Indian Pharma Industry Mid-Year Report Highlights Top Performers and Investment Drivers

INDIAN PHARMACEUTICAL INDUSTRY— Mid Year 2003
Current Recommendations: Cipla (Rs784), Matrix (Rs531), Nicholas Piramal (Rs321),

Torrent (233)
INVESTMENT DRIVERS
Cipla, Nicholas Piramal, Matrix and Torrent are among the companies that should
outperform- on the back of their internationalization initiatives which are yet not fully
noticed by investors. Dr. Reddy’s (Rs. 1131) and Cadila1 (Rs. 206) have met our
expectations. Though Dr Reddy’s and Cadila still offer upside, we find much higher
appreciation potential in four names suggested above.
Our portfolio recommendations increased by 25.5% equaling the broader index and
Lifex. However, it underperformed the MP India Index that was up 28.5%. The key
reason for our below average performance is our missing out on (1) bulk drug group in
general (up ~145%), (2) IPCA (up 158%) and (3) Ranbaxy (up 51%). The key
investment driver of all these outperformers is internationalization in general and
exposure to the US markets in particular.
Bulk drug companies namely Matrix, Divis, Shasun and Neuland jumped up ~90% in
last three months on the news that US will demolish barriers which delay launch of
generics even after expiry of patents. However, our bulk drug company
coverage was less active due to low market cap and low floating stock. Among the other
missed opportunities, IPCA gained as its internationalization efforts, especially its
venture in the European market paid off and is now preparing groundwork to enter the
US generic market. Ranbaxy continued its high growth as its 'accidental' exclusivity of
generic cefuroxime axetil was extended till July 03 as other generic companies lost patent
infringement suit to the innovator (GSK).
Alembic (up 109%) and Burroughs Wellcome (98%) were also among the top
performers although we do not consider them as missed opportunities. Alembic's
appreciation was on the back of improvement in EPS (up by 65%) due to cost reduction.
However, despite cost reduction, its margins are among the lowest in our universe (net
margin 5.5%). Burroughs Wellcome increased by 98% once it reached amicable
settlement with its workers which cleared last hurdle for merger with GSK.
Domestic formulation companies without export focus lost ~14% market value in last
year. Multinational subsidiaries (MNC) also lost ~4% in market value. It underscores the
decreasing importance of domestic formulations market.
Current portfolio consists of 15% cash as we are watching progress of few companies for
recommendations. Unichem appears attractive on all valuations parameters.
Table 1
Indian Pharmaceutical Industry
CURRENT PORTFOLIO
Company Recommended price (Rs.) Weight % Target
Cipla 784 30 950
Matrix 531 15 800
Nicholas Piramal 321 20 400
Torrent 233 20 400
Cash 15
Total 100
Visit our website: www.mpglobal.com for this and related reports August 2003
1
Mehta Partners, LLC provides strategic advisory services.
INVESTMENT OUTLOOK
Positives Negatives
o Indian drug makers to benefit the most from o Huge investment is needed to become
the recent US legislations favoring an early significant player in the regulated
and efficient approval of generics on the back markets. Very few cos. generates such
of rich DMF and ANDA pipeline. huge cash flow.
o A growing number of Indian companies are o Continuing appreciation of Rupee
taking bold initiatives to enter US, Europe, against US$/EU is the flip side of the
and other regulated markets. It is a major strengthening Indian economy. Rupee
shift in mindset; from non-regulated to has appreciated 5.4% in last year and is
regulated markets. likely to strengthen further. Margins of
o Better chance to earn attractive profit despite export oriented companies will be under
high investments in the regulated markets is pressure.
reflected as valuation multiples have risen. o A few mergers of equals are needed as a
o Pressure by WHO and others to make life vast majority of the Indian pharma
saving drugs available to poor countries companies have no plan and little
benefit the Indian companies who efficiently resources to survive post-2005 patent
produce quality products at low cost. regulated environment.
o Taking clue from generic cycle, Indian o Although patent law is enacted by the
companies have invested to reap benefit of Indian government, much confusion
Biogenerics. Although the guidelines are yet prevails as to its implementation. This
not clear for approval of Biogenerics, cos. will reduces pressure on Indian
Like Wockhardt, Shantha biotech, Bharat companies to do R&D. Thus Indian
biotech and Biocon have put up facilities. companies remain engaged in cut-throat
o More companies are now focusing on price war destroying each other.
discovery research, following early success o The Indian drug market has become
of Dr Reddy’s and Ranbaxy. Cadila, intensely competitive as these weak
Glenmark, Lupin, Nicholas Piramal and companies struggle to survive, causing
Torrent have early stage compounds. growth rates to collapse to 5% from
o Although product patents will be recognized double digits rates required in
in India from 2005, its negative impacts may developing markets.
not be felt until the next decade. o Biogenerics opportunity may take longer
o Indian economy is growing at 6+% making it to materialize, delaying the next major
one of the few countries having such robust growth opportunity for Indian
growth. Growth in GDP always result in companies.
higher spend on healthcare – a big plus for
the industry.
FY2003 was a watershed year for the Indian pharmaceutical industry as many companies
have started taking active steps to gatecrash the regulated markets, primarily for two
reasons:
o The Indian domestic market is becoming fiercely competitive with annual growth of
just 5%. The two key ingredients for success in domestic market namely reverse
engineering chemistry skill and speed of new launches have become generic talents
putting all companies on the same platform. Based on domestic formulation market
share, all top 15 companies (except for Sun & Cipla) have lost market share in last 2
years.
o ‘Enviable’ profits earned by Ranbaxy and Dr Reddy’s from US/EU businesses. It
took a decade of painful efforts and bold investments but now both have transformed
from mid-sized Indian companies to large pharma companies competing on a global
scale.
2
Now, the other select major Indian pharma companies are looking at the superior margins
and cash flow that is possible from the regulated markets as a mid term or transitional
strategy to reach their goal of becoming R&D based innovator companies that will
market their own new drugs around the world. Their smaller counterparts are now
beginning to invest in the west also to improve their cash flow, but simply to survive the
consolidation phase that is inevitable and imminent in the Indian pharmaceutical industry.
Indian pharmaceutical industry can be broadly divided into Indian formulations

manufacturers, multinational pharmaceutical company (MNC) subsidiaries marketing
formulations, and active pharmaceutical ingredients (API) manufacturers. The API
manufacturers have outpaced the formulations companies in their early entry and deeper
penetration into the regulated markets, especially the US. On the other hand formulations
companies such as Cadila, Glenmark, Torrent, and Unichem, are only now taking active
steps to enter the US and European generic markets, whereas Ranbaxy and Dr. Reddy’s
started with API sales. Smaller bulk drug companies such as IPCA, Matrix, Neuland, and
Shasun, are finding quicker pay-off with their APIs in US/Europe as Indian API products
are now widely accepted as equal in quality but at lower price. The table below
summarizes how not only the DMF filings have increased but even the number of
companies filing DMF has increased along with the number of filings per company.
DMFs filed CY 2001 CY 2002 Jan-June 2003

No. of DMFs filed 46 54 44
No. of Cos. filing DMFs 15 18 22
Source: US FDA website
Besides attempting to enter the regulated markets, a few companies in our universe are
also trying to move up the value chain by not limiting themselves to supply of APIs or
generic formulation drugs. Products and services are now targeted at various levels of
the value chain to take full advantage of lower cost intellectual capital of India. Divis
and Suven, among others cater to those needing custom synthesis services, while
increasing number of companies offer clinical research or CRO services. Biotech service
oriented entrepreneurs, large and small, including an ambitious project by the Reliance
group (the largest industrial enterprise in India) may put India firmly on global pharma
and biotech map over the next decade.
Ranbaxy and Dr Reddy’s are, of course, the grand daddy of the Indian pharmaceutical
industry. Both crossed $100m sales hurdle in the lucrative US market and now stand at a
major inflection point. Both have aggressive strategies to transform themselves into
specialty pharmaceutical company. Ranbaxy hopes that it’s once a day Cipro will reach
the US market in Q104. Dr Reddy’s has a more ambitious and thus higher risk plan i.e.
bypass Pfizer’s patents on amlodipine with a different salt viz. maleate.
Share price and valuation reflect the accelerated transformation as companies achieve
significant presence in the regulated markets (see table 6). To this end, API companies
have outperformed formulation companies (excluding Ranbaxy and Dr Reddy’s).
Neuland, Shasun, Matrix and Divis Laboratories have appreciated by over 100% in 2003.
As investors have already rewarded many of the companies with successful
internationalization initiatives, one must now identify companies that are currently
domestic focused (and thus still attractively valued) but have plans to globalize with a
clear framework and a sound management team.
3
Portfolio Changes and Rationale
Going forward, our top picks include Nicholas Piramal, it is attractively valued as its
fast growing and profit making alliances are not reflected in the stock price. In addition,
it also devised its much awaited export strategy for the US market and expects an API
supply collaboration with innovator companies by March 2004. Torrent remains
attractively valued on the back of explosive potential from Brazil and Russia businesses.
Torrent, like Dr Reddy’s and Ranbaxy, has licensed its first compound from its discovery
efforts. Cipla is well set to expand its markets in the US and Europe. Cipla is looking
forward to market CFC-free inhalers in Europe and US markets by making supply
agreements. Matrix is a new entrant with robust upside as it leverages its chemistry and
patent ‘hunting’ skills to develop non-infringing processes for complex and mega brands
such as Cipramil (Lundbeck) and Norvasc (Pfizer).
We recommend to exit Dr Reddy’s as the current price reflects much of the near term
upside potential. Ranbaxy is over valued as its growth will erode with the end of its
‘accidental’ exclusivity on cefuroxime axetil with three more generics entering the
market in July2003. We also suggest booking profits in Cadila as it crossed our target
price and near term upside appears limited though it still remains one of the fastest
growing companies for longer term gains.
Consolidation: Internationalize or Perish

Unlike west, Indian companies are family owned businesses with family owners’ stake
being as high as 74%. Thus decision to divest/merge is often driven by a business crisis
or personal needs rather than any careful strategy. As domestic market becomes ‘dog eat
dog’ many companies will come on the block. The strong Indian companies no longer
want to acquire businesses in India, and would rather acquire lucrative opportunities in
regulated markets. MNCs have hardly acquired any businesses in India. So there will be
more sellers than buyers. However, buyers would be those MNCs that are keen to enter
the Indian formulations market. But they too would be very selective and will look for
lean and focused companies without any baggage.
At least three low margin high baggage businesses are available for sale today but buyers
are not turning up. We expect the scenario to worsen for such weak companies.
A number of small-ticket cross border transactions done by Indian companies to build

their presence in the overseas markets are likely to be just a start. Most of these
transactions are done in either Europe or US. Following is the list of transactions done in
the past year.
1. Dr Reddy’s acquired BMS Labs in UK to expand its Europe generic business
2. Ranbaxy acquired a generic company from Bayer, Germany
3. Unichem did a management buy out in UK
4. Torrent bought a small company in Brazil.
5. Suven acquired Synthon Chiragenics (US) – leader in carbohydrate-based chiral tech.
6. Wockhardt acquired C P Pharma in UK to kick start Europe generic business.
7. Cadila Healthcare bought Alpharma’s France division having generic business.
As we expect the phenomenon of internationalization to gather momentum, such

international M&A transactions by Indian companies will increase proportionately.
4
VALUATION DRIVERS – DOMESTIC FORMULATIONS COMPANIES
Our selection of investment opportunities in India is based on their strengths as per the
critical success factors noted below, their management, and relative valuations:
International Presence: Molecules that account for about $40 billion of annual sales
will lose patent protection by 2009. This will open up tremendous opportunities for those
Indian companies able to offer cost effective active ingredients from cGMP (current
Good Manufacturing Practices) facilities. As mentioned earlier in the report as lucrative
international markets open up for Indian players, any company’s global exposure or plans
to internationalize will become the most important growth driver.
Domestic presence: Significant presence in high value therapeutic areas, strong brand
identities, ability to quickly launch complex reverse engineered products, a large number
of new launches and low selling expenses are all critical for the domestic formulations
market. Additionally, the speed and ease with which a company adapts to the new 2005
patent law will become increasingly important.
Discovery Research: With the introduction of new patent law in 2005, the Indian
pharmaceutical industry will no longer be able to take advantage of the reverse
engineering that has been its strength so far. Long-term profitable growth will have to
come from products that emerge from the industry’s own research efforts or successful in
licensing or co-marketing deals, as well as from marketing its products outside of India.
Those companies with some early evidence of active discovery research efforts have an
advantage, but a relatively short time before 2005 or even 2010, call for aggressive
initiatives on all fronts, with own discovery being a longer term driver.
Restructuring, Strategic Alliances, Mergers and Acquisitions: The domestic Indian

pharmaceutical industry is very fragmented. The top 20 companies control only about
56% of the domestic market, whereas in more developed markets, the top 20 companies
control almost 75% of the market. Besides M&A within the Indian market place, we now
expect higher M&A by Indian companies in the international market in the race to
become global. And such global M&As will call for more creative integration.
Fund raising ability: The cost of borrowing in India is ~10% as compared to average
operating margins of ~13%. The ability of companies to arrange financing at reasonable
rates is critical to future success. Funds are needed for several important areas such as;
upgrading of facilities to cGMP standards, investing in ANDA pipelines, setting up
research facilities for discovery, brand building for current products, and preparing for
M&A opportunities.
Table 3 below provides a composite score for the significant domestic companies on
basis of the previously mentioned valuation drivers. Subsequently, we examine the
ratings of the companies in detail for each of the valuations driver.
5
Table 2
Indian Pharmaceuticals Industry
DOMESTIC PHARMA GROUP – RANKING ON VALUATION DRIVERS
Fund
Company R&D Input / International Success in Domestic Weighted
raising
Results Presence Alliances/M&A Ability Presence Total
Ranbaxy 8 9 6 5 7 7.6
Dr Reddy's 7 8 7 6 7 7.3
Cipla 4 6 3 6 9 6.3
Sun 2 6 5 7 8 6.0
Wockhardt 5 5 6 6 5 5.2
Torrent 5 4 3 7 6 5.0
Cadila Healthcare 3 4 6 6 6 4.9
Nicholas Piramal 2 1 7 3 6 3.5
Suven 2 5 3 4 2 3.4
Unichem 0 2 3 2 7 3.3
IPCA 0 6 0 3 3 3.3
Glenmark 1 2 5 3 5 3.2
Lupin 2 3 3 3 4 3.2
Matrix 2 4 3 4 2 3.0
FDC 0 3 1 4 4 2.8
Alembic 1 3 1 1 4 2.6
JB Chem 0 4 2 3 2 2.5
Shasun 1 5 4 1 0 2.4
Orchid 0 4 2 1 1 2.0
Neuland 1 4 2 1 0 1.9
Aurobindo 0 3 1 2 1 1.7
Krebs 0 3 0 1 1 1.5
Zandu 0 1 0 0 3 1.3
Kopran 0 1 1 1 2 1.2
Morepen 1 2 0 0 0 0.9
RPG Life Science 0 1 0 0 1 0.7
Average 2 4 3 3 4 3.1
Source: Mehta Partners, Company Report
6
Current Valuation on Financial and Non Financial Measures
Table 4 shows cash (debt) adjusted market capitalization along with the domestic market
share of each company. Companies are divided into two groups: the emerging global
group, which has a significant presence in developed markets; and the domestic
formulation group, which is primarily India-focused.
o Key take away from the table below:
o Market valuation of Emerging Global group has increased ~ 40% in last one year vis-
à-vis Sensex and Lifex both ~25% each. Market value of Domestic Formulation
group declined by 14% compared to last year.
o Market Share of companies has remained flat at ~38%. It means much needed
consolidation is not happening
o Average Market Value to Market Share has increased ~10% from last year
o Number of companies crossing Rs.1 billion of market value has increased from 5 to 8
Table 3
MARKET BASED VALUATIONS- DOMESTIC FORMULATION
Rs in million
Price (Rs) Market Net Cash Adj Mkt Sh- Mkt Val Prem/(Disc) P/E
Company 25-July-03 Value or (Debt) Mkt Val Are (%) to Mkt Sh. to Ave %
Emerging Global
Ranbaxy 812.8 150668.7 (1050.2) 151719.0 4.66 32557.7 67.3 21.8
Dr. Reddy's 1131.3 86556.5 4363.8 82192.6 2.82 29146.3 49.8 23.8
Cipla 784.4 47037.5 4125.2 42912.3 5.44 7888.3 (59.5) 19.0
Sun Pharma 359.4 33602.5 (172.4) 33774.9 3.04 11110.2 148.6 13.5
Total 317865.1 7266.4 310598.7 15.96
Average 79466.3 1816.6 77649.7 3.99 19461.1 23.7
Domestic Formulation
Lupin Labs. 386.6 15516.5 (5232.7) 20749.2 1.94 10695.5 139.4 21.2
Cadila 206.4 12286.4 (4058.2) 16344.6 2.74 5965.2 33.5 15.9
Nicholas Piramal 321.3 11221.1 (3375.2) 14596.3 3.43 4255.5 (4.8) 10.8
Wockhardt 375.2 13603.7 (719.3) 14323.0 2.10 6820.5 52.6 40.0
IPCA 335.4 4192.5 (915.1) 5107.6 1.01 5057.0 13.2 6.7
Torrent 232.9 4928.2 (111.9) 5040.1 1.86 2709.7 (39.4) 9.9
Glenmark 295.0 3029.7 (1030.1) 4059.7 1.27 3196.6 (28.5) 8.1
FDC 43.2 4202.8 348.8 3854.0 1.16 3322.4 (25.6) 10.6
Alembic 268.0 1929.6 (1115.1) 3044.7 1.66 1834.1 (59.0) 6.3
Kopran 46.8 937.3 (1392.1) 2329.5 0.18 12941.5 189.6 (6.9)
Unichem 208.3 1776.4 (492.9) 2269.3 1.60 1418.3 (68.3) 6.5
German Rem. 292.2 2409.2 413.3 1995.9 1.11 1798.1 (50.3) 12.8
Elder 60.0 658.8 (604.2) 1263.0 0.81 1559.3 (65.1) 7.9
RPG LS 28.0 348.0 (636.0) 984.1 0.39 2523.2 (43.5) (1.7)
Ajanta 42.5 504.1 (295.8) 799.9 0.13 6153.4 37.7 16.1
Zandu 1711.3 689.6 (82.0) 771.6 0.18 4286.8 (4.1) 9.4
Albert 34.6 197.3 (220.2) 417.5 0.35 1192.9 (73.3) 3.8
Total 78431.1 (19518.9) 97950.0 21.92
Average 4613.6 (1148.2) 5761.8 1.29 4468.5 14.2
Source: Mehta Partners, Company Reports
Notes:
o Adjusted Market Value is market cap adjusted for net cash or (debt).
o Market Share data is from AC Neilson ORG market share survey of prescription sales of branded formulations in
India calculated on the moving Average total sales for 12 months ending June 2003.
o In Market based Valuation Table PE is based on annualized EPS on latest available quarterly results. While in
Financial based Valuation Table PE (Income) is taken from latest audited financial year. So the PE reflected in the
tables would be different.
7
Table 5 looks at traditional financial valuation ratios. The multiples and ratios calculated
in these tables offer good anchors and a very complementary valuation screen along with
market and research oriented valuation screens.
o Sales per share of Emerging Global group increased by ~28% and that of Domestic
Formulation group increased by ~21% to last year
o Average Earning Per Share of Emerging Global group was up ~50% from last year
and Domestic Formulation group increased ~18%. It shows that Emerging Global
group is growing faster by ~32% than Domestic Formulation group compared to last
year.
o Market Value (Times) to Sales has decreased compared to last year.
Table 4
FINANCIAL VALUATION MEASURES - DOMESTIC PHARMA GROUP
PER SHARE (in Rs.) MARKET VALUE (TIMES)
Cash Book Cash Book
Company Sales EPS Price Sales Income
flow Value flow Value
Emerging Global
Cipla 262.2 41.3 45.8 146.7 784.4 3.0 19.0 17.1 5.3
Dr.Reddy's 236.6 47.7 58.0 184.5 1131.3 4.8 23.7 19.5 6.1
Ranbaxy 204.0 21.6 25.2 95.9 812.8 4.0 37.6 32.3 8.5
Sun Pharma 106.2 26.0 29.4 57.6 359.4 3.4 13.8 12.2 6.3
Average 196.5 30.2 35.2 111.0 3.5 22.7 19.5 6.2
Ajanta 58.4 2.2 5.7 141.6 42.5 0.7 19.0 7.5 0.3
Albert David 167.0 7.5 13.0 30.2 34.6 0.2 4.6 2.7 1.1
Alembic 769.7 42.8 77.1 217.8 268.0 0.3 6.3 3.5 1.2
Cadila 113.8 11.9 14.9 92.7 206.4 1.8 17.4 13.8 2.2
Elder 168.6 2.1 4.1 79.8 60.0 0.4 29.0 14.7 0.8
FDC 15.2 2.5 3.0 11.9 43.2 2.8 17.2 14.5 3.6
German Rem. 269.4 31.2 39.4 181.5 292.2 1.1 9.4 7.4 1.6
Glenmark 327.1 36.3 36.3 115.2 295.0 0.9 8.1 8.1 2.6
IPCA 403.7 57.0 65.6 125.6 335.4 0.8 5.9 5.1 2.7
Kopran 118.4 4.3 9.1 84.4 46.8 0.4 10.9 5.2 0.6
Lupin Labs. 279.0 18.2 23.3 68.2 386.6 1.4 21.2 16.6 5.7
Nicholas Piramal 299.0 29.7 35.9 114.8 321.3 1.0 10.8 8.9 2.6
RPG LS 96.1 (16.7) (13.2) 83.9 28.0 0.3 (1.7) (2.1) 0.3
Torrent 211.4 31.7 38.8 108.4 232.9 1.1 7.3 6.0 2.1
Unichem 381.0 32.0 41.6 115.7 208.3 0.5 6.5 5.0 1.8
Wockhardt 223.1 28.8 33.8 83.3 375.2 1.7 13.0 11.1 4.5
Zandu 2550.7 17.2 28.0 88.7 1711.3 0.7 99.5 61.2 1.9
Average 181.6 16.8 21.3 86.0 1.1 11.5 9.1 2.2
8
o Export as % sales of domestic companies is up compared to last year and the

share of export to regulated markets has increased.
o EPS CAGR of companies focusing on regulated markets is higher than
companies targeting deregulated markets or solely domestic market.
Table 5
FINANCIAL PARAMETERS – DOMESTIC COS. WITH EXPORT FOCUS
Rs. in million
% Export
Sales % Export Developed Under Dev. Oprt. Net Net Profit 4 Year
Company to Sales to Sales Profit Profit (%) EPS CAGR
Emerging Global
Sun Pharma 9881.0 21.2 5.9 15.3 2807.7 2475.0 24.5 43.8
Dr. Reddy's 18106.1 63.1 39.6 23.5 3408.6 3642.3 20.2 49.2
Cipla 15724.4 31.4 17.3 14.1 3280.5 2474.8 15.7 21.6
Ranbaxy 37824.0 65.7 44.0 21.7 9004 6914.9 10.6 41.2
Total 81535.5 18500.8 15507.0
Average 20383.9 45.3 33.3 19.8 4625.2 3876.7 17.7 38.9
Wockhardt 8091.0 38.2 7.6 30.6 428.0 340.0 12.9 8.2
IPCA 5045.7 55.1 32.2 22.9 792.5 623.0 12.3 36.1
Lupin Labs. 11200.5 36.9 4.4 32.4 1731.3 730.7 6.5 25.8
Alembic 5664.9 20.8 3.3 17.5 611.6 315.3 5.6 1.9
Ajanta 692.2 46.1 0.0 46.1 109.5 26.5 3.8 (48.3)
Total 30694.3 3672.9 2035.5
Average 6138.9 39.4 9.5 27.9 734.6 407.1 8.2 4.7
Note: This table contains companies having export sales of >20% of total sales.
Table 6
FINANCIAL PARAMETERS – DOMESTIC COS. WITHOUT EXPORT FOCUS
Rs. in million
Sales Operating Net Net Profit 4 Year
Company Profit Profit (%) EPS CAGR
FDC 2376.4 421.3 398.0 16.5 19.7
Torrent 4472.4 795.4 496.0 15.0 20.7
German Rem. 2892.9 338.4 187.7 11.6 (7.7)
Cadila Healthcare 6776.3 1097.8 770.9 11.4 16.1
Glenmark 3358.9 658.7 373.1 11.1 31.1
Unichem 3250.1 465.8 273.3 8.4 35.9
Nicholas Piramal 11361.3 1688.6 1129.9 7.6 25.2
Zandu 1132.6 86.4 73.6 6.7 5.1
Albert 1050.6 72.8 52.0 4.5 34.1
Kopran 1380.2 70.2 (135.3) 3.6 NA
Elder 2327.9 227.0 83.2 1.2 21.5
RPG LS 1195.0 32.8 (207.1) (17.3) NA
Total 41574.6 5955.3 3495.4
Average 3464.5 496.3 291.3 6.7 20.2
9
o Table 8 below shows how market value-to-sales multiples are skewed towards
higher exposure to the international and/or regulated markets more specifically.
o PEG ratio shows the PE(x) multiple vis a vis its last 4 yr. EPS growth. As a
thumb rule, a PEG of 1 indicates company’s fair valuation. PEG above 1
indicates over valuation and below 1 shows undervaluation.
o The tables below shows Unichem is undervalued on all parameters although it
achieved a 36% growth in 4 years EPS CAGR. This is in range with the
emerging global’s CAGR. The difference however is that, Unichem’s 80% sales
come from domestic formulation market unlike the global emerging group. This
underscores the market’s fancy for exposures to US/ regulated markets.
Table 7
VALUATION PARAMETERS – DOMESTIC COS. WITH EXPORT FOCUS
Adj. MV to % Export % Exports to sales Adj. MV to Income EV/ PEG
Company Sales (x) to Sales Developed Under Dev. Opt. (x) Net (x) EBIDTA (x)
Emerging Global
Ranbaxy 4.0 65.7 44.0 21.7 16.9 21.9 17.5 0.53
Dr. Reddy's 4.5 63.1 39.6 23.5 24.1 22.6 16.3 0.48
Cipla 2.7 31.4 17.3 14.1 13.1 17.3 12.2 0.88
Sun Pharma 3.4 21.2 5.9 15.3 12.0 13.6 10.8 0.31
Average 3.7 45.3 33.3 19.8 16.5 18.9 14.2 0.55
Ajanta 1.2 46.1 0.0 46.1 7.3 30.2 31.7 (0.33)
Wockhardt 1.8 38.2 7.6 30.6 33.5 42.1 7.4 4.87
Lupin Labs. 1.9 36.9 4.4 32.4 12.0 28.4 6.9 0.82
Alembic 0.5 20.8 3.3 17.5 5.0 9.7 3.9 3.32
IPCA 1.0 55.1 32.2 22.9 6.4 8.2 2.7 0.19
Average 1.3 39.4 9.5 27.9 12.8 23.7 10.5 1.77
Table 8
VALUATION PARAMETERS – DOMESTIC COS. WITHOUT EXPORT FOCUS
Company Adjusted Market Value to EV/ PEG
Sales (x) Opt. Inc. (x) Net Inc. (x) EBIDTA (x)
FDC 1.6 9.1 9.7 59.7 0.23
Zandu 0.7 8.9 10.5 12.2 1.75
Nicholas Piramal 1.0 8.6 12.9 11.6 0.43
Cadila Healthcare 2.4 14.9 21.2 11.2 0.99
Kopran 1.7 33.2 (17.2) 6.0 NA
RPG LS 0.8 30.0 (4.8) 6.0 NA
Unichem 0.7 4.9 8.3 5.6 0.18
German Rem. 0.7 5.9 10.6 5.5 2.18
Torrent 1.1 6.3 10.2 4.9 0.48
Albert 0.4 5.7 8.0 4.5 (0.02)
Glenmark 1.2 6.2 10.9 3.1 0.26
Elder 0.5 5.6 15.2 2.8 (0.50)
Average 1.1 11.6 8.0 11.1 0.60
10
Domestic Presence
o Few domestic companies i.e. Sun, Torrent and Unichem performed better in their
respective therapeutic classes compared to last year. Neurology contributed 17%
more to Sun’s thera class. A better thera class – Gastrointestinal was added
instead of Anti-infectives to Torrent’s top 3 thera class.
o Though there is increase in total value of domestic sales by 11% compared to last
year but total market share of domestic companies have remained same at 36%
Table 09
INDIAN FORMULATIONS MARKET - DOMESTIC PHARMA GROUP
Rs. in million
Total % Mkt Top 3 thera % of % Sales from Brands in Sales Sales force
Company Dom. Sales Share class Sales new launches Top 100 Force productivity
Anti-biotic 33
Cipla 10002.5 5.44 Respiratory 25 1.4 7 1600 6.03
Cardiovascular 11
Anti-infec/Anti-bio. 56
Ranbaxy 8571.7 4.66 Pain Management 10 3.1 4 1770 4.76
Nutritionals/Gastro 9
Female Healthcare 22
Cadila* 7080.6 3.85 Cardiovascular 20 2.7 5 2417 2.93
Anti Asthmetic 20
Cough & Cold 29
Nicholas Piramal 6309.1 3.43 Anti Infective 11 2.9 1 1884 3.29
Biotek 11
Cardiovascular 21
Sun 5598.9 3.04 Psychiatry 18 2.4 2 1450 3.70
Neurology 14
Cardiovascular 23
Dr. Reddy's 5185.5 2.82 Pain 19 0.8 3 1600 3.20
Gastroentology 19
Acute 58
Wockhardt 3866.5 2.10 Chronic 33 2.6 1 1100 3.51
Preventive 9
Anti-TB 38
Lupin 3566.6 1.94 Oral Cephalosporins 25 3.5 2 861 4.22
Neutraceuticals 10
Cardiovascular 34
Torrent 3414.8 1.86 Gastrointestinal 22 2.3 2 1153 2.90
CNS 18
Antibacterial 57
Alembic 3062.3 1.66 Respiratory 10 1.7 2 800 3.92
Anti-Inflammatory 7
Anti Infective 26
Unichem 2947.1 1.60 Cardiovascular 22 2.3 2 835 3.43
Psychiatry 14
Dermatology 39
Glenmark 2328.8 1.27 Internal medicine 25 7.5 0 886 2.54
Pediatrics 18
Anti Biotic 19
FDC 2134.4 1.16 Oral rehydration salts 18 2.3 2 320 6.22
Ophthalmic 15
Anti Malarial 27
IPCA 1864.9 1.01 Cardiovascular 25 2.3 1 791 2.30
Antibacterial 17
Osteoporosis 36
Elder Pharma 1486.1 0.81 Wound Care 24 0.7 1 950 1.58
Vitamins & Nutritions 23
TOTAL/AVG. 67419.7 36.7 35 19039 3.54
Notes: (1) Domestic sales, market share, % sales from new launches, brands in top 100 taken from AC Neilson ORG market
survey data on Moving Annual Total of domestic prescription sales for 12 months ending June 2003. (2) Sales force productivity is
sales (in Rs. mn) generated per sales person. * Includes Cadila + German Remedies + Recon
11
R &D - Focus on Discovery Research
This year was a slightly different year as many more companies beyond Dr Reddy's and
Ranbaxy are getting serious about basic research as can be evident from higher R&D
expense as % of sales. While Torrent has already sold an option to Novartis on buying
rights of its AGE breaker NCE, other companies like Cadila, Lupin, Glenmark and
Nicholas Piramal have already started working on the identified leads with a well defined
R&D strategy. In addition, Dr Reddy's and Ranbaxy are building their marketing teams
by launching branded specialty products with an ultimate aim to have full fledged teams
by the time they launch their own NCEs in the global market.
Along with this encouraging trend, the risks of R&D are also coming out with the failure
of two of Dr Reddy's licensed anti diabetic (PPAR) compounds.
Overall, as Indian companies globalize and the share of domestic market sales in the total
sales reduces, R&D efforts by all companies are more aimed at tapping the lucrative
global markets rather than fallout of the pressures of post 2005 era to save their Indian
market share. Also, companies have put up a separate SBU and chase targets with high
risk areas like PPARs, AGE breakers, Onconova etc.
12
TABLE 10
DISCOVERY RESEARCH – DOMESTIC PHARMA GROUP
Rs. in million
R&D Exp. Income
Total
% of sales from
spent in Future R&D
Company discovery R&D Pipeline Remarks
Prev. Cur. last 5 Capex Emp
research
Year Year years
till now
Clinical trials for DRF 2725
licensed to Novo Nordisk
Anti Diabetic DRF 2593 - (NN622) discontinued following
Phase II. DRF 2725 - tumors found in rats during
discontinued in Phase III HDL carcinogenicity studies. Novartis
Elevators DRF 4832 - discontinued clinical trials on
Preclinical, DRF 4158 - DRF 4158 (LBL 752) without
discontinued in preclinical. declaring the reasons. Novartis
Painkiller (Cox 2 Inhibitor) may take up another PPAR
DRF 4848- Preclinical molecule of Dr Reddys as the
completed Anti Cancer DRF agreement continues. In addition
1042 - Phase I, DRF 1644 - we suspect DRF 4848 also
Preclinical & DRF 3188 - Late might have been scrapped owing
Dr Reddys 5.7 7.3 2924.8 1515 250 1131.0
preclinical. Biotech: Filgrastim to the fading glow of Cox 2
approved by Indian drug inhibitors. DRF now focuses on
controller used for cancer beyond building its
chemotherapy-induced expertise in the glitazone and
neutropenia. Anti-hyper- related chemistry for diabetes
lipoprotenemic: DRF 2937 and metabolism. Substantial
under trial in Switzerland. capex expected for R&D at
Cardiovascular: Restenosis - Hyderabad, expansion at Atlanta
Pre-clinical.Anti-infective DRF R&D HQ, Aurigene (Boston)
8417 & DRF 11057 - and Bangalore based
Preclinical proteonomics and genomics
research centre.
RBx6198: High potency and

selectivity profile observed in
receptor binding study were
retained in in vitro functional
assays.RBx 6198 has a wide
margin of safety and is devoid of
Urology: RBx 6198 & RBx
CNS adverse effects. RBx 2258:
9611 - early discovery, RBx
[Parvosin] is a a1-selective,
9001 - Pre-clinical, RBx 2258 -
orally active compound under
Phase II. Respiratory: RBx
Ranbaxy 2.4 4.5 3801.5 I/S 200 976.7 development for the treatment of
7796 - Phase 1. Anti-bacterial:
benign prostate
RBx 7644 - IND filed. Anti-
hyperplasia.Ranbaxy licenses
infective: RBx 8700 : early
out RBx 2258 to Schwarz
discovery
Pharma for further
development.Ranbaxy to get
total of $ 42 mn for the next 5 to
6 years including $ 6.3 mn as
upfront payment.
Novartis AG of Germany has

got the global rights to an early-
stage development compound
CV: TRC 2XXX - Coronary
known as an ‘AGE-breaker’ and
Vasodilator-preclinical stage,
under investigation for potential
TRC 30X: Safer Antiarrhythimic
use in the treatment of heart
Agent-clinical stage. DPP-IV
disease. Torrent will receive
Inhibitors: TRC-8XXX:
Torrent 4.7 5.8 630.9 I/S 61 24.2 $0.5 mn as non-refundable
Treatment of type II diabetes-
initial payment towards the
Discovery stage. Vasopeptidase
commencement of this
Inhibitors :TRC 9XXX:
agreement.R&D centre worth
Treatment of Hypertention:
Rs800 mn. Scouting for
Preclinical stage
licensing opportunities for all the
3 NCEs.
13
R&D Exp. Income
Total
% of sales from
spent in Future R&D
research
Year Year years
till now
WCK 771A: is a parenteral
fluoroquinolone antibiotic under
develpoment.Results from
WCK 771 - MRSA & VISA
preclinical studies have
sensitive: human clinical phase
demonstrated the superiority of
I. WCK 919 & WCK 1153 -
WCK 771A over currently
broad spectrum respiratory
available anti-MRSA agents
activity: late pre-clinical. WCK
Wockhardt 5.6 5.3 1349.2 I/S 300 (e.g. vancomycin, teicoplanin,
1584 - broad spectrum activity
synercid, linezolid). WCK 919:
in respiratory tract infection,
is an oral fluoroquinolone
gastro-intestinal tract infection
antibacterial for the treatment of
& urinary tract infection : pre-
a broad spectrum of respiratory
clinical
pathogens, particularly
pneumococcal infections.
NCE focus on Anti-fungal, Anti-

histamine and Ant-AIDS. NDDS
focus on sustained and modified
release, transdermal delivery and
Cipla 2.7 2.5 732.2 I/S 250
CFC-free metered dose inhalers.
Seeking partners for NDDS on
Omeprazole.
Diabetes: Non Insulin Non-insulin-dependent

dependant diabetes mellitus CV: diabetes mellitus: DRL has
fibrinogen receptor antagonist, been able to out-license three
sodium-hydrogen exchange drugs in this class; several more
inhibitor. Fungal Infection: are in development by other
Nicholas
1.4 1.5 509.3 I/S 130 Nil Antimycotic active against companies. Sodium-hydrogen
Piramal
azole. Oncology: Cyclin- exchange inhibitor: Aventis has
dependent kinase inhibitor. All been working on canporide for
molecules in initial phase of several years, and is still
clinical studies. optimizing the dosing regimen.
GRC 3015: in development

Anti-Asthma: In the Phospho stage as a potential therapy for
Diesterase Enzyme 4 (PDE4) asthma and chronic obstructive
class of compound: GRC-3015 pulmonary disease. Glenmark
in advanced pre-clinical stage claims that the compound has
and GRC-3049, GRC-3059, potent in vitro activity.Glenmark
Glenmark 3.0 3.5 233.9 50 Nil GRC-3062, GRC-3064 are in have filed a PCT (patent rights
Pre-clinical stage. Obesity: In application) for GRC 3015 and
Beta 3 Agonist class of another for diabetes/obesity
compound: GRC-1087 in pre- (Beta 3 agonist) with drug
clinical stage. regulators in the USA. Glenmark
has filed 11 NCE patents.
Set up R&D centre at Pune at an

investment of Rs500 mn.
Anti Migraine: Preclinical, Research to focus on NCE,
expecting IND filing in Q2 NDDS and ANDA filings. 5
2003. Anti Psoriasis: ANDAs has been filed till
Preclinical, expecting IND filing date.Anti Migraine & Anti
Lupin 2.4 2.3 580.1 100 32 Nil
in Q2 2003. Anti TB: Psoriasis NCEs to be developed
Preclinical expecting IND filing through Phyto chemistry and
in Q4 2003. Anti TB through Synthetic
chemistry. Near term NDDS
focus on OCRS
The proposed R&D centre in

Chennai at Rs400 mn is now
planned at Vadodara. R&D
Sun 2.0 2.5 324.6 500 75 Nil
focus on specialty areas with
low competition
14
R&D Exp. Income
Total
% of sales from
spent in Future R&D
research
Year Year years
till now
Identified CV, Pain and anti
infective as NCE focus areas.
Biotech research focused on r-
DNA based vaccines. Invested
$3mn in Onconova, USA for
research in oncology. Signed 3
Cadila 3.9 3.5 661.3 150 160 Nil
yr collaborative research
agreement with Pantheco A/S,
Denmark.3 molecules in
preclinical evaluation. Total 22
patents filed.
IND filed for Parkinson

diseases. Jt. Development
Zandu 0.9 1.6 50.0 I/S Nil agreement with center for
medical innovation
KNC 1206: for the treatment of

gastrointestinal disorder such as
constipation and diarrhoea suffer
from number of shortcomings
KNC-1206- Synthetic Bulk such as high dose, side effects
Laxative-pre-clinical stage; (cramps, abdominal discomfor
Kopran 0.0 0.0 95.6 Nil KNC-6: Anti-ulcer compound- etc).KNC-6: is an orally
advanced pre-clinical stage administrable novel N-
substituted polymeric
benzimidazole derivative. PCT
application was filed for this
product in February 2000.
In vitro and in vivo experimental

data strongly suggests that DRF
Oncology: DRF 7295 in pre- 7295 should be a good candidate
Dabur Nil clinical stage drug for first line therapy of
adenocarci-nomas of colon,
pancreas, breast, ovary and lung
Notes:
1. Include those companies with R&D at least for filing ANDAs/DMFs and/or basic research.
2. Accumulated R & D expense includes only recurring expenses.
3. Planned future Capex includes future investment related to setting up R&D centre or so.
4. Accumulated Income from R&D includes income from basic research activities.
5. I/S means insignificant
15
International Presence

o Total exports as % of sales has increased 5% from last year.
o Exports sales to regulated markets as % of total exports has increased by 10% from
last year which will accelerate on the back of number of domestic companies filing
more DMFs
o Number of filed DMF has increased from 88 last year to 111
Table 11
INTERNATIONAL PRESENCE- DOMESTIC COMPANIES - BULK ACTIVE
EXPORTS Key patent expirations of US branded
Company Sales % of 3 Yr Devp. Under Filed Filed DMF Sales
Rs mn Sales CAGR Mkt (%) (%) DMF (Rs. bn)
Sertraline(Dec 2005) 13.7
Alendronate (Aug 07) 13.6
Ciprofloxacin (dec 03) 7.4
Cipla 4941.7 31.4 52.0 55 45 42
Fluconazole 5.4
Doxazosin(expired) 3.5
43.6
Itraconazole(expired) 2.2
Ciprofloxacin (dec 03) 7.4
Ofloxacin(expired) 1.7
Neuland 599.8 59.5 13.5 38 62 9
Enalpril 3.1
Albuterol
14.3
Lisinopril (expired) 8.1
Ceftriaxone 4.2
Cefuroxime axetil
Lupin 4130.0 36.9 37.8 12 88 5
Cefaclore
Cefotaxime
12.2
Furosemide
Atenolol
IPCA 2781.1 55.1 17.5 58 42 13 Metoprolol
Triclosan
Metoclopramide
Ibuprofen (expired)
Isradipine
Shasun 1513.7 61.2 10.5 58 42 6 Methohexital
Neproxen
Nizatidine
Divi's Labs. 2273.2 90.0 16.4 66 34 5
Alembic 1178.9 20.8 5.7 16 84 3
Orchid 4515.4 83.4 15.8 0 100 2
Krebs Bio 877.8 86.5 54.1 100 0 2
Ajanta 319.0 46.1 (8.9) 0 100 1
Aurobindo 5582.9 46.9 15.0 37 63 Nil
J B Chemicals 1488.0 51.0 35.2 0 100 Nil
Suven 310.3 68.6 16.2 37 63 Nil
Strides Arcolabs 1451.2 67.2 18.3 16 84 Nil
Matrix Labs. 533.8 20.0 242.1 NA NA 5
Cadila Pharma NA NA NA NA NA 11
Hetero Drugs NA NA NA NA NA 6
USV Pharma NA NA NA NA NA 3 Metformin
Hikal Ltd. NA NA NA NA NA 3 Gebapentin
Atul Ltd. 200.0 30 1 Dapsone
Total/Avg. 45.9 35.2 64.8 111 70.2
Source: Mehta Partners, Company Reports, Websites
o Benchmark for Exports as % sales is 20%
16
o Total exports as % of sales increased by 9% from last year.

o Exports to regulated markets as % of total exports increased by 14% from last year.
o Number of filed DMF has increased from 70 to 98 and approved ANDAs has increased
from 43 to 52
o Companies in this table have opportunity of ~Rs.2.3 billion from ANDA sales to US by FY
2004 which is ~31% of their current total sales.
o Ranbaxy alone has opportunity from ANDA sales to US of Rs.1.74 billion by FY 2004
which would account for ~46% of its current total sales.
Table 12
INTERNATIONAL PRESENCE- DOMESTIC COMPANIES - FORMULATIONS
Rs. in billion
EXPORTS Key approved MP estimates FY04
Sales % of 3 Yr Devp. Under Filed Approved ANDA Molecule Gross US
Company Sales CAGR Mkt (%) (%) DMF ANDA sales sales
Cefuroxime (expired) 0.47
Isotretinoin (expired) 0.07
Ranbaxy 24.8 65.7 50.2 67 33 35 29 1.74
amoxicillin(expired) 0.18
0.72
fluoxetine(expired) 0.20
Dr. Reddy's 11.4 63.2 106.0 63 37 33 7 Tizanidine 0.08 0.51
0.28
Sun Metformin (expired) 0.05
2.1 21.2 38.6 28 72 8 11 0.05
(Caraco) 0.05
Wockhardt 3.1 38.2 41.6 20 80 22 5 NA
Total 56.1 60.4 39.6 98 52 1.06 2.30
Source: Mehta Partners, Company Reports, Websites
Notes:
1. Key patent expiration is selected seeing the competition and size of the molecule.
2. Caraco is Sun's acquisitions in U.S. All ANDAs are of Caraco.
3. Benchmark for Exports is 20 % of sales.
17
Fund Raising Ability
o Though market value of all companies in this table has increased by 30% from last
year, the Available Fund has decreased by 32% as Net Debt of all companies has
increased by 59% is last one year.
o Promoters of Lupin has diluted stake by 25%. The fund is used to repay loan taken by
them in personal capacity from Lupin.
o Market value of Cadila Healthcare increased by 53% which helped the company
attain 8th position from 16th last year.
o Market value of Alembic was lower than its net debt last year. Reduction in debt and
increase in market value improved ‘fund available’ amount by Rs.843 million.
Market value of Alembic appreciated by ~100% in last one year.
o Net debt of five companies, viz. RPG LS, Strides Arcolabs, Kopran, Orchid,
Morepen Labs. is higher than their respective market value. It will be an uphill task
for these companies to come out of the trap.
o Among leading companies only Cipla and Dr.Reddys’ have net cash position while
Ranbaxy, Sun, Nicholas Piramal and Cadila Healthcare are in net debt position.
In Table 14 we have calculated the amount that a company could raise from the stock
market at current valuations while still maintaining a 51% holding.
Table 13
FUND RAISING ABILITY- DOMESTIC COMPANIES
Rs in million
Net (Debt) Promoter's Mkt. Cap FRA Available
Company Cash stake % (Rs mn) with 51 % stake* Fund #
Sun (172) 72 33602 13671.6 13499
Wockhardt (719) 74 13604 6135.0 5416
Dr Reddy's 4364 26 86556 0.0 4364
Cipla 4125 40 47037 0.0 4125
Torrent (112) 74 4928 2228.3 2116
FDC 349 68 4203 1439.7 1788
Cadila Healthcare (4058) 75 12286 5781.8 1724
German Rem. 413 77 2409 1245.7 1659
J B Chem 46 59 3352 540.2 586
Divi's Lab. 55 54 6745 408.7 464
Suven 20 59 744 115.6 136
Zandu (82) 35 690 0.0 (82)
Albert David (220) 70 197 71.9 (148)
Ajanta Pharma (296) 60 504 92.4 (203)
Krebs (241) 43 826 0.0 (241)
Neuland (271) 32 697 0.0 (271)
Glenmark (1030) 63 3030 742.0 (288)
Shasun (488) 46 1794 0.0 (488)
Unichem (493) 49 1776 0.0 (493)
Elder Pharma (604) 44 659 0.0 (604)
RPG LS (636) 51 348 (3.1) (639)
IPCA (915) 53 4193 135.6 (779)
Alembic (1115) 58 1930 271.7 (843)
Matrix Lab. (1220) 55 5164 372.6 (847)
Ranbaxy (1050) 32 150669 0.0 (1050)
Strides Arcolabs (1437) 65 1127 309.5 (1128)
Aurobindo (3070) 62 8311 1725.8 (1344)
Kopran (1392) 33 937 0.0 (1392)
Nicholas Piramal (3375) 51 11221 68.2 (3307)
Orchid (4746) 16 4394 0.0 (4746)
Morepen (5194) 14 943 0.0 (5194)
Lupin (5233) 42 15517 0.0 (5233)
TOTAL (28798) 430393 35353.2 6556
o Fund from new equity shows the company’s ability to raise money from the stock market at current prices
without diluting promoter’s stake beyond 51%. Available funds = Fund from new equity + Net cash (Debt)
18
Selling Expenses
In this table we compare the amount spent on selling and Administration category and
amount spent on Basic Research activities. Companies spending more on Basic Research
are doing well than the companies who are spending more on S & A expenses.

o Domestic sales of companies increased by ~10% compared to last year
o Selling & Admin expenses as % of Sales has remained same compared to last
year which shows that companies still need to do much cost reduction
o No increase in R&D spent compared to last year. Dr. Reddy and Ranbaxy spend
more on R&D than on Selling & Admin Expenses.
Table 14
SELLING EXPENSES – DOMESTIC PHARMA GROUP
Rs. in million
Domestic Selling & S & A Exp. Basic Research Number Sales
Company Sales Admin. Exp. % of Sales Expense of Brands Force
Alembic 3062.3 821.3 26.8 80.0 120 800
Cadila 4480.9 1369.5 20.2 237.2 240 2289
Cipla 10002.4 2763.2 27.6 400.0 432 1600
Dr. Reddy's 5185.5 922.2 18.0 1323.8 149 1600
Elder Pharma 1486.1 320.6 21.6 0.0 99 950
FDC 2134.4 191.9 9.0 0.0 85 320
Glenmark 2328.8 789.9 33.9 117.6 98 886
IPCA 1864.9 620.0 37.0 75.0 91 791
J B Chemicals 964.4 218.3 22.0 0.0 13 NA
Kopran 334.0 81.0 24.3 NA 73 NA
Lupin Labs. 3566.6 1559.7 43.7 256.5 82 861
Nicholas Piramal 6309.1 2582.6 40.9 168.5 260 1884
Ranbaxy 8571.7 1515.9 18.0 1686.3 300 1770
Sun Pharma 5598.9 1456.2 26.0 247.0 286 1450
Torrent 3414.8 975.0 28.6 260.1 106 1153
Unichem 2947.1 670.3 22.7 52.0 116 835
Wockhardt 3866.5 1321.1 34.2 428.0 204 1100
TOTAL 66118.3 13906.7 2939.8 2754 17102
Average / (%) 3889.3 26.9 183.7 3.8*
Note:
o Domestic sales, market share, brands in top 100 taken from AC Neilson ORG market survey data on Moving
Annual Total of domestic prescription sales for 12 months ending June 2003.
* Shows Sales in Rs mn per Sales Person
19
VALUATION DRIVERS FOR BULK DRUG PRODUCERS
o Market value of Bulk drug universe increased by 145% over last year.
o Net Debt of the companies increased by 81% compared to last year.
o Orchid and Aurobindo borrowed significant amount this year.
Table 15
MARKET BASED VALUATIONS- BULK DRUG PRODUCERS
Rs in million
(Rs. in mn) Price (Rs) Market Net Cash Adj P/E
Company 25-July-03 Value or (Debt) Mkt Val (x)
Aurobindo 402.1 8311.4 (3070.0) 11381.4 8.1
Orchid 157.0 4394.4 (4745.9) 9140.3 26.0
Divi's Lab. 526.2 6744.8 55.0 6689.9 12.3
Matrix Lab. 531.1 5164.4 (1219.6) 6384.0 5.7
Morepen labs. 10.4 942.8 (5193.7) 6136.5 (4.8)
J B Chem 208.7 3351.5 45.9 3305.6 6.9
Strides Arcolabs 67.3 1127.3 (1437.2) 2564.5 46.0
Shasun 218.3 1794.0 (487.8) 2281.8 11.1
Krebs Biotech 137.6 825.6 (241.1) 1066.7 5.6
Neuland Labs. 126.8 697.3 (270.5) 967.8 207.5
Suven 169.0 743.6 19.9 723.7 14.1
Total 34097.2 (16545.0) 50642.2
Average 3099.7 (1504.1) 4603.8 10.1

o Average sales per share of Bulk segment have increased by 32% and earning per
share has increased by ~22%
o Market value (times) to income has doubled compared to last year
Table 16
FINANCIAL VALUATION MEASURES - BULK DRUG PRODUCERS
Book
Company Sales EPS Cash flow Book Value Price Sales Income Cash flow
Value
Aurobindo 575.9 49.9 61.1 175.3 402.1 0.7 8.1 6.6 2.3
Divi's Lab. 197.1 42.8 NA NA 526.2 2.7 12.3 NA NA
J B Chem. 181.7 30.2 34.8 118.5 208.7 1.1 6.9 6.0 1.8
Krebs Bio 169.2 23.4 32.5 133.0 137.6 0.8 5.9 4.2 1.0
Matrix Lab. 428.8 77.3 NA NA 531.1 1.2 6.9 NA NA
Morepen 55.5 5.9 9.2 44.1 10.4 0.2 1.8 1.1 0.2
Neuland Labs. 186.7 0.6 6.9 80.5 126.8 0.7 207.4 18.3 1.6
Orchid 193.4 7.0 16.2 117.7 157.0 0.8 22.5 9.7 1.3
Shasun 300.8 19.3 36.7 73.3 218.3 0.7 11.3 5.9 3.0
Strides Arcolabs 70.4 1.5 5.8 50.9 67.3 0.5 46.0 11.6 0.7
Suven 102.8 12.0 15.8 110.4 169.0 1.6 14.1 10.7 1.5
Average 166.3 35.1 17.7 67.4 0.8 11.6 7.9 2.1
20
o EPS CAGR of Bulk segment is better than all other segments. Please read Table
6 for comparison
o Domestic sales now constitute less than 40% of total sales
Table 17
FINANCIAL PARAMETERS - BULK DRUG PRODUCERS
Rs. in million
% Export
Sales % Export Developed Under Dev. Oprt. Net Net Profit 4 Year
Company to Sales to sales Profit Profit (%) EPS CAGR
Divi's Lab. 2465.2 90.0 59.4 30.6 435.6 549.0 22.3 79.1
Matrix Lab. 4169.3 20.0 NA NA 1229.6 751.5 18.0 301.1
J B Chem 2917.7 51.0 0.0 51.0 551.9 485.4 16.6 25.9
Krebs Biotech 1015.0 86.5 86.5 0.0 233.1 148.7 13.8 (0.2)
Suven 452.3 68.6 25.0 43.6 104.7 52.7 11.7 15.3
Morepen labs. 3032.4 NA NA NA (133.6) (197.6) 10.6 NA
Aurobindo 11903.8 46.9 17.4 29.5 1681.5 1031.4 8.7 18.9
Shasun 2472.8 61.2 35.5 25.7 310.9 161.4 6.4 24.2
Orchid 5414.1 83.4 0.0 83.4 714.6 195.4 3.6 (14.8)
Strides Arcolabs 2159.5 67.2 10.8 56.4 313.6 44.9 2.1 (40.4)
Neuland Labs. 1007.8 59.5 22.6 36.9 75.5 3.3 0.3 (13.7)
Total 37010.0 5517.4 3226.0
Average 3364.5 63.4 15.8 34.3 501.6 293.3 10.4 39.5

o Adjusted market value to sales of Bulk segment is next to Emerging market
group and more valued then Domestic companies with exports focus and Solely
Domestic companies group.
o EV/EBIDTA of Bulk segment is highest compared to all other groups
Table 18
VALUATION PARAMETERS - BULK DRUG PRODUCERS
Adj. MV % Export % Export to sales Adj. MV to Income EV/ PEG
Company to Sales (x) to Sales Developed Under Dev. Opt. (x) Net (x) EBIDTA (x)
Strides Arcolabs 1.2 67.2 10.8 56.4 8.2 57.2 22.9 (1.14)
Aurobindo 1.0 46.9 17.4 29.5 6.8 11.0 16.4 0.43
Shasun 0.9 61.2 35.5 25.7 7.3 14.1 12.9 0.46
Divi's Lab. 2.7 90.0 59.4 30.6 15.4 12.2 12.8 0.16
Morepen labs. 2.0 NA NA NA (45.9) (31.1) 9.4 NA
Orchid 1.7 83.4 0.0 83.4 12.8 46.8 8.3 (1.76)
J B Chem 1.1 51.0 0.0 51.0 6.0 6.8 5.9 0.27
Suven 2.1 68.6 25.0 43.6 9.2 18.4 5.6 0.92
Krebs Biotech 1.1 86.5 86.5 0.0 4.6 7.2 5.3 (30.30)
Matrix Lab. 1.5 20.0 NA NA 5.2 8.5 5.0 0.02
Neuland Labs. 1.0 59.5 22.6 36.9 12.8 293.3 0.9 (15.11)
Average 1.5 63.4 15.8 34.3 4.0 40.3 9.6 (4.6)
21
VALUATION DRIVERS FOR MNC SUBSIDIARIES
The strategic parameters influencing the valuations of MNCs remain different from those
for the domestic Indian companies. The following valuation drivers are absent in a
typical MNC subsidiary:
1. MNC subsidiaries do not undertake basic research activities in India.

2. They do not introduce any reverse engineered products.
3. The pace of new product introductions is limited as newly discovered products for
global markets may not be suitable for the Indian market.
4. The Indian subsidiaries of MNCs do not look at the profitable patented / generics
markets outside India.
5. There is always a lurking fear that the parent company may set up a 100% subsidiary
in India, which would be detrimental to the interest of its existing publicly traded
subsidiary.
Thus, the strategic parameters influencing the MNC subsidiaries are:
o Brand strength: Since MNCs have fewer new product launches; the strength of
existing brands becomes crucial in determining their profitability.
o Products under price control: A large portion of MNC sales are under price
control, which adversely affects their profitability, something that does not apply
to domestic companies.
o New product introductions from the parent company can boost profitability and
hence valuations.
o 100% subsidiary: Co-existence of a 100%-owned subsidiary with the publicly
traded subsidiary often reduces the valuation of the publicly traded entity.
o Purchase of minority shareholders’ stake: Indian law has recently changed,
allowing MNCs to own 100% of Indian pharmaceutical companies. Some
companies could choose to buy out the minority shareholders rather than set up a
competing fully owned subsidiary, resulting in significant advantages for the
minority shareholders. Infar (Organon) has already acquired 97% equity and
delisted its shares from stock exchange. AstraZeneca acquired 92% of equity in
Indian subsidiary. Few more MNCs will raise their holding through open
offer/Buy back.
Based on brand power, operating margins, freedom of the subsidiary to operate

independently, and the subsidiary’s integration with global value chain management, we
rank MNC subsidiaries in Table 20, below.
22
o Average operating margins of Emerging market group and Bulk drug companies has
improved by ~4.6% and ~11% respectively from last year. MNCs and domestic
formulations were trailing at ~1.5% and ~0.7% respectively.
o Total market share of MNCs have decreased by 1.7% on account of product pruning.
o Astrazeneca sales increased by ~1% on back of launch of a injectable antibiotic
o Abbott could be at receiving end with competition hotting up in insulin.
Table 19
MNC SUBSIDIARIES
Rs in million
Total Op. % Sales from Parents 100% Sub % Mkt Brands in Brand Score
Company Rev Mrg. (%) new launches Holding % of Parent Share Top 100 Power
GSK Pharma 10472.7 15.1 0.2 49 No 4.98 11 572 7
Pfizer 6512.7 12.1 0.6 40 Yes 1.83 4 262 7
Wyeth Lederle 2682.5 19.3 0.0 63 No 1.39 2 95 7
Aventis 6631.1 13.1 0.0 60 No 2.28 6 320 6
Abbott India 3717.1 19.5 2.4 58 No 2.35 5 238 6
AstraZeneca 1361.7 10.8 2.5 92 Yes 0.71 0 0 6
Solvay Pharma 914.8 16.4 0.7 64 No 0.50 0 0 6
Novartis 4717.0 9.6 1.6 51 Yes 1.91 2 153 6
Merck 3466.9 15.1 0.4 51 No 1.27 3 213 5
Parke-Davis 1807.1 11.3 0.0 40 Yes 1.11 2 124 5
Burroughs Well. 1801.1 16.9 0.0 51 No 0.89 3 104 4
Pharmacia 616.1 (5.5) 0.0 75 No 0.26 0 0 2
Fulford 947.0 (11.5) 0.0 40 No 0.29 0 0 2
Total 45647.8 19.77 38 2081
Average 12.3 1.52 2.92 160
o Market Share, % sales from new launches from AC Neilson ORG market survey data on moving average total of domestic
prescription sales for 12 months ending June 2003.
o Brand power=? (100-Brand rank)
o GSK & Burroughs Wellcome's market share is shown separately, though ORG gives combined sales

o Mkt Cap. of MNCs have decreased by ~4% even though Lifex has gained by 25%
o Net cash of MNCs is up ~40% over last year
Table 20
MARKET BASED VALUATIONS- MNC SUBSIDIARIES
Rs in million
Price (Rs) Market Net Cash Adj Mkt Sh- Mkt Val Prem/(Disc) P/E
Company 25-July-03 Value or (Debt) Mkt Val are (%) to Mkt Sh. to Ave %
GSK Pharma 368.4 27432.9 2427.4 25005.4 4.98 5021.2 38.8 19.5
Pfizer 402.5 11592.0 576.3 11015.7 1.83 6019.5 66.4 15.3
Aventis 365.9 8425.5 185.5 8240.1 2.28 3614.1 (0.1) 11.1
Novartis 237.4 7587.3 443.0 7144.3 1.91 3740.5 3.4 12.2
Wyeth Lederle 292.5 5773.0 192.1 5580.9 1.39 4015.0 11.0 16.5
Merck 289.7 4883.8 77.6 4806.2 1.27 3784.4 4.6 16.5
Abbott India 284.6 4610.5 812.7 3797.8 2.35 1616.1 (55.3) 5.0
Burroughs Well. 417.2 3827.8 1367.2 2460.6 0.89 2764.7 (23.6) 12.0
AstraZeneca 372.0 1860.0 270.4 1589.6 0.71 2238.9 (38.1) 17.0
Fulford 162.9 521.3 (151.2) 672.4 0.29 2318.8 (35.9) (4.0)
Solvay Pharma 148.9 751.8 81.0 670.8 0.50 1341.6 (62.9) 15.4
Pharmacia 95.0 495.9 (38.6) 534.5 0.26 2055.8 (43.2) (6.4)
Parke-Davis * NA NA 266.1 NA 1.11 NA NA NA
Total 77761.7 6509.6 71518.3 19.77
Average 6480.1 500.7 5959.9 1.52 3617.5 14.4
o Delisted after merging with Pfizer
23
o Average sales per share increased by ~13% from last year
o Average EPS is up from Rs16.5 to Rs19.2
o Market value to Income multiple is down from 17.4x to 14.2x
o For the first time in last five years two MNC incurred losses i.e Fulford and
Pharmacia.
Table 21
FINANCIAL VALUATION MEASURES - MNC SUBSIDIARIES
Company Sales EPS Cash flow Book Value Price Sales Income Cash flow Book Value
Abbott 229.5 34.4 37.7 79.7 284.6 1.2 8.3 7.6 3.6
AstraZeneca 272.3 20.7 30.4 152.0 372.0 1.4 17.9 12.2 2.4
Aventis 287.9 26.5 33.1 98.2 365.9 1.3 13.8 11.1 3.7
Burroughs Well. 196.3 36.8 38.6 173.6 417.2 2.1 11.3 10.8 2.4
Fulford 295.9 (23.8) (22.3) 24.6 162.9 0.6 (6.9) (7.3) 6.6
GSK Pharma 140.6 13.2 15.8 77.8 368.4 2.6 28.0 23.3 4.7
Merck 205.6 22.7 28.5 104.2 289.7 1.4 12.7 10.2 2.8
Novartis 147.6 19.4 24.7 65.3 237.4 1.6 12.2 9.6 3.6
Parke-Davis 149.9 13.9 16.2 78.3 NA NA NA NA NA
Pfizer 226.1 26.4 30.1 59.0 402.5 1.8 15.3 13.4 6.8
Pharmacia 118.0 (6.4) (4.3) 88.7 95.0 0.8 (14.9) (21.9) 1.1
Solvay Pharma 181.2 22.7 22.7 52.4 148.9 0.8 6.6 6.6 2.8
Wyeth Lederle 135.9 21.4 23.1 92.4 292.5 2.2 13.7 12.7 3.2
Average 173.3 19.2 22.6 80.9 1.6 14.2 12.0 3.4
24
o Every second year the margin have improved by 10%. This small rise is also
thru contribution of a handful companies who have significant margins in
overseas markets.
o If margins in domestic market do not improve and profits from overseas markets
decline sharply, Indian industry will come under pressure.
Table 22
OPERATING MARGIN – FIVE YEAR TREND
1998 1999 2000 COMPANY/YEAR 2001 2002 Average
NA 21.9 19.7 Ajanta 17.7 15.8 18.8
1.3 5.2 4.6 Albert 6.1 6.2 4.7
12.6 16.1 12.9 Alembic 10.8 10.8 12.6
17.4 15.2 16.5 AstraZeneca 18.3 9.1 15.3
5.6 1.0 6.0 Aventis 9.4 12.5 6.9
18.4 18.9 12.6 Burroughs Well. 9.1 16.9 15.2
12.3 12.9 14.4 Cadila 16.7 17.3 14.7
24.4 23.8 21.7 Cipla 22.4 23.8 23.2
22.9 17.7 20.4 Dr. Reddy's 26.5 37.1 24.9
NA 9.6 11.0 Elder 11.3 10.1 10.5
13.7 18.8 20.1 FDC 17.3 NA 17.5
5.0 (2.6) 0.8 Fulford 1.9 (11.5) (1.3)
19.7 20.8 20.5 German Rem. 17.9 13.9 18.5
14.3 15.2 12.1 Glenmark 16.1 15.3 14.6
10.6 6.5 7.9 GSK India 8.2 15.1 9.6
7.9 9.6 9.3 IPCA 6.4 9.6 8.6
NA NA 9.4 J B Chem 13.8 15.6 13.0
14.4 13.0 14.0 Abbott 14.5 19.5 15.1
11.7 NA 15.2 Kopran 13.8 31.5 18.0
13.3 11.9 20.1 Lupin Labs. 14.6 16.0 15.2
14.2 9.1 15.4 Merck 16.6 15.1 14.1
15.0 15.8 14.9 Nicholas Piramal 15.7 13.2 14.9
8.2 12.9 15.3 Novartis 10.2 12.1 11.7
3.3 3.9 7.1 Parke-Davis 7.0 11.3 6.5
(4.4) 1.0 4.3 Pfizer 7.8 13.7 4.5
3.5 3.3 3.5 Pharmacia 4.6 1.9 3.3
3.0 9.7 11.4 Ranbaxy 13.0 21.1 11.6
5.2 9.2 10.6 RPG LS 9.0 2.7 7.3
2.7 13.0 16.8 Solvay Pharma 18.2 14.6 13.0
21.4 21.0 22.2 Sun Pharma 26.1 25.1 23.2
14.2 15.9 23.3 Torrent 22.3 17.8 18.7
4.4 11.9 11.0 Unichem 12.7 12.2 10.4
18.8 20.7 22.9 Wockhardt 23.9 20.4 21.3
14.8 NA 17.6 Wyeth Lederle 15.4 19.3 16.8
9.8 9.0 5.8 Zandu 9.3 10.4 8.8
11.2 12.2 13.5 Average 13.5 14.6
Burroughs Well. Burroughs Well. Wyeth BEST - MNC AstraZeneca Abbott

Pfizer Fulford Fulford WORST - MNC Pharmacia Fulford
Cipla Cipla Torrent BEST - DOMESTIC Dr.Reddys Dr.Reddys
Albert Albert Albert WORST DOMESTIC Alembic RPGLS
25
COMPANY ANALYSES
This section contains our analysis of recommended Indian pharmaceutical companies and
companies that are worth watching.
For each company we have provided sales and earnings estimates for the current year till
2009.
Notes:
A. Sales are including excise and sales tax.

B. Dividend on Preference shares is treated as interest expense.
C. Tax on equity dividend is treated as income tax paid by the company.
D. Preference Capital is treated as debt in the calculation of Net Debt, Debt Equity
ratio and Book Value.
E. Cash & Cash Equivalents=Cash & Bank balance + liquid and non-strategic
investments.
F. Net Cash=Cash & Cash Equivalents-Debt.
G. All Operations Research Group (ORG) rankings are based on the reported ORG
data for June 2003 adjusted for recent mergers and acquisitions.
26
CADILA HEALTHCARE (BSE, Rs. 206) – Market Perform
HQ: Ahmedabad, India; 52 wk range: Rs. 110– Rs. 258
Fairly Valued
Rs. in million
Fiscal % % Grs Opt. % % Opt. EV/ Net % PE
Year Sales Chg Mrg. Profit Chg Mrg EBITDA Profit Chg EPS (x)
Mar-03 6,776 15.1 30.5 1161.7 27.1 17.1 11.8 770.9 18.0 12.9 15.9
Mar-04 11,769 73.7 30.8 1691.9 45.6 14.4 8.3 888.7 15.3 14.2 14.6
Mar-05 13,355 13.5 30.7 1932.6 14.2 14.5 7.3 1039.6 17.0 16.6 12.5
Mar-06 15,134 13.3 30.7 2199.3 13.8 14.5 6.4 1203.7 15.8 19.2 10.8
Mar-07 17,216 13.8 30.5 2503.1 13.8 14.5 5.6 1414.4 17.5 22.2 9.3
Mar-08 19,543 13.5 30.3 2828.4 13.0 14.5 5.0 1585.1 12.1 24.5 8.4
Mar-09 22,264 13.9 30.1 3198.0 13.1 14.4 4.4 1777.1 12.1 27.0 7.6
$1 = Rs.45.9
SOS (m): 62.8 Div Yield :3.4% Net Cash / (Debt) Rs (4400.0) 4 yr. CAGR (03-07): 14.4%
Mkt. Cap Rs.1.22 bn Mkt Cap : $265.8 mn PEG : 1.1 5 yr. CAGR (03-08): 13.6%
Note: Financials from Mar 04 onwards reflects merger of Cadila, German Remedies, Recon and Banyan
Chemicals. SOS post merger is 62.8 mn.
INVESTMENT DRIVERS
We rate Cadila a market performer as it crossed our target price of Rs175 and is now
fairly valued at current price although we expect growth to remain attractive. Cadila
continues to take bold initiatives to expand its globalization plans. Latest being its
acquisition of Alpharma France’s generic business at € 5.5 mn that will help to kick start
its Europe generic operations.
However, at a PEG of 1.1 on simple market value and PEG of 1.5 based on debt adjusted
market value it falls behind in terms of potential for upside.
Pros Cons
o Gained rapid market share through bold
acquisitions becoming the 4th largest co. in
o 70% of sales come from domestic
domestic formulations.
formulations market which is
o Strong brand equity with five brands in top 100
growing at only ~7% vis a vis
o Acquisitions for entering the regulated markets
industry rate of 5%.
were done cheap. E.g a USFDA plant with five
o Low sales force productivity of
DMFs and a supply agreement with Geneva.
Rs. 2.7 mn p.a per salesman as
Acquisition of Alpharma, France will put
compared to Rs 3.4 mn by close
Cadila on fast track in EU generic market.
competitors
o JV with Altana, Germany for supply of on
o Fragmented product portfolio with
patent API Pantaprazole set to expand to other
six major divisions and ~300
products too. It has annual sales of ~ Rs 1bn
brands.
with ~40% net margin.
o No near term growth drivers
o Early stage but decent R&D pipeline with focus
o High net debt of Rs. 4.4 bn
on hypolipidemics, anti inflammatory and anti
bacterial.
Key Milestones Expectations Time

USFDA approval for its formulation plant Positive 2004
Evolution of regulated market strategy and US strategy in particular 2003-04
Efficient integration of Alpharma France 2004
Eliminating Debt Ongoing
27
CIPLA (BSE, Rs. 784) –Out perform
HQ: Mumbai, India; 52 wk range: Rs.985– Rs.561
CFC-Free Inhalers Offer A Big Opportunity

Rs in million
% % Grs Opt % % Opt EV/ Net % PE
FY Sales Chg Mrg Profit Chg Mrg EBITDA Profit Chg EPS (x)
Mar-03 15,724 23.4 38.4 3281 8.0 20.9 11.7 2474.8 19.2 41.27 19.0
Mar-04 17,805 13.2 38.4 3640 11.0 20.4 10.6 2836.0 14.6 47.29 16.6
Mar-05 20,823 17.0 39.1 4396 20.8 21.1 8.8 3260.3 15.0 54.37 14.4
Mar-06 24,630 18.3 39.8 5361 21.9 21.8 7.2 3979.9 22.1 66.37 11.8
Mar-07 29,364 19.2 40.5 6595 23.0 22.5 5.9 4872.8 22.4 81.25 9.7
Mar-08 34,966 19.1 41.2 8128 23.2 23.2 4.8 5987.4 22.9 99.84 7.9
Mar-09 42,054 20.3 42.1 10119 24.5 24.1 3.8 7437.8 24.2 124.03 6.3
$1 = Rs.45.9
SOS : 60.0 mn Div. Yield : 0.9% Net Cash / (Debt) : Rs 5956.5 mn 4 yr. CAGR (03-07): 18.5%
Mkt. Cap Rs 4.7 bn Mkt Cap : $1 bn PEG: 1.0 5 yr. CAGR (03-08): 19.3%
INVESTMENT DRIVERS
We rate Cipla to outperform with a 12 month target price of Rs. 1000 as we expect
approval to market CFC free metered dose inhalers (MDIs) in Europe in Q403. The
approval will open up a market of $2.9 bn for Cipla with very limited competition. The
concern is that the approval was due in October 2002 but is delayed. Explanation is not
coming thru either from Cipla or regulatory authorities. We believe that the delay is
purely due to administrative lapses. Till now, Cipla’s shares remained under pressure as
they lost the omeprazole opportunity. Andrx lost the legal suit against Astra Zeneca to
launch generic omeprazole. Cipla had a supply agreement for omeprazole API with
Andrx. Additionally, they also reported an 11% fall in local sales in Mar 03 quarter,
largely due to uncertainty over the implementation of a new sales tax regime that has
postponed for an indefinite period.
Background for CFC free inhalers market in EU: As per the Montreal Protocol, most
CFC-containing MDIs will likely be phased out in the European Union over the next 3-4
years (although outer deadline is 2010). This aims to phase out the use of CFC due to its
damaging effects on environment. Under the current policy the existing formulations
will be withdrawn if (a) at least two CFC free alternatives are available for all patient
groups with an adequate range of doses; and (b) the CFC free alternatives have
undergone a minimum of 12 months post marketing surveillance. Based on this, so far,
CFC containing Salbutamol MDI, Fluticasone and beclamethasone MDI has been
withdrawn. The USFDA is also following a similar policy although they are yet to
finalize their strategy for implementation.
Our conservative estimate does not reflect any upside from this opportunity as the timing
of the approval is hard to estimate. However this opportunity can offer peak operating
profit of ~Rs500 mn (15% of FY 03 operating profit). Additionally Cipla is sitting on
cash pile of Rs 5.9 bn which translates into PEG of 0.9 on the cash adjusted market value
and a PE(x) of 16.5.
In addition, Cipla’s supply agreements with Ivax and Watson for API supply in US also
are growth drivers. Although details are not disclosed, we guess these tie-ups would be
for Ciprofloxacin, Fluconazole and Citalopram along with other products. It is the only
company in top five which has organically gained marketshare in last two years.
28
Pros Cons
o Consistently maintaining highest growth rate in o US court ruled in Oct 02
domestic formulations market among the large against Andrx in omeprazole
pharma cos. Last 5 yr domestic sales CAGR is patent infringement case.
18.5%, the highest excluding acquisitions. Last Cipla had supply agreement
year its growth was 15% vs. industry average of of API with Andrx.
5% Omeprazole now is a lost
opportunity.
o Domestic formulations' therapy mix includes
high value Bronchodilators (24% of total o Approval for Budesonide
domestic. market), fourth generation antibiotics CFC free MDI is delayed
which helps sustain superior growth rate. Cipla since last one year. Chiesi
has seven brands among the top 100 brands (Italy) already has received
league - the highest number among Indian approval – a setback for
companies. (GSK has 11 brands in top 100). Cipla.
o No near term upsides except
o Sun and Cipla are the only two cos. that have the uncertain CFC free MDI
organically gained market shares since 1999. business.
Cipla added 1.15% market share followed by.
0.97% by Sun o Investment relation function
is totally neglected.
o Sales force productivity is the highest in the
industry - 1600 sales army generates Rs 10 bn
sales. (refer table 11)
o Cipla is awaiting approval from German

regulator to launch the budesonide based CFC
free metered dose inhalers (MDIs). This
represents a patented market size (Europe) of
$400 mn. A pipeline of other 10 CFC free
MDIs is under development opening up $2.9 bn
EU market
o Improvement in export mix - formulation

export up from 32% to 55% of total exports.
Geographical mix too is improving with 65% of
exports to US and Europe in FY 03 vs. 58% last
year. Supply agreements with Ivax and Watson
for US market to improve mix further
o Operating margin is 21% - the highest in India.

It has maintained 20%+ margin for last 5 years.
o Strong net cash position - Rs 5.9 bn
Key milestones Expectation Date

Approval for Budesonide CFC free inhalers 2003
Approval for Salbutamol CFC free inhalers 2004
Marketing tie up for CFC free inhalers in Europe Positive 2003
29
DR REDDY’S LABS (BSE, Rs 1131) – Market Perform
HQ: Hyderabad, India; 52 wk range: Rs 675– Rs 1218.9
Stock price reflects the benefits of amlodipine maleate launch

Rs. in million
Fiscal % %Grs Opt % %Opt EV/ Net % PE
Year Sales Chg Mrg Profit Chg Mrg EBITDA Profit Chg EPS (x)
Mar-03 18,106 7.2 52.3 4767 (23.9) 26.3 15.6 3649.0 (19.8) 47.7 23.7
Mar-04 22,742 25.6 55.3 6471 35.7 28.5 11.7 4830.8 32.4 63.1 17.9
Mar-05 33,016 45.2 63.8 11319 74.9 34.3 6.9 8518.4 76.3 111.3 10.2
Mar-06 37,580 13.8 62.9 12540 10.8 33.4 6.2 9362.4 9.9 122.4 9.2
Mar-07 40,430 7.6 57.5 12747 1.7 31.5 6.1 9330.8 (0.3) 121.9 9.3
Mar-08 42,219 4.4 54.8 12600 (1.2) 29.8 6.2 9150.6 (1.9) 119.6 9.5
$1 = Rs.45.9
SOS : 76.5 mn Yield (%): 0.80% Net Cash / (debt) : Rs 7.0 bn 4 yr. CAGR (03 - 07): 26.5%
Mkt. Cap : Rs86.6 bn Mkt Cap : $1.88 bn PEG (2003/ 2003-07) : 0.9 5 yr. CAGR (03 - 08): 20%
INVESTMENT DRIVERS
We recommend market perform rating for Dr Reddy’s Labs (DRL). The current price
fully reflects the upside potential from the launch of amlodipine maleate and now
remains exposed to any adverse news-flow on that front. Although the generic pipeline is
filled by two other 505 (b) 2 molecules, it is still very early to assign any value to them
and thus we suggest booking profits. We expect amlodipine maleate could generate peak
sales of $200 mn and will enjoy exclusivity for about 18 months before generic
companies enter the market. Matrix Labs – an Indian API supplier has already filed for
amlodipine mesylate – a third salt version of amlodipine.
Overall, on a longer term, the scrip is fundamentally attractive, however, owing to its
high-risk-high-reward business model; there will be swings in cashflows resulting in to
swings in its share price. We thus suggest to take advantages of swings to enter the stock
at a lower price.
30
Pros Cons
o Launch of amlodipine maleate (non AB generic version of o DRL has adopted high
Norvasc) by Jan 04 subject to FDA approval. This will come risk- high reward business
with ~18 months exclusivity that can result in peak sales of model ; generic business
$200 mn (~50% of current sales) and operating profit of $100 based on patent challenges
mn (100% of current operating profit). entailing long wait and
high litigation costs & risk.
o A strong generic pipeline with three more specialty drugs (such o Discovery programs are
as amlodipine) and other generic products with 180-day also in risky areas i.e.
exclusivity claim. Total patented market value for these PPAR, Oncology etc. So
pipeline products may be $11 bn. Near term upside will be swings in earnings will be
from victory in legal battle for Clopidogrel (generic Plavix) scary.
against Sanofi.
o Although a ban is unlikely,
o Proposed new law in the US which prevents originators from negative publicity for
using tactics to delay generic launches will be big boost to Nimesulide alleging
generic industry. Dr Reddy's will be one to gain the most as it adverse effects for children
has many lawsuits pending against originators. can affect Nise, DRL's
largest domestic brand.
o Rich pipeline with nine NCEs in clinical development. Out of Last year the brand grew@
these, three NCEs are licensed out. 12% p.a
o Strong net cash position of Rs7 bn/$ 152 mn. o Novo Nordisk discontinued
trials on NN622. Novartis
o Robust growth in emerging markets (65% sales to Russia) with replaced LBL 752 (DRF
attractive gross margins. Sales grew by 25% last year in 4158) with another DRL
emerging markets on the back of strong brand building. compound (PPAR only)
o Entry into Brazilian and Mexican generic market will propel o Generic strategy is build
further growth. Its acquisition in UK will help get a fast entry around 180 days
into the EU generic market. exclusivity rule of US FDA
which may be scrapped.
o Aurigene - a contract research subsidiary with offices in India
and the US offers an integrated drug discovery platform by
combining strengths in protein structure determination and
medicinal chemistry. Apart from cash flow to neutralize its
R&D spending, this business model should enhance biology
skills of DRL's in house research projects.
Key Milestones Expectation Date

Launch of Amlodipine Maleate Positive Jan-04
FDA approval of Amlodipine Maleate Positive 3Q04
Finding a suitable marketing partner for amlodipine maleate Positive 2H04
Clinical data on DRF 2593 (Insulin sensitizer, Phase II) licensed to Novo
Neutral 2003
Nordisk
Evolution of Specialty business strategy Neutral 2003-04
31
MATRIX LABS (BSE, Rs 531) –Out perform
HQ: Hyderabad, India; 52 wk range: Rs.665– Rs.100
A specialty API company in making?
Rs. in million
% %Grs Opt. % %Opt EV/ Net % PE
FY Sales Chg Mrg. Profit Chg Mrg EBITDA Profit Chg EPS (x)
Mar-02 1,021.8 68.1 15.5 80.6 709.0 7.9 64.9 70.9 69.0 9.9 53.8
Mar-03 4,169.3 308.0 42.5 1229.6 1426.3 29.5 5.0 751.5 959.6 77.3 6.9
Mar-04 5,165.5 23.9 43.1 1556.7 26.6 30.1 4.0 1032.7 37.4 106.3 5.0
Mar-05 6,160.7 19.3 43.8 1898.5 22.0 30.8 3.3 1359.8 31.7 139.9 3.8
Mar-06 6,507.2 5.6 43.7 1998.4 5.3 30.7 3.1 1488.7 9.5 153.2 3.5
Mar-07 7,002.0 7.6 43.7 2150.3 7.6 30.7 2.9 1641.9 10.3 169.0 3.1
Mar-08 7,442.7 6.3 43.6 2279.2 6.0 30.6 2.7 1769.6 7.8 182.1 2.9
Mar-09 7,940.9 6.7 43.5 2425.9 6.4 30.5 2.5 1886.6 6.6 194.1 2.7
$1 = Rs.45.9
SOS : 9.7mn Yield (%): 1.88% Net Cash/(Debt): (1219.6) 4 yr. CAGR (03 - 07): 21.6%
Mkt. Cap : Rs. 5.2 bn/ $1.13 bn PEG (2003/ 2003-07) : 0.3 5 yr. CAGR (03 - 08): 19%
INVESTMENT DRIVERS
We initiate our coverage of Matrix with outperform rating for a company that is
attractively valued despite its excellent regulatory knowledge complemented by strong
chemistry skills. Through its non-infringing process it became the sole supplier of
citalopram API in Europe (branded citalopram market in Europe is $1 bn). Citalopram
sales have reached Rs 1950 mn ($ 43 mn) and are growing at 35% annually. This non
infringing process can also be leveraged to benefit when citalopram’s US patents expire
in January 2004. Besides other DMF filings, chief being fluconazole and acyclovir, it has
also filed for amlodipine mesylate – a third salt of amlodipine different from besylate
(Pfizer’s Norvasc) and maleate (Dr Reddy’s salt). Dr Reddy’s has won a summary
judgment against Pfizer that bars other salts of amlodipine from getting a patent
extension. If Dr Reddy’s wins the final judgment, then it clears the way for Matrix’s
mesylate salt also to be launched after receiving FDA approval. Norvasc current annual
sales are $1.8 bn. However, we have not considered this upside in our projections.
Sales growth of 24% will be achieved primarily by ongoing citalopram sales in Europe
and the US (off patent in Jan 04), API sales of fluconazole, and supply of acyclovir to
GSK.
At a PEG of 0.3 and a 4 year EPS CAGR of 20.4 % - the stock is attractively valued in
comparison to its peers.
32
Pros Cons
o Sales grew 6.8 folds in three years with 63% of sales coming o Although Citalopram
from Europe. patent is due to expire
in Jan 04 in US - Matrix
o It is currently the sole supplier of Citalopram (API) in Europe. did not file a DMF until
Generic citalopram's market in Europe is ~$800 mn. Matrix's June 03. Supply
citalopram (API) sales are $43 mn (Rs 1950 mn) growing at 35% agreement too is not
annually. Citalopram goes off patent in the US in Jan 04. finalized with any
company.
o Pipeline products include yet to expire products like fluconazole
and ciprofloxacin in US o An appreciating rupee
will have negative
o A supply agreement with GSK for API acyclovir. impact on profitability
for Matrix that has 70%
o Matrix has filed a DMF for amlodipine mesylate - a third salt of sales from exports.
different from besylate (Pfizer's Norvasc) and maleate (Dr
Reddy's version). Dr Reddy's is fighting a legal battle against o High Net Debt of Rs.1.2
Pfizer to invalidate the patent extension to any salt other than bn
besylate. Dr Reddy's has won the summary judgment and is likely
to win the final judgment. If DRL wins, Matrix will be the
biggest beneficiary next to DRL as it too can launch its salt for a
brand with a current annual sales of $1.8 bn
o Upside from amlodipine mesylate is not built into our projections

Outcome of amlodipine patent extension litigation between Dr Reddy’s
Positive Jan-04
and Pfizer.
FDA approval of amlodipine mesylate Neutral 2004
Pace of DMF approvals Neutral Ongoing
Eliminating Debt Positive Ongoing
33
NICHOLAS PIRAMAL (BSE, Rs 321) –Outperform
HQ: Mumbai, India; 52 wk range: Rs 385– Rs 205
Valuations Still Attractive – Does Not Reflect Alliances’Value

Rs. in million
% % Grs Op. % %Op. Net % Net St. alone Cons. PE EV/
Sales Chg Mrg Profit Chg Mrg Profit Mrg. EPS EPS (x) EBITDA
Mar-03 11,361 20.0 37.6 1689 35.6 14.9 956.0 8.4 25.2 30.4 10.6 7.7
Mar-04 13,225 16.4 36.7 1817 7.6 13.7 1518.2 11.5 39.9 45.8 7.0 7.7
Mar-05 14,736 11.4 36.7 2000 10.1 13.6 1742.2 11.8 45.8 52.4 6.1 6.7
Mar-06 16,355 11.0 36.8 2207 10.3 13.5 1945.3 11.9 51.2 58.5 5.5 5.7
Mar-07 18,167 11.1 36.9 2446 10.8 13.5 2270.8 12.5 59.8 59.8 5.4 4.5
Mar-08 20,155 10.9 36.9 2709 10.8 13.4 2481.8 12.3 65.3 65.3 4.9 3.9
Mar-09 22,388 11.1 37.0 3012 11.2 13.5 2725.8 12.2 71.7 71.7 4.5 3.5
$1 = Rs.45.9
SOS : 38 mn Yield:3.27% Net Cash/(Debt) : Rs. 1845.0) mn 4 yr. CAGR (2003): 18%
Mkt. Cap Rs 1.22 bn/ $0.27 bn PEG : 0.6 5 yr. CAGR (2003): 17%
We reiterate our Outperform rating for Nicholas Piramal (NPIL) with new target price is
Rs400 (initially Rs310). Although it reached a 52 wk high, as a result of the general
spurt in the pharma sector this week, the PE ratio of 7x on March 2004 consolidated EPS
should expand as investors begin to reflect the value of subsidiaries and alliances.
Pros Cons
o Its strategy in the increasingly competitive Indian o 78% of sales coming from
formulations market is working: Sales grew 12.8 % vs. domestic formulation market
5% market growth. Most of the leading companies have that is fiercely competitive with
achieved only a single digit growth in domestic market. fast eroding margins. Emphasis
NPIL managed to be in leading position in 14 out of the to grow revenues from outside
18 new products launched in the last two years. of India has been lacking,
limiting further earning upside.
o Chronic therapy segments’ (CV, CNS, Diabetes, Onco)
share in domestic formulations is up from 24% in FY 02 o No post 3/04 drivers for
to 30 % in FY 03. Products under price control declined earnings surprise.
from 19% yp 11%.
o R&D milestones recede, as
o Fast growing, profitable and pharma focused JV with none of the five projects
Allergan and Boots, with total investment of Rs490 mn discussed over the past three
yielding annual profit of Rs230 mn. years have moved towards an
IND. 2 CV projects have been
o Although late, NPIL has taken export initiatives by put on backburner.
merging with Global Bulk Drug and Fine Chemicals
(GLOBAL). NPIL’s API export strategy is to remain o Genomic activities continue to
away from patent challenges. Besides exporting off burden financial and managerial
patent generics, it hopes to supply on patent API to resources. Genomic project is
innovator cos. by leveraging their image of being a put on backburner.
preferred partner for MNCs. FY 04 outlook - to double
sales of API exports to Rs100 mn. o High net debt, low market
capitalization and only 51%
o Good track record of partnering with discovery based holding in hands of Piramal
companies and the largest sales force of 1,950 in India family limits ability to take bold
makes it a preferred partner for in-licensing products. initiatives.
o NPIL group is increasingly perceived as a pure pharma o NPIL as the fourth largest
company; no longer a conglomerate with diverse Indian pharma company could
interests as discontinuation and divestment of all non benefit from stronger and more
core subsidiaries and alliances is improving results. global pharmaceutical
Latest was the divestment of Gujarat glass that also management
helped in reducing group’s debt by Rs 3.7 bn.
34
o Accounting policy is now more conservative, resulting
in FY03 net income reduction of Rs202 mn.
o Ability to acquire high quality pharma franchises at

attractive valuations and then to swiftly integrate into
Nicholas for maximum synergy. Recent example is
integration of ICI pharma division that resulted in decreased
conversion cost by 2.5%.
o Clinical research organization (CRO) achieved cash

breakeven in FY 2003. Total income at Rs50 mn. NPIL to
double its capacity.

Co marketing agreements with Indian companies to expand Positive Ongoing
DMF fillings in US Positive FY 2004
Signing up with innovator companies to supply on-patent API Neutral 2004
IND filing for the Oncology lead Neutral FY 2004
Eliminating its heavy debt Positive 2007
Pathology laboratories expansion 2003-2004
35
RANBAXY LABS (BSE, Rs 831) – Market Performer
HQ: Hyderabad, India; 52 wk range: Rs 675– Rs 1219
No Major Growth Drivers After Cefuroxime Axetil

Rs. in million
Fiscal % %Grs Opt. % %Opt. EV/ Net % PE
Dec-02 37824.0 37.1 42.4 7967.0 122.9 21.1 17.5 3997.2 173.2 21.6 38.5
Dec-03 43809.0 15.8 43.1 9452.0 18.6 21.6 14.8 6220.5 55.6 33.6 24.8
Dec-04 47668.0 8.8 41.5 9522.0 0.7 20.0 14.7 6692.1 7.6 36.1 23.0
Dec-05 52949.0 11.1 41.2 10411.0 9.3 19.7 13.4 7282.7 8.8 39.3 21.1
Dec-06 58343.0 10.2 40.9 11299.0 8.5 19.4 12.4 7869.3 8.1 42.5 19.6
Dec-07 62781.0 7.6 40.5 11936.0 5.6 19.0 11.7 8157.7 3.7 44.0 18.9
Dec-08 66385.0 5.7 40.4 12543.0 5.1 18.9 11.2 9694.0 18.8 52.3 15.9
Dec-09 71580.0 7.8 40.2 13406.0 6.9 18.7 10.5 10285.8 6.1 55.5 15.0
$1 = Rs.45.9
SOS : 185.4 mn Yield : 1.23% Net Cash / (Debt) : Rs (3.8) bn 4 yr. CAGR (2002-06): 18%
Mkt. Cap : Rs 150.7 bn/ $3.28 bn PEG (02 / 02-06) : 2.0 5 yr. CAGR (2002-07): 15%
INVESTMENT DRIVERS
We rate Ranbaxy as Market Performer as the current price does not justify the slowed
sales growth on account of increasing generic competition in cefuroxime axetil where
Ranbaxy enjoyed 18 months of ‘accidental’ exclusivity. The stock steadily appreciated
by 32% in last five months as competition from other generic players is delayed and
cefuroxime sales reached $115 mn in FY 04 (14.5% of group sales). As all of
cefuroxime’s patents expired in July 03, there are no major growth drivers left to match
the historical growth rates. Thus at a PEG of 2, it is certainly overvalued in absence of
near term growth drivers.
36
Pros Cons
o Strongest international network among any Asian o Natural exclusivity on Cefuroxime
company: Presence in 25 countries & (FY 02 sales $115 mn = 14.5% of
manufacturing base in seven countries. groups sales) expired in July 03.
Generic competition will bring
o All the subsidiaries except Chinese and German are decline in sales by 50% in FY04.
profit making.
o Ranbaxy could corner only 1%
o Strong presence in US with sales force of 15 and market share in generic Augmentin, a
total annual sales of $296 mn - highest among significant defeat. We do not expect
Indian companies. any improvement as the competitors
Teva and Geneva are controlling the
o According to IMS prescription data for US market, market.
Ranbaxy is the 28th largest company in all
companies (not just generic) and is growing at o Domestic formulations sales (18% of
19%p.a - fastest among the top 30 in the list. group sales) has declined by 5% in
1Q03 and is expected to remain flat
o FDA clearance for Cipro OD 500 & 100 mg or decline due to heavy dependence
licensed to Bayer will earn royalties in excess of on anti infectives - a segment
Rs400 mn degrowing by ~8%.
o Faster pace of ANDA approvals. Nine ANDAs o Net debt of Rs 3.8 bn.
approved last year. Richest ANDA pipeline among
Indian cos. with 40 approvals and 74 accumulated o Fire at a bulk intermediate plant of
filings in US that include two 505 (2) b challenges. Ranbaxy resulted in the death of
three employees. No financial or
o Licensed original research lead for the treatment of business loss but a blow to its
Benign Prostatic Hyperplasia to Schwarz pharma credibility.
o 10% holding in Nippon Chemiphar, a generic o UK's Serious Fraud Office is probing
company in Japan, makes Ranbaxy the first major its UK subsidiary for alleged
generic company to take strategic initiatve in the 2nd overpricing of penicillin-based
largest market. Teva, Geneva, Watson, Barr etc are medicines and anti-coagulant
absent in Japan. warfarin - in deals with the National
Health Service from July 97 to Dec
o Proposed new US law favoring generic companies 2000. Not a significant financial
by restricting the R&D companies to use patent liability, but a serious blow to an
suits as a tool to delay competition. All Indian image already damaged by financial
generic companies to benefit in general irregularities by UK CFO.

Sales performance of Cefuroxime Axetil after the entry of other generic players,
Neutral 3Q 2003
including Apotex
Sales uptake of Cipro OD 1 gm by Bayer Neutral 4Q 2003
Sales uptake of Amoxycillin including Amoxyclav (branded Amoxicillin) Neutral 2H 2003
Clinical data on RBX 2258 - BPH molecule licensed to Schwarz Pharma, that
Positive 2003
may enter Phase II shortly
Performance of branded products that includes Accutane and Amoxyclav that
Neutral 2H 2003
will set the stage for Ranbaxy's future branded product
Strategy for Japan generics given that it is a very generic unfriendly market. Neutral 2004
Marketing partnership for anti Aids products in South Africa Positive 2003
37
TORRENT (BSE, Rs 233) – Out Performer
HQ: Hyderabad, India; 52 wk range: Rs 320– Rs 157
Investment phase over, operating profit to jump in FY04

Rs. in million
Fiscal % %Grs Opt. % %Opt. EV/ Net % PE
Mar-03 4,298 (0.5) 41.2 795 3.7 18.5 5.8 496.0 (0.5) 23.4 11.7
Mar-04 5,179 20.5 43.1 1118 40.5 21.6 4.9 815.7 64.4 38.5 7.1
Mar-05 6,340 22.4 43.9 1418 26.9 22.4 3.9 961.0 17.8 45.4 6.0
Mar-06 7,248 14.3 44.3 1692 19.3 23.3 3.2 1132.0 17.8 53.5 5.1
Mar-07 8,335 15.0 43.0 1834 8.4 22.0 3.0 1197.7 5.8 56.6 4.8
Mar-08 9,585 15.0 43.0 2109 15.0 22.0 2.6 1297.1 8.3 61.3 4.5
Mar-09 11,023 15.0 43.0 2425 15.0 22.0 2.3 1480.4 14.1 70.0 3.9
$1 = Rs.45.9
SOS : 21.2 mn Yield : 2.75% Net Cash / (Debt) : Rs 310 mn 4 yr. CAGR (2002-06): 25%
Mkt. Cap : Rs 0.6 bn/ $126 mn PEG (02 / 03-07) : 0.4 5 yr. CAGR (2002-07): 27%
INVESTMENT DRIVERS
We upgrade target price from Rs325 to Rs400 based on steady progress of Torrent in
three markets i.e India, Brazil and Russia. Increase in target price is also in line with run
up in broad index and pharma index. With Price to EPS growth ratio (PEG) being tiny
0.4x, we expect the share price only to go up supported by increase in EPS and PE(x)
expansion in the bull market.
38
Pros Cons
o The growth model is steady and well balanced. o Business strategies are overly
Its Brazil subsidiary, which accounts for only 2% skewed towards risk-free axis. Given
of total revenue, launched ten brands in FY03 and that Torrent has robust balance sheet
eight will be added in FY04. Torrent will now and experience of five decades in the
participate in tender business too. Increasing industry, there is little reason to be
geographical coverage from 50% to 75%. overcautious.
o For German generic market, it files dossiers on o Low floating stock and absence of
behalf of local companies. Torrent does it on investor relation desk discourages
cost-plus basis and also earns thru API supply. ‘street’investors.
o Russia, a traditional forte of Torrent, was hit in o It appears Torrent does not seriously
FY03 due to a dispute about a trademark and compare pros and cons of acquiring
other logistics issues. Now the subsidiary is vis a vis building. Its bias seems to
headed by a Russian and is expected to do well in be in favor of building. In last ten
FY04. Russia accounts for ~4% of total revenue. years, its only acquisition is a tiny
Sales force is spruced up in FY04. company in Brazil.
o Revenue from India is 71% of the total. On the
back of new product launches, larger sales team
and 6%+ GDP growth by India in FY04, 13% rise
in sales is achievable. Gross margin from Indian
operations will go up on the back of increase in
selling prices of key products.
o Discovery research activity is productive and cost
effective. Novartis bought option for an AGE
breaker in FY03. Milestone based payment is
expected before end FY04. Pipeline includes
seven programmes at early but promising stage.
o Debt free financial statements with high level of
transparency and conservative style about
recognition of expenses and income puts Torrent
a notch above others.

Novartis’option exercise for AGE breaker Neutral Q304
Sales growth at Brazil subsidiary Positive Q404
New product launches in India Positive Q303
Inspection of API facilities by EU regulators Positive Q203
39
Appendix - 1
COMPANY ACQUISITIONS - VALUATIONS
Financial Information of Sellers
Net Cash
Buyer Seller Time Sales PAT Sales team %Mkt Sh. Price for 100%
(Debt)
Nicholas Piramal Boehringer Mannheim Oct-96 739.2 9.7 600 0.60 (356.1) 193.3
Glaxo Bidder Sawyer 1997 400.0 44.0 0.35 750.0
Ranbaxy Crossland Lab Apr-97 861.0 62.0 600 0.70 (132.3) 1706.0
Sun Pharma Tamilnadu Dadha May-97 631.8 9.5 N.A. 0.30 (129.4) 109.4
Wockhardt Merind 1998 1348.4 41.7 550 0.90 (221.5) 810.0
Sun Pharma Milmet Apr-98 100.0 N. A. (15.5) 52.3
Dr.Reddy’s American Remedies Nov-99 943.0 (114.8) 400 0.63 (472.2) 1002.3
Nicholas Piramal Aventis (Rhone Poulenc) 22-Dec-00 2,314.2 352.6 375 1.10 262.4 3937.5
AstraZeneca JV stake by IDL, Hinduja 01-Jan-01 1,076.9 140.7 700 0.70 257.9 3350.0
Zydus Cadila Asta Medica (German Rem) 10-Apr-01 2,212.8 286.2 525 1.16 26.2 5856.0
Eli Lilly Ranbaxy 01-Jun-01 444.1 N.A. 0.30 1598.0
Sanofi Torrent 01-Jul-01 520.0 N.A. 0.30 886.8
Nicholas Piramal ICI Pharma division 25-Jan-02 540.0 70.0 200 0.30 0.0 550.0
Pharmacia USA Abbott India 29-Jan-02 904.2 30.3 270 0.49 28.3 1267.4
Baxter India Ltd. IV fluids div. of Wock LS 07-Mar-02 805.0 300 1950.0
Zydus Cadila Banyan Chemicals 01-Apr-02 100.0 35.0 30.0 205.1
Micro Labs Eros Pharma 06-Apr-02 220.0 N.A. 185.0
Shri Dhootpapeshwar Nicholas Piramal (1.0) 64.0
Morepen Life Spring-a chain store 07-Jun-02 75.0 100 126.3
N Prasad & Associates Matrix Laboratories Ltd. 24-Oct-02 1,038.8 768.3
Matrix Labs Vorin Laboratories, Medicorp Tech. 09-Nov-02
Orchid Chemicals Meno Pharma 27-Dec-02 260.0
Matrix Labs Fine Drugs & Chemicals Ltd. (FDCL) 23-Jan-03
Shreya Life Sciences Plethico Pharma 27-Jan-03 1,400.0 850.0
Wockhardt CP Pharma – UK 08-July-03 2,594.9 450 828.
Total / Wtd Av. 19275.6 991.9 27455.7
Source: Mehta Partners, Company Reports; Press reports
Notes:
o In case of mergers, cost of acquisitions is deri ved from the merger ratio based on share price of both companies on the date.
o Cost of 100% acquisition is an extrapolation of the price paid to get the controlling stake, irrespective of the actual price paid to acquire the rem
Appendix - 2
SIGNIFICANT BRAND TRANSCATIONS
Rs. in million
Financial Info. of
Buyer Seller Brand details Time Total cost Cost to
Sellers
Sales Sales Force (price + debt) Sales
Five brands in haemostatics,
Dr. Reddy’s Dolphin antibiotics and hepato 1998 250 N. A. 200.0 0.8
stimulant segment
Nicholas
Ambalal Sarabhai Several Brands Oct-97 480 400 350.0 0.7
Piramal
Nicholas Tobraneg, Vancocin,
Eli Lilly Jul-99
Piramal Distaclor and Keflex
Nicholas Mucokef, Zidime, Keroxime
Lilly Ranbaxy Dec-99 80 N.A. 110.0 1.4
Piramal & Lovir
Ranbaxy Gufics Mox Jun-97 700 300 800.0 1.1
Sun Pharma Natco Labs Respiratory brands 1998 529 N. A. 470.0 0.9
Anti inflammatory,
Cadila Recon May-00 540 336 714.2 1.3
Analgesics & CV
Glenmark Lyka Labs Sensur, Alex &Flucort Jun-00 230 377.0 1.6
USV Glaxo India Sep-00 55 0 72.0 1.3
Cadila Kopran Aten Sep-01 364 0 1050.0 2.9
Morepen Reckitt-Piramal Burnol Dec-01 62 0 89.5 1.4
Dr Reddy’s Group Pharma 6 dental brands Dec-01 156 0 280.0 1.8
Morepen Yash Pharma Lemolate - cough & cold 96 105.0 1.1
EAC Trading -
Singapore Pfizer India Protinex Dec-02 250 336.0 1.3
Solvay Pharma Chemech Labs. 8 Gynecological brands Feb-03 60.0 NA
Alembic Solvay Yutopar Jul-03 12 9.0
Total/Average 380.7 5022.7 1.3
Notes:
o Total cost includes debt wherever applicable.
41
Appendix – 3
Indian Pharmaceutical Industry- Performance Analysis
MONTH-TO-MONTH PRICE CHANGE (%) – AUGUST 2002 – JULY 2003
Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug 02-
Company
02 02 02 02 02 03 03 03 03 03 03 03 July 03
(11.1) (3.4) 23.8 7.9 43.6 49.1 Matrix Labs. (1.6) (2.4) 11.5 47.0 20.8 (7.3) 387.2
6.0 (15.0) 0.5 24.4 18.6 13.3 Lupin Lab (5.0) (9.8) 16.7 34.1 42.4 26.8 246.1
NA NA NA NA NA NA Divi's Labs. NA 38.2 19.4 38.8 45.2 (7.5) 207.7
(11.1) (6.6) 1.0 2.3 29.2 5.5 Shasun Chem. (10.5) 0.0 26.6 55.0 28.8 (0.7) 195.3
(1.4) (9.0) 14.8 17.3 13.3 4.8 IPCA (8.4) (0.8) 8.9 43.0 31.5 (4.5) 158.2
(4.7) (2.3) (8.2) 23.4 3.7 (9.6) Orchid (4.1) (6.7) 24.9 50.1 49.4 (9.1) 136.3
2.8 (20.2) 1.6 (4.4) 6.7 (2.0) Neuland Labs (12.0) (5.3) 6.4 30.7 104.8 18.7 128.5
3.5 (11.7) 9.3 15.2 26.3 (9.6) Alembic (11.7) 1.7 24.3 20.2 37.8 (10.9) 109.4
13.0 (5.7) (5.6) 18.8 35.5 (0.7) Suven Pharma (9.6) 4.7 5.7 40.5 8.1 (6.5) 102.2
(3.5) (7.2) (0.8) 15.9 (0.4) (4.1) Burroughs 0.5 8.4 12.0 11.4 53.2 (6.8) 97.8
(7.6) (6.3) 0.7 10.5 0.0 1.1 Elder Pharma (9.3) (5.4) 11.3 39.4 39.5 (3.6) 88.5
1.2 (4.1) (1.4) 2.4 (1.0) 14.1 Aurobindo (5.7) (3.2) 12.3 38.2 21.1 (2.3) 83.1
(1.1) (11.1) (1.3) 1.9 6.6 (0.4) Cadila (0.9) 3.8 (6.5) 7.3 52.1 8.0 60.8
(3.7) (1.6) (2.8) 17.4 0.2 (4.7) Albert David 3.0 (7.0) 11.1 15.0 43.3 (16.1) 57.8
5.3 1.8 (4.8) 2.6 12.7 5.7 Ranbaxy (1.5) 1.1 1.1 7.0 21.5 (2.5) 50.9
(4.8) (14.0) (9.7) 1.8 5.7 (10.6) Fulford (8.1) (23.2) 40.8 19.6 33.8 20.4 43.0
0.8 (0.3) (11.9) 6.5 10.5 (4.9) FDC (8.5) (1.1) 2.0 15.6 37.2 (1.6) 41.7
(5.2) (8.5) 8.9 (1.2) 8.6 (7.7) Nicholas Pir (5.1) (3.2) 16.0 11.4 30.3 (9.9) 37.6
5.8 (14.8) 0.7 10.5 0.0 (2.5) Krebs Bio (3.7) 0.3 9.0 20.0 25.4 (9.5) 32.5
1.4 (9.9) (13.7) 12.3 16.6 0.6 Dr. Reddy's (1.9) 2.3 (8.9) 16.2 20.4 (3.3) 26.7
(4.6) (17.4) 3.6 3.9 13.2 (7.8) Glenmark (0.3) (4.6) 8.0 15.1 18.8 (5.1) 23.7
7.4 (2.8) (3.7) 1.1 7.5 (5.5) Sun Pharma (1.7) (0.2) (0.8) 21.7 7.6 (1.0) 21.2
(4.2) (4.7) (16.6) 16.2 1.2 (10.7) Kopran (19.6) (15.0) (5.5) 36.1 76.2 (8.7) 18.1
3.6 (10.2) 19.3 (14.7) 16.4 (9.9) Torrent (5.5) (8.0) 3.0 11.0 36.0 (10.3) 16.2
0.4 (12.8) 12.4 3.2 (1.5) (2.2) J B Chemicals (10.3) (2.5) 0.7 25.2 13.0 (5.9) 14.3
(3.7) (0.2) (7.4) 4.3 8.8 (3.4) Solvay Pharma (0.4) (10.1) (12.1) 29.0 14.6 (5.2) 11.8
(12.0) (6.2) (9.2) 11.6 (7.3) (11.0) Ajanta Pharma (9.3) (15.6) 19.2 9.2 36.1 1.1 7.3
(3.2) (10.4) (7.5) 5.1 6.2 (4.0) E.Merck (1.9) (1.8) 0.2 12.3 7.5 2.0 5.3
(1.7) 3.1 1.1 (3.2) 0.5 1.1 AstraZeneca (1.9) (5.6) 1.3 1.8 11.6 (4.1) 4.8
(1.5) (13.6) (4.6) (6.5) 7.7 (7.4) Wyeth (5.8) (3.5) 9.2 19.7 9.5 4.8 4.8
2.4 (1.6) 6.6 (0.6) 0.0 3.8 Abbott 4.7 (10.5) (6.7) 1.5 12.1 (4.4) 2.9
5.2 (1.1) (4.0) 0.0 (3.1) (7.5) Zandu (1.0) (5.9) 2.5 9.1 20.0 (4.6) 1.6
2.4 (10.4) (3.7) (0.4) (0.9) (11.5) German Rem (3.6) (3.5) (1.7) 12.4 28.8 0.4 0.1
(1.0) (0.8) (12.4) (0.3) (5.1) (5.0) GSK India 0.4 5.4 9.6 8.0 2.2 (1.0) (1.0)
(2.6) (6.0) (9.4) (13.6) 8.2 (4.5) Aventis (5.9) (6.5) 14.3 13.8 15.5 (1.6) (1.1)
(2.8) (7.9) (10.0) 11.4 20.5 (2.7) Novartis (10.2) (7.3) (0.1) 4.7 8.6 (4.8) (2.5)
(4.7) (6.3) (5.1) 0.2 (2.4) (11.2) Pfizer (1.1) (4.8) 2.9 17.7 3.0 1.2 (8.2)
(1.4) (5.6) (6.9) 1.8 11.3 (12.7) RPG Life Scn. (17.6) (0.4) 4.3 8.8 37.9 (19.8) (10.5)
0.4 (0.7) (18.3) (1.1) 8.9 (19.2) Unichem (11.4) (7.6) 12.4 13.9 18.2 (5.1) (16.9)
(3.2) 4.6 (7.7) (0.4) 2.0 3.0 Wockhardt (3.2) (18.4) (7.7) 9.3 2.1 (0.7) (18.4)
4.7 (1.6) (8.4) 1.6 2.0 (9.9) Cipla (9.1) (2.1) (11.3) 11.1 12.6 (3.1) (19.3)
(0.9) (10.0) 0.2 0.3 (1.8) (12.6) Parke-Davis 0.5 0.0 0.0 0.0 NA NA (22.0)
0.6 (5.9) (2.9) (13.2) 8.3 (11.9) Pharmacia (5.6) (20.2) (8.9) 13.8 22.5 (21.2) (42.9)
(4.6) (21.0) (5.7) 1.7 (7.5) (18.3) Morepen (7.3) (30.7) (28.2) 40.4 (12.1) (25.6) (75.8)
2.3 (4.2) (6.4) 3.5 8.9 (1.1) % Change (2.7) 0.1 (0.4) 13.6 18.9 (2.1) 28.5
Note:
o Companies in bold were our current recommendation.
42
Appendix 4
MEHTA PARTNERS UNIVERSE AND SELECTION
Price as on 25-July-2003 Rs. in million
Share Market Adjusted Annu. Adj.Mkt. Mkt Sh- Export as
Price (Rs.) Value Mkt Val Company PE (x) Cap./Sales (x) are (%) % of sales
812.8 150668.7 152153.0 Ranbaxy 21.8 4.02 4.62 65.7
1131.3 86556.5 82047.7 Dr. Reddy's Lab 23.8 4.53 2.81 63.1
784.4 47037.5 42810.7 Cipla 19.0 2.72 5.30 31.4
359.4 33435.7 34014.4 Sun Pharma 13.5 3.44 2.94 21.2
368.4 27432.9 26324.2 GSK India 19.5 2.51 5.01 5.5
386.6 15516.5 20749.2 Lupin 21.2 1.85 2.00 36.9

321.3 12210.4 19683.7 Nicholas Piramal 10.8 1.73 3.40 3.5
206.4 12286.4 16595.1 Cadila 15.9 2.45 2.42 16.1
402.5 11592.0 11015.7 Pfizer 15.3 1.69 1.89 2.0
375.2 13603.7 10293.8 Wockhardt 40.0 1.27 2.12 38.2
402.1 8311.4 10026.0 Aurobindo 8.1 0.84 0.00 46.9

365.9 8436.5 8810.2 Aventis 11.1 1.33 2.32 17.5
157.0 5083.8 7784.8 Orchid 26.0 1.44 0.09 83.4
237.4 7587.3 7144.3 Novartis 12.2 1.51 1.95 1.1
526.2 6744.8 6689.9 Divi's Labs. 12.3 2.71 0.00 90.0
531.1 5164.4 6384.0 Matrix Labs. 6.9 1.53 0.00 20.0

292.5 5773.0 5286.9 Wyeth Ltd. 16.5 1.97 1.43 13.5
335.4 4192.5 5107.6 IPCA 6.7 1.01 1.00 55.1
232.9 4928.2 5040.1 Torrent 9.9 1.13 1.84 8.6
289.7 4883.8 4949.0 Merck 16.5 1.43 1.32 5.1
43.2 4202.8 3854.0 FDC 10.6 1.62 1.09 16.6

284.6 4610.5 3838.0 Abbott 5.0 1.03 2.32 0.5
268.0 1972.5 3794.1 Alembic 6.3 0.67 1.72 20.8
295.0 3029.7 3778.8 Glenmark 8.1 1.13 1.24 4.3
208.7 3351.5 3305.6 J B Chemicals 6.9 1.13 0.54 51.0
417.2 3827.8 3092.5 Burroughs Well. 12.0 1.72 0.89 0.1

10.4 942.8 2998.5 Morepen (4.8) 0.99 0.17 12.5
67.3 2063.8 2465.1 Strides Arcolabs 46.0 1.14 0.00 67.2
208.3 1776.4 2269.3 Unichem 6.5 0.70 1.57 6.5
218.3 1794.0 2235.0 Shasun Chem 11.1 0.90 0.00 61.2
46.8 937.3 2224.7 Kopran (6.9) 1.61 0.19 18.1

292.2 2409.2 1995.9 German Remedies 12.8 0.69 1.07 0.0
372.0 1860.0 1602.1 AstraZeneca India 17.0 1.18 0.69 0.0
149.7 1804.3 1538.2 Parke-Davis 12.6 0.85 1.15 1.2
60.0 660.5 1002.7 Elder Pharma 7.9 0.43 0.82 11.6
137.6 825.6 998.2 Krebs Bio 5.6 0.98 0.00 86.5

28.0 349.2 985.2 RPG Life Science (1.7) 0.82 0.41 15.4
126.8 684.6 922.0 Neuland Labs 207.5 0.91 0.00 59.5
42.5 504.1 799.9 Ajanta Pharma 16.1 1.16 0.13 46.1
1711.3 689.6 766.8 Zandu 9.4 0.68 0.18 1.9
148.9 751.8 745.6 Solvay India 15.4 0.82 0.50 0.0

162.9 521.3 681.3 Fulford (4.0) 0.72 0.40 0.0
169.0 743.6 639.0 Suven Pharma 14.1 1.41 0.00 68.6
95.0 495.9 468.9 Pharmacia (6.4) 0.76 0.28 2.2
34.6 197.3 423.8 Albert David 3.8 0.40 0.36 11.0
512451.9 528916.5 Grand Total
11646.6 12020.8 Average 17.2
o Market Share from AC Neilson market survey data on moving average tota l of domestic prescription sales for 12 months
ending June 2003. PE is based on annualized EPS on latest available quarterly results.
43
INDIAN PHARMACEUTICAL INDUSTRY
Contents
Current Portfo lio 1
Investment Outlook 2
VALUATION DRIVERS – DOMESTIC FORMULATIONS COMPANIES

Ranking on Valuation Drivers 6
Market based Valuation 7
Financial based Valuation 8
Financial parameters – Export focus 9
Financial parameters – Domestic focus 9
Valuation parameters – Export focus 10
Valuation parameters – Domestic focus 10
Domestic Presence 11
Discovery Research by Indian Companies. 13
International Presence – Bulk Actives 16
International Presence – Formulations 17
Fund Raising Ability 18
Selling Expenses 19
VALUATION DRIVERS FOR BULK DRUG PRODUCERS
Financial Valuation 20
Financial parameters 21
Valuation parameters 21
VALUATION DRIVERS FOR MNC SUBSIDIARIES
Analysis of Multinational Subsidiaries 23
Financial based Valuation 24
Five year trend – Operating Margins of all companies 25
COMPANY ANALYSES SUMMARY PAGES 26
Cadila Healthcare 27
Cipla 28
Dr. Reddy’s 30
Matrix Lab. 32
Nicholas Piramal 34
Ranbaxy 36
Torrent 38
APPENDICES
M&A Table – Full Company Analysis 40
M&A Table – Significant Brand Transactions 41
Share price % changes during the period Aug.2002 – Aug. 2003 42
Mehta Partners universe and selection 43
The information contained in this communication is confidential and solely intended for the addressee. Access by anyone
other than the addressee is unauthorized and disclosure, copying, and distribution of this information is prohibited. We
would appreciate notification if this communication is not intended for you; please contact Mehta Partners: by phone
212.343.4300 or fax 212.343.4303 or by eMail to mpglobal@mpglobal.com.
44

Indian Pharma Industry Mid-Year Report Highlights Top Performers and Investment Drivers

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INDIAN PHARMACEUTICAL INDUSTRY— Mid Year 2003

Current Recommendations: Cipla (Rs784), Matrix (Rs531), Nicholas Piramal (Rs321),

Indian pharmaceutical industry can be broadly divided into Indian formulations

DMFs filed CY 2001 CY 2002 Jan-June 2003

Consolidation: Internationalize or Perish

A number of small-ticket cross border transactions done by Indian companies to build

As we expect the phenomenon of internationalization to gather momentum, such

Restructuring, Strategic Alliances, Mergers and Acquisitions: The domestic Indian

o Key take away from the table below:

o Key take away from the table below:

o Export as % sales of domestic companies is up compared to last year and the

RBx6198: High potency and

Novartis AG of Germany has

NCE focus on Anti-fungal, Anti-

Diabetes: Non Insulin Non-insulin-dependent

GRC 3015: in development

Set up R&D centre at Pune at an

The proposed R&D centre in

IND filed for Parkinson

KNC 1206: for the treatment of

In vitro and in vivo experimental

Source: Mehta Partners, Company Reports

o Key take away from the table below:

o Benchmark for Exports as % sales is 20%

o Total exports as % of sales increased by 9% from last year.

o Key take away from the table below:

* Shows Sales in Rs mn per Sales Person

o Key take away from the table below:

o Key take away from the table below:

1. MNC subsidiaries do not undertake basic research activities in India.

Thus, the strategic parameters influencing the MNC subsidiaries are:

Based on brand power, operating margins, freedom of the subsidiary to operate

o Key take away from the table below:

Burroughs Well. Burroughs Well. Wyeth BEST - MNC AstraZeneca Abbott

A. Sales are including excise and sales tax.

Key Milestones Expectations Time

CFC-Free Inhalers Offer A Big Opportunity

o Cipla is awaiting approval from German

o Improvement in export mix - formulation

o Operating margin is 21% - the highest in India.

o Strong net cash position - Rs 5.9 bn

Key milestones Expectation Date

Stock price reflects the benefits of amlodipine maleate launch

Key Milestones Expectation Date

A specialty API company in making?

o Upside from amlodipine mesylate is not built into our projections

Key Milestones Expectation Date

Valuations Still Attractive – Does Not Reflect Alliances’Value

o Ability to acquire high quality pharma franchises at

o Clinical research organization (CRO) achieved cash

Key Milestones Expectation Date

No Major Growth Drivers After Cefuroxime Axetil

Key Milestones Expectation Date

Investment phase over, operating profit to jump in FY04

Key Milestones Expectation Date

386.6 15516.5 20749.2 Lupin 21.2 1.85 2.00 36.9

402.1 8311.4 10026.0 Aurobindo 8.1 0.84 0.00 46.9

531.1 5164.4 6384.0 Matrix Labs. 6.9 1.53 0.00 20.0

43.2 4202.8 3854.0 FDC 10.6 1.62 1.09 16.6

417.2 3827.8 3092.5 Burroughs Well. 12.0 1.72 0.89 0.1

46.8 937.3 2224.7 Kopran (6.9) 1.61 0.19 18.1

137.6 825.6 998.2 Krebs Bio 5.6 0.98 0.00 86.5