Lupin Initiating Coverage Nov'091

Equity Research
November 30, 2009

INDIA
BSE Sensex: 16632
Lupin BUY
Evolving to higher realms Rs1,361
Pharmaceuticals Reason for report: Initiating coverage
Lupin is a fully-integrated, top-quality Indian pharma company, poised to advance
into the next growth orbit. The company has created a unique, best-in-class,
Target price Rs2,015 rapidly-growing US business encompassing Branded and Generics, which has
total revenues of ~US$260mn over FY04-09. Coupled with this and high growth in
Shareholding pattern key markets such as Japan, European Union (EU) and India as well as strong
Mar Jun Sep intellectual property rights (IPR) capability, we expect Lupin to excel
’09 ’09 ’09 quantitatively (PAT CAGR of 23% during FY09-12E) as well as qualitatively (a
Promoters 50.6 50.4 48.7
Institutional 38.4 38.6 40.2 niche pipeline and IPR & management capabilities) in the next three years. We
investors
MFs and UTI 14.7 15.7 17
initiate coverage on the stock with BUY rating and 18-month fair value of
Insurance Cos. 9.7 9.1 8.7 Rs2,015/share.
FIIs 11.2 12.2 13.5
Foreign Bodies/ f Unique and balanced business model. Lupin differentiates itself from peers by
Banks 2.8 1.6 1.0
Others 11.0 11.0 11.1
virtue of its successful & rapidly growing US branded business, which is on course
Source: NSE to touch ~US$125mn in FY10E. While scaling-up the US branded business is
daunting (where Dr Reddy’s and Ranbaxy have been unsuccessful), we believe
Lupin has all the ingredients for achieving the lofty revenue target of ~US$300mn by
FY12E. Strong US business (32% of total revenues; ninth-largest), profitable &
rapidly growing (~2x industry rate) domestic branded business (30%; #5), Japanese
business (12%; #7), and a globally-competitive API business (20%; RoCE of 33%)
Price chart are other key pillars of Lupin’s well-diversified revenue base. Strong IPR capability
1,550 (cumulative income of ~US$80mn) along with revamped new chemical entity (NCE)
1,400 model provides broader dimensions to Lupin’s business model.
1,250 f Well positioned for Orbit II, with potential 25% revenue CAGR. The past five
(Rs)
1,100 years have seen Lupin achieve revenue CAGR of ~25% to an impressive
950 US$830mn in FY09. Management remains confident of maintaining revenue growth
800
(I-Sec: 22% CAGR) for the next five years on the back of strong performance in the
650
US, Japan, India and RoW markets. Potentially, acquisitions would help attain the
500
FY14 aspirational goal of US$3bn, implying 29% CAGR.
Nov-08
Feb-09
May-09
Nov-09
Aug-09
f Initiate with BUY and 18-month fair value of Rs2,015. Buoyed by

commercialisation of a rich ANDA & branded-products pipeline in the US as well as
exploitation of synergies from the acquired businesses, we expect Lupin to step into
the next growth orbit. Despite 114% run-up in its stock price in the past nine months,
the stock trades at an attractive FY11E P/E of 14.9x, implying 23% discount to peer
average. Besides, positive newsflow and earnings upgrade potential would give
additional boost. We position Lupin as our top BUY in the sector (followed by
Ranbaxy and Glenmark), with potential upside of 48% in the next 18 months.
Market Cap Rs120.5bn/US$2.6bn Year to Mar FY09 FY10E FY11E FY12E
Reuters/Bloomberg LPC IN /LUPN.BO Revenue (Rs mn) 38,666 48,643 59,759 72,557
Shares Outstanding (mn) 88.5 Net Income (Rs mn) 5,310 6,669 8,062 9,906
52-week range (Rs) 1,377/545 EPS (Rs) 60.0 75.3 91.1 111.9
Free Float (%) 51.3 % Chg YoY 20.8 25.6 20.9 22.9
FII (%) 13.5 P/E (x) 22.7 18.1 14.9 12.2
Daily Volume (US$/'000) 6,280 CEPS (Rs) 69.9 87.2 106.9 130.4
Absolute Return 3m (%) 31.1 EV/E (x) 17.2 13.1 10.3 8.0
Rajesh Vora Absolute Return 12m (%) 132.3 Dividend Yield (%) 1.0 1.1 1.3 1.7
rajesh.vora@icicisecurities.com
Sensex Return 3m (%) 4.5 RoCE (%) 21.3 22.8 23.6 24.3
+91 22 5637 7508
Sensex Return 12m (%) 82.9 RoE (%) 39.3 36.0 30.9 29.8
Please refer to important disclosures at the end of this report

Lupin, November 30, 2009 ICICI Securities
TABLE OF CONTENTS
Investment summary .......................................................................................................4

Risks..................................................................................................................................5
US FDA’s warning letter..................................................................................................5
EU inquiry on patent settlements ....................................................................................5
IPR impact on local market .............................................................................................5
Potential genericisation risk to Suprax............................................................................5
Promoters have pledged 10% stake ...............................................................................5
Compelling valuations.....................................................................................................6
Significant rerating in past five years ..............................................................................6
Valuation framework .......................................................................................................7
Comparative valuations...................................................................................................8
Metamorphosis of business model................................................................................9
Enriching revenue mix...................................................................................................10
Stellar scale-up .............................................................................................................10
Aspirational goal FY14 – Revenue of US$3bn .............................................................11
Unique US business model...........................................................................................12
Massive scale-up within only five years ........................................................................12
Prudent and unique strategy.........................................................................................12
US Generics – At a gallop ..........................................................................................14
Stellar show within short spell.......................................................................................14
Smart strategy...............................................................................................................14
Strong, differentiated ANDA pipeline ............................................................................15
Strong growth to continue .............................................................................................15
US branded business – Unique among Indian peers.................................................17
Brave move...great foresight.........................................................................................17
Source: Company website ............................................................................................17
Success despite daunting nature of business ..............................................................17
Branded business – Journey to success ......................................................................18
AllerNaze acquisition – First NDA to be launched in Q1FY11E ...................................18
Antara brand acquisition – Intelligent move ..................................................................18
Paediatricians, the spot-on customer.......................................................................21
Value-accretive acquisition strategy ...........................................................................22
Six smart acquisitions since ’07 ....................................................................................22
Strategic & inexpensive acquisitions.............................................................................22
Acquisitions likely to contribute ~18% to FY10E revenues...........................................23
Maintains interest in acquisitions ..................................................................................23
Rapid ramp-up of non-US business.............................................................................24
Japan – Entry via acquisition ........................................................................................24
2
Strong domestic business ............................................................................................26
Consistent market-beating growth ................................................................................26
Transformation to lifestyle therapies .............................................................................26
New product launches & in-licensing ............................................................................27
Profitable API business.................................................................................................29
Backbone of business ...................................................................................................29
Leadership focus & strong product basket....................................................................29
Amongst the most profitable .........................................................................................29
Strong IPR capability.....................................................................................................30
Background ...................................................................................................................30
Lucrative monetisation of generics R&D.......................................................................30
Drug discovery research ...............................................................................................30
Building robust NCE pipeline ........................................................................................31
Financial analysis ..........................................................................................................33
Strong growth in past five years....................................................................................33
Rising free cashflow ......................................................................................................33
Improving RoCE and RoNW, despite FCCB.................................................................33
Key financials .................................................................................................................35
Annexure 1: US product pipeline .................................................................................36
Annexure 2: Consolidated financials...........................................................................38
Annexure 3: Index of Tables and Charts .....................................................................42
Note: All stock prices and indices are as on November 27, 2009 unless otherwise stated.
3
Investment summary
Unique business model
Lupin’s business model differentiates from that of peers as regards strong US
branded business, which has achieved critical mass of ~US$75mn revenues in FY09.
While branded business is difficult to scale, Lupin has all the requisite ingredients – A
distinct strategy of in-licensing and/or acquiring brands, smart marketing and ability to
build customer franchise. Based on this, Lupin is set to clock-in 23% revenue CAGR
through FY09-12E. The growth will be powered by US Branded (~56% CAGR), US
Generics (~20%), Japan (~25%) and India-branded (~18%) businesses. Lupin’s
robust dosage-form business is well supported by a globally competitive API
business. Strong IPR capability (especially in new drug delivery system-NDDS;
~US$80mn income, as on date) coupled with revamped NCE model provides wider
dimension to Lupin’s business model.
US generics business at inflection

We are fairly impressed by Lupin’s success in the US generics market, which is most
lucrative and the largest globally. In only less than six years of its first product launch
(Cefuroxime Axetil) in the US generics market, Lupin stands at #9 (in terms of number
of prescriptions) with ~US$190mn revenues in FY09, up 90% YoY. The growth
momentum is likely to sustain, with revenue CAGR of 20% to ~US$330mn through
FY09-12E, mainly driven by an impressive pipeline of 65 ANDAs pending approval, of
which 8-10 are para IVs and 15-17 are niche, such as hormones, extended release
(ER) delivery system, complex chemistry and ophthalmics.
Lucrative monetisation of IPR

On account of smart product selection backed by innovation, Lupin has been
considerably successful in commercialising generics research. Beginning with launch
of Cefuroxime Axetil in July ’03 followed by Ceftriaxone, Perindopril and Ramipril,
Lupin is likely to have registered estimated cumulative profit of ~US$80mn from R&D,
which is the highest amongst Indian peers. Of this, a major portion (Rs2.2bn or
€40mn) has come from monetisation of Lupin’s strong IPR for Perindopril. In October
’09, Lupin out-licensed its proprietary bio-adhesive technology to Salix Pharma’s
Xifaxan (rifaximin). Lupin received US$5mn upfront milestone and is entitled to
additional success-based milestone payments along with royalties that could be 5-
10% of revenues, in our view.
Value-accretive acquisitions
Lupin made six strategic and value-accretive acquisitions over FY08-09 for Rs4.5bn,
as a step to fill the geographic gap on its global footprint. The acquisitions have pay-
back period of around three years, given inexpensive price/sales of ~1x. Further, the
company has plans for acquisitions in key markets such as Latin America.
Initiate coverage with BUY; fair value of Rs2,015

Supported by strong management and prudent business strategy & model, Lupin is
poised for a big leap over the next five years, with potential revenue & PAT CAGRs of
22-25% each. Besides, we find consensus EPS estimate to be conservative and
expect earnings upgrade and strong positive newsflow to drive stock price to our 18-
month fair value of Rs2,015/share, implying potential upside of 48%.
4
Risks
US FDA’s warning letter
The US FDA team visited Lupin’s Mandideep manufacturing plant (dosage-form and
sterile APIs) in Q4CY08 and issued 15 observations in Form-483. Following this,
Lupin sent its response in four letters during December ’08-March ‘09. However, the
US FDA found these inadequate and issued a warning letter on May 7, ’09. This has
led to suspension of new ANDA approvals mainly for Cephalosporins. Management
expects the issue to be resolved by mid-CY10. Assuming worst-case scenario
(though unlikely) of imposition of ban by the US FDA, Lupin’s EPS could take a
knock-off of ~7%.
EU inquiry on patent settlements

In July ’09, the European Commission (EC) decided to open a formal anti-trust
investigation against Perindopril innovator Les Laboratories Servier (Servier) for
suspected breach of rules of the EC Treaty on restrictive business practices and
abuse of a dominant market position. The probe found that direct payment was
involved in over 20 settlements with total payment exceeding €200mn. Lupin has
received €40mn or Rs2.2bn as part patent settlement with Servier. Lupin believes that
since it has not delayed the generics launch, there would be no anti-competitive
activity. Timeline for EC’s final decision is difficult to ascertain.
IPR impact on local market

With India coming under the IPR regime since January 1, ’05, the domestic dosage-
form business of all home-grown companies will be impacted going forward; Lupin
derives 30% of its total product revenues from this market. We expect impact of the
regime from ’11-12. Significant ramp-up in revenues from international business,
domestic revenues are slated to decline to 27% of total revenues in FY12E, thereby
reducing negative effect of the IPR regime on Lupin’s business.
Potential genericisation risk to Suprax

Reportedly, Orchid Pharma has filed ANDA for Suprax 100mg/5ml, which has
estimated revenues of ~US$25mn. On October 22, ’09, Lupin filed a citizen’s petition
with the US FDA, requesting the agency that all ANDAs for Suprax must meet the
same standards as Lupin’s Suprax. Lupin is confident about its strong position and
expects to keep any potential generic versions at bay for about two years. However,
in the event of entry of a new player with all dosage-forms of Suprax, Lupin’s EPS
could get dented 6-7% in FY10E and FY11E, assuming 50% reduction in revenues.
Promoters have pledged 10% stake

In February ’09, the promoter family pledged 12.4% equity stake (of their total stake of
50.65%) in Lupin. It reduced the pledged amount to 10.4% in September ’09, which is
a positive. We expect the remaining pledge to be paid in due course.
5
Compelling valuations
Significant rerating in past five years
Powered by stellar business transformation and EPS CAGR of 29% in the past five
years coupled with the ’03-07 bull-run and 114% spike since March’09, Lupin’s stock
touched an all-time high of Rs1,400 (on closing basis is Rs1,377) recently. Until mid-
CY03, the stock was trading at 6-8x one-year forward P/E. During the 18-month
period ending December ’04, the stock traded at 20-35x P/E, mainly owing to first-
time significant newsflow pertaining to the US business. However, such high
valuations are evidently unsustainable and unjustified. Since then, and till the financial
meltdown, the stock traded at a more reasonable 10-15x P/E; it has doubled since
March ’09, boosted by strong positive fundamental newsflow, investors’ heightened
interest for the sector and sharp pullback of 93% in the Sensex over the same period.
The five-year average P/E for the company stood at 7.7x, which has now almost
doubled to 13.9x.
Chart 1: One-year forward P/E bands

1,600
1,400
16x
1,200
1,000 13x
(Rs)
800
10x
600
400 7x
200
0
Oct-00
May-01
Dec-01
Jul-02
Feb-03
Mar-04
Oct-04
May-05
Dec-05
Jun-06
Jan-07
Mar-08
Oct-08
Nov-09
Apr-00
Aug-03
Aug-07
Note: Owing to merger of Lupin Labs and Lupin Chemicals in ’01, we have preferred stock price from same year Apr-09
Source: Bloomberg, I-Sec Research
Lupin’s stock is up 29x or 52% CAGR since the past eight years vis-à-vis only 5x or
23% CAGR for BSE Sensex and 9x or 31% CAGR for CNX Midcap Index. With EPS
rising 8x or 30% CAGR, the stock has rerated at 22% CAGR during the period on the
back of improving quality of the business and underlying growth momentum.
6
Chart 2: Lupin beats stock indices (FY01-09)
35.0
29x (52%)
30.0
25.0
20.0
15.0
8x (30%) 9x (31%)
10.0
5x (23%)
5.0
0.0
Mkt Cap EPS Sensex C N X Midcap
Note: Figures in brackets denote CAGR

Source: BSE India, I-Sec Research
Valuation framework
Segment-based approach
Given Lupin’s unique business model amongst Indian peers, as regards US branded
business, which is at inflection point, we think it prudent to assign value to each key
business segment.
DCF-based valuation
Lupin’s weighted average cost of capital (WACC) is 11%, which we have used to
discount its next 10-year cashflow from operations. We have assumed long-term
sustainable growth rate of 4% for the business. Consequently, we derive DCF-based
value of Rs2,098/share. We have not assigned any value to Lupin’s NCE research at
this stage, given the company’s inability to monetise any compound in the past
decade as well as our view that the first licensing deal may take at least three years.
18-month fair value pegged at Rs2,015/share

Our 18-month fair value of Rs2,015/share is based on the average of two values –
Segment-based and DCF-based. This implies FY11E P/E of 14.9x, which compares
well with that of Sun Pharma and Cipla.
7
Table 1: Fair value pegged at Rs2,015/share
(Rs mn)
Multiple Benchmark Segment Mix
Business Benchmark (x) value (%) Remarks
Dosage-form
US Branded Revenues 4 12,274 49,095 29 Based recent deals in US
Branded space
US Generics P/E 18 2,700 48,599 28 Based on top peers in US
Generics
Non-US generics EV/EBITDA 12 3,839 46,068 27 Torrent/Plethico
API EV/EBITDA 12 769 9,223 5 ~20% discount to Divi's
IPR value P/E 5 3,600 18,001 11 Given past success
Total 170,986 100
Per share (Rs) 1,931
DCF-based value (Rs) 2,098
Average value 2,015
Upside (%) 48
Source: I-Sec Research
Comparative valuations
It is evident (Table 2) that Lupin is trading at a very high 23% discount to peer
average P/E of 19.5x (Sun Pharma, Ranbaxy, Cipla and Dr Reddy’s). Thus, among
aforementioned peers, Lupin is the most inexpensive, in terms of FY11 P/E. Besides,
the company enjoys the highest RoCE of 21% amongst Indian peers. This combined
with strong EPS CAGR of 23% through FY09-12E and unique business model, we
expect the stock to get rerated further.
Table 2: Comparative valuations

Company Rating Price EPS (Rs) P/E (x) EBITDA RoCE Mkt cap/
(Rs) FY10E FY11E FY10E FY11E margin (%) (%) sales (x)
Aventis Hold 1,556 82 94 19 17 19 23 3.6
Cadila Buy 592 31 37 19 16 21 17 2.8
Cipla Hold 320 13 16 24 20 23 16 4.8
Dishman Pharma Hold 215 16 21 13 10 25 12 1.6
Divi's Lab Hold 587 21 29 28 21 44 22 3.2
Dr. Reddy's Buy 1,109 54 67 21 17 19 11 2.7
Glenmark Buy 242 16 22 15 11 27 13 2.9
GSK Pharma Buy 1,632 61 70 27 23 36 32 8.1
Lupin Buy 1,361 75 91 18 15 20 21 3.1
Ranbaxy Buy 444 2 23 190 19 8 5 2.5
Sun Pharma Hold 1,460 55 66 27 22 44 29 7.1
Total/Average 25 18 23 18 3.8
Source: Bloomberg, Company data, I-Sec Research
8
Metamorphosis of business model

Chart 3: Key historic milestones
1968 - 1980 1968 - Commenced business
Journey starts
1972 – Lupin Laboratories incorporated
1980 – Commissioned a formulations

plant and an R&D centre at Aurangabad
1980s 1987 – Cephalexin plant (Mandideep) and

Ankleshwar plant go onstream
Glimpses of global ambition
1989 – Ankleshwar and Mandideep received
US FDA approvals
1989 – JV in Thailand – Lupin Chemicals

(Thailand) established
1993-94 – IPO of Rs622mn; 33% dilution

1990s
Lupin emerges as one of the 1997 – Third plant – Tarapur gets US FDA
best pharmaceutical approval. Mandideep gets UK MCA
exporters in India approval
’01 – Lupin Laboratories and Lupin Chemicals

Lupin shifts orbit; merge to for Lupin Ltd (1:12 swap ratio)
regulated developed markets
with US-heavy focus ’03 – Launches generic Ceftin, its first product
in the US
’04 – Launches its first branded drug Suprax

in US
’00s ’06 – Maiden issue of (FCCB) aggregating

US$100mn, with conversion price
of Rs567/share
’07 – Acquired Kyowa Pharma, Japan to enter

world’s second-largest pharma market
Lupin widens global footprint
via acquisitions ‘08-09 – Makes four acquisitions, in Germany,
Australia, South Africa and Philippines
Source: Company data, I-Sec Research
9
Background
Lupin Laboratories (LLL) commenced operations in 1968 as an outcome of Dr Desh
Bandhu Gupta’s vision to fight life-threatening infectious diseases. In 1983, LLL set up
another company, Lupin Chemical (LCL), to manufacture API of two key anti-TB
drugs viz., Rifampicin and Rifampicin-S. LLL and LCL merged to form Lupin in ’00.
With foresight for the significance of innovation, LLL set up R&D centres at
Aurangabad in the early 1980s and forayed into dosage-form to move up the value
chain. In the late 1980s, Lupin increased focus on the exports market, first on the
semi-regulated market and then the advanced regulated markets, with US FDA
approval for two plants in 1989. The company has made a series of astute moves
since then, becoming a transnational pharma company with 65% of total revenues
from international markets, ~50% of which is contributed by the US, the largest and
most lucrative market globally.
Enriching revenue mix

In the past decade, Lupin’s business model has undergone a metamorphosis, which
is well reflected in the improving revenue mix. Already, the higher-margin dosage-form
exports contribute ~50% to total revenues. Of this, 50% is from the US, which is
world’s largest and most lucrative generics market. Powered by strong growth
(revenue CAGR of 32% through FY09-12E) momentum in the US business (both
generics and branded) as well as step-up in growth of acquired businesses (in Japan,
Australia, South Africa, Germany and the Philippines), dosage-form exports are set to
touch ~63% of total revenues in FY12E.
Chart 4: Improving revenue mix
FY06 FY09 FY12E
9% 11%
3% 23% 20% 21%
37%
18%
26%
9%
17%
30%
18%
33% 25%
API Dosage - Domestic Dosage (Non US Exports) US Branded US Generics
Stellar scale-up
Lupin’s well-planned strategy of putting in place building blocks of growth, consistently
backed by foresight, innovation and impeccable execution has helped the company
achieve stunning results in the past decade. During FY01-09, Lupin witnessed rapid
revenue growth of ~6x and an even faster PAT growth of 8x. While the past five years
witnessed significant scale-up in the US and domestic dosage-form market, the next
five would be powered by continued surge in the US as well as step-up in growth in
the acquired businesses. Besides, the company continues to hunt for value-accretive
acquisitions to fill the gap in its geographic footprint.
10
Chart 5: Phases of rapid growth
100 Grow th from new
90 markets and US
4%
80 R: ~2
r CAG CAGR: ~23%
70 8 yea Acquisitions and
60 licensing income
(Rs bn)
50 CAGR: ~32%
Development of US
40 branded business
30 CAGR: ~17%
20
10
0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Aspirational goal FY14 – Revenue of US$3bn

Lupin achieved strong revenue CAGR of 25% in the past five years, reaching Rs39bn
or ~US$830mn consolidated revenues in FY09. Lupin’s management expects strong
growth momentum to continue and has set an aspirational revenue target of US$3bn
by FY14 – Our quick estimate suggests inorganic element of ~US$722mn (or 24% of
total) in FY14E.
Chart 6: Aspirational goal – Revenues of US$3bn

Likely revenue mix
3,000
RoW API
US
New acquisitions 722 Generics 5%
Branded
10%
20%
9%
(US$ mn)
:2
Japan
GR
CA
2 % Generics
:2
GR 2,278 15%
CA US
Generics
India 30%
830 Organic Branded
20%
FY09 FY14E
11
Unique US business model

Massive scale-up within only five years
In spite of being a late entrant in the US generics market, Lupin has witnessed one of
the most successful scale-ups among Indian peers. The company launched its first
product in ’03 and, since then, has not looked back, with FY09 revenues at an
impressive Rs12bn or ~US$260mn, becoming the ninth-largest player in the US
generics market. The company aims to be the largest (in terms of revenues) Indian
player in the US market in the next five years.
Chart 7: Most powerful growth engine
700 Generics Branded

273
600
500 215
(US$mn)
400
130
300 74
200 32 333
267
100 10 25 187 215
118
40 54
0
FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Prudent and unique strategy

Unlike peers, Lupin has not just focused on its US generics (unbranded) business. It
seized the opportunity of building a branded business via launch of generic Suprax
(cefixime) in ’04, and grown it to a remarkable ~US$70mn. The initial success was
well-supported by in-licensing of complementary brands (Aerochamber) and
acquisition of brands (Antara and AllerNaze) that will help the company scale-up
business to an impressive ~US$270mn by FY12E.
12
Chart 8: Unique US business model
z 9th largest and fastest-growing z Continue growing Suprax

company; ~US$190mn sales franchise
z 22 products in the market with 9 z In-licensing brands

at #1 position and 19 in top 3 (Aerochamber, Atopiclair)
Generics Branded
z 65 ANDAs pending approval; z Acquisition of brands
8-10 FTFs & 15-17 niche (AllerNaze, Antara)
z Monetisation of key ANDAs – z In-house pipeline of

Ceftriaxone, Perindopril, Ramipril NCE/NDDS
13
US Generics – At a gallop
Stellar show within short spell
We are considerably impressed by Lupin’s success in the US generics market, the
most lucrative and largest (~US$50bn) globally. Lupin forayed into US Generics with
launch of its first product – generic Ceftin – in July ’03. Within a short spell (~6 years)
of its entry into the US generics market, Lupin has become the ninth-largest, in terms
of number of prescriptions. The company registered revenues (unbranded Generics)
of ~US$190mn in FY09, up 90% YoY. Hence, revenues are up 12x in the past five
years. More importantly, of the 22 products in the market, nine are #1 and 19 are
among the top-3, which is commendable. This product-focused strategy has enabled
Lupin to achieve ~2x per-product revenues of US$8.5mn vis-à-vis peers.
Table 3: Revenue per ANDA – Lupin leads pack

(US$ mn)
US dosage revenues No of ANDAs Revenues
Company FY09/CY08 approved per ANDA
Ranbaxy 443 137 3.2
Sun 337 71 4.7
DRL 276 75 3.7
Lupin 187 22 8.5
Glenmark 167 45 3.7
Total 1,410 350 4.0
Source: Industry, Company data, I-Sec Research
Smart strategy
Chart 9: Unique strategy for US generics
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D I M
14
Lupin’s stellar success in the US generics market is a result of its smart and
innovative strategy. The company focuses on every business facet, backed by
flawless execution.
Strong, differentiated ANDA pipeline

During initial years, Lupin concentrated mainly on para IV (Altace, Clarinex, Antara)
products, where it still maintains focus. However, in the past couple of years, the
company has advanced to new areas such as complex chemistry (Rocephin) and
NDDS-based generics & oral contraceptives (OC). It targets entering a new therapy
area every year; in light of this, it forayed into OC with seven ANDA filings in FY09
and plans foraying into ophthalmology.
Table 4: Key ANDA pipeline

Brand Likely Sales Patent
name Generic name FTF Therapy Innovator (US$ mn) expiry Remarks/Likely competitors
Antara Fenofibrate Yes Dyslipidaemia Oscient 70 Aug-20 Acquired brand and launched
immediately/Paddock is the only other filer
EffexorXR Venlafaxine Hcl No Anti-depressant Wyeth 3,000 Dec-10 Settlement with Wyeth allows launch in June
’11
Clarinex Desloratidine No Anti-allergy Schering 329 Jun-12
Plogh Settled with innovator for launch in June ’12
Lunesta Eszopiclone No Sleeping Sepracor 600 Jan-12
medicine Teva, Cobalt, DRL, Glenmark, Sun, Orchid
Geodon Ziprasidone No Schizophrenia Pfizer 1,000 Sep-12 Tentatively approved/Dr Reddy's and
Sandoz
Cymbalta Duloxetine Hcl No Anti-depressant Eli Lilly 2,200 Aug-13 More than a dozen para IV filers
Fortamet ER Metformin Yes Anti-diabetic Andrx 70 Mar-18 30-month stay expires in Jun-11
Namenda Memantine Hcl No Alzheimer Forest 700 Aug-15 Sued by Forest Labs/Sun resolved litigation
and will not launch until patent expiry
Fosrenol Lantham Yes Renal disorder Shire 108 ’18-24 Partnered with Natco/Teva, Mylan sued by
carbonate Shire
Lyrica Pregabalin No Neuropathic pain Pfizer 2,500 ’13-18 Pfizer has also sued Sun, Wockhardt, Teva,
Sandoz and Actavis
Niaspan Niacin Cholesterol Abbott 832 ’13-17 Only other filer Barr has settled with
controller innovator
Renagel Sevelamer Hcl Yes Kidney disease Genzyme 678 Aug-13 Sued by innovator, after Impax
Total 12,087
Source: Industry, Company data, I-Sec Research
Strong growth to continue

The growth momentum in US Generics is likely to sustain, with 32% revenue CAGR to
~US$605mn through FY09-12E, mainly driven by an impressive pipeline of 65 ANDAs
pending approval, of which 8-10 are para IVs and 15-17 are niche such as hormones.
The company boasts of a pipeline of 88 DMFs (as of September ’09), giving it a
strong competitive edge through backward integration.
15
US FDA warning letter – A risk
Background
The US FDA team visited Lupin’s Mandideep manufacturing plant (dosage form and
sterile APIs) in Q4FY08 and issued 15 observations in Form-483. Following this,
Lupin responded via four letters during December ’08-March ’09. However, the US
FDA found these inadequate and reiterated some key violations, which are:
• Failure to maintain production/control/distribution records for a year at least
• The Quality department gave information contrary to facts regarding destruction of
Ceftriaxone Inj 10gm, despite being manufactured in August ’08,
• Failure to follow written procedure to prevent microbiological contamination of
sterile drugs
• Inadequate controls to prevent contamination regarding septic processing. A CD-
ROM (video of smoke study) sent by Lupin could not be opened by the FDA
• Failure to regularly calibrate and inspect performance of equipment – e.g., ERP
programme allowed the rejected drugs to be dispatched
• Failure to follow written procedures for containers/closures for drugs – e.g., many
bulk empty glass vials were not labelled and located in a different building; Lupin’s
response contradicts
• Documentation for each step of the manufacturing process was not done by the
person performing it
• Failure to maintain building in clean & sanitary condition – e.g., collection of water
with black residue was found
Negative impact offset by other factors

Based on the aforementioned compliance issues, it is evident that Lupin has not
maintained various basic US FDA requirements, as per c-GMP guidelines. The plant
manufactures two key product categories viz., Cephalosporin and Prils. The company
has filed ANDAs for Cephalosporin drugs from the plant that will not be approved by
the US FDA till the issues are resolved. Currently, the plant contributes estimated
17% to Lupin’s US revenues. However, despite the issues, US revenues continue to
surge with healthy 43% YoY rise to Rs13.47bn for 12 months ending September ’09.
Management expects resolution by end-FY10

Lupin has, evidently, not met various basic US FDA requirements, with its responses
to the regulator being unconvincing. In this light, we believe that Lupin will work swiftly
and effectively to address all issues. Currently, the US FDA team is conducting
inspection at Lupin’s new upcoming Indore SEZ plant (from where all OC ANDAs are
filed) and will inspect the company’s Mandideep facility as well. Management expects
resolving the issues in the warning letter by end-FY10.
16
US branded business – Unique among Indian peers
Brave move...great foresight
Unlike peers, Lupin has not just focused on its US generics (unbranded) business, but
seized the opportunity to build a branded business via launch of generic Suprax
(Cefixime) in ’03. Given no prior experience and knowledge in US branded business,
the company made a brave move, keeping in mind that: i) branded generics business
would provide hedge against volatility of unbranded generics, ii) if branded business
failed, permanent loss would not have exceeded US$4-5mn, iii) Suprax had no
competition, and iv) flexibility of outsourced field-force with lower attendant costs.
Chart 10: Suprax – Brand portfolio
Source: Company website
Success despite daunting nature of business

Notably, the branded business is relatively tougher to build than unbranded generics,
given:
• significant investment required to develop a branded drug (estimated US$20-
60mn) with high level of failure risk
• requirement of field-force promoting to physicians
• longer-gestation period and potential regulatory and IP roadblocks
• dilemma of striking a balance between investment in own pipeline, acquisitions of
compound/brand, field-force and attendant risks
However, once the branded business is established, a company typically enjoys
EBITDA margin of 30-40%, limited competition and longer product lifecycle versus
unbranded generics.
17
Branded business – Journey to success
Table 5: Stellar success in short span
Time Activity
Feb-04 For the first time, the US FDA approved generic versions of Suprax 400mg tablets & Suspension
100mg/5ml
Mar-04 Outsources field-force of 45 men from Ventiv Health, Inc to launch Suprax
Mar-05 Enters into agreement with Allergan for promotion of Zymar to paediatricians
Jan-05 Cornerstone BioPharma's primary care focused field-force to promote Suprax
Feb-06 Discontinues CSO of Ventiv Health and co-promotion with Cornerstone
Mar-06 Lupin to promote Chester Valley's Atopiclair cream to paediatricians
Apr-07 Launches line extension Suprax 200mg/5ml suspension
Jun-08 Ascend Therapeutic's 50-person female healthcare focused field-force to promote Suprax 400mg
tablets
Source: Industry, Company data and I-Sec Research
AllerNaze acquisition – First NDA to be launched in Q1FY11E

Background
Collegium Pharmaceuticals Inc (Collegium) had acquired Tri-Nasal (triamcinolone
acetonide), including its approved NDA and right to market the product, from Muro
Pharmaceutical, Inc. In ’02, Muro indefinitely removed the product from the market
following two Class III voluntary recalls – one for product leakage and the other for
low potency. Post acquisition, Collegium reformulated the product devoid of the two
recall issues and renamed it AllerNase; it filed a supplemental new drug application
(sNDA) with the US FDA in April ’08 and got the regulator’s final approval in January
’09.
Launch likely in Q1FY11E

For the first time, in June ’09, Lupin acquired worldwide rights for AllerNaze nasal
spray sNDA from Collegium for an undisclosed amount. The product is once-a-day
treatment for nasal symptoms related to seasonal & perennial allergic rhinitis in adults
and children (aged 12 years & older). AllerNaze’s target market is allergic rhinitis,
which is estimated at US$2.5bn in the US. Some key products in the market are
Nasonex (Schering), Nasacort (sanofi-aventis), Rhinocort Aqua (AstraZeneca) and
Veramyst (GSK). Lupin expects launching the product in Q1FY11E and subsequently
gaining healthy market share (3-5%) & revenues. The company will expand its field-
force (our estimate 30-50 persons) further taking the total to 150-180.
Antara brand acquisition – Intelligent move

Right fit at throwaway price
In a smart move, Lupin acquired brand Antara (fenofibrate) capsules from Oscient
Pharma in September ’09, for US$39mn and settled & resolved pending litigation
regarding the ANDA product with Oscient. Before the acquisition, on September 21,
’09, Lupin sold its ANDA for the product to Dr Reddy’s Laboratories. The product is
used as an adjunct treatment of hypercholesterolemia (high blood cholesterol) and
hyper-triglyceridemia (high triglycerides) in combination with diet, and generated
revenues of US$70mn in CY08, growing at 20% YoY. The acquisition is inexpensive
at price/sales of 0.55x compared with typical industry benchmark of 1.5-3x. This was
possible, given that Lupin acquired the brand under the US Bankruptcy Court-
mandated procedures.
18
Expect significant scale up
Antara enjoys powerful brand equity with primary-care physicians, which is a large
segment and not addressed by Lupin at present. The acquisition enables Lupin to
promote Suprax tablets and AllerNaze (from Q1FY11E) to new customer segments by
doubling field-force to 120 by March’10. Lupin launched the product under its label
and started booking sales the next day of signing the deal itself. We remain confident
about Lupin reaching 4-5% Rx share in the US$2-bn fenofibrate market within the
next two years. Given its high GPM (75-80%), Lupin will maintain the existing
arrangement of outsourcing manufacturing from the US. With Paddock being a para
IV filer for the product, Lupin is not at potential risk for at least two years, given
ongoing litigation. Besides, Lupin has protection through its sale of para IV ANDA to
Dr Reddy’s.
Key strategic pillars of US branded business

The main pillars of Lupin’s success in the branded business are shown in Chart 11.
Chart 11: Key success drivers of US branded business
AllerNaze, Antara
Acquisitions
Aerochamber, Atopiclair
Co-promotion
z Started with CSO

Innovative & focused promotion z Weekly field force tracking
z Build strong customer franchise
Converted this
opportunity into Suprax provides launch pad
US$70mn brand
19
Primer on Specialty business
Specialty (branded) pharma business has three distinct origins – drug delivery companies, acquisition/in-
licensing and generics. The common thread that runs through all three is marketing, via own field-force or
collaboration. Key to business success is balance of the high risk of investments in developing own pipeline
and/or acquiring compounds/brands vis-à-vis returns. Specialty pharma business has evolved into a viable &
profitable business model over the past 10-15 years (Table 6).
Table 6: Specialty landscape

Origin Specialty companies
Drug delivery Biovail
Elan
Alza
In-licensing King Pharma Market their own
acquisition Endo brands themselves or via
Medicis partners
Generics Mylan Forest Labs
Impax
Watson
Barr Labs#
Revenues….. Heavy on Generics Heavy on Specialty
# now part of Teva
How Specialty business differs from Generics

Structurally, Specialty pharma business requires higher investments and risk-taking capacity vis-à-vis
Generics. However, if executed properly, the Specialty business could generate higher margin and growth
with lower competition. Table 7 illustrates key positives and negatives of Specialty business.
Table 7: Specialty versus Generics

Speciality Generics
Positives Negatives Positives Negatives
• Stronger brand equity • Product development risk • Regular flow of products, • Heavy competition
resulting in customer loyalty (failures, delays) given patent expiries • High degree of pricing
and repeat Rx • Competition from big • Nil therapy focus requirement pressure
• Higher growth sustainability pharmas and other Specialty • Nil field-force requirement • Lower margin (GPM: 40-
& potential companies
• Lower R&D expenditure 60%) and lower revenue
• Higher margin business • Attack from generics visibility
• Para IV products provide
(GPM: 70-80%) companies, given lower level
higher margin • Litigation and regulatory risks
• Lower competition of innovation
• Longer lifecycle of products
Source: Industry, I-Sec Research
20
Case study: Success of Suprax
Genesis of the Suprax opportunity
Suprax (cefixime) is a third-generation Cephalosporin, indicated for the treatment of mild-to-moderate
infections, including uncomplicated urinary tract infection. The product was discovered by Fujisawa and
marketed by Wyeth. It was pulled out from the market after its patent expired in March ’03, given low sales
(estimated at ~US$60mn) and 300-man field-force, not being economically viable for Wyeth. Given strong
brand franchise enjoyed with paediatricians by Suprax, Lupin, on an exclusive basis, acquired trademark for
the same from Fujisawa, for which it pays small royalties. The US oral suspension anti-infective market is
estimated to be US$1-1.2bn, which is the target market for Suprax.
Paediatricians, the spot-on customer
Lupin was spot-on with targeting paediatricians as its customers, given that they number 50,000-60,000 in
the US, thereby making it a relatively low-competition market with potential total size of ~US$8bn. In fact, of
the total customers, Lupin focuses on only ~12,000, who are high-volume prescribers. Other key features of
the segment are:
• Niche market with large unmet needs

• Few dedicated companies in paediatrics
• Fastest growing Rx segment
Firm foundation
With no prior experience, Lupin followed some basic principles (adding value to customers, keeping costs
low, smart marketing) for business success in the US speciality business, which is considerably daunting.
Under the able leadership of Ms Vinita Gupta, CEO of Lupin Pharma Inc, wholly-owned subsidiary of Lupin,
the team, in ’04, chalked out a strategic blueprint of scaling-up the business and making it profitable in less
than three years, ahead of its target.
Parameters Initial years Ongoing

Low-cost operating model Optimal model
Outsourced field-force from Ventiv Owned field-force since Feb-06
Operating model
Virtual business model Strong infrastructure
Small team Experienced team
Leverage strong brand equity with customer base built by Wyeth Expanding customer base via more launches
Value to
Launching line-extensions In-licensing (Aerochamber)
customers/patients
More products (Zymar, Atopiclair) Acquisition of brands (Antara & AllerNaze)
Focused only on paediatricians Expand beyond paediatricians
Smart marketing
Lower, cost-driven selective marketing Aggressive brand building
Suprax provides launch pad for other brands

The success of Suprax led to Lupin launching other brands through in-licensing and acquisition. In fact, the
company entered into agreement with Allergan in ’04 for co-promotion of Zymar, followed by deal with
Chester Valley to promote the latter's Atopiclair cream to paediatricians. In FY09, the company achieved
revenues of US$74mn from the branded segment. The initial success is well-supported by in-licensing of
complementary brands (Aerochamber, and acquisition of brands (Antara and AllerNaze) that will help the
company scale-up the business to an impressive ~US$270mn by FY12E.
21
Value-accretive acquisition strategy
Six smart acquisitions since ’07
Lupin acquired six companies during FY08-09, with aim to: i) fill the geographic gap
on its global footprint ii) leverage its strong capabilities in product development,
manufacturing & marketing and iii) provide additional boost to the organic growth
engine.
Chart 12: Acquisitions to fill geographical gap
Rubamin Laboratories
Enables entry into CRAMs
Hormosan Pharma
To expand EU footprint
Kyowa Pharma
Industry size: US$65bn
World’s 2nd largest market.
Government reforms double to
Generic market to US$6.5bn by FY13
Germany Japan
US Multicare Pharma
Industry size: ~US$2.5bn,
Philippines
India Generics size: ~US$1bn
Opens gate to entire ASEAN market
Australia Generic Health

South Africa
Industry size: ~US$9bn, growing at
~7% pa
Generic size (~US$1bn) to increase as
Pharma dynamics many of the top selling drugs are
Industry size: ~US$2.5bn, growing at ~14% pa expected to go off-patent going
forward
Generics growing at ~22% – Presenting strong
opportunity
Strategic & inexpensive acquisitions

Lupin’s acquisitions are a result of a carefully planned strategy to plug gaps in its
geographic presence. Moreover, the acquisitions have taken place at inexpensive
valuations, at price/sales of ~1x. The Japanese acquisition is the largest as well as
critical to Lupin’s future growth.
Table 8: Acquisitions at a glance

Sales at time
Acquisition Price of acquisition Price/sales
Company Country time (Rs mn) (Rs mn) (x)
Rubamin India Sep-07 373 NA NA
Kyowa Japan Oct-07 2,482 2,703 0.9
Hormosan Germany Jul-08 311 340 0.9
Generic Health Australia Aug-08 205 NA NA
Pharma Dynamics South Africa Sep-08 901 708 1.3
Multicare Pharma Phillipines Mar-09 251 280 0.9
Total/average 4,522 4,031 1.1
22
In terms of post-acquisition strategies of stepping-up growth, Lupin may consider
moving products to India for manufacturing at lower cost, which would increase
overall margins.
Acquisitions likely to contribute ~18% to FY10E revenues

We believe the acquisitions will be the key driver for Lupin’s growth going forward.
Their contribution to Lupin’s revenues would increase from a meagre 5% of total
revenues to ~13% in FY09 (being the first full year of the biggest acquisitions i.e.,
Kyowa) and ~18% in FY10E.
Chart 13: Acquisitions to drive future growth

50,000
Sales ex-acquisitions Sales from acquisitions
45,000
6,919
40,000
35,000 4,971
30,000
(Rs mn)
25,000 1,315
20,000 - 38,949
32,788
15,000
25,749
10,000 20,137
5,000
0
FY07 FY08 FY09 FY10E
Maintains interest in acquisitions

The flurry of acquisitions has not reduced Lupin’s appetite to further strengthen its
global presence. On this front, the company may be looking at the Latin American
region, with key focus markets being Mexico, Brazil and Argentina. Given its
disciplined approach to acquisitions in the past, we remain positive on future
acquisitions by Lupin. With strong balance sheet (D/E of 0.5x for FY10E) and rising
free cashflow, the company is well placed to fund such acquisitions.
23
Rapid ramp-up of non-US business
The non-US international business comprises of over 70 countries with Japan, EU,
South Africa and CIS being the key markets contributing ~90% of the region’s total
revenues of Rs6.9bn, up 199% YoY in FY09. The stellar growth was powered by a
flurry of acquisitions aimed at filling the geographical gaps. Total estimated revenues
from acquired businesses was ~Rs5bn, contributing a whopping ~72% to the non-US
FY09 dosage-form revenues of Rs6.9bn. The region contributed 40% and 18% to
total exports and revenues of the company respectively in FY09. We estimate the
region to post revenue CAGR of 36% to Rs17.5bn in FY12E, powered by aggressive
new-product introductions and geographic expansion. Lupin is likely to do more
strategic acquisitions over the next three years, to fill geographic gaps and achieve
scale.
Chart 14: Non-US business boosted by acquisitions

20,000
Japan EU RoW
18,000
16,000 5,930
14,000
4,492
12,000
(Rs mn)
10,000 2,788
3,456
8,000 2,066
1,437 1,530
6,000
1,023
8,732
4,000 7,042
513 5,679
2,000 4,424
431 473
680 1,315
0
FY07 FY08 FY09 FY10 FY11 FY12
Japan – Entry via acquisition
Kyowa Pharma – A top-10 generics player

In October ’07, Lupin acquired 90.3% equity stake in Kyowa Pharmaceuticals of
Japan for Rs2.35bn, followed by 9.7% stake in FY09 for Rs135mn. Thus, Lupin paid
an aggregate Rs2.5bn for Rs4.4bn revenues in FY09, implying inexpensive
price/revenues of 0.56x for a generic market opportunity, which is at inflection point.
Kyowa is among the top-10 generics companies in the Japanese generics market,
which is valued at US$3-3.5bn. It boasts of a basket of ~200 products across CNS,
Cardiology, Gastroenterology and Respiratory segments. In CNS, the company
covers ~90% of psychiatry hospitals in Japan. Kyowa’s 75-person experienced field-
force helps the company market its products. Lupin had a working relationship with
Kyowa for about two years before acquiring it.
Japanese generics to double by FY13

Japan’s pharmaceuticals market is the second-largest in the world (after the US), at
~US$65bn. However, unlike its developed peers, Japan’s generics market is much
smaller, at ~15% of total Rx in Japan versus ~55% each for the US and UK. In terms
24
of value, the Japanese generics market, which is valued at US$3-3.5bn, is ~5% of the
total Japanese pharma market. This is set to change dramatically, given government-
mandated structural changes, effected April ’06, that allow for generic substitution.
The government aims to almost double Rx market share of generics to 30% of the
total by FY13. The Japanese generics pharma market is peculiar, given two key entry
barriers for new players that are:
• different specifications, dosage forms and strengths, even for blockbuster drugs of
the US/EU and
• virtual monopoly of local companies
At present, Kyowa is ranked #7 and, with the backing of Lupin, is well poised to
benefit immensely from this huge opportunity over the next five years.
Beating market growth and improving margins

In FY09, Kyowa reported strong 23% YoY surge in revenues to ¥9.6bn or Rs4.4bn,
surpassing industry growth of 15%, powered by new products (mainly Amlopdipine
and Risperidone that enjoy market leadership), experienced field-force and deep
reach of distribution network. More importantly, under its management, Lupin has
achieved remarkable turnaround with PAT of ¥776mn in FY09 versus loss of ¥14mn a
year ago. Lupin has chalked a detailed plan for further improving margin at Kyowa
through:
• changing source of API to lower-cost suppliers

• future filings based on captive APIs
• applying for site variations for dosage form of key products
• achieving cost efficiencies across segments
• focusing on marketing & distribution initiatives
Based on these initiatives, our quick estimates suggest pay-back period of almost
three years for Kyowa acquisition.
25
Strong domestic business
Consistent market-beating growth
With 30% of Lupin’s total revenues, its domestic dosage-form business has been the
key growth & success element in the past. During FY06-09, with CAGR of ~23%, the
division has out-stripped industry CAGR of ~12% on the back of:
• smart new product selection and aggressive launches (54 in FY09)
• aggressive marketing, beating even the best in the business (e.g., asthma is
Cipla’s stronghold, where Lupin’s Rx share has risen to 16% from almost nil)
• entry into new therapy areas with robust product basket (e.g., asthma, diabetes,
female healthcare)
• focused in-licensing strategy with 12 launches during FY06-09
• disciplined and productive field-force of ~3,000
Table 9: Smartly outpaces market growth rate
Therapeutic Market growth rate (%) Lupin’s growth rate (%) Lupin’s revenues (%)
CVS 13.2 25.5 19
Anti-TB (5.9) 5.6 14
Anti-Asthma 13.1 48.8 10
Anti infective 9.8 22.1 14
GI 8.2 30.4 7
CNS 10.4 48.7 6
Anti-diabetic 16.7 53.0 6
Source: Company data
Transformation to lifestyle therapies

Lupin was a renowned, TB-drugs-focused pharma major in India. After establishing its
global leadership in TB drugs, Lupin added focus on Cephalosporins and became one
of the largest global players for the same. The two segments contributed as much as
55% of total dosage-form revenues in FY05. With changing lifestyle, Indians are
increasingly suffering from lifestyle therapies such as cardiology, diabetes, psychiatry
& neurology and asthma. Not only do these segments grow faster than other mature
segments such as anti-infectives and cough & cold, but also offer higher-margin and
sustainable Rx generation potential. Consequently, Lupin aggressively pursued this
transformation and achieved huge success, with lifestyle segments contributing 41%
compared with only 18% in FY05. On the other hand, the two older and slower-growth
segments reduced contribution to almost half, from 55% in FY05 to 28% in FY09.
26
Chart 15: Improving therapy mix
Others Anti-TB Others

24% 14% 27%
Anti-TB
Cephalosporins 32%
14%
Anti-diabetic
Anti-diabetic
3%
6%
Gastrology Anti-asthma
CNS 2%
7%
6%
Cardiology
Anti-asthma Cardiology Cephalosporins
13%
10% 19% 23%
2009 2005
41% Lifestyle drugs 18%
35% Non-lifestyle drugs 56%
New product launches & in-licensing

New product launches remain the lifeline and key growth driver for any pharma
company. Lupin is no different; in fact, it launched as many as 54 new products in
FY09 alone. The new products (launched during/post FY05) contributed ~18% of total
domestic dosage-form revenues in FY09, which is impressive. To complement the in-
house pipeline as well as mitigate the impact of IPR, the company has introduced 12
new in-licensed products since the initiative three years ago. The first successful IPR-
recognised (which cannot be reverse engineered) product is Merck & Co’s anti-
diabetic drug Januvia. The drug has clocked-in estimated annual revenues of Rs500-
600mn, given that it is the first drug in its class DPP IV and reasonably priced from
India’s perspective, at Rs40 per tablet. We estimate IPR-recognised products to
capture 10-12% of total market by ’15.
Fastest growing among top-5

We believe this transformation has been critical for the company as the Indian market
has itself changed, from therapy segments to fast-growing lifestyle-based. Thus,
domestic revenues have continued to post CAGR of ~23% through FY06-09. Lupin,
ranked #5 in the Indian prescription market, is the fastest growing among the top-5.
Six of its products rank among the top-300 products in the Indian pharma industry.
27
Chart 16: Domestic dosage-form revenues
FY05 4,940
FY06 6,064
CAGR: ~23%
FY07 7,530
FY08 9,496
FY09 11,412
FY10E 13,552 CAGR: ~18%
FY11E 15,991
FY12E 18,790
0 5,000 10,000 15,000 20,000 25,000

(Rs mn)
28
Profitable API business

Backbone of business
Having started as an API company, Lupin has maintained focus on the segment as it
gives the company strong competitive edge through backward integration. We
estimate that 70-75% of its dosage-form business is based on in-house manufacture
of API. In FY09, the company’s API & intermediates divisions clocked-in total
revenues of Rs7.6bn, with as much as 76% from international territories. This reflects
the company’s strong chemistry skill-set, smart product selection, world-class
infrastructure (nine plants are US FDA-approved) and regulatory capabilities. The
company enjoys leadership position in Cephalosporins (46% of total), anti-TB (16%)
and Cardiology (3%).
Leadership focus & strong product basket

In addition to strong focus on product selection, Lupin focuses on creating global
leadership position through scale, efficient process and strong customer relationship.
As regards the six APIs/intermediates (Table 10), Lupin is the largest manufacturer
globally. Besides, the company boasts of one of the largest DMF pipelines (Annexure
1) in the world, with 88 approved by the US FDA and ~95 EDMF for the EU market.
Table 10: Global leadership

Product Therapeutic segment Global rank
Ethambutol Anti-TB 1
Rifampicin Anti-TB 1
Pyrazinamide Anti-TB 1
7 ACCA Cephalosporin – Intermediate 1
7 ADCA Cephalosporin – Intermediate 1
Lisinopril Cardiovascular 1
Amongst the most profitable

The API business is a commodity business in nature, with almost no pricing power
and high volatility. Despite this, Lupin’s careful focus on product selection, ability to
achieve global scale and lower-cost of production has enabled it to achieve RoCE of
~30% compared with 23% (FY10E) for the whole company and 11% & 19% for pure
API companies such as Dishman and Divi’s respectively.
29
Strong IPR capability
Background
One of the key ingredients of Lupin’s success has been sharp focus on innovation.
About a decade ago, Lupin set up a world-class drug discovery centre called Lupin
Research Park, across 19 acres. The centre is on the outskirts of Pune, Maharashtra,
and boasts of 550 scientists, of which ~100 are dedicated to NCE research. Lupin
aimed at developing a proprietary & differentiated product pipeline for both, generics
as well as patented markets across the world. Further, its R&D capability helps the
company mitigate the impact of the IPR regime in India and move up the value chain
from a long-term perspective. The company spent Rs2.3bn (up 40% YoY) on R&D in
FY09 that amounts to ~7% of revenues. We estimate that almost one-sixth of total
R&D expenditure (i.e., Rs400-450mn) is on NCE research.
Lucrative monetisation of generics R&D

Powered by smart product selection backed by innovation, Lupin has been
substantially successful in commercialising generics research. With first product
launch (Cefuroxime Axetil) in July ’03 followed by launches of Ceftriaxone, Perindopril
and Ramipril, Lupin is likely to have registered an estimated ~US$75mn cumulatively
from generics R&D, the highest among Indian peers. Bulk of this was contributed by
Lupin’s strong IPR for Perindopril, which it sold to the innovator of the drug – Servier –
for Rs2.2bn or €40mn during FY07-08.
Drug discovery research
NCE research – High risk, high return…

NCE research is at the highest-end of the risk & return scale in the pharma business.
The activity involves discovering and developing a safe & effective medicine for an
unmet medical need, which typically takes 10-12 years with considerably low hit rate
of 1:1,000 compounds that are screened at the outset in R&D laboratory.
…highly lucrative, if executed properly

Despite significant risk of failure, if a pharma company executes a well-planned
strategy, NCE research can be considerably rewarding. There are four key pillars for
success in NCE research (Chart 17). In addition, it is critical that the top management
(including promoters) has the right mindset for innovation, backed by commitment and
resources.
30
Chart 17: Key success drivers for R&D
Understanding
of innovation
– Extremely good
– Target-based approach
– More focus on biology
versus chemistry
Careful selection
of therapy areas Mitigate risks
– Room for innovation & – Quick decision-
making
IPR creation Success – Build back-up
– Attractive licensing
opportunity in R&D compounds
– Work on targets where – Invest more at pre-
development clinical stage
challenges are
manageable
Building & retaining

strong team
– Attracting best talent
from India & outside
– High operating
freedom
– High incentives and
training & conferences
– Cutting-edge
infrastructure
Building robust NCE pipeline

Lupin has built a decent NCE pipeline since inception, focused on migraine, psoriasis
and TB.
Table 11: NCE pipeline

Code NCE pipeline Preclinical Phase I Phase II Phase III
LL 2011 Nati-migraine, Herbal (Amigra)
LLL 3348 Anti-psoriasis, Herbal (Desoris)
LL 4218 Anti-psoriasis (Desoside-P)
LL 3858 Anti-TB (Sudoterb)
Type-2 diabetes
Rheumatoid arthritis
31
Slow start…
Despite having commenced drug discovery research (DDR) since a decade, Lupin
has not tasted much success on the NCE front, mainly owing to:
• wrong selection of compounds
• infrastructure not cutting-edge from a global perspective
• people-related issues (attrition at senior level)
…but revamping and sharpening focus

Lupin has taken key initiatives to completely revamp NCE research. All past errors are
being addressed and world-class, cutting-edge infrastructure is being built, which is
likely to be fully ready in Q4FY10E. The key strategic change would be to become a
fast-follower, similar to Glenmark, the most successful Indian pharma company in
NCE research. Besides, revamp also involves identifying and selecting new targets &
therapy areas such as rheumatoid arthritis and diabetes. With biotech facility up &
running since FY09, the company is banking on exploiting the biogenerics opportunity
(seven proteins in pipeline) and carrying out new biological entity (NBE) research. To
spearhead its revamp effort, Lupin appointed Dr Rajender Kamboj as President, NCE
Research, in June ’08. Dr Kamboj, PhD from University of Adelaide, Australia, has
~25 years of experience in DDR & Development. Prior to joining Lupin, he was
working with two Canadian companies viz., Xenon Pharma (five years as VP, DDR)
and Allelix (12 years as CSO). Given this, we believe the first NCE deal is at least
three years away.
NDDS kicks-off with first deal

Key focus areas
For NDDS research, Lupin has selected segments, which are:
• Oral Controlled Release Systems (OCRS)

• Invasive and non-invasive Systems
• Solubilisation/Bioavailability Enchancing Technologies
• Pulmonary Drug Delivery Systems
• Taste Masking Technologies
Five ER products in advanced stage
With respect to OCRS, Lupin has differentiated itself by expanding spectrum to bio-
adhesive and gastro-retentive technologies. The company has already built a robust
pipeline of five ER products, including Rifaxan.
First NDDS deal yields US$5mn

In October ’09, Lupin out-licensed its proprietary bio-adhesive technology-based
Rifaxan to be applied to Salix Pharma’s Xifaxan (rifaximin). Lupin received US$5mn
upfront milestone and is entitled to additional success-based milestone in addition to
royalties that, we estimate, could range over 5-10% of revenues. Lupin will have
exclusive right to supply Rifaximin API. Salix Pharma has in-licensed the technology
to extend life of the product, which has annual revenues of ~US$80mn.
32
Financial analysis
Strong growth in past five years
Over the past five years (FY04-09), Lupin increased revenues and net profit ~3x and
~4x times. This translates into CAGR of 32% and 54%, respectively. This scale-up
was attained on the back of strong growth in the US business, value-accretive
acquisitions and market-beating growth in domestic branded business. The company
achieved ~6 percentage point (pps) expansion in each, EBITDA margin and PAT
margin, during FY05-09. We estimate strong CAGR of 23% through FY09-12E in
topline and bottomline respectively.
Chart 18: Rapidly scaling up

FY04-09 FY09-12E
45,000 Sales PAT 80,000 Sales PAT

40,000 70,000
35,000
60,000
30,000
50,000
(Rs mn)
(Rs mn)
25,000
40,000
20,000
30,000
15,000
10,000 20,000
5,000 10,000
0 0
Rising free cashflow

Lupin is amongst the most prudent allocators of capital in its peer-set, as reflected in
free cash generation and RoCE. Since FY06, despite heavy investment in capex and
acquisitions, Lupin is likely to generate cumulative FCF of Rs1.5bn by end-FY10E and
Rs.15bn by FY12E. This implies nil equity dilution till FY12, which is a key positive.
Improving RoCE and RoNW, despite FCCB

Lupin raised US$100mn via an FCCB issue in January ’06, which was ~27% of
expanded capital employed in FY06. Despite this large addition, Lupin’s RoNW has
expanded 13pps since FY05 to 39% and RoCE improved 3pps to 21% in FY09. With
almost certain conversion of remaining US$72.5mn of FCCBs (as of April ’09), given
high stock price (versus conversion price of Rs567/share), Lupin’s net worth will be
boosted Rs3.1bn, thereby pressuring RoNW, which will decline 9pps to 30% in
FY12E. However, RoCE will expand 3pps on the back of improving EBITDA margin
(130bps) and improved assets turnover (~0.3x).
33
Chart 19: RoCE and RoNW
FY05-09 FY09-12E
45 RoCE RoNW 45 RoCE RoNW
40 40
35 35
30 30
25 25
(%)
(%)
20 20
15 15
10 10
5 5
0 0
34
Key financials
Table 12: Revenue mix – growth momentum to continue
(Rs mn)
% chg % chg % chg % chg CAGR (%)
FY08 FY09 (YoY) FY10E (YoY) FY11E (YoY) FY12E (YoY) (FY09-12E)
Dosage form 19,002 30,190 59 40,421 34 51,261 27 63,513 24 28
Domestic 9,496 11,412 20 13,552 19 15,991 18 18,790 18 18
Exports 9,506 18,778 98 26,869 43 35,270 31 44,724 27 34
US 7,205 11,894 65 16,204 36 21,670 34 27,273 26 32
Generics 5,605 8,683 55 10,107 16 12,000 19 15,000 25 20
Branded 1,600 3,211 101 6,097 90 9,671 59 12,274 27 56
Japan 1,315 4,424 236 5,679 28 7,042 24 8,732 24 25
EU 513 1,023 99 1,530 50 2,066 35 2,788 35 40
RoW 473 1,437 204 3,456 140 4,492 30 5,930 32 60
API 8,062 7,569 (6) 7,093 (6) 7,362 4 7,686 4 1
Domestic 2,942 1,804 (39) 1,443 (20) 1,486 3 1,516 2 (6)
Exports 5,120 5,765 13 5,650 (2) 5,876 4 6,170 5 2
Total product sales 27,064 37,759 40 47,514 26 58,624 23 71,199 21 24
R&D income 1,127 0 0 0 0
Total Operating Revenues 27,730 37,759 36 47,514 25.8 58,624 23.4 71,199 21.5 24
Chart 20: Enriching revenue mix

US Branded US Generics India Branded Japan generics RoW Generics API
100%
15% 13% 11%
20%
30% 12%
80% 10% 11%
7%
12% 12%
4% 12% 12%
5%
60%
27% 26%
30% 29%
35%
40%
20% 21%
21%
20% 21%
23%
13% 16% 17%

6% 9%
0%
FY08 FY09 FY10E FY11E FY12E
35
Annexure 1: US product pipeline
Chart 21: Aggressive build-up
100 DMF filings ANDA filings 90
90 85
80 74
70 62
60
No. of filings 60 51
50 46
40 36
31
30
18
20 14
10 5
0
FY04 FY05 FY06 FY07 FY08 FY09
Table 13: List of DMF filings (as of Sep-09)

Sr. No Submission date Products
1 2/8/1989 7 ADCA
2 1/9/1995 Rifamycin-S
3 8/2/1996 7 ACCA
4 4/30/1998 Rifampin
5 4/30/1998 Cefaclor
6 4/30/1998 Cefotaxime Sodium (Sterile)
7 9/1/1998 Cephalexin
8 3/9/2000 Cefuroxime Axetil
9 10/18/2000 Lisinopril
10 3/26/2002 Ceftriaxone Sodium
11 5/20/2002 Cefixime
12 8/21/2002 Cefuroxime Axetil (Amorphous)
13 9/12/2003 Benazepril Hydrochloride
14 3/24/2004 Cephalexin
15 3/31/2004 Lovastatin
16 4/27/2004 Lovastatin
17 8/31/2004 Trandolapril
18 9/24/2004 Cefdinir
19 9/29/2004 Cefprozil
20 9/30/2004 7 APCA Intermediate
21 9/30/2004 Lovastatin Technical
22 12/27/2004 Simvastatin
23 12/29/2004 Perindopril Tert-Butylamine
24 12/31/2004 Ramipril (Process B)
25 12/31/2004 Quinapril Hydrochloride
26 2/4/2005 Ziprasidone Hydrochloride
27 3/22/2005 Ramipril
28 3/29/2005 Sertraline Hydrochloride
29 3/29/2005 Lansoprazole
30 3/31/2005 Venlafaxine Hydrochloride
31 6/10/2005 Zolpidem Tartrate
32 10/5/2005 Amlodipine Besilate
33 12/27/2005 Desloratadine
34 12/30/2005 Levetiracetam
35 12/31/2005 Escitalopram Oxalate
36 2/28/2006 Carvedilol
37 2/28/2006 Pantoprazole Sodium Sesquihydrate
38 3/16/2006 Risperidone
36
Sr. No Submission date Products
39 3/20/2006 Losartan Potassium (Amorphous)
40 3/21/2006 Cefadroxil
41 3/27/2006 Alendronate Sodium
42 3/27/2006 Valsartan
43 3/30/2006 Topiramate
44 3/31/2006 Tolterodine Tartrate
45 3/31/2006 Azithromycin Monohydrate
46 6/30/2006 Bicalutamide
47 6/30/2006 Pioglitazone Hydrochloride
48 8/18/2006 Benazepril Hydrochloride (Process B)
49 10/5/2006 Lamotrigine (Micronised)
50 10/20/2006 Rifabutin
51 10/25/2006 Rabeprazole Sodium
52 1/19/2007 Irbesartan
53 2/9/2007 Sterile Cefepime Hydrochloride (Buffered)
54 2/12/2007 Sterile Cefepime Hydrochloride
55 3/30/2007 Ethambutol Hydrochloride
56 3/30/2007 Memantine Hydrochloride
57 3/31/2007 Rifaximin
58 4/13/2007 Esomeprazole Magnesium Dihydrate
59 4/16/2007 Valacyclovir Hydrochloride
60 1/3/2008 Glipizide
61 1/10/2008 Lamivudine
62 3/11/2008 Imipramine Hydrochloride
63 3/24/2008 Nabumetone (Micronised)
64 3/28/2008 Mesalamine
65 3/28/2008 Imipramine Pamoate
66 3/28/2008 Mesalamine
67 3/31/2008 Sevelamer Hydrochloride
68 3/31/2008 Omeprazole
69 3/31/2008 Fluvastatin Sodium (Micronised)
70 3/31/2008 Carvedilol Phosphate (Amorphous)
71 3/31/2008 Quetiapine Fumarate
72 3/31/2008 Omeprazole Magnesium
73 4/8/2008 Duloxetine Hydrochloride
74 4/18/2008 Fenofibrate
75 9/10/2008 Fenofibrate-SLS Mixture
76 12/9/2008 Sevelamer Carbonate
77 12/9/2008 Eszopiclone
78 12/9/2008 Rifamycin O
79 12/17/2008 Pregabalin
80 2/25/2009 Norethindrone
81 3/13/2009 Ethinyl Estradiol
82 3/26/2009 Norethindrone Acetate
83 3/31/2009 Levonorgestrel
84 4/15/2009 Norgestimate
85 4/15/2009 Atorvastatin
86 8/3/2009 Levofloxacin Hemihydrate
87 9/18/2009 Emtricitabine
88 9/30/2009 Choline Fenofibrate
Source: US FDA website
37
Annexure 2: Consolidated financials

Table 14: Profit and Loss statement
(Rs mn, year ending March 31)
Gross Sales 27,730 38,238 48,005 59,203 71,880
Less: Excise Duty 666 479 491 580 681
Net Sales 27,064 37,759 47,514 58,624 71,199
Domestic 12,438 13,216 13,552 15,991 18,790
exports 14,626 24,543 33,962 42,632 52,409
Other Operating Income 1,645 908 1,129 1,136 1,358
Total Operating Income 28,708 38,666 48,643 59,759 72,557
Less:
Raw Materials incl Inventory adjust 11,638 16,043 20,431 25,091 30,046
Power and Fuel 1,129 1,391 1,806 2,345 2,848

Personnel Expenses 3,076 4,871 5,602 6,442 7,473
Selling and Distribution Expenses 2,364 3,545 4,704 5,980 7,618
Other Expenses 2,197 2,355 2,637 2,954 3,471
Research & development expenses 1,657 2,318 3,088 3,928 4,984
Repaires and maintenance 333 456 618 821 997
Total Operating Expenses 22,394 30,979 38,886 47,560 57,437
EBITDA 6,315 7,687 9,757 12,199 15,120

EBITDA margin (%) 17.3 18.0 18.2 18.9 19.3
Depreciation & Amortisation 647 880 1,046 1,398 1,636

Other Income 420 46 118 158 260
EBIT 6,087 6,854 8,828 10,960 13,744
Less: Gross Interest 374 499 554 838 689
Recurring Pre-tax Income 5,714 6,355 8,274 10,121 13,055
Less: Extra ordinary expenses 312 295 0 0 0

Minority Interest 2 29 128 160 192
Share of Loss in Associates 0 33 70 77 85
Less: Taxation 1,318 983 1,407 1,822 2,872
--Current Tax 1,137 877 1,257 1,642 2,632
--Deferred Tax 181 106 150 180 240
--tax for earlier years 0
Net Income (Reported) 4,083 5,015 6,669 8,062 9,906
Growth (%) 32 23 33 21 23
Recurring Net Income 4,394 5,310 6,669 8,062 9,906
38
Table 15: Balance sheet
Current Assets, Loans & Advances
Cash & Bank balance 2,742 778 2,492 3,837 6,578
Inventory 7,893 9,572 12,035 14,573 17,287
Sundry Debtors 7,439 10,349 12,757 15,571 18,709
Loans and Advances 2,367 2,780 3,288 4,055 4,923
Total Current Assets 20,441 23,478 30,572 38,037 47,497
Current Liabilities & Provisions
Current Liabilities 6,019 11,504 14,382 18,373 22,817
Sundry Creditors 4,366 7,007 8,523 11,076 13,690
Other Current Liabilities 1,653 4,497 5,860 7,297 9,127
Provisions 1,451 1,827 2,557 3,258 3,934
Total Current Liabilities and Provisions 7,470 13,331 16,939 21,630 26,752
Net Current Assets 12,971 10,147 13,632 16,407 20,745
Investments
Strategic & Group Investments 37 0 0 0 0
Other Marketable Investments 21 216 300 400 1000
Total Investments 58 216 300 400 1,000
Goodwill 1,872 3,174 3,174 3,174 3,174
Fixed Assets
Gross Block 14,859 18,200 23,040 26,873 30,548
Less Accumulated Depreciation 4,698 6,188 7,234 8,632 10,269
Net Block 10,161 12,012 15,805 18,241 20,279
Add: Capital Work in Progress 964 2,240 1,733 1,400 1,225

Less: Revaluation Reserve - - - - -
Total Fixed Assets 11,125 14,252 17,539 19,641 21,504
Total Assets 26,027 27,788 34,645 39,622 46,424
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings
Short Term Debt 6,494 6,901 8,901 7,401 5,901
Long Term Debt 5,535 5,332 1,332 1,000 1,000
Total Borrowings 12,029 12,233 10,233 8,401 6,901
Deferred Tax Liability 1,107 1,164 1,314 1,494 1,734
Share Capital
Paid up Equity Share Capital 821 828 885 885 885
No. of Shares outstanding (mn) 82.1 82.8 88.5 88.5 88.5
Face Value per share (Rs) 10 10 10 10 10
Minority Interest 95 143 271 431 624
Reserves & Surplus 11,976 13,420 21,942 28,410 36,280

Share Premium 1,361 1,731 4,911 4,911 4,911
General & Other Reserve 10,615 11,689 17,030 23,499 31,368
Net Worth 12,797 14,248 22,827 29,295 37,165
Total Liabilities & Shareholders' Equity 26,027 27,788 34,645 39,622 46,424
39
Table 16: Cashflow statement
Cash Flow from Operating Activities
Reported Net Income 4,083 5,015 6,669 8,062 9,906
Add:
Depreciation & Amortisation 2,315 1,491 1,046 1,398 1,636
Provisions
Deferred Taxes 81 58 150 180 240
Less:
Other Income 420 46 118 158 260
Net Extra-ordinary income (312) (295) 0 0 0
Op. Cash Flow before Working Capital change (a) 6,370 6,812 7,748 9,481 11,522
Changes in Working Capital

(Increase) / Decrease in Inventories (3,595) (1,678) (2,463) (2,539) (2,713)
(Increase) / Decrease in Sundry Debtors (3,401) (2,910) (2,409) (2,814) (3,137)
(Increase) / Decrease in Operational Loans & Adv. 81 (413) (508) (767) (868)
Increase / (Decrease) in Sundry Creditors 1,269 2,641 1,516 2,553 2,615
Increase / (Decrease) in Other Current Liabilities 1,979 3,221 2,092 2,138 2,507
Working Capital Inflow / (Outflow) (b) (3,667) 860 (1,772) (1,429) (1,598)
Net Cash flow from Operating Activities (a) + (b) 2,704 7,673 5,976 8,053 9,924
Cash Flow from Capital commitments

Purchase of Fixed Assets 5,469 4,617 4,333 3,500 3,500
Purchase of Investments 1,903 1,459 84 100 600
Consideration paid for acquisition of undertaking
Cash Inflow/(outflow) from capital commitments (c) (7,372) (6,076) (4,417) (3,600) (4,100)
Free Cash flow after capital commitments (4,668) 1,596 1,559 4,453 5,824
(a) + (b) + (c) (2,766) 3,055 1,643 4,553 6,424
1,883 12,860
Cash Flow from Investing Activities
Other Income 420 46 118 158 260
Net Cash flow from Investing Activities (d) 420 46 118 158 260
Cash Flow from Financing Activities

Issue of Share Capital during the year 17 7 57 0 0
Proceeds from fresh borrowings 3,381 204 (2,000) (1,832) (1,500)
Repayment of Borrowings
Increase in Minority Interest 95 48 128 160 192
Dividend paid including tax (967) (1,211) (1,328) (1,594) (2,036)
Reserve Adjustments 931 (2,360) 3,180 (0) 0
Net Cash flow from Financing Activities (e) 3,457 (3,312) 37 (3,265) (3,344)
Net Extra-ordinary Income (f) (312) (295) 0 0 0
Total Increase / (Decrease) in Cash (1,103) (1,964) 1,714 1,346 2,741

(a) + (b) + (c ) + (d)+ (e) + (f)
Opening Cash and Bank balance 3,845 2,742 778 2,492 3,837
Closing Cash and Bank balance 2,742 778 2,492 3,837 6,578
Increase/(Decrease) in Cash and Bank balance (1,103) (1,964) 1,714 1,346 2,741
40
Table 17: Key ratios
(Year ending March 31)
Per Share Data (Rs)
Recurring Earning per share (EPS) 49.6 60.0 75.3 91.1 111.9
Diluted Recurring EPS (DEPS) 49.1 59.3 74.5 90.1 110.7
Recurring Cash Earnings per share (CEPS) 56.9 69.9 87.2 106.9 130.4
Free Cashflow per share (FCPS-post capex) (37.4) 21.4 4.9 35.2 52.5
Reported Book Value (BV) 144.5 160.9 257.8 330.9 419.8
Adjusted Book Value (ABV) ** 144.5 160.9 257.8 330.9 419.8
Dividend per share 10.9 13.7 15.0 18.0 23.0
Valuation Ratios (x)

Diluted Price Earning Ratio 27.4 22.7 18.1 14.9 12.2
Price to Recurring Cash Earnings per share 23.9 19.5 15.6 12.7 10.4
Price to Book Value 9.4 8.5 5.3 4.1 3.2
EV / EBITDA 20.6 17.2 13.1 10.3 8.0
EV / Total Operating Income 4.5 3.4 2.6 2.1 1.7
EV / Net Operating Free Cash Flow (Post-Capex) (46.9) 43.2 78.0 27.5 18.8
Dividend Yield (%) 0.8 1.0 1.1 1.3 1.7
Growth Ratios (% YoY)

Diluted Recurring EPS Growth 38.5 20.8 25.6 20.9 22.9
Diluted Recurring CEPS Growth 38.5 22.8 24.7 22.6 22.0
Total Operating Income Growth 33.5 34.7 25.8 22.9 21.4
EBITDA Growth 43.4 21.7 26.9 25.0 23.9
Recurring Net Income Growth 38.5 20.8 25.6 20.9 22.9
Operating Ratios (%)

EBITDA Margins 22.0 19.9 20.1 20.4 20.8
EBIT Margins 21.2 17.7 18.1 18.3 18.9
Recurring Pre-tax Income Margins 19.6 16.4 17.0 16.9 17.9
Recurring Net Income Margins 15.3 13.7 13.7 13.5 13.7
Raw Material Consumed / Sales 43.0 42.5 43.0 42.8 42.2
SGA Expenses / Sales 15.9 15.3 15.1 14.9 15.3
R&D /sales 6.1 6.1 6.5 6.7 7.0
Other Income / Pre-tax Income 7.3 0.7 1.4 1.6 2.0
Other Operating Income / EBITDA 26.0 11.8 11.6 9.3 9.0
Effective Tax Rate 23.1 15.5 17.0 18.0 22.0
Return / Profitability Ratios (%)

Return on Capital Employed (RoCE)-Overall 21.1 21.3 22.8 23.6 24.3
Return on Invested Capital (RoIC) 33.4 30.6 33.0 35.9 40.0
Return on Net Worth (RoNW) 40.8 39.3 36.0 30.9 29.8
Dividend Payout Ratio 23.7 24.1 19.9 19.8 20.6
Solvency Ratios / Liquidity Ratios (%)

Debt Equity Ratio (D/E) 102.6 94.0 50.6 33.8 23.2
Long Term Debt / Total Debt 50.6 48.5 22.9 25.2 31.7
Net Working Capital / Total Assets 39.3 33.7 32.2 31.7 30.5
Interest Coverage Ratio-based on EBIT 16.3 13.7 15.9 13.1 20.0
Debt Servicing Capacity Ratio (DSCR) 0.5 0.6 0.9 1.3 2.0
Current Ratio 1.3 1.0 1.1 1.2 1.3
Cash and cash equivalents / Total Assets 10.5 2.8 7.2 9.7 14.2
41
Annexure 3: Index of Tables and Charts

Tables
Table 1: Fair value pegged at Rs2,015/share.......................................................................8
Table 2: Comparative valuations ..........................................................................................8
Table 3: Revenue per ANDA – Lupin leads pack ...............................................................14
Table 4: Key ANDA pipeline ...............................................................................................15
Table 5: Stellar success in short span ................................................................................18
Table 6: Specialty landscape ..............................................................................................20
Table 7: Specialty versus Generics ....................................................................................20
Table 8: Acquisitions at a glance ........................................................................................22
Table 9: Smartly outpaces market growth rate ...................................................................26
Table 10: Global leadership ................................................................................................29
Table 11: NCE pipeline .......................................................................................................31
Table 12: Revenue mix – growth momentum to continue ..................................................35
Table 13: List of DMF filings (as of Sep-09) .......................................................................36
Table 14: Profit and Loss statement ...................................................................................38
Table 15: Balance sheet .....................................................................................................39
Table 16: Cashflow statement ............................................................................................40
Table 17: Key ratios ............................................................................................................41
Charts
Chart 1: One-year forward P/E bands ..................................................................................6
Chart 2: Lupin beats stock indices (FY01-09).......................................................................7
Chart 3: Key historic milestones ...........................................................................................9
Chart 4: Improving revenue mix..........................................................................................10
Chart 5: Phases of rapid growth .........................................................................................11
Chart 6: Aspirational goal – Revenues of US$3bn .............................................................11
Chart 7: Most powerful growth engine ................................................................................12
Chart 8: Unique US business model...................................................................................13
Chart 9: Unique strategy for US generics ...........................................................................14
Chart 10: Suprax – Brand portfolio .....................................................................................17
Chart 11: Key success drivers of US branded business ....................................................19
Chart 12: Acquisitions to fill geographical gap....................................................................22
Chart 13: Acquisitions to drive future growth ......................................................................23
Chart 14: Non-US business boosted by acquisitions .........................................................24
Chart 15: Improving therapy mix.........................................................................................27
Chart 16: Domestic dosage-form revenues ........................................................................28
Chart 17: Key success drivers for R&D ..............................................................................31
Chart 18: Rapidly scaling up ...............................................................................................33
Chart 19: RoCE and RoNW ................................................................................................34
Chart 20: Enriching revenue mix.........................................................................................35
Chart 21: Aggressive build-up.............................................................................................36
42
I-Sec investment ratings (all ratings relative to Sensex over next 12 months)
BUY: +10% outperformance; HOLD: -10% to +10% relative performance; SELL: +10% underperformance
ANALYST CERTIFICATION
We /I, Rajesh Vora, Grad. CWA, CFA analysts and the authors of this report, hereby certify that all of the views expressed in this research report accurately reflect
our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly
related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person
of the ICICI Securities Inc.
Disclosures:
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43
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Equity Research

November 30, 2009

f Initiate with BUY and 18-month fair value of Rs2,015. Buoyed by

Please refer to important disclosures at the end of this report

Investment summary .......................................................................................................4

US generics business at inflection

Lucrative monetisation of IPR

Initiate coverage with BUY; fair value of Rs2,015

EU inquiry on patent settlements

IPR impact on local market

Potential genericisation risk to Suprax

Promoters have pledged 10% stake

Chart 1: One-year forward P/E bands

Note: Figures in brackets denote CAGR

18-month fair value pegged at Rs2,015/share

Table 2: Comparative valuations

Metamorphosis of business model

1968 - 1980 1968 - Commenced business

1980 – Commissioned a formulations

1980s 1987 – Cephalexin plant (Mandideep) and

1989 – JV in Thailand – Lupin Chemicals

1993-94 – IPO of Rs622mn; 33% dilution

’01 – Lupin Laboratories and Lupin Chemicals

’04 – Launches its first branded drug Suprax

’00s ’06 – Maiden issue of (FCCB) aggregating

’07 – Acquired Kyowa Pharma, Japan to enter

Source: Company data, I-Sec Research

Enriching revenue mix

Chart 4: Improving revenue mix

FY06 FY09 FY12E

API Dosage - Domestic Dosage (Non US Exports) US Branded US Generics

Source: Company data, I-Sec Research

Source: Company data, I-Sec Research

Aspirational goal FY14 – Revenue of US$3bn

Chart 6: Aspirational goal – Revenues of US$3bn

Source: Company data, I-Sec Research

Unique US business model

Chart 7: Most powerful growth engine

700 Generics Branded

Source: Company data, I-Sec Research

Prudent and unique strategy

z 9th largest and fastest-growing z Continue growing Suprax

z 22 products in the market with 9 z In-licensing brands

z Monetisation of key ANDAs – z In-house pipeline of

Source: Company data, I-Sec Research

Table 3: Revenue per ANDA – Lupin leads pack

Source: Company data, I-Sec Research

Strong, differentiated ANDA pipeline

Table 4: Key ANDA pipeline

Strong growth to continue

Negative impact offset by other factors

Management expects resolution by end-FY10

Chart 10: Suprax – Brand portfolio

Source: Company website

Success despite daunting nature of business

AllerNaze acquisition – First NDA to be launched in Q1FY11E

Launch likely in Q1FY11E

Antara brand acquisition – Intelligent move

Key strategic pillars of US branded business

Chart 11: Key success drivers of US branded business

z Started with CSO

Source: Company data, I-Sec Research

Table 6: Specialty landscape

Lupin Initiating Coverage Nov'091

Lupin Initiating Coverage Nov'091