Wind of Change - US Opportunity Dips India & EMs Shine - Pharma Thematic

Pharmaceuticals | Thematic | India Research
Institutional Equities
Wind of changeUS opportunity dips;India & EMs shine

Souvik Chatterjee (vteco o18 s crsd e + 20 o aeia .m 29 u t @ n ) 27 i e mic 9 7 k j h nn il 20 Mitesh Shah (e a co o mhnic ih sd e tp m n s @a .m s h i n ) il
October 3, 2011
Pharmaceuticals | Thematic | India Research Wind of change - US opportunity dips; India and EMs shine Institutional Equities
Contents
Executive Summary
Uitt e pt Sr r e i n g ai s io e t vd u n a s g e c c n p
4 pe ip1se nt n 8 iax o 2i bne %p pt -ite g e d te s 1 h io d r o ny2 ; t g f nt r 0 4 i n h ? Sottp x p i t vi i a p o r e a te o n er e e nnyr y t s g t i pt m e r t u Ui ao e e mstm Sr r b v p r rrr n g m e o l a e oi e n k c l e e o uy i s e c t t m ag u a m ; n e p H px otf Uu %1 ir e p t i r S c p 3 srt e ro t e: c i n td 0 F o a t b o oe o y s cu m e n r ~ s e 4t Y Sy jb srx o 5 c o r k dp t a f o b urs r m u g p1 c a ce e i t l ot r i y2 0
3
1 0
1 0 1 1 1 2 1 3 1 4
Emerging markets to drive long term growth

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16
1 6 1 8 2 0 2 2 2 5 2 7
Valuations
2 9
Key risks
33
Company Section
Sa u t U um LN n a a. P Pc l d ) hes( r t i c S D ' ao dD r d o s( ) .e L rt R R biL R d re D y a s t . Lt P u. C p() id n L L CD a H d ) iC l a (
34
3 5 4 7 6 2 7 6
Executive Summary
We expect a significant change in business strategy of large cap Indian generic pharmaceutical companies as we forecast US attractiveness is likely to get reduced post the patent cliff dips off. The Indian generic drug makers should now shift focus to the domestic and Pharma-emerging markets which provides exciting growth opportunities. We believe the next phase of valuation of the Indian pharmaceutical companies will be driven by the Pharma-emerging markets opportunities, robust product pipeline and strong domestic growth. We initiate coverage on DRRD IN (Out-performer), LPC IN (Out-performer) and CDH IN (Out-performer); we upgrade our rating on SUNP IN from Market-performer to Out-performer.
Except ~48% drop in patent expiry post 2014 in the US: The golden era of patent expiry opportunity
(USD71bn) is likely to come to end post 2015, however we expect 2013 to be the beginning of the end on the back of a ~74% drop in patent expiry opportunity. We see a sharp drop of ~85% in the patent expiry opportunity for the generic players in the US over 2016-20 (USD10.7bn) from USD71bn over 2011-15.
Generic growth to slow down post 2015: Generic market in the US over the past 10 years suggests that as
the level of penetration increased there has been sharp drop in the growth rate for generic pharma market. The high growth during 2000-05 was mainly attributed to the lower penetration of generics coupled with expiry of blockbuster drugs during 2002-06. We expect CAGR 7% for generic pharma market in the US as against 12% in the previous decade.
US becoming a pure volume play: Generic penetration in the US is at its peak (80-85%) and we estimate stiff
erosion of generic drug prices owing to sharp increase in competition thus resulting in lower margins. We anticipate slower generic prescription sales growth in the US, at CAGR of 9% over 2010-20 vs. 12% over 200009, putting pressure on the margins of the generic drug manufacturers.
Exhibit-1: Global pharmaceutical market CAGR of 7% over 2010-14E

1 ,0 2 0 1 ,0 0 6 9 9 0 1 ,0 0 0 U S D b n 7 8 1 8 0 0 6 0 0 4 0 0 2 0 0 0 2 0 0 2 8 0 0 0 92 1 2 0 0 E 1 2 1 0 E 1 2 2 0 E 1 3 0 E2 1 4 E To r o ra t l k a de l Wt M Ga r R ot w t e h
Source: IMS, Industry
1 ,0 1 1 4 0 % 9 % 8 % 7 % 6 % 5 % ( % ) 4 % 3 % 2 % 1 % 0 % 9 2 0
8 7 5 8 0 8
Pharma-emerging markets to account for ~40% of global healthcare revenue by 2015
Wt h m rto1( R 0ar U e a p-e mg a %o 1 dc 2 ete ag k rt5 A r0 taD s e a r a oa- Cv - n h 0 t hm g t i m r ei ne w 7 ) 2 s 1G e 1o S5 e 0 2TaiAe r ri r eg y1e 0 5h- i ( Ch asj d o ~ %0 t 0e P P a e e o tr b A f At m n sc . ia c ) la kp h c t e o b- o 1o c t w 5 2 1 v 3 r 1 5 U nb 3ol la e u rI , i J , sn Sbrn4h h r e eraana D ot~ % o la n pn n R d 5 n g 0e e r e ed , p s 6 t i 0f g 0 i cu t bt e . a h vW i h a i c f e C au , a B t aam ri rfwt i r s j h eme g o n a hr m g tt so pt z e p- r a no t o e i l m ag k m h u a o r ei ne s r pi. r s
INDIA: T i c e u i i nii n eIcsy d hn e c d s h l t tiI i ikl e i m p h c c s t /t ll e r n v lw i s oe e r e ll o t er a i i om eIe e a ne h I i i t nr -I s o
5 i e r ny . e a I n a e a i u 0 n c e b5 rt nh ao ac t % a ed 2 f s da r m r h i s la i e t s n0 o t ip m i i se h p g 1 eh W e c ar k n mt t t r t nr n a g t o t0 e m a u d g un nr r f %5 pdfrr nr eeg n w ~i 1 x ei s e i e ha u te 12 ec i n cnt ir ce a h l o n6 d l l . W cr ti a s g s e a t t l u I o t h w S- bg e 2c g g mi s i v 1 ni sv 5 ta rg a t t e 5 b vo 1 ana e a . h D0 n e ir o r 0 e e r n U2 i 0 nt d 0 e dd d l i np u nc i i if i l c e
JAPAN: J hl e uog pv e ee g o aaapi f aea 0 g s ~ f l p t r ood o oy ) rt 2o a h s l n e l b a r e 2t ne t a ode e r en % s gp t l p ( 6 api s n t a
pia 2e reuwn 0epi J oob t e i na ict ~ f t ooa p n0 s c pi l cf 5h p . p u d5 nz p l ny h a t 0 i t ooa o oo u a o i l n or% t t l u t aln l a t n c tp . on Pa eh e o 1 2 o u s ~ f eGh r iixd c b0y r y 7 i t D la c pt a % , s r e e 5sr o t w n n% i l d t e n c heee5 0 t e h sc r t hy m 2l d y e seu po rt ~nt sta rbdg r g a u l h % er ge i vb d ed J a t eniar e h e r d. n s nn s 1 l m n nu irn c s s 0 u c a rG c ia c f o a v e a u i n g m hruu r e ta er u r U5 a r ed nr e t J e e s eS b ro n gf e xhn i do Dn kt e m s p pg i t a 1 e e ir at . t f g c a We s c r c 0 c u e c a e nt h n y 1 b aG a r e h r f eni at s y t R ni hpfw I g m e 2a 9 d ee s orn n nr 0C1 t v x e t t d e u r 1A % 5 2ot t o h d n a g o i e h ar f c a . c u
CHINA: Ci G i) S t dafbi t tel e h h ( n Dap o i s b c r iw nl U n u 1po sd t na o o~ n l n nee o s a D a t P m f 6 pi . 5 oo4 t . s dh a o e n g
pca e e a e e g a n 0 eu he m wrU kp F b .edr a u a t oe Sa anc 1 r g r t rn rt m a l khd hv nn ay G r e i c t i lft o iJ de 5 i s r t a r 2n c a t aneea u dGdct 6 Do h b t h he i s e r ct 3 2f e o h s r t n. n uo ~Un b e C pca t e gu % bh c o i em u k f n a l i c r r s n y i c a o ( 9t S ) e t pca ei poeR l1 o r u an e r r 1 0 the m s c e C % . am r d t la t a l k ee gA t 4 i c t a xdi t s Gi t 5 l 2
RUSSIA: Rpcaks e b Ds 0 ixd u he m tt t u . n 2 d e o s a u as a a S a 1 s c s r t i a m r e d t 8 o0 ee na l e i i c t m o 6 n a pt i a U b n t
r U b aRhtart a u ea S eSn 5 2e r a p r ts ot 1 aD 2C % n p a a ad u 3 c 2 0A . c y e pc l no 0 h b 1GT 2 y t 1 oh c he p bD us a m i i c f U w eoh t R ( 2 gge g p l h vw t o a S) g t n r o o i i e en f m 0 e r d o ta c h n t h o U ss eo w t f s l r a a nD i a 0 t u i n m u t e s h i n pcas R he i t u a u dn . r t ni s m u a l i c r s y i a
LATIN AMERICA: Tnca ua a ta rg tr e h A pc l r ms o a ch e m r tm of s imo L eh i a r t i i a m k n t we s n aa e g e n s s e c t i s ht e g rat k
w odl rawf t s n imr ee o h iu eg arae L emp rtg i m r ge theA a x l lu v a r i t e , e a r d h a t o d rt t t . Ai d k n s en i n f e i nc k e r i a e c nt i s t d tpC1o1 n m sor h ua od R 22 . e avgf e aa e e a o % 0 o j r ot t a tm xt a A - v -O nG 1r 1 f f 0 e 5 t or r o r i r 0 hr e d fw pc l k i e h h m e c t s i t lv n efs rataee e i n s n r t p et ec h rt rc t s n g e p f o se e f i sve a o s d ri a s la h t i . i o e s ut n co cr e e ant m ep o c es t o p z h r i c
Exhibit-2: Pharma-emerging market to dominate growth

3 0 % 2 5 % 2 0 % 1 5 % 1 0 % 5 % 0 % C h i n u aR s s I i a n B d r i a a z i l
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Source: Glenmark, SMC Inst. Research
Exhibit-3: Snapshot of world pharmaceuticals market

D r is v e r GDP Growth (%) (2012) Healthcare spending as % of GDP Total Pharma market by 2015 (USD bn) Generic penetration (Sales) Ia n d i 8 . 0 % 8 . 0 % 2 0 N A J a p a n 3 . 0 % 8 . 5 % 1 0 2 6 % C h i n a 9 . 0 % 8 . 0 % 8 0 N A G eCa o n ih v t hs e oa r fn n m ileN md pt E ee L mD n (i lslu NEa a s D t oer nn g a t i See eg md iu - l ra t Regulatory environment m p Hu air r ti kh e c iya t w e gg. h ld lee rt c l cm o es n h tm r a o n i LdL n ia Rt l s Na t E i ) nD a (o N Ea be s liun s Rs t e er nm t i e m D )ra ritg n u o td g ee L u s la t r ch e ul l s r o tt t c re a u e pcas he iu aud r tn m a l t i c r y ac r d n t ig d t sr t h u oe u i g n c o s t . Hu iya gg. h ld lee rt See eg md iu ra l t H uU iyaS gg. F h ld A lee D rt t otif h l ho e a tr nu do a r y g a ac e p.a n pH e r t r o h i c v l W ps a l re xavh mot a n i e w d rod i f0 g8 h a t 1s y ei te xi or ct ti lv h u s yf s t g f. ei ne er r il c R u s s i a 4 . 5 % 5 . 5 % 2 2 4 0 % L a t A M 4 . 0 % 7 . 5 % 5 5 8 0 % U S 2 . 0 % 1 7 . 0 % 4 8 0 2 0 %
2 op 2to % pe o u fa l t l a t He u s g t e i dc o m d .c e Ie ma ar n s d e n a6sn b yu o et v ai e r g 0p pe rr eo s n s u Ge o n v t e ' r s n m H ee. u sm g t a e i n dc d od m G el s o nit v ti o e p r o n c me N :ax em p a P i r te t e e r r ny t o nr p iw pto oy r t u t h U b5 Sn1 Dy i 82 00 b n t sal c ef au r P as mI n o Ve r h . Fmp a :a h r L a t r r e g m r e a s t mhp a i rtt rh ce k y io e e t ; ge v gd e r nu eg r s i c
Opportunities
L an a rIe r kr ge a e t s m e .c ra p eeh g hm ue a lt a t r L an i a rIe r kr n ge a e t s m e .c ha n er d a e .o l sL t pw he c ih i s ni ss cc e rd oe na aih ng d e r a i s l nh m pI ane r dc k rt e o t a tP cii so h ss i r d ps o e re na v c e d g pt e ei n nn e e r to i r c a ph re ou vg i e d ae wt as r o e n s r wte i sa fi glt o h t r ti r g h pt l a n u oy c gr . et on pi u a ve n rn dn G t o e m on pi pt oy r . t u p si rer ou vp i e d o r cn p oiao mdd p ni a e re s v g fr e ag nv eo r i i cn g r o w t h go n r pi o pt w ty t o. hu r ptl oo l se i h c p i e ih i s ni s cc e rd oe na g. r o w t h
Pn re e ist cs e i e v m a r k e t . Challenges Ge o n v t e r n m dr . rp ui gn s g i c Ln a. ee r s r n s iw g as e c e s M dd ol t r ri o e ea in s n w c
Lu fa am l r bo g ec e r no l p a iu l rn n al w yo h e g s t Roky ei l c gn lt u ar l s a a ci t R rl i eoa gys udn l e a y t raatt ee k c g m u a n c a a an u r rr lde e nsn r t tu s dp ae psg t a n r r d ae y pa i r l w o oh v l t ps es re n ot d vr o i e u d m c tn ott w mo p n e e i i o fiet on r ts e r. ga n n L XC N PY D A C,R ,BL R ,H D DN R P R ,N DG , S P U GRP N, N PS ,R D D U s trn uoe b fu j te e q c t ce h a n g s Ge o n v t e s r n m pi p. rt o o ls ts i e c c m i e
Hp a ic tn g e l h i o ot n m g i o w rra ic o e tt a w h tc . u pr t hi M0 on r r 9c e % t h p a i e e aa rnp of t st e i en or t e. x p i r y
iriih bd nt n tn t eo e r d v e n ar nu dg es
Indian presence
A l l Rm ii e so e e ll ne c v
Al ls m o t a l
Lma a ep t r h i i nc r An a am mxd as c r ee k pt e eo t i t Ged o nio v t n e f g r uf n n m e aR x tG pC 1 a A0 n o d f Wd o e t ii u vip t i h nf e p o w g s p xp i a p oi te o n e i pt nyr e tr t s u ihes a nSraa t g p en c Ui e e c s p ta e oht s ro s eh i b t l e t g g on e r fi no Ia ew r t n i c h d p cn h oi am r p me aa s .
c d ii own u ir pts l h e e cii s h ss rd oe na c e
SMC Comment
Dt t 1a g 2r 5 n g R ao u nt s i r s m i a p i s a n t EJ t i xa d p ar e nv Ube c o t p e S ni 1 r0 e 2 2 .n %1 o -O v 1 e 5 0 ll l 5 iy d k e% ea t 0 o s npe uim t b l r n m ho sa o t t i v o a i uw o ais a t e m r tgt khg e t w r e h f mr t ea h pf e h ns xe t o t jdo h re e r f o v r ha iie r s ae el nc t h t a ha h ntr e e e n a ts h i ol c pls o .u tas eR n i t i a n g fe r or o re wn t g h i c g fh r o or we t t h sib5 p yE e F n Y d 1 n g . iau dt pcak n c ioh he m frrlu r t we s e b t u l l e a u as r t r m a l e i c t i atr n nr a u s g f a h c v u pcak he m a ua r t r m a l e i c t s Wh me i ea fc e ot rt e s pcl ri hem au k r i a z eeeSn m e a t a t s e xd c 2 ptaD eo U cr t h2 b Iar nh da ip n a C1 r1 m A2 F G% 1 Ro 9v - e Y ia gm sove nl en t o t i nr s an b5 rtG ( c tDb y . e a Rf u S n 2 fcA r rU ) 0 oC 1 e W s or 8 y m e . n6 b ma aot r m 1 k ii e n 5 t t a n see t t do eu t p fs p f o p r 1 oe3 2 C % 8v n e 0 A. -% e a 1 G 2r x r 0t t s 5R e h y a 2 t 1 iun tra sen ct u r a nl ie c n at c co r e a s s s e tu 8 2 o Un1 th 0 0 oS b5 c b . Dy g td r ro oe w f tn h ha i er t a es l f t o hr c ~i 0 12 6 1 %5 t . l l cs in t . i z e
Source: Company, SMC Inst. Research
Sun Pharmaceuticals (SUNP IN)
Out-performer
TP: INR557
S a Une as r p s ems. ev u mi e ms a p i pcae e n aP o or e- l r h a la b P( ) hS s f r N o h gve an a u c le t s el c y t he p t g i g ae r t i c W i e S it o d e ie ot ntc pt t S g U itg c l we n t al p in .r N s p p l a m h tf o i e o P s r t i l b o o e o nht , t r oi n w nu e h p bt e l i z e i e p f ry U n t u S n diu ps o oir nr s s w l c o bs i s rv ni l e . e e d n mno ut len oo e p aa e s rep a t t p W r t h s i t c ev p s d t oi e a a t l a o t i n e o ud n u c n tinr( IdIe k U wg e sa e a e k r t I i t e N try di r p w t I i c hog s i p m n a i ari ) y P h g e te s n et e S r t I s t s o an mk t to m eh t e ce t . W b St v a lp io 1 e 2nb o e e U a rb o fSnF 3we e le o a e o n~0r - ale f k i e N e k pt U o 1 d ot y vP hm t a r y Dv 1 i e t u b Y E l n h bie e tf o . ea t al p i ni f P i pt e s fr h c r y i co t f e on n t u
Wn em rm ee c d o Out-performer r m f a egR o 1 W e e n s as o v 1 e c n oi r C 2 r - . o d rt m a e gn t i oc ni A 3 F 3 n G% f e 1 Y E e S oti eh s s nhe aWs x U a tai ck m e s r e a n pN i i s e a e e t o m f s g e Pn l r r y t c t t m a d n s o e s di k o t ps g i n m e rto t c t . e r c di o cuit a i sag 2 A r0 o g tn e hb ( r ry ( RY . m t o , lg s n T o2 GF 3 e wt h e u e ) w Cv s t c hi r o en ee np bs x t b%o1 s o o . 5 ) e 1 E
W P Feg R dg fi c t o n e S t Yrs 2 a N t ot p i o v U2 E aN l u a 1n I 4 d P e p pt f e 2 3i o .ad V de x a f nNnn o 8 i l i m i m oe i o ri nt s u I 2 e t t e 5 lg nsf f t M N r t arf 5 ia t p 1 h R r o e o 8ne io r e 1 i u pI t vr o a r i N p p l d% C a g c R yo u 9 i m ta e i o P m .
Financial Summary
Particulars Rsm e ( n v I ) e N nR u e R g( e r % v o) e w n t u h e E(m BN I I n TR D ) A ER P S () I N R o E ( % ) P E ( x ) FY10 4 0 ,5 0 7 () 5 . 8 1 3 ,2 6 3 1 3 . 0 1 8 . 2 3 6 . 0 FY11 5 7 ,4 2 1 4 2 . 8 1 9 ,0 7 0 1 7 . 5 2 3 . 0 2 6 . 7 FY12E 8 8 ,1 6 1 5 4 . 9 2 7 ,2 5 8 2 7 . 0 3 0 . 1 1 7 . 1 FY13E 9 7 ,8 3 9 9 . 9 3 0 ,2 9 6 3 0 . 5 2 6 . 0 1 5 . 1
Source: SMC Inst. Research
Dr Reddy's Laboratory Ltd. (DRRD IN)
Out-performer
TP: INR1,864
D ' aR e rp tnepcaeo a r d ( D oos enihe s dt d .e L ) n t i i I g a u ae s R b i d Do u c h y R s s f p ndn r t p t ty o k i ae m r c a l c i c u e i s I nsr , rUedn u l iu n o I no g s S s eg c i ng b a dm ttg s acp p c a e r i di o o bs x r t e lnm a ae w t c h nu ni o i nd u f V i n i t d p e i r p o nt S pi i e ptn . oe U ri h t s u
Ws i Rb ef d cg F t yd t S e p w 'oiioulnTr c a h a rd Rul p s d F o at e r e t Dt noiu e p i ns U e s h s s e c it o ndi i m eD r p p rt n h pt ie u n. WR o ~b vo 1 g T iih cg ec D eUon r4 hF ne ln e D m S f ev tuF e t Sd x R n Dru Fh i p e t t ot i z 3e e n e Y e r t p n iu os i e U i p l n ga d gx A Gay. r, e n r i g nZ c o de t r o , p a
W v o tr m et e n c mOut-performer f a3n GF ii c g e e e no i e a t oo d t a r h cn e s k i n g oi 6i C e1 rt % sR 1 e g a Ar c s neg o r n v Y 1h oar i e sa A o1 xo m 3e fr g hdi rC % 1 p i a E bi eg nm e R e - ; a no o an nc c t k s o t o m 1r 1 n t j i w n t h t kG v e c t ( 5F 3 s o Y ei ) n r p-e m nn t Sp as h m rawse hv i . a r a nl c h e en r m g td ui U d r ag k e h ei ne s a n t lr n e o i eg
W R x En N nn o 0 a t ii e D 2 3i o 1 a N R s fhl v R 0 eg R d g f 3 h a D F as 9 d P l u a Yr f e t 1n I .ad V 8 i I pr e n N ee p r o p r e e o n a t t t e 1 p p lsf f t M p i tr o e o, 5ne p 2 h pto aarf 8 lg n io r e o e i u pI 6 ia t d % C ri r t s vr u e r i Ni y o u 4 g c Rm ta e i o P m .
Financial Summary
Particulars Rsm e ( n v I ) e N nR u e G% r( o) w t h E (m BN I I n TR D ) A ER P S () I N R o E ( % ) P E ( x ) FY10 7 0 ,7 2 7 1 . 2 2 ,8 0 0 () 6 . 7 () 2 . 6 N A FY11 7 4 ,3 6 9 6 . 3 1 2 ,9 6 2 4 9 . 5 1 8 . 3 3 2 . 3 FY12E 8 6 ,4 1 2 1 5 . 3 1 6 ,2 9 0 6 9 . 6 2 0 . 4 2 1 . 6 FY13E 9 7 ,1 2 9 1 3 . 0 2 2 ,9 4 3 9 1 . 8 2 1 . 2 1 6 . 2
Lupin (LPC IN)
Out-performer
TP: INR 580
L P o or ena e h n a aeh u Cf ms n i p s e pc la C p) i n o h as ddl r I ( ne gva- p i nhe s. Le t s eI m y t da u c a t g i i can i ar t p m i c L P s t f elo g dan ar t p i s lr d r r i fm u pagf u l r ab d a df b bu t i r o i a t i e e n t r e lrl o ed l n w aa s o s m e ia nk y n g t t m yh e a o e s zb e n poa akC % s s . ecdi r tt o i Saa y 1 o bse t o f u o r nd bbR diu We s m t f U p e A i mn xh t o l i nndG n t i J c 9 e ce s p m ln e t e c a oi o dtg w R e1oa y a n i )it r u ti C %1 ry d opsy a ifr w A o -s l c K a b e i v e h G v 1 gk wa irt n e r t u o h 1 r 4 bby s a m a 9F t Y n e ( J u ds g tg C % oeG r r R e a1 i s A t 5
Lr d l net S u ~ f t Uuee P nr t bs e ctr% t S e xd Cdm s iha s 4i o r s pt ' af u u n (oo o ae ) e o s e a i b oi on s U n 5sl v i c f t e sc n t c u ee titao p s r )d lt ot oto h h hc e d l a s i e p n m g w u n ul z o i c t t e t r r i b rt o t e h r t e am m o w h n w ( N l f o Ae c ne de m i i o n on pi. pt oe ri t s u
Wn e m r e e d c o Out-performer o t f aeg oo1 W m n c c asR v 1 e L t o s r C 2r - . v P h oi n G% 1 a C e rt s eg k ni A3F 3 l n f e Y E u e aFeg R a t t t eR p p lsf t Yrs 2 ra a rf 5 lg n io 2 3n 0E x a o 9 r o e o 8 ia t p 2 1 i f .o n I 2vu p I 0n e N t i er r i N you 2 g c i m tad % i e f tM rh oC m e P .
Financial Summary
Particulars Rsm e ( n v I ) e N nR u e G% r( o) w t h E(m BN I I n TR D ) A ER P S () I N R o E ( % ) P E ( x ) FY10 4 8 ,8 7 0 2 6 . 0 9 ,9 8 3 1 5 . 3 3 4 . 1 3 1 . 3 FY11 5 8 ,0 3 2 1 9 . 7 1 1 ,1 9 1 1 9 . 3 2 9 . 5 2 4 . 8 FY12E 6 9 ,6 5 8 1 9 . 3 1 5 ,9 4 3 2 4 . 7 2 9 . 4 1 9 . 4 FY13E 8 2 ,0 8 4 1 9 . 0 1 8 ,2 1 4 2 9 . 2 2 7 . 2 1 6 . 4
Cadila Healthcare (CDH IN)
Out-performer
TP: INR 912
C e r H r eno eim h n a a a a e ) u r oa t md tnhe d la i l t ( i re u n e ia e pc l a h D p de g r H Cof c r c s e r tm hg - i I e nc g p da u n i ar t m i c s m us gf e aam r ea e p i b orml dh e m f s s r a n st o o o d ag k o C p c le f t i d e p- r a e y es ac i n e a xv nm g t rt p r ei n e eD t . W H c x o C 2 r1 e t o bs H t ite l rs A7 F 4 p diuo wa o e n G%1nc mnCld n oeg R o -a e a v 1 xh s s f t e Y dt e t i e c e Dd o v a s i l r ac t r i t h l n a g a e A o1 r o bs yg r tvl r n a R e1 t mn b s m r o d s 1r -f e s s l il h u e w rt t f h c G v 1 diu e s i oC % 7F 4 Yo e i h t ce s df pl n t af a t oi oc i a w 1r t p iAo s e t G v ar h 5t t i C% R e eo hd . e d
Waonh s wr ma i hl i t e cab o f t i p-e m twh e J te f a ggm g e ed h x p p n ot s r e t ee t o h e n ag r n o t e a r ei nk t s r w G e cd tde h r t bC p i s a o n e f o eig c s e D n s e v t r e r t s e eW H b t e 'n r s af e h n i s o u r a c ev ' au o m er t c i nh . la t o les i e J s b an e l t g w 4r1 om i A o1 n r tGv - . g o h 0F 4 e w Re 1 r t C% h Y E
W v o tr m et e n c mOut-performer a e g g oo ii c g e e e no i e a t oo d t a r h cn e s k i n g n ae sR v d s a C 1r f t r A6 oi n G% r ni c n f e F 3 a HYrs R a t t t e 9 Y . e C 0E g 4 r o e o 1 1 W aFe o5r u pI 2 1 vD 1 l E u t e 23n x a f . o aarf 1i I 6e r i N n N ti vr g cR .
Financial Summary
Particulars Rsm e ( n v I ) e N nR u e G% r( o) w t h E (m BN I I n TR D ) A ER P S () I N R O E ( % ) P E ( x ) FY10 3 6 ,8 8 6 2 5 . 9 8 ,6 0 8 2 4 . 6 3 5 . 3 3 0 . 8 FY11 4 6 ,2 3 0 2 5 . 6 1 0 ,2 2 6 3 4 . 7 3 7 . 4 2 1 . 9 FY12E 5 5 ,3 5 7 2 0 . 0 1 1 ,9 0 7 3 7 . 3 3 1 . 1 2 0 . 3 FY13E 6 6 ,0 2 8 1 9 . 3 1 3 ,1 3 3 4 5 . 6 3 0 . 2 1 6 . 6
Exhibit-4: FY11 Geogrophical breakup of Indian companies

60% 50% 40% 40% 30% 21% 20% 10% 0% 35% 23% 38% 32% 41% 53%
Dr reddy
Cadila Domestic US
Sun
Lupin
S: m Inst. Research oo, u p r c a e n Cy SMC
Exhibit-5: Company Snapshot

Parameter Rating Target price (Upside %) Recent developments SUNP Out-performer INR558 (21%) DRRD Out-performer INR1,864 (26%) LPC Out-performer INR585 (22%) CDH Out-performer INR912 (20%)
1 e ta 1 ()d 1cg E )e d t R c i vev) zF D)u UR en t e P E R L or 1) USFDA warning letter to i f P i e a R a flm r nD n t h a U a vo t p so M s o Mexican unit for S p l r t a ur ati F p f s Dr Ao a e t l eiv en t te r ( k z f e e the g x R d ir) ee D, rP P 2 e L .2 e U no) li ) e a v , c i v it e p o R d1 O i manufacturing violation. c i v Sm a 3 t n 0 h , U a vo pohoMa e Zydus Cadila acquires S p l r rtui r a ge 2) F p f aa n i 2 e g n Dr Ao a p lc t ) r o ag v l L p k r t t i n m e gtEt8 o iih ) i Sio S Ul w (r tnS t a f C rr o R 1 ts x a a i 0 v )t . wn r German company, Bremer h A ne a t a U ho 3 f N d k xi D A s p s i i . Pharma GmbH. 3) Zydus a e ct R l rts d Pn y te v m l y R l a t r t he ag i r i ns u D g a oi l s se r u i c np p rn. e iS tg aU i n l i plans to buy US drug cos for USD60 mn E sG3 asG3 rsG2rsR o a C f %n R6n A 3 i C 3r r n A 2r C f % g R %g o v i n R g o E nA i g o E Cf a i n o E A2 a n G% n f e o1 v1 e r 1 F3 Y o1 v1 e r 1 F3 Y o1 v1 e r 1 F3 Y F3 Y 1 1 1 3 6 % 1 % 2 1 % 3 1 %
Financial forecasts Share Price Outperform Vs HC Sector (1yr) Positive catalysts
1 s ea1 h d x o o s B n ui ) b ms L oa 1 s eaa d s l Rdi l ) n o i oo s u s e a f p ) b mse ZC t t c u Fa c nu r n Rdi l y u s e r t t c ay a dd a g.)o di hw do )u nn t t a r 2g c tU 1 g. L o j ho n o Sp w nu t t rt h r o n S 8 r 2c e a s e i 0 w n wn e e t h a t a f o d uw y h h i s p pe t U ev) r n p s p pa cJ i i i h t xi 2e Ou rer e l o p n S c yA t e l n e ol t u s i. g e m rt eC c o t o hc a i d oi v a u d m sn t i t cl o g w mt g t i 3 V n a eh r i u t f o wo a e i d p ne iz t n tj s o r r npn I t a i e i e h c F o h oa ) a t n i Fs l i l e dt c J t o h . t nr i u a e o n ) r i ee k tre eg p i 3o na a pt 6 t t p r o. ry T t u a o J s e odei h et am n . p h rs o un vg n i a p g t ii reta n or r n vo c i w d h t o on pi pt o. ry t u tS h e U .
Negative catalysts
M n tySr aa L t es D i l r ig t e c p c t 1 g ne o h p Sw e o ha r i l ui a n n a ) w d 1e n c F a t t n l o s )w x U r owh t h r r a e t An nt g e p. rs e v a i l p pet gi e si h x uo r rr hw Cs e in f igs i e tt bs c e n r n un M nr i ns u oh i h O nt e e c i a t Gm e t Sw p nrit e a )c h L a c u n i r mtR e o n m iv n a k e U e e at g o n . r2 t e n . 2t x ) r h t f e a c o. u l a t p a t A rs. ee n hr r t pf c e Ni o i r dr e o i m n l a li l z a e e n e a d t m3 oi a m r e s c k) e t . Ua lr Sweo F r tt Di t An n e g D ep R xl Ri a Da t ' sc n M n

S: dCy Inst. Research o n, m u uo , r s c t e r p I y a n SMC
Exhibit-6: Global peer comparison

Mkt Cap (USD bn) (USD bn) Company Indian front-line generics S u n * D' ry R* e d d s C i p l a R a n b a x y L P C * EV (USD bn) FY 11 EBITDA (USD mn) EBITDA CAGR EV/EBITDA EPS EPS CAGR PE
FY 12
FY 13
FY 11
FY 12
1 8 x 1 6 x 1 5 x 1 0 x 1 4 x 15x 15x 1 6 x 1 2 x 6 x 7 x 9x 10x 1 4 x 1 3 x 9 x 6 x 11x 10x 7 x 7 x 7 x 6 x 3 x 7x 6x N/A 9 x 7 x 9 x 6 x 8x 8x
FY 13
1 6 x 1 2 x 1 3 x 1 2 x 1 2 x 12x 13x 1 3 x 1 0 x 5 x N A 10x 10x 1 1 x 1 0 x 8 x 5 x 9x 9x 7 x 7 x 7 x 5 x 3 x 7x 6x N/A 8 x 7 x 8 x 5 x 7x 7x 6 x 5 x 4 x N A 5x 5x 5 x 6 x 6 x 6x 6x 1 0 x 1 4 x 9 x 4 x N A 10x 10x 5 x 7 x 9 x 6 x N A N A 7 x 1 0 x 5 x 9 x 6 x 7x 7x
FY 11
0 . 4 1 . 1 0 . 3 0 . 6 0 . 4
FY 12
FY 13
FY 11
FY 12
FY 13
1 0 1 . 7 0 . 04 3 7 5 . 8 8 6 1 4 . 6 3 1 1 . 72 %8 x 5 . 2 6 2 . 6 8 0 3 . 7 7 4 5 9 . 6 8 3 2 . 63 %1 x 5 . 0 5 3 . 9 0 0 3 . 3 4 4 0 0 . 8 3 6 1 . 81 %8 x 4 . 4 5 3 . 9 4 1 4 . 2 6 3 6 8 . 4 7 7 1 . 3 %4 x 4 . 4 4 2 . 4 6 4 3 . 7 4 4 3 0 . 1 3 3 8 . 22 %x Median 21% 18x Mean 20% 16x 3 . 6 1 . 8 0 . 8 0 . 4 3 . 8 2 . 2 1 . 8 1 . 0 2 2 8 2 . 0 4 2 5 9 . 5 4 4 9 . 31 %x 1 3 1 1 . 6 9 2 3 3 . 8 8 5 1 . 83 %6 x 2 0 9 2 . 9 0 2 5 4 . 5 4 8 . 6 %7 x 9 9 1 . 4 1 1 9 5 . 3 6 5 8 . 12 %x Median 19% 9x Mean 20 10x 9 7 1 . 9 3 1 7 7 . 8 2 3 2 . 73 %0 x 1 3 9 1 . 9 2 1 8 5 . 2 9 7 1 . 6 %1 x 1 4 6 1 . 7 5 1 2 8 . 8 3 2 1 . 31 %0 x 3 4 . 6 4 6 . 15 4 2 9 . 8 6 x % Median 19% 10x Mean 19% 12x
0 . 6 0 8 2 1 7 . 62 %0 9 x x x1 1 . 5 2 6 3 2 6 . 03 %2 1 x x x1 0 . 3 0 5 2 2 7 . 41 %3 0 x x x1 0 . 7 0 8 1 1 6 . 6 %9 5 x x x1 0 . 5 0 3 2 1 6 . 62 %2 9 x x x1 Median 23% 22x 19x 16x Mean 22% 23x 19x 16x 0 . 2 0 () 2 2 8 . 52 8 3 2 x % x x1 0 . 4 0 1 2 1 3 . 52 %6 6 x x x1 0 . 4 0 8 . 5 %7 7 6 x x x 1 . 0 1 2 9 6 5 . 23 %x x x Median 14% 16x 12x 9x Mean 8% 16x 13x 10x 0 . 8 1 0 2 1 5 . 03 %6 9 x x x1 0 . 4 0 3 1 1 5 . 51 %9 8 x x x1 0 . 4 0 0 1 1 9 . 51 %2 2 x x x 0 . 2 0 4 7 7 5 . 31 %x x x Median 13% 16x 15x 12x Mean 16% 16x 14x 11x 2 . 3 2 2 1 8 8 . 51 %0 x x x 4 . 2 4 0 1 1 9 . 71 %0 0 x x x 5 . 6 6 8 1 1 1 . 21 %5 2 x x x1 1 . 2 1 9 2 1 2 . 52 %0 5 x x x1 3 . 3 3 4 . 6 %8 8 8 x x x Median 12% 10x 10x 9x Mean 15% 13x 11x 9x 5 . 8 6 1 8 7 6 . 21 %x x x 0 . 8 1 6 1 1 2 . 01 %7 4 x x x1 N N N 31 2 A A A1 3 x x x1 0 . 7 0 9 1 1 1 . 82 %8 3 x x x1 3 . 8 4 4 9 8 7 . 31 %x x x Median 15% 13x 13x 11x Mean 17% 13x 11x 10x 7 . 2 8 3 1 1 2 . 52 %7 4 x x x1 1 . 9 2 6 1 1 1 . 42 %8 4 x x x1 4 . 3 4 3 1 1 0 . 4 %0 0 x x x1 0 . 3 0 N 21 0 . 4 A2 2 x x x1 Median 23% 18x 13x 11x Mean 17% 17x 13x 11x
Mid-cap Indian generics C a d i l a * Gk l a e * n m r Ao u rd o b i n S ts r i d e
0 . 9 0 . 4 0 . 4 0 . 7
Indian CRAMS D i v i ' s B in o c o * Jn u b it l a D i a s h m n
2 . 0 1 . 4 0 . 7 0 . 1
1 . 9 1 . 5 1 . 2 0 . 4
0 . 6 0 . 4 0 . 4 0 . 2
US generics M y l a n H o s p i r a W a t s o n Ix m p a P a r
8 . 3 6 . 7 8 . 8 1 . 2 1 . 0
1 1 5 ,6 1 . 7 6 8 . 7, 2 , 8 1 8 9 2 2 0 . 43 0 x . 3 % 1 1 0 ,3 1 . 5 0 8 . 0, 1 , 9 4 1 1 6 1 . 46 . 2 %7 x 1 1 0 ,0 1 . 3 1 0 . 6, 7 , 0 1 9 3 1 5 4 . 27 6 x . 0 % 1 1 . 1 0 3 1 . 5 3 1 5 7 . 0 5 0 8 . 03 %x 0 2 . 9 0 2 2 . 6 0 2 7 1 . 6 5 3 . 8 %3 x Median 10% 8x Mean 13% 7x
2 . 0 3 . 9 4 . 4 0 . 9 3 . 3
GLobal generics T e v a A s p e n R ie c h t r H ia k m S t a d a
3 5 5 5 . 7 0 ,9 6 . 0 9 1 . 6 , 4 , 9 1 N/A 9 7 7 5 . 26 3 . 0 % 5 . 1 6 5 . 4 0 0 6 . 6 2 6 4 9 . 3 4 8 1 . 31 %1 x 2 . 9 3 3 . 7 6 6 3 . 2 8 4 9 3 . 8 9 9 . 0 %8 x 1 . 7 2 1 . 7 7 1 2 . 9 2 2 3 4 . 9 7 0 1 . 42 %2 x 1 . 8 3 4 . 6 5 8 5 . 2 1 5 9 6 . 2 1 1 7 . 41 %x Median 13% 9x Mean 14% 9x 1 . 6 1 . 1 0 . 8 0 . 2
5 . 0 0 . 7 N A 0 . 5 3 . 3
Japanese generics S a w a i N ic h i i k o T o w a N in p p o
1 2 . 5 0 1 2 . 7 4 2 7 8 . 0 0 8 8 7 . 61 %x x 1 1 . 1 6 5 1 . 3 9 2 2 1 . 9 3 4 7 6 . 51 %x x 0 1 . 8 3 4 1 . 9 6 1 4 8 . 0 7 8 5 5 . 21 %x x 0 . 2 N A N N N N N A A A A A Median 18% 7x 6x Mean 16% 7x 6x 4 x 6 x 7 x 6x 6x 1 1 x 5 x 8 x 5 x 8 x 8x 8x 5 x 7 x 9 x 6 x 0 x 0 x 7 x 1 1 x 4 x 9 x 6 x 6x 6x
5 . 6 1 . 5 4 . 1 0 . 2
Japanese Formulation T a k e d a A s ts e l l a D a ii i c h
3 8 2 6 . 1 7 ,5 6 . 2 2 6 . 4, 1 , 0 6 5 5 4 . 21 7 4 . 1 %x 1 7 1 2 . 3 5 ,1 2 . 1 1 6 . 7, 1 , 1 1 7 5 2 7 6 . 45 1 x . 5 % 1 4 1 2 . 2 3 ,7 2 . 2 1 6 . 4, 4 , 3 6 0 2 6 4 . 41 . 6 %6 x Median 6% 6x Mean 3% 6x 2 4 2 1 . 0 4 ,6 2 . 9 8 2 . 5, 0 , 1 1 1 0 2 6 2 . 99 2 3 . 0 % x 8 . 9 8 ,5 1 . 51 5 6 . 1 , 24 3 8 7 . 70 4 4 . 0 5 x % 6 . 3 6 ,1 7 6 . 41 1 6 . 57 8 8 . 3 2 2 6 . 2 3 x % 2 . 5 2 3 . 8 2 0 3 . 0 9 4 1 8 . 9 9 4 7 . 32 %x N 2 3 A . 1 5 1 3 . 2 8 6 N N 9 . 0 A A x Median (6%) 7x Mean (8%) 8x 1 4 1 37 , 7 , 9 0 2 7 1 . 3 8 , 9 1 33%5 . 7 3 32 0 0 . 2 1 5 4 . . x 1 7 1 23 , 4 , 1 8 4 7 0 . 3 3 , 9 2 28%8 . 5 4 26 7 3 . 3 3 2 6 . . x 1 4 1 12 , 3 , 6 1 9 7 8 . 0 0 , 0 8 16%9 . 3 2 17 3 5 . 6 8 0 5 . . x 9 8 1 17 , 4 , 2 . 61 5 8 . 6 , 4 8 10 % x 7 17 8 3 6 6 . 8 7 7 6 . . 1 0 3 4 10 , 8 N N 0 . 76 7 . 4 ,4 7 1 10 A A x 1 . 3 2 . 8 6 6 20 , 1 N N 0 . 8 2 0 . 4 ,3 8 1 10 A A x 9 . 3 0 . 7 8 9 12 , 3 , 8 7 . 6 1 1 . 3 , 0 2 13%8 2 12 7 6 . 0 2 5 8 . . x 5 7 5 4 . 7 6 ,5 4 . 4 3 8 . 8, 8 , 9 1 1 8 5 4 4 . 51 1 3 . 0 % x 5 8 6 10 , 0 , 5 . 2 7 4 . 6 , 6 3 14 % x 8 11 3 8 4 3 . 0 2 3 6 . . 5 0 4 7 . 2 6 ,2 5 . 9 2 3 . 3, 2 , 7 5 5 9 0 . 76 1 7 . 06 x % 4 1 4 7 . 7 3 ,8 6 . 8 4 5 . 7, 8 , 4 5 7 4 0 . 71 3 6 . 8 %x Median 0% 6x Mean (0%) 6x
4 . 6 4 . 8 3 () 1 1 3 . 61 2 0 0 x % x x1 2 . 2 2 . 5 2 3 1 1 3 . 81 %6 5 x x x1 1 . 3 1 . 1 1 4 1 1 5 . 4 %5 8 x x x1 Median 4% 15x 15x 13x Mean 2% 14x 14x 14x 3 . 6 4 . 4 8 . 1 5 . 0 0 . 7 4 . 2 4 6 2 1 6 . 91 %1 8 x x x1 3 . 7 1 () 7 92 . 34 6 %x x 6 x 5 . 1 4 () 1 1 9 . 22 8 0 6 x % x x1 5 . 6 6 7 9 8 6 . 81 %x x x 0 . 9 N N N AN A A AN A Median (6%) 9x 12x 18x Mean (11%) 12x 13x 17x 2 . 3 2 3 . 4 %8 8 8 x x x 5 . 3 5 7 1 1 1 . 7 %3 2 x x x1 5 . 8 6 2 1 9 9 . 0 %0 x x x 3 . 9 3 2 . 9 %9 8 8 x x x 3 . 5 N N 31 N A A1 2 A x x 4 . 2 4 N 7 8 7 . 5 A x x x 5 . 0 5 7 1 1 0 . 3 %1 0 x x x1 6 . 0 6 4 1 1 4 . 91 %9 7 x x x1 6 . 2 6 8 6 7 7 . 2( % x x x ) 2 . 0 2 6 1 1 5 . 0( %3 4 x ) x x1 3 . 7 4 3 8 1 9 . 0( % x 0 x ) x Median 2% 10x 10x 9x Mean 2% 10x 10x 10x Source: Bloomberg
Specialty pharma A la l n e r g F o r e s t Cn e p h a l o U n i t e d K i n g
Big Pharma P f i z e r Jo o h n s n N o v a r t i s M e r c k Gi l lS i a tn xh oK m e S a n o f i A b b o t t N o v o Ae sn t c r a a Z e B y r-e il r s t os M E l i
2 . 3 5 . 0 5 . 7 3 . 7 3 . 2 4 . 7 4 . 6 5 . 3 7 . 3 2 . 3 4 . 3
*SMC Inst. Research estimate
US generic attractiveness dipping out

@patent expiry opportunity to shrink US opportunity by ~48% post FY12 Lower @ US generic market turning a volume play with lower margin, penetration levels are above 80%
and negative generic inflation

@ para-IV approval and better than expected US generic market growth act as a potential Higher
risk to our estimates
We ring the alarm bell foreseeing the challenges emerging on the Indian pharmaceutical industry post 2015 on the back of sharp drop in patent expiries in the US. The Indian pharmaceutical industry is been bullish for long on the USD70bn US patent expiry (generic opportunity of ~USD14-20bn) overlooking the stiff downfall thereafter. We expect the patent expiry opportunity to fall ~48% over 2012-14 and 85% post 2015 (2016-20) creating serious challenge for the Indian generic pharmaceutical industry.
48% drop in patent expiry post 2012-14; is it the beginning of the end?
T e o t io n Dsym o 5v s h n p x p i U )i t ed 0 ee e e a p o ( 7 ll c o s , w e g r te pt Sn o a e r ry 0 k oe t l d f ny t u b e i o t p1 e e n 2o w hr 2 bbn eo o n t a a d pe 0 e e g e t p io b ~ r a x 1 t g o n i pt h o 4 i t p 3 hn f t o e n t d so n c 7 p e i i i h f h ry e f % t u k o ny nt r o n r 2rMt lo . 0t a o l b p io 1 e e e os ( 9 m t o t pt e .st d lSn 2a jt hkr o v r y2 p t u 0 A e oh hc H uI a t , c ) a rf bu i n 0, o e d i y c e s b d t a t p w1 u ke eo n r dp r oee 1t s i t a lp io a ra e e b 2 E h h t n uns x e 0 hin rbo f d g t e i t ne e s t r e 1sn m pt 5 rg k a ry e t u g d t S Ub 2 t D v1sn0n e rn f S n 0 o- o 6 u 0 l nu eo 7o 1 Un 0a g % e g U D v 1 S r s i c i h m r 1e 4r 1 1 e - s 8 f 5 2r 2m a b2 ( i 0 9i l pWr p % ax p i o ep i e e r. e s d ~n te o n t nan o i) s ho 5e t i ptrg l r hv c e e a o i p p o fhr y t S s e pf a r 8h t e r ry e i e U ny t u e c s r 2 E 0 o 7e1 0 ( 1f U o 1 1 Ub Sn0 . 6S n D r 2 0 . )m v 1 D r 7 1 2E b 5
Exhibit-7: Sharp drop in the US patent expiry opportunity

30 26.5 25 20 USD bn 15 10 6.2 5 0 2003 04 05 06 07 2008 09 10 11 12 13 14 2015 16 17 18 19 2020 4.0 4.3 4.0 9.7 6.0 7.0 ~55% fall in patent expiry opportunity 13.8 9.7 6.9 2.6 3.2 2.5 ~85% fall in overall patent expiry opportunity
13.0
8.5
1.6
0.8
Source: Medco, SMC Inst. Research
10
Street over estimating patent expiry opportunity; generic opportunity to increase by mere USD1.6bn over 2010-15
According to our analysis, we believe the street has been over estimating patent expiry opportunity in the US over 2010-15. Branded drugs worth USD70bn is likely to face patent expiry over 2010-15 only to add USD1.64bn to the US generic (base) market after ~95-98% price erosion post expiry. We see this opportunity to be very miniscule (10-20% addition over 2011-15) in order of addition to the USD31bn US generic market.
Exhibit-8: Patent expiry of USD70bn to add only 10-20% generic market in the US
1 2 0 1 0 0 8 0 6 0 4 0 2 0 0
U S D B n
2001
2002
2004
2005
2003
2006
2007
2008
2009
2000
2010
2011E
2012E
2013E
2014E 2020
Source: Medco, SMC Inst. Research
We expect slower CAGR of 7% for generic market in the US over FY10-20

Our trend analysis of the generic market in the US over the past 10 years suggests that as the level of penetration increased there has been sharp drop in the growth rate for generic pharma market. The high growth during 2000-05 was mainly attributed to the lower penetration of generics coupled with expiry of blockbuster drugs during 2002-2006. We expect 7% CAGR (2011-20) for generic pharma market in the US as against 12% in the previous decade.
Exhibit-9: Generic growth to slow over 2010-20

500 450 400 350 300 250 200 150 100 50 0
2001 2005 2011 2004 2002 2009 2012 2014 2015 2003 2006 2007 2013 2016 2008 2017 2000 2010 2018 2019
25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
USD bn
Total pharma mkt size Generic mkt growth (%) (RHS)
Generic mkt size Pharma mkt growth (%) (RHS)

Source: IMS Health Dec 2009, SMC Inst. Research
2015E
11
US generic market to become volume play; margin pressure to remain

Generic penetration in the US is at its peak (80-85%) and we estimate stiff erosion of generic drug prices owing to sharp increase in competition thus resulting in lower margins. We expect the US generic market to become a volume play from the high margin play for the generic pharma players, (exception being the Para IV opportunity). We anticipate slower generic prescription sales growth in the US, at CAGR of 7% over 2010-20 vs. 12% over 2000-09, putting pressure on the margins of the generic drug manufacturers.
Exhibit-10: Generic pharma market penetration in the US

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 9% 1% 20% 23% 33% 45% 55% 78% 72% 85%
Source: SDI, SMC Inst. Research
Generic drug inflation at the lowest; margins pressure to remain

The generic drug inflation in the US is at the lowest (-1.1% in 2009) since 2004 indicating gradual decline in the generic drug prices. It is expected that generic drug prices to further decline on the back of large number of drugs hitting the market post the patent expiry 2013 onwards. We expect generic pharma market in the US to be more competitive with more players entering the market resulting in sharp fall in drug prices and thin margins.
Exhibit-11: Generic drug inflation at the lowest

1 0 . 0 8 . 3 8 . 0 6 . 7 6 . 0 4 . 0 ( % ) 2 . 0 0 . 5 0 . 0 () 2 . 0 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 T o t a l 0 . 4 0 . 2 0 . 1
() 0 . 4 () 1 . 1
9 . 2 7 . 4 5 . 3 5 . 5
6 . 3
6 . 9
5 . 2
4 . 7
4 . 9
4 . 9
2 0 0 8
2 0 0 9
B rd a n d e
G e n e r i c
Source: Medco, Caremark, SMC Inst. Research
12
History repeats: expect contribution from US to reduce ~40% post FY13

We dig in to the history to find a similar situation of high patent expiry in the US. We analyze the performance of various companies (mainly US based generic companies) over 2004-08 when USD35bn of patent expiry opportunity went off in the US. Our analysis showed profitability of these generic companies depicted sharp rise during the high patent expiry period but contracted severely post that. Revenue growth of Teva, Mylan and Watson (the three companies we used in our analysis) plunged significantly in 2006-08 on the back shrinking patent opportunity post 2006. Mylan recorded a revenue de-growth of 11% in 2007 on account of sharp drop in patent expiry and high base effect of 2006 (refer to Exhibit7). Mylan's high revenue growth of 49% in 2007 was mainly attributed to Matrix lab acquisition (2007 sales of USD1.6bn), adjusting to the acquisition the growth is only 11%. Similar trend of decline in revenue and margins has been observed for Teva and Watson over 2007-08. We expect a similar situation happening for the generic pharma companies (more specifically the Indian pharma companies). We anticipate US revenues to decline by ~40% over 2015-20 mainly because of limited growth coupled with high base of 2012-15.
Exhibit-12: Revenue and margin contraction of US generic companies post 2006

5,000 83% 4,000 3,000
USD mn
90% 70% 50%

USD mn
2,000
90% 70%
2,000
90% 70% 50% 30%
1,500
49%
1,000 0% 500 0% 0% 2% 0% 11% -
50% 30% 10%
1,500
USD mn
2,000 20% 1,000 19% 16% 0%
30% 15% 11% 10% 10% 2005 2006 Teva US Revenue Rev Growth (%) (LHS) 2007 2008
1,000 15% 22% 7% 1% 2006 2007
0% -10% -30%
4%
0
500
10% 10% 2% -0% -10% 2008
0 2005 2006 2007 2008
1 -% 2005
Mylan US Revenue Rev Growth (%) (LHS) US Revenue Watson Rev Growth (%) (LHS)
EBITDA Margin (%) (LHS)

13
Scarcity of major blockbuster drug expiry post 2015

We see drying up of blockbuster drugs (sales >USD1bn) post 2015. Apart from AstraZeneca's anti cholesterol drug Crestor (rosuvastatin calcium), patent expiry in Q3FY16, there is no drug with sales more than USD2bn expiring between 2016-20 vis--vis 10 such blockbuster drug over 2011-15, sharply reducing the opportunity of generic pharma companies in the US market.
Exhibit-13: Scarcity of blockbuster drug expiry post 2015

Patent 2010 2011 2011 2011 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2013 2013 2014 2014 2015 Expiry Nov Jun Oct Nov Mar Mar Mar Jul Jul Aug Aug Aug Oct Nov Nov Dec May Aug Oct Name of drug US Sales in 2009 (USD mn) Aricept Levaquin Zyprexa Lipitor Lexapr Seroquel Gabitril Tricor Singulair Actos Diovan Diova Viagra Lidoderm AcipHex Cymbalta Celebrex ProAir Abilify 1,465 1,633 1,968 6,054 2,557 2,557 3,483 1,350 3,466 2,783 1,470 1,376 1,001 1,065 1,160 2,621 1,581 1,074 3,583
S: e o d Inst. Research u c r c o e , M SMC
Patent 2016 2017 2017 2018 2018 2019
Expiry Jul Oct Oct Jul Oct Jul
Name of drug US Sales in 2009 (USD mn) Crestor Zetia Vytorin Spiriva Nasonex Lyrica 2,626 1,111 1,233 1,436 1,098 1,566
14
Our assessment
We believe the loss of patent expiry opportunity in the US will hit the generic pharma industry hard post 2015. Though there will be a flood of generic products in US market by then, we expect a cut-throat price war environment to prevail significantly reducing the profit margin. With lower new drug approval trend in the US we expect pharma companies will have to revisit their growth strategy in the wake of lowering opportunities.
Exhibit-14: Decline in new product approval to reduce generic opportunity in the long run
40
30
20
10
0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
USFDA New drug approval
Source: USFDA, SMC Inst. Research
Indian generic drug makers, according to us will emerge as likely winners because of their diverse geographical presence and strategic alliances. LPC (currently 41% revenue from the US) will compensate the patent expiry opportunity loss post 2015 in the US through its strong domestic presence (currently 35% of revenue) and concentrating in Japan and other key markets through its aggressive organic and inorganic expansion plans. DRRD (currently 35% of revenue from US) is likely to gain for the GSK marketing agreement in the emerging markets and through its plans to enter in to other key markets including Japan. SUNP according to us is likely to be runners-up predominantly on account of their US dependency. SUNP is expected to have ~40% US dependency (including Taro) in FY12E and we expect the US contribution to come down to 36% by FY14E on the back of strong domestic and emerging market sales.
15
Emerging markets to drive long term growth

@ Emerging markets to generate ~40% of global healthcare revenue by 2015 @ domestic market (India) CAGR of ~15/18% over FY10-15 to fuel growth for Indian Expect
pharma companies
@ Japan, APAC, CIS and LatAm to fuel future growth for Indian pharma companies
We believe more focus on domestic and emerging markets will help drive growth for the Indian pharmaceutical companies over medium to long term. Japan being the second biggest pharma market (~USD80bn) after the USA, has <10% generic penetration by value terms to provide tremendous opportunity for the Indian generic drug manufacturers. APAC according to us, have a high growth potential with increased government healthcare spending and high generic penetration levels.
Emerging markets to lead generic growth; to account for ~40% of global healthcare revenue by 2015
The emerging countries are forecasted to grow at a 15-17% rate over 2010-15, to USD200-250bn. The APAC healthcare market is projected to grow by ~13-15% over 2010-15 to USD560bn contributing ~30-40% of the global healthcare revenue. Currently APAC countries spend ~7-10% of GDP on healthcare and is expected to increase to ~12-15% by 2020 putting tremendous pressure on respective governments exchequer. Indian pharmaceutical market is expected to reach USD 30bn at CAGR 23% by 2020. Russian pharmaceutical market is expanding at a CAGR of 10-12% and is estimated to reach USD50bn (Ruble 1.5tn) by 2020. We expect the Japanese generic industry to reach USD10-15bn by 2015 at a CAGR 9-12%. China, which is predicted to grow 25-27% to more than USD50bn next year, is now the world's third-largest pharmaceutical market. We expect the governments across the world will emphasis more on the low cost generic drug going forward, in order to curtail the ever rising healthcare cost. As countries recover from the global economic crisis there will be growing divergence in the pace of pharmaceutical growth among major markets.
Exhibit-15: APAC countries average healthcare spend to grow to 7% of GDP

14% 12% 10% % of GDP 8% 6% 4% 2% 0% 2005 2006 Australia Indonesia Singapoere 2007 2008 China Japan South Korea 2009 2010E India Malaysia Average (RHS)
Source: Frost and Sullivan, SMC Inst. Research
8% 7% 6% 5% 4% 3% 2011E 2012E
16
Exhibit-16: Bifurcation of pharma emerging countries

Tiers Countries 2009 GDP based on PPP valuation (tn USD) 2009-13 (bn USD) T i e r 1 T i e r 2 C h i n a B r a z i l R u s s i a I n d i a T i e r 3 Va el n e z u e P o l a n d Aa ri g e n t n T u r k e y M e x i c o Sa .r A f i c
Source: KPMG, SMC Inst Research
Incremental Pharma Market Growth from 4 0 5 1 5
9 2 4
T h a id l a n In na d o e s i R o m a n i a E g y p t P a k in s t a
< 2
1 5
1 5
V ia e t n m U k r a i n e
17
India- strong demand growth

The rise in income level coupled with rise in chronic diseases in the tier-II/III cities is likely to lead 50% rise in healthcare spending by FY15E. We forecast the Indian pharma market to maintain its current annual growth trend of ~16% till 2015. We expect medical infrastructure in India to register huge changes with over USD150200bn being invested over 2015 in creating and upgrading medical facilities.
Exhibit-17: Indian pharma market likely to triple by 2015

50 40 35.2 27.3 20.9 20 10 0 CAGR 10% (Bear case) CAGR 16% (Base case) CAGR 20% (Bull case) 6.3 11.8
USD bn
30
2005
2009
2015E
Source: McKinsey, SMC Inst. research
Rapid growth in chronic disease to fuel growth of domestic pharma market

As a result of rapid urbanization, the Indian tier-II/III cities have witnessed a sharp rise in chronic/lifestyle ailments like obesity, diabetes, cardio vascular ailments and oncology. The healthcare spend on these lifestyle-related diseases is expected at 50% CAGR by 2015. This would eventually result in huge healthcare opportunity in the tier-II/III cities across India.
Exhibit-18: Rapid rise in several chronic diseases to prevail

4 0 3 5 Ib N R n 3 0 2 5 2 0 1 5 1 0 8 . 9 . 0 2 . 3 6 . 5 3 . 4 6 1 4 . 2 6 . 8 5 . 1 2 2 . 8 3 6 . 5
5 1 . 0 . 2 9 0 2 0 0 8
2 0 0 9 C a r d i c D it a b e i c
2 0 1 2 E O n c o l o g y
2 0 1 5 E
S: Ht Me o O y I rr u , dS s a r c e I s Ceh Wr n, u n c t .s
18
Healthcare spends to increase growth

With rise in chronic diseases, the per capita healthcare expenditure as a percentage of per capita income in tier-II/III cities is likely to increase from 7% in 2008 to 14% by 2020. However, per capita healthcare spending as a percentage of per capita income in India is much lower at 7% vs. 10% of the world average). Rise in chronic diseases and healthcare spending in tier-II/III cities coupled with the metro/tier I cities, Indian healthcare market is expected at 50% CAGR by 2015E. Penetration of health insurance would also boost healthcare spending. Currently, health insurance accounts for less than 8% of the overall health expense which is likely to increase to 15% by 2015.
Exhibit-19: Per capita income in India is much lower at 7% vs. 10% of the world 2 5 %
1 6 % 1 4 %
Exhibit-20: Percentage of average household spending on healthcare 2 0 %

1 7 %
2 5
2 0 % 1 2 % 1 5 % 1 0 %
1 8
1 5 %
1 6 1 3 7
1 0 % 1 0 %
5 % 5 %
Ia Ia E a ED EIa n0d 0n d 8i0 h2 C E(n i0n2 i2 O2 e 2 2 C0 E 0 x 0 2 M 0 d i ai na d) C h n 2 0 2 0 E
0 % 2 0 0 8 2 0 1 0 E
0 % 2 0 1 2 E 2 0 1 5 E 2 0 2 0 E
S: D I s Me o RY r Ceh u An, r c , , dS s a e E u I &t y I rr n c t .s
A ld M li I n aEI ) U (n ea S x d i A We oe r r lv dg A a
S: D I s Me o RY r Ceh u An, r c , , dS s a e E u I &t y I rr n c t .s
Down penetration of health insurance to offer additional opportunities
H uho eesw e t oi r i sn en e e ot agg n el n e t d asc b n f t i s t h i scu li r a m h t hn c a s eo s r e s n f t o gi e n m n n un a f ad e n r y hn etole h r s w la n e e i r r ptwu goyr a ettae gsc en r i i r et d h e h v h ae i os e n r i u n a ul d n p io h r . t hp e n a t s I ls t s c e p ns n t y e scmr to I b 0 I 6 0 A e a up hwd N 2 t R 2 . s a l n e i a nl o7 0 o b 0 l r t r rm e f R s h n ug n mn 0 6 , h i ae s o- r f n 1 Nn 0, i 2 n8o i 9 io n h a et hn ei s hi e co n t ol h r i bt sc vh e a lt tu f e la l yh n ds d s i i r i cs t fi d c oa e s s hc c a y a upr e n i n e r re li a o a l c n n pr ea t r s z. o h ii wp o a i a dt t s an o l
Exhibit-21: Increase in health insurence to help domestic pharma growth

6 ,0 0 0 5 ,0 0 0 Im N R n 4 ,0 0 0 5 0 % 4 4 % 3 ,0 0 0 4 0 % 2 ,0 0 0 1 ,0 0 0 0 2 0 2 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 9 1 0 02 1 5 H up ( m e scm n a r rm li a e I ) t hn i N ne u R G% r (L o)S wH t () h %I c L oI i () frIeS TI i H i /t e I s
S: D S se o RYn a u AM r r c , , Ceh e E Ir c I & t .s
7 0 %
6 0 %
6 % % 2 5 2 %6 2 0 2 % 2 % 2
3 0 %
3 2 % 3 0 % 2 0 %
19
Japan- Kikai no tochi (Land of opportunities)

Japan is the second largest pharma market in the world after the US with market size of ~USD80bn. Mostly driven by formulation drugs, generics in Japan accounts for less than ~10% in value terms. We expect Japan to drive the next phase of growth for the Indian generic manufacturers (previously it was US led). We expect the Japanese generic industry to reach USD10-15bn by 2015 at a CAGR 9-12%.
Generic, the only option for ageing Japan

Japan has the largest population of old aged people (above 60 years age) representing ~22% of total population. As per the Japanese government estimates, by 2050 the senior citizen population will account for ~50% of the total population. Japan currently spend ~7.5% of its entire GDP on healthcare and is expected to reach 15% by 2020 thus putting tremendous pressure on the public healthcare cost. To get relieved of this burden, Japan's government is promoting the use of generic drugs and has set a target of 30% market share of generics in prescription by 2012 from current ~18-20%.
Exhibit-22: Healthcare cost as percent of GDP (2009)

20 16.0 16
Exhibit-23: Japan's healthcare cost to rise three fold

1,200 16% 13.8% 900 12% 10.1% 600 6.6% 300 4.7% 4% 10.6% 8%
% of GDP
8.7 8 4 0
UK
8.5
8.5
7.5
6.5
5.9
7.0
(USD bn)
12
11.2
10.5
0 1990
Australia Japan France Germany Norway Korea Mexico India USA
0% 2005 2020E 2025E 2035E
Medical expense (USD bn)
Medical expenditure as % of GDP (LHS)

Source: OECD, Mckinsey, SMC Inst. Research
Source: OECD, Mckinsey, SMC Inst. Research
Low generic penetration to provide greater opportunity

Japan has one of the world's lowest consumption rates for generic drugs. Japanese generic drugs contribute only 18-20% of prescription sales and ~6% in value terms. Although, Japanese pharmaceutical market contributed ~10% of global sales at ~USD900bn, generics had sales of USD5-7bn or accounted for 6-8% of the Japanese pharmaceutical market. We see high demand growth for generics drugs in Japan backed by government's initiative to increase generic acceptability in order to reduce public healthcare cost.
20
Exhibit-24: Japan has one of the lowest generic penetrations among the developed countries
90% 71% 70% 52% 50% 30% 10% - 0% 1 28% 23% 41% 75% 60% 89%
Exhibit-25: Japan's healthcare cost to rise three fold

25% 20% 15% 10%
In 2003, Japan announced incentive for selling generic products to doctors and pharmacists
20%
16%
14%
20% 6%
15%
5% 0%
UK
Germany
USA
France
Spain
Japan
Global Value Volume
Value (sales)
Volume (prescription)
Source: OECD, Japan Ministry of health, SMC Inst. Research
Source: OECD, Japan Ministry of health, SMC Inst. Research
Japan's healthcare expenses to reach JPY 95tn by 2035 having deficit of 47%
According to McKinsey report, Japan's healthcare budget is expected to increase from 6.7% in 2005 to 13.5% of the GDP by 2035. We expect Japan's healthcare spend to rise at CAGR 3.6% to JPY 63tn by 2020 and JPY 95tn by 2035 while the conventional sources of funds (copayments, insurance premiums, and government subsidies) are expected to generate revenues of JPY 43tn by 2020 and JPY 50tn by 2035. Hence, in our view, the snowballing gap between the healthcare expenses and the NHI (National Healthcare Insurance) revenues reinforce the need to stress on the generic drugs in order to reduce the deficit.
Exhibit-26: Japan's health care deficit to reach 47% by FY35break-up

160 140 120 JPY tn 100 80 60 40 20 0 2005 Expenditure 2020 Revenue 2035 Deficit (%)
Source: McKensey, SMC Inst. Research
Fig27: Japan's health insurance industry
47% 32% 27%
50% 40% 30% 20% 10% 0%
Other mutual benefit insurance, 8%
National health insurance, 40% Government (managed health insurance), 28%
Society health insurance (Union managed), 24%

Source: McKensey, SMC Inst. Research
21
China- Yo rn (The Medicine Man)

China with a GDP (nominal) of USD ~6.5tn and population of 1.4bn is poised to be the second largest pharmaceutical market the world after the US overtaking Japan and France by 2015. An incremental government funding of USD 125bn targeting substantial improvement to the nation's healthcare infrastructure will according to us double the size of China's pharmaceutical market by 2015. We forecast China pharmaceutical market CAGR 18-20% to touch USD 80bn by 2015. We believe China to be the next industry leader in the medium to long term as US attractiveness reduces post the sharp fall of the patent cliff post 2015.
Exhibit-28: Scarcity of blockbuster drug expiry post 2015

2003 United States Japan Germany France Italy United Kingdom Spain Canada Brazil China Mexico Australia India Netherlands South Korea Belgium Poland Portugal Greece Switzerland 2008 United States Japan France Germany China Italy Spain United Kingdom Canada Brazil Russia Mexico India Australia Turkey South Korea Greece Netherlands Belgium Poland 2013 United States Japan China Germany France Italy Spain Brazil Canada United Kingdom Russia India Venezuela South Korea Mexico Australia Greece Turkey Poland Belgium 2020 United States China Japan Brazil Germany France Russia Italy India South Korea United Kingdom Canada Spain Venezuela Mexico Australia Greece Turkey Poland Belgium
S: cy I R o kS s e u i , C eh r c n e s MM a e n r ts . c
22
Generic advantage
Generic drugs are the back bone of the Chinese pharmaceutical industry. Generic drugs account to ~63% (USD 29bn) of the total pharmaceutical market and rising at a CAGR of 13% over 2014.
Exhibit-29: Generic drugs account to ~63% of the total Chinese pharmaceutical market
1 2 0 1 0 0 ( % ) 8 0 6 0 4 0 2 0 0 2 2 2 2 2 2 2 2 2 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 5 6 7 8 9 0 1 2 3 4 B rd G a n d e e n e r i c O T C
S: dS s e o n, C eh u uM a r s c t e r IR I y n r ts . c
We believe Indian generic players have a better opportunity in China than their MNC counterparts because of low cost model and proven expertise in the US and other pharma-emerging markets.
Current situation
Chinese healthcare system is marked by: 1) growing demand of superior drugs and 2) wide disparities between the urban and rural healthcare system. To regulate and restructure the local pharmaceutical industry and to cut the rising drug cost, Government of China (GoC) has implemented NEDL (National Essential Drug List) and NERDL (National Essential Reimbursement Drug List). Currently the medicines listed under NEDL and also those drugs having monopoly in the market are subject to price control by the Government.
Exhibit-30: China Pharmaceutical industry break-up
G, e n e r i c s 2 2 %
USD34bn
O T C , % 6 4
P a td e n t e D% r1 u g s , 4
Source: BMI, SMC Inst. Research
23
Exhibit-31: Overview of drug distribution in China
Pharmaceutical companies
Wholesalers
Hospitals 80%
Pharmacies 20%
Patient
S: Il e I R o M Ss e u ,e M a r c D C eh e Bo i t t , n r ts . c
Now is the time to act for Indian pharma players

We believe investment in to the Chinese pharmaceutical sector is the need of the hour for the global generic drug makers (including Indian majors). Chinese pharmaceutical industry witnessed a sea change in the recent past post the government regulations. Most of the global majors have already made a footing in to the Chinese market mainly with their off-patent drugs. We believe now is the time for the Indian generic players to tap in to this opportunity in to one of the fastest growing pharma market in the world. According to us Indian companies should penetrate the Chinese market through JV with the local players instead of going solo as it former strategy will increase marketing strength and will help reduce cost drastically.
Exhibit-32: Global majors in China

1Q 2011 Sales Growth (%) (USD mn) Pfizer AstraZaneca Bayer Sanofi Roche Merck Novartis GSK Novo Nordisk J&J 835 749 663 620 531 443 440 378 359 288 31 32 20 31 31 15 25 30 30 30 Market share (%) 8.32 7.47 6.61 5.59 5.29 4.42 4.39 3.77 3.58 2.87
Exhibit-33: Sample M&A transections in China in 2010

Buyer GSK Seller Nanjin Meirui Pharmaceutical company Minsheng Pharma Guangdong Tianpu Pharma Deal size (USD mn) 70
Sanofi Nycomed
NA 214
Sanofi Shanghai Pharma Shanghai Pharma
BMP China Health System Ltd. Xinya pharma
520 339 217
S:P I C eh o M IR u GMe r c , , e B n a KMts Ss r . c
Source: KPMG, BMI, SMC Inst. Research
24
Russia- na tverdoi pochve (on solid ground)

Russia, according to us is an important market for global pharmaceutical players with huge growth potential. Russian pharmaceutical market is estimated at about USD9bn as 2010 and is expected to reach USD22bn by 2015 at CAGR15%. The country has a per capita pharmaceutical spend of about USD130 which is even lower than that of Romania (USD200) suggesting tremendous growth potential of pharmaceutical industry in Russia.
Exhibit-34: Russian pharma market to grow 15% over 2010-12

4 0 3 1 % (b I n N R ) 3 0 2 0 1 0 1 8 % 1 4 % 2 9 %
3 5 %
3 0 %
2 5 %
20 1% % 2 1 6 %
1 6 %
1 5 %
1 0 % 5 %
0 0 % 2 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 1 2 0 0 1 2 1 0 E 1 2 E
PM( b h ai U a r zD r k S mS ae t e n ) G% r ( o ) Source: IQS, SMC Inst. Research w t h
Current environment
I rd m gaatfi 0h c c n e me edg c nc 0 t c n e n p v nul ni e n w ee w l o e tr u m t t a l no i t pn e oe f 2i hpo E rt i o e 9 et f t aa a sa s t i D ( )n osm y aa et a d lo r sLi gg mW s nm r c uE s f r eb n s t ee u s gD s d c n H L , i t ct o i nu r e d O e s bnn o e d d s y s a s s nm d gi o iu n ac ca 2re t aidt a u rge nur .r 0 gto p co rr do ds ii o 0 r r ne r r i f rt e o r m us n r e i e e ub xn F 1 l i t e , dg i i d a cl n q o s a a ed iu t D no L c n . ldE dh e e
C yd dc tt sh m m irR d u b p s p h t he aT os r r r r d cc w opcak m s u e a rt u - d e a l r o v i n n oo o f t l e u y i r au r t i c e pu g t . ea n p i t g e si a ot ap mstl e r t hen d on o t d, e r h n l f a lm eoa b u c o v n a ei m e f d t sgio s t il rc eyr - t a d t w n ii hl t c a t n i m e u cg sr o mc ara ds at i sn e id rt t n ni s i s nr R ln n u t eo y a c s . u d s uxvgr n o d v ra f a n , dp c u i a i i e es e o l f a f o c g due oa e l Ten t ao a nr a uo a frh hr t s o m at pca a0 k e e n a g dil u d a l r 5 a a g e el o v h m ao sy f er ts c %e s f e m r t c l a he t h o tr c u m i c e m s b (r a 2 iie ldg rn arm y c t o % l s ar g e cga 2 r y dT b th o t h o . 0 er 0s t e ue p ip s 2 nu ) w u o v 0 l n. u h l i m t hm s g n unr r
Exhibit-35: Ratio of Original & Generic in real term is 1:2; while opposite in value term (2:1)
1 2 0 1 0 0 ( % ) 8 0 6 0 4 0 2 0 0 H a om Ba go ke s r p k e r i t a e ny Oor l t e du ck f i c r t pa i uf m t cg o v e r a e G e n e r i c s Or r lu ia s g g id n 8 7 7 3 6 5
4 3 2 2 H a om s r p k i t ae l t 3 6
Ia nr re em l t 1 3
I lt ne v r am u e
2 7
3 5
5 7 7 8
6 4
Ba g u or e r ny e d O ck f i cr i u t- ke - pa o m f t cg o v e r a e
G e n e r i c s
Or r lu ia s g g id n
Source: Pharma Expert, SMC Inst. Research
25
Market segmentation
Russian pharmaceutical market has come out of the domination of the state owned companies and pharmacies. Currently private sector accounts for nearly 70% of the market value. Commercial segment This segment includes retail drug sales and 'Para-Pharmaceuticals' (health and beauty products and other non-medicinal products) but excludes medical drug sales under the Federal Reimbursement program (FRP). The segment forms about 70 % of the market by value.
State-owned segment
Tm ese su r ee R a e l h h el s ochpc dF gsa tu i gn s fdt g m r P m s r s n s t u e ie h an e i d c am r hi l i n o a s t p , we g u er a s h o r l ao l s h
v pia a fi anah e oo t o a rt n mi nc i Tm n b % r e n e ti s c l n s n tru f i ov ue d e l s n t nt da s et u a 0 e o r t a c e l c. e i i h ga s o c f c 3h t me aa r l k . e t v u
Exhibit-36: Russian pharma market segment
Commercial sector, 30%
State-owned sector, 70%
Source: Industry, SMC Inst. Research
Exhibit-37: Top 5 therapeutic segment contribution (in percentage)

TOP5 ATC groups of generics (in value terms) Cardiovascular system General anti-infectives systemic Alimentary tract and metabolism Musculo-skeletal system Respiratory system Total (%) 20.73 15.88 15.31 11.25 10.71 73.88 TOP5 ATC groups of generics (in Real terms) Cardiovascular system General anti-infectives systemic Alimentary tract and metabolism Musculo-skeletal system Respiratory system Total (%) 20.86 19.00 12.14 12.03 11.99 76.02
Source: Pharma Expert, SMC Inst. Research
26
Latin America - creciendo fuerte (growing strong)

The Latin American pharmaceutical market is among the fastest growing across the world. The top eight pharmaceutical markets in Latin American were worth more than USD30 bn in 2009. Although individual markets are growing at different rates, the entire Latin American market is expected to expand at CAGR of 1012% over 2010-15. One of the major drivers of growth for the pharmaceutical markets is national governments stepped up efforts to increase access to healthcare for its citizens. The Latin American markets, which are already growing at double-digit rates, will receive a huge boost from the increasing use of generic pharmaceuticals.
Exhibit-38: Latin America pharma market growth

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Argentina Brazil Chile CAGR 2003-07 Columbia Mexico Peru Venezuela 12.9% 13.7% 9.5% 9.7% 4.6% 7.4% 4.3% 8.8% 7.2% 7.4% 9.2% 8.8% 27.6% 26.7%
CAGR 2007-12
Source: BMI, SMC Inst. Research
Brazil
Brazil being one of the largest emerging into a world power and is already the largest market in Latin America, representing 38% of the market compared with 21% for Mexico, 16% for Venezuela, and 9% for Argentina. Brazil's healthcare spending represents almost 8% of GDP and of its population of nearly 200 million people (20% have private insurance) make use of both private and public-health services with demand for pharmaceutical products is growing 10% per year.
Exhibit-39: Indian generic players command ~4% market share in Brazil

German, 1.8% Indian, 3.6% Swiss, 5.1% US, 1.1% Canadian, 0.3%
Brazilian, 88%
S: dS s e o n, C eh u uM a r s c t e r IR I y n r ts . c
27
Brazil, according to Osec, a Swiss Bank, houses are 270 private and 20 state-owned pharmaceutical laboratories in business. This growing local business has been driven by the government's industrial policy, enhanced regulations, and the introduction of generics. The government supports investments through special credits and encourages innovation through subsidies and strong IP protection. A number of global pharmaceutical companies are using Brazil as a production platform, and there are small, but growing R&D opportunities in the country.
Mexico
Mexico is the second-largest pharmaceutical market in Latin America after Brazil. Mexico after signing the North American Free Trade (NAFTA) has opened the door to trade with large pharmaceutical markets. Enforcement of patent protection laws has also increased foreign investment. It also enables foreign manufacturers to register their patents with the Mexican regulatory authorities and manufacture their products in Mexico. Branded products are purchased primarily by population with higher income, while generics are bought by population with lower income. Expiry of patents of blockbuster products is also expected to spark an increase in the growth of generics. Mexico is one of the most attractive destinations for foreign manufacturers, however, the research and development sector has not matured and so the majority of foreign investment in Mexico is targeted at its manufacturing industry.
Argentina
Argentina's pharmaceutical market is dominated by local players accounting for ~60% of the market value. Despite the increasing inflation and manufacturing costs, the pharmaceutical industry has managed to keep the price of its drugs low. The Government in order to increase affordability and to maintain growth gave discount of approximately 30% was given on 600 drugs. Demand continues to rise significantly in Argentina's pharmaceutical market propelled by the efforts of the government and its commitment to increasing access to healthcare.
28
Valuations
expect a re-look in the valuation multiple on the back of changing industry fundamentals We Domestic and emerging market growth would help Indian pharma companies command
premium over its global peers

Initiate Out-performer on DRRD, LPC, CDH and recommend Out-performer on SUNP. We
SoTP methodology
Indian generic pharma companies have always traded at a premium to its global peers on the back of strong growth and high revenue visibility both in the domestic market and also in the regulated market. We value the Indian generic players on SOTP basis to assess the various parts of the business. We value the base business on earnings multiple to capture the relative growth and the product pipeline on NPV based on the opportunity. We assign premium multiple to the Indian players vis--vis the global players.
Exhibit-40: BSE HC vs SUNP, DRRD, LPC and CDH (price performance)

6 0 % 5 0 % 4 0 % 3 0 % 2 0 % 1 0 %
0%
1 0 % 0 0 0 1 1 1 1 1 11 1 1 01 1 1 1 1 1 1 1 1 1 1 1 1t r y n l g p v c n b a r p c o e a e e O N D J F Mp a J J A S A Mu u u e S B Ix S n Ed Te H C DE Rq Ru Di I t N y CE Du Ht Iq N i y LE Pu Ci Iq N t y
SN Uq N i P t I u E y
S: o gI R o l b C eh u o, r m ne c e e Br Ss a M r ts . c
PE band chart of all the above companies Exhibit-41: SUNP 1-year fwd P/E
I N R 6 0 0 5 0 0 4 0 0 3 0 0 2 0 0 1 0 0
J u l 0 9 O c t 0 9 J0 a n 1 A p r 1 0 A p r 0 6 J u l 0 6 O c t 0 6 J7 a n 0 A p r 0 7 J u l 0 7 O c t 0 7 J8 a n 0 A p r 0 8 J u l 0 8 O c t 0 8 J9 a n 0 A p r 0 9 J u l 1 0 O c t 1 0 J1 a n 1 A p r 1 1 J u l 1 1 O c t 1 1
Exhibit-42: DRRD 1-year fwd P/E

I N R
2 5 x
3 0 0 0 2 5 0 0
3 0 x 2 5 x
0 0 2 2 0 0 x 1 5 0 0 0 0 1 1 5 0 x 5 0 0
2 0 x
1 5 x
1 0 x
0 5 0 0 D e c 0 5 J7 a n 0 J8 a n 0 J9 a n 0 J0 a n 1 J1 a n 1 -0 1 0 0 -0 1 5 0
29
Exhibit-43: LPC 1-year fwd P/E

I N R 7 0 0 6 0 0 5 0 0 4 0 0 3 0 0 2 0 0 15x 12x 25x 20x
Exhibit-44: CDH 1-year fwd P/E

I N R 1 2 0 0 1 0 0 0 8 0 0 6 0 0 4 0 0 25x 20x 15x 10x
A p r 0 9
A p r 0 6
O c t 0 6
O c t 0 7
A p r 0 7
A p r 0 8
O c t 0 8
O c t 0 9
A p r 0 9
A p r 0 6
O c t 0 6
O c t 0 7
A p r 0 7
A p r 0 8
O c t 0 8
O c t 0 9
A p r 1 0
O c t 1 0
A p r 1 1
1 0 0 0
A p r 1 0
O c t 1 0
A p r 1 1
2 0 0
30
SUNP
Out-performer
TP: INR 558

FY12 2 0 . 5 FY13 2 4 . 8 2 2 5 4 6 1 2 558
Source: SMC Inst Research
Target price calculation BE a P s S e b i z T aP a s / r eE g b( e i x t B z ) Tr a i s a i bs ) r c ee ge b e ( u t Ps n s L ct o n i e p p i (NPV) m e pt i ot t m oe d i i o ri nt s u Total Target Price (INR)
DRRD
Out-performer
TP: INR 1864

FY12 6 9 . 6 FY13 9 1 . 8 2 0 1 ,5 8 3 2 9 1,864
Target price calculation BE a P s S e b i z T aP a s / r eE g b( e i x t B z ) Tr a i s a i bs ) r c ee ge b e ( u t Ps n s Limited competition opportunities (NPV) Total Target Price (INR)
LPC
Out-performer
TP: INR 585

FY12 2 4 . 7 FY13 2 9 . 2 2 0 585
Target price calculation BE a P s S e b i z T aP a s / r eE g b( e i x t B z ) Total Target Price (INR)
CDH
Out-performer
TP: INR 912

FY12 37.2 FY13 45.6 2 0 912
Target price calculation Base biz EPS T aP a s / r eE g b( e i x t B z ) Total Target Price (INR)
31
Exhibit-45: Peer Comparison table

Mcap Company S u n * D* ry r e d d C i p l a R a n b a x y L u p i n * C a d i l a * D i v i ' s Gk l a e * n m r B in o c o * P ia r a m l Ao u rd o b i n I p c a Jn u b it l a S ts r i d e O r c h i d D i a s h m n
*SMC Inst Research Estimates
Mcap INR bn
Revenue INR bn
EBITDA Margin (%) FY11
EPS FY12E FY13E FY11
PE FY12E FY13E
USD bn
1 5 0 0 . 6 4 3 . 0 7 95 . 2 3 1 4 . 4 1 7 7 2 . 5 5 . 7 2 2 8 0 1 . 7 . 4 8 . 6 1 6 . 6 5 2 . 2 5 9 0 . 5 4 47 . 1 2 1 0 . 8 4 4 9 6 . 5 9 . 6 9 3 1 2 2 . 8 . 3 1 . 3 1 6 . 1 4 2 . 8 2 4 9 . 5 1 26 . 3 2 0 2 . 1 1 8 2 1 . 3 4 . 3 1 2 7 0 1 . 0 . 0 6 . 8 1 4 . 7 4 2 . 3 0 1 4 . 2 9 08 . 6 2 1 0 . 9 3 2 5 3 . 6 3 . 0 2 1 9 4 1 . 7 . 7 6 . 3 1 1 . 0 4 2 . 5 1 4 5 . 2 7 15 . 0 2 7 1 . 1 1 4 9 2 . 3 4 . 7 2 2 9 1 1 . 2 . 8 7 . 9 1 6 . 4 3 1 . 5 7 9 0 . 1 4 74 . 6 1 5 9 . 8 3 9 4 3 . 7 7 . 3 4 2 5 2 2 . 6 . 8 2 . 1 1 8 . 1 2 9 . 0 7 6 . 7 1 7 3 . 0 3 7 8 . 1 3 2 2 3 . 4 7 . 5 4 1 6 9 1 . 9 . 7 5 . 7 1 3 . 5 1 8 . 8 8 7 . 4 2 1 9 . 4 2 9 0 . 0 1 8 6 1 . 8 9 . 7 2 2 4 6 1 . 5 . 4 6 . 3 1 3 . 1 1 6 . 4 6 1 . 6 2 5 3 . 0 2 1 4 . 6 1 0 8 1 . 4 9 . 4 2 1 3 9 1 . 4 . 5 8 . 5 1 5 . 3 1 6 . 2 0 7 . 3 2 6 5 . 1 0 4 . 7 5 6 7 3 1 . 7 9 . 3 2 1 1 8 1 . 3 . 7 7 . 0 1 2 . 3 5 . 7 5 . 0 9 . 1 7 . 2 N A 6 . 2 4 . 3
0 3 . 8 7 0 . 9 4 8 3 . 8 2 1 2 . 0 1 5 9 1 . 6 8 . 6 2 2 . . 97 0
0 3 . 7 5 5 . 4 1 6 8 . 8 2 3 0 . 2 2 0 1 2 . 0 2 . 7 2 1 7 2 1 . 9 . 4 0 . 1 0 3 . 7 4 3 . 5 3 1 4 . 3 1 3 6 . 4 1 3 4 1 . 4 7 . 6 2 1 2 2 . 8 . 3 9 . 5 0 1 . 3 7 7 . 4 1 9 6 . 9 1 6 9 . 2 2 6 6 4 . 1 4 . 1 5 6 . . 26 8 0 1 . 3 4 0 . 2 1 0 6 . 8 2 4 0 . 4 2 9 2 2 . 2 0 . 8 2 8 . . 49 7 0 . 1 . 15 1 2 9 . 9 1 1 6 . 7 9 . 9 9 . 1 1 1 . . 87 0 5 . 3 7 . 1 5 . 4
Source: Bloomberg
32
Key risk to our call

Business risk
Failure of research and development efforts may restrict introduction of new products
F r sp s n e ycu m r t g e a u s f r d oat cl oc p sl ln n t eoa e n i os ce eu o e d u l oo e t b s s m ru e et t i n d p ht u l l i ey r f i a oi b r l i d z c n gs a i c oetai &s l dyt a t n ei ce t s n u Ds d sf t b cu lnm hm rR co v a ht o d g r e e ie r g. l np caee s F r o ue f e y t e r l c i on e oc l i i eo m v p i a l l y ss r tdl oi u l d op i. cu c v rb c ps e f l e oa r i t s u f n l t y a a Increase in competition, and higher than expected fall in prices of generic products
Ae c t ihc r tew iu tc ac i n a ot nu p c r ls c o e ne y s m ta d c gie i ni p c ne r e i i o e hdt y u t a wee n l e u o r nr r a d n n oa l l t t pr hi da r s mr s re g a nii oo .u mm ah ae ch i da f c n r e n e r a dy it r ke v fn gp l t m e n a e t t s he f u s e e nrb h a r m l t m oi af t e y c d y t y p O o a t i og t aee u on t pc do n d i h a dyt e r e d p f g b an u ty v edo t x r ro (h e g) s i e fe t e p i i r f dm s c l he n a c o er t a n r s u r d e t ne b d e c el g v iaoeni et m rn eg a p u u as e c r e r s s t i ne a n t . gv d nm i
Regulatory risk
Delay in regulatory approvals and timely launch of products is a key risk to our call
Tm n a aau d t re ln ahu h i n por tai o gthe mp e so pn gy r e u ta e r e c s sfa tt e r h s a a s k r t uo b i al i o l i c u t t n a tct e o o o y o n e i ot t d w nra rc ei (i1 su w S n t iet a r e t Fe ndct i h AH l g p l s o F h 8 ev te u a l rd u b et y pt T a 0xi h F dc a i c i eh l l nt f l v d gal yt D y s i) U eh r W o . ch ao we a drs r p, a A 8 ai yso u t dlo ea r x c9 hr m1at t i e n mo a f 4u m i n t E o ym p t rr s r y u n v s e e / aeo a a qn i ne r t t o f g p l e hr t a b pin o Te t ta a s v e o aaer ne t h tna r vb e n u ld a e o u e a o p ay n a c r e o arn t k b p r w ds y p ph e nv d tc y i h r . m e o i nvi o e l c ye y f s n ey oda t Ti tp obe ao o s lam f l i h to e u t r k i toas t a po r r rs n g l e xhve tu a s r nt r m e r ho c. i g ns l ms r t f e r t pn e i o e i a s a c s i eh o ein d d seh io l ss s ns os v g r t i eh a l t b cu c t s olnp s nsi tw a u l e r e u e e u c t s w bt c l l a c s e t f o w ar t d p o na r c e ke t l eo s l n e ey f s ed u ps c rt ho n u w. c
Tu rr t d l so s gs a sn nto hlr u st o ni olry e ci n r e aem h iain um be on r t qe e y e a p d g o i n e e p f a aml, c e n i c n rt oe o t t e a st i u r i s are s o u c s r r o at r nd f r yo c d p no rn r , e c r n bd b f qre f t e.sshi e io i t u e a te t r a t n e ae a eo h s e e dro aA l e r s o e s u i t s a kn s e ci ese oic eg e ohn tso e o c uu ,h l ao n cuso n a mi c l nhl t v t r t a e t , w pwra w d l a t ht n h g sc i o d e - e d nr i s u on n so d a s l r e d wh n l m f c a i o ry ua a ed s tlga gy v n u t h o o aps ws h dd r t pf p . e w h i n l f lr r o r t e e o or o l c
Market risk
Demand slowdown in key markets adversely impact our recommendation
W a a m rt t o d m r g o a e et h e mo re ok m n c ht er r a o r t e a t o t t k ai d ag k u m p te r v e s P- i mm ge p hl rn f w b en t s e f v e e i o ho h e f f g t o i eo 5rra nn o it ra a a p in p1 tg t aig nn e d dto nh s a o u d e m e l ip pt t S2 d e r p n eo g nnr y U 0 s gy r v n r t e t u t n nl o c i i r t h e u m wd i e apat S dt h m r a S wa h r a r h d n a e m r ld e nyet l e I a p- r a k e o mk k i yU i d r ton n e tr s . i nd t m ci s u l n a a e ag k n n hm g t ei ne s h oeo tt d r m o wk e eo ce n l d r om o m . d n tr a tr s ss u a ii d s au i n e n od a t i o
33
Company Section
34
India | Pharmaceutical
Company Review
SUN PHARMACEUTICALS INDUSTRIES LTD. Out-performer

Shining bright upon the cloudy sky
Current Price: 1year Target: Expected Return:
INR 462 INR 558 +21%
Sun Pharma (SUNP) according to us is one of the most aggressive large-cap players in the Indian pharmaceutical space. We believe SUNP, with its strong product pipeline will be able to monetize on the patent cliff opportunity in the US. We recommend on SUNP as OUT-PERFORMER, forecasting an earning CAGR of 25%.
Stock details
Bloomberg code Shares O/S (mn) M Cap (INR mn) M Cap (USD mn) 52 week H/L (INR) Avg. 6M daily vol SUNP IN 1,030 479,988 9,711 540 / 390 1,038,859
Domestic business to drive growth at CAGR 17% over FY11-14

SUNP's chronic domestic portfolio in our view would be a key growth driver. The company has been able to maintain its leadership position in the key therapeutic segments of neurology, cardiology, ophthalmology, orthopedics and psychiatrists with strong brand recall among doctors. We expect the domestic segment CAGR of 17% FY11-14 on the back of aggressive product launches in key segments and increasing penetration through existing products.
Strong growth across key markets, headwinds in the US to remain

SUNP has formidable presence in key global markets like the US and Europe. We expect a CAGR of 52% in the semi-regulated markets for SUNP. We however, expect tepid performance from Sun Pharma (ex Taro) and Caraco in the US for FY12 on account of limited near-term Para IV opportunities (Effexor XR launch in Q4 FY11 expected to be competitive and no clarity on the generic Gemzar and Taxotere launch). Moreover, the USFDA's warning to SUNP Michigan plant will add to the slow US growth.
Shareholding pattern (%)

Promoter group FII DII Others 63.7 18.4 7.2 10.7
Taro integration, a long term growth driver for Sun

We see Taro as a long-term growth driver for SUNP mainly in the US. Taro compliments SUNPs portfolio through its presence in key dermatology products (~57% of revenue) and steroids. We expect significant growth from Taro in the next 6-8 quarters on account of improvements in execution. We estimate Taro to provide an incremental revenue growth of CAGR of 12.6% over FY10-13E for SUNP.
Stock chart
50% 40% 30% 20% 10% 0% -10% -20% -30%
SN U4 N 1 N 2 i= P I 6 f5 = t ,5 y 0
Recommend Out-performer; TP INR570

At CMP of INR462 SUNP trades at 15.1x FY13E earnings. We recommend Out-performer recommendation forecasting earnings CAGR of 32% over FY11-13. We expect SUNP to maintain its leadership across key segments in the domestic market. We forecast strong domestic growth to continue, helping the base business (ex Taro) grow by 22.5% (CAGR) over FY10-13E. We value SUNP at 22x FY13 earnings of INR24.8 and adding NPV of limited competition opportunities of INR 12 to arrive at our target price of INR558 implying a potential upside of 21% from the CMP.
Sep-10 Dec-10 Mar-11 Jun-11 Sep-11

SUNP IN Equity NIFTY Index
Key risk to our recommendation

1) Lower than expected growth in the domestic business 2) Delay in regulatory approvals in term of new launches and resolution of legal issues, and 3) Lower than expected growth in the key Pharmaemerging markets.
Stock price performance

Return (%)1 Mth Absolute Relative (5) (5) 6 Mths 5 18 1Yr 15 32
Summary financials
Particulars (INR mn) N( m e I n ts ) SN aR l e E (m BN I I n TR D ) A ER P S () I N ED VA / ( E x B) I T R O E ( % ) P E ( x ) Bh Vr pe e r s a FY10 FY11 FY12E FY13E CAGR (%) (FY 10-13E) 3 4 . 4 3 1 . 4 3 2 . 8 N M N M N M N M 4 0 , 57 8 0 5 7 , 48 9 2 1 , 17 6 1 ,8 3 9 1 3 , 29 2 6 1 3 , 07 3 7 0 , 20 5 8 ,2 9 6 1 3 . 0 1 7 2 . 5 7 3 . 0 0 . 5 2 5 . 7 1 7 1 . 8 7 1 . 0 4 . 4 1 8 . 2 2 3 3 . 0 0 2 . 1 6 . 0 3 6 . 0 2 6 1 . 7 7 1 . 1 5 . 1 7 5 . 6 7 1 7 0 1 . 0 2 3 . 0 3 . 1
Analyst
Souvik Chatterjee +91 22 22877009 souvikchatterjee@smcindiaonline.com Mitesh Shah miteshpshah@smcindiaonline.com October 03, 2011
35
Financial statements
Profit and loss statements
Particulars FY10 FY11 FY12E FY13E
Cash Flow
Particulars FY10 FY11 FY12E FY13E 1 1 3 8 2 3 , 0, 1 , 6, 3 5 1 7 1 1 6 9 6 1 2 1 2 , 3, 1 , 8, 9 5 0 2 2 3 4 8 9 5 1
T Ime s 4 nr p c or om eoo 0 5 f a t i n , 5 , 4 , 1, 8 P 0 7 8 9 7 2 8 7 1 6 3 1 9 A Te e e 6 (5(06 o r x s , 2 , 4 , 9, 6 t a p (4 3 a t e 2 l onn p i gs 4 7 6 (4 ) 11 6 ) 2 3 ) ) EBITDA 13,632 19,700 27,582 30,962 Di e t po r n e c i a
Ci o a (7 5 (69 h wp 4 a n r cl , 5 , 2, 7, 4 g ki e i nna 6 g t ) 4 9 (8 8 8 6 ) ) O-h e (93 tn a n , 2, 6 ( ) 1 hc jm 3 (8 8 , 7 e a st 3 r s t s o d n u ) 9 ) 5 5 1 8 7,614 23,894 21,837 28,464
Dt&a(32 (52 e i A t 1 (4 2 (1 Operating cashflow po oo 3, 1 , 8, 9 r n ri , ) 0 e c i a m t n i z 5 ) 8 9 ) ) EBIT Om ti e h e r n c o 12,099 17,659 24,724 28,043 C xt a pr pee ie i t n a d l u
(54 (03 2 (7 4 (0 , 2, 0 , 0, 0 7 1 ) ) 5 5 ) ) (3,500) 24,964 -
2 , 8 , 9 , 4, 9 0 2 4 6 4 5 9 9 5 7 9
Ci v n (5 (6 h i st a n s 1 n e g t e m 1 1 n e , 4, 0 8 4 ) ) O sa ti tc w, 78 h i s e nf r n v e h go 1 ( 5 l 45 4 ,5 1 ) Investing cashflow (12,889) 4,862 (21,485) 19,724
P r e iy 4 0 2 3 r farn , 7 , 8 , 8, 1 o ex a 1 2 fo td1 i t ar4 t bx o e& r 3 9 3 5 6 6 9 4 Edn x iy e t no r a m 1 ar o i r c 9 9 P ft re x or f o i e t ba Pn roa of x vo i sr i t N ei tf p r o t Me i in n tt o r r e t ys I Reported PAT Adjusted Profit -
(4,500) 17,337 -
Free cashflow to firm
1 4 2 , 7 , 8 , 8, 1 Cio g 3 0 2 3 4 3 9 3 5 6 6 9 4 h bi a rn n r s g o e w n iei v a id dd n ( ) (8(82 6 1 7 , 4 , 2, 8 D p 9 2 1 (1 ) 7 0 ) )
3(8 0 ,7 67 3 )
(23 (22 3 (1 2 (2 , 1, 4 , 3, 3 3 3 ) ) 4 4 ) ) (2,423) 22,541 21,772 44,313
tf c h h ic w 4 ( ) e nf r i n a a go ( ) 6 l 4 2 4 7 1 3 1 , 9 , 4 , 6, 3 O n s 4 9 2 3 6 0 7 1 7 9 6 1 2 4 () 19 1 3 13,510 13,311 18,161 18,161 31,623 31,623 Financing cashflow Netcashgeneratedduringyear 27,916 27,916 Cash at beginning of year Cash at end of year (3,457) (8,733) 14,634 5,901 (7,747) (5,338) 12,196 6,858
(2,423) 14,914 6,858 21,772
Balance sheets
Particulars Soe hdu aei r r t e 'q h l sy Me i in n tt o r r e t ys i s L rb om nd ge t e t Pn ro os v i s i Seb hm o d r e t t r t Cli s uil r a r b e i nt t i e FY10 FY11 FY12E FY13E
Key ratio
S () I N 7 8 7 1 1 , 9 , 5 , 3, 3 ER 2 9 0 3 8 7 5 7 5 6 8 4 4 P Bh R Vr ) pe e ( r I s N a 1 , 2 , 2 , 2, 2 9 8 3 4 8 8 7 4 4 7 7 R O E ( % ) 4 2 5 , 9 , 9, 9 90 2 2 4 0 0 4 4 Growth (%) 3 , 4 , 0 , 6, 2 4 5 8 0 3 3 3 3 3 6 8 Rs e v e n u e 1 , 2 , 7 , 7, 7 E 2 2 5 2 2 2 0 2 2 0 0 B I T D A 4 , 5 , 3 , 2, 3 N 0 9 9 2 8 9 0 9 7 8 8 ei tf p r o t
1 3 . 01 7 2 . 5 7 0 . 03 . 5 7 5 . 67 1 1 7 0 3 . 0 2 3 . 0 . 1 1 8 . 22 3 3 . 0 0 6 . 12 . 0
() 5 4 . 8 2 5 . 8 4 9 . 9 . 9 (4 4 1 4 . ) 6 5 . 4 1 0 . 81 . 3 (9 4 2 6 . ) 4 4 . 5 0 2 . 01 . 3 (5 4 3 0 . ) 6 4 . 0 0 3 . 01 . 4
P S Tb e o i su 8 1 t l & ai l t q l i i e i a t y 9 0 1 1 , 2 , 5 , 8, 6 E 5 6 3 6 1 7 0 3 1 7 7 1 3 N ia e gs t ns i bt nl e t es a Na e s td f s i xe et s Is t nn v s e t m e In ni ve es t o r Sd ue nb dt r o yr s L ae od a v na s n &s c 5 1 , 7 , 0 , 2, 4 Margins (%) 7 0 1 4 6 0 9 0 0 5 9 8 E B I T D A 1 5 2 , 0 , 0 , 9, 8 0 5 2 2 9 0 7 8 6 2 2 0 9 E B I T 3 0 2 , 4 , 0 , 0, 0 6 2 2 2 6 3 2 2 1 3 3 1 1 N ei tf p r o t 1 0 1 , 9 , 4 , 1, 1 7 4 1 2 3 7 9 6 9 6 8 4 7 Valuation ratios 1 1 1 , 8 , 6 , 4, 5 Year ending 31 March 7 1 1 1 4 7 3 4 1 1 4 1 1 / E ( x ) 8 1 , 8 , 1 , 3, 9 P 4 1 1 1 8 2 2 4 8 9 9 7 1
3 4 . 03 4 3 . 4 1 1 . 13 . 8 3 0 . 23 0 2 . 9 7 8 . 92 . 8 3 5 . 33 5 3 . 6 3 4 . 53 . 5
FY10
FY11
FY12E
FY13E
3 6 2 . 0 6 1 1 . 7 7 5 . 1 . 1 6 . 2 6 . 1 4 3 . 6 . 5 1 2 . 1 8 . 5 5 5 . 5 . 0 8 . 7 6 . 1 5 4 . 3 . 6 2 5 1 . 7 7 1 1 . 8 7 4 . 0 . 4 1 2 . 1 8 . 5 5 5 . 5 . 0 2 . 8 3 . 7 5 6 . 7 . 5
iB cx e) / Ors tc te he t e ns r u s ra 7 4 4 4 4 5 5 9 1 P( 0 4 rV Msx aa s r p( k/ ) e a t l ce Ca ie a s v s h ls 6 he n & a cq t u , 3 , 8 , 2, 3 0 6 2 4 7 8 1 4 5 7 3 7 1 Es Vx / ( s ) a l e Ca us r s r e e t ns t 3 7 4 , 1 , 4 , 9, 1 1 5 6 1 2 0 7 0 9 9 1 8 0 3 ED VA / ( E x B) I T Dts e e at f ds t e x, r a r e e n 8 3 9 , 3 , 8, 3 06 3 2 5 1 5 1 1 M( c lx as p ) / S a e Te o t ts as l a s 8 1 9 0 1 1 , 2 , 5 , 8, 6 E s ( 5 6 3 6 1 7 0 3 1 7 7 1 3 a Y r i% ne i ns g ) l

36
Domestic business holds the key to success

The domestic business comprises high-margin (above 30%), high-growth chronic therapeutic areas, such as neuro-psychiatry, cardiovascular, diabetes and gastroenterology. SUNP commands dominance with strong brand recall amongst doctors in these therapeutic areas. During FY0511, SUNP's domestic formulation business registered 22% CAGR (consistently growing above the industry average) and contributed 45% to the total turnover in FY10. Strong domestic business provides support to volatile international operations. We see new product launch and tapping new markets (tier II & tier III cities & towns) the key to SUNP's growth strategy in the domestic market. SUNPs aggressive strategy with 4,000 strong field force and lower attrition provides a leading edge in the acute therapeutic segment.
Exhibit-46: Domestic business to grow at 17-18% over the next 3 years

45,000 40,000 35,000 30,000 INR MN 25,000 20,000 15,000 10,000 5,000 0 FY10 FY11 FY12E FY13E FY14E 40 35 30 25 20 15 10 5 0 -5 -10 (%)
37
Domestic leader in chronic therapy; top 10 brands contribute ~20% of revenue

SUNP is the market leader in key chronic therapy in India commanding a 4.4% market share. SUNP derives ~70% of its revenue from lifestyle therapeutic segments including CNS, CVS, GI and anti-diabetes. It is the market leader in two of the fastest growing therapy segments, CNS and CVS. The top 10 brands of SUNP contribute to nearly 20% of its domestic revenue. Seven of its brands feature among the top 300 brands of the industry. Most of the top brands have one of the highest recall values among physicians in the respective sector.
Exhibit-47: WACC Calculation

Brand Name Pantocid Glucored Group Susten Aztor Pantocid-D Gemer Strocit Repace Group Encorate chrono Clopilet Therapy area Proton pump inhibitor Oral anti diabetic Women's healthcare CVS, cholesterol reducing agent Proton pump inhibitor Oral anti diabetic CNS, stroke CVS, Hypertension CNS, epilepsy CVS, anti clotting agent
Exhibit-48: India Branded Generics

Opthamology, 5% Musculo-Skeletal & Pain, 5% Antiasthamatic & Antiallergic, 4% Gynecology & Urology, 7%
Others, 8%
NeuroPsychiatry, 28%
Diabetology, 14% Cardiology, 19% Gastroenterology, 11%
Emerging market to add growth traction

SUNP's ex-US markets consist more than c1500 product registrations and c900 strong product pipeline across 40 countries in the world. Currently, non-US base business contributes ~62% to overall sales. We believe that while growth in the US will continue to ride on the back of new launches and increasing penetration through existing products, Pharma-emerging markets share as a proportion of total sales will improve on the back of diminishing US opportunity post 2015. Ex-US markets consist of 40 markets with more than 1500 product registrations and above 900 are in the pipeline. We expect the high growth in the emerging market coupled with the aggressive growth strategy and efficient management team of SUNP will add growth traction to the overall financials of the company.
38
Strong Para IV pipeline to help accelerate growth

We expect SUNP's strong product pipeline with more than 369 cumulative filings (including Caraco and Taro) would provide accelerated growth in the next 2-3 years on the back of the large amount of patent expiries in the US. We believe SUNP to have a marketable opportunity of ~USD10bn over FY12-13E and will be one of the key beneficiaries of the Patent cliff opportunity.
Exhibit-49: SUNP's robust product pipeline provides USD10bn opportunities by 2013

API / Generic name Docetaxel Entacapone/Levodopa/Carbidopa Entacapone Gemcitabine Hcl Alfuzosin Hcl Azelastine Hcl, Opthalmic Drops Azelastine Hcl, Nasal metered spray Acetaminophen; Tramadol Hydrochloride Tiagabine Hydrochloride Risedronate Sodium Eszopiclone Escitalopram Oxalate Amifostine Rivastigmine Tartrate Levocetirizine DiHcl Innovator Sanofi-Aventis Orion Orion Eli Lilly Aventis Meda pharma Meda Pharma J&J Cephalon Aventis Sepracor Forest Astra Zeneca Novartis Aventis Brand Name Taxotere Stalevo Comtan Gemzar Uroxatral Optivar Astelin Ultracet Gabitril Actonel Lunesta Lexapro Ethyol Exelon Xyzal Therapy Oncology CNS, Parkinson's CNS Oncology Urology Antihistamine Antihistamine Pain management CNS, Anticonvulsant Women's Healthcare CNS CNS Oncology CNS Respiratory Brand Patent expiry Sep-10 Oct-10 Oct-10 Nov-10 Jan-11 May-11 May-11 Aug-11 Sep-11 Nov-11 Jan-12 Mar-12 Jul-12 Aug-12 Sep-12 Sales (USD mn) 3,033 233 94 1,363 487 41 177 56 761 2,300 43 945 253
S:o , Ceh o m IR u p r c a ne e n s a Cy ts S . M r c
Taro, a long term growth driver; effective integration holds the key
Taro compliments SUNP's product portfolio through its presence in key dermatology products (~60% of revenue) and steroids. Taro has over 153 ANDAs and 30 active DMFs filed with the USFDA and manufacturing sites in Israel and Canada. Taro in our view, would also give SUNP access to Europe with more than 100 filings in the EU. With Caraco still shackled with regulatory issues, Taro's manufacturing facilities would provide necessary support to SUNPs US manufacturing strategy. We expect revenue CAGR of 18% over FY11-14E from Taro on account of improvements in execution.
Exhibit-50: Financial performance of Taro

700 600 500 USDMn 400 20% 300 200 100 0 CY05 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E
50% 40% 30%
10% 0% - 10% NET SALES EBITDA Margin
39
Increase in product portfolio to add strength to US revenues

SUNP has the largest ANDA filings (369) by any Indian player in the US post the Taro acquisition. Taro integration strengthens the US formulation business particularly in the field of dermatology and steroids. In our view SUNP through its proven management skills will be able to increase Taro's efficiency. We forecast a CAGR of 26% in SUNP's US business over FY10-13E on account of upsides from exclusivity products and constant new launches and helping SUNP to become the numero uno among the Indian generic players in the US. We expect significant growth from Taro in the next 6-8 quarters on account of improvements in execution. We estimate Taro to provide CAGR of 12.6% incremental revenue growth over FY10-13E for SUNP.
Exhibit-51: Cumulative ANDA approvals

Products filled FY06 FY07 FY08 FY09 FY10 FY11 (Incl Taro) 59 96 142 177 207 377 Product approvals 20 29 53 69 84 225
Exhibit-52: Comparing SUNP with other peers

400 350 300 250 200 150 100 50 0 Sun Ranbaxy Aurobindo Pharm Dr Reddy Lupin Cadila
153 Taro
224
215
173
158
127
106
Taxotere case partially favourable; limited upside remaining

US district court has invalidated patents of Sanofi's Taxotere (docetaxel), favouring SUNP and other three generic manufactures (Hospira, Apotex and Sandoz), limiting the exclusive marketing opportunity for SUNP. Now with the USFDA approval we expect Hospira (having FTF status) to launch generic Taxotere (docitaxcel) post expiry of branded drug by H1FY12. SUNP's launch (~6 months after Hospira's launch) of generic Taxotere may be further delayed by 12-15months in the event of a possible Preliminary Injunction (PI) granted to Sanofi by a higher US court. In case of a launch, we expect SUNP to garner incremental EPS of 9.5% in FY12E and 6.1% in FY13E (assuming 60% price erosion and 10% market share in FY12E and 80% price erosion and 20% market share in FY13E).
40
Exhibit-53: Generic Taxotere opportunity

Particulars Taxotere market size in US (USD Mn.) Price erosion Sun's market share Sun's market opportunity (USD Mn) Profitability Earnings (USD Mn) Earning in INRMn (USD/INR 45) No. of shares Earning impact (INR) FY12E 2,800 60% 10% 112 40% 44.8 2016 1036 1.9 FY13E 2800 80% 20% 112 30% 33.6 1512 1036 1.5
Caraco merger to help resolve USFDA issues

We expect the proposed merger of SUNP and Caraco would help in resolution of the USFDA issues in terms of quality at the Caraco's Detroit plant. SUNP in previous instance has helped to reinstate Caraco sales following the product seizure from Caraco's Detroit facility in 2008, through site transfer and product acquisition. Caraco, had earlier stated that it it would commence manufacturing of the first set of products from its Detroit facility by the end of Mid FY12 and expect to launch two products by the end of FY12. We believe the merger will help fast restructuring of Caraco's Detroit facility either through site transfers or through corrective measures within the Detroit plant. Although this merger do not change our earnings estimate, we believe this to be a positive development for SUNP and will increase efficiency in Caraco's functioning.
Exhibit-54: Caraco revenue

4 0 0 3 5 0 Im N R n 3 0 0 2 5 0 2 0 0 1 5 0 1 0 0 5 0 0 F Y 0 9 F Y 1 0 R e v e n u e F Y 1 1 E F Y 1 2 F Y 1 3 1 0 % 2 0 % 3 0 % 4 0 % 3 0 % 2 0 % 1 0 % 0 %
Rg e r v o e w n t u h e
Robust core business to boost profitability

We expect SUNPs base business revenue (ex para IV & Taro), to grow at 22% over FY10-13E led by strong growth in the domestic market (CAGR 21% over FY10-13E) and improving US business. We expect SUNPs domestic business to provide crucial support to its growth against the volatile international environment. SUNPs presence in niche segments along with over 4,000 strong field staff provides a leading edge in the chronic therapeutic segment.
41
Core business revenue CAGR of 22% over FY10-13E

We expect SUNP's core business (non Para IV non Taro) revenue to reach ~INR60bn by FY13E at CAGR 22% over FY10-13E. We see limited near-term Para IV opportunity for SUNP as there is lack of clarity on the generic Gemzar (gemcitabine) and generic Taxotere (docetaxel) launch in the US. Moreover, the delay in resolving of USFDA's warning to Sun Pharma's Michigan plant will add to the slow US growth.
Exhibit-55: SUNP revenue break-up

INR mn Domestic formulations Caraco Semi-regulated markets APIs Others Taro Total sales (Ex TARO) Total Sales FY10 18,301 11,021 5,123 5,491 78 40,014 40,014 FY11 24,959 11,184 14,778 5,309 92 4,793 56,323 61,115 FY12E 27,954 10,338 15,533 5,280 106 20,409 59,211 79,620 FY13E 32,147 10,498 15,948 5,323 107 22,971 64,023 86,994
Exhibit-56: SUNP Base business growth

80,000 70,000 60,000 INR mn 50,000 40,000 30,000 20,000 10,000 0 FY 06 FY 07 FY08 FY09 FY 10 FY 11 FY12E FY13E FY14E 70 60 50 40 30 20 10 0 (10) (20) (%)
Base Business performance
Base business growth

42
Recommend Out-performer; TP INR558

We set a 12 month SOTP-based target price of INR558 for Sun pharma, valuing the base business at 22x FY13 earnings and assigning INR12 per share for the possible limited competition opportunities in the US including generic Gemzar Taxotere and Cymbalta. We refrain from using a composite multiple to value SUNP's business because of its unique nature of business. In our view, the earnings from the limited competition launches in the US need to be valued separately because of the non-recurring cash flow. SUNP historically commanded valuation premium over its peers on account of its robust growth and high margins. SUNP deserves a premium to its peers, given its consistent track record, high profitability and superb return ratios. At 24.8x FY13 EPS we arrive at a value of INR558 valuing Sun's core business at 22x FY13E core earnings and ascribe a NPV value of INR12 per share to SUNP's limited competition opportunities in the US. We recommend Out-performer rating on the stock with a possible upside of 19% from its CMP.
Exhibit-57: Target price calculation

FY12 B ER a P s S e () bI i z N T aP a s / r eE g b( e i x t B z ) Tr a i s a i bs ) r c ee g e b (INR) e ( u t Ps n s L ct o n i e p p i (NPV) m e pt i ot t m oe d i i o ri nt s u Total Target Price (INR) 2 0 . 5 FY13 2 4 . 8 2 2 5 4 6 1 2 558
Exhibit-58: 1-year fwd P/E

I N R 6 0 0
Exhibit-59: 1-year EV/EBITDA

INR mn
700,000 600,000
25x 20x 15x
5 0 0 4 0 0 3 0 0 2 0 0 1 0 0 0
J u l 0 9 O c t 0 9 J0 a n 1 A p r 1 0 J u l 0 6 O c t 0 6 J7 a n 0 A p r 0 7 J u l 0 7 O c t 0 7 J8 a n 0 A p r 0 8 A p r 0 6 J u l 0 8 O c t 0 8 J9 a n 0 A p r 0 9 J u l 1 0 O c t 1 0 J1 a n 1 A p r 1 1 J u l 1 1 O c t 1 1
500,000 400,000 300,000
10x
200,000
D e c 0 5
J7 a n 0
J8 a n 0
J9 a n 0
S: o gIR o l b Ceh u o, r m na c e e Br S se M r t s c
J0 a n 1
J1 a n 1
100,000
43
Profit and loss statement
Year ending 31 March Ge re s on s u s e r v Lc ei s s s e : E x Net revenues Ce s ov s e t n ou f r e Gf rr oi s t s p o Ee n mp p xs le s o e y ee Or ee tonn h ax s e t p r i p e gs e Tp oe t n a s l E x e EBITDA Dt e i po r n e c i a EBIT Om ti e h e r n c o PBT Im na c x oe e t s PE oO s I t t a x Me i in n tt o r r e t ys i Reported net profit FY10 4 1 ,9 7 8 6 9 4 40,075 1 0 ,8 9 7 2 9 ,6 0 9 4 ,0 7 4 1 ,3 3 5 1 5 ,4 4 6 13,632 1 ,3 5 3 12,099 2 ,8 0 4 14,147 6 7 9 () 1 9 9 ( 4 1 ) 13,311 FY11 5 9 ,6 4 0 8 5 7 57,214 1 4 ,7 6 0 4 2 ,7 6 0 7 ,9 8 1 1 ,2 0 3 2 2 ,8 9 0 19,700 2 ,1 0 4 17,659 2 ,9 6 9 20,358 1 ,4 2 8 9 1 3 18,161 FY12E 8 9 ,3 6 1 1 ,2 0 0 88,611 2 3 ,2 9 5 6 4 ,9 6 5 1 1 ,9 6 6 2 5 ,8 4 0 3 7 ,7 0 7 27,582 2 ,8 8 5 24,724 4 ,4 9 7 29,698 1 ,2 7 8 27,916 FY13E 9 8 ,2 4 3 1 ,7 1 7 97,398 2 6 ,8 0 8 7 1 ,9 3 0 1 3 ,7 0 1 2 7 ,0 3 3 4 0 ,7 3 4 30,962 2 ,9 9 1 28,043 5 ,9 5 9 33,641 2 ,8 0 1 31,623
Balance sheet
Year ending 31 March EC qa up i t i ya t l R ap es u s nl e ds r s v r e u Sofs hdn a ed r r es h' l u Me i in n tt o r r e t ys i s Bn og r s r o w i Total Liabilities I gs nls ti A a n e bt es Gc rl ok s s b o Dt&a e i At po oo r n ri e c i a m t n i z N ek tc b l o C I a P p iW t a l Te t od tx e aa l f s i s s Is t nn v s e t m e In ni ve es t o r Sd ue nb dt r o yr s Cu s a ie s v ha el qn t Ors tc te he t e ns r u s ra Tra or s t ee a ns l ct t u s Scr ur s nd di r t yo e Pn ro os v i s i Trli s or a t e l a nt l ct i ui i b e Net current assets Dts e e at f ds t e x, r a r e e n Total Assets FY10 1 ,6 0 3 7 7 ,4 2 5 7 8 ,9 2 8 1 ,2 9 3 1 ,2 7 1 81,932 5 ,7 7 4 2 0 ,0 8 8 8 ,3 0 1 1 3 ,2 6 4 1 ,8 4 4 1 5 ,0 0 9 3 0 ,4 6 6 1 0 ,9 7 3 1 1 ,8 7 4 6 ,3 0 7 7 4 3 7 ,1 1 2 4 ,5 0 9 3 ,4 4 8 7 ,9 5 7 29,542 8 9 0 81,932 FY11 1 ,6 0 3 7 8 ,9 7 1 7 9 ,5 7 5 8 ,2 4 7 4 ,6 2 5 92,482 1 0 ,0 6 0 3 9 ,1 1 7 2 0 ,6 2 8 2 2 ,4 3 5 2 ,6 7 0 2 5 ,0 0 6 2 2 ,0 3 1 1 4 ,4 7 9 1 1 ,6 7 1 6 ,8 8 5 4 4 5 4 5 ,4 0 9 9 ,3 2 0 5 ,0 0 3 1 4 ,4 2 3 30,860 3 ,3 6 5 92,482 FY12E
FY13E 1 ,6 0 3 1 3 6 ,7 8 0 1 3 7 ,3 8 4 8 ,2 4 7 4 ,6 2 5 150,570 9 ,4 5 8 4 7 ,4 5 2 2 6 ,4 0 6 2 5 ,5 9 4 2 ,3 3 5 2 8 ,8 2 9 2 2 ,0 3 1 2 6 ,1 8 7 1 4 ,5 4 1 4 4 ,3 3 1 5 1 4 1 0 1 ,1 0 3 9 ,3 7 8 3 ,2 3 8 1 3 ,6 1 6 87,866 2 ,3 5 1 150,570

1 ,6 0 3 1 0 4 ,8 6 0 1 0 5 ,3 6 4 8 ,2 4 7 4 ,6 2 5 118,371 1 0 ,2 0 9 4 4 ,4 0 2 2 3 ,4 1 4 2 4 ,6 8 5 2 ,3 3 5 2 7 ,9 2 0 2 2 ,0 3 1 1 9 ,1 6 4 1 3 ,4 1 1 2 1 ,2 7 7 4 9 0 6 7 ,9 9 8 8 ,2 9 8 3 ,6 3 6 1 2 ,8 3 4 55,642 3 ,8 1 1 118,371
44
Cash flow statement

Year ending 31 March PBT Depreciation Others Change in sundry debtors Change in inventories Change in loans & advances Change in other current assets Change in current liabilities Change in provisions Change in working capital Direct taxes paid Other operating cashflow Cashflow from operations Purchase of fixed assets Proceeds from sale of fixed assets Purchase of investments Proceeds from sale of investments Other investing cashflow Cashflow from investing Proceeds from borrowings Interest paid Dividend paid, including taxes Other financing cashflow Cashflow from financing Net cash generated during year Cash at beginning of year Cash at end of year FY10 14,148 1,533 (1,769) (3,376) (982) (708) 390 (4,675) (1,624) 7,614 (2,841) 89 (165,553) 153,970 1,447 (12,889) 306 (62) (3,321) (381) (3,457) (8,733) 14,634 5,901 FY11 20,358 2,041 (2,909) 4,377 (713) 1,817 5,482 (1,077) 23,894 (4,454) 284 (123,198) 126,427 (20,544) (21,485) (3,787) (577) (3,314) (69) (7,747) (5,338) 12,196 6,858 FY12E 29,698 2,858 (1,398) (4,847) (1,692) (45) (221) (1,665) (9,867) (1,782) 931 21,837 (4,500) (4,500) (2,423) (2,423) 14,914 6,858 21,772 FY13E 33,641 2,919 (1,300) (7,231) (1,946) (24) 801 17 (9,684) (2,018) 3,606 28,464 (3,500) (3,500) (2,423) (2,423) 22,541 21,772 44,313
45
Key ratios
Particulars (INR mn) EPS (INR) CEPS Book Value per share RoE (%) RoCE (%) Valuation Ratios P/E (x) P/Sales (x) P/B EV/Sales (x) EV/ EBIDTA (x) MCap/Sales Du Pont Analysis Tax burden (Net income/PBT) (%) Interest burden (PBT/EBIT) (%) EBIT margin (EBIT/Revenues) (%) Asset Turnover (Revenues/Avg TA) (%) Leverage (Avg TA/Avg equtiy) (%) Du Pont RoE (%) 36.0 12.1 6.2 8.7 25.7 12.1 FY10 95.5 116.9 30.2 46.9 114.9 18.2 26.7 8.5 6.1 6.1 17.8 8.5 FY11 89.2 115.3 30.9 58.3 124.2 23.0 17.1 5.5 4.6 5.3 17.0 5.5 FY12E 94.0 120.1 27.9 74.6 128.1 30.1 15.1 5.0 3.5 4.6 14.4 5.0 FY13E 94.0 120.0 28.8 66.2 120.9 26.0
FY10 13.0 5.9 75.6 18.2 17.3
FY11 17.5 6.6 77.0 23.0 21.5
FY12E 27.0 21.0 102.0 30.1 29.6
FY13E 30.5 42.8 133.1 26.0 33.5
Common size metrics- as % of net revenues

Year ending 31 March Cost of revenues Other operating costs Depreciation & Amortisation Income taxes Common size metrics- as % of Total Assets Year ending 31 March Current assets Current assets - Cash Net fixed assets Net intangible assets Investments Common size metrics- as % of Total Liability & Equity Year ending 31 March Current liabilities Provisions Long-term debt Short-term debt Other liabilities Shareholder's equity FY10 4.6 3.9 0.5 1.4 2.2 87.5 FY11 8.6 4.7 1.9 2.1 7.9 74.7 FY12E 6.9 2.6 1.6 1.7 6.5 80.8 FY13E 6.0 2.1 1.3 1.3 5.2 84.2
FY10 27.4 38.6 3.8 1.7
FY11 25.5 40.0 3.6 2.2
FY12E 27.0 41.8 3.2 2.0
FY13E 26.8 41.4 3.0 2.1
FY10 41.5 34.7 16.9 6.4 34.3
FY11 42.3 35.8 23.5 9.9 20.9
FY12E 52.0 35.4 20.8 7.7 17.1
FY13E 61.7 34.6 17.3 5.9 13.6
46
India | Pharmaceutical
Initiating Coverage
Dr Reddy's Laboratory Ltd. (DRRD IN) Out-performer

All-round growth opportunity
Current Price: 1year Target:
INR 1,483 INR 1,864
Dr. Reddy's Lab (DRRD) is one of our top picks in the Indian generic pharmaceutical space due to its steady Indian domestic growth, strong US business and exciting product pipeline including a number of para IV opportunities in the US. We initiate on the stock with an OUT-PERFORMER rating, forecasting 36% CAGR in EPS
Expected Downside: +25.7%
Stock details
Bloomberg code Shares O/S (mn) M Cap (INR mn) M Cap (USD mn) 52 week H/L (INR) Avg. 6M daily vol DRRD IN 169 252,427 5,103 1855 / 1386 365,269
over FY11-13.
Domestic growth to revive, expect CAGR 16% over FY11-14E
A l leo ee s s ih fqse fta r rcheu n s u w thu r a t o bs e e r ec e c p n di i r k e e s f t m i n mnt a t ce s p t w, x a t e p r e t D di s c6RYo ai e c t R iu t o C e1 t cn fs e R a e e %v - n kr o h D b od Ar 1 e o au 'ns r 1 o 1 h f s o s I n s r GF 4 b c e n tIc nn s o i / i dsf s . eIee io f r iaa I t I s xol r I p n ac ee
Diversifying to emerging markets to add traction

W aD i J (V jl) s tii oi ev Dno i w i ae np n bt R t tp e h ' r anh m nn s le R y a i e t s n n i us t h t i e J F t i F n gg t d e si r o n tCkhc i o h'R eldt t e hm ta t f C l x sl doh e a i h io Bi sbs a c o I r te s Se t w qn u i Je m u wr n c a s i i n ti a t c ng r . e tae m R g d o 'om e J t a a r D e d m t g Wp kro b 3a p n o a y e w p n ek R t r i s r t xa b l h e c o ye tD n I n f e i hn p c nr ad t a he g pca h o ( L C n c e ne he a m P a h or dn a u r p t C io k t my a a e nl a f d ) e f eo e r t a bt m r m ui s c a l i c o nr p ih pte o t ry t u e
Strong product pipeline provides USD3bn opportunity in the US
Stock chart
30% 20% 10% 0% -10% -20% -30% Sep-10 Dec-10 Mar-11 Jun-11 Sep-11
DRRD IN Equity NIFTY Index
DRRD IN = 1,483 Nifty = 5,015
W s iDhsef d cg Fr y e p w ' e t l ou l n T t a rd R r p r e t R o ii p s de p i e s h s b n oiu Fpt i m e D u e t p rt c it n ho n o u c a t Se D a mUon r 4 atn . ec D t o ~be o 1 ns e d ih ie U x R b n S f e v d W R lo t p e t i e e D ru F s i z 3 v e e n e Y tu Tii ecg re ay. hi Fn Uiga d gx r t p n iuA G n r o F e t S n t o de g h i e s p h l l n dr, i g nZ c o , p a
Initiate with Outperformer; TP INR1,864
Ao 4R s6 3 g ii c gh t P 1 D a x e s n o os CI 8 t M 3 r t. Fa . e t v no f ND d 2 RRe a 1 1i W e t t Yn r n i er t a a e e c k r m t oe g g oo1 e D e e O m e sR v 1 v R c nurrt a C 3r - W D o d p f a r A6F 3 l R m i ne oi n G% 1 a gr f c s ni n f e Y . u a e t 23gR dg f 3h t iio n 0 e s 9 a NRsf e nr i x a o1 d P 0a h e t e F r f .n Y i I 8d V p e p p i 1n n N a i no e o p pt I N r r r e o s l u trt t t e 1 p p lsf7 t M o aarf , 4ne p 2oC a o e o 8 lg n io f h r u pI 6 ia t d . r e i vr e r i Ni y o u 5m g c Rm ta e % i P .

Return(%) 1 Mth Absolute Relative (0) (1) 6 Mths (9) 5 1Yr 3 20
1r ee t t o bs li gy vt ) e xdhdiu2 n ta a r Lhe r i e s s ) a u ps m oa c o h t i w p w mn era pi t nt gn e ce s y lr r n De o o e l ol cnlo g e 3r eew k f a s r to i s )w xd h e nn d i fa , d e e h e n lu w a o l s a L h e r ih u e s u es n oa c o t y t p nt g n t e P-e m hmr a r a r mgt ag k ei ne s .
Summary financials
Particulars (INR mn) N( m e I n ts ) SN aR l e E (m BN I I n TR D ) A ER P S () I N ED VA / ( E x B) I T R O E ( % ) P E ( x ) Bh Vr pe e r s a FY10 FY11 FY12E FY13E CAGR (%) 1 1 . 5 1 2 3 . 6 N A 7 0 ,7 4 2 7 7 ,3 8 6 9 6 ,4 7 1 9 2 ,1 2 9 2 ,8 2 0 1 0 ,9 1 6 2 6 ,2 2 9 2 0 ,9 4 3 () 6 . 7 1 3 5 . 3 () 2 . 6 4 9 . 5 2 1 . 5 1 8 . 3 6 9 . 6 9 1 . 8 1 6 . 1 1 2 . 1 2 0 . 4 2 1 . 2 2 1 . 3 1 6 . 2 2 5 7 2 . 8 9 2 . 4
Analyst
N M
N M
N 3 A 2 . 3 1 7 5 2 . 8 2 7 . 2
N M
N M
47
Particulars N e ts S a l e FY10 FY11 FY12E FY13E
Cash Flow
Particulars FY10 FY11 FY12E FY13E (3 8 1 1 1 , 1 , 3 , 6, 2 1 ) 4 1 5 1 7 4 5 9
ei tf p r o t 7 0 7 , 7 , 3 , 4, 1 N 2 4 8 9 7 6 6 7 9 1 2 2 9
Te e e6 o r xs 8 6 t ap a t e l onn p i gs , 9 , 4 , 2, 3 2 2 6 7 6 0 9 4 6 2 8 2 5 EBITDA 2,008 12,629 16,902 22,439
Di At 1 et m 2 p nro , 3 , 8 , 9, 7 ro o n6 4 e & i c i a t i z a 7 1 3 4 4 5 3 9 4 Ci o a (4 (3 2 (0 h wp1 a n r cl , 7 , 8 , 6 4 g ki e i nna 5 6 g t ) 7 ) 24 0, ) 3 O -hm 4 2 tn a e3 h cd n1 e aut , 1 , 6 2 4 r s s s o j n t 1 8 4 0 3 6
Doon , 9 , 7 , 7, 9 et A i pnr r &t e c m i a i to 2 i z a 1 2 9 6 3 3 2 2 6 0 3 EBIT I ee ne e tt n ex s rp s s Om ti e h e r n c o (191) 10,002 13,694 18,800
Operating cashflow C xt a pr pee ie i t n a d l u
13,226
8,009
17,804
15,940
(6 (1(65 4 , 8 , 8 , 7, 7 0 8 ) 7 5 (3 ) 1 8 ) )
3 1 8 2 4 9 4 0 Ci v n (0 3 (6 ( ) 3 6 h i st a n s 3 n e g t e m n e , 9 , 2, 2 9 0 ) 6 4 4 3 ) 3 5 4 8 3 O sa ti tc w 7 3 (05 h i s e nf r n v e h go l 9 , 3 , 8, 7 (1 3 (2 5 ) 0 0 ) ) (6,998) (8,589) (12,537) (11,800) ( 2 ) -
Pr ei rf x o oexn ( ) 9 1 1 fo t a 1 i t r r 4 , 6 , 2, 4 Investing cashflow t aa y 6 8 3 8 b& e r d 1 4 3 5 9 Edn x iy e t no r a m ar o i r c Profit before tax Pn roa of x vo i sr i t N ei tf p r o t Me i in n tt o r r e t ys I Reported PAT Adjusted Profit 8,413 11,756 15,492 Ie i sf t se uu oy q
1 7
2 9
(1,131)
Cio g (6 3 (1 4 h bi a rn n r s 3 g o e w n , 2 , 9, 7 , 9 5 ) 5 7 9 3 ) 3 3 Dp iei v a id dd n (3 (6 1 ,3 ,3 2 3 ) 0 ) -
( ) (0(92 9 1 8 , 3 , 6, 3 5 4 1 (0 ) 6 9 ) ) (3 8 1 1 1 , 1 , 3 , 6, 2 1 ) 4 1 5 1 7 4 5 9 (1,131) (1,131) 8,413 8,413 11,756 11,756 15,492 15,492
Ons tf c h h ic w2 ( ) ( ) ( ) e nf r i n a a go ( ) l 5 9 9 4 5 2 2 5 9 6 1 Financing cashflow Cash generated during year Cash at beginning of year Cash at end of year (5,307) 921 5,378 6,545 (377) (957) 6,545 5,729 (7,876) (2,609) 5,729 3,120 4,048 8,188 3,120 11,309
Balance sheets
Particulars Soe hdu aei r r t e 'q h l sy Me i in n tt o r r e t ys i s L rb om nd ge t e t Pn ro os v i s i Seb hm o d r e t t r t Cli s uil r a r b e i nt t i e FY10 FY11 FY12E FY13E
Key ratio
S () I N 4 2 4 , 5 , 0 , 4, 6 ER 9 5 5 7 1 9 7 3 9 7 2 4 3 P Bh R Vr ) Pe e ( r I SN a
() 6 4 . 7 9 6 9 . 5 9 1 . 6 . 8 1 7 2 5 2 2 2 . 8 7 5 9 . 2 7 2 . 8 . 4 () 2 1 . 6 8 2 2 . 3 0 1 . 4 . 2 2 5 5 . 5 1 2 2 . 1 8 8 . 0 . 0
O E ( % ) 5 , 5 , 1 , 8, 4 R 3 5 8 2 6 8 7 6 3 1 9 / E ( % ) 1 , 4, 4 9 1 0 1 9 3 1 7 ,0 D 92 9 5 1 , 5 , 0 , 6, 9 Growth (%) 5 8 6 2 9 1 2 5 2 5 1 1
e v e n u e 2 2 2 , 4 , 1 , 2, 4 Rs 3 1 1 2 2 4 9 2 8 7 3 9 0 E B I T D A Ob tLe hi s el r i i t a i 2 8 7 8 0 3 5 7 9 0 3 7 N ei tf p r o t Total Liabilities 77,571 92,983 95,082 117,850 E P S I gs nls ti A a n e bt es 1 3 1 , 3 , 6 , 7, 9 9 5 1 2 7 2 7 1 4 9 1 3 2 Margins (%) Na e s td f s i xe et s 2 2 2 , 9 , 2 , 3, 5 4 9 3 3 5 6 1 4 4 5 8 4 2 E B I T D A Is t nn v s e t m e 3 ,0 3 4 5 9 1 1 , 5, 0 3 6 6 7 1 E B I T In ni ve es t o r 1 3 1 , 1 , 9 , 3, 7 3 6 1 1 7 0 7 8 5 2 1 3 5 N ei tf p r o t Sd ue nb dt r o yr s 1 1 1 , 0 , 5 , 8, 8 9 7 1 1 6 6 2 7 1 4 8 7 8 Valuation ratios Ca ie a s v s h ls 6 he n & a cq t u , 5 , 9 , 0, 9 5 5 4 7 3 1 2 1 1 2 3 0 P / E ( x ) Or s tCA h ee e ns r t t u s r 6 , 8 , 0 , 3, 5 5 8 4 1 7 8 9 9 7 2 1 P /) B V ( x Tra or s t ee a ns l ct t u s 3 8 4 , 4 , 3 , 4, 9 4 7 4 5 2 5 0 6 9 7 0 5 6 M( c lx as p ) / s a e Dts e (3 ( e at f ds t e x, r a r e e n 1 ,8 8 ( 4 ) 7 8 ( ) 7 8 ) 7 ) Es Vx / ( s ) a l e Oe ta ht es r s s 2 4 2 3 7 2 3 6 5 0 9 3 ED VA / ( E x B) I T Total assets 77,571 92,983 95,082 117,850 Es ( a Y r i % ne i nd g ) l
1 . 2 6 1 1 . 3 5 3 . 3 . 0 (. 1 7 5 0 2 9 9 3 3 ) . 0 3 2 . 8 . 8 (6 8 4 . ) (7 8 4 . ) N 3 3 A 9 1 . 7 . 8 N 4 3 A 0 1 . 5 . 9
2 1 . 9 6 1 2 . 9 9 3 . 6 . 1 () 0 1 . 3 3 1 1 . 4 5 9 . 9 . 3 () 1 1 . 6 1 1 1 . 3 3 5 . 7 . 9
N3 A 2 2 1 . 3 1 6 . 6 . 2 8 . 6 6 . 6 5 5 . 8 . 1 3 . 6 3 . 4 2 2 . 9 . 6 3 . 9 3 . 6 3 2 . 2 . 8 1 3 5 2 . 3 1 1 1 . 5 6 2 . 1 . 1
N3 A . 1 4 6 %. 6 . %1 %
48
Domestic growth the way ahead with CAGR 16% revenue growth
We expect the domestic business to get back on focus as a key driver to DRRD's growth on the back of new launches and more emphasis towards tier II/III cities. DRRD's domestic formulations business is back in to the double digit growth due to additional investments in the sales force and increased rate of new launches. We forecast DRRD's India formulations revenue to grow by 16% (CAGR) over FY11-14 up from CAGR 13% over FY08-11.
Exhibit-60: Domestic business revenue growth

25,000 25
20,000
20
INRMn
15,000
15 (%)
10,000
10
5,000
FY09
FY10
FY11
FY12E
FY13E
FY14E
Sales force addition to bring in growth in volumes

In FY11, the company added around ~400 sales representatives taking the total to 4,100. We expect DRRD in FY12 may see the further addition of 300-400 people focusing mainly on the tier II/III cities and towns of India. DRRD's top 10 brands (total of ~240 branded products in India) accounted for 34% of total revenues in FY11 and we expect DRRD's top 10 brand sales to decline on account of the new launches and higher growth in newly launched products.
Exhibit-61: Sales force addition to focus in the tier II/III cities

16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 FY 08 FY 09 FY 10 FY11
14,900 13,455 11,228
1,786
49
Exhibit-62: Revenue from the top 10 brands in India

INR mn Omez Nise Stamlo Reditux Omez-DR Stamlo Beta Razo Atocor Mintop Razo-D FY11 1,028 700 507 405 377 328 285 278 209 200 FY10 892 690 473 232 310 326 247 274 196 169 Growth 15% 1% 7% 75% 22% 1% 15% 1% 7% 18%
Emerging market focus to add traction

The recent JV of DRRD and Japan's leading firm Fuji films according to us in an important step in order to tap the high growth potential of generic drugs in Japan. We believe that DRRD's entry in to Japan would provide adequate traction and strong CIS growth to the company's long term growth. We expect Japan to be a key market for DRRD being the 3rd Indian pharma company (after LPC and Cadila) on the back of the tremendous generic pharmaceutical opportunity there. We believe the revenue contribution of CIS and RoW markets in the consolidated revenue of DRRD to increase by CAGR 10-12% over FY11-14E.
Exhibit-63: Emerging market holds the key to growth

4 0 0 3 5 0 3 0 0 2 5 0 2 0 0 1 5 0 1 0 0 5 0 0 F Y 0 8 F Y 0 9 F Y 1 0 F Y 1 1 F Y 1 2 F E Y 1 3 F E Y 1 4 E R O W
RO u tC s h s i ae &I r S
50
Strong CIS growth to add strength

Russia and other CIS countries contributes ~15% of DRRD's total revenues, which grown by 19% y-o-y in FY11. We believe the brands acquisition will provide an increment boost of 7-9% to total Russian sales of DRL in FY12E. We forecast a CAGR of 16% over FY11-14E in the Russian business of DRRD and we expect DRRD to generate almost 60% of its Russian revenue through the sale of Rx products.
Exhibit-64: Russia to add growth

20,000 40
15,000
30
INR mn
10,000
20
5,000
10
0 FY09 FY10 FY11 FY12E FY13E Growth (%) FY14E
Russia & Other CIS
S:o , Ceh o m IR u p r c a e n ne Cy s a S ts M r . c
DRRD-GSK JV to add strength in the EM

GlaxoSmithKline (GSK) in 2009 has entered into an agreement with DRRD's to develop and market select products across emerging markets outside India. As part of the partnership GSK will gain access to DRRD's portfolio and future pipeline of more than 100 branded pharmaceuticals in therapeutic segments such as diabetes, cardiovascular, gastroenterology, pain management and oncology and will have marketing rights in various emerging markets, such as Latin America, Asia Pacific, Africa and the Middle East. DRRD is likely to reap the benefit from the GSK deal over the next 2 years. The management is upbeat on it, targets of clock a revenue of USD3bn by FY13. DRRD management expects to receive USD6-9mn milestone payment on transfer of title of products in Brazil over the next 5 years.
(%)
51
Exhibit-65: Revenues from the top products in Russia

INR mn Nise Omez Keterol Ciprolet Senade Cetrine FY11 2,311 1,554 1,376 778 598 590 FY10 1,862 1,458 1,287 760 408 Growth 24% 7% 7% 2% NA 45%
Japan entry a significant move forward

DRRD has signed 49:51 joint venture (JV) with Fujifilm to sale generic drugs in Japanese market. The JV would utilize Fujifilm's advanced quality control technologies and DRRD's expertise in cost competitive technologies for API and formulations. The JV plans to launch its first products within next 3-4 years. DRRD with this JV will be the third Indian generic pharmaceutical company entering Japan after LPC and CDH apart from RBXY which is presence in Japan through its parent Daiichi Sankyo.
Exhibit-66: Japan's Generic Drug Market

1 2
Exhibit-67: Patent expiry opportunity in Japan

Year Active Ingredient ro d i re m sn i et u ds a o Sponsor in Japan Nd o i v s ok N o r At jm i o n o o Cil lS i a tn xh oK m e Ah sP ts m ea l l r a a Ah sP ts m ea l l r a a
1 2 ns 4 0s p 1ua 0l Ii r n a t 1 2 1 0
1 0 U S D b n
st x t ar o le f m o ei a o e l n tls au c r o i m
2 t sa 0 oi lm 1r n 1v c Aa i a c t u
8
6
pz yldT iio ro o no e a gec l t h r a d i h k e d a 2 no 0al 1s e 2t az r o l r om op s tu a a t as ni s qif r ue a e u tn t i a m p a e rr s az d bl i e em p o a u o tit er la m s a n Zn oi i l od ec dc ra Ac sn t a r a Z e Bhe a au nr t ym u aa Pc l i c A h sn s P, t e ts m c ea r a l l r a aZ A a e EL iC s t ad i o
6
4
P xh ldp eelm r e i ro No r h a o d r i ni I e m y i i l p e o e ph n dc h oe g Bg ne i
4 2 0
r f h ld C ll ano e h il l ed r o yo x ie c r i h uL gi a y i E Ah sP ts m ea l l r a a N o v a r t i s
No e lm i ni r h pe I e ph n or g Bge n i
2222222 22 0000000 00 0000001 11 4567890 12 GD e r nu e g r s i c Aoa aR s t p mS % h r H o fa m( ) t r k l ae t
Strong product pipeline provides exciting opportunity in US

DRRD has one of the most impressive product pipelines including the FTFs for the US market. DRRD had a cumulative filing of 170 ANDAs of which 76 are pending approvals. The recent launch of Fonadparenux (with exclusivity) in the US provides confidence about DRRDs product pipeline and the ability to launch complex drugs. We believe the US to remain the primary market for DRRD for near to medium term contributing ~1/3rd of sales of the global generics business. However we also believe that the long term growth of DRRD lies in the effective geographic diversification mainly in to key pharma-emerging countries.
52
Exhibit-68: Generic Market Share of Key Rx Products

Key Rx Products Tu a s c r o l i m O lx mR ee p( r a ) z o Cx ifc p i ra on l o St ia m vn s a t i Fr i te n a s e i d Fa e d x i on f e e n 2010 2 6 % 2 0 % 2 5 % 9 % 1 3 % 3 3 % 2011 2 8 % 1 6 % 2 5 % 8 % 1 7 % 3 5 %
S: m oo, S u p r c a e n Cy I M
Timely regulatory approval key for US growth

We believe the US will remain the primary growth market for DRRD for the next 3-4 years contributing 31% market share of global generics. We expect North America generics sales to register CAGR 18% over FY11-14 on the back of increasing share of the limited competition opportunities. We believe that timely approval of the USFDA remains the key upside trigger for DRRD. We expect near-term opportunities in fondaparinux (launched in Jul 2011 with phase wise launch), Ziprasidone (Geodon), olanzapine (Zyprexa) and Atorvastatin (Lipitor) (without exclusivity) to materially drive growth in the US. We include upside from fondaparinux, ziprasidone and olanzapine in our model but we believe that the timely approval from the USFDA would remain a key catalyst to our valuation.
Exhibit-69: DRRD expected near term product pipeline in the US

Branded Market size (USD Mn) Arixtra (Fondaparinux) Zyprexa (olanzapine) Plavix (Clopidogrel) Geodon (ziprasidone) Lipitor (Atorvastatin) 340 2,030 4,675 1,010 9,000 Expected date of launch 2HFY12 3QFY12 3QFY13 1QFY13 2QFY13 NPV per share (INR) 5.0 8.9 0.3 8.6 1.9
S: m I R o o , C eh u p r c a e n ne Cy s a S ts M r . c
53
DMF filings impressive

DRRD have a cumulative total of 167 filings as of Sep-10 (24 in FY10) covering 70-80% of the generic patent expirations. The company filed 13 ANDAs last year of which six were para-IV opportunities. The management expects to add 15-20 ANDA filing in FY12. We tabulate recent DMF filings (over the last three years) which cumulatively cover USD43bn in the branded market. DMFs for dexlansoprazole, bortezomib, bivalirudin, testosterone and ranolazine is bring filed in the latest USFDA filing which will according to us provide additional strength to DRRDs product pipeline.
Exhibit-70: Annual DMF filling of DRRD

6 0 5 0 4 0 3 0 3 0 2 0 1 0 0 F Y 0 6 F Y 0 7 F Y 0 8 F Y 0 9 F Y 1 0 F Y 1 1
Source: USFDA, Company, SMC Inst. Research
5 6
5 4
5 5
5 6
3 6
Proprietary products to gain traction
Dr tp s el s N r ttf nu . r s m Ror d gn a C ow em P P ( Rp r t m e Di y c ndw p s d t l nm a ' sr pa u e os t ue a di i e i c f E uh f a o hU n c d f ot e r i r o i a S s u r
s i )o o d d r ryac d Dr y uu u yc ne u s l doln .Rr h p s b i u b p s ekm ci s ss r d c ve t i onDta r t irf e a r t d a d nof e e l a i s c l s o oa r o g t oR n f u e od r c e ii r t r i h tnr e mrdi xn ofnteao i c feem p t de te l c o r or et a s u iw cuPb r h a n po d g c g r f h e hm n f se s i r i a bc t o s .
t am d iu r ,iibe A P aP P h ce ei nFt R , a e f di s r sr a oc wl ia t ar t la g t o h t r m h d s u D i a e e r i a l i z c e i h c l m g x mp bn n f i o -r . m a l m g i a um
Exhibit-71: DRRD's developmental pipeline

Compound New Chemical Entities (NCEs) D R F 2 5 9 3 Therapeutic area Status Remarks
Msr h ec d tl i e a o b r o i d sPI Ih c l t f y i t a s e n Il an p b I I PI i t g e e a i e o 2e s ns r e c i I Tds a pe Noe ado s s r wii i t ni r c et d e r h Bc c n
D2 R L 1 7 8 2
Msr ec d tl i e a o b r/ o i ds C s dr h a c id a T g i iass ra s s s du r P i oa e vr l o e a d e t ci I I r ym l s g s arr e l t i np / o i d h o e e
Novel differentiated formulations (DFs) DRP L2 -B N A DRP L5 -B N A DRP L6 -B N A D F A 0 2 D F P 0 2 Oc n o c s h i os m y Ps si o r i a s Ps si o r i a s Ac nt te i i - v i ns f e M ii g r a n e PI I a l a g c c h a s e n Ii l tf n o I I PI i tn h s hc e o o i s n i r m e c I s O y s C l aT g s i l a Ps n i c r g si e o t r i ni a C l aT g s i l a Ps n i c r g si e o t r i ni a C l aT grfo i l a b le n i c r a ic g c ns e t t i n i e t a i n C l aT g i i l a M n i c r g in e g t i na r e

S: m I R o o , C eh u p r c a e n ne Cy s a S ts M r . c
54
Exhibit-72: PSAI revenue to remain steady

6 0 0 5 0 0 Im N R n 4 1 7 4 0 0 3 2 7 3 0 0 2 0 0 1 0 0 0 F Y 0 8 F Y 0 9 F Y 1 0 F Y 1 1 F Y 1 2 E F Y 1 3 E
4 5 4
4 4 2
4 6 7
4 9 6
Recent bad news factored-in

The USFDA had recently imposed an import ban on products made at the company's Mexican plant (which produces intermediates and active pharmaceutical ingredients) for violation of current good manufacturing practices (CGMP). The total revenues from the facility are ~USD 60 mn, of which half is from Naproxen which was not affected by the ban. We expect a net impact of ~USD 30 mn on account of this ban for FY12E. We believe that the news of accident in one of DRRD's plant in Bellaram, Andhra Pradesh that resulted in the loss of 2 lives and the recent strike in the Srikakulam formulation plant in Hyderabad is been factored-in in the current price of the stock. We expect that these are unsystematic business risk and do-not cast cloud the longterm opportunities of the company.
55
Initiate Outperform with target price of INR1,864

We believe that DRRD is the best play in the Indian generic drug space on the back of its strategic presence in the key global markets along with strong product pipeline that would help gain from generic opportunities in the US. We believe there are a number of interesting near-term opportunities, including fondaparinux, ziprasidone, olanzapine launches in the US and upside from emerging markets. We haven't factored in significant upside from the GSK deal as we believe material benefits will only accrue in FY13 and beyond. We initiate DRRD with an Outperformer rating on the back of its strong domestic growth and increased focus on de-risking through geographical diversification. We see the clear visibility of the US business in terms of product launches as a near term trigger for the stock. We value DRRD on SOTP basis wherein we value the base business at 20x FY13E earnings and limited competition opportunities at NPV basis to assign INR 29 per share to arrive at out target price of INR 1,864

FY12 B ER a P s S e () bI i z N T aP a s / r eE g b( e i x t B z ) Tr a i s a i bs ) r c ee g e b (INR) e ( u t Ps n s Limited competition opportunities (NPV) Total Target Price (INR) 6 9 . 6 FY13 9 1 . 8 2 0 1 ,5 8 3 2 9 1,864
Source: SMC Inst Research Source: SMC Inst Research

I N R 3 0 0 0 2 5 0 0 2 0 0 0 1 5 0 0 1 0 0 0 5 0 0 0 5 0 0 D e c 0 5 J7 a n 0 J8 a n 0 J9 a n 0 J0 a n 1 J1 a n 1 -0 1 0 0 -0 1 5 0

450,000 400,000
3 350,000 0 x
INR mn
300,000 250,000
2 5 x
2 200,000 0 x 1 150,000 5 x
16x 13x 10x
100,000 50,000 0
D e c 0 5 J9 u n 0 D e c 0 6 D e c 0 7 D e c 0 8 D e c 0 9 J6 u n 0 J7 u n 0 J8 u n 0 J0 u n 1 D e c 1 0 J1 u n 1
- 50,000 -100,000
Source: Bloomberg, SMC Inst. Research
Source: Bloomberg, SMC Inst. Research
56
Revenue Mix
Particulars Global Generics Ne S a o r & r iU d t hc C A( a m a n a ) E u r o p e I n d i a RO u tC s h s e i a r &I S R O W PSAI Ne S a o r & r iU d t hc C A( a m a n a ) E u r o p e I n d i a R O W Others Total Revenue FY10 48,605 1 6 ,7 8 1 9 ,3 6 4 1 0 ,8 1 5 9 ,9 1 1 2 ,8 8 6 20,404 3 ,2 6 7 6 ,3 6 5 2 ,6 6 4 7 ,3 4 3 1,268 70,277 FY11 53,340 1 8 ,6 9 9 8 ,1 4 3 1 1 ,0 6 9 1 0 ,8 8 5 3 ,5 3 6 19,647 3 ,0 1 7 7 ,0 0 2 2 ,9 6 1 6 ,8 8 3 1,705 74,692 FY12E 63,059 2 4 ,0 6 3 8 ,1 5 4 1 3 ,2 4 5 1 2 ,9 8 1 3 ,7 6 1 20,964 3 ,2 2 9 7 ,2 3 2 2 ,8 7 0 7 ,3 6 4 2,102 86,124 FY13E 72,387 2 9 ,3 0 6 8 ,2 7 1 1 5 ,4 8 7 1 4 ,2 8 3 3 ,6 9 0 22,340 3 ,6 4 5 7 ,8 6 8 2 ,9 7 8 8 ,7 4 0 2,564 97,291
Profit & Loss

Particulars Net revenues Ce s ov s e t n ou f r e Gf rr oi s t s p o S xs Ge &e A e p n s Re &s De Es x p n I ies ml pt a o r s m n O ox s t( ms h ee e r I )p n/n c ee O ee p xs e p r a e t i nn gs EBITDA Dt&a e i At po oo r n ri e c i a m t n i z EBIT Fag i ca nC ah n r i l e s O O i ms tNa c ( e h p n Es e e r o t ox ) ni r n e n g / p e P B T Im na c x oe e t s Net Profit FY10 70,277 3 3 ,7 9 3 3 6 ,0 3 4 2 2 ,5 5 0 3 ,3 7 9 8 ,3 6 0 () 5 6 9 6 8 ,9 2 6 2,008 2 ,9 1 9 (191) 3 4 8 () 1 4 6 9 8 5 (1,131) FY11 74,693 3 4 ,0 4 3 4 0 ,3 2 6 2 3 ,9 6 8 5 ,0 0 6 (1 1 ,5 1 ) 6 2 ,4 0 6 12,629 2 ,7 6 2 10,002 1 8 9 3 9 ,6 8 1 1 ,3 4 0 8,413 FY12E 86,124 3 8 ,1 9 2 4 7 ,2 2 0 2 5 ,4 2 7 5 ,1 8 4 () 8 1 4 6 9 ,2 2 2 16,902 3 ,7 2 0 13,694 2 4 3 1 3 ,2 4 5 1 ,6 6 9 11,756 FY13E 97,291 4 2 ,4 4 2 5 4 ,7 8 6 2 6 ,8 5 3 6 ,0 8 1 () 9 2 0 7 4 ,3 8 5 22,439 3 ,9 6 3 18,800 4 0 6 1 8 ,4 3 9 2 ,3 9 0 15,492
57
Balance sheet
Particulars Equity Capital Reserves and surplus Shareholder's equity Long-term debt Short-term debt Total Debts Other liabilities Current liabilities Provisions Total Current liabilities & Provisions Total Liabilities N ia e gs t ns i bt nl e t es a Gc rl ok s s b o Dt&a e i At po oo r n ri e c i a m t n i z N ek tc b l o Capital WIP Net fixed assets Investments Inventories Sundry debtors Other current assets Cash & cash equivalents Total Current assets Working Capital Dts e e at f ds t e x, r a r e e n Oe ta ht es r s s Total assets FY10 844 42,071 42,915 5,385 5,565 10,950 288 22,324 1,094 23,418 77,571 1 3 ,3 9 7 2 9 ,9 6 7 1 2 ,7 0 8 1 7 ,2 5 9 4,867 36,432 3,910 13,371 11,960 6,548 6,545 38,424 15,006 (3 1 ,8 4 ) 2 4 3 77,571 FY11 844 45,146 45,990 5,271 18,220 23,491 707 21,481 1,314 22,795 92,983 1 5 ,6 2 4 3 8 ,9 3 5 1 4 ,4 7 1 2 3 ,5 6 4 5,997 44,888 313 16,059 17,615 8,190 5,729 47,593 24,798 ( 8 7 ) 2 7 6 92,983 FY12E 844 56,900 57,744 6,618 9,556 16,174 393 19,792 979 20,771 95,082 1 7 ,7 9 3 4 3 ,6 5 2 1 7 ,1 9 2 2 5 ,5 6 0 5,938 49,481 4,675 17,233 12,478 7,923 3,120 40,754 19,983 ( 8 7 ) 2 5 9 95,082 FY13E 844 72,392 73,236 8,394 12,119 20,513 507 22,304 1,290 23,594 117,850 2 1 ,9 1 2 4 9 ,4 3 6 2 1 ,0 5 6 2 7 ,4 8 0 7,021 55,955 5,610 18,157 17,888 8,715 11,309 56,069 32,475 ( 8 7 ) 3 0 3 117,850
58
Cash flow statement

Particulars P ft re x o re f os i e t ba Dt&a e i At po oo r n ri e c i a m t n i z I ies ml pt a o r s m n I et n() tt ee r s N O t h e r s Ci nb h sy r a ue n dt g r o e n d s Ci vi h in a ne n es g t e o n r Ci a d h l sv a oa e n na g &s e n n c Citc te h o ra a he t n e ns g r e n us r s Ciuils h c ti a rl i n ra g e t e n i n b e Ciro h pn a os n v g i e s ni Ci o a h wp a n r cl g ki e i nna g t De it s r xd e p c a t ai Cashflow from operations Pee t u oa r fd c f s hi s a xe s s Ps s f a rd a x e of lf d c r ee t eo o s em i s s Pe e t u ot s r fs c i m hn n a v s e Ps s i s t rd a v n of lfe s cr e t eo o m em n e I gs nl s ta e ees n bt A Ie m ni e tt ec r o s n O sa ti tc w h i s e nf r n v e h go l Cashflow from investing Ie i sf t se uu oy q Psp t mm rd a ) S e a o ( yf h L c Re e e n o o e / m r r ot T n r FY10 1 ,8 0 6 4 ,0 1 6 8 ,3 6 0 1 2 3 3 ,0 6 5 9 0 0 (9 1 ,3 5 ) (3 2 ,0 1 ) 1 ,1 2 5 2 5 (4 1 ,7 5 ) (3 2 ,1 8 ) 13,226 (2 4 ,9 1 ) 6 1 (1 2 4 ,1 1 ) 2 1 ,2 1 0 () 1 5 4 2 3 3 (6,998) 1 7 ( 8 3 ) FY11 1 1 ,0 0 4 4 ,8 1 4 2 0 0 2 ,1 3 1 (7 4 ,9 5 ) (2 3 ,4 6 ) ( 1 9 ) 1 ,4 1 5 3 3 0 (3 6 ,8 7 ) (5 2 ,2 9 ) 8,009 (6 9 ,6 0 ) 3 4 8 (6 8 ,0 9 ) 1 2 ,2 6 0 (4 2 ,0 5 ) 1 2 7 (0 1 ,0 1 ) (8,589) 2 9 1 2 ,1 5 4 (4 8 ,2 9 ) () 3 6 6 (6 3 ,3 0 ) () 5 7 6 (377) () 9 5 7 1 4 1 6,545 5,729 FY12E 1 3 ,2 4 5 3 ,9 5 9 2 4 3 5 ,7 1 3 (7 1 ,4 1 ) 2 6 7 (8 1 ,9 6 ) () 3 3 5 2 ,6 2 0 (9 1 ,6 6 ) 17,804 (0 5 ,8 1 ) (6 4 ,2 3 ) (8 3 ,3 0 ) 1 7 (12,537) ( 2 ) (6 8 ,4 6 ) 1 ,7 3 4 () 2 4 3 () 3 1 4 (7,876) (0 2 ,9 6 ) 5,729 3,120 FY13E 1 8 ,4 3 9 4 ,7 3 4 4 0 6 (1 5 ,0 4 ) () 9 2 5 () 7 9 2 2 ,2 5 1 3 1 1 (0 4 ,4 3 ) (0 2 ,3 9 ) 15,940 (2 6 ,1 9 ) () 9 3 5 (0 3 ,0 9 ) ( 4 4 ) (11,800) 2 ,4 5 6 1 ,6 7 7 () 4 0 6 1 1 4 4,048 8 ,8 1 8 3,120 11,309
Psp t mm (7 rd a ) L r a o ( yf o L c Re e e n n o e / m r g o T n 3 e ,9 4 ) I ed np tt ea r i s D p ln ieing v a ux id c t d d ia ni de , s O t h e r s Cashflow from financing N ee n eg d y tha re c nd a ae u r s r t i g Fasp oil) a r ni c e/ m x( g s t o Cash at beginning of year Cash at end of year () 4 4 9 (3 1 ,3 2 ) ( 8 0 ) (5,307) 9 2 1 2 4 6 5,378 6,545
59
Key ratios
Particulars Key Operating Ratios ER P S () I N C E P S Blp e ouh oe a k e Vs ar r R o E ( % ) R o C E ( % ) Valuation Ratios P / E ( x ) P( / x S) a l e s P / B Es Vx /( S) a l e ED VA /T E( B) I x M Cs a p / S a l e Du Pont Analysis T e i m) a n cP x (n B bNe( ue / % r t d oT ) I edT ( nb( /) tt e E ) eu B % r rP T s nB I E rE v ) Bg T u Ia Be ( T ( /n ) m Rs i Ie % n e Ar r eA% su ( n g ) s n e sT e o v/ A t v T R e u e ) v( L eTe ( e ( A u) v A vt% e vAi r gg) a g /q y Do u E P ( o % n ) t R 7 7 4 . 7 7 6 . 4 () 0 . 3 8 9 . 8 1 8 4 . 2 () 2 . 7 8 5 . 7 9 8 . 1 1 3 . 4 8 7 . 6 1 9 1 . 8 1 8 . 9 8 7 . 4 9 8 . 2 1 5 . 9 9 1 . 6 1 8 1 . 3 2 2 . 7 8 4 . 2 9 7 . 8 1 9 . 3 9 1 . 4 1 6 2 . 6 2 3 . 7
FY10
FY11
FY12E
FY13E
() 6 . 7 3 8 . 8 2 5 4 . 2 () 2 . 7 () 2 . 1
4 9 . 5 3 3 . 9 2 7 2 . 4 1 8 . 9 1 3 . 9
6 9 . 6 1 8 . 5 3 4 2 . 0 2 2 . 7 1 6 . 7
9 1 . 8 6 7 . 0 4 3 3 . 7 2 3 . 7 1 9 . 0
N A 3 . 0 5 . 0 1 . 3 1 0 8 . 9 3 . 0
3 2 . 3 3 . 6 5 . 9 1 . 5 2 2 . 8 3 . 6
2 1 . 6 2 . 9 4 . 4 1 . 0 1 5 . 8 2 . 9
1 6 . 2 2 . 6 3 . 5 0 . 8 1 1 . 7 2 . 6
60
India | Healthcare
Initiating Coverage
LUPIN (LPC IN) Out-performer

Aggressive growth, attractive valuation
Current Price: 1year Target: Expected Upside:
INR 480 INR 585 22%
Lupin (LPC) according to us is one of the most aggressive Indian pharmaceutical players in the generic space. LPC has transformed itself from being a bulk drug play to an integrated formulations player with a sizeable branded portfolio in US and Japan. We recommend on LPC as OUT-PERFORMER forecasting an earning CAGR of 23% over FY11-14 on account of strong growth in OC and limited competition opportunities.
Stock details
Bloomberg code Shares O/S (mn) M Cap (INR mn) M Cap (USD mn) 52 week H/L (INR) Avg. 6M daily vol LPC IN 446 214,207 4,321 520 / 363 1,057,609
Domestic formulation to drive CAGR 19% earnings over FY11-14
L d u a t~ f le 1t gR o Pi r t c f2o s 1 r C 1 r C f l n n 7t lnr e A7 'nm c o os F g a o v s oi I a a or% a Y s o u s t ai ei i n G% f e F 1 a u i i r t t ri moe t Y L gl h s u o h r h h i 0 P r l f to i whni r c 7 C a sd dx d a r t p 1 hd t p ms . s a e y c agg na i cc e u al no h l ao haf is a r i e g t o n ee p m g B e e ry h g w a a a s kh,p od nl p ol y mt r o l a m ' s h r tr n t o t s not i T m h m ah h . n t e s ha%si i R a dw ie c nm es 9 k c i od r a I b e i nc m 4k n 2 r 6e tr t Nm .
Kwoya to add traction; forecast 15% revenue CAGR over FY11-14

L os ir o m da i e ei t Pu s i K a eat o p x g Cg u y a ah r n e p h t hb w hi s r t d y a hd s asm r e t a g s ln t s i o e nr p l f agw i he mC nd o s a hoe pcak 'J s i taJ ' i g g e on r n t i p ht n a u aLa u y s h cm e r t r a l r P as i c e s t . p ir b a c u % u1 eaeA5F 4 ot1e iY w t n R o1 t ns o e 1 f s u o v 1 h t e fe Fn r r e f r ~ r i b 0v na o e C 1r -o n d e v G% 1e c e Yn bnn d s ctit os n a e cn a u p h et c ws n gi p e t g k l hi efs n s m o a a r o a hi f u e c i n ng p e a l .
Oral contraceptives to drive US revenue
Stock chart
40% 30% 20% 10% 0% -10% -20% -30% Sep-10 Dec-10 Mar-11 Jun-11 Sep-11
LPC IN Equity NIFTY Index
LPC IN = 480 Nifty = 4,924
L bcuanai sow A t S P e clesS ( c f F a n h Ce e ni g x e r u) hn s s hp- n m ati e a ss s u i t i une f b l r l d j sda U i i a nr a n m ' r d l n sh c f4ttS u a Pnr tbse o r% a v r Cd u ui Un 5 t U e k s e a s n a t ~ f or s e b f t . Lao i m i on e tS s c o o l e u i s e n a e i c u eeti hc e d l a nxt otoh h e h p s r ) dpoi e t g w u n ul z w tn m r t l ec e t t r b rt o h n w ( N o w tao r t e f o Ae c a ed t o n n ltot p i . d i e p pt s me oic i m m oe i o ri nt s u
Recommend Out-performer; TP - INR585
Ao 7t s . Fasr m t P 4 r a x eg e e CI 9 a 1 1i . e M Ld 6 3 f N C t4 r W n R P e Y n c d n o Out-performer o m n t h e sf aeg oo1 t oi asR v 1 oc c s r C 2r k t n G% 1 r ni A3F 3 eg n f e Y .
W aFas R a t t t e 5 lg e L 0 eg 2 r o e o 8 ia v Px r o 9r u p I 5n a C Y i f . o aarf l ut e 23 1n n I 2v r N ti e r i Np g c R y i m p lsf f t M ou 2 h ta e%e ep 2 n io r C t d i o P m .
Key risk to our recommendation:

Return(%) 1 Mth Absolute Relative 10 10 6 Mths 16 26 1Yr 20 38
1r ee t t o bs li gy vt ) e xdhdiu2 n ta a r Lhe r i e s s ) a u ps m oa c o h t i w p w mn era pi t nt gn e ce s y lr r n De o o e l ol cnlo g e 3r eew k f a s r to i s )w xd h e nn d i fa , d e e h e n lu w a o l s a L h e r ih u e s u es n oa c o t y t p nt g n t e P-e m hmr a r a r mgt ag k ei ne s .
Summary financials
Particular N( m e I n ts ) SN aR l e E (m BN I I n TR D ) A ER P S () I N ED VA / ( E x B) I T R O E ( % ) P E ( x ) Bh Vr pe e r s a FY 10 FY 11 FY 12E FY 13E CAGR(%) 1 9 . 4 2 2 . 6 2 4 . 0 N M N M N M N M 4 8 , 88 7 5 0 ,0 6 3 2 9 , 68 5 8 2 ,0 8 4 9 , 91 8 1 3 ,1 1 9 1 5 , 91 4 3 8 ,2 1 4 1 5 . 3 1 9 . 3 2 2 . 6 1 8 . 6 3 4 . 1 2 9 . 5 3 1 . 3 2 4 . 8 5 7 . 7 7 3 . 5 2 4 . 7 1 4 . 3 2 9 . 4 1 9 . 4 2 9 . 2 1 2 . 0 2 7 . 2 1 6 . 4
Analyst
9 4 1 . 7 2 0 . 2
61
Cash Flow
T 4 8 5 , 8 , 0 , 6, 0 P 7 8 6 8 0 3 9 2 2 5 8 8 4 A
6 , 6 , 6 , 9, 2 8 8 1 1 1 6 1 3 2 0 0 3 4 1 , 9 , 2 , 7, 0 2 1 3 7 1 2 1 9 3 7 3
e t po r n e c i a Te e e3 o r xs 8 4 t ap a t e l onn p i gs , 9 , 0 , 7, 8 Di 8 6 5 6 6 4 4 4 1 1 6 4 9 EBITDA 9,839 11,911 15,439 18,142
Ci o a (6 (1(05 h wp1 a n r cl , 6 , 0 , 4, 3 g ki e i nna 3 1 g t ) 5 3 (2 ) 8 5 ) )
tn a n, 6 , 5 , 5, 0 hc jm4 2 e a st 1 r s t s o d n u ) 1 1 (5 ) 6 9 ) ) Di At et m p nro , 9 , 2 , 7, 0 O-h e(6 (9(11 r o o n2 1 e& i c i a t i z a 1 3 7 1 2 1 9 3 7 3 E B I T Fag i ca nC ah n r i l e s Om ti e h e r n c o 8 1 , 0 , 9 , 2, 2 Operating cashflow 6 0 1 1 0 1 3 5 9 4 8 6 1 pee ie i t n a d l u 3 8 3 5 2 3 3 5 6 8 C xt 2 1 a pr 1 4 2 8 9 a n s n e g t e m n e 8 1 5 1 Ci v n 1 h i st 6,764 7,969 9,743 10,399
(9 (7(25 6 , 2 , 6 , 2, 2 6 4 ) 2 7 (3 ) 0 5 ) ) () 1 1 1 ( 5 1 ) 1 2 (5,532) 4,868 -
ti tc w 1 h i s e nf r n v e h go l Pr ei rf x o oexn 8 fo t a , 7 , 3 , 5, 2 O s a i t r r 3 9 1 1 t aa y 5 9 3 5 b& e r d 6 1 5 8 4 Profit before tax t a x N ei tf p r o t Me i in n tt o r r e t ys I 8,357 9,963 13,185 15,542 Investing cashflow (6,802) 72
(4,315) 3,693
(7,022) 2,722 -
1 , 0 , 9 , 8, 1 Free cashflow to firm 3 1 6 1 1 2 6 9 3 7 3 se uu oy q 6 , 7 , 4 , 8, 1 Ie i 9 8 1 1 9 7 1 3 9 2 2 0 1 sf t a rn n r s g o e w n () () () () 1 1 1 2 4 1 1 8 4 4 Cio g 8 8 h bi 2 0 v a id dd n 2 2 Dp 0 0 iei 13,042 13,062 I ed nP tt ea r i s Financing cashflow
1 0 1 7 3 8 2 ,5 8 9
1 9 3 1 4 0 0
Im/c nrVa c o st o mis 6 eJse f A o 9 Reported PAT Adjusted Profit 6,816 6,885
(6 (3(81 1 , 2 , 2 , 2, 5 2 1 ) 4 1 (0 ) 7 8 ) ) () () () () 3 7 3 9 1 3 3 2 6 8 2 1 1,361 (1,605) (1,235) (1,845)
8,626 8,646
11,039 11,059
Balance sheets
Particulars Soe hdu aei r r t e 'q h l sy Me i in n tt o r r e t ys i s L rb om nd ge t e t Pn ro os v i s i Seb hm o d r e t t r t Cli s uil r a r b e i nt t i e Total liabilities & equity Na e s td f s i xe et s Is t nn v s e t m e In ni ve es t o r Sd ue nb dt r o yr s L ae od a v na s n &s c Ors tc te he t e ns r u s ra Ca ie a s v s h ls he n & a cq t u Ca us r s r e e t ns t Dts e e at f ds t e x, r a r e e n Total assets FY10 FY11 FY12E FY13E
Key ratio
i dN l ER uS t () eI 2 5 3 , 8 , 1 , 6, 3 DP 6 2 4 5 7 8 2 3 1 2 6 3 4 2 5 5 5 1 5 5 5 1 1 5 5 1 , 8 , 6 , 2, 9 3 1 1 2 1 1 0 5 6 5 0 2 , 9 , 8 , 0, 2 2 2 2 7 2 2 1 2 2 4 6 Bh R Vr ) pe e ( r I s N a R O E ( % ) Growth (%) Rs e v e n u e
1 5 . 31 9 2 . 3 4 9 . 72 . 2 5 7 . 77 3 9 1 . 5 4 2 . 7 0 . 2 3 4 . 12 9 2 . 5 9 7 . 42 . 2
2 6 . 01 9 1 . 7 9 9 . 31 . 0 3 3 . 12 1 2 . 1 9 7 . 61 . 5 4 1 . 42 6 2 . 5 8 8 . 01 . 1 3 1 . 72 6 2 . 1 8 8 . 01 . 1
1 0 1 , 1 , 8 , 1, 5 E 0 0 1 1 8 4 0 1 1 9 2 8 6 B I T D A ei tf p r o t 9 1 , 3 , 0 , 4, 1 N 6 1 1 1 6 8 2 4 0 4 8 8 9 49,224 59,468 70,009 84,185 E P S Margins (%) E B I T D A E B I T N ei tf p r o t
2 2 2 , 0 , 1 , 5, 7 6 5 3 3 4 8 0 4 8 9 1 2 2 2 6 4 3 2 3 3 2 2
2 0 . 22 0 2 . 4 2 1 . 22 . 9 1 7 . 71 7 1 . 5 9 9 . 31 . 1 1 4 . 01 4 1 . 8 5 5 . 91 . 7
9 1 , 5 , 0 , 3, 6 7 2 1 1 1 0 2 5 0 8 2 4 8
1 1 1 , 6 , 8 , 4, 5 Valuation ratios 2 2 1 1 6 5 3 6 5 8 8 3 7 / E ( x ) 4 , 9 , 8 , 9, 6 P 7 6 5 2 8 1 0 0 0 9 5 6 P( rV iB cx e) / Msx aa s r p( k/ ) e a t l ce Es Vx / ( s ) a l e 2 7 3 , 5 , 7 , 4, 8 7 4 4 5 5 9 0 1 6 4 4 6 3 (3 1 (11 1 (1 1 (1 , 5 , 1 , 1, 1 4 ) 4 ) 4 4 ) ) 49,224 59,468 70,009 84,185 ED VA / ( E x B) I T M( c lx as p ) / S a e Es ( a Y r i% ne i ns g ) l 3 1 2 . 3 4 1 1 . 8 9 6 . 4 . 4 8 . 3 6 . 5 5 4 . 1 . 0 4 . 4 3 . 7 3 2 . 1 . 6 4 . 6 3 . 8 3 2 . 2 . 6 2 2 1 . 6 8 1 1 . 6 4 2 . 3 . 0 4 . 4 3 . 7 3 2 . 1 . 6 3 . 2 4 . 0 5 6 . 2 . 1

2 , 5 , 1 , 8, 1 0 4 1 2 5 8 0 6 7 8 1
62
Domestic formulation to drive CAGR 19% earnings over FY11-14

LPC is ranked as the 7th largest domestic formulations player in the IPM having registered growth of 13.8% during FY 11 and has an overall market share of 2.7% of the Indian Pharma Industry. LPC's India formulations account for~27% of total sales in FY11 registering a CAGR of 17% over FY07-11. LPC has gradually shifted its product mix towards high margin chronic therapeutic areas like nephrology, ophthalmology and gynaec apart from its strong anti-TB medicines which command a leadership position with ~45% market share.
Exhibit-76: Domestic formulation to drive CAGR 19% earnings over FY11-14E

3 0 ,0 0 0 2 5 ,0 0 0 2 0 ,0 0 0 INRMn 1 5 ,0 0 0 1 0 ,0 0 0 5 ,0 0 0 0 3 0 2 5 2 0 (%) 1 5 1 0 5 0
F Y 0 Y 8F 0 Y F 9F 1 Y F 0 1 Y F 1 1 Y F 2 1 Y E 3 1 E 4 E I n d i a G r o w t h
The company is among the top five within the cardiology market registering a growth of over 21% in FY11 as against the relevant market growth rate of 16%. LPC's cholesterol lowering drug Tonact is rated amongst the highest prescribed brand in the Atorvastatin category with prescription share of over 11%.
Exhibit-77: Top Ten LPC Brands

Products TONACT GLUCONORM RABLET RCINEX RAMISTAR AKT CLOPITAB L-CIN Telekast Budamate Therapeutic Segment Segment Ranking CVS Anti Diabetic Gastro Intestinal Anti-TB CVS ANTI-TB CVS Antibiotics Anti-Asthma Anti-Asthma 3 4 2 1 2 1
Exhibit-78: LPCs growth in comparison with market

Therapeutic Segment CVS Anti-TB Anti-Asthma Antibiotics+Cephalosporins Oral Anti Diabetic 3 1 3 3
Lupin Growth (%) 21% 10% 28%
Market Growth (%) 16% 5% 14%
1% 31% 22% 20% 86%
14% 24% 17% 17% 14%

Gastro Intestinal (GI) CNS Gynaecology
63
Partnering with Eli Lilly in insulin helps complete LPC's product basket
LPC has entered in a partnership to promote and distribute Eli Lilly's insulin products in India and Nepal. We believe the deal will complete LPC's diabetes portfolio and increase Eli Lilly's reach of insulin products in India. India is likely to be the diabetes capital of the world with the largest diabetic patient population and large global players in the diabetes space will increasingly focus on India. We are not factoring this opportunity in our estimates for LPC as we believe the benefit, to begin with, will be small compared to LPC's overall business. However we believe this opportunity will provide traction in LPC's domestic sales and marketing competencies and improves the overall domestic business growth outlook.
Completes product basket, except for analogs

LPC will deploy a sales force of 300 medical representatives to promote the insulin products from Lilly. The collaboration would double the current customer base for Lilly's insulin products (approximately 45,000 doctors will now be targeted). Addition of insulin make LPCs already strong diabetes portfolio more comprehensive. The deal, does not seem to include Humalog, Lillys insulin analog.
Japan to provide long term growth

Kyowa Pharmaceutical, LPC's Japan subsidiary has strong presence in the neurology, cardiovascular, gastroenterology and respiratory segments with more than 200 strong product portfolio and 75 member sales team. In FY 11, the neurology segment contributed to 44% of Kyowa's total revenues. During the year, Kyowa launched 5 new products and filed applications for an additional 20 products. Japan being the second largest pharmaceutical market in the world with a market size of USD80bn is now emerging as a key market for the generic player as it provides tremendous growth opportunities having only close to 9% generic penetration. The government has, in the past two years, legislated to encourage the use of generics. We believe the Japanese market holds huge long-term potential for generic players and a successful presence in such a market will require tie-ups/associations with known local names since Indian companies are still
64
Exhibit-79: Kyowa's revenue performance

12,000 10,000 8,309 8,000 INR mn 6,212 6,000 4,000 2,000 0 FY09 FY10 FY11 FY12 FY13E FY14E 5,107 5,341 7,225 9,555
Oral contraceptives to drive US revenue

LPC has been successful in establishing Suprax (in-licensed from Fujiwasa) and Antara in the US market. LPC's branded formulation business in the US accounts for ~45% of its total US revenues and we expect it to contribute more to the growth with the launch of new products (AllerNaze) and some limited competition opportunities. The recent USFDA approval of Watson's NOR-QD (norethindrone) ,a progestin-only oral contraceptive (OC) and indicated for the prevention of pregnancy will add much needed strength to LPC in order to deeper penetrate the USD5bn OC industry in the US. LPC has 26 product strong OC pipeline in order to tap the US market. We expect LPC to to launch 2-3 products in this segment by 1HFY13 and be one of the leading OC player in the US by FY14.
US branded business unique and successful strategy

LPC's differentiated business model, with successful branded business operations in the US has made the company one of the top 5 generic players in the US overtaking its peers like SUNP and DRRD. LPC entered into the branded business in the US with the launch of Suprax in '03 and currently has three branded products in the US, Suprax, Antara and Aerochamber while the fourth product AllerNaze is in the pipeline.
65
Exhibit-80: LPC is 5th fastest growing generic manufacturer in the US

Manufacturer USD mn Teva PHARMACEUTICA MYLAN WATSON LABS SANDOZ LUPIN PHARMA QUALITEST PRODUCTS GREENSTONE LTD AMNEAL PHARM MALLINCKRODT ACTAVIS DR REDDY'S LAB ZYDUS PHARM HIKMA ( WEST-WARD) ) ROXANE RANBAXY PHARM AUROBINDO PHARM PAR PHARM LANNETT TARO PHARM GLENMARK PHARMA 2008 590 295 245 188 62 90 82 34 95 79 51 25 25 28 51 27 51 35 27 16 2,760 2009 598 330 238 182 92 99 102 67 91 71 71 34 34 30 30 38 46 36 31 24 2,921 2010 610 367 236 208 130 125 102 97 80 69 60 53 44 42 42 39 38 38 37 34 3,072 CAGR 1.7% 11.5% -2.0% 5.2% 45.1% 17.8% 11.5% 68.4% -8.2% -6.8% 8.8% 44.4% 34.6% 23.2% -9.8% 20.1% -13.4% 4.3% 18.3% 45.3% 5.5%
S:IA o K u M r c e H
Branded business to lead growth

LPC's US branded business has increased more than 10-fold in the past five years, from only INR580mn in FY06 to INR6.1bn (USD127mn) in FY10. We expect this segment to grow to INR9.7bn in FY13, driven by increased sales of Antara and the launch of AllerNaze in FY12. We estimate Suprax touched about USD78mn in revenue in FY10, from just USD14mn in FY06. We however estimate a 10-15% decline in Suprax sales in FY13 on account of generic launch. We expect the US branded business would continue to be a major focus area for LPC as this gives it sustainable growth and better margins (28-30% vs. overall margins of about 20%) as these are branded and do not face competition in the long run. Looking at the success of Suprax, we expect Antara and AllerNaze to contribute significantly to long-term revenue.
66
Exhibit-81: US revenue growth of generic and branded segment

3 5 ,0 0 0
IM N R n
2 8 ,0 0 0
2 1 ,0 0 0
1 4 ,0 0 0
7 ,0 0 0
0 F Y 0 Y 8F 0 Y F 9F 1 Y F 0 1 Y F 1 1 Y F 2 1 Y E 3 1 F E 4 Y E 1 5 E G e n B (apd a e r i c r dr r Ae a A un N nn a l z dt S ae ) e a x l , r
EU to grow at 34% over FY11-14

LPC has an aggressive product pipe line in order to tap the up-coming European generic opportunity where USD41bn worth of branded drugs will go off their respective patents. The company mainly focuses in the UK, France and German markets and has cumulative finished dosage product filings of 65, with 31 final approvals. We expect LPC's European business revenue at 34% CAGR over FY11-14E to INR2.6bn which is in line with the CAGR 33.7% in revenues over FY09-11 mainly driven by the low base and increasing number of product approvals.
Exhibit-82: Generic opportunity in EU

1 6
U S D B n
1 2
0 2 0 1 0 2 0 1 1 2 0 1 2 E 2 0 1 3 E 2 0 1 4 E 2 0 1 5 E
Px i U a p E te s ei n ni t r e
S: dS s e o n, Ceh u uM a r s c t e r IR I y n r ts . c
67
Exhibit-83: Generic opportunity in EU

1 6
U S D b n
1 2
0 2 0 1 0 2 0 1 1 2 0 1 2 E 2 0 1 3 E 2 0 1 4 E 2 0 1 5 E
Px i U a p E te s ei n ni t r e
S: dS s e o n, Ceh u uM a r s c t e r IR I y n r ts . c
Exhibit-84: LPC EU sales to grow at 34% CAGR over FY11-14

5 ,0 0 0 Im N R n 4 ,0 0 0 3 ,3 2 8 3 ,0 0 0 2 ,0 0 0 1 ,3 0 2 1 ,0 5 0 0 1 3 0 F Y 0 8 F Y 0 9 F Y 1 F 0 Y 1 F 1 Y 1 2 F E Y 1 F 3 Y E 1 4 E Es U S a l e
4 ,0 4 0
2 ,0 4 5 1 ,9 8 2 1 ,7 2 5
ROW markets add strength

LPC's ROW business spreads across South Africa, Australia, the CIS, the Philippines and the Latin American markets. The company in these geographies grew through various organic and inorganic expansions. LPC's ROW formulations business registered staggering revenue CAGR of 71% over FY08-11, led by aggressive organic and inorganic growth strategies. We expect LPC's South Africa business to drive the entire ROW revenue registering CAGR 44% over FY11-14. We forecast LPC to clock 23% revenue CAGR in ROW formulations over FY10-14 through its focus on increasing therapeutic presence and introduction of products.
68
Exhibit-85: LPC to clock 23% of revenue CAGR in ROW formulations over FY10-14E
1 2 ,0 0 0 1 1 ,4 4 0
Im N R n
8 ,8 6 2 9 ,0 0 0 6 ,6 5 3 6 ,0 0 0 3 ,3 7 6 3 ,0 0 0 9 9 9 0 F Y 0 F 8 Y 0 F 9 Y 1 F 0 Y 1 F 1 Y 1 F 2 Y E 1 F 3 Y E 1 4 E Rr Oe W m a k t
4 ,6 9 5
1 ,1 6 9
69
Initiate with Out-performer

At CMP LPC trades at 16.4x FY13 earnings. We recommend Out-performer recommendation forecasting earnings CAGR of 23% over FY11-13. We expect LPC to gain strength in the US through its aggressive strategy and new launches in the OC segment. We are upbeat on the opportunities that forecast emerging market (incl. India) at CAGR 23% growth to continue, helping the base business grow by 22.5% (CAGR) over FY10-13. We value LPC at 20x FY13E earnings of INR29.2 to arrive at our target price of INR585 implying a potential upside of 22% from the CMP.

Traget price calculation BE a P s S e b i z T aP a s / r eE g b( e i x t B z ) Total Target Price FY12 2 4 . 7 2 0 FY13 2 9 . 2 2 0 585
Exhibit-87:1-year fwd P/E

I N R 7 0 0 6 0 0 5 0 0 4 0 0 3 0 0 2 0 0
A p r 0 6 A p r 0 7 A p r 0 8 A p r 0 9 O c t 0 6 O c t 0 7 O c t 0 8 O c t 0 9 A p r 1 0 O c t 1 0 A p r 1 1

I N R
400,000 350,000 25x 20x 15x
25x
300,000
20x 15x 12x
250,000 200,000 150,000 100,000
10x
1 0 0 0
D e c 0 5
J7 a n 0
J8 a n 0
J9 a n 0
J0 a n 1
J1 a n 1
50,000
70
Revenue Mix
Particulars U S S a l e s B (apd a r d aaAe a A unN nn r dt S ae ) e r xl z , l r G e n e r i c Es U S a l e J( y aw po a a n ) K Advance Market Sales I n d i a Sf or uc t i h A a O t h e r s E gts m ra eM r a l g k i ne S e Rr Oe W m a k t Total Formulation A P I D o m e s t i c E x p o r t Total FY10 1 6 ,2 5 4 6 ,1 1 2 1 0 ,1 4 2 1 ,7 2 5 5 ,1 3 4 23,140 1 3 ,2 5 0 1 ,8 3 2 2 ,5 4 3 1 7 ,5 2 6 3 ,3 7 6 40,405 7 ,6 6 9 2 ,4 1 3 5 ,2 5 6 48,101 FY11 2 0 ,0 0 8 6 ,4 0 2 1 4 ,6 0 5 1 ,9 8 2 6 ,2 2 1 28,121 1 5 ,2 7 3 1 ,9 8 2 3 ,7 1 2 2 0 ,8 6 8 4 ,6 9 5 48,809 8 ,3 6 1 2 ,2 6 8 5 ,1 9 3 57,422 FY12E 2 3 ,3 3 7 6 ,6 5 0 1 6 ,7 8 6 2 ,0 4 5 7 ,5 2 2 33,048 1 8 ,2 6 4 2 ,9 5 1 4 ,7 0 1 2 5 ,8 1 7 6 ,6 5 3 58,226 9 ,6 6 9 3 ,1 3 7 6 ,4 3 2 67,922 FY13E 2 7 ,7 3 9 7 ,7 1 5 2 0 ,1 2 4 3 ,3 2 8 8 ,9 3 0 38,989 2 2 ,1 3 7 3 ,9 4 6 5 ,9 1 5 3 0 ,9 9 9 8 ,8 6 2 69,988 1 0 ,1 9 8 4 ,7 2 3 6 ,4 7 4 80,970

Year ending 31 March Ge re s on s u s e r v Lc ei s s s e : E x Nu en te r e es v Ce s ov s e t n ou f r e Gf rr oi s t s p o Ee n mp p xs le s o e y ee S xs Ge &e A e p n s Pn od we ef ru al R me e& a p an a in i r n s t c e Re &s De e s x p n Tp oe t n a s l E x e EBITDA Dt e i po r n e c i a EBIT I ee ne e tt n ex s rp s s Om ti e h e r n c o PBT Im na c x oe e t s Me i in n tt o r r e t ys i Im/c nrVa c o st o mis eJse f A o Reported net profit FY10 4 8 ,1 9 8 2 7 3 4 8 ,8 7 0 1 9 ,4 6 9 2 9 ,4 0 1 5 ,2 8 7 6 ,5 9 6 1 ,7 5 4 6 7 3 4 ,9 1 1 1 9 ,5 1 7 9,839 1 ,9 2 3 8,600 3 8 5 1 4 2 8,357 1 ,0 3 6 1 1 2 6 9 6,816 FY11 5 8 ,4 6 7 3 5 4 5 8 ,0 3 2 2 2 ,9 3 7 3 5 ,1 9 4 7 ,7 6 7 8 ,6 6 6 2 ,5 0 5 7 9 8 4 ,4 8 3 2 4 ,0 0 3 11,911 1 ,2 7 1 10,199 3 2 5 8 9 9,963 1 ,9 1 6 1 4 8 2 0 8,626 FY12E 7 0 ,9 0 0 4 2 2 6 9 ,6 5 8 2 6 ,3 4 4 4 3 ,3 1 4 8 ,8 6 9 1 0 ,5 0 3 2 ,2 4 5 9 5 2 5 ,7 5 6 2 7 ,4 7 0 15,439 1 ,7 9 7 13,462 3 6 2 8 5 13,185 1 ,8 9 7 1 4 8 2 0 11,039 FY13E 8 3 ,4 3 4 5 0 4 8 2 ,0 8 4 3 1 ,9 4 7 5 1 ,1 3 6 1 0 ,5 3 5 1 2 ,4 1 8 2 ,9 9 1 1 ,4 1 3 6 ,7 6 2 3 3 ,9 2 1 18,142 2 ,0 3 3 15,812 3 8 1 1 1 1 15,542 2 ,1 3 3 1 4 8 2 0 13,042
71
Balance sheet
Year ending 31 March EC qa up i t i ya t l R ap es u s nl e ds r s v r e u Shareholders' funds Me i in n tt o r r e t ys i s Bn og r s r o w i O t h e r s Total Liabilities I gs nls ti A a n e bt es Gc rl ok s s b o Dt&a e i At po oo r n ri e c i a m t n i z N ek tc b l o C I a P p iW t a l Te t od tx e aa l f s i s s Is t nn v s e t m e In ni ve es t o r Sd ue nb dt r o yr s Cu s a ie s v ha el qn t Total current assets Scr ur s nd di r t yo e Pn ro os v i s i Trli s or a t e l a nt l ct i ui i b e Net current assets Dts e e at f ds t e x, r a r e e n Total Assets 37,332 4 ,2 9 3 2 0 ,9 6 9 6 ,9 5 6 1 4 ,0 1 3 3 ,9 5 7 2 2 ,0 6 4 2 6 4 9 ,5 7 1 1 1 ,6 2 6 2 ,5 0 1 27,755 9 ,3 6 6 2 ,9 2 2 1 1 ,3 8 9 15,862 (3 1 ,5 4 ) 37,332 44,950 5 ,8 1 6 2 3 ,4 1 8 7 ,3 7 8 1 5 ,1 4 0 5 ,2 3 1 2 5 ,1 8 8 3 2 1 2 ,0 0 0 1 2 ,8 5 5 4 ,1 2 0 34,967 1 1 ,0 8 0 2 ,8 7 1 1 4 ,8 5 1 20,449 (1 1 ,1 4 ) 44,950 55,285 5 ,4 1 0 2 9 ,6 6 0 9 ,4 1 8 2 0 ,2 4 2 5 ,0 4 0 3 0 ,5 9 2 3 2 1 2 ,3 8 4 1 3 ,4 8 3 5 ,8 6 8 40,464 1 2 ,4 4 8 2 ,0 2 4 1 4 ,4 7 2 25,740 (1 1 ,1 4 ) 55,285 67,032 4 ,5 8 3 3 4 ,0 7 5 1 0 ,8 8 5 2 3 ,2 8 9 5 ,0 4 0 3 4 ,7 1 2 3 2 1 5 ,6 2 8 1 6 ,5 8 7 8 ,1 7 1 51,438 1 4 ,1 8 9 2 ,2 2 6 1 7 ,3 1 5 34,285 (1 1 ,1 4 ) 67,032
FY10 8 8 9 2 4 ,9 7 8 25,678 2 5 5 1 1 ,9 3 9
FY11 8 9 2 3 1 ,8 9 1 32,811 5 1 5 1 1 ,4 6 2
FY12E 8 9 2 4 1 ,4 3 4 42,236 5 1 5 1 2 ,4 5 3
FY13E 8 9 2 5 2 ,0 7 5 53,643 5 1 5 1 2 ,4 8 7
72
Cash flow statement

Year ending 31 March Profit before taxes Dt&a e i At po oo r n ri e c i a m t n i z I et n() tt ee r s N O t h e r s Ci nb h sy r a ue n dt g r o e n d s Ci vi h in a ne n es g t e o n r Ci a d h l sv a oa e n na g &s e n n c Ciuils h c ti a rl i n ra g e t e n i n b e Ciro h pn a os n v g i e s ni Ci o a h wp a n r cl g ki e i nna g t De it s r xd e p c a t ai Cashflow from operations Pee t u oa r fd c f s hi s a xe s s Ps s f a rd a x e of lf d c r ee t eo o s em i s s Pe e t u ot s r fs c i m hn n a v s e Ps s i s t rd a v n of lfe s cr e t eo o m em n e Is tu y nns / v ib J e ni V t m ir e s a d Ie m ni e tt ec r o s n Dsm ie c v i e id d o n n O sa ti tc w h i s e nf r n v e h go l Cashflow from investing Ie i sf t se uu oy q Ps bi rd o g of rn cr r s eo o em w Re o g e nr s p t rn a ow yf o m bi S ea hm o L r t T n r s o I ed np tt ea r i s D p ln ieing v a ux id c t d d ia ni de , s O t h e r s Cashflow from financing Net cash generated during year Forex gain/(loss) impact Cash at beginning of year Cash at end of year FY10 8,357 1 ,9 2 3 3 8 5 () 1 7 7 (1 3 ,3 1 ) () 2 8 0 2 ,7 0 2 (6 1 ,6 3 ) (7 1 ,0 6 ) 6,764 (0 6 ,9 7 ) 1 7 ( 2 9 ) 2 ( 8 4 ) 3 1 ( 2 ) (6,802) 1 0 7 2 ,3 9 7 ( 7 7 ) () 3 7 9 (6 1 ,2 2 ) 1,361 1,324 (33) 681 1,972 FY11 9,963 1 ,2 7 1 3 2 5 ( 3 9 ) (8 1 ,0 4 ) (4 2 ,9 1 ) 2 ,9 1 1 (1 1 ,0 5 ) (5 2 ,9 4 ) 7,969 (8 4 ,7 2 ) 1 0 () 5 7 6 6 0 6 ( 8 0 ) 2 1 1 ( 9 ) (4,315) 1 3 8 1 () 3 1 2 (3 1 ,2 4 ) (1,605) 2,049 (3) 1,980 4,026 FY12E 13,185 1 ,7 9 7 3 6 2 (7 1 ,6 2 ) () 8 4 4 (9 1 ,1 8 ) 6 8 5 () 4 7 8 (0 3 ,4 8 ) (7 1 ,8 9 ) 9,743 (2 7 ,2 0 ) (7,022) 9 1 0 () 3 6 2 (8 1 ,2 7 ) (1,235) 1,487 4,201 5,688 FY13E 15,542 2 ,0 3 3 3 8 1 (4 3 ,2 0 ) (4 2 ,3 4 ) (6 2 ,7 4 ) 2 ,7 4 0 2 3 (2 5 ,3 5 ) (3 2 ,1 3 ) 10,399 (3 5 ,2 5 ) (5,532) 3 4 0 () 3 8 1 (0 1 ,5 8 ) (1,845) 3,022 5,688 8,711
73
Common size metrics- as % of net revenues

Particulars (INR mn) PaR ar m r s n t ( i cI ) u l N Ce s ov s e t n ou f r e Or c ton h ao e t s r i t p e g s Dt&a e i At po oo r n ri e c i a m t n i s I ee ne e tt n ex s rp s s Om ti e h e r n c o Im na c x oe e t s Common size metrics- as % of Total Assets Particulars (INR mn) Ca us r s r e e t ns t Ca C us a r s s r e h e t ns t Na e s td f s i xe et s Is t nn v s e t m e Common size metrics- as % of Total Liability & Equity Particulars (INR mn) Cli s uil r a r b e i nt t i e Pn ro os v i s i L rb om nd ge t e t Seb hm o d r e t t r t Oi s tl l hi e t r i i e a b Soe hdu aei r r t e 'q h l sy FY10 1 9 . 6 4 . 5 2 . 7 2 0 . 5 0 . 5 5 2 . 2 FY11 1 9 . 8 4 . 6 2 . 0 1 7 . 5 0 . 9 5 5 . 2 FY12E 1 7 . 8 3 . 2 2 . 2 1 5 . 7 0 . 7 6 0 . 3 FY13E 1 7 . 7 2 . 7 1 . 9 1 3 . 4 0 . 6 6 3 . 7 FY10 5 6 . 4 5 2 . 3 4 6 . 0 0 . 5 FY11 5 8 . 8 5 1 . 7 4 3 . 5 0 . 1 FY12E 5 7 . 8 4 9 . 7 4 4 . 2 0 . 0 FY13E 6 1 . 1 5 0 . 8 4 0 . 5 0 . 0 FY10 F Y 1 0 4 0 . 4 3 9 . 4 2 . 5 0 . 8 0 . 3 2 . 8 FY11 F Y 1 1 3 8 . 4 4 1 . 2 2 . 9 0 . 6 0 . 2 2 . 0 FY12E F Y 1 2 E 3 8 . 0 3 8 . 0 2 . 5 0 . 6 0 . 2 2 . 8 FY13E F Y 1 3 E 3 8 . 0 3 8 . 0 2 . 5 0 . 6 0 . 2 2 . 8
Key ratios
Particulars (INR mn) Key Operating Ratios EPS (INR) CEPS BV per share RoE (%) RoCE (%) Valuation Ratios P/E (x) P/Sales (x) P/B EV/Sales (x) EV/ EBIDTA (x) MCap/Sales Du Pont Analysis Tax burden (Net income/PBT) (%) Interest burden (PBT/EBIT) (%) EBIT margin (EBIT/Revenues) (%) Asset Turnover (Revenues/Avg TA) (%) Leverage (Avg TA/Avg equtiy) (%) Du Pont RoE (%) 31.3 4.4 8.3 4.6 22.6 4.4 FY10 81.6 97.2 17.7 109.2 223.4 34.1 24.8 3.7 6.5 3.8 18.6 3.7 FY11 86.6 97.7 17.5 107.3 185.8 29.5 19.4 3.1 5.1 3.2 14.3 3.1 FY12E 83.7 97.9 19.3 107.5 172.5 29.4 16.4 2.6 4.0 2.6 12.0 2.6 FY13E 83.9 98.3 19.1 107.4 160.8 27.2
FY10
FY11
FY12E
FY13E
15.3 4.5 57.7 34.1 35.4
19.3 9.4 73.5 29.5 35.4
24.7 12.7 94.7 29.4 38.7
29.2 19.5 120.2 27.2 41.0
74
India | Healthcare
Initiating Coverage
Cadila Healthcare (CDH IN) Out-performer

On strong footing
Current Price: 1year Target: Expected Upside:
INR 759 INR 912 20%
We prefer Cadila Healthcare (CDH) among the emerging mid-cap Indian pharmaceutical company mainly because of its strong mix of developed and pharmaemerging market. We forecast CHD's export CAGR at 27% over FY11-14 and expect the domestic business of CDH will add traction to the overall earnings growth and forecast CAGR 17% over FY11-14. We initiate coverage on CDH with a OUT-PERFORMER rating, forecasting earnings CAGR of 14.7% over FY11-13.
Stock details
Bloomberg code Shares O/S (mn) M Cap (INR mn) M Cap (USD mn) 52 week H/L (INR) Avg. 6M daily vol CDH IN 205 155,138 3,174 987 / 651 119,347
Domestic business on track at CAGR 17% over FY11-14

CDH enjoys leading position in cardiovascular, gastrointestinal, women's healthcare and respiratory segments apart from having strong presence in other important therapeutic areas like dermatology, neurology and anti infective. We expect the domestic business of CDH will add traction to the overall earnings growth. We forecast CAGR 16% over FY11-14 for the domestic business led by its flagship formulation vertical with CAGR 15% over the stated period.
Japan and LatAm to add traction to long term growth

CDH was one of the first Indian companies to enter in to Japan to tap the huge generic opportunity there. We expect Japan to be one of the fastest growing pharma-emerging markets in the world with the Government's increased effort to reduce the rising healthcare cost. We believe CDH's Japan business to add traction to its long term growth with CAGR 40% over FY1114E.
Exports led by the US to register CAGR 27% over FY11-14

The international business of CDH has grown handsomely over the past four years (CAGR of 36% over FY08-11). This strong growth was driven by aggressive new product filings and focuses on niche therapeutic segments as well as inorganic strategy in Brazil, Japan, Spain and South Africa. We forecast CDH to demonstrate robust growth in its exports business with a CAGE 27% over FY11-14.
Stock chart
60% 50% 40% 30% 20% 10% 0% -10% -20% -30%
CDH IN = 759 Nifty = 5,015
Initiate with Out-performer; TP - INR912

At CMP of INR759 CDH trades at 16.6x FY13E earnings. We initiate coverage on the stock recommending Out-performer forecasting earnings CAGR of 15% over FY11-13E. We value CDH at 20x FY13 earnings of INR45.6 to arrive at our target price of INR912 implying a potential upside of 20% from the CMP.
Sep-10 Dec-10 Mar-11 Jun-11 Sep-11

CDH IN Equity NIFTY Index

1) Lower than expected growth in the domestic business 2) Delay in regulatory approvals in term of new launches and resolution of legal issues, and 3) Lower than expected growth in the key Pharma-emerging markets.

Return(%) 1 Mth Absolute Relative (10) (11) 6 Mths (4) 9 1Yr 16 32
Summary financials
Particular N( m e I n ts ) SN aR l e E (m BN I I n TR D ) A FY 10 FY 11P FY 12E FY 13E CAGR(%) 2 1 . 6 1 8 . 1 2 2 . 8
3 6 ,8 4 8 6 6 ,2 5 3 0 5 ,3 6 5 7 6 ,0 2 8 8 ,6 1 0 8 0 ,2 1 2 6 1 ,9 1 0 7 3 ,1 3 3 2 4 . 6 1 1 . 3 3 5 . 3 3 0 . 8 7 9 . 4 3 4 . 7 9 . 4 3 7 . 4 2 1 . 9 1 0 5 . 9 3 7 . 3 1 4 . 8 3 1 . 1 2 0 . 3 1 3 3 . 9 4 5 . 6 1 2 . 1 3 0 . 2 1 6 . 6 1 6 8 . 3
Analyst
ER P S () I N ED VA / ( E x B) I T R O E ( % ) P E ( x ) Bh Vr pe e r s a
N M
N M
N M
N M
75
Cash Flow
Particulars FY10 FY11 FY12E FY13E 5 , 1 , 0 , 4, 7 0 7 5 1 7 9 1 6 3 5 4 1 , 9 , 9 , 3, 0 3 1 3 2 1 1 6 1 2 3 3
ei tf P r o t 3 6 4 , 8 , 2 , 3, 0 N 8 6 5 6 6 3 5 6 0 5 2 7 8 Di e t po r n e c i a
Te e e2 o r xs 8 3 t ap a t e l onn p i gs , 2 , 0 , 4, 9 7 6 4 5 8 0 4 2 4 4 9 9 4 EBITDA 8,086 10,262 11,079 13,331
Ci o a (0 (3(92 h wp1 a n r cl , 0 , 1 , 1, 6 g ki e i nna 4 2 g t ) 3 2 (7 ) 0 6 ) ) O-h e 1 tn a n , 4 6 1 1 hc jm 9 e a st r s t s 6 o d n u 4 , 5, 1 8 0 2 4 5
Dt&a 1 e i A t , 9 , 9 , 3, 0 po oo 3 1 r n ri 3 e c i a m t n i z 2 1 1 6 1 2 3 3 EBIT I ee ne e tt n ex s rp s s Om ti e h e r n c o 6,747 8,993 9,946 12,101
Operating cashflow C xt a pr pee ie i t n a d l u
6,954
6,696
7,741
9,153
(9 (6(62 2 , 4 , 6 , 2, 1 9 4 ) 1 5 (1 ) 4 9 ) ) () 5 4 2 ( 5 ) (2,911) 6,241
8 2 6 1 9 7 1 9 9 , 0 Ci v n 40 0 h i st a n s n e g t e m n e
h i s e nf r n v e h go ( ) l 1 0 3 5 9 1 5 1 9 3 1 1 1 4 9 O sa 7 2 ti tc w8 ( ) (3,716) 3,960 (4,530) 2,530
P err Bx i y 6 Tt d ar n no d aa , 5 , 5 , 0, 2 Investing cashflow 0 8 8 4 9 1 2 3 1 0 2 9 Edn x iy e t no r a m ar o i r c PBT Pn roa of x vo i sr i t N ei tf p r o t Me i in n tt o r r e t ys I Reported PAT Adjusted Profit 4 6 6,131 9,300 11,292 Free cashflow to firm Cio g h bi a rn n r s g o e w n Dp iei v a id dd n 7 1 4 , 4 , 5, 4 1 0 1 1 6 3 6 9 9 5 , 4 , 1 , 5, 8 3 7 4 3 7 9 6 9 5 0 9
(5,462) 2,278
8,425
2 4 4 2 3 8 0 , 5, 0 3 8 5 9 7 ( ) (2(22 7 1 5 , 2 , 5, 2 1 2 1 (8 ) 9 2 ) )
Ons tf c h (4 ( ) ( ) (0 h ic w 5 9 e nf r i n a a go 2 l , ) 7 0 7 1 2 9 ,0 40 ) Financing cashflow (3,248) (10) 2,517 2,507 (1,721) 445 2,507 2,952 177 2,455 2,952 5,407 288 6,529 5,407 11,936
() () () () 2 3 2 8 5 2 2 1 5 5 Cash generated during year 1 1 5,097 5,051 7,110 7,110 7,654 7,654 9,347 9,347 Cash at beginning of year Cash at end of year
Balance sheets
Particulars Soe hdu aei r r t e 'q h l sy Me i in n tt o r r e t ys i s L rb om nd ge t e t Pn ro os v i s i Seb hm o d r e t t r t Cli s uil r a r b e i nt t i e Total liabilities & equity Na e s td f s i xe et s Is t nn v s e t m e In ni ve es t o r Sd ue nb dt r o yr s L ae od a v na s n &s c Ca ie a s v s h ls he n & a cq t u Ca us r s r e e t ns t Dts e e at f ds t e x, r a r e e n FY10 FY11 FY12E FY13E
Key ratio
Particulars FY10 24.6 79.4 35.3 FY11 34.7 105.9 37.4 FY12E 37.3 133.9 31.1 FY13E 45.6 168.3 30.2
1 6 2 , 5 , 5 , 4, 9 EPS (INR) 2 1 2 3 8 7 7 4 1 4 5 4 0 3 9 6 2 6 9 1 9 2 ,1 01 7 8 , 6 , 2 , 6, 6 0 8 1 1 6 0 0 2 5 1 7 7 9 1 , 1 , 3 , 9, 6 9 2 5 2 2 2 3 6 9 1 7 BV Per Share (INR) ROE (%) Growth (%) Revenues
25.9 33.5 66.5 66.5
25.6 26.9 40.8 40.8
20.0 8.0 7.6 7.6
19.3 20.3 22.1 22.1
2 , 9 , 1 , 2, 2 EBITDA 8 2 3 9 3 4 2 6 6 9 4 6 , 0 , 5 , 3, 3 Net profit 7 8 6 9 9 1 5 7 2 7 7 3 36,293 44,545 54,624 68,828 EPS Margins (%) EBITDA 2 0 2 7 0 2 2 7 0 0 7 7 EBIT 7 , 4 , 9 , 6, 4 Net profit 5 8 1 1 0 1 0 2 1 4 4 3 1 4 , 8 , 2 , 3, 9 Valuation ratios 6 7 6 6 7 1 5 6 0 0 0 7 3 , 0 , 6 , 3, 2 P/E (x) 1 4 2 1 5 6 0 1 6 3 7 2 , 7 , 2 , 7, 6 5 2 0 9 5 1 5 4 1 0 9 3 1 7 2 , 9 , 9 , 9, 1 7 2 2 4 9 8 8 1 2 5 1 7 0 (4 1 (21 1 (2 1 (2 , 1 , 7 , 7, 7 1 ) 1 ) 1 1 ) ) 54,624 68,827 Price/BV(x) Market cap/sales (x) EV/sales (x) EV/EBITDA (x) Mcap/Sales (x) Earnings Yields (%)
1 9 2 , 6 , 6 , 5, 6 3 2 2 2 2 6 6 8 3 9 6 6 4
21.9 18.3 13.7
22.2 19.4 15.4
19.9 17.9 13.8
20.1 18.3 14.1
30.8 9.6 4.2 2.5 11.3 4.2 3.2
21.9 7.2 3.4 2.1 9.4 3.4 4.6
20.3 5.7 2.8 3.0 14.8 2.8 4.9
16.6 4.5 2.3 2.4 12.1 2.3 6.0
Mun ile pr 1 snxt c oe e 0 e s d l aei u 2 Total assets 36,293
44,545
76
Domestic business CAGR of 17% over FY11-14E

CDH is among the top five players in the chronic therapeutic segment in the domestic market. CDH enjoys leading position in cardiovascular, gastrointestinal, women's healthcare and respiratory segments apart from having strong presence in other important therapeutic areas like dermatology, neurology and anti-infective. We expect the domestic business of CDH will add traction to the overall earnings growth. We forecast CAGR 16% over FY1114 for the domestic business led by its flagship formulation vertical with CAGR 15% over the stated period.
Exhibit-89: Domestic market revenue growth

40,000 35,000 30,000 INR mn 25,000 20,000 15,000 10,000 5,000 0 FY07 FY08 FY09 FY10 FY11 FY12E Growth
25 20 15 (%) 10 5 0 FY13E FY14E
Domestic revenue
Diversification in pharma-emerging markets de-risk US concerns

We believe CDH's presence in key markets, both developed and pharma-emerging, will de-risk the business model. We believe Japan and LatAm to be the key growth market for CDH growing at a cumulative CAGR of 24% over FY11-14E.
Exhibit-90: CDHs Pharma-emerging market revenue

5,000 4,000 INR mn 3,000 2,000 1,000 0 FY09 FY10 FY11 FY12E FY13E FY14E
Europe
LatAm
Japan
77
Japan provides long term growth opportunities

CDH entered Japan in 2007 to tap the huge generic opportunity that exists. It strengthened its presence through the acquisition of Nippon Pharma in 2008. In FY10 the company acquired the Aldomet brand (an antihypertensive) to get entry to the hospital segment. Over last year CDH has launch glimepride (anti-diabetic drug) and rabeprazole (an antiulcer drug in the class of proton pump inhibitors) in the Japan market. During FY11, CDH has launched Amlodipine (an anti-hypertensive), making it the first Indian company to launch a product developed and manufactured from India. Over the past three years, CDH has demonstrated significant growth in the Japanese market mainly through launches of in-licenced products and targeting the hospital segment. We expect strong sales growth to continue on the back of new launches and aggressive strategies. We forecast 40% CAGR over FY11-14 on the back of CAGR 38.5% over FY08-11.
Exhibit-91: CDHs Japan business growth

1,400 1,200 1,000 50 40 30 (%) 600 400 200 0 FY09 FY10 Japan FY11 FY12E FY13E FY14E
INR mn
800
20 10 0
Growth (YoY)
Emerging markets to add long term growth traction; LatAm to grow at 20%
CDH emerging markets business has grown at a CAGR of 23% over the past four years. CDH has a formidable presence in the LatAm market with Brazil being the main stay. CDH entered Brazil in 2005 and acquired Nikko's manufacturing and distribution operations in 2008. CDH currently has 16 products in the Brazilian market with 64 filings with 23 approvals. Brazil being one of the fastest growing pharma market and is already the largest market in Latin America, representing 38% of the market share. We expect CDH to demonstrate strong sales CAGR of ~21% over FY1114 contributing ~5% of sales in FY12.
Europe to have muted performance

CDH in Europe is largely concentrated in France and Spain with more than 250 SKUs. The company is present in France through its subsidiary Zydus France SAS while it entered Spain through the acquisition of Combix Labs in 2008. The company launched 14 new molecules in FY10 including the launch of eight of them on day one of patent expiry. In FY 11, Europe contributed 6% (down from 7.6% in FY10) of CDH's total revenue. Though we expect strong volume growth in the region, we expect sharp pricing pressure environment to prevail which will hamper the profit margin of CDH. We forecast ~10% CAGR over FY11-14E.
78
Exhibit-92: Europe to witness pricing pressure; CAGR 10% over 11-14E

4,000 3,500 3,000 120 100 80 60 40 20 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
INR mn
2,500 2,000 1,500 1,000 500 0
Europe
Growth (%)
JV's add strength

Zydus Hospira JV Provides an entry into high-margin oncology injectable Segment
Zydus Hospira, (50:50 JV between CDH and Hospira) commenced commercial operations (supplying oncology injectables in Europe) in FY09. CDH plans to manufacture six oncology products in its Cytotoxic facility in Ahmedabad and out of them the JV has started supplying of three products to Hospira to be marketed in the EU. The JV also commenced initial shipments to the US market during Q3FY11. The management has indicated plans to launch the remaining products by 2HFY12E. We believe this JV opens a large opportunity in the USD22bn injectables market. We estimate oncology drugs worth USD9 bn expected to lose patent protection by 2015. We expect revenue CAGR of 20% from this JV (DHs share) over FY11 and FY14E.
Abbott alliance Opens attractive opportunities in EMs

CDH entered into a strategic alliance with Abbott Labs in 1QFY11. CDH as part of the deal will manufacture 24 branded generic drugs under the Abbott brand name, which will be marketed in 15 EMs including Brazil, Russia, Turkey, etc. Abbott has the option to increase the scope of the agreement to 40 drugs. This alliance presents attractive growth opportunities for CDH given the potential for growth in the EMs. CDH received licensing fee of INR 470mn from Abbott. We expect sales to start from this deal in FY13.
79
Exhibit-93: Europe to witness pricing pressure; CAGR 10% over 11-14E

3 ,0 0 0 2 ,0 5 0 2 ,0 0 0 2 ,8 7 0
INR mn
1 ,7 5 9 1 ,0 5 0 1 ,0 0 0 5 0 0 0 F Y 0 9 Zy y c do um s e N d F Y 1 0 Zo y s dp ui s r H a 9 9 9 8 3 9
2 ,2 1 5
7 5 8
5 5 6 F Y 1 1
Strong bio-similar portfolio provides new dimension
C i 1 nv s-i n to i usf. e a D Y oo eib ap c npoo H 0l u h t a ( r at h c d o T p n a w a e n ia t l F d y c ns i c t i n a dy v ) e r h n der t n i t o c y l i m
l c dsgl at v f ai f z 1a iY a dsi ey f r co e l a Nf n uI 'i n un e i r m A) x F n if d s u d e nI e( 1 l ha e nr i o t n m a a Pc n c uc n d u H i S1 n - u 1 V -
ar yainr tct 5 ota e ni e n n el a p i a o nw tl m t d tau n d pf mi l o c l vi u h t uu a - d h s r e b nl a c o ni o c 6s p l y e s n ~d h s 2s o e s n
no er Hla- v ss u l apl c e oe .D n e2 e p p n c u x r y t t t e w ha c t v r s u h 1i i r te d t aa Cr r y 1a n d i e 0 c i o i ne t n c n t c e xoh p e l b l t t a a t e ynn ~oru eV o m ee -e dt t - f l e aa b r d n a t r 3 o n d iS he r yu e t i x f - e k l enx r o b 4 a e h3s c u % e . t 4 aoe i t v t
c oi i e sa t e o y ec ' apo of cn mkh t re . e C c o uv s di rn x t e pa l ec t o m e w n e he t c e no e s x D i r t i t ha r r W H eo p sn l e t v c t f i
Exhibit-94
Project ZYH1 ZYH2 ZYH7 ZYI1 ZY01 ZYT1 ZYOG1 ZYD1 ZYGL241 ZYGK1 ZYG19 ZYPH0907 Targets PPAR Alpha gamma PPAR Alpha gamma PPAR Alpha Multi-Modal CB-1 aatagonist TR-beta agonist Oral GLP-1 agonist GLP-1 agonist Oral GLP-1 agonist Glucokinase activator GPR-119 agonist PTH agonist Indication Dyslipidemia Diabetes Dyslipidemia Pain Obesity Dyslipidemia Diabetes Obesity Diabetes Obesity Diabetes Obesity Diabetes Diabetes Osteoprosis Drug Discovery Pre-Clinical Lead Optimization Development IND Phase I Phase II Phase III NDA
80
Initiate with Out-performer

We initiate CDH with a Out-performer rating on the back of its strong domestic growth and increased focus on de-risking through geographical diversification. We see the clear visibility of the US business in terms of product launches as a near term trigger for the stock. We value CDH on SOTP basis wherein we value the base business at 20xFY13 Earnings to arrive at our target price of INR 912 per share.

Target price calculation Base biz EPS T aP a s / r eE g b( e i x t B z ) Total Target Price FY12 37.2 FY13 45.6 2 0 912

I N R 1 2 0 0 1 0 0 0 8 0 0 6 0 0 4 0 0 25x 20x 15x 10x
Exhibit-97:1-year EV/EBITDA
300,000 250,000 INR mn 25x 20x 15x
INR mn
200,000 150,000
10x 100,000
A p r 0 9
A p r 0 6
O c t 0 6
O c t 0 7
A p r 0 7
A p r 0 8
O c t 0 8
O c t 0 9
A p r 1 0
O c t 1 0
A p r 1 1
2 0 0 0
50,000
D e c 0 5
J7 a n 0
J8 a n 0
J9 a n 0
J0 a n 1
J1 a n 1
81
Revenue Mix
Particulars (INR mn) A. Domestic 1. Formulations adm . aFa B ot rd l n nr i e u o s b i rt .n m Goi eFa e u r c ln o s 2 .I A P s 3e .e W ls ls n 4 la t .i H h AeO n l m& at hr e s B. Exports 1. Formulations a . U S be .r E u o p cn .p J a a dg r . eM Egt m k r a i ne s L e a r tm i nc A i a O t h e r s 2. APIs C. JV 1H0 . d p% Z o5 ys ui s r ) a ( 2 N( ) . do 0 Zy 5 yc um s e d % Total FY10 18,724 14,458 1 3 ,5 6 2 8 3 3 3 1 8 2 ,5 6 7 1 ,3 2 7 15,821 13,179 6 ,5 7 1 2 ,0 7 4 3 1 6 3 ,8 4 0 1 ,8 8 1 1 ,0 5 9 2,642 1,597 8 3 9 7 5 8 36,142 FY11 22,325 17,146 1 6 ,0 2 0 9 4 6 3 5 2 3 ,5 3 5 1 ,2 4 7 20,178 17,062 9 ,5 6 5 2 ,5 7 5 4 2 2 4 ,0 2 3 2 ,0 2 5 1 ,0 9 8 3,116 2,708 2 ,2 1 5 5 5 6 45,211 FY12E 26,201 20,014 1 8 ,4 9 5 1 ,0 0 6 3 8 7 4 ,3 0 9 1 ,8 7 0 25,202 21,618 1 3 ,4 0 3 3 ,1 0 3 5 9 1 4 ,3 9 6 2 ,5 7 4 2 ,8 2 1 3,583 3,150 2 ,2 5 8 5 6 7 54,552 FY13E 30,763 23,363 2 2 ,6 1 7 1 ,7 1 8 4 2 6 4 ,4 9 9 1 ,1 9 8 31,710 27,590 1 7 ,6 5 9 3 ,4 3 3 8 2 7 5 ,3 8 3 3 ,9 3 4 2 ,4 4 8 4,121 3,806 3 ,8 2 2 5 7 8 66,280

Particulars (INR mn) Gross revenues Less: Excise Net revenues Cost of revenues Gross profit Employee expenses SG&A expenses Power and fuel Repairs & maintenance R & D expenses Total Expense EBITDA Depreciation EBIT Interest expenses Other income Exceptional items PBT Income taxes Post tax EOI Minority interest Reported net profit FY10 37,269 401 36,868 11,784 25,084 4,422 10,349 660 318 1,249 16,998 8,086 1,339 6,747 821 159 46 6,039 741 9 238 5,051 FY11 46,866 564 46,302 14,754 31,548 6,008 12,097 789 405 1,987 21,286 10,262 1,269 8,993 699 131 8,425 1,064 251 7,110 FY12E 56,253 681 55,573 18,061 37,512 6,947 15,783 947 486 2,270 26,433 11,079 1,133 9,946 794 147 9,300 1,395 251 7,654 FY13E 67,107 827 66,280 21,541 44,739 7,941 19,135 1,129 580 2,623 31,408 13,331 1,230 12,101 1,000 192 11,292 1,694 251 9,347
82
Balance sheet
Particulars (INR mn) Equity Capital Reserves and surplus Shareholders' funds Minority interests Long-term debt Short-term debt Total Debts Others Total Liabilities Intangible Assets Gross block Depreciation & Amortization Net block Capital WIP Total fixed assets Investments Inventories Sundry debtors Cash equivalents Other current assets Total current assets Sundry creditors Provisions Total current liabilities Net current assets Deferred tax asset, net Miscellaneous expenditure Total Assets 27,582 5,818 14,890 4,403 10,487 2,111 19,326 207 7,504 4,668 2,507 17,799 6,760 1,951 8,711 9,088 (1,141) 102 27,582 33,357 5,654 17,285 5,255 12,030 3,441 22,636 207 8,119 7,652 2,952 22,829 8,955 2,233 11,188 11,641 (1,127) 33,357 42,232 7,044 23,276 6,065 17,212 1,199 26,965 207 10,436 7,603 5,407 28,579 9,773 2,619 12,392 16,187 (1,127) 42,232 53,118 7,276 25,544 6,884 18,660 1,199 28,646 207 12,414 10,079 11,936 41,101 12,733 2,976 15,709 25,392 (1,127) 53,118
FY10 682 15,603 16,285 392 8066 2839 10,905
FY11 1,024 20,691 21,715 669 8052 2921 10,973
FY12E 1,024 26,420 27,444 920 10176 3692 13,868
FY13E 1,024 33,485 34,509 1,171 12796 4642 17,438
83
Cash flow statement

Particulars (INR mn) Profit before taxes Depreciation & Amortization Interest (Net) Others Change in sundry debtors Change in inventories Change in loans & advances Change in current liabilities Change in provisions Change in working capital Direct taxes paid Other operating cashflow Cashflow from operations Purchase of fixed assets Proceeds from sale of fixed assets Purchase of investments Others Cashflow from investing Issue of equity Proceeds from borrowings Repayment of borrowings Short Term Loans Interest paid Dividend paid, including taxes Cashflow from financing Net cash generated during year Cash at beginning of year Cash at end of year FY10 6,039 1,339 716 511 (697) (1,492) 789 (1,400) (771) 641 6,954 (3,041) 47 (842) 120 (3,716) 2,473 (2,225) (2,016) (729) (751) (3,248) (10) 2,517 2,507 FY11 8,425 1,269 587 553 (3,824) (615) 2,108 (2,331) (1,385) (301) 6,696 (4,395) 229 (5) (359) (4,530) 669 (266) (335) (567) (1,222) (1,721) 445 2,507 2,952 FY12E 9,300 1,133 794 49 (2,317) (1,027) 818 386 (2,091) (1,395) 7,741 (5,462) (5,462) 2,895 (794) (1,925) 177 2,455 2,952 5,407 FY13E 11,292 1,230 1,000 (2,476) (1,978) (1,540) 2,960 357 (2,676) (1,694) 9,153 (2,911) (2,911) 3,570 (1,000) (2,282) 288 6,529 5,407 11,936
84
Key ratios
Particulars Key Operating Ratios EPS (INR) CEPS Book Value per share RoE (%) RoCE (%) Valuation Ratios P/E (x) P/Sales (x) P/B EV/Sales (x) EV/ EBIDTA (x) MCap/Sales Du Pont Analysis Tax burden (Net income/PBT) (%) Interest burden (PBT/EBIT) (%) EBIT margin (EBIT/Revenues) (%) Asset Turnover (Revenues/Avg TA) (%) Leverage (Avg TA/Avg equtiy) (%) Du Pont RoE (%) 30.8 4.2 9.6 2.5 11.3 4.2 FY10 83.6 89.5 18.3 107.7 239.1 35.3 21.9 3.4 7.2 2.1 9.4 3.4 FY11 84.4 93.7 19.4 114.6 212.7 37.4 20.3 2.8 5.7 3.0 14.8 2.8 FY12E 82.3 93.5 17.9 112.1 201.7 31.1 16.6 2.3 4.5 2.4 12.1 2.3 FY13E 82.8 93.3 18.3 107.4 199.3 30.2
FY10
FY11
FY12E
FY13E
24.6 18.4 79.4 35.3 31.9
34.7 14.4 105.9 37.4 35.2
37.3 26.4 133.9 31.1 32.5
45.6 58.2 168.3 30.2 37.1
85
Key to ratings
Ratings Outperformer Underperformer Definition ESR is greater than EMR + 5% ESR is lesser than EMR - 5%
Market Performer ESR falls between EMR - 5% and EMR + 5%
Notes: ESR = Expected Security Return EMR = Expected Market Return, defined as 1 year domestic yield + 5% (as a proxy for market risk premium)
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Wind of Change - US Opportunity Dips India & EMs Shine - Pharma Thematic

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Wind of Change - US Opportunity Dips India & EMs Shine - Pharma Thematic

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Pharmaceuticals | Thematic | India Research

Wind of changeUS opportunity dips;India & EMs shine

Emerging markets to drive long term growth

Exhibit-1: Global pharmaceutical market CAGR of 7% over 2010-14E

Pharma-emerging markets to account for ~40% of global healthcare revenue by 2015

INDIA: T i c e u i i nii n eIcsy d hn e c d s h l t tiI i ikl e i m p h c c s t /t ll e r n v lw i s oe e r e ll o t er a i i om eIe e a ne h I i i t nr -I s o

JAPAN: J hl e uog pv e ee g o aaapi f aea 0 g s ~ f l p t r ood o oy ) rt 2o a h s l n e l b a r e 2t ne t a ode e r en % s gp t l p ( 6 api s n t a

CHINA: Ci G i) S t dafbi t tel e h h ( n Dap o i s b c r iw nl U n u 1po sd t na o o~ n l n nee o s a D a t P m f 6 pi . 5 oo4 t . s dh a o e n g

RUSSIA: Rpcaks e b Ds 0 ixd u he m tt t u . n 2 d e o s a u as a a S a 1 s c s r t i a m r e d t 8 o0 ee na l e i i c t m o 6 n a pt i a U b n t

LATIN AMERICA: Tnca ua a ta rg tr e h A pc l r ms o a ch e m r tm of s imo L eh i a r t i i a m k n t we s n aa e g e n s s e c t i s ht e g rat k

Exhibit-2: Pharma-emerging market to dominate growth

Exhibit-3: Snapshot of world pharmaceuticals market

c d ii own u ir pts l h e e cii s h ss rd oe na c e

Source: Company, SMC Inst. Research

Sun Pharmaceuticals (SUNP IN)

W P Feg R dg fi c t o n e S t Yrs 2 a N t ot p i o v U2 E aN l u a 1n I 4 d P e p pt f e 2 3i o .ad V de x a f nNnn o 8 i l i m i m oe i o ri nt s u I 2 e t t e 5 lg nsf f t M N r t arf 5 ia t p 1 h R r o e o 8ne io r e 1 i u pI t vr o a r i N p p l d% C a g c R yo u 9 i m ta e i o P m .

Source: SMC Inst. Research

Dr Reddy's Laboratory Ltd. (DRRD IN)

W R x En N nn o 0 a t ii e D 2 3i o 1 a N R s fhl v R 0 eg R d g f 3 h a D F as 9 d P l u a Yr f e t 1n I .ad V 8 i I pr e n N ee p r o p r e e o n a t t t e 1 p p lsf f t M p i tr o e o, 5ne p 2 h pto aarf 8 lg n io r e o e i u pI 6 ia t d % C ri r t s vr u e r i Ni y o u 4 g c Rm ta e i o P m .

Source: SMC Inst. Research

Lupin (LPC IN)

TP: INR 580

Source: SMC Inst. Research

Cadila Healthcare (CDH IN)

TP: INR 912

W v o tr m et e n c mOut-performer a e g g oo ii c g e e e no i e a t oo d t a r h cn e s k i n g n ae sR v d s a C 1r f t r A6 oi n G% r ni c n f e F 3 a HYrs R a t t t e 9 Y . e C 0E g 4 r o e o 1 1 W aFe o5r u pI 2 1 vD 1 l E u t e 23n x a f . o aarf 1i I 6e r i N n N ti vr g cR .

Source: SMC Inst. Research

Exhibit-4: FY11 Geogrophical breakup of Indian companies

Exhibit-5: Company Snapshot

Financial forecasts Share Price Outperform Vs HC Sector (1yr) Positive catalysts

Exhibit-6: Global peer comparison

Mid-cap Indian generics C a d i l a * Gk l a e * n m r Ao u rd o b i n S ts r i d e

Indian CRAMS D i v i ' s B in o c o * Jn u b it l a D i a s h m n

1 1 5 ,6 1 . 7 6 8 . 7, 2 , 8 1 8 9 2 2 0 . 43 0 x . 3 % 1 1 0 ,3 1 . 5 0 8 . 0, 1 , 9 4 1 1 6 1 . 46 . 2 %7 x 1 1 0 ,0 1 . 3 1 0 . 6, 7 , 0 1 9 3 1 5 4 . 27 6 x . 0 % 1 1 . 1 0 3 1 . 5 3 1 5 7 . 0 5 0 8 . 03 %x 0 2 . 9 0 2 2 . 6 0 2 7 1 . 6 5 3 . 8 %3 x Median 10% 8x Mean 13% 7x

Big Pharma P f i z e r Jo o h n s n N o v a r t i s M e r c k Gi l lS i a tn xh oK m e S a n o f i A b b o t t N o v o Ae sn t c r a a Z e B y r-e il r s t os M E l i

*SMC Inst. Research estimate

US generic attractiveness dipping out

and negative generic inflation

risk to our estimates

Exhibit-7: Sharp drop in the US patent expiry opportunity

Source: Medco, SMC Inst. Research

Source: Medco, SMC Inst. Research

We expect slower CAGR of 7% for generic market in the US over FY10-20

Exhibit-9: Generic growth to slow over 2010-20

25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

Total pharma mkt size Generic mkt growth (%) (RHS)

Generic mkt size Pharma mkt growth (%) (RHS)

US generic market to become volume play; margin pressure to remain

Exhibit-10: Generic pharma market penetration in the US

Source: SDI, SMC Inst. Research

Generic drug inflation at the lowest; margins pressure to remain

Exhibit-11: Generic drug inflation at the lowest

Source: Medco, Caremark, SMC Inst. Research

History repeats: expect contribution from US to reduce ~40% post FY13

Exhibit-12: Revenue and margin contraction of US generic companies post 2006

90% 70% 50%

90% 70% 50% 30%

50% 30% 10%

2,000 20% 1,000 19% 16% 0%

1,000 15% 22% 7% 1% 2006 2007

10% 10% 2% -0% -10% 2008

0 2005 2006 2007 2008