capability coupled with the acquisition of Carbogen Amcis has provided given it critical scale in this segment. ➢ All these development has attracted confidence of many outsourcing pharmaceutical players towards Dishman. which will boost the revenue from this segment in next two years. Execution Capacity enables Dishman to ramp up revenue fast: ➢ Strategy of inorganic growth of Dishman has helped them to add manufacturing facilities and laboratories to address incremental projects. Dishman’s strategy is to focus on the CRAMS business due to huge potential in the pharma contract research (CRO). in August 2006 leading to sudden jump in high end CRO and CMO capability. new supplies for fresh contracts with MNCs like Astra Zeneca. Of this total value of CRAMS contribution of Carbogen Amcis is 53% and 49% in FY2009 and FY2010 respectively. Polpharma and others the revenue from Dishman facilities in India is expected to move at CAGR of 25% for next two year. Strong technological competence and Swiss FDA patent in their pocket Carbogen Amcis. Tractio n in CRAMS business ➢ With increasing customers base both in Central Europe and America and with couple of deals in hands Dishman pharma is flying high in CRAMS segment. ➢ Apart from this Dishman has also been adding manufacturing capability organically in India. increased off take of existing contracts. ➢ Having acquired a couple of small CRO businesses in Europe(like Synprotec. A step to this strategy is their expansion plan of Plant in Bavla. CRAM which is the biggest contributor of total revenue of Dishman with 75% and 72% in 2008 and 2009 is estimated to contribute 76% in FY2010.IO3S).it acquired Carbogen Amcis. Supplies from Indian facilities to increase ➢ With the commissioning of new manufacturing facilities in Bavla. acquisition is a strategically fit for Dishman adding extra fuel to their core business of CRAMS.a major Swiss player in field of CRAMS. 57 .➢ The company is one of the largest manufactures of Quats in the world. Pharmathen (Greece Company). ➢ Apart from this rise in high end CRO revenue would also lead to margin expansion post the integration of Carbogen Amcis.

PTC (Phase transfer Catalysts) . which expired on 2008.➢ Also company will be ramping up supply of Eprosartan Mesylate to Solvay after it completes backward integration steps. Dishman was supplying about 70tonnes of EM annually. Company is expecting to increase its contribution and has taken no.Total requirement of API of Solvay. is mainly fulfilled by Lonza and Dishman. ➢ Till December 2007. but with the commissioning of new layer facility from Jan 2008 Dishman is supplying about 200 tones of EM to Solvay from 2009 onwards.65cr in FY2008 to 201. 58 . thus have very low profit margin. some of their strategies include: Strategy to commercialize Quats:➢ Dishman enjoys competency in producing QUATS (Quaternary Ammonium Tertiary).5%.95cr in FY2009. ➢ Apart from this they have also signed an agreement with them for the supply of another API called Delnafaxin hydrochloride for anti depressant drug. a y-O-y growth of 82. Exhibit: Solvay’s revenue contribution to Dishman pattern Marketable Molecules: This segment contributes one fourth of total revenue of Dishman. ➢ In addition to supply of EM they have also established fourth manufacturing facility in Bavla site dedicated for the production of Delnafaxin hydrochloride an API for anti depressant drug for its supply to Solvay. Solving Dishman’s way: ➢ Dishman has renewed their contract with Solvay for the supply of EM. ➢ All these development has made contribution of Solvay to Dishman’s revenue to leap from 110.Since these products are commodity in nature. of steps to commercialize this segment.

The company will continue production of Cholesterol and Vitamin D analogues in the Netherlands. while Vitamin D2and D3 is outsourced from local players. inclusive of working capital. was their part of their strategy to increase their hold on European market which constitutes over 80% of overseas sales of Dishman. ➢ Moreover. Dishman plans to transfer the plant and machinery used for manufacturing Vitamin D analogues from Solvay’s main ➢ plant at Weesp to Veenendaal in Netherlands (plant acquired with the business acquisition) and start production of Vitamin D analogue in that plant. the acquired facilities manufacture cholesterol. ➢ This acquisition has also enabled them to increase their margin from Vitamin D business which earlier was limited with the supply to Solvay only. for the production of High Potent API (HPAPI). ➢ The acquired business has broadly four products – Vitamin D2. ➢ To answer all these challenges they established a new plant in Sanghai with investment of $10 mn.➢ Also Chinese players pose great deal of competition to them by producing low price QUATS. ➢ We believe the cholesterol and vitamin business has good scalability and margins would expand after the successful integration. ➢ The acquired business generates a revenue of €15 mn at an EBIDTA margin of around 17% (EBIDTA of €2. ➢ Thus in all this move was a part of company’s strategy to increase the contribution of MM segment in company’s revenue pattern and increasing product line of MM segment. Dishman will start transferring production of Vitamin D2 and D3 to India from FY09 onwards post to the contracts with local producers come to an end. ➢ Also they have renewed their contract with Ferro Corporation –a Chinese company producing chemicals and plastics and other polymer based product for the supply of Quats. as cost of production is low in china. 59 . ➢ Vitamin D analogue is manufactured at Solvay’s main plant at Weesp. Dishman Netherland: Boost marketable molecules business via inorganic route ➢ Acquisition of “Fine Chemical & Vit. Currently. for producing early phase APIs which would be transferred to Bavla plant in Ahmadabad. cholesterol and Vitamin D analogues.D” business of Solvay in 2007 for €12 million. Post integration. EBIDTA margins to rise ➢ It is expected that EBIDTA margins of the acquired business would rise from existing 16-17% in FY10E and to 20% from FY10E onwards after the successful integration. Vitamin D3. which may take around one year.6 million).

out of which three are fully operated which exclusively cater the supply to Solvay (incurs investment of Rs 1. Developing Quan Xie to bag long term API deal from Japanese majors. PTC (Phase transfer Catalysts) . as cost of production is low in china. which is one of the reasons that the company is not shifting the production to India.5mn). Additional Developments Expansion of Bavla facility (‘Project Taurus’) ➢ Dishman India has been developing four new API facilities at Bavla site in Ahmedabad. and the raw material for cholesterol is locally available in Netherlands.➢ Under Solvay.Since these products are commodity in nature. 60 . ➢ Vitamin D analogue is a high value and a high potency product (sold for almost $ 1 million per kg) used in manufacturing oncology drugs. ➢ Also Chinese players pose great deal of competition to them by producing low price QUATS. for producing early phase APIs which would be transferred to Bavla plant in Ahmedabad. ➢ It is expected that with increased focus on production and marketing. High-end products to be added through acquisition ➢ The acquisition placed Dishman into one of the three players worldwide manufacturing high-end Vitamin D analogues. ➢ Bavla site is designed by its daughter company Carbogen Amcis. Strategy for commercialization of QUAT production ➢ Dishman enjoys competency in producing QUATS (Quaternary Ammonium Tertiary). ➢ To answer all these challenges they established a new plant in Sanghai with investment of $10 mn.5 bn ($37. and will be the largest of such facility in Asia. for the production of High Potent API (HPAPI). ➢ Fourth plant will be dedicated to produce cytotoxic compounds for catering the demands of rest of their clients which incurs investment about Rs 35cr. the business will see good traction. Other products such as cholesterol and Vitamin D2 and D3 are common products. the business was under-pressure as it was not a focus area and margins were under pressure due to lower capacity utilization levels. thus have very low profit margin. ➢ Cholesterol is the raw material for Vitamin D2 and D3.

5% 6. has opened their market of API and are looking for partners for long term API supply. 5% 3. ➢ This is also a part of their strategy to get long term deal for catering API needs of Japanese companies as Japanese govt. Dishman Netherlands. Till 2008 US market contributes to only 5% of overseas sales of Dishman. ➢ Apart from this they also want to make their way into US Pharma and chemical market as Solvay has developed a wide customer base in the US. 5% 5. for the supply of 8-10 APIs. 5. ➢ Targeting Polish Market ➢ Recently Dishman has concluded a deal with Poland based Polpharma.48. 75% Polpharma Sanofi Aventis GSK Servier Sandoz Others Fig: Value share distribution of various drug makers in Polish market (Source: Polpharma quoted by Puls Bisnesu) ➢ Making base in promising US market ➢ Acquisition of Carbogen Amcis in 2006 was Dishman’s first step to enter US market as Carbogen is having many US clients. ➢ Polpharma is major player in Polish market having annual turnover of US$400 mn. 6% 4. ➢ Also this deal is another step by company to increase their client base in European market which constitute about 80% of total Dishman’s sales in overseas market(in 2008).34.87. 61 .which was earlier served by Solvay.29. 4% 74. SolubilizingSolvay: Dishman Netherland ➢ Acquisition of “Fine Chemical & Vit.D” business of Solvay in 2007 was their part of their strategy to increase their hold on European market which constitutes over 80% of overseas sales of Dishman.88.➢ Recently they have formed JV with Japanese company named Azzuro Corporation for distribution and marketing of specialty chemicals of Dishman.& Carbogen Amcis Ltd. under the name of Dishman Japan Ltd.14. ➢ Company is quite bullish that this deal would bring 30% growth in revenue in coming three years.

➢ The total project cost for two said two SEZ segment will be around Rs 650 cr & will be funded partly by promoter of Dishman and partly by loan & private equity or public participation.crore) FY2007 CRAMS-Solvay % of total revenue CRAMS-Non-Solvay % of total revenue CRAMS-Carbogen Amcis % of total revenue Marketable molecules % of total revenue 84.32 15% 106.one for Pharmaceuticals & Fine Chemicals segment and another for Engineering Segment through its subsidiary namely Dishman Infrastructure Ltd.8 39% 163 28% 0 FY2008 110.38 20% 222.➢ After that they had made many deals with major US pharma players such as Pfizer.95 19% 168.66 14% 137.03 38% 232 18% 70. Business model and assumptions(Rs.30 18% 478.96 17% 353 44% 168. ➢ Over 90% of part of these SEZ will be processing units.43 21% 33. where less than 20% of this SEZ will be utilized by Dishman. willing to set up their units in SEZ.00 62 .03 FY2009 201. Merck and others.2 18% 224.66 40% 210 20% 54.50 FY2010E 256.20 APIs having order potential of $10-$20mn by 2010. ➢ Forex Move: converting FCCBs ➢ To mitigate the effect of MTM losses they have converted most of their FCCBs in equity. ➢ After getting approval from govt. ➢ Recently they are undergoing talk with US based company named Astra Zeneca for the supply of 14.59 16% 430. they are getting good response from both domestic as well as overseas companies. ➢ In Q3 FY09 they have registered MTM gain of about Rs 50 c ➢ Project SEZ: Benchmarking & Tax Shielding Mechanism ➢ Dishman has promoted the project of SEZ.

72 285.47 24.91% FY 2008 803.96% FY 2009 1065 0 1084.66 801.32 110.97% 200.20% 76% 19% 16% 71.34 23.38 222.08 0 1254.31 601.84% 71.00% 45% 21% Consolidated Profit & Loss Account FY 2005 Net Sales Other Income Total Income Total Expenditure % Total Sales EBITDA EBITDA (%) 187.23% 282.01 801.08 917.2 75.8 415.08 46.10 26.32 106.56% 52.94% FY 2007 578.75 650.57 23.13% 45.22 137.16 213.20 256.62 201.59 430.44 7.4 27.03 956.88 463.30 478.95 168.97 25.86 190.55% FY 2010E 1254.96 353 601.12% 138.Vitamin D business of Solvay % of total revenue Total revenue 0% 578.70 6% 1258.54 80.66 137.71 CRAMS-Solvay CRAMS-Non-Solvay CRAMS-Carbogen Amcis Total CRAMS EBIDTA margins EBIDTA on Solvay CRAMS EBIDTA on Carbogen Amcis CRAMS EBIDTA on MM EBIDTA on Vitamin D business 84.19 76.20% 336.31 850.97% FY 2006 277.2 224.70% 35% 19% 78.82 73.08 5% 1065.71 60.98 73.81 26.36 2.80% 63 .40% 61.90% 62% 18% 55.4 4% 803.28 80.

87% 47.44% 12.57% 4.15 162.Less: Depreciation EBIT EBIT (%) Less: Interest PBT PBT (%) Less: Tax Net profit before extraordinary items Extra-ordinary Items Adjusted Profit After Extraordinary item PAT (Adjusted) (%) 7.34% 11.37% 1.09% 30.45% 3.31 112.48% Valuation And Recommendation:-With increasing margin in MM segment and maintaining growth in CRAMS segment company is expected to trade at PE of 9 with EPS of 27 in 2010.03 19.28 19.17 84.64 44.71 35.01 15.11 163. CHAPTER 6: FUNDAMENTAL ANALYSIS OF STOCK #3 Orchid Chemicals and pharmaceuticals Ltd 64 .07 119.85 174.60% 5.85 0 50.29% 3.19 18.5 122.53% 62.05 59.16 91.76 34.09 91.9 -0.3 19.05 16.95 53.17 20.16 95.89% 8.54 0 34.20 17.54 10.92 21.19 153.12 50.98 233.65% 45.87 16.8 15.91 219.71 -0.67% 25.59% 13.97 19.46 36.93 259.9 20.33% 26.36% 16.31% 76.76 23.78 15.85 18.20 0 219.99 219.54 18.

65 .Status: Moderately Underweight Call: Buy Target price: 180 Time Horizon: 8 to 10 months About the company: Orchid Chemicals and pharmaceuticals Ltd. formulations and nutraceuticals. is leading pharmaceutical company headquartered in Chennai. India involved in manufacture and marketing of diverse bulk actives.

drug discovery and pharmaceutical research at Chennai. Typically. globally present Indian pharmaceutical companies. fully integrated.of-the. the Company attaches a great importance to its quest for novel drug delivery systems (NDDS). Orchid’s world –class manufacturing infrastructure including US FDA and UK MHRA complaint API and dosage form facilities are located at Chennai and Aurangabad. value chain integration. straddling the full pharmaceutical value chain. capturing all the critical dimensions. change of dosage forms or through novel combinations. which are premium priced. Orchid. despite being a first generation enterprise that commenced operations only in 1994. Bombay Stock Exchange & Madras Stock Exchange in India. Strategy:Company mainly started with the production of antibiotics and developed a robust leadership position in the antibiotics space. developing New Chemicals Entities (NCEs) in six therapeutic areas.art GLP complaint R &D centres for API research.With exports spanning more than 75 countries. Orchid has dedicated state. But with the development of stiff competition in this field they started moving their strategy to the production of niche products. has distinctively and rapidly evolved to emerge as one of the few. A clear strategic focus on niche generics and drug discovery. This can be brought about by innovative changes in formulations. 66 . collaborative partnerships and an empowered organization constitute the key elements of Orchid’s growth model. drug discovery and drug delivery. better tolerated products or as drugs extendable to other indications. While the generics strategy is a key component of Orchid’s growth. Orchid is working on a few projects in this area. which will help extend the frontiers of applications for certain medicines. in the US. and chemical entities which called for complex reactions and huge cost involvement. NDDS products can reposition well established and well-proven medicines as more efficacious. ISO14401 & OHSAS18001 certifications. Orchid has two subsidiaries to carry out drug discovery-Orchid Research Laboratories Ltd in Chennai & Bexel Pharmaceuticals Inc. orchid is the largest manufacturer –exporter of cephalosporin bulk actives in India and ranked amongst the top 5 cephalosporins producers in the world. Orchid is listed on the National Stock Exchange. This evolution is reflected in its multitier integration encompassing APIs and dosage forms for regulated and emerging markets. product versatility. Orchid has ISO9001:2000. state-of-the-art infrastructure.

67 . ➢ Company is also expecting to launch around dozen of products in the Cephalosporin and other categories in the US and the EU in 2009-10 with estimated market size of about US$ 2.2009 Financial Abstract: Sections Beta Institutional Holding Dividend Yield Current M-Cap CMP Numbers 0. Gemifloxacin and as per the management they are the only first. ➢ Already launched high value product namely Cefdinir & Cefepime among others in US will generate sizeable amount of revenue from 2009-10.59% 1179.09 Current Ratio Return on Investment Investment Rationale: Future Growth Drivers: ➢ Company is bullish about Carbapenems segment to be their main growth driver per year beyond fiscal ‘09.Shareholding Pattern as on Mar.7 20.55cr 179.to file company.31% 0. along with few Paragraph IV first-to-file products like Ibandronic acid. Memantine.6billion (pre-patent expiry).

➢ This generic is premium priced and thus help the company to get decent margin from this product.6 bn in 2008. Company is also bullish that this product will surge for 15-20% growth in revenue. ➢ Liberalization by the Japanese government to increase the share of generics from the current low of 4% to as high as 30% in years to come. Japan: New market Base Findings & figures that make Japan an attractive market: ➢ Japan is the second largest pharmaceutical market and the second highest healthcare spender.Piperacillin +Tazobactum: Growth factor of company ➢ On Sep. List of generic drugs marketed by Apotex Product Name Brand Reference Pack Size 68 . ➢ This move would help the company to reap the full benefit of market opportunity of US$ 250 million in the US. These approvals cover orchid generic equivalents in 2. most of them are injectables.They have listed nine products for Japan.5 g vial as well as 40. ➢ Japan is having large no. 3. Alliances Marketing Alliance: ➢ Company enjoys dominant position in the US Cephalosporins generics market.A part of their success is due to their marketing partner Apotex.6 bn in 2007 to US$68.So far they have filed three DMFs. Canada and Australia. 16 company got approval from the US FDA for its ANDA for Piperacillin & Tazobactum for injection.5 g (Pharmacy Bulk Package) dosage forms and strengths. of ageing population in the world.375 g and 4. ➢ In order to exploit these opportunities in emerging Japanese market they have established Orchid pharma Japan . ➢ Apart from this the US FDA has recognized that the company is a first applicant for the product and accordingly has also granted 180 days exclusivity to market this product in the US. ➢ They are also going to launch this product in EU.25 g. ➢ The pharmaceutical sales in the Japanese market increased by 3% from US$66.

Apart form this they have invested in Diakron Pharmaceuticals Inc.. ➢ Company is also involved in development of New Chemical Entities(NCEs) and drug discovery in selected therapeutic areas of diabetes. Pharmaceuticals Ltd.Inc. In area of development and manufacture of Anticoagulant drug candidate they have joined hands with for phase I trails. Currently. 1. Dishman’s business is organized & Shasun Chemicals Drugs Ltd. and then diversified themselves into manufacturing of diverse bulk actives.Cefazolin (injection) Cefepime(injection) Cefoxitin(injection) Ceftriaxone(injection) Granisetron HCL ANCEF MAXIPIME CEFOXITIN ROCEPHIN KYTRIL 10X20 ML 10X20ML 25X20ML 10X20ML 5X1ML 1ML. with Merck & Co. It started with the production of phase transfer catalysts (PTCs) & Quaternary Ammonium & Phosphonium compounds. To NCEs in the inflammatory and oncology areas are undergoing regulatory toxicological studies and could be positioned for phase I studies on successful completion.US. formulations & nutraceuticals. & 1. Comparative Analysis: PARAMETERS Dishman Pharmaceuticals Orchid Chemicals & Chemicals Ltd. Also diversified themselves into CRAMs. intermediates & enteric coating excipients. 2. pian management . Started initially with the production of Cephalosporin (antibiotics). 69 . which has an exclusive licensing agreement with Merck for this compound.4ML Piperacillin+Tazobactum ZOSYN 10X48ML ➢ For EU they formed major pan European alliances with Actavis and Hospira. They are mainly into the manufacturing of Active Pharmaceuticals Ingredients (API).oncology & antiinfective products.

A major part of operating expenses is on employee. Intermediates and APIs. 25mg. Apart from this huge operating expenditure is also due to their strategy of developing niche products which require huge cost involvement and complex reactions. Biotechnology & Finished dosages.(SPSL). 5 mg and 10 mg strengths. 2009. UK. which provides contract process research & development. Sales 1062cr 1260cr 1179. 5 mg and 10 mg on Sept 18. received approval from USFDA for its generic version of Pfizer’s anti-hypertension pills Amlodipine Besylate (Norvasc) in 2. Recently they forayed in Non Penicillin Non Cephalosporin segment (NPNC).5 mg. For this they have established wholly owned subsidiary named Shasun Pharma Solutions Ltd. 50mg. & 100mg. however Orchid suffer from loss of 52. 2.17cr. they received final approval from USFDA for its drug Sumatriptan Succinate tablets.This is due to high interest & depreciation charges coupled with high operating expenses. In May they received tentative approval from the US Food and Drug Administration (US FDA) for its migraine pill Sumatriptan Succinate. specialty chemicals.under the two segments – Business Model Marketable molecules and CRAMS. in May. In Aug.07cr Capitalization The market capitalization of Dishman and Orchid chemicals are almost comparable. 70 .3.55cr 762cr 14.44cr Market 1837. Apart from this they got final approval for its ANDA for Zaleplon Capsules. But once such products are developed they are premiumly priced in the market which could draw decent margin for the company. The marketable molecules (MM) segment houses quaternary compounds (QUATS).13. Regulatory Update On July.

02cr in 2008 to 1126.27cr in 2009. this is due to delay in approval by USFDA for Piperacillin Tazobactum injection which was supposed to contribute 15-20% growth in sales. Pilling up of stocks (intermediates.46cr.19%.81 cr in contrast to profit of 228. finished goods) of 72. Growth in sales are flat. 71 . WIP. an increase of 17. At the same time operating expenses has also increased from 961.Table of approvals Segment ANDAs Marketing Authorization (EU) Cephalosporins 2 3 Betalactams Carbapenems NPNC 0 1 0 2 0 3 DMFs (in the US) CoS(Certificate of Suitability)in EU Cephalosporins 2 9 Formulations Betalactams Carbapenems NPNC APIs 0 5 0 3 2 1 Cephalosporins 2 6 Betalactams Carbapenems NPNC 0 2 3 3 1 1 Cephalosporins 12 Betalactams Carbapenems NPNC 1 Nil 07 Financials Results of 2009 results are quite gloomy in the sense that company has to suffer from the loss of 33.56 cr in 2008.

45) 1. from the cash generated by the sales of their premium & niche products in the market.43 company is highly levered when it is compared with peers in this field.11 SCDL 310.68.4% respectively which when compared with that of its competitors like Dishman who have OPM of 26.52 respectively.Analysis of credit: Company has current ratio of 1. Apart from this inventory turnover ratio is also undesirable when compared to its peers which has average inventory turnover ratio of 5. Also ROI of company is negative which is also a gloomy figure when compared to Dishman. & Dishman Pharmaceuticals & Chemicals Ltd. However management of the company is confident of repaying half their debt by Q2 FY2010.32 & 3.48 DPCL 672. i. which have current ratios of 2. which is not very satisfactory when compared with its competitors like Shasun Chemicals & Drugs Ltd.e Shasun & Dishman who are having D/E of 1.52 9.3 (5.39 2. Overall Profitability Company is having Operating profit & Gross profit margin of 16.09 & 0.81) 3.10 2.86 (22. Valuation Ratios (Peer’s Comparison) OCPL Enterprise Value EV/EBIDTA P/E P/BV 1760 7.63.1) (1. Analysis of leverage: With debt equity ratio of 4.46 respectively.80%.2 72 . High debt is a major risk associated with the company.3% & 5.

which is currently trading at 9. At the same time it has high enterprise value and high EV/EBIDTA ratio among its peers. I would recommend ‘buy’ call on this stock at current level with a investment purpose of minimum two years. 73 . Company is having total FCCBs of US$ 193million out of which US$ 175million are to matured in 2012 and 18million are to be matured in 2010. This is lower than that of Dishman. Also with the introduction of Tazo+Pip.All these changes has made me to inferred that by 2010 its OPM will increase to 25% and increase in EBDT margin upto 15%. sales of the company are expected to increase by 15%. and could bring their profit in positive figures by Q3FY2010.90.45)X EPS of (7. and also conversion of FCCBs amounting Rs18m in 2010 reduces some burden of unsecured loan.21 to 43.In addition to this company has also taken dollar denominated long term loan of about 210 cr. Canada & Australia & also in emerging markets like Japan they can part off their some of loans. In Q1 FY2009 company has to suffer from mark to market loss of 58 cr due to depreciation of rupee by 8% from 40.79 has been so far converted. Orchid is trading at (22. In the light of above discussions. EU.61) which is lowest of historic P/E range for five years. Recommendation At the current price of 170.10X EPS of 20.Out of this FCCBs amounting to US$ 22.Risks and Concerns: Huge foreign currency loans & Foreign Currency Convertible Bonds are the main concerns of the company as they are club to mark to market loss.22. there by giving some cushion to the assumption that with the realization of revenue from their high end products in the US.13.

All these factors made me to infer that there is huge untapped market in this sector to tap in India.CONCLUSION: After making through study of report published by Deutsche Bank on future prospects of pharmaceuticals sector in India following inferences have been made by me: ➢ Increasing disposable income of individuals in India. ➢ Large market share for generic drugs ➢ Cheap and literate labor ➢ Large human resource having knowledge of English language-there by giving room to MNCs to get efficient human resource ➢ Large no. Then after making valuations of few pharma stocks using earning multiples I came to conclusions that the stocks tracked are underpriced and thus provide opportunity for safe investment. of pharma companies getting quality standards like FDA. 74 . ASSOCHAM etc.

com http//www.indiaearnings.dpcl.com http//www.moneycontrol.References: Websites Referred http//www.biocon.com http//www.com http//www.ocpl.com 75 .

1985) Peter Fortune also developed a study on.IL:Dow Jones-Irwin.By William Sharpe and Gordon Financial Management –By IM Pandey Journals referred Investment policies by Charles D Harris (Homewood. “A Assesment of Financial Market Volatility 76 .Books referred Fundamentals of investments.

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