India Pharma Sector - Sector Update

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Edel Pulse: Pharmaceuticals
Executive Summary
The domestic branded generics market, a critical cog in the growth wheel for most Indian companies, is currently in spate. Unlike the apprehension of market participants about the sustainability of growth, our survey findings indicate that growth is not only sustainable but will move into the next orbit of 18-20% viz-a-viz current growth of 14-15%. Higher growth in domestic market will not only improve growth prospects of pharma companies (c30-50% to revenue), but will also improve overall profitability (margins are relatively higher). Further, as is the norm, when all companies are in expansion mode, only a handful will potentially emerge as winners. Hence, to understand these changing dynamics, we commissioned an extensive and unique study across 27 cities in 11 states (all four zones North, South, East, and West), covering more than 100 distributors, representing notably 4550% of the total pharma market. These distributors, with more than 10-15 years of presence in the market, ideally connect suppliers on one hand and consumers on the other. We covered all tiers of geographies in each zone including metros, tier-I to IV cities. We travelled across the length and breadth of the country to gain incisive insights into the future of the domestic pharma market, performance of various Indian companies, strategies adopted and ground level challenges impacting growth. We have tied our observations to industry data from AIOCD to overcome individual distributors bias over companies. We further highlight that views of distributors are restricted to their coverage companies, which differ, but collectively represent 80% of the total market. ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Key questions addressed from the survey include:
What is the potential growth in domestic market and key drivers of this growth? How sustainable is the current market growth over next three-four years? Which therapeutic areas are growing faster? What are the key strategies adopted by various companies? What are the key changes in the activity level of MNCs?
We conclude that, Sun Pharma and Lupin are ranked by 94% and 74% of coverage distributors, respectively, as preferred players in the largecap space, while IPCA and Torrent Pharma are ranked by 86% and 70% of coverage distributors, respectively, as leading players in the mid-cap space. Interestingly, Sanofi-Aventis, among MNCs, is ahead of peers and is aggressively making its mark in tier III and IV cities. We also identified emerging new players such as Mankind, Eris, and Macleods, which are gaining strong traction in various markets. Combining the takeaways from our distributors survey and the prospects of Indian companies in emerging markets and US, we expect Lupin, Dr. Reddys, Cadila and Torrent Pharma to do well over the next 12-18 months. We are positive on Sun Pharma, however, current valuations do not leave much upside for investors. Overall, through this report, we have attempted to identify trends, drivers, and challenges faced in the ever-changing market scenario and effectiveness of current strategies adopted by various companies.
Edelweiss Securities Limited
Contents
At a Glance ................................................................................................................ 3 Ear to the ground: Verdict is Out ................................................................................... 4 Domestic Formulations: On a high ................................................................................. 7 Chronic Leads; Cosmetology New Avenue ...................................................................... 9 Metro, tier-I key markets; Semi urban and rural areas are new growth pockets ................ 13 Aggressive MNC expansion Poses High Risk .................................................................. 17 Differentiating Class from Mass ................................................................................ 20 Future Growth Drivers ............................................................................................... 29 Valuations: Rich, But Not Stretched ............................................................................. 31 Key Risks ................................................................................................................. 34 Appendix I Growth drivers: Pull and Push factors ..................................................... 37 Appendix II Survey Methodology ........................................................................... 43
g M a r k e t s P D F i n - s d m c p l 0 Distributor Survey - Questionnaire ........................................................................ 45
Companies Cadila Healthcare ................................................................................................ 53 Cipla.................................................................................................................. 71 Dr. Reddys Laboratories ...................................................................................... 79 Lupin ................................................................................................................. 89 Ranbaxy Laboratories .......................................................................................... 99 Sun Pharmaceuticals ......................................................................................... 119 Torrent Pharmaceuticals .................................................................................... 129
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AT A GLANCE Financials (INR mn) Rating Revenue EBITDA Net profit P/E (x) P/B (x) 54.3 35.9 26.7 20.8 16.7 26.6 25.6 25.9 21.1 17.3 61.2 20.1 17.3 14.1 11.4 17.6 21.0 23.8 13.4 22.6 18.0 (77.1) 5.2 11.6 12.0 31.0 8.8 12.9 17.9 21.2 2,154 4,087 4,414 5,323 6,679 2,687 2,973 3,608 4,614 25.5 31.8 35.1 42.6 54.5 (7.4) 55.5 35.6 14.5 20.4 16.8 18.6 17.8 20.8 239.1 38.7 33.3 31.0 (29.9) 77.7 37.9 17.0 43.5 36.3 8.0 20.6 25.5 16.0 (58.4) 354.9 60.1 23.9 30.0 (31.9) 47.3 31.4 17.5 63.1 24.8 10.6 21.3 27.9 23.8 13.4 22.6 16.0 (58.4) 354.9 60.1 23.9 30.0 (31.9) 47.2 38.3 18.7 63.1 24.8 10.6 21.3 27.9 23.5 19.2 15.4 12.3 10.5 22.4 100.5 27.5 19.9 14.0 35.8 52.3 28.7 20.2 16.7 17.5 12.6 11.6 9.4 7.3 38.9 25.0 20.5 17.7 32.4 26.8 21.6 19.1 15.6 83.3 200.0 44.0 27.5 22.2 33.8 49.7 33.7 24.4 20.5 23.2 18.6 16.8 13.9 10.8 5.7 4.4 3.9 3.4 3.0 7.9 7.4 6.0 4.5 3.7 12.0 7.1 5.3 4.2 3.4 4.6 4.5 3.5 3.0 2.5 6.4 5.8 4.9 4.3 3.7 7.7 6.0 4.7 3.7 2.9 4.4 5.7 34.3 37.8 22.4 21.6 18.0 19.1 20.4 19.3 20.4 23.4 33.5 28.4 24.9 25.7 23.8 24.5 25.2 4.0 6.7 22.4 29.1 26.2 29.6 16.5 27.2 31.0 34.3 32.6 42.5 38.5 38.7 41.4 7.5 30.7 6.9 25.9 9.2 22.9 20.7 21.3 21.9 22.4 22.8 23.7 24.6 21.7 22.6 23.3 15.8 20.0 21.0 21.3 21.7 19.6 20.1 20.5 21.1 21.4 10.7 2.6 8.5 10.5 12.5 34.7 26.3 30.0 30.5 31.2 18.4 21.5 19.5 20.0 20.8
Note: * Financials (ex-ROCE) represent base business (Ex one-off from para IV) **Financials for Sun pharma includes Taro but excludes one-off from Para-IV *** CMP as on 21st April 2011
Growth (%) EPS (INR) EPS 20.5 51.0 34.4 28.7 24.4 50.4 3.6 (0.8) 22.4 21.9 120.0 57.1 55.5 22.4 15.7 28.6 12.9 15.7 18.8 18.6 21.5 11.4 14.3 18.2 23.2 30.2 ROCE (%) 15.6 23.5 31.6 40.6 50.5 12.1 12.5 12.4 15.2 18.5 25.5 40.1 62.4 76.4 88.4 12.7 15.4 19.1 21.6 26.5 4.5 1.9 8.5 13.6 16.9 12.9 8.0 (6.6) 14.5 15.9 18.3 17.6 17.2 19.2 25.5 29.0 40.0 49.0 18.7 29.9 15.5 17.8 15.7 16.0 17.6 22.4 7.5 13.2 55.5 9.7 39.0 57.6 35.0 44.0 120.0 16.2 19.7 21.9 14.1 18.9 22.4 11.4 (1.6) (0.8) 7.1 11.2 3.6 23.7 45.5 50.4 20.0 22.1 24.4 22.1 24.7 28.7 23.0 26.4 34.4 25.0 28.7 51.0 26.0 33.0 20.5 EV / EBITDA (x) EBITDA margins (%)
Valuations
Company Revenue FY09 FY10 FY11E FY12E FY13E 802.9 FY10 FY11E FY12E FY13E 168.9 FY10 FY11E FY12E FY13E 444.7 FY10 FY11E FY12E FY13E 421.0 CY09 CY10 CY11E CY12E 1,035.6 FY10 FY11E FY12E FY13E 84.6 FY10 FY11E FY12E FY13E 26,616 32,142 22,586 19,040 50,009 Buy FY09 16,307 2,999 68,656 78,642 20,941 24,504 50,623 15,186 32,546 8,545 9,084 13,377 461,878 Hold FY09 35,141 12,190 13,340 90,331 11,291 7,104 80,682 8,472 5,735 72,273 6,108 3,583 68,725 1,801 788 197,047 Hold CY08 73,610 7,873 1,891 64,939 75,280 13,710 16,121 9,608 11,781 56,693 11,594 8,472 48,359 9,728 6,841 183,216 Buy FY09 38,523 7,541 5,266 97,459 21,186 14,926 84,371 17,982 12,901 72,724 15,297 10,539 67,624 13,510 6,777 279,726 Buy FY09 61,642 9,718 4,300 82,819 19,311 14,867 71,260 16,128 12,195 62,465 13,569 9,967 56,057 13,795 10,050 257,731 Hold FY09 52,343 12,411 9,705 65,929 15,001 10,345 54,932 12,289 8,319 44,991 9,856 6,462 36,580 7,798 4,808 29,275 6,058 3,184 EBITDA Net profit 204.7 172,767 Buy
CMP (INR)***
CMP (ExShares O/S Mkt cap NPV) (mn ) (INR mn) (INR)
Cadila Healthcare
844
844
Cipla
321
321
Dr Reddy's*
1656
1,562
Lupin Pharma
412
412
Ranbaxy*
468
374
Sun Pharma**
446
436
17,576 20,658
Torrent Pharma
591
591
Ear to the Ground: Verdict is Out

India is projected to be the third-largest pharma market (after the US and China) in terms of incremental growth. It is also evident that the sub-continent, with the highest population and robust economic growth, offers attractive return to pharma companies due to its costeffective manufacturing capabilities and branded generics nature of the market. Historically, the non-regulated structure of market has enabled Indian companies to build strong market share, however, with changing market dynamics, companies have to adopt new strategic approach to grow and compete. Therefore, to gain a deeper understanding of this transformation, we set out to survey various markets, encompassing all zones and tiers. We selected a sample of 27 cities, ideally representing a mix of all geographies within India, and after meeting more than 100 distributors across cities, we gained the following insights:
Growth momentum to sustain and move into next orbit

Indian pharma market is likely to sustain current growth momentum (14-15% versus historical run-rate of 10-12% over FY00-10) and a large number of distributors anticipate growth trajectory to move to the next level of 18-20%. This could potentially add USD 3 bn of incremental sales over the next four to five years. This strong growth is inclusive of metros, tier I and II cities and smaller or tier III and IV towns. However, one-third of this incremental growth will come from tier III-IV towns and rural markets, which constitute 20% of the total market, and are currently growing at 25-30%, higher than metros and tier-I cities. This is largely led by increase in income levels, higher penetration of healthcare, and increase in health awareness among masses. Cipla, with a strong portfolio in the acute and respiratory segment, is depicting strong growth in tier II-IV 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. ISIEmergingMarketsPDF in-sdmcpl01 frommarkets, while Cadila, Lupin, Sanofi-Aventis and IPCA are also aggressively expanding in these regions.
Chronic therapies leading growth; cosmetology new growth avenue

Chronic therapies including cardiac, diabetics and neuro-psychiatry, constitute 28% of the total market and are growing at 18-19% versus the current industry growth of 15% (MAT March 2011). Most distributors have observed that anti-diabetics is emerging as a high-growth segment, followed by cardiac and CNS. Further, rising discretionary spending and focus on personal care is driving growth in the cosmetology segment. This segments growth potential is large, given lower penetration, and it entails higher margins due to better pricing of products. Other super specialties such as oncology, pediatrics and nephrology are also picking up in selective markets. The competition in chronic therapies is increasing rapidly, leading to higher investments by players to retain market share. Consequently, specialty focused promotion is emerging as a strong and effective approach to build brand loyalty. As per our survey, most companies have carved new divisions for key specialties, while others have created dedicated field force or special tasks force (STFs) to promote high-value brands within segments. Most distributors view this as highly effective strategy to enhance market share and also results in higher field force productivity. Sun Pharma has pioneered the specialty focus model, resulting in higher market share in the chronic segment.
Expansion by MNCs could intensify competition for Indian counterparts

Multinational pharma companies have become aggressive and have initiated meaningful investments in the domestic market. These investments, although at nascent stage, will eventually set the base for the next leg of growth. Most leading players have set bold aspirations for their Indian businesses and are adopting a more localised business model, including pan-India penetration, branded generics launches, and well-spread out distribution network. While recent branded generics launches are priced economically, our survey indicates that sales have not ramped up in most markets for these products.
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Moreover, in-licensing of off-patented/patented molecules could incrementally drive higher revenues in the medium term. We believe that with aggressive expansion plans and deep pockets, MNCs could potentially emerge as strong competitors, compelling Indian companies to hike investments, while price wars could potentially hurt their profitability in the long term.
Higher attrition in field force poses risk to current growth

The cost of hiring competent field force is soaring and retention is posing a key challenge. Most markets are seeing more than 30% field force attrition. We have identified four key reasons behind high attrition: (a) increase in demand for medical representatives to increase doctor focus, coverage and number of divisions; (b) limited supply of talent pool with companies competing for high quality people; (c) setting up challenging field force targets with a mandate to aggressively capture market share; and (d) shift to other sectors like IT and financial services which offer higher incentives and growth. We perceive higher attrition as a potential risk for companies following the old incentive structure and inefficient policies to retain field force, which could dent their growth and profitability in the near term. Cadila, Cipla, IPCA and GSK are few players facing higher attrition, while Sun Pharma, Lupin and Torrent have been ranked by most distributors as companies possessing highly effective and stable field force.
Decline in success rate of new product introductions

Most large and mid-size companies, to actively expand coverage across molecules or therapies, are aggressively launching new products. New product introductions contribute 4-5% of overall market growth. However, as per our survey, 70-80% of these products are failures. Most of these failures are in established segments, where more than 10-15 players currently exist. Also, there is a growing resistance among retailers g i n g M a r k e t s P D F i n and distributors to provide shelf space for new products before prescription generation. Hence, we observe companies that are more proactive and launch products ahead of the market are more successful in building brands, which potentially contributes to higher business growth. Most distributors suggest that new launches by Sun Pharma, SanofiAventis and Lupin have pent-up demand in the first week of launch. Also, companies with differentiated R&D pipeline like Sun Pharma and Dr. Reddys clearly have an edge over others.
Differentiating class from mass: End driver of survey

Through our distributor survey we tried to differentiate highly effective companies from others (class from mass) on the basis of parameters such as: (a) portfolio concentration (chronic versus acute); (b) growth relative to the market; (c) field force stability and productivity; (d) field force penetration; (e) success of new product launches; and (f) ability to build brands. The survey questionnaire was designed to gauge top 30 companies (as per market share) on the basis of these key parameters. We conclude that, Sun Pharma and Lupin are ranked by 94% and 74% of coverage distributors, respectively, as preferred players in the largecap space, while IPCA and Torrent are ranked by 86% and 70% of coverage distributors, respectively, as leading players in the mid-cap space. MNCs are adopting a more localised approach to build market presence and are building infrastructure for the next leg of growth. Interestingly Sanofi-Aventis, among MNC pharma, is ahead of peers and is aggressively coming up in tier IIIIV cities. Moreover, we also identified some key emerging small-mid size players, such as Macleods, Aristo, Eris and Mankind, who are scaling up and capturing incrementally higher market share.
Edelweiss Securities Limited D o w n l o a d e d b y i n s d m c p l 0
5 1 f

Fig. 1: Competitive scorecard
Company Name Domestic growth CAGR (5yr) Portfolio concentration Success of Brand new product building ability launches Field force stability Field force productivity Reach (Medical reps)
Large Cap Sun Pharma Dr Reddy's Cipla Lupin Cadila Mid-cap
Torrent Pharma IPCA Glenmark MNC
Ranbaxy

Sanofi-Aventis GSK India Pfizer India Scale: Best 5 Least 1
Source: Edelweiss research
Table 1: Top picks - Lupin and Torrent Pharma offer highest upside CMP TP NPV of Reco Company one-offs Cadila Cipla Dr. Reddy's Lupin Ranbaxy Sun pharma Torrent Pharma 844 321 1,656 412 468 446 591 960 350 1,950 500 432 477 760 94 10 94 BUY HOLD BUY BUY HOLD HOLD BUY
(INR) Upside (%) 14 9 18 21 (8) 7 29 FY11E 26.7 25.9 25.0 21.6 44.0 33.7 16.8 P/E (x) FY12E 20.8 21.1 20.5 19.1 27.5 24.3 13.9 FY13E 16.7 17.3 17.7 15.6 22.2 20.5 10.9
Source: Edelweiss research Note: * PE multiple for Dr Reddys, Sun Pharma. and Ranbaxy is based on CMP adjusted for NPV of one-off exclusivity sales
Domestic Formulations: On A High

The Indian pharmaceutical market (IPM) has historically posted 10% CAGR over FY01-09. However, in the past two years market growth has been on a high trajectory at 15-16% indicating significant expansion in overall market base. To understand the trends and drivers of this growth, we commissioned an extensive survey of 100 distributors covering 27 cities in 11 states (all four zonesNorth, West, South, and East), representing notably 45-50% of the total pharma market. Chart 1: IPM growth has been robust over past two years 20.0
17.8 15.0 15.0
16.0
Sustainability of growth is not an issue
14.9
14.2
12.0
(%)
10.0 8.0 5.0 7.0 4.5
10.4
8.0 4.0 0.0 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011 (MAT March)
Source: CRISIL, Edelweiss research
Growth not only sustainable, but likely to move in higher orbit Most distributors (95%) believe that the growth is not only strong, but will sustain over the medium term. Over 60% respondents are of the view that growth is likely to sustain at an average 13-15%, while a relatively good number of distributors (27%) believe that it can be higher than the current average. Chart 2: Majority of distributors believe growth is sustainable
Average sustainable growth
Sustainability of growth Not sustainable 5%
>15% 27%
<13% 8%
13-15% 65%
Sustainable 95%
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We believe, apart from strong macro economic growth and changing socio economic profile, aggressive strategies adopted by pharma companies are also adding momentum. We, thus, broadly classify growth drivers as pull factors and push factors (Chart 3 shows the major drivers of growth as per distributors). Among pull factors, increase in health awareness and higher prevalence of lifestyle-related disease is resulting in higher demand for pharmaceuticals. Further, among push factors, field force expansion to cover larger masses, focus on building brands, aggressive product introductions, and specialty-focused promotion have been identified as major growth drivers. We have analysed each of these factors in detail (Appendix A) and our study indicates that these macro factors will continue to drive higher growth over the next decade. Chart 3: Factors driving growth in the market
Population and aeging 16% Health insurance 9%
Pull factors
Healthcare infrastructu re / Govt expenditure 11%
Push factors
Price increases 9% Specialty promotion 17%
New divisions 6%
New product launches 23%
Changing Higher lifestyle income 30% level / Affordability Brand 4% building ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Health 13% awareness 30%
Field force expansion 32%
Chronic Leads; Cosmetology New Avenue

The chronic segment (also termed as life-style-related ailments), comprising three specialty areascardiovascular, anti-diabetics and neuro-psychiatryaccount for ~28% of the total market and is growing at a faster clip of 18-19%, well above the average industry growth of 16% (Table 2). Among these specialties, cardiovascular is the largest therapy constituting 15% of total pharma market, while anti-diabetics, though relatively smaller in size (6% contribution), is emerging as the fastest growing segment (chart 4). This is further substantiated by our survey which shows that among various therapies, highest growth is viewed in anti-diabetics, followed by cardiac and neuro-psychiatry segments. Table 2: Chronic segment has out performed overall market growth FY09 FY10 Mar-11 (%) % of total
Chronic Acute Overall market growth
19.1 14.9 16.1
19.2 14.9 16.2
17.4 14.1 15.0
27.9 72.1 100.0
Source: AIOCD, Edelweiss research
Chart 4: Anti-diabetics is fastest growing segment
Chart 5: Therapies depicting higher growth (survey)
% of total market 30.0
6%
15%
7%
1%
100.0 80.0
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. 60.0 24.0
Growth- (%)
18.0 12.0 6.0
(% of distributors)
40.0 20.0 0.0
Cardio vascular
NeuroPsychiatry
Oncology
0.0
AntiDiabetics
Respiratory
Anti-Diabetes
Cosmetology
AntiInfectives
Cardiac
MAT Mar-10
MAT Mar-11
While rising urbanisation and sedentary lifestyles are driving higher growth in lifestyle diseases (Chart 6), the overall base of the market is also expanding. Increase in health Base of chronic segment is expanding awareness and proliferation of various single specialty and multispecialty hospitals has led to early diagnosis of chronic disease among people. As shown in chart 7, growth in the chronic segment is led by higher prescription growth, rather than pricing, which implies higher penetration of the market. Hence, companies focused on chronic segment are likely to post higher and sustainable growth than overall market, in the long term.
Oncology
9
CNS

Chart 6: Population with lifestyle disease will double 6.0 Chart 7: Growth driven by higher prescriptions 100%
(% of population)
4.8 3.6 2.4 1.2
80% 60% 40% 20%
Coronary heart disease
0.0
Diabetes
Asthma
Obesity
Cancer
0% Anti diabetics Volume CVS Price CNS IPM
2005
2015E
Source: McKinsey, Edelweiss research
New products
Cosmetology, oncology and nephrology: New growth avenues within chronic As per our survey, the super specialty segment could be the next growth driver within chronic, given lower penetration, soaring affordability and insurance penetration. The rise in discretionary spending and focus on personal care is driving growth of the cosmetology segment and players like Dr. Reddys, Ranbaxy, and Glenmark are gaining from this trend. Super specialty therapies such as oncology, urology, vaccines, and nephrology are also depicting higher prevalence, specifically in metros and EST. DownloadPDF. ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 tier-I cities. These therapies, although have niche presence, are growing double the industry growth rate due to higher number of standalone specialty centers for early diagnosis and treatments. Moreover, newer introductions in these therapeutic areas will also expand the market as was the case with DPP IV categories in diabetes where despite premium pricing of Januvia (Sitagliptin; 4-5x to the current treatment), the product has been a huge success. More active competition in chronic segments is resulting in higher investments Strong growth in chronic therapies has led to higher competition with most companies expanding portfolios to enter the lucrative market. For instance, Ranbaxy, Cipla and IPCA, which are traditionally focused on the acute segment, are now actively building their chronic portfolio, by aggressively launching new products to fill therapeutic gaps. Moreover, while the market is becoming more competitive, its overall scope has expanded with higher number of doctors. Most of the existing and new players have enhanced investments in terms of field force expansion and new divisions to: (a) increase focus on specialists and super specialists; (b) expand reach to the uncovered doctor population; and (c) ramp-up sales of new products. We mention two cases of companies, with higher focus on chronic segment (Torrent and Sun Pharma), to understand their strategic approach to gain market share in a highly competitive market.
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Chart 8: Case 1 Torrent Pharma has doubled field force and added sub-divisions and further subdivided existing divisions to increase focus on each specialty
2,000 1,600
1,797
Therapies FY09
Divisions FY10 Therapies
Divisions FY11 Psycan, Delta, Psycan CND
577 1,170 49% 285 12% 76% 935

CVS / Antidiabetics
(No of reps.)
1,200 386 800 254 400 530 0 FY09 Cardiovascular
Psycan, Psycan, Delta, Delta and Psycan Azuca CND and Azuca Axon, Mind & Neuron Axon, Mind & Neuron
CVS
CNS
AntiDiabetics CNS
Azuca Axon, Mind & Neuron
FY11 Anti-diabetics CNS

Source: Company, Edelweiss research
As shown in Case 1, focus on brand building is becoming vital for existing players, hence, specialty promotion is emerging as the new and widely adopted strategy across markets wherein companies, like Torrent, are adopting micro-focused approach to build brand loyalty with doctors. Most companies are carving new divisions with dedicated field force to focus on individual specialties like anti-diabetics, CVS, CNS, dermatology, etc. and even individual Specialty focused products or brands in a few cases (e.g., Sanofi Aventis). This helps field force to focus on few ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. marketing is gaining products, leading to better promotion among doctors and higher market share. Sun Pharma ground (case 2) has been successful in building strong brand franchise through therapy-focused marketing. The company has mapped three to four divisions within each of the key therapies to focus on multiple product segments with dedicated field force (refer Fig. 2). This strategy offers more depth in marketing, with multiple medical representatives covering a single specialist, leading to higher prescription share and mind share. Sun Pharmas multi-focused marketing has rendered it the highest field force productivity among peers (INR 8.9 mn versus industry average of INR 3.7 mn). Almost all distributors believe that specialty focus improves brand positioning and creates high impact on growth.
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Fig. 2: Case 2 - Sun Pharma has build strong franchise by creating higher specialty focus
Therapy Cardiology, Diabetology Cardiovascular
Divisions / Sub divisions ARIAN AZURA Life sciences AZURA Criticare AVIOR
Interventional Cardiology
CNS (Psychiatry, Neurology)
SYNERGY
SYMBIOSIS
SIRIUS
Gynecology Fertility, Urology
SPECTRA INCA Life Sciences
INCA Life Sciences
Gastroenterology Orthopedics
SUN
SOLARES
Opthalmology
AVESTA
MILMET
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Oncology SUN Oncology
Rheumatology, Dermatology
ORTUS RADIANT
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Metro, tier-I key markets; Semi urban and rural areas are new growth pockets
We believe metros and tier-I markets will remain key drivers of industry growth, while the base of semi-urban and rural markets will expand driven by higher affordability and improved access to better healthcare. We have tried to analyse through our survey the changing dynamics of various tiers or classes of geographies within the industry. We can divide, based on the population parameter, the IPM into two major categories: (a) metros and tierI cities (population ranging from 500,000 to 1 mn and above); and (b) semi urban and rural markets (population ranging from 5000 to < 500,000). Metros and tier-I cities account for 60% of the total market, while semi-urban (tier II-IV) and rural markets account for the balance 40%. The table, below, highlights cities covered through the survey and growth in various tiers of the market, as perceived by distributors. Table 3: Tier-I, III and IV cities are registering higher growth above industry average
City Tier Metro Tier-I Tier-II
Overall share of market (%) 30% 30%
Population >1 mn 500,000 to <1 mn
Cities covered through survey Hyderabad, Chennai, Mumbai, Ahmedabad, Delhi, Kolkata Pune, Surat, Secunderabad
No of retail chemists 4,000 to 20,000 2,000 to 5,000
Average Growth (%) 13-15% >15%
Gurgaon, Bhubaneshwar,Baroda, 1,000 to 3,000 Cuttak, Howrah 300,000 to 20% 500,000 Tier III Karimnagar, Warangal, 1,000 to 2,000 Nashik, 2011-11-09 01:19:45 EST. DownloadPDF. ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on Noida Tier IV 20% Rural/Micro Towns up to 300,000 Vapi, Satara, Sangli, Abhore, Kolhapur, Miraj, Behrampur, Sikar, Chomu etc. 250 to 700
>15%
25-30%
We highlight that metros are growing at an average rate of 13-15%, in line with the industry. Acute therapy still constitute ~60-65% of volumes, while the share of chronic therapies is increasing, which is driving higher number of specialty set ups. As a result, companies are expanding field force in these markets to target larger doctor population. Most distributors guide that growth in metros will sustain for the foreseeable future led by four key factors: (i) urbanisation (due to migration of people from lower tiers) resulting in higher population; (ii) rapid changes in lifestyle, leading to faulty eating habits, key driver of chronic disease; (iii) higher growth of middle income levels group driving affordability; and (iv) increase in diagnosis and treatment levels. Increase in health awareness is also resulting in higher self medication, which is driving most companies to switch leading brands from prescription to OTC (e.g., Pfizer is expanding its brand franchise by promoting Gelusil syrup as an OTC product). This strategy enables companies to get higher growth and return from established brands with lower investments. Moreover, companies like IPCA and Cadila are entering into nutraceuticals segment driven by higher demand for additional supplements to cope with rising stress levels. IPCA has introduced Nutralite to venture into the nutraceutical segment.
13

Growth in tier-I cities higher than metros We view, on the basis of our survey, higher growth in tier-I markets (at 15-20%) than metros, largely due to increasing base of chronic disease (diabetes and CNS) growing at a faster rate compared to metros and increasing penetration of better healthcare facilities such as higher secondary care and single specialty care hospitals. Semi-urban and rural markets: New growth pockets Semi-urban markets, comprising various tier II-IV cities, are potentially high growth markets, growing in the range of 15-30%, higher than average industry growth. Affordability is the biggest growth driver, led by higher disposable incomes, which has led to significant increase in pharmaceutical spending. Further, these markets are highly underpenetrated (70-75% of population comprising 40% of total market by value) which will enable it to sustain high double digit growth over the next four-five years. We believe this strong growth has positive implications for top tier pharma companies, majority of which have embryonic presence in these markets. However, the dynamics are different form metros (Table 4) entailing companies to tailor their marketing strategies to individual markets. Table 4: Dynamics of semi-urban and rural markets vary from metros and tier-I markets Semi-urban & Rural Metros & Tier -I towns Comments markets Chronic Acute therapies account for 80-90% of total Chronic (10-20%) (35-40%) consumption in semi urban areas
Anit-infectives, gastro-intestinal and respiratory are high growth therapies, while chornic therapies are catching up with higher growth in towns with more urbanization ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Therapeutic mix
Specialists (5-10%) GPs and CPs (50%)
Doctor population
GPs (MBBS), RMPs (90-95%) Specialists (50%)
Nature of doctor population is largely GPs and CPs (90-95% of total), while specialists presence is limited to fewer class-II/III towns which are seeing higher urbanization and expansion of therapies like respiratory, neuropsychiatry and diabetics Poliferation of local players giving stiff competition to Top tier pharma companies
Local competition
Very high
Not much impact
Local playes have better relations with doctors, low pricing strategy and incentivise retailers with better schemes
Distribution set-up
Hub and spoke Multi-layered Lack of distribution set-up leading to higher cost (Hub is the Tier-III/IV town Wide spread and organized of distribution. (Sanofi Aventis does taxis tours which catrers to near by using own vehicles into micro interiors) micro towns) More skillful with better Penetration and local presence is lower in tierproduct knowledge and III/IV cities understanding of the market
Field force
Lack of quality in field force
Local field force presence is critical to gain market share in semi-urban and rural markets
We detail out three key strategies adopted by companies to penetrate tier III and IV markets. First, most companies are appointing local staff or setting up a local headquarter to cater to these markets, which was earlier addressed by field force from tier I and II towns in close proximity. As per distributors, local field force is essential to promote products effectively to local GPs and CPs which leads to higher volume growth. Second, existing

players are expanding their coverage (field force is doubled in most regions) to address larger pool of doctors and micro interiors, which were earlier not covered. For instance, to increase penetration, Sanofi Aventis is doing taxi tours in micro interiors which have no transport. Last, companies are organising more CMEs (medical education programmes by inviting senior physicians for local doctors) as well as healthcare awareness camps which are helping them reach targeted customers more effectively. Hence, by improving accessibility in under-penetrated markets, companies are creating higher demand for pharmaceuticals. We believe companies like Cipla, Cadila, IPCA, Ranbaxy, and Sanofi Aventis, which are adopting a more localized approach, are well positioned to take advantage of growing demand. Table 4, above, further depicts that the disease profile of tier III-IV cities is highly Companies primarily focus on acute segment in tier III-IV and rural markets concentrated on the acute segment. We believe companies in order to penetrate and build base in tier IIIIV markets, will have to initially tailor their product portfolios to the acute segment, while selectively positioning in the chronic segment. As per our analysis, chronic segments like respiratory (anti-asthma), cardiac, and diabetes are also picking up in selective markets which gives opportunities for growth to companies like Sun pharma, Torrent, and USV, who have selectively focused on neuropsychiatry, cardiac and anti-diabetic segments, respectively, in these markets. Chart 9: Players becoming more active or expanding coverage in tier III-IV areas 75.0
(% of distributors)
60.0 45.0
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. 30.0
15.0 0.0
As per our survey, larger players such as Cipla, Cadila, and Ranbaxy, with strong concentration in the acute segment, are doing well in semi-urban and rural areas, while players such as Lupin and IPCA are also expanding coverage and seeing positive traction from these regions (Chart 10). Moreover, MNCs (GSK, Pfizer and Sanofi Aventis) are also expanding field force, strengthening distribution networks, and launching economically priced branded generics products (such as Rabeprazole by Pfizer). We highlight that these products have initially not posted higher traction and will take longer gestation periods before building market share.
Glenmark
Ranbaxy
Dr Reddy's
Torrent
15
Sanofi Aventis
Cadila
Pfizer
IPCA
Lupin
Cipla
GSK

Chart 10: Relative performance in semi-urban and rural markets (Survey) 100.0
80.0 60.0 40.0 20.0 0.0
(%)
Dr Reddy's
Glenmark
Ranbaxy
Mankind
Macleods
Torrent
Cadila
Sanofi Aventis
Pfizer
Lupin
Cipla
IPCA
Gaining market share
Losing market share

Interestingly, Mankind and Macleods are prominently gaining market share, giving stiff competition to other players in these markets. While most companies have been traditionally focused on metros and tier-I towns, companies like Mankind and Macleods have expanded Mankind, Macleods have strong foothold in semiurban and rural markets penetration in smaller markets, thereby establishing strong hold in terms of prescription share of doctors. However, the positioning is different than other peers and hence do not directly compete with similar doctor population. To illustrate our point further, Mankind
strategy differentiates on two points: (a) lower prices; and (b) deeper penetration in doctors ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. with a larger coverage list. Moreover, they have relatively better promotional strategies for retailers wherein the company offers schemes with higher incentives than other players. Finally, Mankinds field force largely comprises people with non-science backgrounds and attrition is low due to higher incentive structure. We believe higher stability or lower attrition is critical to build market share in these markets. Chart 11: Field force stability of players in rural market (Survey)
Pfizer Mankind Lupin Ranbaxy Cadila Cipla IPCA 0% 20% 40% (% distributors) Better field force Poor field force
60%
80%
100%
16
GSK
Aggressive MNC Expansion Poses High Risk

MNC pharma companies are aggressively expanding with meaningful investments in the domestic market. These investments, although at a nascent stage, will set up base for the next leg of growth. Most leading MNC companies have set bold aspirations for their Indian businesses and are adopting a more localised business model including pan-India penetration, well spread out competent field force, strong distribution network and branded generic presence. 65% of total distributors believe that MNCs are becoming aggressive in terms of launching new products, therapies, and competitive pricing of products. MNCs such as Aventis, MSD, and Abbott are transforming existing policies and aggressively building channel relations with distributors. For instance, Sanofi Aventis has directly interacted with all distributors across India (video conference call) to elucidate their business and future strategies. Moreover, senior management and area heads from MNCs are directly meeting key distributors to strengthen coverage. Chart 12: Strategies adopted by MNCs
100.0 80.0 60.0 40.0
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. 20.0
(% of distributors)
0.0 New product launches (incl branded generics) Field force expasnion Brand promotion Building channel relations
Chart 13: Most distributors perceive aggressive expansion by MNCs
Not much change in activity 35%
Higher activity level 65%
17

Distinct shift in strategy by launching branded generics products MNCs are overhauling domestic portfolios by aggressively investing into branded generics, rebuilding the old/established brands through the OTC route and expanding into new therapies like CVS, CNS and Oncology. Table 5 shows, recent braded generic launches by some MNCs (GSK and Pfizer) and respective pricing of products versus Indian players. Table 5: MNCs are adopting aggressive pricing strategy in branded generics
MNC Molecules Therapy Brand name Pricing (INR) Indian Competitive brands Company Ranbaxy Brand name Pricing (INR) 180 (10 tablets) 125 (10 tablets) 110 (10 tablets) 157 (10 tablets) 55 (15 tablets) 64 (15 tablets) 70 (10 tablets)
Intas Glaxo Atorvastatin CVS 43 (10 tablets) Dr Reddy's
Cipla Intas Gastrointestinal 24 (7 tablets)
Pfizer
Rabeprazole
Above 5
Cipla
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Dr Reddy's
This, table, depicts that MNCs have entered into the branded generics segment with extremely competitive prices versus Indian companies. However, sales from these brands have not picked up due to lack of strategic bandwidth in promoting branded generics. Most distributors believe that branded generics launches by MNCs will take longer to build traction as there are cultural barriers which companies face while marketing a non-parent product. Moreover, in licensing of off- patented/patented drugs from parent pipeline (over next twothree years) are sought as key business drivers. For example, MSD has strong pipeline of in licensed molecules which are gaining traction in the market. Field force expansion to enhance penetration MNCs are rapidly expanding field force as part of their strategy to expand geographical reach into tier I and II cities. For instance, Pfizer has increased its field force from 1,100 reps in CY09 to 2,300 by CY2010 and further plans to add field force in CY11-12. Similarly, GSK has increased its field force from 2,000 in CY08 to 2,800 in CY10 (growth of 40%). Sanofi Aventis has also expanded its field force to 1,800 reps from 1,100 in CY08. These investments will reap benefits over the next three to four years, in our view.
18

Chart 14: Field force expansion by key MNC players
3,500 43%
MNCs have doubled field force to expand geographical reach
2,800
188% 64%
(No. of reps.)
2,100 1,400 700 0 GSK 2008 Pfizer 2010
Aventis
Sanofi-Aventis is preferred play in MNC space Sanofi Aventis is emerging as the most aggressive player, among MNCs, with an all inclusive strategy for growth. The company has positioned itself into the high growth chronic segment (50% of its total portfolio) with strong market share in anti-diabetics. Among the top 10 brands, six are in the chronic segment. Further, Aventis has active coverage across markets and is increasing reach into various tier II-IV markets. The company has adopted dual strategies 124.124.255.5 on 2011-11-09 01:19:45 EST. metros and tier-I markets is to ISIEmergingMarketsPDF in-sdmcpl01 fromfor each class of market. For instance, its focus in DownloadPDF. aggressively build brands and has employed a specialty task force (STF) for each of its brands. Lantus, Cardace and Allegra are few of the strong brands build by Sanofi despite stiff competition. For tier II to IV markets, the company is building upon its acute franchise by expanding reach and access through project Prayas (which underlines its strategy to reach micro interiors) and by launching line extensions of established brands such as combiflam cream. Chart 15: Relative performance of MNCs (Survey) 100%
80%
Sanofi-Aventis is leading the MNC pack
60% 40% 20% 0%
Growing above market
Growing below market
In line
Ranbaxy
19
Sanofi Aventis
Abbott Piramal
Pfizer
GSK
Differentiating Class from Mass

A strong and growing domestic market has opened floodgates of opportunities for Indian as well as MNC players, who are targeting these with multi-pronged approach. While some companies have been frontrunners in identifying future opportunities, others have lost momentum. To differentiate the former from the latter, we have contemplated various parameters which could be critical for growth. Further, we believe that historical execution is a realistic measure to differentiate players, but it may not be indicative of future growth and performance. Hence, these five key parameters (or critical success factors) could gauge the strength of a companys domestic business and act as an effective tool to differentiate good from the bad (or winners from losers). These include: a) b) c) d) e) Portfolio concentration or business mix (acute versus chronic) Ability to build brands Success of new product launches Field force penetration or coverage Field force stability and productivity
On the basis of above mentioned parameters and through our analysis from the survey, we have identified few highly effective companies which have strong execution and are growing ahead of market. Sun from 124.124.255.5 favored plays 01:19:45 EST. DownloadPDF. ISIEmergingMarketsPDF in-sdmcpl01and Lupin emerge as on 2011-11-09 in large cap; Torrent/IPCA score in mid cap Sun pharma and Lupin were ranked by most distributors as outperformers among large caps, We judge strength of while Torrent and IPCA scored in mid caps. Among MNCs, Aventis scored over other players domestic business of each such as GSK and Pfizer. Players such as Cipla, Ranbaxy and Cadila are facing some pressures player on the basis of five in terms of growth and stability but are likely to turnaround, in our view. key parameters Sun pharma has emerged as the undisputed choice among distributors primarily because of its ability to identify therapeutic gap areas and launch products ahead of competition, resulting in better mind share and market share. Second, the company has focus on medical colleges and has innovatively built its doctors franchise by engaging them at an early stage. Lupin scores over peers due to its focus on key opinion leaders (KOLs). The company has actively build a wider portfolio by entering into newer therapeutic areas and is growing ahead of peers in chronic segments such as CVS, CNS, and respiratory. Moreover, its aggressive and highly effective field force helps it sustain growth in a highly competitive market. Cipla, despite deep penetration and high field force productivity, has seen slow growth in domestic market. This is largely due to instability in the field force which has further impacted its ability to build big brands. However, we believe that Cipla can surprise the market positively due to its higher focus on tier II and IV markets, where the company has started witnessing high growth traction, and addressing of structural issues with reference to its mature and generic-generic portfolio in domestic market. Other companies like Cadila, Dr. Reddys, and Ranbaxy are also gearing up which is evident from the fact that they have ramped up their field force by 22%, 94%, and 72%, respectively, over the past two years. In the mid-cap space, Torrent is ahead of comparable peers on account of higher focus on the chronic segment, better field force stability, and ability to build brands. However, it lags in terms of launching new products. Moreover, IPCA is also gaining strong momentum in all

markets and has increased divisions (12 from earlier seven) to expand into newer therapies and tier II to IV towns. We highlight that Torrent and IPCA have expanded field force aggressively (by 64% and 58%, respectively) which has impacted their field force productivity (Fig. 3). In the MNC space, Sanofi-Aventis has a clear advantage over other MNCs because of high focus on the chronic segment, strong brand building abilities, competent sales force, and aggressive approach in metros as well as tier II to IV towns. Fig. 3: Competitive score card
C ompany Name Domestic growth C AGR (5yr) Portfolio concentration Brand building ability Success of new product launches Field force stability Field force productivity Reach (Medical reps)
Large Cap Sun Pharma Dr Reddy's C ipla Lupin C adila
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Mid-cap
Torrent Pharma
IPC A Glenmark MNC
Ranbaxy Sanofi-Aventis GSK India Pfizer India Scale: Best 5 Least 1
The competitive score card, above, measures each company on the basis of its strength in each of the parameters, which is key end driver of our survey. We now illustrate our findings through discussion of each of these key parameters and substantiate our preferred plays over others.
21

Portfolio concentration or business mix
We prefer Sun Pharma, Lupin, and Torrent as they have higher concentration in chronic therapies, which contribute 45-60% of their total sales (Chart 16). The presence in the chronic segment has historically offered these players higher growth than industry. Further, chronic therapies provide better realization than acute, thereby rendering higher gross margins (80-90% versus 70% in acute segments). Companies which are largely focused on the acute segment such as Ranbaxy, Dr. Reddys, Cipla, and IPCA, are posting higher growth in micro markets. The acute segment continues to have larger share of IPM (~72% of total market) and has posted better growth in the past two years due to increased penetration of companies in tier II-IV towns and rural areas. Among MNCs, portfolio concentration is more skewed towards acute except Sanofi-Aventis which has build strong presence in the chronic segment, where we see growth picking up over the past six months. Chart 16: Players with strong focus on chronic segment to outperform market Torrent
Sun Pharma Sanofi Lupin Cipla

Sun, Lupin and Torrent have high focus on chronic segment
Dr Reddy's Cadila IPCA
Ranbaxy Glenmark ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Pfizer Glaxo 0.0 20.0 Chronic 40.0 (%) 60.0 Acute
80.0
100.0
We believe, within the chronic segment, companies with higher market share and ability to build successful brands will grow ahead of peers. As seen in charts 17-19, Sun Pharma has leading market share in most specialty segments, while Lupin has posted higher growth among peers. We highlight that the cardiovascular segment has become extremely competitive with older molecules facing pricing pressures. Cadila and Torrent have relatively underperformed in CVS due to pricing pressures in older molecules and lack of new product launches. As per our survey, Cadila is facing higher attrition among peers, leading to loss of market share in few divisions.
22

Chart 17: Key players in anti-diabetics market 40.0
12.0 36 9.6
32.0 24.0 (%)
29
29 20 16 22
16.0 8.0 0.0 Sun Pharma SanofiAventis Piramal Lupin USV MSD
Industry growth 17
7.2 4.8 2.4 0.0 (%)

23
Market share (RHS)

Chart 18: Key players in cardiovascular market 40.0 35 We prefer players with higher market share and
Growth (LHS)
Torrent
6.5 5.2
32.0 24.0 19 Industry growth 14
(%)
16 segment 14 16.0 12 2011-11-09 01:19:45 EST. DownloadPDF. ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 8.0 0.0
2.6 1.3 0.0
Ranbaxy
Cadila
Sun Pharma
Market share (RHS)
Growth (LHS)
Chart 19: Key players in neuro-psychiatry market 30.0
Torrent Pharma
Lupin
Intas
Cipla
27 24
17.5 14.0 10.5 7.0 3.5 0.0
24.0 18.0
19 15 13
18
(%)
12.0 6.0 0.0
10
Sun Pharma
Torrent
Piramal
SanofiAventis
Abbott
Market share (RHS)
Growth (LHS)
Lupin
Intas
GSK
(%)
14
Industry growth
(%)
growth within chronic
19
3.9

Ability to build brands: A key differentiator
As new product launches dwindle, building big brands has assumed much greater importance and is rather necessary to improve profitability. To instill a culture and mindset of building large brands, companies need to focus on several aspects. First, for large brands, companys require active life cycle management, while for scaling up medium sized brands they need to broaden coverage across doctors and geographies and finally for relatively new brands the focus should be to create credibility and generate prescriptions among KOLs (key opinion leaders). We recognize brand building as future growth driver and have identified companies with better track records in building brands. Our survey highlights that among domestic companies, Sun pharma leads the pack, followed by Lupin with 68% and 59% of distributors, respectively, gauging strong brand building capability. Among MNCs, respondents believe Sanofi-Aventis has better brand building ability. Similarly, in mid caps, Torrent, IPCA and Glenmark have better brand building ability compared to peers. Chart 20: 68% respondents believe Sun Pharma has better brand building ability 75
(% coverage distriibutors)
60 45 30
Glenmark
Dr Reddy
The table 6, below, further shows that the incremental growth in top 10 brands of most players is higher or in line with the overall growth of respective domestic business, except for Dr Reddys where growth is largely driven by new products. Sun pharma has shown highest growth in top 10 brands which further supports our preference.
24
Ranbaxy
Mankind
Sun Pharma
Abbott Piramal
Aventis
Torrent
Cadila
Intas
Pfizer
Lupin
IPCA
GSK
Cipla
USV

Table 6: Top 10 brands are growing in line or higher than overall domestic growth Growth (MAT Mar 2011) (%) Top - 10 brands Overall Relative Cont. to sales domestic performance (%) Top 10 brands
Relative outperformance of Top 10 brands reflects higher focus on brand building by most players
Glenmark Ranbaxy Torrent Cipla Cadila Sun Pharma GSK Sanofi Aventis IPCA Lupin Pfizer Dr Reddy's
36.9 36.6 30.4 27.9 28.3 19.6 38.7 55.1 34.7 21.0 63.9 39.9
27.6 15.7 24.0 25.0 17.9 32.5 12.4 20.0 22.0 21.6 21.0 8.2
22.4 9.1 22.1 20.6 14.9 22.9 13.2 21.2 24.4 24.3 23.7 11.5 7 2 4 3 10 -1 -1 -2 -3 -3 -3
Success of new product launches

Most large and mid-size companies, to actively expand coverage across molecules or therapies, are launching new products. However, as per our survey 70-80% of these products have been failures; most of these failures have been in established segments, where more than 10-15 players currently exist. Hence, we observe companies which are more proactive and from products ahead of the market 01:19:45 EST. DownloadPDF. ISIEmergingMarketsPDF in-sdmcpl01launch 124.124.255.5 on 2011-11-09 are more successful in building brands, which potentially contribute to higher growth of the business. The chart, below, indicates that companies like Sun Pharma and Lupin are equally successful in building new products, as Top 10 brands contribution to growth is relatively lower than the peers. However, companies like Ranbaxy and Glenmark still have high dependency on Top 10 brands. Ranbaxys Top 10 brands are driving ~50% of its incremental growth, primarily due to slower pace of new launches over the past two three years. Similarly, MNCs dependency on top 10 brands is relatively high due to fewer product launches compared to Indian peers. Chart 21: Lower contribution from Top 10 brands indicates higher traction from new launches Indian peers MNC peers
50
65 Glenmark Cipla Cadila Torrent IPCA
(Top 10 brands c ontribution to growth)
(Top 10 brands c ontribution to growth)
42 34 26
58 51 44 37 30
Pfizer Ranbaxy Sanofi Aventis
Dr Reddy's
Lupin 18 10 10 20 30 40 50 Top 10 brands contribution to total domestic sales (%) Sun Pharma
GSK
10
30
50
70
90
Top 10 brands contribution to total domestic sales (%)

25

Chart 22: Companies most aggressive in launching new products 65.0
(% of distributors)
52.0 39.0 26.0 13.0 0.0
Ranbaxy
Torrent
Most distributors view higher traction from new launches by Sun Pharma , Sanofi Aventis and Lupin. Sun Pharmas ability to identify therapeutic gap area and launch products ahead of the market are key differentiating factors behind its success. Also differentiated R&D pipeline of Sun Pharma and Dr Reddys clearly give them an edge over others. Dr. Reddys growth contribution from new products (78%) is highest among peers and higher than industry (40%).
Higher field force penetration or coverage
Many pharma companies, including MNCs, have enhanced their field force over the past two years to expand their reach and penetration in existing as well as tier-II to IV markets. We believe there is a huge scope for higher coverage as modern medicine till date reaches only 35% of the population. India has approximately 8, 00,000 doctors, but most companies cover only 1,50,000-2,00,000 as these are the leading prescription generators. However, success of few pharma companies such as Mankind and Macleods has challenged the traditional model of top down approach and many companies (both Indian as well as MNCs) have expanded their reach to gain the incremental pie of growing opportunities. Chart 23: Field force penetration has increased over past four years
5,500
Higher field force penetration to optimise reach to pharmacists, doctors and hospitals
CAGR (FY08-11) 19% 25% 20% 18% 19% 5% 9%
4,400 13%
(Field force)
23% 3,300 2,200 1,100 0
FY08
FY11 (YTD)
26
Glenmark
Ranbaxy
Dr. Reddy's
Torrent
Cadila
Sun Pharma
IPCA
Lupin
Cipla
Glenmark
Mankind
Sun Pharma
Pfizer
Intas
Lupin
Cipla
IPCA

As viewed in Chart 23, Cipla, IPCA, and Cadila have the largest field force, while Sun Pharma has not expanded its field force due to its restricted focus on Metros and tier I towns. Ranbaxys field force expansion, through its Project Virat, from 2,500 reps to 4,200 reps, over the past six months, has been the largest. Further, Glenmark lags its peers in terms of penetration, but expects to expand field force by 15-20% per annum over the next two years.
Field force stability critical for sustainable growth

Field force stability is critical to maintain higher productivity and growth, while instability results in disruption of sales. Although retention has always been a challenge for the industry, off late, the attrition rate has zoomed owing to aggressive hiring. We believe, companies with strong and effective field force management have higher probability of sustaining market share and growth. Historically, MNCs were associated with better field force stability because of higher pay scale. However, as per the survey, Lupin, Sanofi-Aventis and Sun pharma have been ranked as companies possessing highly effective and stable field force compared to its large cap and MNC peers. Cipla has the highest attrition followed by Ranbaxy, while field force stability of Dr. Reddys and Cadila is above average. In the mid-cap space, Torrent and Glenmark have more stability than IPCA, Unichem, and FDC. In the unlisted space, Mankind has a stable field force because of its highly effective incentive policy. Chart 24: Companies with highly stable and effective field force (Survey) 100%
80% ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. 60% 40% 20% 0%
Dr Reddy's
Glenmark
Sun Pharma
Ranbaxy
Torrent
Abbott Piramal
Sanofi Aventis
Unichem
Mankind
Cadila
Pfizer
Lupin
IPCA
Satble field force
Average
GSK
Poor field force stability

Field force productivity is of paramount importance

Companies with higher field force stability and higher concentration in chronic segment has Higher field force productivity yields higher margins better productivity. Although, aggressive field force expansion has impacted per man productivity of many companies in the short term, we view these investments as positive as they lend long-term growth visibility. Analysing the long-term trend, we observe that Sun pharma, Cipla, and Lupin have higher productivity. Among MNCs, the field forces of Aventis and GSK are highly productive because of strong brand equity and concentration in a few therapies and geographies. Among mid caps, productivity of Torrent and IPCA has been impacted due to aggressive expansion in field force over the past two years. We highlight that it takes three to four years for new medical representatives to achieve company level productivity.
Cipla
USV
27
FDC

Chart 25: Recent expansion in field force has impacted productivity 12.0
Field force productivity (INR mn)
9.6 7.2 4.8 2.4 0.0 1,000 2,000
Sun GSK Aventis Glenmark Lupin Ranbaxy Cipla
DRRD Torrent
Cadila IPCA
3,000
4,000
5,000
6,000
Field force (no of reps)

Historical execution in domestic market

Historical revenue growth reflects the effectiveness of strategies and strong execution capabilities of management. We highlight that companies which have scored well on all parameters, as discussed above, have also delivered strong revenue growth (over past five years). Chart 26 indicates that Lupin and IPCA have posted 24% CAGR over FY05-10, while Sun Pharma and Torrent have also registered strong growth of 22% and 20%, respectively.
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Chart 26: Companies with strong historical growth scored well in our survey 30.0
24.0
24.1 23.7
21.9
Growth (%)
20.1 19.9
18.4 14.5 11.6 10.0 9.3 7.2
18.0 12.0 6.0 0.0
6.8
Dr Reddy's
Glenmark
Sun Pharma
28
Ranbaxy
Torrent Pharma
Cadila
Sanofi Aventis
GSK
Cipla
Pfizer
Lupin
IPCA
Future Growth Drivers

As the domestic pharma market grows in size and diversity, there are several opportunities that will scale up to their full potential. Some of these include biologics and vaccines, consumer healthcare, patented products and hospital segment, which are at an early stage of lifecycle, but are likely to scale up with upgradation of therapies, increased penetration of multi-specialty hospitals and changes in patients preference. According to industry sources, these opportunities will collectively grow to USD 25 bn by 2020 from the current USD 5 bn. Rising acceptability of new therapies As the domestic pharma market grows in size and diversity, we believe the acceptability of Acceptance of biologics and vaccines will increase modern medicine (including biologics and vaccines) and new therapies will increase due to aggressive market creation by players and greater propensity of self medication. Investment in enhancing patient awareness and education will impact diagnosis and treatment levels. In addition patients will show greater propensity to self medicate. The consumer healthcare segment has the potential to grow at over 14% annually, provided players make large OTC brands easily available to consumers, differentiate their products, and establish an emotional connection with patients. Finally, the acceptance of biologics and vaccines will rise. The biologics market is expected to reach USD 3 bn by 2020 from the current USD 300 mn. Launch of patented products Although patented products contribution to the domestic market is negligible (USD 200 mn; <1% of total market) and there have been very few launches since 2005 in India, the recent successes of Januvia and Galvus indicates that patented products can drive tremendous growth in a few therapeutic areas, provided they are priced adequately. Rising affordability ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. and increased healthcare insurance penetration will be the primary growth drivers for the patented products segment. The overall contribution of patented products is likely to remain below 5% (USD 1.7 bn by 2020), however, revenue will be concentrated to few brands and hence would be attractive for MNC players who proactively launch and build brands. Hospital segment to gain importance The hospital segment is one of the fast growing segments and has been a key growth driver for the domestic industry. While the retail segment is mainstay of the pharma market (contributes 85-90% of overall sales), the hospital segment is gaining importance driven by dramatic rise in infrastructure and advent of corporate hospitals. In the developed world, hospitals account for more than 25% of the pharmaceutical market, while in India they account for less than 10%, but are increasing at rapid pace. Over time, the proportion of pharmaceutical sales to hospitals is likely to increase with strong capacity addition (37% increase in FY10) in the healthcare segment. The hospital market contribution to domestic market to likely to grow from USD 1.7 bn to USD 14 bn by 2020 (22% CAGR; 26% market share). We highlight that our survey indicates strong focus by MNCs in hospital segment.
29

Chart 27: Hospital market to post 22% CAGR
15 12 9 6 3 0 2009 Market Share (%) 13 Public Private

Source: Mckinsey, Edelweiss research
(%)
2020E 26
30
Valuations: Rich, But Not Stretched

Earning CAGR of 23% likely over FY10-13E
We expect our pharma universe to post 17% revenue CAGR over FY11-13E, driven by 25% and 21% growth in Sun Pharma and Cadila, respectively. The drivers of this growth are multiple, in our view, including strong traction in the domestic market, USD 135 bn worth opportunity from patent cliff in the US market, and double digit growth in various emerging markets. We expect operating margins to expand by 220 bps to 21.8% over FY11-13E, led by outperformance from Ranbaxy (400 bps expansion) and Sun Pharma (300 bps margin expansion) during the same period. We expect strong revenue growth and operating margin expansion to drive 23% earning CAGR over FY11-13E. Table 7: Earnings growth momentum across coverage universe
Revenue Company Cadila Cipla Dr Reddy's* Lupin Ranbaxy* Sun Pharma** Torrent Pharma Total FY11 45.0 62.5 72.7 56.7 72.3 50.6 22.6 382.4 FY13E 65.9 82.8 97.5 75.3 90.3 78.6 32.1 522.6 CAGR (%) 21.1 15.1 15.8 15.2 11.8 24.6 19.3 16.9 9.9 13.6 15.3 11.6 6.1 15.2 4.4 76.0 15.0 19.3 21.2 16.1 11.3 24.5 6.7 114.1 FY11 EBIDTA FY13E CAGR (%) 23.4 19.3 17.7 17.9 36.0 27.0 23.0 22.5 21.9 21.7 21.0 20.5 8.5 30.0 19.5 19.9 22.8 23.3 21.7 21.4 12.5 31.2 20.8 21.8 6.5 10.0 10.5 8.5 3.6 13.4 3.0 55.4 10.3 14.9 14.9 11.8 7.1 20.7 4.6 84.3 EBIDTA Margins (%) FY11 FY13E FY11 PAT FY13E CAGR (%) 26.5 22.1 19.0 17.9 40.8 24.3 24.6 23.4 31.6 12.4 62.4 19.1 8.5 12.9 35.1 182.0 50.5 18.5 88.4 26.5 16.9 21.2 54.5 276.5 26.5 22.1 19.0 17.9 40.8 28.1 24.6 23.3 FY11 EPS FY13E CAGR (%)
(INR bn)
Source: Edelweiss research Note: * Financials (ex-ROCE) represent base business (Ex one-off from Para IV) **Financials for Sun pharma includes Taro but excludes one-off from Para-IV
Pharma Indexs relative performance to broad market has moderated

The BSE Healthcare Index has underperformed the broad market (Sensex) over the past four months, after a strong outperformance over the past three years. This is further evident from the fact that the relative premium to the broader market, which had expanded towards the beginning of the year (43-45% relative to market), has corrected more than 14-15% from its peak since January 2011. We believe this is largely because: (a) sector valuation multiples (one year forward) have expanded from their five year historical average of 19x to 23x; and (b) the sector is fairly owned across institutional investors who have been booking profits. However, post correction, over the past four months, the sector is trading near to its five year average multiple (18-19x).
31

Chart 28: Healthcare Index performance viz--viz Sensex
105.0 70.0 35.0 0.0 (9) (35.0) (70.0) YTD CY10 CY09 BSE HC (5) (32) (51) CY08 Sensex
68 34 18
71 47 47 22
(%)
Recent underperformance led by correction from peak multiples
16
CY07
CY06
Valuations rich, but not stretched; prefer stock-specific approach

Although valuations of the pharma sector have moved up, they are not in stretched territory. While we remain positive on the sector (as fundamentals remain strong), we prefer to be more stock specific. Moreover, variations in stock performance within the sector also highlight the importance of company-focused approach. Chart 29: Relative performance within sector (to Sensex) ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. 1 yr Ablsolute 1 yr Relative Pfizer 12 Pfizer 25 GSK (2) GSK 10
Torrent Pharma IPCA Cadila Lupin
Torrent Pharma 5 42 13 IPCA Cadila Lupin Glenmark Ranbaxy 16 30 Sun pharma Dr Reddy's Cipla 20 (%) 40 60 (20) (4) 0 4
14 18 54 25 11 28 42
Glenmark (1) Ranbaxy Sun pharma Dr Reddy's Cipla (20) 0 (16) (8)
20 (%)
40
60
Premium valuations to sustain

Our universe currently trades at 22x FY12E and 18.5x FY13E EPS. Current sector valuations are closer to their five year average PE. Historically, the pharma universe has traded at a 10-15% premium to the broader market on account of consistent earnings growth, healthy balance sheet, and defensive nature of the market. Currently, the Pharma Index is trading at 24-25% premium to the Sensex (past one year average premium is 25-26%), slightly higher than the long-term average premium of 10-15%. We expect premium valuations to sustain with emergence of the innovator-generic partnership model, strong earnings growth (23% earning CAGR), robust financial ratios (Universe RoCE of 28% and low leverage of 0.2 x) and higher positive free cash flow.
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Chart 30: Pharma relative premium/discount to Sensex
400 320
Pharma index has traded at 45% premium
1.8 1.4 1.1 0.7 0.4 0.0
240 160 80 0
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Oct-10
Pharma
Sensex
Relative premium
Lupin and Cadila likely to catch up peers multiple

We expect our large-cap universe to continue to trade at 19x one year forward PE (inline with five-year average). However, Lupin and Cadila, which have historically traded at five year mean multiple of 13-14 (mid-cap valuations), are seeing visible narrowing down of the multiple gap with large peers as these companies have gradually moved into the big league and we expect this gap (still trading at 10-15% discount to comparable peers) to further narrow. ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Top picks We conclude, on the basis of our distributor survey, that Sun Pharma, Lupin, Cipla, and Torrent have a strong franchise in the domestic market and robust growth outlook. However, after considering incremental upsides from international markets, companyspecific issues and current valuations, we expect Lupin, Dr Reddys, Cadila, and Torrent to be outperformers over the next 12-18 months. Table 8: Peer valuations matrix
CMP INR Sun Pharma* Cipla Ranbaxy* Cadila Dr. Reddy's* Lupin Large Caps Glenmark Torrent pharma IPCA Aurobindo Unichem Mid-cap 446 321 468 844 1,656 412 300 592 310 195 191 HOLD HOLD HOLD BUY BUY BUY NC BUY NC BUY NC Reco EPS (INR) FY11E FY12E 12.9 12.4 8.5 31.6 62.4 19.1 15.2 35.1 17.2 19.7 13.1 17.9 15.2 13.6 40.6 76.4 21.6 18.6 42.6 22.0 22.5 15.2 CAGR (FY11-13) (%) FY13E 21.2 18.5 16.9 50.5 88.4 26.5 22.9 54.5 29.0 27.8 19.8 28.1 22.1 40.8 26.5 19.0 17.9 22.9 24.6 29.9 18.7 23.0 P/E (x) FY11E 33.7 25.9 44.0 26.7 25.0 21.6 29.5 19.8 16.8 18.1 9.9 14.6 15.8 FY12E FY13E 24.4 21.1 27.5 20.8 20.5 19.1 22.2 16.2 13.9 14.1 8.7 12.5 13.1 20.5 17.3 22.2 16.7 17.7 15.6 18.3 13.1 10.9 10.7 7.0 9.7 10.3 EV/Sales (x) FY11E FY12E FY13E 8.4 4.0 2.3 4.0 3.7 3.2 4.3 3.2 2.2 2.2 1.8 2.0 2.3 7.8 3.5 2.0 3.2 2.8 2.7 3.7 2.8 1.8 1.8 1.5 1.7 1.9 6.3 3.0 1.7 2.6 2.4 2.3 3.0 2.3 1.5 1.5 1.2 1.3 1.6 EV/EBITDA (x) FY11E FY12E FY13E 28.7 18.8 27.5 18.2 17.3 15.4 21.0 11.8 11.6 11.1 7.5 9.6 10.3 20.2 15.7 19.9 14.3 14.1 12.3 16.1 10.7 9.4 8.9 6.8 8.2 8.8 16.7 12.9 14.0 11.4 11.4 10.5 12.8 8.8 7.3 7.3 5.5 6.3 7.1
Note: * PE multiple for Dr Reddys, Sun Pharma. and Ranbaxy is based on CMP adjusted for NPV of one-off exclusivity sales Source: Edelweiss research
Apr-11
33
(Relative premium to sensex)
(Index)
Key Risks
High field force attrition could dent growth and profitability
A well spread out and competent field force (with good communication skills and product knowledge) is critical for establishing and sustaining market share in a fiercely competitive market like India. Players like Sun pharma, Lupin and most MNCs have pioneered various models to establish quality field force. This entails rigorous investment in hiring, training, and retaining people, which creates upfront costs recovered over twothree years. For example, it takes one year for a company to recover upfront costs (or sunk costs) for each new medical representative and it takes another two-three years for a medical representative to reach company level productivity. Moreover, it takes sixeight months for a new sales representative to establish relations with physicians and practitioners. Hence, loss of a trained field person not only results in loss of sales, but also loss of initial investment. As per the survey, most companies are facing high attrition across tiers or geographies which could potentially risk growth in near term. Almost ~ 75-80% of distributors confirmed 15-30% (and above) field force attrition across markets surveyed (see chart 31). Chart 31: Higher attrition rates across the board
<10% 10-15%
>30%
15-30%
We have identified three key reasons behind higher attrition: (a) increase in demand for medical representatives and limited supply of talent pool with companies competing for high quality people; (b) setting up challenging field force targets with mandate to aggressively capture market share; and (c) shift to other sectors like IT and financial services for better incentives and growth. Sun pharma, Lupin, and Torrent have been ranked by distributors as companies possessing highly effective and stable field force, while Cadila, IPCA, GSK, and Cipla are companies facing higher attrition.
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Chart 32: Companies with poor field force stability 100.0
(% of distributors)
80.0 60.0 40.0 20.0 0.0
Ranbaxy
Dr Reddy's
Unichem
Cipla
Cadila
Rise in fixed costs and higher competition to impact domestic margins

While attrition is posing potential risk to growth, increase in cost of hiring is likely to impact profitability. Most companies are hiring non-science graduates for ramping up field force which could result in high training expenses. Moreover, to retain the field force, companies such as Unichem, IPCA, and Torrent, among others, are revising inventive structures, resulting in higher employee costs. Other factors such as expansion into Tier-II to Tier IV towns as well as increase in competition from MNCs and new ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. players will also exert pressure on margins. Rural penetration requires higher investment Managing penetration in smaller markets offers several challenges to companies such as higher distribution costs due to poor infrastructure, increase in working capital led by high inventories to initially fill channel and longer credit period. As per the survey, average credit period in smaller towns is between one to two months versus less than fifteen days in metros and tier-I cities. Moreover, it takes longer to break even investments due to lower productivity of medical representatives. The payback period ranges from one and half to two years versus less than one year for urban markets. Apart from higher cost of investment, attrition, lack of talent pool, malpractices and higher competition from local players are other challenges for companies to grow and expand in these markets. Emerging competition from MNCs and new players could lead to price war The domestic market is being targeted by both MNCs and Indian companies. This is further brought out by our survey where most distributors are seeing aggressive expansion by MNCs. As seen in chart 33, these high investments have started to yield traction for MNC players like Aventis, AstraZeneca, and MSD. Further, new players such as Macleods, Mankind, Aristo etc. are rapidly expanding market share, giving stiff competition to Indian counterparts. We believe this emerging competition could lead to higher investments by existing players, while price wars could potentially hurt their profitability in the near term.
IPCA
35
FDC

Chart 33: MNC growth has improved over past few months 35.0
28.0
(% Y-o-Y)
21.0 14.0 7.0 0.0 Aug-10 Sep-10 Aventis Oct-10 Nov-10 Dec-10 Pfizer Jan-11 Feb-11 GSK
Mar-11
Table 9: Emerging competition from new players Market share (%) Rank
Growth Y-o-Y (%) 2011 7 9 15 2010 22.5 16.3 35.8 2011 28.7 21.0 34.4 93.4
2010 Mankind Alkem Macleods 2.87 2.82 1.69
2011 3.21 2.96 1.98
2010 7 8 17
Eris Life Sciences 0.24 0.40 75 58 146.0 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF.
Decline in success rate of new product introductions

New product introductions contribute 4-5% of overall market growth. Most large and mid-size companies, to actively expand coverage across molecules or therapies, are aggressively launching new products. However, as per our survey, 70-80% of these products are failures. Most of these failures are in established segments, where more than 10-15 players currently exist. Also, there is a growing resistance among retailers and distributors to provide shelf space for new products before prescription generation. Hence, we observe companies that are more proactive and launch products ahead of the market are more successful in building brands, which potentially contributes to higher business growth. Most distributors suggest that new launches by Sun Pharma, SanofiAventis and Lupin have pent-up demand in the first week of launch. Also, companies with differentiated R&D pipeline like Sun Pharma and Dr. Reddys clearly have an edge over others.
Potential expansion of controlled pricing list to impact profitability

Domestic drug prices are lowest in the world, however, time and again the government has deliberated expansion of the drugs list under pricing control. Currently, 74 drugs (15% of total market) are under controlled pricing and government is contemplating to expand this list to include up to 356 drugs which could cover potentially 50-60% of the total market. Most of the existing products under price control are anti-infective, pain killers and vitamins, among others, which primarily belong to the acute therapy segment. However, the proposal, if implemented, will extend the list to include some basic anti-diabetics and cardiovascular/other specialty class drugs, which are increasing prevalence and affecting the masses.
36
Appendix- I
India will emerge third largest country in terms of incremental growth
Industry sources project Indian pharma market to be worth USD 55 bn by 2020 (14.5% CAGR). Interestingly, this makes the domestic market the third largest, next to US and China, in terms of incremental growth. Chart 1: USD 55 bn industry by 2020
80 70 60 50 40 30 20 10 0 Pessimistic case Base case Aggressive case (2020) 01:19:45 EST. DownloadPDF. (2020) (2020) ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09
CAGR ~10% CAGR ~17%
70 55
CAGR ~14.5%
35
12.6
2009
Chart 2: India will emerge third largest in terms of incremental growth
1 2 3 4 5 6 7 8 9 10 11
US Japan France Germany Italy UK Spain China Canada Mexico Brazil
1 2 3
US Japan France
US China India France Japan UK Canada Brazil Germany 11% 13% 4% 2% 5% 7% 8% 2%
9%
4 Germany 5 6 7 8 9 10 11 12 13 14 China UK Italy Spain Canada India Brazil Mexico South Korea Turkey
12 South Korea 13 14 Turkey India
37
Key driver of growth in pharma industry (PULL factors)

Aging population and increased prevalence of chronic diseases: 46% of distributors believe that large and aging population coupled with increase in prevalence of chronic diseases is key drivers of pharma growth. Also, increased prevalence of chronic diseases will sustain higher growth in domestic market (currently growing at 18-20% vs. 15% of industry) due to longevity of prescription generation. India is also home to the largest pediatric and geriatric population, which is an attractive market in healthcare segment (consumes 66% higher drugs).
Chart 3: Aging population
Chart 4: Increased prevalence of chronic diseases
100 80 60
75 60 45 30 15
(%)
40 20
0 CHD Diabetes Asthma Obesity Cancer

Prevalence of disease areas (%)
0 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. 2000 2005 2010 2015 2020 2025 2030 2.8 2.8 3.8 5.0 0-14 15-59 60+ years 65+ years 2005 2010 2020
0.2
Source: Industry, Edelweiss research
Rising income level and increased awareness: Increased awareness and rising per capita income have emerged (34% of the respondents) as second key growth drivers for pharma growth, as per our survey. The per capita pharma spend in India significantly lags other emerging markets. Healthcare spending has high beta on income. Rising income will drive 73 mn people into middle or upper income segment, leading to higher affordability and as income grows, percentage spend on healthcare rises as well.
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Chart 5: India has low /capita inc. (USD) Affordability drives growth Health spend has high beta on income 30.0
100% Brazil 690 80% Russia 613 60% 40% 20% China 148 0% India 50 FY06 Deprived FY10 FY20 (P)
24.0 18.0 12.0 6.0 0.0 1960 1970 1980 1990 2000 2010 Health Food
Thailand
346
Consuming
Elite
(%)
Growing healthcare infrastructure, higher access and increase in government spending are other macro drivers 20% of distributors believe that rapid penetration of insurance and growing healthcare infrastructure is another factor driving higher growth in pharma spending. USD 200 bn projected investment for creating and upgrading the healthcare infrastructure which will add growth momentum to the pharma industry. This spend will be largely through private sector.
Healthcare insurance posted 25% CAGR over CY05-10 and currently over 300mn people are covered by various ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. healthcare policies. This is likely to go up to 655 mn people by 2020. Higher government spending on healthcare e.g. Arogya Raksha Yojana (micro health insurance plan) has increased health spend in Tier IV and other micro areas. Total government expenditure has increased by a healthy 18% CAGR over CY06-09.
Chart 6: Growing healthcare infra.
Rapid insurance penetration

Growth
High spending on healthcare by Govt.
50 40 30 20 10 0
12.5 CAGR 18% 10.0

(USD bn)
2 22 8
7.5 5.0 2.5 0.0 2006 2007 2008 2009
Govt. hospital
Large Pvt. hospitals
Corp. chains
Mini hospitals
Med. Pvt. hospitals
14
2010
2020
Growth rate (%)

7 5 9
16
2009
2020
3 State insurance RSBY ESIC Pvt insurance Govt. employee insurance
39
Key driver of growth in pharma industry (PUSH factors)

Chart 7: Various strategies adopted by Indian companies (Survey) Pricing 4% New divisions 15% Field force expansion 35%
Brand building 21%
New product launches 25%

Expanding reach to drive penetration-driven growth story Most pharma companies have ramped up their sales force over the past two-three years in order to extend their marketing efforts to Tier II and rural markets.
79% of distributors believe that pace of field force expansion by both Indian as EST. DownloadPDF. ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 well as MNC pharma companies is very aggressive. Chart 6: 35% of distributors believe that field force expansion is one of the key strategies adopted by pharma companies to accelerate growth. Chart 8: Pace of field force expansion
No change in field force 7% Normal 14%
High 79%
40

Penetration in rural markets Metro and tier-I towns will continue to remain significant growth drivers because of growing urbanization, while rural and tier II markets are gaining importance because of high income growth and penetration. Rural markets have grown higher (25% CAGR) than the industry owing to better penetration and increase in affordability. We expect this growth momentum to sustain, taking its share from 20% of total market in 2010 to 25% in 2020.
Chart 9: Rural markets have outperformed average domestic growth in the past
6,000 CAGR 13% 4,800

(USD bn)
1,500 CAGR 25% 1,200

(USD bn)
3,600 2,400 1,200 0 Urban market
900 600 300 0 Rural market
2005 2007 2005 2007 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF.
New product launches 25% of the respondents believe that new product introduction is another key strategy adopted by pharma companies to step up the growth trajectory. 4-5% of the industry growth has been driven by new launches in the past. However, going forward, the pace of new launches will moderate and focus will be on building brands. The average value per new launch has increased consistently despite lesser products being launched. This could be due to brand building efforts by companies.
Table 1: Value contribution from new products (>INR 100mn) has increased multi fold 2007 2008
2009 366 4,365 24 8.4 6.7 15 12.3 521
2010 438 4,562 27 9.6 6.2 20 16.1 814
Domestic market (INR bn) No. of new introduction (NI) Value of NI (INR bn) Value/ NI (INR mn) Contribution to domestic market (%) No. of NIs above INR 100 mn Contribution of NIs above INR 100 mn to total NI value (%) Value of largest NIs (INR mn)
288 4,810 22 6.0 7.5 10 6.2 233
329 4,285 22 7.7 6.6 10 7.5 309
Source: IMS, Edelweiss research
41

Focus on building brands 21% of our distributors believe that focus on brand building is a key strategy adopted by various pharma companies. Understanding the need of building brands, companies have already started focusing on specialty promotions as well as multi-brand marketing strategies. Not only the number of new introductions above INR 100 mn has doubled over the past 4 years, but their value contribution has also increased multifold.
Focus on specialty promotion Mass therapies continue to remain largest segment (contributes 67% to the market), while specialty and super specialty therapies have grown higher than the market. Increased awareness (higher rate of diagnosis) and affordability are key growth drivers of specialty therapies. Pharma companies are carving out separate marketing divisions to monetise growth opportunities in chronic Chart 8: segments.
42
Appendix- II
Survey Methodology
Objective of the survey We conducted an extensive field study by interviewing distributors/stockists, area managers, and medical representatives across various geographies within India, to gain comprehensive perspective of the domestic market. This exercise had four primary objectives: A) To understand growth in various regions and its sustainability: The first objective was to review current growth in various regions across the country (including metros, tier-I, II, III, and IV towns) and its sustainability over the next three to four years. This objective was set to address a key question: Whether the high growth of 14-15% in the domestic market is a near term phenomenon or a structural change which will sustain over the next three to four years? This further puts a check on current higher estimates of domestic growth build for various large cap/mid-cap domestic-focused players. B) To understand drivers of this growth: The second objective was to understand from perspective of distributors the impact of various factors such as rising income, health awareness, changing lifestyles, affordability, insurance penetration, etc. on current domestic growth. We classified these as Pull Factors. We also tried to identify the activity level of various companies (including MNCs) in terms of new launches, field force expansion, new divisions, specialty focus, among others, and its ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 growth. We classify these as Push Factors. We, further, tried to impact on current on 2011-11-09 01:19:45 EST. DownloadPDF. get distributors perspective on new business models adopted by pharma companies. C) To understand growth within segments: The third objective was to understand growth within various therapeutic areas, shifting focus of market to new therapies and evolving competition in these segments. Our focus was to identify therapies growing ahead of the market and companies with niche strong traction in these therapies. D) To gauge performance of key focus companies: The ultimate aim of our survey was to identify, as per distributors preference, companies (among Top 30 players) that have a strong domestic franchise in terms of growth relative to the market, ability to build brands, success of new product launches and higher field force stability. We tried to dwell into the reasons behind outperformance/ underperformance of these companies in terms of their marketing focus, therapeutic focus, operational strategies, and supply-chain models. Further, we also gained insights on the structure of the domestic market and key risks to its current growth. Methodology We designed a questionnaire which covers the aforesaid objectives in a structured manner for all markets. However, a few questions were customized for tier-III/IV markets, where our objective was to identify trends which are driving higher focus of pharma companies in these areas. We tried to understand the characteristics of these markets, marketing strategies adopted by companies, and challenges faced by new players.
43

We split the domestic market into four zones (North, West, East, and South) and carefully selected cities in each zone which represent an ideal mix of large market (metros , tier I), mid-size market (tier II) and smaller markets (tier III and IV) within each zone. We targeted primarily large and mid size distributors in each of these cities to get a broader perspective on the market. Our distributor sample has larger retail network (at least 70-80% of retail chemists coverage within the region), distributorship of at least 20 companies and annual turnover in the INR 50 mn to INR 750 mn range. This ensured that the survey findings reflect a larger coverage list of companies, which helps minimize errors. We also interacted with a few unlisted players, medical representatives, area managers, and regional heads, with 10-15 years of experience in respective regions, who shared their perspectives on the market. This helped us dwell into operational models of companies, commercial approach adopted, and current strategic perspective. Why distributors? Distributors also called stockists, are a key link between manufacturers and consumers. The domestic drug distribution system is multi-layered where stockists form the first layer and represent primary sales. They distribute products, based on secondary sales demand, to various retail chemists, hospitals, medical professionals, and other consumers. They are also an important link, as they handle inventory in the supply chain. There is a sub-layer of second level distributors called sub-stockists which caters to a smaller area within a region. The sub-stockists help to expand reach to retailers which are not catered to by wholesale distributors. We highlight that distributors are more a organized section of the channel with better ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. understanding of players in the market and hence, in our view, have a finger on the pulse of market. Fig. 1: Domestic distribution channel
Manufacturers C&F agents/Super stockists
Stokists (65,000)
Sub-stockist
Govt tenders 4-5%
Medical professionals 2-3%
Chemists 5,50,000 78-83%
NGO/Others 1-2%
hospitals (>15,000) 13%
Consumers
Source: KPMG
44
DISTRIBUTOR SURVEY - Questionnaire
Name of the distributor No of companies covered List of all companies covered

S
: : :
M a r
No. of chemists under coverage
Total chemists in the area or city Monthly turnover (INR mn) Visiting card
: :
Edelweiss Securities Limited D o w n l o a d e d b y i n s d m c p l 0 1 f r o m 1 2
45 4 . 1 2 4

END MARKET DEMAND What is the average growth rate (please tick below)? What in your view is sustainable growth? Range <13% 13-15% >15% (please mention) Which factors are driving this growth? (Please rank the factors below in each column in increasing order of your preference -1 means highest preference, 2,3 etc.) Pull Strategy (demand driven) Increase no. of healthcare facilities Changing lifestyles Increasing health awareness Government expenditure Health insurance Increase in life expectancy Push Strategy (company driven) Rapid product introductions Increase in field force Focus on brand building Focus on specialty promotion Price increases Others Respective coverage region Overall market
Which are the fast-growing companies in your region and which companies are losing market share? (Please tick relevant column below) Gaining market share Losing market share ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Cipla Sun Pharma Ranbaxy Dr Reddys Torrent Pharma Cadila Lupin IPCA Abbott Piramal Unichem Alkem Intas Pharma FDC USV Glenmark GSK Pharma Pfizer Sanofi Aventis Others (Please specify) Which are the upcoming local players in the region? Are local players increasing activity in your region of coverage?
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THERAPEUTIC AREAS Which therapeutic areas are growing at a rapid pace? Where do you see active competition among these fast growing TA? TA Acute Anti-infectives Respiratory Pain management Gastrointestinal Chronic Cardiac CNS Anti-Diabetes Gynecology Dermatology PRICING Are companies taking price increases (Y/N)? What is the magnitude of price increases? o o <5% 5-10% E m e r g >10% (please mention) Rank in terms of growth (highest ranked 1 followed by 2, 3 etc.) Active competition (please tick)
S
o
What percentage of products depicting price changes (frequency)? o o o o <15% 15-30% 30-50% >50% (please mention)
Which therapeutic areas do you see price increases and pricing pressures (please tick relevant column)? TA Anti-infectives Respiratory Pain management Gastrointestinal Cardiac CNS Anti-Diabetes Gynecology Dermatology Others (please mention) Price increases Pricing pressures
47 1 f

STRATEGIC FOCUS Which of these is the key strategic focus of Indian companies in recent past? o o o o o New product introduction Brand building (key promotional strategies) Field force expansion New divisions Others
Do you see change in activity level of MNC players? o o o Increase in product introductions Increase in field force Building channel relations (frequency of visits)
FIELD FORCE EXPANSION At what pace are companies increasing field force in the region? o o o Normal Higher Not much change in field force
Has this resulted in higher sales (Y/N)? What are your observations on field force attrition in your region?
E m e o I Less than 10%

o o o 10-15% 15-30%
>30% (please mention)
Which companies have more stable and effective field force? (Please rank companies with higher stability 1, followed by 2, 3) Cipla Sun Pharma Ranbaxy Dr Reddys Torrent Pharma Cadila Lupin Glenmark Unichem IPCA Dos u think specialty focused field force bring in better results (Y/N)? Abbott Piramal Mankind Alkem Intas Pharma FDC USV GSK Pharma Pfizer Others
48 D o
Edelweiss Securities Limited w n l o a d e d b y i n s d m c p l 0 1 f

NEW PRODUCT INTRODUCTIONs Which companies are very aggressive in launching new products/brands in the market? Cipla Sun Pharma Ranbaxy Dr Reddys Torrent Pharma Cadila Lupin Abbott Piramal Glenmark IPCA Which of these companies have been successful in building new brands? Cipla Sun Pharma Ranbaxy Dr Reddys Torrent Pharma Cadila Lupin Abbott Piramal I Glenmark E S I m IPCA Which therapeutic areas you see highest product introduction? Therapeutic area Anti-infectives Respiratory Pain management Gastrointestinal Cardiac CNS Anti-Diabetes Gynecology Dermatology Others (please mention) Unichem Alkem Intas Pharma FDC USV GSK Pharma Pfizer Sanofi Aventis k e t s P Others (Please specify) D Unichem Alkem Intas Pharma FDC USV GSK Pharma Pfizer Sanofi Aventis Others (Please specify)
Do u see lack of brand shelf space as a concern for new products?
Edelweiss Securities Limited D o w n l o a d e d b y i n s d m c p l 0 1 f r o
49 m 1 2

TIER-II /IV CITIES Which are the key areas where you see increase in activity level by companies? Rapidly introducing new products Increase in field force Increase in brand building Specialty promotion Increase in Number of divisions
Which companies are becoming more active or expanding coverage (in terms of new products, new therapies) or recently started coverage in your area? Cipla Sun Pharma Ranbaxy Dr Reddys Torrent Pharma Cadila Lupin IPCA Abbott Piramal Others (Please specify) What in your view are the key challenges these companies (mentioned above) could face? ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. o o o o o o o Lack of trained pool of field force Higher attrition Higher investment in training Distribution challenges (unorganized) Receivables loss Capturing market share from local players Pricing of products Unichem Alkem Intas Pharma FDC USV GSK Pharma Pfizer Sanofi Aventis
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SUPPLY CHAIN What are average inventory days (please tick)? Do you see increase in channel inventory (Y/N)? o o o o <7 days 7-15 days 15-30 days >1 month (please mention no of days)
What is the credit period given by companies? o o o <15 days 15-30 days >1 month (please mention no of days)
What is the magnitude of change in the period (substantial or no change)? KEY RISKS / CONCERNS What are the key risks that you feel could impact current growth momentum in the industry? o o OTHERS Short term (regulatory and other) Long term (regulatory and other)
I S I E m e r g i n g M a In your view which companies should potentially do well and why?
Which others companies, excluding your existing list, would you like to add?
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India Equity Research
Pharmaceuticals
Initiating Coverage
CADILA HEALTHCARE
Looking for next leap of growth
Domestic formulations turnaround: A boon

Cadila Healthcares (CDH) renewed focus on the chronic segment and expansion in field force over the past two years (22%) has improved its revenue traction in the domestic market. Revenues have grown a robust 17% Y-o-Y (9mFY11), in line with the industry, viz-a-viz relative underperformance over FY07-10 (11.6% CAGR). CDH is through with restructuring phase and is set to grow in tandem with industry. This growth will be more inclusive with strong traction from tierII/IV markets, as depicted through our distributor survey. Further, recent tie-up with Bayer Schering (Bayer) secures its future product pipeline.
April 25, 2011

Reuters: COKI.BO Bloomberg: CDH IN
EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Outperformer Medium Equalweight
US generics gearing for more profitable growth

CDH has build USD 200 mn solid franchise (80% CAGR in FY06-11) in US on the back of higher focus on quality and services. Its recent filings focus on niche or limited competition products (including Para IVs), encompass USD 160-180 bn innovator market, which supports next leg of growth. CDH has three Para IVs opportunities in its pipeline, which offer decent upsides over next two-three years, in our view. These products also offer higher margin than current plain-vanilla generic portfolio. We expect CDHs US sales to post 22% CAGR over FY11-13E.
Note: Please refer last page of the report for rating explanation
MARKET DATA CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : : INR 844 941 / 542 204.7 172.7 / 3,891.5 110.4
Avg. Daily Vol. BSE/NSE (000) : SHARE HOLDING PATTERN (%) : : : : :
Higher return on investment through JVs/partnerships
Promoters* CDH has been exceptionally successful in establishing highly profitable JVs with ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. MFs, FIs & Banks global pharma majors. With modest investment of USD 13 mn, it has attained
74.8 13.3 5.4 6.5 Nil
cumulative profits of USD 100 mn and USD 13 mn from Nycomed and Hospira JVs (18 mths), respectively. We expect sales from the Hospira JV to ramp-up to INR 3.5-4.0 bn at peak capacity utilisation by FY13E, with PAT contribution of INR 875 mn to INR 1 bn (CDHs share). The incremental earnings from Hospira JV will offset lower earnings from Nycomed, with genericisation of Pantoprazole.
FIIs Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock
Nifty 8.9 2.5 11.9
EW Pharma Index 5.5 (7.0) 18.0
Outlook and valuations: Strong execution; initiating coverage with BUY

CDHs one-year forward P/E has expanded from 9x to 17x, driven by consistent outperformance and strong execution across markets. However, it still trades at 10% discount to larger peers. We note that CDHs medium-term earnings growth (29% CAGR over FY10-13E) is best among peers and its long-term vision to attain USD 3 bn supports downside risks to valuation. We, thus, value the stock at 19x FY13E EPS (TP INR 960) and expect gap to narrow down with larger peers. We initiate coverage on CDH with BUY/Sector Outperformer.
1 month 3 months 12 months
13.6 1.2 48.4
Financials Year to March Revenues (INR mn) Rev growth (%) EBITDA (INR mn) Adj. net profit (INR mn) Shares outstanding (mn) Adj. Diluted EPS (INR) EPS growth (%) P/E (x) EV/EBITDA (x) ROAE (%) FY10 36,580 25.0 7,798 4,808 204.7 23.5 51.0 35.9 23.3 34.2 FY11E 44,991 23.0 9,856 6,462 204.7 31.6 34.4 26.7 18.2 33.3 FY12E 54,932 22.1 12,289 8,319 204.7 40.6 28.7 20.8 14.3 32.6 FY13E 65,929 20.0 15,001 10,345 204.7 50.5 24.4 16.7 11.4 31.2
Edelweiss Securities Limited 53 Edelweiss Securities Limited
Manoj Garg +91 22 6623 3302 manoj.garg@edelcap.com Peril Ali +91 22 6620 3032 perin.ali@edelcap.com
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Investment Rationale
Domestic formulations ramp-up to contribute to higher growth and profitability
We expect domestic branded formulations to post 15% CAGR over FY10-13E, in line with average industry growth, viz-a-viz relative under performance during FY07-10 (growth of 11% versus average industry growth of 15-16%). Domestic growth suffered since the company was re-organising various business units and had defocused on the generics business (CAGR of 1% over FY07-10). Table 1: Domestic formulations to ramp-up over FY10-13E, in line with industry FY07 FY10 CAGR (%) FY11E (INR mn) CAGR (%)
FY12E 19,001 17,974 1,026
FY13E 21,899 20,760 1,139
Domestic formlations Branded generics Generic-generics
10,602 9,790 812
14,458 13,625 833
10.9 11.6 0.9
16,511 15,587 925
14.8 15.1 11.0
While re-structuring of the domestic business is now complete, the management has renewed its focus on higher-growth chronic therapies such as cardiovascular (CVS), respiratory, neuro-psychiatry (CNS) and rheumatology, which, coupled with expansion in field force (from 3,400 reps. in FY07 to 4,500 in FY11), has resulted in relatively higher growth over the past nine months (Chart 1). We believe that the company is now set to attain industry level growth over FY13E. Chart 1: Revival in domestic growth momentum
25.0 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Domestic business growing in line with industry 20.0
(Growth %)
17.1 13.2 11.8 8.6 4.8 13.2 9.9 8.4
17.3
18.6 16.6
15.0 10.0 5.0 0.0

Q1'09
Q2'09
Q3'09
Q4'09
Q1'10
Q2'10
Q3'10
Q4'10
Q1'11
Q2'11
As shown in the chart 1, 9mFY11 growth performance in the domestic business has been in line with the industry. We highlight that this outperformance is largely from CVS, respiratory, gastro-intestinal and gynecology segments, where the company has build a formidable franchise. These segments contribute ~59% to its overall revenues and are growing higher than the industry, which underpins CDHs strong franchise in these segments. Moreover, the companys growth will be all inclusive of metros and tier-II-IV towns, where it has inducted ~350 people under special rural task force. This is also evident from the results of our survey, which indicates that all coverage distributors in tier-II and tier-IV towns see strong growth traction for CDH.
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Q3'11

Chart 2: Domestic business geared up for higher growth 5,000
6.0 4.8 3.6 2.4 1.2 0.0

Sales per rep (INR mn)
55
(No of medical reps)
4,300 3,600 2,900 2,200 1,500 FY06 FY07 Field force FY08 FY09 FY11 (YTD) Productivity FY10
Tie-up with Bayer improves future product pipeline for domestic market CDH has formed a 50:50 JV with Bayer Schering (Bayer), Germany, where both partners will shift some of their existing products to the JV. Bayer will further add future potential off-patented/patented drugs that will be supplied through CDHs distribution network. The JV is likely to commence operation from H2 FY12. While the company has not disclosed the detailed functioning of the JV, its focus is likely to be largely on CVS,
ISIEmergingMarketsPDF in-sdmcpl01diabetes, womens healthcare, oncology 01:19:45 EST.segments. from 124.124.255.5 on 2011-11-09 and diagnostic DownloadPDF.
We view this development as win-win for both partners. Through this JV, CDH can access Bayers strong domestic portfolio for diabetes (where CDH currently does not have much presence) and also its future pipeline (Bayers key late stage pipelines are in oncology, CVS and CNS). Bayer, on the other hand, could capitalise on CDHs strong distribution and reach.
US generics gearing up for profitable and robust growth

Despite being a late entrant and with plain vanilla generic portfolio, CDH has been able to build up USD 200 mn franchise (80% CAGR growth) in US generics, driven by higher focus on quality and customer services. Owing to relatively higher focus on services, the company currently enjoys a strong relationship with customers and has been bestowed the status of preferred supplier. This enables it to retain higher market share in most products. Out of 39 products currently marketed in the US, company enjoys more than 20% market share in 15 products and has average market share of 14% across products.

Chart 3: CDH has established solid base in US generics market 10,000
200 160 120 80 40 0

(%)
8,000
(USD mn)
Built-up franchise of USD 200 mn over six years in US
6,000 4,000 2,000 0 FY06 FY07 Revenue FY08 FY09 FY10 Growth FY11
As shown in Chart 3, CDHs US generics business has ramped-up from modest revenue of INR 500 mn from five products in FY06, to INR 9.3 bn revenue by FY11E (39 products). Gearing for the next leg of growth CDHs long-term strategy largely focuses on niche and limited competition products. The company has ramped up its ANDA filing in niche segments, including Para IVs and has a ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. pending pipeline of 59 ANDAs with 12-15 new filings each year. These filings consist of differentiated and difficult-to-formulate products, including those in the respiratory Niche pipeline will drive next leg of growth in US segment (seven ANDAs filed; market opportunity of USD 20 bn) and injectibles (15 filed; market opportunity of USD 17 bn). Moreover, the company is also focused on different delivery systems such as transdermal patches and has planned to file seven ANDAs (USD 3 bn opportunity) over the next 3-4 months. Other segments where CDH has increased its focus are: oncology (USD 55 bn opportunity), bio-similars (USD 40 bn opportunity) and vaccines (USD 22 bn opportunity). Collectively, these initiatives target USD 160-180 bn market and could be long-term growth drivers. Over the near term, we expect CDH to launch 10-12 products each year, driving 22-25% growth over FY13E. Moreover, we expect CDH to also monetise its Para IV/limited competition products opportunities such as Astelin (USD 100 mn opportunity), PrevacidODT (limited competition product with sales of USD 400 mn with expiry in September 2012) and Lialda (USD 291 mn opportunity; FTF; expiry in October 2012) over the next two years. While we have build INR 276 mn and INR 473 mn of sales from Astelin in our FY12 and FY13 estimates, respectively (expect CDH to launch the product in Q2FY12), we currently do not factor any upside from Prevacid ODT and Lialda due to lack of clarity. However, successful launch of these could provide decent upsides to our FY13 estimates.
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Table 2: US generics to benefit from Para IV pipeline
Brand Astelin Generic name Azelastine Innovator Meda US Revenue (USD mn) 100 Patent expiry May'2011 Cadila's potential launch May'2011 Para IV N Remarks Apotex and Cobalt have already launched the products through settlement with innovator; Cadila will be third company Teva (FTF) and Sandoz (AG) have launched; Limited competition
Prevacid Lanzoprazole -ODT Lialda Mesalamine
Takeda
400
Expired
Oct'2012
Shire
291
June'2020
Nov'2012
Y
Unlocking value through alliances

CDH is one of the few Indian companies to have formed most successful and profitable JVs with global pharma majors. The company formed its first JV with Altana (later on Created most successful and profitable JV acquired by Nycomed) to supply two key intermediates of Pantaprazole (Altana was the innovator) for its global supply. The company has initially invested USD 2 mn in the JV in 1997, and has made over USD 100 mn profit over the past nine years (JV started supplying Pantaprazole intermediates from 2003). However, going forward, owing to patent expiry and generic launch of Pantoprazole, we expect lower revenue and profits from JV. This is despite the fact that the JV has added 14 incremental APIs, supplies for which are likely to start from H2FY12. These APIs include all genericised products and, hence, will have lower margins, in our view. CDH entered into a second JV with Mayne (later on acquired by Hospira) in 2005 to manufacture and supply 2011-11-09 products for DownloadPDF. ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on six oncology 01:19:45 EST. global markets, with an initial investment of USD 11 mn (CDHs contribution to total USD 22 mn investment). Supplies to Hospira have started from Q1FY10 and in less than two years (18 months), CDH has recouped its initial investment and made a profit of INR 602 mn (USD 13 mn), while the JV is yet to reach its full potential. Hospira JV to ramp-up with supplies of Taxotere and Gemzar in US We expect Hospira JVs revenue to ramp-up after it starts supplying generic Taxotere and generic Gemzar to JV partner in the US (Q4FY11 onwards). YTD, the JV was supplying three products to Hospira for the EU markets (9mFY11 revenue of INR 818 mn), with relatively smaller batches of generic Taxotere in the US. However, with recent launch of Taxotere in the US (launched in March 2011, with Hospira as the only generic player in the USD 1.2 bn innovator market), we expect significant revenue growth over the next few quarters. We highlight that Hospira is the largest generic player in EU for Taxotere, and we expect it to garner a large market share even in the US, since the product is similar to originator (single vial injection) unlike other players such as Sun Pharma, Sandoz, and Apotex that have a two-vial product. Overall, we expect the JV to reach peak level by FY13 with potential sales of INR 3.5-4.0 bn (CDHs share) and 25-30% sustainable PAT margins. We estimate INR 875 mn to INR 1 bn recurring PAT per annum from the JV for CDH.
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Chart 4: Hospira JV to be on firm footing over FY11-13E 4,000
3,200 2,400 1,600 800 0 FY10 FY11 Revenue FY12E PAT FY13E
(INR mn)
We believe that incremental earnings from Hospira JV will offset lower profitability of Nycomed JV and will be highly accretive to CDHs overall earnings. Chart 5: Hospira earnings to offset decline in Nycomed JV profits 900
720
(INR mn)
540 360 180 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Nycomed - PAT Hospira -PAT
Strategic alliance with Abbott to add growth momentum in emerging markets

CDH has signed a strategic deal with Abbott to supply 24 products in 15 key emerging markets with an option to add another 40 products. CDH has already received initial Strategic alliance with Abbott will add USD 50-60 mn revenue milestone of USD 10 mn from Abbott for the deal and product supply is likely to commence 2HFY12 onwards. Full impact of revenue from this deal will be visible in the next 2-3 years, as we believe that combined portfolio has potential to contribute USD 50-60 mn revenues for CDH. Moreover, we see this deal as strategically important to CDH as it will enable the company to tap the emerging market opportunities without any substantial investments in front-end sales and marketing infrastructure. We expect CDH to start generating revenue FY12E onwards with initial launch of 8-10 products, which could attain critical mass in the third year of its operations (USD 50-60 mn).


Bold vision to attain USD 3 bn in FY16 from USD 1 bn in FY11
After attaining a billion-dollar revenue target in FY11E, CDH has set a milestone of USD 3 Cadila is aiming to become USD 3 bn company by 2016 bn revenue by 2016 (25% CAGR over FY11-16). Although management has not shared details of its five-year strategic plan, the past track record and management commitment to execute guidance gives some surety of achieving the set target. We believe the growth will be multipronged, encompassing all segments including US, India, Brazil and partnerships. We try to summarize key growth drivers with focus on achieving the said objective. First, the companys investment in niche segments for US generics such as transdermal patch, oncology, vaccines and pulmonary products, which have a market potential of over USD 160-180 bn, will be highly accretive over next three to four years. Few of these products are already off-patent and others still under patent. The company is also developing new drug delivery system for some of these products to file them under 505 (b) 2 routes to enjoy exclusivity. The second driver is CDHs focus on new drug discovery research, to become a global research-driven company in the long term. The company has been increasing its R&D expenditure over the years and currently has 12 molecules (including two from partners) in the pipeline addressing the therapeutic areas of metabolic disorders (diabetes, obesity and dyslipidemia) and inflammation. Chart 6: CDH aims to become a research-driven company by 2020
P ro je c t T a rge t Indic a t io n D rug dis c o v e ry ZYH1 P P A R alpha: gamma M ultiDyslipidemia Le a d o pt im is a t io n P re c linic a l de v e lo pm e nt IN D P ha s e I P ha s e II P ha s e II NDA
ZY1 1 P ain ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. mo del ZY01 ZYH2 ZYH7 ZYT1 ZYD1 CB -1 antago nist P P A R alpha: gamma PPAR alpha TR beta ago nist GLP -1 ago nist GLP -1 ago nist ZYOG1 Undisclo sed Undisclo sed Co llabo rative pro gram Co llabo rative pro gram Selective GR ago nist Undisclo sed Obesity, Diabetes Diabetes Dystipldemie Dystipldemie Diabetes Diabetes Diabetes A thero sctero tic P laque Inflammatio n CVS
With Karo Bio With EII Lilly
Source: Company
As shown in chart 6 above, 12 NCE molecules are in various stages of development, with Out of 12 NCEs, six are in human clinical trial stage over 425 scientists dedicated for new molecular entity research at Zydus Research Centre. Six of these programs are currently in human clinical trials in India and three NCEs have already got IND approval from USFDA. The company has also entered into strategic alliances with Eli Lilly and Co. (CVS drug), Prolong Pharmaceuticals of USA and Karo Bio of Sweden to undertake joint drug discovery and development programs. Commercialisation of molecules will take time; nevertheless, successful launch of any molecule could be instrumental to the company attaining its vision.
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Chart 7: R&D investments to increase as pipeline achieves higher milestones 1,400
1,120
(INR mn)
840 560 280 0 FY06 NCE Research FY07 FY08 Generic Markets FY09 FY10 API & Others
During FY10, expenditure on R&D was INR 2.1 bn (6% of total sales). Management has indicated that it does not plan to de-merge its R&D entity, while monetising its R&D assets are likely to take some time (18-24 months). However, we strongly feel that in the long run, unlocking its R&D assets can provide significant upside. The company has a stated objective to look for out-licensing partners only once it establishes the proof of concept (post Phase II trial). We currently do not forecast any out-licensing income or upside from NCE research owing to lack of visibility. ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF.
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Valuation
Valuations: Re-rating driven by strong execution; initiating coverage with BUY
CDH has re-rated from 9x to 17x one-year forward P/E on the back of consistent outperformance and strong execution across markets. It has consistently delivered market expectations, which strengthen our confidence in its ability to meet future guidance. Although we believe that a large part of multiple re-rating is already behind us, the stock currently trades at 10% discount to large peers. CHD strong earnings growth visibility of 29% CAGR over FY10-13E (highest among peers), high return on capital (RoCE and RoE of over 30%) and healthy balance sheet, could potentially result in narrowing of gap with peers. Chart 8: Historical valuation trendone year forward P/E 1,200
960 720 480 240

ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. 0
20x 15x
(INR)
10x 5x
Oct-06
Oct-07
Oct-08
Oct-09
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Oct-10
818 30.0 10,350 11,168 9,382 40.6 45.8 20.8 18.4
Moreover, valuations based on earnings before NCE R&D are highly attractive (Table 3). CDH has been directing ~30-35% of its R&D expenditure on NCE, for which, it currently does not accrue to its value. Table 3: Valuations excluding investments on NCE are attractive (INR mn) FY08 FY09 FY10 FY11E FY12E FY13E
Basic R&D % of total R&D PBT (reported)

Ex NCE R&D valuations become more attractive
516 38.6 3,232 3,748 3,037 12.9 14.8 65.5 57.0
465 29.7 3,611 4,076 3,324 15.6 16.2 54.3 52.0
598 36.0 6,039 6,637 5,823 23.5 28.4 36.0 29.7
670 30.0 8,432 9,102 7,736 31.6 37.8 26.8 22.4
Apr-11
1,001 30.0 13,176 14,177 11,625 50.4 56.8 16.8 14.9
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PBT (pre R&D) PAT (pre R&D) Eps (reported) EPS (pre R&D) PE (EPS rep) PE (EPS pre R&D)
We, thus, initiate our coverage on CDH with a BUY/ Sector Outperformer recommendation/rating. We set a target price of INR 960, valuing the company at 19x March FY13E EPS of INR 50.4, the average one year forward multiple for large cap peers.
Key Risks
Re-structuring in domestic formulation impacted historical performance
Despite being the fifth largest player in the domestic market (with market share of 3.7%), CDH has struggled to keep pace with the market growth during FY07-10 (grew 11% versus industry growth of 14%) due to internal restructuring initiatives. The company consolidated its marketing divisions by merging non-profitable smaller divisions and optimised field force by removing 350 low productive sales force in 2006-07. Chart 9: Historical execution poses risk to growth outlook 30.0
24.0 18.0
(%)
12.0 6.0 0.0 Lupin Sun Dr Reddy's Cipla Ranbaxy Industry ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 Pharma on 2011-11-09 01:19:45 EST. DownloadPDF. Cadila
The underperformance can be further illustrated with its growth in top 10 brands (~28% of total domestic sales), which has lagged industry (Table 4). The top two brands: ATEN (Atenolol; 4.5% of domestic revenue) and DERIPHYLIN (Theophylin; 3.4% of domestic revenue) have pulled down performance of the domestic formulation business. Further, growth in unbranded generics has remain muted (8-9% of domestic formulation business and 1% CAGR over FY07-10) negatively impacting overall growth. Table 4: Top 10 brand performance
Brands ATEN DERIPHYLLIN ATORVA FALCIGO PANTODAC OCID MIFEGEST KIT PRIMOLUT N DEXONA AMLODAC Total
Therapy Chronic Chronic Chronic Acute Acute Acute Acute Acute Acute Chronic
% of total 4.5 3.4 3.2 3.1 2.9 2.8 2.3 2.1 2.0 1.9 28.3
Market share 56.0 90.4 10.3 54.2 16.2 26.5 18.9 46.7 42.8 15.0
Growth rate 12 4 17 (5) 15 8 2,866 7 21 6
Contrbution to growth 3.7 1.0 3.5 (1.2) 2.9 1.6 16.8 1.1 2.8 0.9 33.1
While most of the restructuring is over, with domestic formulations reverting back to industry level growth (9m FY11), CDH has resumed its plans of increasing depth and
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width of coverage. However, given its historical underperformance, we remain cautious and build a normal industry level growth scenario for FY12 and FY13. We highlight that incremental upsides from higher field force productivity (post expansion) and profitable product pipeline (from Bayer JV) could be an upside risk to the overall companys growth and earnings estimates.
Delay in ANDA approval from US FDA

US generics constitute 18% of total sales and have incrementally higher contribution to overall growth of business. The approval time at USFDA has increased dramatically over the past one-two years due to manpower issues in the agency. As per USFDA, the current backlog of pending ANDAs is more than 2,000, with an average waiting period of ~26 months (from 12-14 months earlier). CDH ANDA pipeline with 59 pending approvals and 15-16 annual filings under development, underlines strong growth visibility, however, any delay in approvals could hurt growth in FY12-13E.
Lower scale-up from Hospira JV

We expect the Hospira JV to scale from INR 817 mn in 9mFY11 to INR 3.4 bn in FY13E on the back of expected ramp-up in supplies to the US market for generic Taxotere and generic Gemzar. Lower offtake by Hospira for these products could impact our revenue and earnings estimates for the JV.
Currency appreciation could hit profitability

CDHs international markets constitute 54% of total sales. Hence, volatility in currency (INR USD and INR EUR) could hit its profitability.
63
Company Description
CDH, founded in 1952 and headed by second generation entrepreneur Pankaj R Patel, is the sixth largest company in Indian pharma market with 3.9% market share. The domestic franchise, with widespread field force (4,500) and pan-India presence, constitute 35-40% of total sales. The chronic segment accounts for 26% of total domestic business with largest contribution from cardio vascular therapy (CVS), where CDH has leading market share (6.1%) after Sun Pharma and Ranbaxy. Apart from prescription products, CDH has built a formidable presence in nutraceuticals through its listed entity Zydus Wellness (owns 72% of total share holding). CDH has successfully build its international operations, with presence in branded generics emerging markets of Brazil, Asia-Pac and Africa and plain generics regulated markets of US, EU and Japan, which together account for 39% of CDHs total business. Moreover, managements strategic focus on building strong partnerships in the US through Hospira and Nycomed JVs has been significantly accretive to business over the past five years. Chart 10: Revenue mix Chart 11: Export formulations mix
India Brazil formulations 12% 37% ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Japan 3%
APIs 8%
JVs 5%
Others 3%
Other emerging markets 11%
US generics 53%
Export formulations 39%
India consumer 8%
Europe (France/ Spain) 21%
Chart 12: Current shareholding pattern
Retail and others 7% Institutions and FIs 13%
FIIs 5%
Promoters 75%
Source: NSE
Domestic Formulation Snapshot

Growth versus industry (%)
Mar 2011 (Month) Incl bonus Company growth Industry growth Relative performance
Therapeutic growth versus industry (MAT)
Therapeutic area Cardiovasculars Gastrointestinal Respiratory Gyneacology Anti-infectives Pain t Neurologicals Dermatology Anti diabetic % of total 20 17 10 10 11 7 3 3 1 Market share 6.0 6.2 4.8 11.2 1.6 3.9 2.6 1.8 0.8 Cadila Industry growth Growth 14.2 16.0 19.5 31.1 0.0 16.1 12.8 52.0 10.9 16.5 14.1 14.5 21.9 13.4 13.8 14.1 14.4 21.0
MAT (Mar-11) Incl bonus 16.6 15.0 Excl bonus 14.6 14.3
Excl bonus 20.7 13.1
CAGR (5yr) 11.6 14.4
26.5 13.8
(%)
Contrbution to growth 19.3 17.9 11.5 19.9 0.0 6.1 3.8 5.8 0.8 35.4
Top 10 brand performance

Brands ATEN DERIPHYLLIN ATORVA FALCIGO PANTODAC OCID MIFEGEST KIT PRIMOLUT N DEXONA AMLODAC Total Therapy Chronic Chronic Chronic Acute Acute Acute Acute Acute Acute Chronic % of total 4.5 3.4 3.2 3.1 2.9 2.8 2.3 2.1 2.0 1.9 28.3 Market share 56.0 90.4 10.3 54.2 16.2 26.5 18.9 46.7 42.8 15.0 Growth rate 12 4 17 (5) 15 8 2,866 7 21 6
(%)
Contrbution to growth 3.7 1.0 3.5 (1.2) 2.9 1.6 16.8 1.1 2.8 0.9 33.1
Chronic contribution to growth
4.8 3.6 2.4 1.2 0.0
Gastrointesti nal 17%
Antiinfectives 11%
Dermatology 3% Gyneacology 10%
1,500 FY06 FY07 FY08 FY09 FY10 FY11 (YTD) Field force Productivity
Sales (INR bn)
14.4
15% 6 3 6
28 21 14 7 0
28 21 14 7 0
8 2 7
(%)
10.8 7.2 3.6 0.0 Cadila Volume Price
Ranbaxy
Sun pharma
Mankind
Cadila
GSK
Pfizer
Lupin
Cipla
Industry New product introductions
Dr Reddy's
Piramal
65
(Industry growth)
Growth composition (MAT Mar-11) 18.0 17%
Relative performance to peers (MAT Mar-11) 35
35
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Therapy wise break-up Field force expansion and productivity 5,000 Others Diagnostics Cardiovascul Chronic Nutraceutica 11% CAGR (3%) 2% ars 33% 4,300 ls 20% 2% Biologicals 3,600 CNS 4% 3% 2,900 Pain mgmt. Respiratory 2,200 7% 10%
6.0
Financial Outlook
29% earnings CAGR led by strong revenue growth and operating performance
We expect CDH to pose 22% CAGR over FY10-13E, driven by (a) 59% CAGR in Hospira JV, (b) 28% CAGR from US business, and (c) 15% CAGR in the domestic formulation business. Over the past five years, CDHs EBIDTA margins (ex-other operating income) has improved from 16.7% to 19.5% in FY10, driven by operating leverage and improved product mix. We expect EBIDTA margins to continue to expand further over FY11-13E (110 bps expansion) to 21.3% on the back of sustain improvement in product mix and higher scale of operations in the US. Overall, robust sales growth coupled with strong operating performance will lead to 29% earnings growth over FY10-13E. Moreover, strong operating performance will also lead to its ROCE catapulting from 26% in FY10 to 38% in FY13E. Table 5: Revenue break-up (INR mn)
FY10 Domestic formulation Consumer/OTC Animal health Export formulation US generics 14,458 2,675 1,191 13,179 6,715
FY11E 16,511 3,478 1,274 17,573 9,401
% Y-o-Y 14.2 30.0 7.0 33.3 40.0
FY12E 18,943 4,277 1,351 21,694 11,665
FY13E 21,802 5,176 1,432 26,062 14,051
CAGR (FY10-13E) 14.7 24.6 6.3 25.5 27.9 26.5 46.6 15.0 19.3 54.1 (3.3) 58.8 18.4 (6.7) 20.7 21.8
Europe (France/Spain) 2,740 3,699 35.0 4,624 5,549 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Japan 316 474 50.0 711 995 Brazil Other emerging markets JVs Nycomed Hospira Abbott alliance API Domestic Others Total gross sales 3,043 321 2,721 36,142 3,561 289 3,271 44,564 17.0 (10.0) 20.2 23.3 1,818 1,590 1,597 758 839 2,091 1,908 2,168 568 1,600 15.0 20.0 35.8 (25.0) 90.7 2,404 2,290 3,897 597 2,400 900 4,266 275 3,991 54,427 2,765 2,702 5,846 686 3,360 1,800 5,050 261 4,789 65,367
Table 6: EBTIDA margins to expand over FY13 FY09
FY10 33.0 4.6 11.0 31.9 19.5 21.3
FY11E 32.6 5.1 10.7 31.3 20.3 21.9
FY12E 32.6 5.1 10.5 30.9 20.9 22.4
(%) FY13E
C OGS R&D Employee costs Other fixed costs EBITDA (excl other op income) EBITDA
33.4 5.5 10.9 31.4 18.9 20.7
32.8 5.2 10.5 30.2 21.4 22.7
66

Chart 13: ROCE likely to expand from 26% in FY10 to 38% n FY13E 40.0
38
34 32.0 26 24.0 31
(%)
16.0 8.0 0.0 FY10 FY11E FY12E FY13E
67
Financial Statements
Income statement Year to March Income from operations Net revenues Other operating income Total operating expenses Materials cost Employee cost R&D cost Selling, admin and general exp. Other expenses EBITDA Depreciation and amortisation EBIT Net interest expense/(income) Other income Profit before tax (excl extraord.) Provision for tax Core profit Extraordinary items Reported profit after tax FY09 29,275 28,624 651 23,217 9,566 3,109 1,564 7,322 1,656 6,058 1,118 4,940 1,205 116 3,851 666 3,185 (241) 2,944 FY10 36,580 35,741 839 28,782 11,784 3,930 1,660 9,172 2,236 7,798 1,339 6,459 821 158 5,796 741 5,055 243 5,298 FY11E 44,991 44,090 901 35,135 14,383 4,716 2,234 11,067 2,736 9,856 1,312 8,544 705 142 7,981 1,265 6,716 451 7,167 FY12E 54,932 53,937 995 42,643 17,607 5,659 2,731 13,484 3,161 12,289 1,490 10,798 544 115 10,369 1,659 8,710 8,710 (INR Mn) FY13E 65,929 64,831 1,098 50,928 21,238 6,791 3,341 15,884 3,674 15,001 1,656 13,345 289 153 13,209 2,378 10,831 10,831 487 10,345 205 50.54 205 50.5 58.6 8.0 15.8
Minority interest & others 1 247 322 391 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Adjusted Profit after minority int. 3,184 4,808 6,462 8,319 Equity shares outstanding (mn) 205 205 205 205 EPS (INR) basic Diluted shares (mn) EPS (INR) adjusted CEPS (INR) Dividend per share (INR) Dividend payout (%) Common size metrics- as % of net revenues Year to March Cost of revenues Employee cost Selling, admin and general exp. R & D cost Total operating expenses Depreciation and Amortisation Interest expenditure EBITDA margins Net profit margins Growth metrics (%) Year to March Revenues EBITDA Net profit PBT Adj. EPS FY09 26.1 32.7 18.5 16.7 20.5 FY10 25.0 28.7 58.7 50.5 51.0 FY11E 23.0 26.4 32.9 37.7 34.4 FY12E 22.1 24.7 29.7 29.9 28.7 FY09 32.7 10.6 25.0 5.3 79.3 3.8 4.1 20.7 11.1 FY10 32.2 10.7 25.1 4.5 78.7 3.7 2.2 21.3 14.1 FY11E 32.0 10.5 24.6 5.0 78.1 2.9 1.6 21.9 15.2 FY12E 32.1 10.3 24.5 5.0 77.6 2.7 1.0 22.4 16.1 15.55 205 15.6 21.0 4.5 28.9 23.49 205 23.5 30.0 5.0 21.3 31.24 205 31.6 37.6 5.0 15.8 40.64 205 40.6 47.9 6.5 16.0
FY13E 32.2 10.3 24.1 5.1 77.2 2.5 0.4 22.8 16.7
FY13E 20.0 22.1 24.4 27.4 24.4
68

Balance sheet As on 31st March Equity capital Reserves & surplus Total shareholders Funds Borrowings Deferred tax liability (net) Minority interest Sources of funds Gross block Depreciation Net block Capital WIP Investments Inventories Sundry debtors Cash and bank balances Loans and advances Total current assets Sundry creditors Other current liabilities Provisions Total current liabilities and provisions Net current assets FY09 682 11,670 12,352 12,673 1,316 228 26,569 22,870 7,571 15,299 1,889 249 6,012 4,549 2,517 2,533 15,611 5,256 474 1,186 6,916 8,695 FY10 682 15,603 16,285 10,905 1,141 392 28,723 25,578 8,733 16,845 2,482 207 7,504 4,668 2,507 3,070 17,749 6,146 564 1,951 8,661 9,088 FY11E 1,024 21,250 22,274 7,905 1,141 714 32,034 29,328 10,046 19,282 2,482 750 8,799 5,753 1,700 3,249 19,502 7,446 812 1,825 10,083 9,419 FY12E 1,024 28,012 29,036 4,905 1,141 1,105 36,187 33,078 11,536 21,542 2,482 1,250 10,760 7,035 1,467 3,973 23,234 9,104 993 2,325 12,422 10,812 (INR Mn) FY13E 1,024 36,440 37,464 1,905 1,141 1,592 42,102 36,571 13,192 23,378 2,482 1,750 12,925 8,451 3,281 4,772 29,430 10,937 1,193 2,909 15,039 14,390 102 42,102 183 (INR Mn) FY09 3,184 1,118 (2,020) 2,282 932 3,214 (4,305) (1,091) FY10 4,808 1,339 (499) 5,648 403 6,051 (3,478) 2,573 FY11E 6,462 1,312 (1,570) 6,204 1,138 7,341 (3,749) 3,592 FY12E 8,319 1,490 (2,862) 6,947 1,627 8,574 (3,750) 4,824 FY13E 10,345 1,656 (3,042) 8,958 1,764 10,723 (3,493) 7,230
Miscellaneous expenditure 438 102 102 102 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Uses of funds 26,569 28,723 32,034 36,187 Book value per share ( INR) Free cash flow Year to March Net profit Depreciation Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow Cash flow metrices Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid FY09 3,214 3,083 (4,300) 1,997 (4,305) (1,483) FY10 6,051 (2,886) (3,436) (271) (3,478) (408) FY11E 7,341 (3,856) (4,292) (807) (3,749) (462) FY12E 8,574 (4,557) (4,250) (233) (3,750) (1,302) 58 79 108 141
FY13E 10,723 (4,916) (3,993) 1,814 (3,493) (1,302)
69

Profitability and liquidity ratios Year to March ROAE (%) ROACE (%) Inventory days Debtors days Payable days Cash conversion cycles Current ratio Debt/ EBITDA Debt/equity Adjusted debt/Equity Operating ratios (x) Year to March Total asset turnover Fixed asset turnover Equity turnover Du pont analysis Year to March NP margin Total assets turnover Leverage multiplier FY09 11.1 1.2 2.1 FY10 13.5 1.3 2.0 FY11E 14.5 1.5 1.6 FY12E 15.4 1.6 1.3 FY13E 16.0 1.7 1.2 31.2 FY09 1.2 2.1 2.5 FY10 1.3 2.2 2.5 FY11E 1.5 2.4 2.3 FY12E 1.6 2.6 2.1 FY13E 1.7 2.9 1.9 FY09 28.3 22.9 202 50 167 85 2.3 2.1 1.0 1.0 FY10 34.2 25.9 206 45 174 78 2.0 1.4 0.7 0.7 FY11E 33.3 30.7 204 42 170 76 1.9 0.8 0.4 0.4 FY12E 32.6 34.3 200 42 169 73 1.9 0.4 0.2 0.2 FY13E 31.2 37.8 201 42 170 73 2.0 0.1 0.1 0.1
ROAE 28.3 34.2 33.3 32.6 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Valuation parameters Year to March Adjusted EPS (INR) EPS YoY growth (%) CEPS (INR) Diluted PE (x) Price/BV(x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) FY09 15.6 20.5 21.0 54.3 14.5 6.2 30.2 0.5 FY10 23.5 51.0 30.0 35.9 10.7 5.0 23.3 0.6 FY11E 31.6 34.4 37.6 26.7 7.8 4.0 18.2 0.6 FY12E 40.6 28.7 47.9 20.8 6.0 3.2 14.3 0.8
FY13E 50.5 24.4 58.6 16.7 4.6 2.6 11.4 0.9
70
Pharmaceuticals
Company Update
CIPLA
Turning around
Domestic growth can surprise positively

Cipla has broadly underperformed the domestic market (13% CAGR versus industry growth of 14-15%) over the past three years due to decline in its mature (~20% of domestic) and generic portfolio (20% of total domestic sales declined by 10-15%), while its focus portfolio was growing ahead of the market (19-20% growth). We believe the companys domestic market growth can surprise positively due to higher traction from tier II-IV towns, where it has a strong foothold (as per our survey), while its strategy to address decline in mature and generic-generic portfolio can give higher upside from a low base.
April 25, 2011

Reuters: CIPL.BO Bloomberg: CIPLA IN
EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector HOLD Performer
Risk Rating Relative to Sector Medium Sector Relative to Market Equalweight
Emerging markets lead exports; regulated markets to gain traction

Emerging markets so far have been the key growth drivers for Ciplas exports; the contribution has jumped from 46% in FY07 to 54% in FY10 (24% CAGR), driven by Africa, Middle East, and Australia. We expect regulated markets contribution to soar with ramp-up in supply contracts as the company will benefit from the patent expiry in US and EU where it is one of the early filers of DMF/ANDA, through partners, for some blockbuster drugs. We estimate 17% CAGR for ROW markets.
MARKET DATA CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : : INR 321 380 / 286 802.9 257.7 / 5,801.2 1,625.9
Avg. Daily Vol. BSE/NSE (000): SHARE HOLDING PATTERN (%) Promoters* : : : : :
Combination inhalers in EU: Key driver of future growth
After initial regulatory hurdles in EU, the company has launched single ingredient ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. MFs, FIs & Banks inhalers in a few EU markets. Cipla has also launched the Seroflo combination inhaler (gAdvair) in Russia and South Africa, which instills confidence in its ability to monetise opportunities in regulated (initially in EU) and ROW markets going forward. The combined addressable market (single and combination products) in ROW/EU is USD 2.3 bn/USD 6 bn. We expect Cipla to get early approvals for ROW markets, while launch of combination inhalers in EU will be a long term driver.
FIIs Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock 1 month 3 months 12 months 9.9 (8.3) (1.3)
36.8 18.7 15.4 29.1 NIL
Nifty 8.9 2.5 11.9
Outlook and valuations: Positive growth catalyst; upgrade to HOLD

We expect Ciplas revenue (ex-tech income) to post 15% CAGR over FY10-13E, driven by growth in India and formulation exports. We believe, with higher growth in the domestic formulation business and lower base effect of licensing income, EBIDTA margin is likely to expand 160 bps over FY10-13E. We value the company at 19x FY13E, in line with the industry and set a 12 months price target of INR 350 per share. Hence, we upgrade our recommendation on the stock from REDUCE to HOLD. We rate the stock Sector Performer on relative returns basis.
Financials Year to March Revenues (INR mn) Rev growth (%) EBITDA (INR mn) Adj Net profit (INR mn) Shares outstanding (mn) EPS (INR) EPS growth (%) P/E (x) EV/EBITDA (x) ROE (%) FY10 56,057 7.1 13,795 10,050 802.9 12.5 3.6 25.6 18.5 19.6 FY11E 62,465 11.4 13,569 9,967 802.9 12.4 (0.8) 25.9 18.6 15.9 FY12E 71,260 14.1 16,128 12,195 802.9 15.2 22.4 21.1 15.5 17.2 FY13E 82,819 16.2 19,311 14,867 802.9 18.5 21.9 17.3 12.7 18.4
Edelweiss Securities Limited Edelweiss Securities Limited 71

Table 1: Financial snapshot (INR mn) % Y-o-Y
FY10 Net sales - Domestic formulations - Export formulations - Export bulk - Technology fee income Gross profit Gross margins (%) EBITDA EBITDA margin (%) EBITDA margin (Ex milestone) PBT Tax Tax rate (%) Reported PAT Adjusted PAT Adjusted EPS 56,057 25,113 23,188 5,802 1,538 31,527 56.2 13,795 24.6 22.5 12,311 2,435 19.8 10,826 10,050 12.5
FY11E 62,465 28,536 26,202 6,324 770 34,855 55.8 13,569 21.7 20.7 11,965 1,998 16.7 9,967 9,967 12.4
% Y-o-Y 11.4 13.6 13.0 9.0 (49.9) 10.6 (1.6)
FY12E 71,260 32,816 30,132 6,893 700 39,692 55.7 16,128 22.6 21.9
% Y-o-Y 14.1 15.0 15.0 9.0 (9.1) 13.9 18.9
FY13E 82,819 38,067 35,707 7,582 600 46,130 55.7 19,311 23.3 22.8
16.2 16.0 18.5 10.0 (14.3) 16.2 19.7
(2.8) (17.9) (7.9) (0.8) (0.8)
14,692 2,498 17.0 12,195 12,195 15.2
22.8 25.0 22.4 22.4 22.4
17,912 3,045 17.0 14,867 14,867 18.5
21.9 21.9 21.9 21.9 21.9
Chart 1: Historical valuation trend One year forward PE 500
25x 20x 16x 12x
400
(INR)
200 100 0
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
72
Apr-11
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Company Description
Owned and managed by Dr. Y.K. Hamied, a second generation entrepreneur, Cipla is Indias third largest company by domestic sales. The companys revenues (excluding tech fees) and profits have posted 17% and 13% CAGR over FY06-10 to INR 65 bn and INR 12 bn in FY10, respectively. Domestic formulations contributed 47% to total FY10 revenues (excluding tech fees) and posted 14% CAGR over FY06-10. With a market share of ~5%, Cipla is the third largest player in the domestic market, with leadership positions in ARTs, respiratory and urology. The companys export sales (excluding tech fees) posted 22% CAGR over FY06-10 to INR 28 bn in FY10. Africa, with 34% share, is the largest contributor to exports, followed by the Americas (26%) and Europe (17%).
Chart 2: Revenue mix
APIs 10%
Chart 3: Export formulation mix MEA 11%
Domestic formulations 47%
North/South America 21%
Africa 42%
ROW ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. 43%
EU 14%
Australia 12%
Chart 4: Shareholding pattern
Retail & others 29%
Promoters 37%
FII's 15% MF & inst 19%

Source: NSE
73
Domestic Formulations Snapshot

Therapeutic area Respiratory Anti-infectives Gyneacology CVS Gastro-intestinal Pain mgmt. CNS Dermatology Anti - diabetics % of total 28 25 13 12 8 2 2 2 1 Market share 19.2 7.1 14.6 4.6 3.7 2.1 1.8 1.9 0.6 Cipla Industry growth Growth 19.9 16.1 29.2 14.5 14.1 11.0 26.7 18.3 18.7 14.5 13.4 21.9 16.5 14.1 13.8 14.1 14.4 21.0
MAT (Mar-11) Incl bonus 18.8 15.0 Excl bonus 16.4 14.3 8.8 13.1
Excl bonus
CAGR (5yr) 14.5 14.4
10.3 13.8
(%)

Brands SEROFLO ASTHALIN MTP KIT NOVAMOX FORACORT AEROCORT MT PILL CIPLOX BUDECORT AMLOPRES AT Total Therapy Chronic Chronic Acute Acute Chronic Chronic Acute Acute Chronic Chronic % of total 3.8 3.2 3.1 3.1 2.9 2.8 2.8 2.3 2.1 1.8 27.9 Market share 62.4 88.7 34.8 32.0 54.2 100.0 40.0 23.2 70.6 18.6 Growth rate 18.4 19.1 246.0 9.7 34.8 15.1 (4.4) 14.1 15.4 5.2
(%)
Contrbution to growth 3.7 3.3 14.0 1.7 4.8 2.3 (0.8) 1.8 1.8 0.6 33.1
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Therapy wise break-up Field force expansion and productivity
AntiInfectives & pain mgmt. 28%
Respiratory 28%
4,700 3,900 3,100 2,300 1,500

FY11E FY06 FY07 FY08 FY09 FY10
5.7 5.4 5.1 4.8 4.5
Gastrointestinal 8% Gyneacology Dermatolog 13% y 1.6%

Growth composition (MAT Mar-11)
CVS Chronic 12% 43% CNS 2% Anti diabetics 0%
Field force
Productivity
Relative performance to peers (MAT Mar-11)
20.0 16.0
19%
35 Sales (INR bn)

15% 6 3 6
6 1
28 21 14 7 0 Ranbaxy Sun Pharma Cadila GSK Pfizer Lupin Cipla Dr Reddy's

Industry growth
(%)
12.0 8.0
12 4.0 0.0 Volume Cipla Price
74
Others 7%
5,500
CAGR 2.2%
6.0
Key Risks
Higher field force attrition poses risk to domestic growth
Cipla has one of the highest attrition among the comparable peers in the domestic market. Instability is one of the major reasons for subpar performance in the domestic market.
Contingent NPPA liability

NPPA (National Pharmaceutical pricing Authority) has served notice to Cipla demanding INR 12.3 bn (including interest) penalty for overcharging on certain products which comes under Drug Price Control Order (DPCO). Cipla has challenged the NPPA assertions and the matter is currently under sub-judice in the Supreme Court. We highlight that Cipla has not made any provisions for such a contingency and any adverse ruling can have one time material impact on its profitability. Moreover, Supreme Court in its recent verdict has asked Glaxo India to pay principal amount of outstanding dues to NPPA, over the dispute on pricing of DPCO controlled drug, which could be used as precedent for future litigations and thus increases risk for Cipla.
Large contracts could boost exports

Large contracts, especially in ART and to some extent in the swine flu segment, could have a disproportionate impact on Ciplas revenues. These contracts are based on funding programmes that are difficult to predict.
Strong growth in export formulation sales

I S I E m e r g i n g M a r e s P D F i Strong, unanticipated growth in export k contracts, t especially as only 37 products out of an
product basket of 118 products have been launched in the US. Inhaler opportunity in Europe could be significant but is contingent on long-pending approvals.
75 1 f
Income statement Year to March Income from operations Gross revenues Less: Excise Net revenues Other operating income Total operating expenses Materials cost Employee cost R&D cost Selling, admin and general expenses EBITDA Depreciation and amortisation EBIT Interest expense/(income) Other income Profit before tax Provision for tax Core profit Extraordinary items FY09 52,343 50,216 610 49,606 2,737 39,932 23,474 2,714 2,355 11,389 12,411 1,518 10,893 378 (1,546) 8,968 1,258 9,705 FY10 56,057 54,117 522 53,595 2,462 42,262 24,530 3,191 2,507 12,034 13,795 1,671 12,125 99 285 12,311 2,435 10,050 950 FY11E 62,465 61,062 571 60,491 1,973 48,895 27,609 4,476 2,722 14,088 13,569 2,401 11,168 3 800 11,965 1,998 9,967 FY12E 71,260 69,842 651 69,191 2,070 55,133 31,568 4,843 3,114 15,607 16,128 2,693 13,435 3 1,260 14,692 2,498 12,195 (INR mn) FY13E 82,819 81,356 750 80,607 2,213 63,509 36,689 5,804 3,627 17,389 19,311 2,911 16,399 3 1,515 17,912 3,045 14,867 14,867 14,867 803 18.52 803 18.52 22.1 4.2 22.5
Reported Profit after minority interest 7,710 10,826 9,967 12,195 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Adjusted PAT after minority interest 9,705 10,050 9,967 12,195 Equity shares outstanding (mn) EPS (INR) basic Diluted shares (mn) Adjusted EPS (INR) fully diluted CEPS (INR) Dividend per share (INR) Dividend payout (%) Common size metrics- as % of net revenues Year to March Cost of revenues Selling, admin and general expenses R & D cost Other expenses Total operating expenses Depreciation and amortisation Interest expenditure EBITDA margins Net profit margins Growth metrics (%) Year to March Revenues EBITDA Net profit PBT EPS FY09 23.7 45.5 50.4 7.0 50.4 FY10 7.1 11.2 3.6 37.3 3.6 FY11E 11.4 (1.6) (0.8) (2.8) (0.8) FY12E 14.1 18.9 22.4 22.8 22.4 FY09 44.8 21.8 4.5 21.8 76.3 2.9 0.7 23.7 19.6 FY10 43.8 21.5 4.5 21.5 75.4 3.0 0.2 24.6 18.8 FY11E 44.2 22.6 4.4 22.6 78.3 3.8 0.0 21.7 16.5 FY12E 44.3 21.9 4.4 21.9 77.4 3.8 0.0 22.6 17.6 777 12.49 803 12.09 14.4 1.9 16.0 803 12.52 803 12.52 14.6 2.0 16.0 803 12.41 803 12.41 15.4 2.8 22.5 803 15.19 803 15.19 18.5 3.4 22.5
FY13E 44.3 21.0 4.4 21.0 76.7 3.5 0.0 23.3 18.4
FY13E 16.2 19.7 21.9 21.9 21.9
76

Balance sheet As on 31st March Equity capital Reserves & surplus Common shareholders equity Total Shareholders Funds Borrowings Deferred tax liability (net) Sources of funds Gross block Depreciation Net block Capital work in progress Investments Inventories Sundry debtors Cash and bank balances Loans and advances Other current assets Total current assets Current liabilities Provisions Total current liabilities and provisions Net current assets FY09 1,555 41,923 43,478 43,478 9,402 1,642 54,522 26,933 7,008 19,925 3,663 801 13,983 18,529 534 10,899 235 44,179 10,129 3,917 14,046 30,133 FY10 1,606 57,500 59,106 59,106 51 1,792 60,948 28,973 8,861 20,112 6,842 2,464 15,126 15,666 621 11,682 578 43,673 9,980 2,164 12,143 31,530 FY11E 1,606 64,843 66,449 66,449 51 1,792 68,291 39,630 11,262 28,368 2,464 17,114 17,114 2,785 12,850 665 50,527 10,153 2,915 13,068 37,459 FY12E 1,606 73,827 75,433 75,433 51 1,792 77,275 43,230 13,955 29,275 2,464 19,523 19,523 4,759 14,135 765 58,706 9,668 3,501 13,170 45,536 (INR mn) FY13E 1,606 84,780 86,386 86,386 51 1,792 88,228 46,347 16,866 29,481 2,464 22,690 22,690 9,495 15,549 879 71,304 10,816 4,205 15,021 56,284 88,228 108 (INR mn) FY09 7,710 1,518 150 9,378 (5,828) 3,550 (6,161) (2,611) FY10 10,826 1,671 150 12,647 (1,310) 11,337 (5,037) 6,300 FY11E 9,967 2,401 12,368 (3,765) 8,603 (3,815) 4,788 FY12E 12,195 2,693 14,888 (6,103) 8,784 (3,600) 5,184 FY13E 14,867 2,911 17,778 (6,011) 11,767 (3,117) 8,650
Uses of funds 54,522 60,948 68,291 77,275 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Book value per share ( INR) 56 74 83 94 Free cash flow Year to March Net profit Depreciation Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow Cash flow metrices Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid FY09 3,550 2,214 (6,027) (263) (6,161) (1,819) FY10 11,337 (4,568) (6,700) 69 (5,037) (1,873) FY11E 8,603 (2,624) (3,815) 2,164 (3,815) (2,624) FY12E 8,784 (3,210) (3,600) 1,974 (3,600) (3,210)
FY13E 11,767 (3,914) (3,117) 4,736 (3,117) (3,914)
77

Profitability and liquidity ratios Year to March ROAE (%) ROACE (%) Inventory days Debtors days Payable days Cash conversion cycles Current ratio Debt/ EBITDA Debt/equity Adjusted debt/Equity Operating ratios (x) Year to March Total asset turnover Fixed asset turnover Equity turnover Du pont analysis Year to March NP margin (%) Total assets turnover Leverage multiplier FY09 19.6 1.00 1.22 FY10 18.8 0.93 1.13 FY11E 16.5 0.94 1.03 FY12E 17.6 0.95 1.03 FY13E 18.4 0.97 1.02 18.37 FY09 1.00 2.72 1.22 FY10 0.93 2.68 1.04 FY11E 0.94 2.50 0.96 FY12E 0.95 2.40 0.98 FY13E 0.97 2.74 1.00 FY09 24.0 22.4 195.8 119.9 146.5 169.3 3 0.8 0.2 0.2 FY10 19.6 21.6 216.6 116.4 149.6 183.4 4 0.0 0.0 0.0 FY11E 15.9 18.0 213.1 98.9 133.1 178.9 4 0.0 0.0 0.0 FY12E 17.2 19.1 211.8 96.6 114.6 193.8 4 0.0 0.0 0.0 FY13E 18.4 20.4 210.0 95.6 101.9 203.7 5 0.0 0.0 0.0
ROAE (%) 23.95 19.59 15.88 17.19 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Valuation parameters Year to March Adjusted diluted EPS (INR) FY09 12.1 FY10 12.5 FY11E 12.4 FY12E 15.2
FY13E 18.5
EPS YoY growth (%)

CEPS (INR) Diluted PE (x) Price/BV(x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%)
50.4
14.4 26.6 5.7 4.9 20.8 0.6
3.6
14.6 25.6 4.4 4.5 18.5 0.6
(0.8)
15.4 25.9 3.9 4.0 18.6 0.9
22.4
18.5 21.1 3.4 3.5 15.5 1.1
21.9
22.1 17.3 3.0 3.0 12.7 1.3
78
Pharmaceuticals
Company Update
DR. REDDYS LABORATORIES

More steam left
Domestic formulation: Gaining priority

We expect Dr. Reddys Laboratories (DRRD) domestic market to grow at 17% over FY10-13E led by strategic initiatives such as field force expansion (750 additions in existing markets and 1,600 contractual field force for rural markets) and increase in new launches. Its differentiated product pipeline such as biosimilars (Reditux and Cresp) and novel formulations like Fentanyl patches, have also been successful. Our survey indicates that the companys supply chain initiatives, which had impacted growth in FY09, are now contributing to better performance and incrementally higher returns as inventory in channel has dipped to 7-8 days versus 15-21 days (best among peers).
April 25, 2011
Reuters : REDY.BO
Bloomberg : DRRD IN
EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector BUY Outperformer
Risk Rating Relative to Sector High Sector Relative to Market Equalweight
US pipeline of limited competition products

DRRD has the most interesting pipeline of limited competition and Para IV products (34 Para IV, 18 have FTF status), however execution of the same is critical to attain the goal of USD 1bn revenue from current base of USD 350 mn (FY10) in the US. We expect US to post 27% CAGR over FY10-13E led by ramp-up in sales from existing products such as Omeprazole OTC, Prevacid and Tacrolimus and new product launches such as Fondaperinux, Finestride, Olanzapine, Ziprasidon and Rivastigmin.
MARKET DATA CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : 1,656
: 1,855 / 1,160 : 168.9
:279.7 / 6,314.2 448.5
Avg. Daily Vol. BSE/NSE (000) :
GSK alliance to aid growth momentum in emerging markets ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF.
DRRD has exited a few non-core ROW markets in FY10 and forged an alliance with GSK to capture the growing opportunity in the branded generic space in emerging markets. The company has already started supplying products to GSK for five-six markets including Brazil and Mexico; however, full impact on revenue will be visible in the next two-three years.
SHARE HOLDING PATTERN (%) Promoters* MFs, FIs & Banks FIIs Others * Promoters pledged shares (% of share in issue) : : : : : 25.7 13.1 27.2 34.0 1.2
Outlook and valuations: Execution critical for growth; upgrade to BUY

We remain positive on strong growth visibility in branded generics, improved traction in limited competition products and potential upside from the GSK deal. We maintain our core earnings estimate of INR 76 and INR 88 for FY12 and FY13, respectively. Our SOTP-based fair value at INR 1,950, values base business at 21x FY13E core EPS (10% premium to sector multiple due to strong pipeline in US) and assigns INR 94 per share as NPV of Para IVs. Hence, we upgrade our recommendation to BUY/Sector Outperformer from HOLD/Sector Outperformer. Execution in US is a key risk.
1 month 3 months 12 months 12.2 0.6 45.1 8.9 2.5 11.9 PRICE PERFORMANCE (%) Stock Nifty EW Pharma Index 5.5 (7.0) 18.0
Financials Year to March Revenues (INR mn) Rev growth (%) EBITDA (INR mn) Adj. Net profit (INR mn) Shares outstanding (mn) Adj. EPS (INR) EPS growth (%) P/E (x) EV/EBITDA (x) ROE (%) FY10 70,519 2.5 15,970 8,376 168.9 49.6 10.3 33.4 17.8 26.3 FY11E 74,508 5.7 16,546 11,351 168.9 67.2 35.5 24.6 16.7 27.0 FY12E 93,814 25.9 24,485 17,128 168.9 101.4 50.9 16.3 10.8 31.4 FY13E 104,148 11.0 25,012 17,413 168.9 103.1 1.7 16.1 10.1 25.1
Edelweiss Securities Limited 79 Edelweiss Securities Limited
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY10 Net sales - India formulations - Betapharm - US formulations - Russia - PSAI Gross profit Gross margins (%) EBITDA EBITDA margin (%) EBITDA margin (ex-milestones) PBT Tax Tax rate (%) Reported PAT Recurring PAT Recurring EPS 70,519 10,158 7,298 16,817 7,200 20,404 47,831 67.8 15,970 22.6 20.4 12,259 2,668 21.8 3,515 6,777 40.1
FY11E 74,508 11,864 5,564 18,070 8,652 19,287 50,568 67.9 16,546 22.2 19.9 12,754 1,333 10.5 10,789 10,539 62.4
% Y-o-Y 5.7 16.8 (23.8) 7.5 20.2 (5.5) 5.7 3.6
FY12E 93,814 13,900 5,767 30,497 10,154 20,093 64,189 68.4 24,485 26.1 24.2
% Y-o-Y 25.9 17.2 3.7 68.8 17.4 4.2 26.9 48.0
FY13E 104,148 16,336 5,796 32,351 11,987 21,688 70,534 67.7 25,012 24.0 22.1
11.0 17.5 0.5 6.1 18.1 7.9 9.9 2.2
4.0
20,391 3,263 16.0 17,128 12,901 76.4
59.9 144.7 58.8 22.4
20,979 3,566 17.0 17,413 14,926 88.4
2.9 9.3 1.7 15.7
206.9 55.5
Chart 1: Historical valuation trend One year forward P/E 2,000
18x 14x
1,600 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF.

(INR)
1,200 800 400 0

Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10
10x 6x
Table 2: SOTP based valuation SOTP
(INR)
Base business EPS March-13 Target P/E Value of base business (INR per share) NPV per share for one-off sales Total target price
`
88 21 1,856 94 1,950
80

Table 3: Niche product pipeline (including Para IV filings) for US market
Brand Name Arixtra Zyprexa Avandia Allegra-D-24 (OTC) Plavix Boniva Geodon Clarinex-D-12/24 Exelon Propecia Micardis Lunesta Actonel Avelox Namenda
Molecule Fondaparinux Olanzapine-20mg Rosiglitazone Fexofenadine Clopidogrel Ibandronate Ziprasidone Desloratidine Rivastigmine Finestride Telmisartan Eszopiclone Residronate Moxifloxacin Memantine
Innovator GSK Eli Lilly GSK Sanofi Aventis BMS Roche Pfizer Scherring Novartis Merck Boehringer Sepracor Roche Bayer Forest Labs
Type
Market size Generic players (USD mn) 270 1 1 2 1 4-5 players 4 2 3 1 1 4 Many 2 800 600 200 3,300
Data of Launch Awaiting approval April'11 June'11 Aug'11 Nov'11/ May'12 Mar'12 Mar'12 Mar'12 Aug'12 Dec'12 Jan'14 May'14 June'14 Aug'14 Jan'15
Para IV Para IV
Para IV Para IV Para IV Para IV Para IV Para IV Para IV Para IV
500 Multiple players 1,200 172 225 100 140 761 700 400
1,300 Multiple players
81
Company Description
Promoted by Dr. K Anji Reddy, a first generation entrepreneur, DRRD is a professionally managed company with revenue of USD 1.6 bn in FY10 (30% CAGR between FY06 and FY10). Operating in 40 plus countries, international operations revenue contribution has increased to 82% currently from 40% in FY00, with US/Russia operations contributing c.32% of FY10 sales. The company has set itself an internal target of USD 3 bn revenue and ROCE of 25% by FY13. The companys key strength has been its vertical integration through its Pharmaceutical Services & Active Ingredients (PSAI) operations and 16 manufacturing bases (10 USDFDA approved) which enable it to have one of the best gross margin ratios in the Indian pharmaceutical industry. This is actively supported by an extensive R&D programme, which spans CRAMs to drug discovery. It also has one of the deepest pipelines of bio-similars amongst leading global generic companies, addressing global brand sales of USD 30 bn. Chart 2: Revenue mix
APIs 29%
Domestic formulations 15%
ROW 17% Biotech ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. 2% Germany (Betapharm) 10%
EU 3%
US 24%
Promoters 26% Retail & others 34%
MF & inst 13%
FII's 27%
Source: NSE
82
Domestic Snapshot
Therapeutic area Gastro CV Pain mgmt. Anti-infectives Anti - diabetics Respiratory Dermatology Gyneacology CNS % of total 24 21 12 10 6 5 5 4 1 Dr Industry Market share Reddy's Growth 4.5 3.6 4.1 1.0 2.3 1.5 2.4 0.1 0.4 12.5 10.1 (0.7) 9.9 17.0 23.1 30.5 7.7 7.4 14.1 16.5 13.8 13.4 21.0 14.5 14.4 21.9 14.1
CAGR (5yr) 18.4 14.4
13.5 13.8
(%)
Contrbution to growth 28.3 20.1 (0.8) 9.0 9.2 10.8 13.4 3.2 0.9 40.9

Brands OMEZ NISE STAMLO OMEZ D STAMLO BETA ATOCOR RAZO MINTOP CLAMP ECONORM Total Therapy Acute Acute Chronic Acute Chronic Chronic Acute Acute Acute Acute % of total 9.9 6.9 4.7 3.2 3.2 2.9 2.8 2.2 2.2 2.1 39.9 Market share 53.1 48.3 20.6 26.2 12.9 5.2 13.7 48.9 2.9 10.3 Growth rate 9.8 (7.5) 4.4 11.6 3.6 7.2 8.2 16.8 24.5 28.4
(%)
Contrbution to growth 9.3 (5.8) 2.1 3.5 1.1 2.0 2.2 3.3 4.4 4.8 26.8
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 onField force expansion and productivity 2011-11-09 01:19:45 EST. DownloadPDF. Therapy wise break-up
Gyneacology Others 11% 4% Antiinfectives 10% Pain mgmt. 13% Gastro 24%
CNS 1% Anti diabetics 6% Respiratory 5% Dermatology 5%
2,400 1,800 1,200 600 0
CAGR 3.7%
5.1 4.7 4.3 3.9 3.5
Chronic 34%
FY06 FY07 FY08 FY09 FY10 FY11E Field force Productivity
16.0 12.0 8.0 4.0 0.0 (4.0) Volume 3 (0) Dr Reddy's Price 10.6%
15% 6 3 6
35 28
Sales (INR bn)
21 14 7 0
(%)
Industry growth
Ranbaxy
Sun Pharma
Cadila
Pfizer
Lupin
Cipla
GSK
Dr Reddy's
83
CV 21%
3,000
5.5
Key Risks
Domestic growth driven by new products than prescription generation
DRRDs domestic performance has been a laggard because of lack of strategic focus. In most therapeutic segments, companys performance is below the industry level growth. Moreover, growth is mainly led by new introductions and price increase which indicates that new prescription growth is very poor. However, as domestic market is expected to report robust growth, management has also changed its priority towards Indian market.
Rupee appreciation
Rapid rupee appreciation could impact our sales estimate, especially on international revenues which are currently based on a currency estimate of USD/INR of INR 46.
Regulatory issues
Regulatory issues including product approval delays, unfavorable litigation outcomes, and potential future adverse inspections from USFDA are structural negatives for DRRD.
84 D o w
Edelweiss Securities Limited n l o a d e d b y i n s d m c p l 0 1 f r o m 1 2 4 . 1 2 4 . 2 5 5 . 5 a t
Income statement
Year to March Income from operations Gross revenues Less: Excise Net revenues Other operating income Total operating expenses Materials cost Employee cost R&D cost Selling, admin and general expenses EBITDA Depreciation and amortisation EBIT Interest expense Other income Profit before tax Provision for tax Core Profit Extraordinary items FY09 68,830 68,326 809 67,517 1,313 54,081 23,223 9,920 4,093 16,845 14,749 4,977 9,772 972 783 9,583 2,608 6,975 16,147 FY10 70,519 68,833 316 68,517 2,002 54,549 22,688 10,948 3,731 17,182 15,970 4,131 11,839 312 732 12,259 2,668 9,591 6,077 FY11E 74,508 72,909 583 72,327 2,181 57,962 23,940 12,700 4,520 16,802 16,546 4,565 11,981 247 1,020 12,754 1,333 11,421 632 FY12E 93,814 92,103 667 91,436 2,379 69,329 29,625 14,605 6,035 19,064 24,485 4,986 19,499 284 1,175 20,391 3,263 17,128 0
(INR mn)
FY13E 104,148 102,322 770 101,552 2,595 79,136 33,614 16,503 7,109 21,910 25,012 5,407 19,605 124 1,497 20,979 3,566 17,413 0 17,413 17,413 17,413 169 103.1 169 88.4 135.1 15.0 14.6
Profit after tax (9,172) 3,515 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 Reported profit after minority interest (9,172) 3,515 Adjusted PAT after minority interest 7,571 8,376 Equity shares outstanding (mn) Adjusted EPS (INR) (Dil) Diluted shares (mn) Recurring EPS (INR) fully diluted CEPS (INR) Dividend per share (INR) Dividend payout (%) 168 44.9 168 25.5 71.0 6.3 13.9 169 49.6 169 40.1 81.2 11.2 22.7
10,789 17,128 EST. DownloadPDF. 10,789 17,128 11,351 17,128 169 67.2 169 62.4 94.6 8.0 11.9 169 101.4 169 76.4 130.9 10.0 9.9
Common size metrics- as % of net revenues

Year to March Cost of revenues Selling, admin and general expenses R & D cost Total operating expenses Depreciation and amortisation Interest expenditure EBITDA margins Net profit margins FY09 33.7 24.5 5.9 78.6 7.2 1.4 21.4 10.3 FY10 32.2 24.4 5.3 77.4 5.9 0.4 22.6 14.0 FY11E 32.1 22.5 6.1 77.8 6.1 0.3 22.2 15.8 FY12E 31.6 20.3 6.4 73.9 5.3 0.3 26.1 18.7 FY13E 32.3 21.0 6.8 76.0 5.2 0.1 24.0 17.1
Growth metrics (%)

Year to March Revenues EBITDA Net profit PBT EPS FY09 (241.3) (116.4) (107.4) (110.2) 124.3 FY10 2.5 8.3 37.5 27.9 10.3 FY11E 5.7 3.6 19.1 4.0 35.5 FY12E 25.9 48.0 50.0 59.9 50.9 FY13E 11.0 2.2 1.7 2.9 1.7
85

Balance sheet
Year to March Equity capital ESOPS & others Reserves & surplus Common shareholders equity Total shareholders funds Borrowings Deferred tax liability (net) FY09 842 628 33,791 35,261 35,261 19,976 539 FY10 845 573 36,351 37,768 37,768 14,840 70 FY11E 845 573 45,558 46,976 46,976 9,840 70 FY12E 845 573 60,710 62,128 62,128 4,340 70
(INR mn)
FY13E 845 573 75,158 76,576 76,576 1,840 70
Sources of funds
Net block Capital work in progress Intangible assets & goodwill Investments Inventories Sundry debtors Cash and bank balances Loans and advances Total current assets Current liabilities Provisions Total current liabilities and provisions Net current assets
55,775
16,318 4,296 12,952 523 13,250 14,406 5,623 5,519 38,798 15,118 1,994 17,112 21,686
52,678
17,376 7,622 6,146 3,580 13,394 11,599 6,600 6,609 38,202 16,746 3,502 20,248 17,954
56,886
20,807 4,246 4,470 3,580 14,046 12,296 9,734 6,943 43,019 17,064 2,172 19,235 23,784
66,538
22,924 4,567 2,719 3,580 17,629 15,544 15,525 8,778 57,476 21,554 3,174 24,729 32,748
78,486
24,724 4,891 915 3,580 19,721 17,264 25,855 9,749 72,589 23,932 4,282 28,214 44,376
Uses of funds
55,775
52,678
56,886
66,538
78,486
453
Book value per share ( INR) 209 224 278 368 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF.
Free cash flow

Year to March Net profit Add: Non cash charge Depreciation Others Gross cash flow Less:Changes in WC Operating cash flow Less: Capex Free cash flow 4,977 (4,195) (4,681) (8,876) (11,761) (20,638) 4,131 7,646 4,709 12,355 (2,767) 9,588 4,565 (0) 15,354 (2,695) 12,659 (5,500) 7,159 4,986 0 22,114 (3,173) 18,941 (5,000) 13,941 5,407 (0) 22,820 (1,298) 21,521 (5,000) 16,521 FY09 (9,172) FY10 3,515 FY11E 10,789 FY12E 17,128 FY13E 17,413
Cash flow metrices

Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid Share issuance / (buyback) FY09 (8,876) (512) 7,564 (1,824) (11,761) (1,232) 172 FY10 12,355 (6,611) (4,766) 978 (2,767) (2,217) 226 FY11E 12,659 (6,581) (2,943) 3,134 (5,500) (1,581) FY12E 18,941 (7,476) (5,674) 5,791 (5,000) (1,976) FY13E 21,521 (5,464) (5,727) 10,330 (5,000) (2,964) -
86

Profitability and liquidity ratios
Year to March ROAE (%) ROACE (%) Inventory days Debtors days Payable days Cash conversion cycles Current ratio Debt/ EBITDA Debt/equity Adjusted debt/Equity FY09 17.4 19.3 191 57 200 47 2.3 1.4 0.6 0.6 FY10 26.3 20.4 214 69 256 27 1.9 0.9 0.4 0.4 FY11E 27.0 23.4 209 60 258 12 2.2 0.6 0.2 0.2 FY12E 31.4 33.5 195 56 238 13 2.3 0.2 0.1 0.1 FY13E 25.1 28.4 203 59 247 15 2.6 0.1 0.0 0.0
Operating ratios (x)

Year to March Total asset turnover Fixed asset turnover Equity turnover FY09 1.1 4.7 1.7 FY10 1.3 4.1 1.9 FY11E 1.3 3.8 1.7 FY12E 1.5 4.2 1.7 FY13E 1.4 4.3 1.5
Du Pont Analysis
Year to March NP margin Total assets turnover Leverage multiplier FY09 10.3 1.1 1.5 FY10 14.0 1.3 1.5 FY11E 15.8 1.3 1.3 FY12E 18.7 1.5 1.1 FY13E 17.1 1.4 1.0 25.1
ROAE 17.4 26.3 27.0 31.4 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF.
Valuation parameters
Year to March Adj. Diluted EPS (INR) FY09 44.9 FY10 49.6 FY11E 67.2 FY12E 101.4 FY13E 103.1
EPS YoY growth (%)

124.3
71.0 36.8 7.9 4.3 19.8 0.4
10.3
81.2 33.4 7.4 4.0 17.8 0.7
35.5
94.6 24.6 6.0 3.7 16.7 0.5
50.9
130.9 16.3 4.5 2.8 10.8 0.6
1.7
135.1 16.1 3.7 2.4 10.1 0.9
87
88
Pharmaceuticals
Company Update
LUPIN PHARMA
Growth evident; strong outlook
Domestic formulations growth to outpace industry

Lupin Pharmas (LPC) domestic growth has consistently outpaced the broad market and peers over the past five yearsdomestic growth has been a sturdy 24% (CAGR) over FY05-10. This is further evident through our extensive distributor survey, which validates LPCs strong domestic franchise led by wider therapy coverage (chronic 41% of total sales), strong traction from new launches, and effective field force. We expect the companys growth momentum to sustain in the domestic market and estimate 18% CAGR over FY11-13E.
April 25, 2011

Reuters: LUPN.BO Bloomberg: LPC IN
EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Outperformer Low Equalweight
Higher API sourcing from India to boost Japan margins

LPC has guided to 15-16% growth driven by 8-10 products launches in FY12E. We believe Japans contribution to margins will be far higher as the company expects to source more products from India (out of the 8-10 product launches, four-five will be sourced from India). Management expects margins from Japan to expand 600 bps to 24-25% over FY13-14E.
MARKET DATA CMP 52-week range (INR) Share in issue (mn) : : : : INR 412 519 / 324 444.7 183.2 / 4,137.3 1,107.9
Strong ANDA pipeline in US imparts strong growth visibility

LPCs solid base in US generics (USD 350 mn) with a large pending pipeline of 90 products (50-60 ANDA approvals expected in next 2-3 years) including niche segments such as OC, ophthalmology as well as Para IV (13 FTFs with four being
M cap (INR bn/USD mn)
Avg. Daily Vol. BSE/NSE (000) : SHARE HOLDING PATTERN (%) : : : : :
Promoters* exclusive), imparts long-term growth 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. ISIEmergingMarketsPDF in-sdmcpl01 from visibility. However, there could be some MFs, FIs & Banks pressures in the near term, largely due to genericization of Lotrel and delay in
47.0 20.1 22.0 11.0 NIL
launches of OCs (2-3 launches by end FY12).
FIIs Others
Execution slippage in US branded formulations poses key risk

US branded formulations faces key challenge of possible genericization of Antara and Suprax, although management is confident of mitigating these risks through effective product life cycle management. Further, with no visible product pipeline and expected delay in launch of Allernaze (FY13E), we expect a moderate 11% CAGR in US branded formulations over FY11-13E.
* Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock 1 month 3 months 12 months 6.3 (10.3) 25.6
Nifty 8.9 2.5 11.9
Outlook and valuations: Strong execution play; maintain BUY

We remain positive on LPC due to its strong execution track record, established franchise in domestic market, and earnings growth visibility, imparting strong upsides from current valuations. It is our preferred pick in the large cap space. We re-iterate BUY/Sector outperformer rating with TP of INR 500.
Financials Year to March Revenues (INR mn) Rev growth (%) EBITDA (INR mn) Adj. Net profit (INR mn) Shares outstanding (mn) Adj. EPS (INR) diluted EPS growth (%) P/E (x) EV/EBITDA (x) ROE (%) FY10 48,359 25.5 9,728 6,841 444.7 15.4 21.0 26.8 19.8 34.3 FY11E 56,693 17.2 11,594 8,472 444.7 19.1 23.8 21.6 15.8 28.0 FY12E 64,939 14.5 13,710 9,608 444.7 21.6 13.4 19.1 12.9 24.4 FY13E 75,280 15.9 16,121 11,781 444.7 26.5 22.6 15.6 10.5 23.9
89

FY10 Net sales - Domestic Formulations - US (generics) - US (branded) - Europe - Japan - API Gross profit Gross margins (%) EBITDA EBITDA margin (%) PBT Tax Tax rate (%) Reported PAT Adjusted PAT Adjusted EPS 48,359 13,498 10,783 6,033 1,396 5,341 8,106 28,665 59.3 9,728 20.1 8,357 1,360 16.3 6,816 6,841 15.4
FY11E 56,693 15,928 13,710 5,690 1,954 6,089 8,798 33,725 59.5 11,594 20.5 9,884 1,186 12.0 8,472 8,472 19.1
% Y-o-Y 17.2 18.0 27.1 (5.7) 40.0 14.0 8.5 17.7 19.2 18.3 (12.8) 24.3 23.8 23.8
FY12E 64,939 18,795 15,245 6,594 2,541 7,002 9,551 38,653 59.5 13,710 21.1 12,331 2,466 20.0 9,608 9,608 21.6
% Y-o-Y 14.5 18.0 11.2 15.9 30.0 15.0 8.6 14.6 18.3 24.8 107.9 13.4 13.4 13.4
FY13E 75,280 22,178 18,480 6,868 3,176 8,052 10,368 44,921 59.7 16,121 21.4 15,119 3,024 20.0 11,781 11,781 26.5
15.9 18.0 21.2 4.2 25.0 15.0 8.6 16.2 17.6 22.6 22.6 22.6 22.6 22.6
Chart 1: Historical valuation trend One year forward P/E 600
22x 16x
500 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. 400
(INR)
12x 300 200 100 0 7x
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
90
Apr-11
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10

Table 2: Niche product pipeline over FY11-15E
Brand Name Fortamet Effexor-XR Tricor Renagel Solodyn Geodon Fosrenol Glumetza Combivir Cipro OD Clarinex-D-12/24 Femcon FE
Molecule Metformin Venlafaxine ER Fenofibrate Sevelamer Minocycline Ziprasidone Lanthum Metformin Lamivudine and Zidovudine Ciprofloxacin Desloratidine Estradiol and Norethindrone Ethinyl Estradiol and Drospirenone Duloxitine Doxycycline Niaspan
Innovator Depomed Pfizer (Wyeth) Abbott Genzyme
Market size (USD mn) 70 800 1,500 600 500
Generic Players 1 5 4 2 Multiple players 4 2 1 2 4 2 3
Data of Launch June'11 July'11 Sep'11 Nov'11 Mar'12 Apr'12 May'12 May'12 June'12 July'12 Jan'13
Type Para-IV
Para-IV Para-IV Para-IV Para-IV Para-IV Para-IV Para-IV
Pfizer Shire Depomed GSK Bayer Scherring Warner Chillcot
1,200 130 45 360 150 172 65
Yaz Cymbalta Oracea Niacin
Bayer Eli Lilly Galderma Abbott
772 2,500 240 330 Multiple players
Jan'13 June'13 June'13 Para-IV Para-IV Para-IV Para-IV
3 Sep'13 Multiple Oct'13 Lyrica Pregabalin Pfizer 1,596 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 players EST. DownloadPDF. Lunesta Eszopiclone Sepracor 761 4 May'14 Ultram Loestrin 24 Namenda Welchol Tramedol Norethindrone and Ethinyl Memantine Daiichi Sankyo 200 Warner Chillcot Forest Labs 357 1,300 30 2 2 Multiple players 3 May'14 Julu'14 Jan'15 2015
Para-IV Para-IV
91
Company Description
Promoted by Dr. Desh Bandhu Gupta, a first generation entrepreneur, LPC is Indias fifth largest company by domestic sales. The companys revenue and profit (ex-IP related revenues) have posted 29% and 40% CAGR over FY06-10 to INR 49 bn and INR 6.8 bn in FY10, respectively. Its domestic formulations contributed 28% to total FY10 revenues and posted 22% CAGR over FY06-10 to INR 13.3 bn in FY10. With a market share of ~2.8%, LPC is the tenth largest player in the domestic market with six products in the top 300 pharma brands in India. The companys export sales posted 39% CAGR during FY06-10, growing to INR 32 bn in FY10. US formulations contributed 35%, with Japan and Europe formulations contributing 14% to FY10 sales. Chart 2: Revenue mix (%)
ROW 8% Japan 13% Domestic formulations 33%
Europe 6%
US 40%
Retail & others 11%
FII's 23%
Promoters 47%
MF & inst 19%

Source: NSE
92

Therapeutic area Anti infectives (incl TB) CVS Respiratory Gastrointestinal Anti-diabetics CNS % of total 34 22 12 7 7 5 Market share 4.6 4.3 4.3 1.7 3.8 2.2 Lupin Industry growth growth 15.4 35.2 21.4 23.8 36.6 30.6 13.4 16.5 14.5 14.1 21.0 14.1
CAGR (5yr) 24.1 14.4
24.9 13.8
(%)
Contrbution to growth 20.4 31.1 10.2 6.5 9.8 6.1 57.1

Brands TONACT RAMISTAR GLUCONORM G R-CINEX BUDAMATE LUPENOX L CIN ESIFLO TAZAR RABLET Total Therapy Chronic Chronic Chronic Acute Chronic Chronic Acute Chronic Acute Acute % of total 3.8 2.1 2.1 2.0 2.0 2.0 1.8 1.8 1.7 1.7 21.0 Market share 9.6 16.5 7.2 52.6 19.4 13.9 13.6 15.4 10.2 11.6 Growth rate 27.7 20.4 45.6 19.7 30.9 12.9 11.9 23.7 23.3 25.6
(%)
Contrbution to growth 4.1 1.8 3.2 1.6 2.3 1.1 0.9 1.7 1.6 1.7 20.1
4.6 3.7 2.8 1.9 1.0
Nsaids 2% Gastrointes tinal 6%
diabetics 6%
2,300 1,900 1,500
CNS 5% Respiratory 9%
Antibiotoics 18%
Anti TB 11%
Field force
Productivity
Growth composition (MAT Mar 2011) 30.0 25%
Relative performance to peers (MAT Mar 2011)
35 28
24.0
Sales (INR bn)
(%)
18.0 12.0 6.0 0.0
12 2 11
15% 6 3 6 Industry New product introductions
21 14 7 0
FY11E
FY06
FY07
FY08
FY09
FY10
Industry growth
Ranbaxy
Sun Pharma
Cadila
Pfizer
Lupin
Cipla
GSK
Lupin Volume Price
Dr Reddy's
93
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Therapy wise break-up Field force expansion and productivity 3,500 Generics CVS CAGR 4.1% 12% 21% 3,100 Chronic Others 41% 2,700 10% Anti-
5.5
Key Risks
Lack of new approvals; delay in approvals
The pace of new product approvals has moderated since FY10. Despite such low success rate, LPC has managed to deliver robust growth in 9mFY11. While LPC has a healthy pipeline of ANDAs pending, a delay in approvals could hurt US generics sales in FY12.
Slowdown in domestic formulation market

Domestic market contributed 34% to total sales and has a higher impact on overall profits. Moreover, Anti-infective and anti TB still contributes 33% of overall domestic sales and these segments are growing at lesser pace than the overall growth of the industry and the company. We have estimated domestic formulation CAGR of 18% over FY11-13. Slowdown in the domestic market could have a disproportionate impact on profits.
Price reductions in Kyowa

As per LPC, Kyowa is expected to grow at 15-16% over FY12-13E despite a mandated price cut of 15-16% in LPCs current portfolio in Japan. We highlight that Kyowa contributes 11% to total revenue and any shortfall in sales could impact our earning estimates.
94 D o w
Edelweiss Securities Limited n l o a d e d b y i n s d m c p l 0 1 f r o m 1 2 4 . 1 2 4 . 2 5 5 . 5 a t
Income statement
Year to March Income from operations Net revenues Other operating income Materials cost Employee cost R&D cost Selling, admin and general expenses Total operating expenses EBITDA Depreciation and amortisation EBIT Interest expense/(income) Other income (incl. forex gain/(loss)) Profit before tax Provision for tax Core profit Extraordinary items Profit after tax Minority interest & others Reported profit after minority interest FY09 38,523 37,761 762 16,043 4,871 2,228 7,839 30,981 7,541 880 6,661 499 192 6,355 983 5,372 (295) 5,666 62 5,604 FY10 48,359 47,405 954 19,694 5,872 3,438 9,627 38,631 9,728 1,239 8,489 385 282 8,386 1,360 7,026 (29) 7,055 180 6,875 FY11E 56,693 55,747 946 22,968 6,968 3,958 11,205 45,099 11,594 1,698 9,896 337 325 9,884 1,186 8,698 8,698 226 8,472 FY12E 64,939 63,956 983 26,286 7,995 4,477 12,471 51,229 13,710 1,854 11,856 255 730 12,331 2,466 9,865 9,865 256 9,608
(INR Mn)
FY13E 75,280 74,227 1,053 30,359 9,130 5,196 14,474 59,159 16,121 1,817 14,303 270 1,086 15,119 3,024 12,095 12,095 314 11,781 11,781 445 26.5 445 26.5 30.6 5.5 20.6
Adjusted PAT after Minority interest 6,841 8,472 9,608 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 5,266 on 2011-11-09 01:19:45 EST. DownloadPDF. Equity shares outstanding (mn) 414 445 445 445 EPS (INR) basic Diluted shares (mn) Adjusted EPS (INR) diluted CEPS (INR) Dividend per share (INR) Dividend payout (%) 12.8 414 12.7 14.9 2.6 20.1 15.4 445 15.4 18.2 2.9 18.6 19.1 445 19.1 22.9 3.9 20.6 21.6 445 21.6 25.8 4.4 20.6

Year to March Cost of revenues Employee cost Selling, admin and general expenses R & D cost Total operating expenses Depreciation and Amortisation Interest expenditure EBITDA margins Net profit margins FY09 41.6 12.6 20.4 5.8 80.4 2.3 1.3 19.6 14.2 FY10 40.7 12.1 19.9 7.1 79.9 2.6 0.8 20.1 14.8 FY11E 40.5 12.3 19.8 7.0 79.5 3.0 0.6 20.5 15.6 FY12E 40.5 12.3 19.2 6.9 78.9 2.9 0.4 21.1 15.4 FY13E 40.3 12.1 19.2 6.9 78.6 2.4 0.4 21.4 16.3
Growth metrics (%)

Year to March Revenues EBITDA Net profit PBT Adjusted EPS FY09 40.6 49.5 26.6 14.3 17.6 FY10 25.5 29.0 30.8 32.0 21.0 FY11E 17.2 19.2 23.8 17.9 23.8 FY12E 14.5 18.3 13.4 24.8 13.4 FY13E 15.9 17.6 22.6 22.6 22.6
95

Balance sheet
As on 31st March Equity capital Reserves & surplus Common shareholders equity Total Shareholders Funds Borrowings Deferred tax liability (net) Minority interest FY09 828 13,420 14,248 14,248 12,233 1,164 143 FY10 889 24,789 25,678 25,678 11,399 1,435 255 FY11E 889 33,980 34,869 34,869 8,899 1,435 481 FY12E 889 43,125 44,014 44,014 7,399 1,435 738
(INR Mn)
FY13E 889 53,604 54,493 54,493 5,399 1,435 1,052
Sources of funds
Gross block Depreciation Net block Capital work in progress
27,788
18,200 6,188 12,012 2,240 3,174 216 9,572 9,180 778 2,780 22,309 10,335 1,827 12,162
38,767
22,937 7,072 15,865 3,579 3,197 264 9,715 11,266 2,015 4,759 27,755 9,649 2,243 11,893
45,684
25,937 8,770 17,167 964 3,197 1,176 14,104 15,163 8,636 3,902 41,805 17,281 1,344 18,625
53,585
29,437 10,624 18,813 964 3,197 1,176 16,181 17,396 13,275 4,477 51,329 19,826 2,067 21,894
62,379
32,937 12,441 20,496 964 3,197 1,176 18,779 20,190 18,553 5,196 62,718 23,010 3,162 26,172 36,546
Intangible assets & Goodwill

Investments Inventories Sundry debtors Cash and bank balances Loans and advances Total current assets Current liabilities Provisions Total current liabilities and provisions
Net current assets 10,147 15,862 23,180 29,435 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Uses of funds 27,788 38,767 45,684 53,585 Book value per share ( INR) 34 58 78 99
62,379
123
Free cash flow

Year to March Net profit Depreciation Others Gross cash flow Less:Changes in WC Operating cash flow Less: Capex FY09 5,372 880 (188) 6,064 860 6,923 (4,007) FY10 7,026 1,239 221 8,486 (4,478) 4,009 (6,431) FY11E 8,698 1,698 10,396 (697) 9,698 (385) FY12E 9,865 1,854 11,719 (1,616) 10,103 (3,500) FY13E 12,095 1,817 13,913 (1,833) 12,080 (3,500)
Free cash flow Cash flow metrices

Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid
2,917
(2,422)
9,313
6,603
8,580
FY09 6,923 (3,360) (5,465) (1,902) (4,007) (1,235)
FY10 4,009 3,780 (6,503) 1,285 (6,431) (1,483)
FY11E 9,698 (1,781) (1,297) 6,620 (385) (408)
FY12E 10,103 (1,963) (3,500) 4,640 (3,500) (463)
FY13E 12,080 (3,302) (3,500) 5,278 (3,500) (1,302)
96

Year to March ROAE (%) ROACE (%) Inventory days Debtors days Payable days Cash conversion cycles Current ratio Debt/ EBITDA Debt/equity Adjusted debt/Equity FY09 39.3 24.9 199 79 186 91 1.8 1.6 0.9 0.9 FY10 34.3 25.7 179 77 185 71 2.3 1.2 0.4 0.4 FY11E 28.0 23.8 189 85 214 60 2.2 0.8 0.3 0.3 FY12E 24.4 24.5 210 92 258 44 2.3 0.5 0.2 0.2 FY13E 23.9 25.2 210 91 258 44 2.4 0.3 0.1 0.1

Year to March Total asset turnover Fixed asset turnover Equity turnover FY09 1.40 3.41 2.79 FY10 1.42 3.40 2.37 FY11E 1.32 3.38 1.84 FY12E 1.29 3.56 1.62 FY13E 1.28 3.78 1.51
Du pont analysis
Year to March NP margin Total assets turnover Leverage multiplier FY09 14.1 1.4 2.0 FY10 14.4 1.4 1.7 FY11E 15.2 1.3 1.4 FY12E 15.0 1.3 1.3 FY13E 15.9 1.3 1.2 23.9
Year to March Adj. diluted EPS (INR) FY09 12.7 FY10 15.4 FY11E 19.1 FY12E 21.6 FY13E 26.5
EPS YoY growth (%)

17.6
14.9 32.4 12.0 4.7 24.1 0.6
21.0
18.2 26.8 7.1 4.0 19.8 0.7
23.8
22.9 21.6 5.3 3.2 15.8 1.0
13.4
25.8 19.1 4.2 2.7 12.9 1.1
22.6
30.6 15.6 3.4 2.3 10.5 1.3
97
98
Pharmaceuticals
Initiating Coverage
RANBAXY LABORATORIES
Running ahead of reality
Emerging markets to drive growth; positive traction from Project Virat

Ranbaxy Laboratories (RBXY) CY11 revenue guidance of USD 1.87 bn implies base business growth of 14%, largely driven by emerging markets (EM) such as Africa, Latam, India, CIS, and Romania. During CY10, organic growth in EM has been robust at 12%. We believe growth from these regions will be key growth driver over the medium term. This is further evident from Daiichi Sankyos midterm business plan, where EMs (ex-Japan) are projected to post 23% CAGR, largely driven by RBXY. India is the key component of this growth strategy and is seeing positive traction over the past three months after launch of Project Virat, a significant positive. We expect EM to post 15% CAGR over CY10-12E.
April 25, 2011

Reuters: RANB.BO Bloomberg: RBXY IN
EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market HOLD Performer High Equalweight
Lipitor launch: Key trigger for stock

Lipitor (USD 5.3 bn opportunity in US) is an exciting PIV opportunity for RBXY. The companys success in monetising other Para IVs cannot be extrapolated for Lipitor; however, successful launch could have a large bearing on valuations. We believe there is uncertainty around Lipitor launch during the exclusivity period, given the current import ban and AIP at Ponta Sahib (Lipitor ANDA is filed from the facility). However, we have build base case scenario for Lipitor (relinquishes Lipitor exclusivity) with an NPV of INR21 per share. Successful launch of Lipitor in Nov2011 can has incremental option value of INR48/ share.
MARKET DATA CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : : INR 468 624 / 364 421.3 197.3 / 4,444.6 1,109.4
Avg. Daily Vol. BSE/NSE (000) : SHARE HOLDING PATTERN (%) Promoters* : : : : :
We estimate INR in-sdmcpl01 from 124.124.255.5 FDA-DOJ resolution ISIEmergingMarketsPDF74 per share upside from positive on 2011-11-09 01:19:45 EST. FIs & Banks DownloadPDF. MFs,
Positive resolution of the FDA-DOJ issue could be another positive trigger and enable RBXY to cover lost ground in the US. We believe recovery in the US base business sales, post resolution, is likely to be gradual and more accretive to earnings than sales, as assets have been underutilized and fixed costs have soared due to higher legal and consultation costs. We estimate incremental EPS of INR4.6 per share (option value of INR 74) on back of positive resolution.
FIIs Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock 1 month 3 months 12 months (0.6) (17.2) 5.1
63.8 12.0 7.5 16.7 NIL
Nifty 8.9 2.5 11.9
Outlook and valuations: Fairly valued; initiating coverage with HOLD

Current valuations, in our view, already factor in potential upsides in the base business. However, positive resolution of the FDA-DOJ issue and/or clarity on Lipitor launch could be potential triggers for the stock. We initiate coverage with HOLD/Sector Performer recommendation/rating with SOTP-based value of INR 432 per share, valuing the base business at INR 338 per share (20X one year forward PE). NPV of Para IV is INR 94 per share. Our estimates on core earnings fully reflect the benefits of revival in its base business operations.
Financials Year to December Revenues (INR mn) Rev growth (%) EBITDA (INR mn) Adjusted net profit (INR mn) Shares outstanding (mn) Adj. Diluted EPS (INR) EPS growth (%) P/E (x) EV/EBITDA (x) ROAE (%)
CY09 74,529 0.4 6,106 3,586 420.4 8.5 60.5 55.0 35.3 9.0
CY10 87,106 16.9 16,802 12,929 421.0 30.7 260.6 15.2 12.1 28.1
CY11E 102,450 17.6 22,600 14,989 421.0 35.6 15.9 13.1 9.0 27.1
CY12E 111,900 9.2 22,500 14,548 421.0 34.6 (2.9) 13.5 8.6 20.4
Edelweiss Securities Limited Edelweiss Securities99 Limited
Investment Rationale
CY11 guidance underlines emerging markets as future growth drivers
RBXYs CY11 revenue guidance of USD 1.87 bn (including Aricept, but excluding other Para IVs) implies base business growth of 14% in CY11E. The growth guidance holds significance as it underlines importance of EMs as future growth drivers. During CY10, the companys base business posted strong organic growth of 12% Y-o-Y, driven by 23% growth in Africa, 17% each in CIS and Latam, and 13% in the domestic formulation business. Further, US generics also grew 35% Y-o-Y, largely driven by strong sales (post exclusivity) from generic Valtrex. Chart 1: Base business growth guidance of 14% in CY11 1,900
1,800
(USD mn)
Ranbaxy expect base business growth of 14% in CY11E
1,700 1,600 1,500
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. 1,400 CY10 CY11
Base
Para IV
RBXY has identified seven priority marketsIndia, Brazil, Mexico, South Africa, Nigeria, CIS, and Romaniawithin EMs, which are currently contributing over USD 100 mn each and will continue to drive strong organic growth, in our view. India is the key component of the companys EM strategy as it is committed to be No. 1 (in terms of market share) through both organic as well as inorganic initiatives. Similarly, in other EMs, the focus will be to grow profitably by leveraging Daiichi- Sankyos pipeline. Daiichi-Sankyo, in its mid-term business plan, has guided to 23% CAGR from EMs over FY10-13 where RBXY will be used as a front-end vehicle. Table 1: Key growth drivers within emerging markets (USD mn)
CY09 India Africa CIS LatAM Asia Romania Total Total base business % of overall base revenue 337 125 86 71 120 76 815 1,400 58.2
CY10 384 154 101 83 100 80 902 1,545 58.4
% chg 13.8 23.2 17.4 16.9 (16.7) 5.3 10.6 10.3
CY11 438 223 116 95 112 90 1074 1,755 61.2
CAGR (CY10CY12 12E) 504 246 132 108 124 100 1214 2,009 60.4 14.6 26.3 14.5 14.2 11.5 12.0 16.1 14.1
100

Table 2: Daiichis guidance implies 23% growth in EM through RBXY (Yen bn)
FY10 Net sales Japan US EU ASCA* Others Ranbaxy 960.0 470.4 220.8 115.2 86.4 67.2 148
FY13E 1150.0 494.5 310.5 149.5 161.0 34.5 270
Growth (%) 6.2 1.7 12.0 9.1 23.1 (19.9) 22.2
Source: Company, Edelweiss research Note: * ASCA is term used for emerging markets outside US, EU and Japan
Project Virat: Positive traction over past three months

RBXYs domestic business has been a laggard in the past despite strong franchise in CVS, anti-infective, and dermatology segments. The company posted a 6.7% CAGR over CY05-10 vis--vis industrys average 14.4% growth. Chart 2: Domestic growth has lagged industry 16,000
Historically domestic business has underperformed
20.0 16.0 12.0 8.0 4.0 0.0
12,800 9,600 6,400 3,200 0 CY07 CY08 CY09 Ranbaxy growth CY10 India sales (excl consumer)
(INR mn)
IPM growth
Chart 3: RBXY- Domestic business is largely concentrated on acute segment
Others Urology 9% 4% Pain mgmt. 9% Gastrointestinal 6%
CVS 15% CNS 6% Anti-diabetics 3% Respiratory 4% Dermatology 9%
Chronic 28%
Anti infective 35%

101
(%)

In most therapeutic areas, except CVS, RBXY has lost market share (Table 3) which is evident from the fact that growth in most therapies has been lower than industry. Table 3: Most therapies lagging industry growth (%)
Therapeutic area Anti infective CVS Pain mgmt. Dermatology Gastro-intestinal CNS Respiratory Urology Anti-diabetics
% of total 35 16 9 9 6 6 4 4 3
Market share 8.1 4.9 6.5 8.1 2.5 3.6 2.1 12.3 2.3
Ranbaxy growth 6.8 20.2 18.5 12.1 1.1 5.0 6.5 25.9 9.2
Industry growth 13.4 16.5 13.8 14.4 14.1 14.1 14.5 16.8 21.0
Daiichi-Sankyos post acquisition strategy lays strong focus on growth from the domestic market. Consequently, RBXY management has renewed its strategic focus with significant investments over CY11 to regain leading market share in India. Management has undertaken several initiatives under Project Viraat such as increasing reach (field force has been expanded from 2,500 to 4,300), portfolio optimization, new launches (60 till date), hospital focus as well as shifting of the operational team from Delhi to Mumbai. While 124.124.255.5 leader in metros and tier-1 markets with more ISIEmergingMarketsPDF in-sdmcpl01 fromthe company is a on 2011-11-09 01:19:45 EST. DownloadPDF. than 6.5% share, the focus is to expand reach to tier II and IV towns to capitalize on the penetrationdriven growth opportunity. Though it is early to estimate the impact of Project Viraat, growth over the past three months (as seen in monthly growth trend) is a positive indicator, with initial signs of turnaround in the domestic market. Over the past three months, RBXY has outpaced the industry growth and grew by 26-28% in Dec-Feb 2011 (chart 4). Moreover, as per our distributor survey, feedback is positive, especially from tier II and IV towns, which shows off late quicker pick up of RBXYs products. We expect its domestic business to post 15% CAGR over CY10-12E. Chart 4: Monthly trend growth implies strong growth 30.0
24.0
(% Y-o-Y)
Over last three months growth in domestic market has picked up
18.0 12.0 6.0 0.0
May-10
Jan-11
Aug-10
Sep-10
Nov-10
Dec-10
IPM
Ranbaxy
102
Mar-11
Apr-10
Jun-10
Oct-10
Jul-10
Feb-11

Multiple margin expansion drivers in base business
Over the past seven quarters, operating margins of RBXYs base business have seen a marked improvement. Although in lower teens, they have improved from 3% in Q2CY09 to 8.5% in Q4CY10. We expect them to improve from 8.4% in CY10 to 12.5% in CY12E driven by: (a) increased contribution from high margin geographies such as India, Africa, CIS, and Latam; (b) savings from divestment of NCE research; and (c) operational leverage by consolidating non-profitable businesses and cost optimisation. Chart 5: Base business margins improving
14.0 11.2
Base business margins have moved up from 3% in Q2 CY09 to 8% in Q4 CY10
13.3 11.0 9.6 9.8 8.8 8.0 8.5 10.5
12.5
(%)
8.4 5.6 3.0 2.8 0.0 0.1 5.7 5.5
CY11E
Brand Olvance Prastia Evista Tavanic Cravit Tavanic Olvance

RBXY is consolidating its position in EU by lowering the cost base. The company has also closed its London marketing office as well as scaled down operations in many nonprofitable countries. Similarly, it has also divested its stake in China, Vietnam, and Japan as part of the re-structuring exercise. It has further realigned its R&D strategy by transferring NDDR (New Drug Discovery Research) unit to Daiichi-Sankyo, saving USD 20-25 mn annually. Moreover, synergies with Daiichi-Sankyo for launching its patented products in India and other EMs coupled with its recent initiatives on developing more profitable field force franchises will further aid margin expansion. Table 4: Daiichis product launch in emerging markets
Date Apr'09 Jun'09 Sep'09 Aug'10 Oct'09 Mar'11 Jan'12 Dec'09
Market India India Romania Romania Mexico Singapore South Africa Kenya, Mozambique, Nigeria, Tanzania, Uganda, and Zambia
TA CVS CVS Osteoporosis Antibacterial Antibacterial Antibacterial CVS
Generic Olmesartan Prasugrel Raloxifene Levofloxacin Portfolio of Daiichi products Levofloxacin Levofloxacin Olmesartan
FDA resolution: Lever for margin expansion It has been more than 31 months since the US FDA issued an import ban on 30 drugs from Ranbaxy because of CGMP compliance failures at two of its manufacturing facilities,
Edelweiss Securities Limited Downloaded by in-sdmcpl01 from 124.124.255.5 at 2011-11-09 01:19:45 EST. ISI Emerging Markets. Unauthorized Distribution Prohibited. 103
CY12E
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
CY08
CY10

Dewas and Paonta Sahib (under AIP). Post this ban, the revenue of the company declined from USD 106 mn per quarter to USD 44 mn per quarter in Q4CY09. Although base business revenue of US has picked up, off late, led by higher market share of Valtrex post exclusivity, however, company is still incurring higher manufacturing and legal costs in US. Positive resolution of the FDA-DOJ issue will enable RBXY to optimise costs in the US generics business, wherein the company is currently manufacturing products out of the US Ohm facility (at higher cost than India), while on other, it is also incurring higher legal and consulting fees (USD 68 mn in CY09) to resolve the FDA issue. We believe post resolution of import alert on Dewas and Ponta Sahib, utilisation of these assets will be higher, resulting in positive operating leverage.
Successful monetisation of rich Para IV pipeline

RBXY has probably one of the most lucrative Para IV pipelines among domestic peers with 13 Para IV products addressing USD 23 bn opportunity (including 10 FTFs worth USD 18 bn). Despite a FDA issue in CY09, RBXY has been able to monetise all Para IV opportunities. It has generated USD 565 mn revenue and USD 305 mn PAT from the FTFs in CY09-10, which reflects the companys ability to monetise its highly lucrative Para IV pipeline. Table 5: Value accretion from earlier Para IV monetization (USD mn)
Revenue Imitrex Valtrex Flomax 20 360 50
PAT 10 200 35
NPV (INR) 1 22 4 7 34
Aricept* 135 60 ISIEmergingMarketsPDF in-sdmcpl01 Total 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. from 565 305
Source: Edelweiss research Note: Estimated revenue of USD 100 mn in CY11
Table 6: Future Para IV pipeline addresses USD 18 bn innovator market (USD mn)
Product Aricept Caduet Lipitor

NPV of Para-IV pipeline is INR 94 per share
Launch date Nov'10 Nov'11 Nov'11 Apr'12 Apr'12 Aug'12 Sep'12 Mar'13 Jan'14 May'2014
market size 2,300 300 5,300 1,000 380 3,100 2,492 270 211 2,675
No. of generic CY11E CY12E CY13E CY14E players 2 1 2 4 3 2 1 2 1 366 255 204 99 18 250 50 46 124 150 54 75 36 19 321 451 35
Provigil Oxycontin Actos Diovan Valcyte Rapamune Nexium FTF Total Para IV
Among the future Para IV pipeline, Lipitor is the most exciting PIV opportunity. It is a blockbuster drug with US sales of USD 5.3 bn and RBXY is entitled to FTF exclusivity on the product. Though the companys success with all other Para IVs, post FDA import ban, cannot be extrapolated to Lipitor launch, timely launch during the exclusivity period (November 2011) could have a large bearing on valuations. We believe there is uncertainty on RBXYs ability to launch Lipitor by November 2011, given its current

import ban. Unlike earlier Para IVs, Lipitor application has been filed out of the Ponta Sahib facility which is under serious allegation of fraudulent data and currently AIP (Application Integrity Policy). Although media reports suggest that validity assessment at the Ponta Sahib facility has already begun, which is a step closure to the final inspection of the facility to revoke the AIP, the timeline of the same cannot be ascertained. Moreover, Mylans suit against USFDA seeks clarity on approval status of RBXYs ANDA for Lipitor and has further raised doubts in investors minds. However, the FDA has filed an opposition to Mylans preliminary injunction and requested the court dismiss the same. FDA has further stated that its determination of RBXY's eligibility for exclusivity will necessarily be intensely fact-driven, entailing, among other things, an evaluation of whether the data in the companys atorvastatin application is unreliable. FDA is currently engaged in ongoing and confidential discussions with RBXY to resolve issues identified in the AIP letter. Scenarios on launch of Lipitor and its impact on earnings Given the uncertainty over the launch, various scenarios can play out which is further clouded by the pre-MMA nature of the ANDA challenge, legal complexities, and heightened political focus, where several US senators have weighed in on the importance of getting generics to market in a timely fashion. We have highlighted each of the scenarios and their sensitivity to RBXYs earnings. A. RBXY secures ANDA approval and launches by November 2011 In this 124.124.255.5 on 2011-11-09 securing EST. DownloadPDF. ISIEmergingMarketsPDF in-sdmcpl01 from scenario we have assumed RBXY 01:19:45 approval for ANDA (either by revoking of AIP at Ponta Sahib or site transfer) and subsequent launch on November 30, 2011, with 180 days exclusivity along with Watson (authorised generic). We further incorporate dynamics during exclusivity and post exclusivity. Pfizer has recently introduced co-pay card system which allows 33% discount over the current market price for a months supply. This will enable the company to retain market share and dampen pricing for generic Lipitor, thereby lower revenue for RBXY and Watson during exclusivity. The scenario assumes limited competition post 180 days exclusivity (4-5 additional players), which implies that price erosion will not be at commodity levels, resulting in meaningful sales post exclusivity. We expect Teva and Mylan to launch by May 2012, while the 30 months stay on Dr Reddys and Kudco expires on April 12 and they may launch the product at risk. In either case, we believe competition should not exceed beyond six-seven players until end CY12, which will help early entrants post decent sales. Overall, we have build NPV of INR 32 per share during exclusivity and INR 37 per share as recurring earnings post exclusivity from Lipitor for RBXY, in this scenario. B. RBXY parks exclusivity RBXYs ANDA has pre-MMA (Medicare Modernization Act) status, wherein exclusivity can only be triggered until the company launches the product. In this case, it is technically possible that RBXY may park exclusivity till it resolves the outstanding FDA issue. In other words, no other generic company will be able to launch pending completion of RBXYs exclusivity. This could be positive for Pfizer and Watson, where only one generic can be in the market for possibly more than six months.
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While technically there is no limit on how long RBXY could park its exclusivity, we see a number of swing factors such as: (i) RBXY will do this only in case it is sure that its ANDA is approvable and FDA issues could be resolved in the near term; (ii) we believe FDA will prefer multiple generics to come in to the market for such a large product and hence could grant approval to other generic players; and (iii) Teva and Mylan can settle with RBXY to launch during the exclusivity period C. RBXY relinquishes its exclusivity If RBXY believes there is little chance of its ANDA being approved, it could potentially monetise the opportunity by relinquishing its exclusivity and strike a deal with Teva We have assumed relinquishing of exclusivity as a base case scenario for arriving at our TP and/or Mylan for a potential payment or royalty as they get to launch their generic versions six months earlier. This is the base case scenario which we have assumed in our estimates as we believe that in any case, Ranbaxy must have protected their downside risk and time and again they have assured about the monetization of this opportunity. In the past, RBXY has used this option to monetise Flomax exclusivity by striking a deal with the innovator. In this case, though RBXY will be able to monetize the upside from 180 days exclusivity, it will lose recurring earnings from Lipitor post exclusivity. We estimate NPV of INR 21 per share if this scenario unfolds. D. RBXY licenses its exclusivity RBXY can potentially out license its product to another approvable generic manufacturer as the USFDA allows the first filer to waive its 180-days exclusivity. But, in order to do so with a pre-MMA application it must first start the exclusivity clock by gaining approval and shipping the product. We see a low probability of this scenario and do not believe the company will select it. 2011-11-09 this case, EST. DownloadPDF. ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on Moreover, in 01:19:45 though the impact will depend on the economics of the agreement, the value accretion to RBXY will definitely be lower relative to expectations of an outright launch. FDA rejects RBXYs ANDA It is possible that USFDA could eliminate RBXYs exclusivity and allow other approvable generic manufacturers to enter the market, a route pursued by Mylan. In this scenario, RBXY will not only lose out on NPV of INR 32 per share on Lipitor, but also the recurring earning of INR 1.9 per share post exclusivity.
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Table 7: Various scenario analysis and impact
Scenarios No. of players RBXY launches 30 Nov'11 3 players market (RBXY, WPI,PFE) RBXY parks exclusivity 2 players market (WPI and PFE) RBXY relinquishes exclusivity (base case) 4 players (WPI,PFE, MYLAN and Teva RBXY licenses exclusivity FDA rejects RBXY's ANDA
4 players 3 players market (WPI,PFE, MYLAN (Teva or Mylan along with WPI and and Teva) PFE) RBXY license its product to others generic company for potential upfront payment; assuming USD250mn 21 RBXY will not be able to launch Lipitor for next 2630 months
Assumptions
50% discount; 35% MS
RBXY manages approval after six months from FDA, i.e, May'12
RBXY strikes a deal with Teva and Mylan for upfront Royalty (USD 250 mn)
NPV during exclusivity (INR) Recurring earnings post exclusivity
32 INR 1.85 in CY12; EPS cont. (10%)
0 Assuming co will launch after six months; EPS contributionINR1.85 37
21
RBXY will not be able to RBXY will have RBXY will not be launch the product small market share able to launch the post exclusivity product
Overall NPV contribution of Lipitor - including recurring eanings post exclusivity (INR) Fair value of base business (ex Lipitor) (INR) NPV of Para IV (ex Lipitor) (INR)
69
21
21
338 73
338 73
338 73
338 73
338 73 411 (4.9)

Target price (INR) 448 432 ISIEmergingMarketsPDF in-sdmcpl01 480 from 124.124.255.5 on 2011-11-09 432 01:19:45 EST. DownloadPDF. % impact to our target price 11.1 3.7 0.0
Positive FDA-DOJ resolution: A potential trigger

RBXY management has been seeking a composite resolution of the FDA-DOJ issue. Few media reports lately have suggested that the validity assessment of the Ponta Sahib facility has begun, which could be the penultimate step in the process of revoking the AIP. While management is confident of resolving the FDA-DOJ issue, its timeline cannot be ascertained. A resolution will definitely be positive for RBXY and enable it to cover lost ground in the US market. Post FDA ban and import alert, RBXYs US business sales plummeted from USD 106 mn in Q2CY08 to USD 44 mn in Q4CY09 (ex one-offs; current run rate is USD65-70mn USD). We believe post resolution, recovery in the US business will be gradual and is likely to be more accretive to earnings than revenue. RBXY is currently manufacturing products out of the Ohm facility in the US where manufacturing cost is higher than in India, and on other hand the company has incurred high fixed costs on consultants and legal resources to resolve the FDA-DOJ issue. Moreover, positive resolution of the issue will also bring clarity on the monetization of its FTF pipeline along with other niche opportunities such as Penems (potential USD 50-60 mn revenue in the first year of launch). RBXY is the second generic company (Orchid Pharma was first) to file ANDAs for both Imipenem (base patent expired in September 2009 in US; no generic approval) and Meropenem (base patent will expire in September 2010 in US). Penems require dedicated manufacturing facilities and are, therefore, expected to be limited competition products. Overall, there are just five players who have filed DMFs for both these products, making it a lucrative opportunity for RBXY.
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Currently, Hospira (through Orchid ANDA) and Sandoz are marketing Meropenem in the US. Despite Imipenem base patent expiry in September 2009, no generic has been approved in the US so far (most likely RBXY has FTF status on Imipenem). We believe post resolution of the Dewas issue and approval for Penems, RBXY will be able to launch these products in the market. We are of the view that Carbapenem launch can add USD 50-60 mn revenue for RBXY within the first year of launch. Table 8: Potential earning accretion on positive resolution of FDA-DOJ issue
Cost savings on FDA-DOJ resolution Legal and processing charges
(INR mn) 1,034
Remarks Legal and professional charges have increased from 2.8% of revenue in CY07 to 4.3% in CY09 Assuming 50 bps expansion in EBIDTA due to saving in manufacturing cost and 1% of export benefits on incremental exports
Saving in manufacturing cost and export benefits
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Total savings Total savings net of tax Incremental EPS
1,150 840 2 CY11 CY12 16.9 2.7 Remarks Current estimates including Lipitor launch Assuming positive FDA resolution and timely approval of penem's in US (one full year impact in CY12)
Base business EPS Incremental EPS from Penem's
13.6
Incremental EPS from savings 2.0 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Total base business EPS 21.5 Total incremental EPS incremental delta on FDA resolution Incremental value per share (20x incremental EPS) Less: Penality 4.7 28.0% 94 20 Assuming one time penalty of USD200mn; few media reports also indicated USD400mn penalty
Option value of FDA resolution
74
extent of penalties remains a hangover Given the extent of inquiry by DOJ, it seems a near certainty that RBXY will be asked to pay financial penalties to settle the ongoing FDA issue. However, quantum of the penalty cannot be estimated. The number of financial settlements, off-late, has increased, with the FDA tightening its regulatory standards. Few of the recent settlements involving large players are Glaxo (USD 750 mn), Schering Plough (USD 500 mn) and Genzyme (USD 175 mn) in the branded space, while RBXY could be the first major settlement in the generic counterpart. We estimate the penalty to range from USD 200-400 mn (impact of INR 20-40 per share). We believe the penalty could be a short-term negative for the stock; however, complete resolution of the FDA issue is a long-term positive for the company.
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Table 9: Recent financial settlements with FDA
Date 26-10-10 Company Glaxo Facility Cidra, Pureto Rico Allston (US) FDA issue Manufacturing violations Manufacturing violations Violations of manufacturing standards Settlement with the FDA GSK has been asked to pay USD750mn Genzyme agreed to pay USD175mn under consent decree Schering signed a consent decree and paid a fine of USD500mn
Remarks Equivalent to the revenue of 4 products under question Equivalent to 18.5% of the revenue Genzyme received from selling these products
24-05-10
Genzyme
18-05-02
Schering Plough
NJ and Pureto Rico
Japan: Long-term growth driver

Japan generics market offers significant potential for all players, as generics currently contribute only 15% of the total prescription and 7% to total value of the overall Japanese pharma market (much lower than the US where the penetration is as high as 76%). Mounting healthcare costs has forced the Japanese government to undertake various initiatives to encourage generic usage and the government is committed to increase the penetration to 30% by 2013-14. In order to tap this opportunity, DaiichiSankyo has already floated Daiichi-Sankyo Espha, a subsidiary, which will market generic drugs as well as Daiichi-Sankyo products in Japan. RBXY will benefit by supplying the products to Daiichi-Sankyo. However, it will take three-four years for it to make a meaningful contribution to RBXY sales.
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Valuation
Positive FDA resolution or clarity on Lipitor launch critical to stock performance
Post 12% correction in the stock price in the past three months, key question on investors minds is, what to do with the stock? Though we do agree that post the sharp correction the stock is currently trading at fair value, the upside from here primarily depends upon a lot of variables such as clarity on Lipitor launch, extent of penalty FDA will impose and composite resolution of the FDA-DOJ issue. Though we believe RBXYs base business has already bottomed out and we are positive on the companys long-term prospects, current valuations have factored in most of the improvement in the base business. We believe outcome of the FDA-DOJ issue and clarity on Lipitor launch could be potential triggers for the stock. We continue to maintain our cautious outlook on the company. Chart 6: Historical valuation trendOne year forward P/E 800
640 480 320
32x 24x 16x 8x
(INR)
0
Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
(INR)
Oct-06
Oct-07
Oct-08
Oct-09
We have arrived at a target price of INR 432 per share We have valued the company on its CY12E base business earnings on account of it fully reflecting the benefits of revival in the base business, strong earnings traction in domestic and other emerging markets and operating performance. We have valued its base business at INR 338 per share (20x CY12E base EPS of INR 16.9). The NPV of our Para IV pipeline is INR 94 per share. We have arrived at a price target of INR 432. We initiate coverage on RBXY with HOLD/Sector Performer recommendation/rating. Table 10: SOTP base value
SOTP Base business EPS Dec-12 Target P/E Value of base business (INR per share) NPV per share for one-off sales Total target price 16.9 20.0 338 94 432
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Oct-10
Key Risks
Slower recovery in base business profitability
We have assumed 400 bps expansion in operating margins over the next two years in the base business driven by change in product mix and cost optimization. Slower-thanexpected recovery in base business margins can impact our earnings estimate.
Inability to monetise Lipitor exclusivity

Despite the ongoing FDA issue, we have built option value of INR 69 per share from Lipitor launch in the US. This is because the company in the past was able to monetise all other Para IV opportunities. Inability to monetise the same can negatively impact valuations.
Higher-than-expected penalty for FDA resolution

We have assumed USD 200 mn as financial penalty by FDA-DOJ to settle the ongoing issue. Higher-than-expected penalty could lead to downside to our target price.
Significant delay in FDA resolution

A potential resolution of the FDA issue is not part of our estimates currently. However, a significant delay of beyond six-eight months can cap the option value of INR 74 per share. Moreover, it can also impact the base business in the US.
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Company Description
RBXY, incorporated in 1961, is Indias largest pharma company with presence in domestic, emerging, and regulated markets. The company has strong presence in the domestic market and ranks No. 2 as per IMS. Over the years it has build a well diversified model with presence in various international markets (including LATAM, Europe, Russia, Africa, Asia, US and Canada) which renders sustainable growth to overall business. Also, the company, historically, has been successful in developing a strong FTF/exclusivity product pipeline (launched products such as Sumatriptan, Valacyclovir, Oxcarbazepine and Aricept in US over past two years) and despite an overhang from AIP imposed by USFDA in 2008, has been successful in monetising these opportunities. In 2008, the second generation promoters sold their stake to Daiichi Sankyo, which now owns ~64% in the company. Chart 7: Revenue mix
Latin America API 6% 5% Asia Pacific 5%
Consumer Healthcare 3% India 18%
Europe, CIS, Africa 28% ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. US & Canada 35%
Chart 8: Current shareholding pattern
Retail & others 17%
FII's 7%
MF & inst 12%
Promoters 64%
Source: NSE
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Therapeutic area Anti infective CVS Pain mgmt. Dermatology Gastro-intestinal CNS Respiratory Urology Anti-diabetics % of total 35 16 9 9 6 6 4 4 3 Market share 8.1 4.9 6.5 8.1 2.5 3.6 2.1 12.3 2.3 Ranbax Industry y growth growth 6.8 20.2 18.5 12.1 1.1 5.0 6.5 25.9 9.2 13.4 16.5 13.8 14.4 14.1 14.1 14.5 16.8 21.0
CAGR (5yr) 6.8 14.4
24.8 13.8
(%)

Brands REVITAL STORVAS MOX VOLINI CIFRAN ZANOCIN CEPODEM SPORIDEX ROSUVAS CILANEM Total Therapy Acute Chronic Acute Acute Acute Acute Acute Acute Chronic Acute % of total 5.7 5.5 4.7 4.6 4.0 2.6 2.6 2.5 2.3 2.1 36.6 Market share 87 22 41 49 34 20 13 27 37 40 Growth rate 17 17 (1) 49 (3) 8 25 1 55 48
(%)
Contrbution to growth 8.2 7.8 (0.6) 14.8 (1.2) 1.9 5.0 0.1 7.9 6.6 50.5

Therapy wise break-up Field force expansion and productivity
Pain mgmt. 9% Gastrointestinal 6% Anti infective 35%

CNS 6%
Antidiabetics 3% Respiratory 4%
3,300 2,700 2,100 1,500 CY06 CY07 CY08 CY09 CY10 CY11E Field force Productivity
5 3 2 0
Dermatology 9%
16.0 12.0 11% 6 2 4 0.0 Volume
15% 6 3 6
35
28
Industry21 growth
Sales (INR bn)
28 21 14 7 0
14
(%)
8.0 4.0
7 0
Sun Pharma
Ranbaxy
Cadila
Pfizer
Lupin
Cipla
GSK
Ranbaxy Industry Price New product introductions

Dr Reddy's
Chronic 28%
Urology 4%
Others 9%
CVS 15%
4,500 3,900
CAGR (5%)
9 7
Financial Outlook
41% earnings CAGR in base business
We expect 6% earnings CAGR over CY10-12E driven by 41% CAGR in base business earnings and monetization of FTF opportunity (INR 22.6bn of PAT over CY10-12E). We expect base business revenue to post 12% CAGR on back of growth in (a) Africa (25% CAGR); (b) CIS (13.5%); (c) India (14%); and (d) US base business (8%). We expect base business operating margins to expand by 400bps to 12.5% in CY12E driven by higher contribution from branded generic and USD 25 mn savings on account of NCE research. We expect base business EPS to grow from INRI 8.5n CY10 to INR 16.9 in CY12E, driven by recovery in the base business and strong operating performance. Table 11: Differentiating base and Para IV CY10 (INR mn) CAGR (%)
CY11E 34,445 12,782 16,932 4,731 3,020 9,442 4,032 10,049 5,227
CY12E 36,097 14,748 11,457 9,892 3,321 9,986 4,516 11,053 5,958
US Base Para IV Nexium supply Canada Europe (Ex Romania) Romania Africa CIS
27,456 12,624 13,957 875 2,791 8,786 3,661 7,047 4,622
14.7 8.1 (9.4) 236.3 9.1 6.6 11.1 25.2 13.5 14.0 13.2 10.6 4.1 13.4 (9.4) 11.9 15.7 36.0 (12.5) 280.8 6.1 40.8 (24.7) 267.9 6.1 40.8 (24.7) 267.9
India 17,557 19,706 22,832 ISIEmergingMarketsPDF in-sdmcpl01 Lat AM124.124.255.5 on 2011-11-093,798 from 01:19:45 EST. DownloadPDF. 4,294 4,867 Asia API Total revenue Para IV Base EBIDTA Base Para IV Nexium supply PAT Base Para IV Nexium supply EPS Base Para IV Nexium supply 4,576 5,217 85,510 13,957 70,679 16,802 6,108 10,475 220 12,929 3,583 9,182 165 30.7 8.5 21.8 0.4 5,040 5,387 100,641 16,932 78,977 22,600 8,472 12,699 1,429 14,989 5,735 8,254 1,000 35.6 13.6 19.6 2.4 5,594 5,656 109,881 11,457 88,532 22,499 11,291 8,020 3,187 14,548 7,104 5,213 2,231 34.6 16.9 12.4 5.3
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Income statement Year to December Income from operations Net revenues Licensing income Other operating income Total operating expenses Materials cost Employee cost R&D cost Selling, admin and general expenses Other expenses EBITDA Depreciation and amortisation EBIT Net interest expense/(income) Other income Profit before tax (excl extraordinaries) Provision for tax Core profit Extraordinary items Minority interest & others CY08 74,214 72,414 237 1,562 69,213 27,704 9,670 4,314 16,543 10,982 5,001 2,825 2,176 2,055 2,706 2,827 0 2,827 (17,827) 163 CY09 74,529 73,294 688 547 68,423 31,657 14,175 4,875 9,285 8,431 6,106 2,676 3,430 710 2,402 5,123 1,102 4,020 4,976 142 CY10 87,106 85,355 799 951 70,303 30,978 15,060 4,577 11,577 8,111 16,802 3,397 13,405 614 2,795 15,586 1,447 14,139 5,415 185 CY11E 102,450 100,387 799 1,265 79,850 36,240 18,070 4,519 12,682 8,340 22,600 3,107 19,493 1,832 2,514 20,175 3,637 16,538 (5,628) 142 (INR mn) CY12E 111,900 109,587 799 1,514 89,400 41,039 20,164 4,745 14,246 9,205 22,500 3,348 19,153 1,614 2,653 20,191 5,452 14,740 0 192 14,548 14,548 421 34.6 421.0 34.6 42.5 3.5 10.0
Reported profit after minority interest (15,163) 8,854 19,369 10,769 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Adjusted PAT after minority interest 2,234 3,586 12,929 14,989 Equity shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) adjusted CEPS (INR) Dividend per share (INR) Dividend payout (%) Common size metrics- as % of net revenues Year to December Cost of revenues Employee cost Selling, admin and general expenses R & D cost Total operating expenses Depreciation and amortisation Interest expenditure EBITDA margins Net profit margins Growth metrics (%) Year to December Revenues EBITDA Net profit PBT Adj. EPS CY08 9.4 (45.3) (68.3) (71.7) (59.6) CY09 0.4 22.1 42.2 81.2 60.5 CY10 16.9 175.2 251.7 204.3 260.6 CY11E 17.6 34.5 17.0 29.4 15.9 CY08 37.3 13.0 22.3 5.8 93.3 3.8 2.8 6.7 3.9 CY09 42.5 19.0 12.5 6.5 91.8 3.6 1.0 8.2 5.5 CY10 35.6 17.3 13.3 5.3 80.7 3.9 0.7 19.3 16.6 CY11E 35.4 17.6 12.4 4.4 77.9 3.0 1.8 22.1 16.5 420 (36.1) 420.4 5.3 13.1 0.0 0.0 420 21.1 420.4 8.5 15.6 0.0 0.0 421 46.0 421.0 30.7 41.2 2.0 6.5 421 25.6 421.0 35.6 46.3 3.6 10.0
CY12E 36.7 18.0 12.7 4.2 79.9 3.0 1.4 20.1 13.5
CY12E 9.2 (0.4) (10.9) 0.1 (2.9)
115

Balance sheet As on 31st December Equity capital Share warrants/appliaction money Reserves & surplus Total shareholders funds Borrowings Deferred tax liability (net) Minority interest Sources of funds Gross block Depreciation Net block Capital work in progress Total fixed assets Investments Inventories Sundry debtors Cash and bank balances Loans and advances Total current assets Sundry creditors Other current liabilities Provisions FY09E 2,102 1,757 39,104 42,962 43,114 (12,229) 675 74,522 61,942 17,042 44,900 4,707 49,607 5,432 19,643 13,310 23,956 10,012 66,922 8,183 31,536 7,720 CY09 2,102 1,759 39,573 43,434 36,295 (4,746) 533 75,517 62,785 17,880 44,906 6,231 51,137 5,407 18,407 18,400 12,416 10,863 60,086 14,394 18,117 8,602 CY10 2,105 66 53,876 56,047 43,348 (227) 647 99,815 67,050 21,571 45,479 3,818 49,296 4,985 21,926 16,053 32,644 16,309 86,932 18,977 12,888 9,534 CY11E 2,105 66 62,892 65,064 26,176 (227) 789 91,801 72,837 23,768 49,069 3,663 52,732 4,985 25,558 18,873 14,926 18,025 77,382 21,556 15,717 6,024 (INR Mn) CY12E 2,105 66 75,740 77,911 20,176 (227) 981 98,840 78,500 26,856 51,644 3,583 55,227 4,985 27,886 20,602 19,735 19,313 87,536 24,498 17,097 7,313 48,908 38,628 98,840 185 (INR mn) CY08 (15,163) 2,825 51,026 38,688 (23,526) 15,161 (6,813) 8,349 CY09 8,854 2,676 (38,597) (27,067) 11,031 (16,036) (4,206) (20,242) CY10 19,369 3,397 (50,780) (28,014) 6,332 (21,682) (1,557) (23,239) CY11E 10,769 3,107 (45,377) (31,502) 6,269 (25,233) (6,542) (31,775) CY12E 14,548 3,348 (34,412) (16,517) (266) (16,783) (5,843) (22,626)
Total current liabilities and provisions 47,438 41,112 41,398 43,297 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Net current assets 19,484 18,974 45,534 34,084 Uses of funds Book value per share ( INR) Free cash flow Year to December Net profit Depreciation Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow Cash flow metrices Year to December Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid CY08 15,161 16,391 (21,945) 9,607 (6,813) (43,065) CY09 (16,036) (6,350) (3,079) (25,465) (4,206) (43,537) CY10 (21,682) 19,599 (11,798) (13,881) (1,557) (56,180) CY11E (25,233) (8,156) (16,089) (49,477) (6,542) (65,218) 74,522 102 75,518 103 99,815 133 91,801 155
CY12E (16,783) 6,847 (20,794) (30,730) (5,843) (78,096)
116

Profitability and liquidity ratios Year to December ROAE (%) ROACE (%) Inventory days Debtors days Payable days Cash conversion cycles Current ratio Debt/ EBITDA Debt/equity Adjusted debt/Equity Operating ratios (x) Year to December Total asset turnover Fixed asset turnover Equity turnover Du Pont Analysis Year to December NP margin Total assets turnover Leverage multiplier CY08 3.7 1.0 2.1 CY09 5.3 1.0 1.7 CY10 16.3 1.0 1.8 CY11E 16.3 1.0 1.6 CY12E 13.3 1.1 1.3 20.4 CY08 1.0 1.7 2.0 CY09 1.0 1.6 1.7 CY10 1.0 1.9 1.7 CY11E 1.0 2.1 1.7 CY12E 1.1 2.2 1.5 CY08 7.5 4.0 234 68 109 194 1.4 8.6 1.0 1.0 CY09 9.0 6.7 216 77 128 165 1.5 5.9 0.8 0.8 CY10 28.1 22.4 234 71 194 112 2.1 2.6 0.8 0.8 CY11E 27.1 29.1 236 61 201 96 1.8 1.2 0.4 0.4 CY12E 20.4 26.2 234 63 202 96 1.8 0.9 0.3 0.3
ROAE 7.5 9.0 28.1 27.1 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Valuation parameters Year to December Adjusted EPS (INR) CY08 5.3 CY09 8.5 CY10 30.7 CY11E 35.6
CY12E 34.6
EPS YoY growth (%)

(59.6)
13.1 88.2 4.6 2.8 42.2 0.0
60.5
15.6 55.0 4.5 2.9 35.3 0.0
260.6
41.2 15.2 3.5 2.3 12.1 0.4
15.9
46.3 13.1 3.0 2.0 9.0 0.8
(2.9)
42.5 13.5 2.5 1.7 8.6 0.7
117
118
Pharmaceuticals
Company Update
SUN PHARMACEUTICALS
Undisputed leader
Differentiated strategy in domestic market to render higher growth

Sun Pharma (SUNP), with its unique ability to identify therapeutic gap areas and launch products ahead of market, dominates the Indian chronic therapy segment (62% of domestic sales). The company also tops our survey results and has emerged an undisputed choice among distributors. SUNP has innovatively built its doctors franchise by engaging them at an early stage, which enables it to retain market share. It is now focused on building a wider product portfolio in other therapies (such as respiratory) and plans to launch 15 products per annum. Recent tie-up with Merck for differentiated products is likely to further augment the companys product pipeline for domestic market, in our view. We expect the domestic business to grow at 20% CAGR over FY10-13E, higher than peers.
April 25, 2011

Reuters: SUN.BO Bloomberg: SUNP IN
EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market Hold Outperformer Low Equalweight
MARKET DATA
Margin upsides from core business

We expect Taros operating margin (27%) to remain under pressure due to lack of new products in its R&D pipeline, pricing pressure on existing base of business and integration risk. We expect SUNPs core EBITDA margins (including Taro) to improve by 120 bps over FY12-13E, led by higher contribution from domestic and emerging markets and expected ramp-up from Caraco in H2 FY12.
CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn)
: : :
INR 446 511 / 303 1,035.6
: 461.9 / 10,402.5 1,087.0
Avg. Daily Vol. BSE/NSE (000) : SHARE HOLDING PATTERN (%)
Current pipeline offers upsides to US generics business

pending Taro and 29 pending Caraco), which will support sustainable growth in US generics over the next three-four years. We expect the US base business (ex-taro) to post 15% CAGR over FY11-13E, while special products (Taxotere, Gemzar, Stalevo) would contribute USD 145-150 mn of sales.
Promoters* MFs, FIs & Banks FIIs Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%)
: : : : :
63.7 6.7 19.0 10.6 0.4
ISIEmergingMarketsPDF in-sdmcpl01 fromof 149 pending approvals (including 28 SUNP currently has a large pipeline 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF.
ROW markets to depict strong growth trajectory

The company expects ROW to post strong double-digit growth over the next 3-4 years and is, therefore, raising its localised therapeutic focus. Moreover, the current tie-up with Merck adds visibility for higher growth from these markets.
1 month 3 months 12 months
Stock 2.6 (8.7) 24.7
Nifty 8.9 2.5 11.9
Outlook and valuations: Strong levers for growth; maintain HOLD

We are positive on SUNP over the long term due to its strong franchise in domestic market and growth potential in the US. However, current valuations fully discount base business growth and incremental upsides from exclusivitydriven revenues in the US. We maintain HOLD/Sector Outperformer recommendation/rating on the stock.
Financials Year to March Revenues (INR mn) Rev growth (%) Operating profit (INR mn) Adj. Net profit (INR mn) Shares outstanding (mn) EPS (INR) EPS growth (%) P/E (x) EV/EBITDA (x) FY10 40,075 (4.2) 13,633 13,194 1,035.6 12.7 (27.4) 35.0 31.5 FY11E 49,440 23.4 18,068 16,551 1,035.6 16.0 25.4 27.9 23.1 FY12E 52,113 5.4 18,213 17,113 1,035.6 16.5 3.4 27.0 22.3 FY13E 62,218 19.4 21,854 20,671 1,035.6 20.0 20.8 22.3 18.0
Edelweiss Securities Limited Edelweiss Securities Limited 119

Table 1: Financial Snapshot
FY10 SUNP Revenue Growth (%) EBITDA EBITDA margin (%) EBITDA margin (ex-one off) % PBT Adj PAT Margin (%) EPS - C ore EPS - Special products (one-off) 13,633 35.8 26.3 13,815 13,194 34.6 12.7 8.8 4.0 38,086 49,440 29.8 18,068 36.5 30.5 18,250 16,551 33.5 16.0 12.1 3.9 2,440 27.6 27.6 1,715 1,272 14.4 1.2 1.2 FY11E Taro 8,830 C onsol 58,269 53.0 20,507 35.2 30.0 19,964 17,391 29.8 16.8 12.9 3.9 SUNP 52,113 5.4 18,213 34.9 32.5 18,669 17,113 32.8 16.5 16.3 0.3 4,657 25.1 25.1 3,381 2,536 13.7 2.4 2.4 FY12E Taro 18,554 C onsol 70,667 21.3 22,871 32.4 30.5 22,050 18,787 26.6 18.1 17.9 0.3 SUNP 62,218 19.4 21,854 35.1 33.0 22,550 20,671 33.2 20.0 19.5 0.5 4,982 25.6 25.6 3,658 2,744 14.1 2.6 2.6
(INR mn)
FY13E Taro 19,481 C onsol 81,699 15.6 26,835 32.8 31.2 26,208 22,481 27.5 21.7 21.2 0.5
Table 2: Revenue mix (Consolidated, including Taro) Year to March FY10 FY11E
% change 53.2 24.7 85.8 12.2 4.3 10.0
FY12E 64,290 27,000 37,290 40 412 6,288 1,224
% change 22.6 18.3 25.9 60.0 114.8 9.8 9.0
FY13E 74,717 31,866 42,851 80 433 6,893 1,322
(INR mn) % change
Total formulations Domestic formulations International formulations - of which C araco (USD mn) - of which Taro (USD mn) Total bulk Domestic bulk
34,246 18,301 15,945 22 5,491 1,021
52,460 22,831 29,629 25 192 5,727 1,123
16.2 18.0 14.9 100.0 5.0 9.6 8.0 10.0 1.5 15.6
International bulk 4,470 4,604 3.0 5,064 10.0 5,571 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Others 78 82 6.1 89 7.6 90 Total sales 39,815 58,269 46.4 70,667 21.3 81,699
Chart 1: Historical valuation trend One year forward P/E 600
26x
480 360
19x
(INR)
12x 240 120 0 5x
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
120
Apr-11
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10

Table 3: SOTP based value SOTP (INR)
Base business EPS Mar-13 Target P/E Value of base business (INR per share) NPV per share for one-off sales Total target price
21.2 22.0 467 10 477

Table 4: Niche product pipeline (including Para IV filings) for US market Market Brand Name Molecule Innovator Size (USD mn)
Taxotere C ardizem C D Gemzar Gabitril Prandin Stalevo Lyrica Eloxatin C omtan C ymbalta Docetaxel DILTIAZEM Gemcitabine Tiagabine Repaglinide C arvidopa/Levadopa/ Entacapone Pregabalin oxaliplatin Entacapone Duloxitine Sanofi Aventis Biovail Eli Lilly C ephalon Novo Nordisk Orion Pfizer Sanofi Aventis Orion Eli Lilly 1100 70 600 60 250 120 1596 1000 90 2896
Launch date Any time Waiting approval May'11 Sep'11/ April'12 March'12 April'12 July'12 Aug'12 April'13 June'13
No. of generic players 3 1 6 1 1 1 8 4 2 10
Type
Para IV Para IV Para IV Para IV
Para IV Para IV Para IV Para IV Para IV
Lunesta Eszopiclone Sepracor 760 May'14 Multiple ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF.10 Strattera Atmoxitine HC L Eli Lilly 500 Not confirmed Gleevec Namenda Imatinib Memantine Novartis Forest 1000 1300 July'15 Jan'15 1 Multiple
121
Company Description
Promoted by Mr. Dilip S Shanghvi, a first generation entrepreneur, SUNP is Indias fourth largest pharmaceutical company. It is also one of the fastest growing Indian pharmaceutical companies with revenue and profit growth of 26% CAGR and 30% CAGR over FY05/10, respectively. It also has one of the highest margins amongst its domestic peers. SUNP has significant presence in the domestic formulation and the US generic market. Indian domestic formulations sales, at INR 18 bn in FY10, constitute almost 45% of sales. With over 3,000 medical reps, SUNP has a market share of 3.7% and is a top five player in the Indian domestic market. It has been consistently ranked #1 across leading therapeutic categories like psychiatry, neurology and CVs. Taros acquisition in the US generics space augments its ANDA pipeline with products differentiated in dermatology and pediatrics therapies. Chart 2: Revenue mix (%) Excluding Taro Including Taro
APIs 12%
APIs 10%
US generics 29% ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. US generics 44% ROW markets ROW (ex-US) markets 14% (ex-US) 13%
Domestic formulatio ns 46%
Domestic formulatio ns 32%
Retail & others 10%
FII's 19%
MF & inst 7%
Promoters 64%
Source: NSE
122

Therapeutic area Neuro-psychiatry Cardiology Gastroentrology Diabetology Gyneacology Pain Respiratory % of total 27 19 14 11 7 5 5 Market share 16.4 6.2 4.9 6.8 6.8 3.3 2.3 Sun Industry growth 19.5 19.6 23.2 26.9 19.1 36.8 12.6 14.1 16.5 14.1 21.0 21.9 13.8 14.5
CAGR (5yr) 21.9 14.4
24.7 13.8
(%)
Contrbution to growth 25.5 19.5 14.1 11.0 7.1 7.6 2.7 58.7

Brands PANTOCID SUSTEN GLUCORED AZTOR GEMER Therapy Acute Acute Chronic Chronic Chronic % of total 3.1 2.5 2.4 2.4 2.0 1.6 1.5 1.4 1.4 1.4 Market share 19.2 26.1 59.7 8.6 9.9 14.7 36.3 20.6 57.7 22.7 Growth rate 17.7 14.0 9.2 16.8 28.7 22.0 23.2 16.7 9.6 6.9
(%)
PANTOCID DSR Acute OXETOL CLOPILET ENCORATE CHRONO STROCIT Chronic Chronic Chronic Chronic
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on Total 2011-11-09 01:19:45 EST. DownloadPDF. 19.6
Therapy wise break-up Field force expansion and productivity
2,500 2,250 2,000 1,750 1,500
8 6 4 2 0
Pain mgmt. 5% Gyneacolog y 7% Gastroentro logy 14%
Diabetology 11%
Chronic 62%
Field force
Productivity
25.0 20.0
21% 7 2 12 15% 6 3 6 Sun Pharma Industry
35 28
Sales (INR bn)
FY11E
Neuropsychiatry 27%
FY06
FY07
FY08
FY09
FY10
(%)
15.0 10.0 5.0 0.0 Volume
21 14 7 0
Industry growth
Ranbaxy
Sun Pharma
Cadila
Pfizer
Lupin
Cipla
GSK
Price
New product introductions

Dr Reddy's
Opthalmolo gy 4%
Others 8%
Respiratory 5% Cardiology 19%
2,750
CAGR 12.7%
10
Key Risks
Excessive dependence on metro/tier-I markets
SUNPs domestic focus in chronic therapy is largely restricted to metros and tierI markets and specialists/super specialists doctors. Hence, rising competition in these markets/segments, for chronic therapies, can be a potential risk to companys domestic growth.
Rupee appreciation
Rapid rupee appreciation could impact our sales estimate, especially on international revenues which are currently based on a currency estimate of USD/INR of INR 46 and INR 45 for FY12E and FY13E, respectively.
Regulatory issues
Regulatory issues, including product approval delays, unfavourable litigation outcomes and potential future adverse inspections from USFDA, are structural negatives for SUNP.
124
Financial Statements (Ex-Taro)

Income statement Year to March Income from operations Net revenues Other operating income Total operating expenses Materials cost Employee cost R&D cost Selling, admin and general expenses Other expenses Operating income Depreciation and amortisation EBIT Interest expense/(income) Other income Profit before tax Provision for tax Core profit Extraordinary items Profit after tax Minority interest & others FY09 41,833 41,833 0 23,194 8,556 3,401 3,099 5,278 2,860 18,640 1,233 17,407 (1,217) 868 19,492 712 18,780 0 18,780 603 FY10 40,075 38,086 1,988 26,441 10,977 4,008 2,083 6,143 3,230 13,633 1,533 12,100 (1,138) 576 13,815 679 13,136 334 13,470 (41) FY11E 49,440 49,440 0 31,372 14,585 4,729 3,584 5,015 3,458 18,068 1,591 16,477 (1,338) 435 18,250 1,186 17,063 0 17,063 512 FY12E 52,113 52,113 0 33,900 14,435 5,439 3,856 6,138 4,032 18,213 1,716 16,497 (1,676) 497 18,669 1,027 17,642 0 17,642 529 (INR mn) FY13E 62,218 62,218 0 40,364 17,608 6,146 4,666 7,226 4,718 21,854 1,842 20,012 (2,042) 497 22,550 1,240 21,310 0 21,310 639 20,671 20,671 1,036 20.0 1,036 19.5 21.7 3.6 18.1
Profit after minority interest 18,177 13,511 16,551 17,113 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Adjusted PAT after minority interest 18,177 13,194 16,551 17,113 Equity shares outstanding (mn) EPS (INR) adjusted Diluted shares (mn) Recurring EPS (INR) fully diluted CEPS (INR) Dividend per share (INR) Dividend payout (%) Common size metrics- as % of net revenues Year to March Cost of revenues Selling, admin and general expenses R & D cost Other expenses Total operating expenses Depreciation and amortisation Interest expenditure EBITDA margins Net profit margins Growth metrics (%) Year to March Revenues EBITDA Net profit PBT EPS FY09 27.1 20.2 21.1 21.9 (10.3) FY10 (4.2) (26.9) (30.1) (29.1) (31.9) FY11E 23.4 32.5 29.9 32.1 38.0 FY12E 5.4 0.8 3.4 2.3 34.3 FY09 20.5 12.6 7.4 6.8 55.4 2.9 (2.9) 44.6 44.9 FY10 27.4 15.3 5.2 8.1 66.0 3.8 (2.8) 34.0 34.5 FY11E 29.5 10.1 7.3 7.0 63.5 3.2 (2.7) 36.5 34.5 FY12E 27.7 11.8 7.4 7.7 65.1 3.3 (3.2) 34.9 33.9 1,036 17.6 1,036 12.9 1.2 3.1 17.7 1,036 12.7 1,036 8.8 14.2 3.2 25.2 1,036 16.0 1,036 12.1 17.5 2.9 18.1 1,036 16.5 1,036 16.3 18.2 3.0 18.1
FY13E 28.3 11.6 7.5 7.6 64.9 3.0 (3.3) 35.1 34.3
FY13E 19.4 20.0 20.8 20.8 19.8

125

Balance sheet As on 31st March Equity capital Reserves & surplus Common shareholders equity Total shareholders funds Secured loans Unsecured loans Borrowings Deferred tax liability (net) Minority interest Sources of funds Gross block Depreciation Net block Capital work in progress Intangible assets & goodwill Investments Inventories Sundry debtors Cash and bank balances Loans and advances Total current assets Current liabilities FY09E 1,036 69,414 70,449 70,449 227 1,562 1,789 (679) 1,970 73,530 21,476 6,851 14,625 1,571 3,253 18,595 9,757 8,811 16,690 7,425 42,683 2,648 FY10 1,036 77,254 78,289 78,289 479 1,233 1,712 (890) 1,932 81,042 23,340 8,013 15,328 1,448 4,060 30,664 10,739 11,748 6,073 8,562 37,121 2,693 FY11E 1,036 90,810 91,846 91,846 479 733 1,212 (890) 2,444 94,611 25,340 9,603 15,737 500 4,060 30,664 11,865 14,832 17,396 8,899 52,992 4,084 FY12E 1,036 104,827 105,863 105,863 479 733 1,212 (890) 2,973 109,157 27,340 11,320 16,021 500 4,060 30,664 12,507 15,634 29,758 9,406 67,306 3,898 (INR mn) FY13E 1,036 121,758 122,793 122,793 479 733 1,212 (890) 3,612 126,727 29,340 13,162 16,178 500 4,060 30,664 14,372 17,732 43,315 11,230 86,650 4,754 6,572 11,326 75,324 126,727 119
Provisions 4,550 4,886 5,259 5,496 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Total current liabilities and provisions 7,198 7,579 9,343 9,393 Net current assets Uses of funds Book value per share ( INR) Free cash flow Year to March Net profit Depreciation Others Gross cash flow Less:Changes in WC Operating cash flow Less: Capex Free cash flow Cash flow metrices Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid FY09 21,350 1,902 (19,944) 3,308 (7,914) (3,215) FY10 9,901 (5,529) (14,989) (10,618) (2,920) (3,321) FY11E 15,870 (3,495) (1,052) 11,323 (1,052) (2,995) FY12E 17,458 (3,096) (2,000) 12,362 (2,000) (3,096) FY09 18,177 1,233 122 19,532 1,818 21,350 (7,914) 13,437 FY10 13,511 1,533 (469) 14,575 (4,675) 9,901 (2,920) 6,981 FY11E 16,551 1,591 512 18,654 (2,785) 15,870 (1,052) 14,818 FY12E 17,113 1,716 529 19,359 (1,900) 17,458 (2,000) 15,458 35,485 73,530 68 29,542 81,042 76 43,650 94,611 89 57,912 109,157 102
FY13E 20,671 1,842 639 23,152 (3,855) 19,297 (2,000) 17,297
FY13E 19,297 (3,740) (2,000) 13,557 (2,000) (3,740)
126

Profitability and liquidity ratios Year to March ROAE (%) ROACE (%) Inventory days Debtors days Payable days Cash conversion cycles Current ratio Debt/ EBITDA Operating ratios (x) Year to March Total asset turnover Fixed asset turnover Equity turnover Du pont analysis Year to March NP margin Total assets turnover Leverage multiplier ROAE FY09 43.5 0.7 1.1 30.2 FY10 34.6 0.5 1.0 17.7 FY11E 33.5 0.6 1.0 19.5 FY12E 32.8 0.5 1.0 17.3 FY13E 33.2 0.5 1.0 18.1 FY09 0.7 3.3 0.7 FY10 0.5 2.5 0.5 FY11E 0.6 3.2 0.6 FY12E 0.5 3.3 0.5 FY13E 0.5 3.9 0.5 FY09 30.2 48.6 373 100 109 364 5.9 0.1 FY10 17.7 29.3 341 94 89 346 4.9 0.1 FY11E 19.5 36.3 283 98 85 296 5.7 0.1 FY12E 17.3 34.6 308 107 101 314 7.2 0.1 FY13E 18.1 39.4 279 98 90 287 7.7 0.1
Valuation parameters ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Year to March FY09 FY10 FY11E FY12E Diluted EPS (INR) EPS YoY growth (%) CEPS (INR) Diluted PE (x) Price/BV(x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) 17.6 22.2 1.2 25.4 6.6 10.3 23.1 0.7 12.7 (27.4) 14.2 35.0 5.9 10.7 31.5 0.7 16.0 25.4 17.5 27.9 5.0 8.4 23.1 0.6 16.5 3.4 18.2 27.0 4.4 7.8 22.3 0.7
FY13E 20.0 20.8 21.7 22.3 3.8 6.3 18.0 0.8
127
128
Pharmaceuticals
Company Update
TORRENT PHARMACEUTICALS
Strong play on branded generics
Strong domestic formulations growth over FY11-13

Torrent Pharmas (TRP) domestic focus on the high growth chronic segment (62% of domestic sales), with leading market share in CVS and CNS, imparts higher growth than the industry. Moreover, with strong focus on brand building and higher field force stability, the company is gaining strong traction in metros and tier I cities, as per our survey. We expect its domestic business to post 18% CAGR over FY11-13E after registering 16-17% growth in FY10-11, led by growth in covered market and ramp-up of new divisions.
April 25, 2011

Reuters: TORP.BO Bloomberg: TRP IN
EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector BUY Outperformer High Equalweight
Field force expansion, new launches to boost margin from H2 FY12

The company has been in consolidation phase with significant investments over the past 12-14 months, which has impacted its operating performance. EBITDA margins declined 170 bps from 21.5% in FY10 to 19.8% in 9m FY11, while earnings growth has been mute. We expect margin pressure to continue in H1FY12 with commissioning of the Sikkim facility; however, margins are likely to recover from H2FY11 as domestic field force ramp up and new launches in Brazil/Mexico start attaining critical mass. We expect EBITDA margins to improve 100-120 bps over FY13E.
Sector Relative to Market
MARKET DATA CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : : INR 591 640 / 490 84.6 50.0 / 1,127.4 76.9
Avg. Daily Vol. BSE/NSE (000):
27% earnings CAGR over FY11-13E likely

SHARE HOLDING PATTERN (%) We expect TRPs earnings to post 27% CAGR over FY11-13E on back of ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Promoters* : improvement in operating margins and robust revenue growth, as investments 71.5 12.8 3.6 12.2 NIL
start gaining traction. We estimate 19% revenue CAGR over FY11-13 driven by: (a) strong growth in domestic business; (b) scaling up of Mexico; (c) new product launches in Brazil and Europe; and (d) ramp-up in US generics (USD 60 mn in FY13E from USD 30 mn in FY11E). Moreover, TRPs strategic tie ups (AZN) for emerging markets will add further momentum to earnings.
MFs, FIs & Banks FIIs Others * Promoters pledged shares (% of share in issue)
: : : :
Outlook and valuations: Positive upsides; maintain BUY

TRP has set itself a goal of expanding into higher value branded generics markets of India, Brazil, Mexico, and other emerging markets. Moreover, the company has been consistently ramping up filings to establish a strong base in US and Europe. We believe these investments should start gaining traction, thereby contributing higher to overall growth and profits. We reiterate BUY/Sector Outperformer recommendation/rating. Torrent offers higher upside in our coverage universe.
PRICE PERFORMANCE (%) Stock 1 month 3 months 12 months 12.4 0.5 14.2 Nifty 8.9 2.5 11.9 EW Pharma Index 5.5 (7.0) 18.0
Financials Year to March Revenues (INR mn) Rev growth (%) EBITDA (INR mn) Adjusted net profit (INR mn) Shares outstanding (mn) Adj. Diluted EPS (INR) EPS growth (%) P/E (x) EV/EBITDA (x) ROAE (%) FY10 19,040 16.8 4,087 2,687 84.6 31.8 24.8 18.6 12.2 36.3 FY11E 22,586 18.6 4,414 2,973 84.6 35.1 10.6 16.8 11.3 31.3 FY12E 26,616 17.8 5,323 3,608 84.6 42.6 21.3 13.9 9.2 29.7 FY13E 32,142 20.8 6,679 4,614 84.6 54.5 27.9 10.8 7.1 29.9
Edelweiss Securities129 Limited Edelweiss Securities Limited

FY10 Net sales - Domestic formulations - Brazil/Mexico - Heumann - US - EU Gross profit Gross margins (%) EBITDA EBITDA margin (%) EBITDA margin (ex-milestone) PBT Tax Tax rate (%) Reported PAT Adjusted PAT Adjusted EPS 19,040 7,254 3,006 2,547 909 1,163 13,315 69.9 4,087 21.5 18.4 3,652 1,160 31.8 2,312 2,687 31.8
FY11E 22,586 8,465 3,645 2,928 1,343 1,314 15,630 69.2 4,414 19.5 16.3 3,847 873 22.7 2,973 2,973 35.1
% Y-o-Y 18.6 16.7 21.2 15.0 47.8 13.0 17.4 8.0
FY12E 26,616 10,019 4,414 3,074 2,025 1,551 18,631 70.0 5,323 20.0 17.8
% Y-o-Y 17.8 18.4 21.1 5.0 50.8 18.0 19.2 20.6
FY13E 32,142 12,023 5,250 3,228 2,813 1,830 22,499 70.0 6,679 20.8 18.9
20.8 20.0 18.9 5.0 38.9 18.0 20.8 25.5
5.3 (24.7) 28.6 10.6 10.6
4,625 1,018 22.0 3,608 3,608 42.6
20.2 16.5 21.3 21.3 21.3
5,915 1,301 22.0 4,614 4,614 54.5
27.9 27.9 27.9 27.9 27.9
Chart 1: Historical Valuation trend One year forward P/E 800
14x 11x
640 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF.
(INR)
480 320 160 0
8x
5x
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
130
Apr-11
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Company Description
TRP, founded in 1959, is headed by Mr. Samir Mehta, a second generation entrepreneur. The company is a leading player in the branded generics space in India and Brazil. Domestic formulations is the largest segment contributing 39% to FY11 sales. It is the second largest domestic player in the chronic segment (CNS, CV, and anti-diabetic) which contributes 62% to its portfolio. The companys branded generics business in Brazil is the second largest segment and contributed 16% to total sales in FY10 and is one of the largest operations by an Indian company in this crucial market. Apart from branded generics, the company is also present in regulated markets of US/Europe. It is also involved in the contract manufacturing business with Novo Nordisk for supplying insulin. Chart 2: Revenue mix
CRAMS 10% US 6% ROW 6% Domestic formulations 39%
Germany (Heumann) 14% EU ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. 6% Russia Brazil 2% 17%
Retail & others 12% FII's 4%
MF & inst 13%
Promoters 71%
Source: NSE
131

Growth versus Industry (%)
Therapeutic growth versus Industry (MAT)
Therapeutic area CV CNS Gastrointestinal Anti-infectives Anti-diabetics Pain mgmt. % of total 35.0 20.0 19.0 11.0 7.0 4.0 Market share 3.5 4.4 2.6 1.1 1.5 0.8 Torrent Industry Growth Growth 12.6 17.0 44.9 14.4 23.3 21.4 16.5 14.1 14.1 13.4 21.0 13.8
MAT (Mar-11) Incl bonus 21.4 15.0 Excl bonus 20.8 14.3 13.2 13.1
Excl bonus
CAGR (5yr) 20.1 14.4
13.9 13.8
(%)
Contrbution to growth 20.5 16.9 22.0 25.5 4.0 3.5 41.4

Brands ALPRAX TOPCEF DILZEM NIKORAN DOMSTAL DROXYL NEBICARD AZULIX-MF NEXPRO RD NEXPRO Total Therapy Chronic Acute Chronic Chronic Acute Acute Chronic Chronic Acute Acute % of total 4.3 4.1 3.8 3.7 3.7 2.5 2.4 2.0 2.0 1.9 30.4 Market share 25.8 4.7 45.4 45.7 63.5 15.1 33.2 3.7 34.1 22.9 Growth rate 15.3 66.3 13.0 10.4 20.8 8.9 16.1 29.4 49.5 32.8
(%)
Antiinfectives 11% Gastrointe stinal 19% Others 4% CNS 20%
CVS 35%
Chronic 62%
3,000 2,500 2,000 1,500 FY06 FY07 FY08 FY09 FY10 FY11E Field force Productivity
1.5 1.0 0.5 0.0
Growth composition (MAT Mar-11) 25.0
Relative performance to peers (MAT Mar-11) 35
30 24
Industry 18 growth
20.0
Sales (INR bn)
6 0.4 6 15 3 6 Torrent pharma Industry Price New product introductions
28 21 14 7 0
(%)
15.0 10.0 5.0 0.0 Volume
12 6 0
Dr Reddy's
Sun Pharma
Cadila
132
Torrent Pharma
Intas
Lupin
Cipla
IPCA
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Therapy wise break-up Field force expansion and productivity trend 4,000 AntiPain CAGR 10.8% diabetics mgmt. 3,500 7% 4%
2.5 2.0
Key Risks
Slippages in domestic business could hurt revenue growth
TRPs track record in the domestic business has been uneven. Continued execution issues in semi-urban and rural markets could slowdown the business and have a disproportionate impact on overall company growth and margins.
Forex impact from adverse currency movement

Over the past quarter, USD and INR have been appreciating against EUR due to concerns over deficits in Greece, Portugal, and Spain. TRP has fully hedged its exposure in Europe; however, adverse currency movements could lead to translation losses. We have not included the forex impact in our estimates.
Delay in product launches in Brazil

Our revenue assumptions for Brazil market estimate ~60 product launches in the next three-five years, which is aggressive. Any slippage on product introductions could negatively impact sales growth in this critical market.
Capacity constraints
TRP has been envisaging capacity constraints due to significant ramp-up in various geographies and entry in new markets. The company has planned capital investments of INR 10 bn over the next three-five years. Any delay in commissioning of facilities could have a disproportionate impact on growth in various markets and could have long-term implications on licensing contracts. a r k e t s P D F i
Edelweiss Securities Limited D o w n l o a d e d b y i n s d m c p l 0 1 f r o m 1 2 4 . 1 2 4 . 2 5
133 5 . 5 a t
Income statement (INR mn)
Year to March Income from operations Gross revenues Less: Excise Net revenues Other operating income Total operating expenses Materials cost Employee cost R&D cost Selling, admin and general expenses EBITDA Depreciation and amortisation EBIT Net Interest expense/(income) Other income Profit before tax (excl extraordinaries) Provision for tax Core profit Extraordinary items
FY09 16,307 16,169 304 15,865 441 13,307 5,357 2,565 1,119 4,266 2,999 423 2,577 94 (473) 2,010 78 2,154 (88)
FY10 19,040 18,673 344 18,329 710 14,953 5,725 3,162 1,202 4,864 4,087 481 3,606 165 211 3,652 1,160 2,687 (180)
FY11E 22,586 22,158 443 21,715 871 18,172 6,957 3,873 1,355 5,987 4,414 610 3,804 128 170 3,847 873 2,973 0
FY12E 26,616 26,443 529 25,914 702 21,292 7,985 4,454 1,677 7,177 5,323 709 4,614 89 100 4,625 1,018 3,608 0
FY13E 32,142 32,056 641 31,415 727 25,463 9,643 5,077 2,089 8,653 6,679 840 5,840 25 100 5,915 1,301 4,614 0 4,614 4,614 85 54.5 84.6 54.5 64.4 9.3 17.1
Reported profit after minority interest 1,844 2,312 2,973 3,608 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Adjusted PAT after minority interest 2,154 2,687 2,973 3,608 Equity shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) adjusted CEPS (INR) Dividend per share (INR) Dividend payout (%)
85 25.5 84.6 25.5 30.5 4.0 15.7
85 31.8 84.6 31.8 37.4 6.0 18.9
85 35.1 84.6 35.1 42.3 6.0 17.1
85 42.6 84.6 42.6 51.0 7.3 17.1
Year to March Cost of revenues Employee cost Selling, admin and general expenses R & D cost Total operating expenses Depreciation and amortisation Interest expenditure EBITDA margins Net profit margins
Growth metrics (%)
FY09 32.9 15.7 26.2 6.9 81.6 2.6 0.6 18.4 13.6
FY10 30.1 16.6 25.5 6.3 78.5 2.5 0.9 21.5 14.7
FY11E 30.8 17.1 26.5 6.0 80.5 2.7 0.6 19.5 13.7
FY12E 30.0 16.7 27.0 6.3 80.0 2.7 0.3 20.0 13.9
FY13E 30.0 15.8 26.9 6.5 79.2 2.6 0.1 20.8 14.7
Year to March Revenues EBITDA Net profit PBT Adj. EPS
FY09 20.4 43.5 63.1 34.8 63.1
FY10 16.8 36.3 24.8 81.7 24.8
FY11E 18.6 8.0 10.6 5.3 10.6
FY12E 17.8 20.6 21.3 20.2 21.3
FY13E 20.8 25.5 27.9 27.9 27.9
134

Balance sheet (INR Mn)
As on 31st March Equity capital Reserves & surplus Total shareholders funds Borrowings Deferred tax liability (net)
Sources of funds
FY09 423 6,086 6,509 4,826 584

11,919
FY10 423 7,887 8,310 5,224 499

14,033
FY11E 423 10,265 10,688 4,824 499

16,011
FY12E 423 13,152 13,575 3,724 499

17,798
FY13E 423 16,843 17,266 3,224 499

20,989
Gross block Depreciation Net block Investments Inventories Sundry debtors Cash and bank balances Loans and advances Other current assets Total current assets Sundry creditors Other current liabilities Provisions Total current liabilities and provisions Net current assets
Uses of funds
7,740 2,094 5,647 1,395 2,645 2,666 2,300 1,578 344 9,534 3,134 609 913 4,656 4,877
11,919
9,228 2,718 6,510 1,412 3,236 2,982 3,883 1,138 368 11,607 3,782 434 1,280 5,496 6,111
14,033
11,228 3,328 7,900 1,412 3,992 3,421 3,585 1,138 405 12,541 4,084 477 1,280 5,841 6,700
16,011
13,228 4,037 9,191 1,412 4,718 4,044 3,561 1,138 405 13,866 4,865 525 1,280 6,671 7,195
17,798
15,728 4,876 10,851 1,412 5,795 4,829 4,180 1,138 405 16,348 5,764 578 1,280 7,622 8,726
20,989
Book value per share ( INR) 77 98 126 160 ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF.
Free cash flow
204 (INR mn) FY13E 4,614 840 5,453 (911) 4,542 (2,500) 2,042
FY09 1,844 423 211 2,478 101 2,579 (705) 1,874 FY10 2,312 481 (74) 2,719 349 3,069 (1,108) 1,961 3,583 (886) 2,697 (2,000) 697 4,317 (520) 3,797 (2,000) 1,797 FY11E 2,973 610 FY12E 3,608 709
Year to March Net profit Add : Non cash charge Depreciation Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow
Cash flow metrices
Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid
FY09 2,579 (182) (396) 2,001 (705) (332)
FY10 3,069 1,047 (1,125) 2,991 (1,108) (592)
FY11E 2,697 (995) (2,000) (298) (2,000) (595)
FY12E 3,797 (1,822) (2,000) (24) (2,000) (722)
FY13E 4,542 (1,423) (2,500) 619 (2,500) (923)
135

Year to March ROAE (%) ROACE (%) Inventory days Debtors days Payable days Cash conversion cycles Current ratio Debt/ EBITDA Debt/equity Adjusted debt/Equity
FY09 37.1 32.6 55.5 53.5 85.9 23.0 2.0 1.6 0.7 0.7
FY10 36.3 42.5 56.4 54.1 94.8 15.7 2.1 1.3 0.6 0.6
FY11E 31.3 38.5 70.0 60.0 90.0 40.0 2.1 1.1 0.5 0.5
FY12E 29.7 38.7 70.0 60.0 90.0 40.0 2.1 0.7 0.3 0.3
FY13E 29.9 41.4 72.0 60.0 90.0 42.0 2.1 0.5 0.2 0.2
Year to March Total asset turnover Fixed asset turnover Equity turnover
Du Pont Analysis
FY09 1.49 2.84 2.73
FY10 1.41 3.02 2.47
FY11E 1.45 3.01 2.29
FY12E 1.53 3.03 2.14
FY13E 1.62 3.13 2.04
Year to March NP margin Total assets turnover Leverage multiplier
FY09 13.6 1.49 1.83
FY10 14.7 1.41 1.75
FY11E 13.7 1.45 1.58
FY12E 13.9 1.53 1.39
FY13E 14.7 1.62 1.26 29.92
Year to March Adjusted EPS (INR)

EPS YoY growth (%)
FY09 25.5
63.1
FY10 31.8
24.8
FY11E 35.1
10.6
FY12E 42.6
21.3
FY13E 54.5
27.9
30.5 23.2 7.7 3.1 17.1 0.7
37.4 18.6 6.0 2.6 12.2 1.0
42.3 16.8 4.7 2.2 11.3 1.0
51.0 13.9 3.7 1.8 9.2 1.2
64.4 10.8 2.9 1.5 7.1 1.6
136

Cadila Healthcare Cipla 400
900 775
350 (INR) 300 250 200

Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11
Redc Redc Redc Redc Redc
(INR)
650 525 400
Dr. Reddys Laboratories 2,000
Lupin
500 (INR)
1,625 (INR) 1,250 875 500
Hold Hold
Hold Hold
400 300 200 Buy
100 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11
Sun Pharmaceuticals

Ranbaxy Laboratories
630 (INR) 510 390 270 150 May-10 Jun-10 Jul-10 Aug-10 Nov-10 Dec-10 Jan-11 Sep-10 Oct-10 Feb-11 Mar-11 Apr-11
(INR)
500 425 350 275 200 Hold Hold Hold Hold
Torrent Pharmaceuticals 700
600 (INR) 500 400 300
Buy Buy
Buy Buy
Edelweiss Securities Limited 137
Buy Buy Buy Buy Hold Hold Hold Hold
Edel Pulse: Pharmaceuticals NOTES:
138 D o
Edelweiss Securities Limited w n l o a d e d b y i n s d m c p l 0 1 f
RATING & INTERPRETATION
Company Apollo Hospitals Enterprise Cipla Lupin Sun Pharmaceuticals Industries
Absolute reco BUY REDUCE BUY HOLD
Relative reco None SU SO SP
Relative risk None L M L
Company Aurobindo Pharma Dr.Reddys Laboratories Piramal Healthcare Torrent Pharmaceuticals
Absolute reco BUY HOLD UNDER REVIEW BUY
Relative reco SO SO SU SO
Relative Risk H M H H
ABSOLUTE RATING
Ratings Buy Expected absolute returns over 12 months More than 15%
ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.55% 2011-11-09 01:19:45 EST. DownloadPDF. on Hold Between 15% and Reduce Less than -5%
RELATIVE RETURNS RATING

Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING

Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return
139

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai 400 021, Board: (91-22) 2286 4400, Email: research@edelcap.com
Vikas Khemani Nischal Maheshwari Head Head Institutional Equities Research vikas.khemani@edelcap.com nischal.maheshwari@edelcap.com +91 22 2286 4206 +91 22 6623 3411
Coverage group(s) of stocks by primary analyst(s): Pharmaceuticals

Apollo Hospitals Enterprise, Aurobindo Pharma, Cipla, Dr.Reddys Laboratories, Lupin, Piramal Healthcare, Sun Pharmaceuticals Industries, Torrent Pharmaceuticals
EW indices
1,400 1,250 1,100
Recent Research Date 11-Apr-11 Company Sun Pharma Pharma Lupin Title JV with Merck: A win win deal; Event Update Price (INR) Recos 450 Hold
01-Apr-11
950 800 20-Apr-10 20-Oct-10 EW Pharma Index 20-Apr-11 Nifty
Steady growth and margins; strong visibility for next fiscal; Quarterly Preview Near- term challenges; long-term growth intact; Visit Note Positive move to tap largest Latin American market; Event Update 415 136 Buy Buy
23-Mar-11
08-Mar-11
UPL
Distribution of Ratings in-sdmcpl01 ISIEmergingMarketsPDF / Market Cap from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF. Edelweiss Research Coverage Universe Buy Rating Distribution* * 3 stocks under review > 50bn Market Cap (INR) 111 Between 10bn and 50 bn 61 < 10bn 17 118 Hold 51 Reduce 17 Total 189 Rating Interpretation Rating Buy Hold Reduce Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period
Access the entire repository of Edelweiss Research on www.edelresearch.com

This document has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and associate companies are a full service, integrated investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. We and our affiliates, group companies, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Edelweiss and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Edelweiss nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Edelweiss Securities Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved
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India Pharma Sector - Sector Update

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Edel Pulse: Pharmaceuticals

Edelweiss Securities Limited

Edel Pulse: Pharmaceuticals

g M a r k e t s P D F i n - s d m c p l 0 Distributor Survey - Questionnaire ........................................................................ 45

Edelweiss Securities Limited w n l o a d e d b y i n s d m c p l 0 1 f r o m 1 2 4 . 1 2 4

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Edel Pulse: Pharmaceuticals

Edelweiss Securities Limited

Edel Pulse: Pharmaceuticals

Ear to the Ground: Verdict is Out

Growth momentum to sustain and move into next orbit

Chronic therapies leading growth; cosmetology new growth avenue

Expansion by MNCs could intensify competition for Indian counterparts

Edel Pulse: Pharmaceuticals

Higher attrition in field force poses risk to current growth

Decline in success rate of new product introductions

Differentiating class from mass: End driver of survey

Edelweiss Securities Limited D o w n l o a d e d b y i n s d m c p l 0

Edel Pulse: Pharmaceuticals

Large Cap Sun Pharma Dr Reddy's Cipla Lupin Cadila Mid-cap

Torrent Pharma IPCA Glenmark MNC

ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF.

Source: Edelweiss research

Edelweiss Securities Limited

Edel Pulse: Pharmaceuticals

Domestic Formulations: On A High

17.8 15.0 15.0

10.0 8.0 5.0 7.0 4.5

8.0 4.0 0.0 2001

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2011 (MAT March)

Source: CRISIL, Edelweiss research

Average sustainable growth

Sustainability of growth Not sustainable 5%

Source: Edelweiss research

Edel Pulse: Pharmaceuticals

Population and aeging 16% Health insurance 9%

Healthcare infrastructu re / Govt expenditure 11%

Price increases 9% Specialty promotion 17%

New product launches 23%

Field force expansion 32%

Source: Edelweiss research

Edelweiss Securities Limited

Edel Pulse: Pharmaceuticals

Chronic Leads; Cosmetology New Avenue

Chronic Acute Overall market growth

19.1 14.9 16.1

19.2 14.9 16.2

17.4 14.1 15.0

27.9 72.1 100.0

Source: AIOCD, Edelweiss research

Chart 4: Anti-diabetics is fastest growing segment

Chart 5: Therapies depicting higher growth (survey)

% of total market 30.0

18.0 12.0 6.0

40.0 20.0 0.0

Source: Edelweiss research

Edel Pulse: Pharmaceuticals

4.8 3.6 2.4 1.2

80% 60% 40% 20%

Coronary heart disease

0% Anti diabetics Volume CVS Price CNS IPM