JPM_APHS_010915_103038

www.jpmorganmarkets.com

Asia Pacific Equity Research

07 January 2015

Equity Ratings and Price Targets

Mkt Cap Rating Price Target

Company Ticker (Rs mn) Price (Rs) Cur Prev Cur Prev

Dr. Reddy's Laboratories Limited DRRD IN 521,689.00 3,065.55 OW n/c 3,600.00 3,400.00

Sun Pharmaceutical Industries Ltd. SUNP IN 1,674,640.00 808.55 OW n/c 925.00 n/c

Lupin Ltd. LPC IN 625,315.90 1,395.85 N n/c 1,400.00 1,300.00

Glenmark Pharmaceuticals Ltd. GNP IN 195,614.80 721.75 OW n/c 875.00 825.00

Apollo Hospitals Enterprise Ltd. APHS IN 152,745.50 1,097.90 N n/c 1,130.00 1,075.00

Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 06 Jan 15.

Indian Pharmaceuticals and

Healthcare Services

Positive on the sector with improving organic growth

and M&A

India

Pharmaceuticals

Neha Manpuria AC

(91-22) 6157-3589

[email protected]

Bloomberg JPMA MANPURIA

J.P. Morgan India Private Limited

Pinakin Parekh, CFA

(91-22) 6157-3588

[email protected]

J.P. Morgan India Private Limited

Sean Wu

(852) 2800-8538

[email protected]

J.P. Morgan Securities (Asia Pacific) Limited

See page 45 for analyst certification and important disclosures, including non-US analyst disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that

the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision.

The Indian Pharmaceutical sector continued to outperform for the third

consecutive year (BSE Healthcare Index up 47% vs. 30% for the Sensex in 2014)

despite concerns about USFDA scrutiny, slower US growth, and sector rotation

after the national elections. While the sector has re-rated over the past year

(average forward P/E moved from 18.7x in Dec-13 to 21.6x) and earnings growth

remains positive for our coverage (16-20% three-year EPS growth for large caps),

we would look beyond the near-term noise to invest in the sector.

R&D spending to drive organic growth, but monetization still key. We

believe R&D spending will remain elevated as companies transition their

portfolio to niche/limited competition generics, build a branded portfolio, and

make progress on LT opportunities. As this could limit margin expansion, the

ability to deliver on the R&D pipeline and generate revenue opportunities

earlier is likely to be rewarded. We therefore like Dr Reddys given its focus

on R&D (complex generics, bio-similars, etc) and upside from potential filings

(proprietary products) over the next year.

Business development remains an opportunity. While Lupin has been

pursuing acquisitions, it has been fairly cautious in its strategy, with a focus on

small tuck-in deals to plug portfolio gaps. Sun Pharma (SUNP) has pursued

sizable deals with strong execution historically. We remain OW on SUNP after

its recent correction in view of the potential upside from the consolidation of

Ranbaxy (RBXY) and its continued strong fundamentals to pursue inorganic

opportunities (albeit in the medium term).

Improvement in ANDA approvals a key trigger. Growth in the US has been

affected by the lag in new product launches. While the trend so far has been

tepid, any pick-up in ANDA approvals would be a key driver for growth in the

near term, in our view. However, a delayed ramp-up in approvals could see

launches getting bunched up in FY16/FY17. This is a key risk to our US growth

assumption for Glenmark, but any improvement should kick start growth and

drive margin expansion.

Healthcare services Focus on profitability and returns. The demand

potential of the hospitals sector in India is well understood. Going forward, we

believe there will be an increasing focus on the profitability and return outlook

given the capacity addition, potential new opportunities in the listed space in the

sector, and the sharp valuation re-rating (as seen in Apollo Hospitals) over the

last few years. While we like Apollos long-term growth story as a full-scale

healthcare service provider in India, we remain Neutral given earnings pressure

in the near term from the new bed additions.

Please see Specialty Pharma 2015

Outlook report by J.P. Morgans

US pharma analyst, Chris Schott

(Poised For Outperformance On

Improving Fundamentals, M&A

and Multiple Expansion)

This document is being provided for the exclusive use of USER 01 at INDIAN INSTITUTE OF MGMTCALCUTTA

2Asia Pacific Equity Research

07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Table of Contents

Earning growth intact, but remain selective in 2015 .............3

R&D Investment in growth pipeline .....................................6

M&A Acquiring capability vs. growth ................................10

US generic pricing outlook....................................................12

ANDA approvals Delay remains a key risk to growth ......13

Regulatory scrutiny - Increasing investor sensitivity .........15

Hospitals Strong demand fundamentals but focus on

margins and returns...............................................................16

Dr. Reddy's Laboratories Limited .........................................20

Sun Pharmaceutical Industries Ltd.......................................24

Lupin Ltd. ................................................................................28

Glenmark Pharmaceuticals Ltd. ............................................32

Apollo Hospitals Enterprise Ltd. ...........................................36



07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Earning growth intact, but remain selective

in 2015

The Indian Pharmaceutical sector continued its rally in 2014, outperforming the

broader market, with the BSE Healthcare Index up 47% vs. 30% for the Sensex. This

was supported by strong underlying fundamentals, earnings growth, and large

consensus earnings revision in some stocks. Average forward P/E valuation for the

pharmaceutical companies under coverage has moved from 18.7x in Dec-13 to 21.6x.

We witnessed some correction in the last month due to concerns about delays in

approval slowing US growth and the impact from EM currencies. However, we

believe the growth outlook remains strong for our coverage (16-20% three-year

EPS growth for large caps and higher for GNP), and we would look beyond the

near-term noise at longer-term growth drivers in the sector.

Table 1: Stock outperformance driven by multiple expansion and

EPS revisions in most stocks

2014

Performance

FY15E EPS

Revision

FY16E EPS

Revision

SUNP 46% 12% 11%

LPC 57% 23% 19%

DRRD 28% -1% 1%

CIPLA 56% -23% -10%

GNP 44% -6% -1%

ARBP 189% 58% 62%

CDH 97% 16% 26%

APHS 19% -16% 15%

Source: Bloomberg. Note: EPS revision based on consensus numbers.

Figure 1: 2014 was led by small & mid-cap stocks in the sector

Source: Bloomberg.

Table 2: FII Holding has increased across the sector over the last few years

FII Holding Mar-11 Mar-12 Mar-13 Dec-13 Mar-14 Jun-14 Sep-14

Sun Pharma 18.4 20.0 22.6 22.5 22.5 23.0 22.8

Lupin 22.1 27.5 28.8 31.9 31.9 31.7 31.8

Dr Reddys 44.6 44.2 46.5 50.5 52.3 53.8 55.5

Cipla 15.7 16.2 24.7 24.9 23.3 23.3 22.6

Glenmark 30.5 34.9 32.4 33.1 33.2 34.4 35.1

Aurobindo 21.2 12.4 16.8 21.2 23.7 27.6 27.7

Cadila 5.4 4.1 5.4 5.8 5.8 5.9 6.4

Ranbaxy 9.1 11.6 12.6 12.4 13.3 12.4 13.1

Apollo Hospitals 29.4 40.0 41.8 42.1 41.6 41.5 42.6

DII Holding Mar-11 Mar-12 Mar-13 Dec-13 Mar-14 Jun-14 Sep-14

Sun Pharma 7.1 5.5 3.4 5.7 5.6 5.1 4.6

Lupin 20.0 16.5 14.3 11.3 11.3 11.0 11.0

Dr Reddys 14.0 13.4 11.0 7.6 6.3 5.4 5.4

Cipla 18.6 17.2 10.2 10.6 11.4 11.4 12.1

Glenmark 6.9 4.6 8.1 7.5 7.8 6.9 5.9

Aurobindo 11.0 17.0 15.0 10.4 9.9 7.7 8.0

Cadila 13.3 12.7 11.2 8.1 8.2 8.3 8.1

Ranbaxy 12.0 10.9 10.0 8.8 8.3 8.1 8.4

Apollo Hospitals 3.4 2.4 2.9 3.3 3.8 4.0 3.2

Source: BSE Data.

187%203%

134%154%

108%

61% 54%43% 40%

49%31% 29%

4%

0%

50%

100%

150%

200%

250%

12-Months



07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

While the rally has been broad-based and the sector has continued to re-rate, the mid-

cap stocks witnessed stronger returns than in previous years. The valuation premium

of large-cap companies ($6bn+) has narrowed significantly over the past year, with

the premium declining from 42% in Dec-2013 to ~17% currently, compared with an

average valuation premium of 12% for large-cap pharmaceutical stocks in 2012.

While the average P/E for large-cap stocks has moved ~23% from Dec-13 to 24x

currently, the forward P/E in mid-cap space has increased from 14x to 21x over the

same period. At these levels we would prefer large pharmaceuticals companies

for what we believe to be their sustainable long-term growth potential and

superior risk-reward.

Figure 2: Historical P/E for Indian Pharma companies

Source: Company reports, Bloomberg and J.P. Morgan estimates. Note: Cipla based on consensus EPS.

Figure 3: Valuation gap between the large-cap and mid-cap pharma companies narrowing

Source: Bloomberg and J.P. Morgan estimates. Note: Large-cap average includes SUNP, LPC, DRRD and CIPLA (NC; based on

consensus). Mid-cap average includes GNP, CDH (NC; based on consensus), ARBP (NC; based on consensus), DIVI (NC, based on

consensus).

Table 3: Indian Pharma: Valuation summary

Mcap P/E (x) EV/EBITDA (x) P/BV (x) RoE (%)

CMP $Mn CY14/FY15 CY15/FY16 CY14/FY15 CY15/FY16 CY14/FY15 CY15/FY16 CY14/FY15 CY15/FY16

Sun Pharma 809 26,341 25.4 22.9 19.1 19.2 17.1 7.0 5.6 34.9

Dr Reddy's 3,066 8,212 23.9 19.6 15.9 15.6 12.8 4.8 4.0 21.9

Glenmark 722 3,080 23.9 17.5 12.3 15.4 11.7 5.3 4.2 23.7

Lupin 1,396 9,863 26.8 23.4 19.8 16.2 13.7 7.1 5.7 30.2

Cipla 614 7,759 34.8 25.7 20.3 20.8 16.1 4.4 3.8 13.3

Ranbaxy 612 4,090 na 26.2 23.8 12.8 16.1 5.7 4.6 31.0

Aurobindo 1,088 4,987 20.1 16.6 13.3 13.1 10.8 6.1 4.6 34.0

Cadila 1,660 5,347 31.9 24.2 19.4 21.7 16.8 7.9 6.3 27.1

Source: Bloomberg, J.P. Morgan. Note: Consensus estimates for NC stocks Cipla, Ranbaxy, Aurobindo and Cadila. J.P. Morgan estimates for all others. SUNP does not include RBXY merger.

Prices as of 6 Jan 2015

10.0

15.0

20.0

25.0

30.0

Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14

SUNP DRRD GNP LPC CIPLA

10.0

15.0

20.0

25.0

Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14

Large Cap Avg Mid-Cap Avg



07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Key stock picks

Dr Reddys (DRRD): Dr Reddys is our top pick in the sector, with improving

earnings growth after a tepid FY15 (20+% in FY16E-17E vs. 4% in FY15),

continued focus on transitioning its portfolio to complex segments (R&D/Sales

highest among peers at ~11%), and option value of the proprietary product filing

expected over the next six months. In the near term (2H FY15-FY16), US revenue

growth will be supported by new launches, and a turnaround in the PSAI business

over the next few quarters, but could see an adverse impact on growth in

Russia/Ukraine due to currencies. Furthermore, the launch of major products such as

gNexium, and gCopaxone provides further upside potential (these have not been

included in our estimates given the uncertainty on timing). DRRD trades at 20x

FY16E EPS, which is at a discount to large-cap peers (23-26x). Our PT of Rs3,600

implies 17% upside from the current share price.

Sun Pharmaceuticals (SUNP): The stock has lagged behind its peers (down 11.6%

since mid-Nov vs. -4% for BSE Healthcare and -2% for Sensex), given delays in the

RBXY deal closure, investment in an innovative R&D pipeline, and the outcome

after Form 483s were issued to the Halol facility. As the conditional approval from

CCI last months does take the merger process close to closure, we believe

completion of the merger (FTC/court approval pending) and a pick-up in approvals

will be a key trigger for the stock. In our view, the premium valuation will continue,

with a 19% EPS CAGR (RBXY not included), strong balance sheet ($1.3bn in net

cash and $630mn including RBXY debt) and superior returns. Our PT of Rs925

implies 14% upside from the current share price.

Glenmark (GNP): We expect Glenmarks FY15 performance to highlight the

strength of its emerging market franchise given the tepid performance in the US (3%

growth in 1H FY15). While currencies could affect near-term performance for

Russia/CIS, growth in LatAm and Europe remains on a strong footing. GNP has been

investing in building the long-term growth pipeline in the US, but improvement in

US growth would depend on a pick-up in ANDA approvals. While we expect the

operating performance and debt position to improve in the medium term, a pickup in

ANDA approvals and US growth is a key potential catalyst over the next few

months. The opportunity to monetize the innovative R&D pipeline should help

accelerate debt reduction and drive earnings upside (not yet in our estimates). Our PT

of Rs875 implies ~21% upside from the current share price.

Key upside risks

M&A picking up among the Indian generic companies in the international

market

Strong improvement in the ANDA approval rate over the next two years to

achieve GDUFA timelines

Continued INR weakness provides upside to our estimates (estimates based

on INR/USD at 60.8 vs. the current rate of ~63.6)

Key downside risks

Pricing pressure in the US due to the consolidation among channel partners

Regulatory risk related to the increasing scrutiny by the USFDA and other

regulatory agencies

Currency risk in emerging markets such as Russia, Ukraine, and Latam

(particularly for DRRD and GNP) and also the risk from potential INR

appreciation

Link to SUNP upgrade note:

Upgrade to OW; integration of

Ranbaxy a key driver



07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

R&D Investment in growth pipeline

The last two years has seen increasing competition in the US generic market with the

entry of several small and mid-sized players and fewer large opportunities going off-

patent. Therefore, Indian generic companies have adopted the strategy of focusing on

complex and limited-competition products. The complexity can vary depending

on development, regulatory pathway, bioequivalence or commercialization. Beyond

generics, companies have also stepped up investment in novel molecules and

incremental innovation to build a portfolio of branded products. Against the

backdrop of sharp volatility in plain-vanilla generic products (which provide

strong returns in periods of exclusivity followed by pricing erosion as new

players enter the market), companies are focusing on building a more

sustainable growth model (albeit with a gradual pick-up in sales trend).

Table 4: Gauging the complexity in key therapy areas

US opportunity

($bn)

Development

complexity

Regulatory

complexity

Competitive

scenario

Key MNCs

Bio-similars 55 High High - Several players investing

Inhalers/Respiratory 20 High High 3-4 Mylan, Teva, Sandoz

Injectables 5 Medium Fairly clear 5+ Mylan, Teva, Hospira

TDS 5 High High 2-3 Mylan, Mallinckrodt

Topical 9 High Fairly clear 4-5 Taro, Perrigo, Sandoz

Ophthalmology 5 Medium Fairly clear 3-4 Teva, Apotex, Sandoz, Valeant

Controlled substances 7 Medium High 4-5 Actavis, Sandoz

Source: Company reports and J.P. Morgan

While the traditional generics are still a key driver of the base business,

companies are focusing on moving up the complexity curve to target products

that provide higher revenue potential and sustainable margin due to fewer

players in the generic product. While there will be some large opportunities in bio-

similars and inhalers, however, we expect the Indian generic players to see potential

upside from these areas only after 2016, given the fairly nascent stage of investment.

The medium generic opportunities (such as complex Injectables, ophthalmology,

dermatology, CS) might be smaller but are limited-competition drugs that are likely

to provide steady revenue stream for Indian players.

While Indian companies such as Dr Reddys are likely to make a foray into bio-

similars after 2017, as highlighted by J.P. Morgans US analyst Chris Schott in

his Specialty Pharma 2015 Outlook report (link to the report), there could be

several bio-similar catalysts in 2015 with a number of companies with clinical

data and potential filings throughout the year We see a wave of biosimilars

being introduced in the US and European markets over the next 5-10 years and

beginning in 2015. Regulators have created a path to market and payers appear

highly incentivized. Potential Sandozs biosimilar Neupogen approval in the US

would represent first biosimilar approved under 351k pathway (May PDUFA).

A key indicator of the shifting focus in R&D is evident by the growing

investment in R&D and capex by the Indian generic companies. The spending on

R&D increased from 4-7% of revenue in FY09 for companies under our coverage to

6-10% in FY14. R&D expenses for large Indian companies increased by 20-30%

over the last five years, with generic players targeting complex therapy segments,

specialty business, and several long-term opportunities in the US market. This is

evident by the improving quality of pending pipeline and filings for Indian



07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

companies with filings in Complex Injectables, Immunosuppressants, Topicals,

Transdermal patches, Nasal sprays, and Inhalers. The higher R&D expense is

warranted during the development stage due to product complexities and clinical trial

requirements in some instances. We expect R&D spending to remain elevated (15-

25% CAGR in FY15E-17E) as Indian companies transition their portfolio to niche

therapy segments and make progress in development.

Table 5: Snapshot of R&D spending trajectory for Indian pharma companies

DRRD GNP LPC SUNP CIPLA ARBP CDH

R&D as % of Sales (%)

FY09 5.8 4.2 7.1 7.1 5.0 3.6 5.4

FY14 9.4 10.0 8.6 6.1 5.4 3.7 6.3

FY15E 11.3 9.8 9.0 6.8

R&D Expenses (Rs Mn)

FY09 4,037 883 2,669 3,099 2,515 1,032 1,564

FY14 12,402 5,998 9,583 9,862 5,175 2,708 4,563

FY15e 16,379 6,718 11,850 12,663

CAGR (%)

FY09-FY14 25.2 46.7 29.1 26.1 15.5 21.3 23.9

FY15-17 19.0 14.0 20.1 24.4

Source: Company reports and J.P. Morgan estimates. Note R&D for Cipla and ARBP including Capital R&D and for Cadila from P&L.

Table 6: Indian Pharmaceuticals: Focus on niche or complex areas

Dermatology Complex

Injectables

Ophthalmology Controlled

Substance

Transdermal

(TDS)

Respiratory /

Inhalation

Bio-similar

Sun Pharma Lupin Dr Reddys Cipla Aurobindo Glenmark Cadila

Source: Company reports and J.P. Morgan. Note: Shaded boxes represent products in advanced stage or already seen some launches.

Another aspect of the higher spending is the increase in capital expenditure outlined

by players. Capex for companies also increased over last three years, and companies

continue to guide to higher spending going forward. In our view, the higher capex

encompasses two key areas in the current operating environment 1) spending

to ensure compliance (cGMP) given higher USFDA scrutiny, and 2) building

manufacturing capacity in the newer areas of focus.

Table 7: R&D and capex guidance focus on complex products

Guidance FY14 R&D/Sales R&D/Sales Capex

DRRD 9.4 10-11% Rs10-15bn

GNP 9.1 9.5-10% Rs4.5-5bn

LPC 8.4 9-10% Rs5-5.5bn

SUNP 6.1 6-8% Rs9bn

CIPLA 5.4 ~5% Rs5+bn

ARBP 3.7 ~4.5% Rs6bn

CDH 6.3 6-7% Rs5.5bn

Source: Company reports.



07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Table 8: Evaluating the R&D pipeline for companies under coverage

Dr Reddy's R&D 10-11% of sales with 65% spend on generic and rest on Proprietary products and Bio-similars

Complex generics Focus on limited competition products (>$150-200Mn). Capex outlined in specific areas (Cyto-toxic injectable, non-cyto-toxic

injectable, topicals, heparins, peptide, etc)

Proprietary products Investment of $300Mn with two products in clinical trials. Expects two NDA filing over the next year (first NDA filing before end-

FY15) with market potential of $50-100Mn each

Bio-similars Received IND for Phase I trial for Rituximab and pegfilgrastim. Capping R&D spend to $150Mn over next 3-4years after which

this business should be self sustaining

Lupin R&D 9-10% of sales with bulk of spend on generics and remaining in drug pipeline (15-20%), bio-similars (~10%) and

small portion towards branded portfolio

Complex generics Differentiated products in therapies like derma (5-6 filing likely in FY15 with launches in 2-2.5years), inhalation (filings few years

away), nasal spray (filing expected next year)

Branded Over 3-4 years, launches for branded portfolio from its own R&D pipeline in areas like Derma (2 molecules in early stage to enter

clinics next year), respiratory (2 products in Pilot with exhibit batches expected by end of next year) and controlled substances

Bio-similars JV with Yoshindo - conducting clinical development of certain bio-similars including regulatory filings and obtaining marketing

authorizations in Japan

Sun Pharma R&D at 6-8% of sales with Taro spending on improving pipeline and spend related to recent pipeline addition

Complex generics No specific areas outlined but filings seen in derma, injectables, respiratory, ophthals, etc

Innovative R&D Recent licensing agreement for Mercks plaque psoriasis candidate (late stage) - tildrakizumab. Spending of $250Mn over 5

years; Help strengthen its dermatology presence in the US

Glenmark R&D 9.5-10% of sales with focus on complex generic and innovative pipeline (for out-licensing eventually)

Complex generics New filing in the US this year mostly in areas of derma, Injectables, etc. Filing in one new niche area every year

Innovative R&D Innovative R&D capped to 4-4.5% of sales. Monetizing innovation drug pipeline (realized $232Mn since FY04) helps mitigates

risks and helps fund its R&D activities

Bio-similars Stayed away from bio-similar (given uncertainty and high R&D spend) and focus on novel biologics

Source: Company reports and J.P. Morgan estimates.

R&D productivity near-term margins vs long-term growth

In our view, given the current scenario of higher spending, the two points that will be

key to earnings growth for Indian companies are:

1) Balancing margins with higher R&D spending on growth pipeline; and

2) Ability to deliver return over the medium term on the elevated spending.

While the higher spending is likely to limit large margin expansion over the medium

term, we believe the execution of growth opportunities (such as limited-competition

generics and specialty business) will help build a sustainable operating model (longer

product life cycle rather than exclusivity-driven volatility) for Indian generic

companies. These products have a better margin profile given their better pricing

power (specialty/branded business) or limited competition (complex generics).



07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Figure 4: EBITDA margin expansion in the last three years vs.

increase in R&D spending (bp)


Figure 5: Higher R&D spending to limit large margin expansion over

the next three years

Source: Company reports and J.P. Morgan estimates

A key concern arising out of the higher R&D spending is the ability of the

companies to monetize the R&D programs into revenue-generating

opportunities given the near-term pressure from higher spending. Moreover,

many of these complex generic and bio-similars are likely to be branded products

and may require marketing infrastructure to gain market share from the innovator and

other large specialty players. Any success in these R&D programs could provide

significant upside given that the R&D cost has already been expensed by the

companies. We believe investors would look at track record of players (similar

product in other markets, launches in new international markets, etc) as a key catalyst

to gauge the R&D investments. In our view, companies that demonstrate an ability to

deliver on their R&D pipeline (DRRD for bio-similars, and Cipla for respiratory) and

maintain the productivity of their pipeline are likely to be rewarded by investors for

long-term growth.

900

645

249 221

105

11

231

328

0

100

200

300

400

500

600

700

800

900

1000

SUNP LPC GNP DRRD

Margin expansion (FY11-14) Increase in R&D/Sales from FY12

-46

110

202

29624%

19%

20%

14%

0%

5%

10%

15%

20%

25%

30%

-100

-50

0

50

100

150

200

250

300

350

SUNP DRRD LPC GNP

Margin expansion (FY14-17) % CAGR in R&D spend (RHS)


10


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

M&A Acquiring capability vs. growth

The US generic industry witnessed several large deals in 2014 and our US pharma

analysts indicates in his outlook report (link) that we see no signs of consolidation

slowing in 2015, given ample capacity across the sector and the favorable financing

environment, and growing evidence these businesses can be managed with more

efficient cost structures. While we agree that the size of the deals will differ for

Indian generic companies, their business development activities have been fairly

limited for growth in the US or in other emerging markets. In our view, valuations

of specialty assets are making acquisitions difficult given the fairly conservative

nature of most the Indian firms.

Table 9: Select specialty pharma M&A transactions

Announced Buyer Target Size ($Mn) TV/Revenue

11/17/2014 Actavis Allergan 66,000 8.3

11/6/2014 Perrigo Omega Pharma 4,500 2.6

10/9/2014 Impax Tower/Lineage 700 3.2

10/9/2014 Endo Auxilium 2,600 5.5

10/1/2014 Sagent Omega Laboratories 84 2.6

7/31/2014 Meda AB Rottapharm 3,049 4.2

7/14/2014 Mylan Abbott's EPD 5,300 2.8

6/24/2014 Endo Dava Pharmaceuticals 575 4.4

4/28/2014 Forest Furiex 1,100 na

4/7/2014 Mallinckrodt Questcor 5,600 5.2

2/18/2014 Actavis Forest Laboratories 25,000 5.7

2/11/2014 Mallinckrodt Cadence Pharmaceuticals 1,324 7.6

2/3/2014 Valeant Precision 475 3.7

1/8/2014 Forest Aptalis 2,900 4.2

Source: Company reports and J.P. Morgan estimates. Note: Table extracted from Specialty Pharma 2015 Outlook report published on

6-Jan-2015.

While companies such as Dr Reddys and Glenmark have highlighted their

focus on organic growth (supported by higher R&D spending), Sun Pharma,

Lupin and Cipla have been actively pursuing business development

opportunities (albeit mostly tuck-in deals to fill portfolio gaps). Further,

strategic divestitures in 2015 by US firms could generate interesting acquisition

opportunities for Indian firms. There could also be some deals in the domestic

market, particularly among the mid-cap companies, to enhance their portfolio.

The largest deal in the sector in India, the $4bn Sun Pharma-Ranbaxy deal, helped

strengthen SUNPs Indian and US presence and provided higher exposure to EM

markets. However, we believe Sun Pharmas focus on integrating and turning around

the Ranbaxy business would make any other large deal difficult in the near term.

However, its strong balance sheet position ($1.3bn in cash as of Sep-14 and FCF of

$3+bn over FY15E-17E) should help support more M&A in the medium term. We

expect Lupin (to augment its EM presence, branded portfolio in developed markets

and new technology) and Cipla (to increase its front-end presence in international

markets and potentially in the US) to remain active in pursuing business

development activities over the next year.


11


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Table 10: M&A/JVs by some Indian companies over the last year

Acquired Co/Business Acquirer/Partner Details

Dec-14 Habitrol brand Dr Reddy's Financial terms not disclosed; OTC nicotine patches in the US

Dec-14 Natrol Aurobindo Acquired business for $132.5Mn for OTC business in the US

Sep-14 Shasun Phamaceutical Strides Arcolab $330Mn deal expected to be completed by Jun-2015

Sep-14 Mfg facilities - Goa/Satara Cipla Acquired facilities for Rs1bn (pending)

Jun-14 Pharmalucence Sun Pharma Financial term not disclosed; Strengthen injectable business in the US

Apr-14 Yoshindo Lupin JV named YL Biologics located in Japan for developing bio-similars pipeline

Apr-14 Ranbaxy Sun Pharma $4bn all share deal (pending approval)

Jul-14 Mabpharm Pvt Ltd Cipla Financial term not disclosed; Bal 75% stake in biotech company

Jun-14 Co in Yemen Cipla 51% stake in a drug manufacturing and distribution company in Yemen for $21Mn

May-14 Stake in Chase Pharma Cipla 14.6% stake in Co focusing on early stage development company (focus on Alzheimers disease)

Mar-14 Laboratorios Grin SA de CV Lupin Financial term not disclosed; Latam business with focus on ophthalmic

Feb-14 Nanomi BV Lupin Financial term not disclosed; For developing complex injectable products

Jan-14 Actavis' EU business Aurobindo European business (loss making) acquired for Euro30Mn; Strengthen European business of ARBP

Dec-13 Elder Pharma Torrent Pharma Acquisition of domestic formulation business (30 OTC brands) for Rs20bn

Source: Company reports, Bloomberg and J.P. Morgan.

Balance sheet has room for M&A but promoter holdings

restrict large deals

In our view, Indian firms have a comfortable enough balance sheets position to

evaluate inorganic opportunities. However, the promoter holdings and risk of

dilution do limit the opportunities to look at large deals through share issuance, in

our view. We believe business development remains a key potential catalyst for

Lupin over the near term given its strong balance sheet and defined focus areas for

M&A. However, promoter holdings at 46.7% are likely to limit the deal size to debt

capacity ($1-1.5bn based on 1.5-2x FY16E EBITDA), in our view. Sun Pharmas

strong FCF generation ($3+bn over FY15E-17E ex RBXY) and net cash balance

sheet ($1.3bn in Sep-14 or $630mn including RBXY debt) will continue to support

the companys inorganic growth strategy. However, given the complexity of the

recent RBXY deal, we see limited bandwidth for any large acquisition by the

company in the near term.

Table 11: Leverage and balance sheet capacity for Indian pharma companies

Net debt (cash) in $bn

as of Sep-14

Net debt (cash)/TTM

EBITDA as of Sep-14

FCF generation (FY15-

17 in $bn)

FY16 EBITDA

(Rs mn)

Net debt capacity in $bn

(based on 1.5x EBITDA)

SUNP -1,282 -1.01 3,346 88,204 2,176

LPC -149 -0.25 903 43,808 1,081

DRRD 169 0.29 953 39,820 982

GNP 433 1.82 318 18,553 458

CIPLA 44 0.13 30,603 755

ARBP 447 0.98 31,003 765

CDH 296 1.22 20,872 515

Source: Company reports, Bloomberg and J.P. Morgan estimates. Note: CIPLA, Aurobindo and Cadila based on Bloomberg Consensus

Figure 6: Flexibility for dilution in M&A deals promoter holdings in Indian pharma companies

Source: BSE India.

25.5%

36.8%

46.7% 48.3%54.1%

63.7%

74.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

DRRD CIPLA LPC GNP ARBP SUNP CDH


12


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

US generic pricing outlook

The Indian generic firms have seen a two-way impact on pricing in the US.

While they have seen upside in select drug/therapies due to supply disruption

and shortages, the last few quarters witnessed pressure on pricing from the

consolidation of channel partners in the US. While our discussions with industry

participants highlight that some impact is likely to continue into the next few

quarters, J.P. Morgans US pharma analyst, Chris Schott, highlights positive US

generic pricing as an industry tailwind in 2015 (Specialty Pharma 2015 Outlook

report).

He highlights in the report While we still expect generic pricing as a whole to

decline annually, the rate of decline has dropped substantially. In our view, several

industry factors are driving this favorable environment that could continue in 2015

and potentially 2016, including:

A greater emphasis on value instead of market share by manufacturers

Higher regulatory hurdles (GDUFA) reducing competition in the near term

Supply disruptions and industry shortages creating a supply/demand

imbalance

Categories seeing the greatest increase include:

Controlled substances (highly regulated)

Extended topicals (manufacturing hurdles)

Generic injectables (shortages)

Select older generic products (supply disruptions)

We believe this trend is positive for firms such as Sun Pharma (topical, generic

injectables, etc) and Dr Reddys (generic injectables given the increasing focus).

Furthermore, companies such as Glenmark have also highlighted their focus on

the profitability of their portfolio rather than market share to improve returns

in a business that is witnessing increasing pricing pressure from a consolidating

customer base.

Please see our note US channel

consolidation Diminishing the US

opportunity for Indian generic

players? No, in our view

published on 22-Apr-2014


13


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

ANDA approvals Delay remains a key

risk to growth

The GDUFA over a five-year period (starting Nov-12) aimed to ensure timely

review and approval of generic drugs, increasing FDA transparency, and

building necessary resources to meet the ANDA review goal of 10 months in

year 5 (from ~30 months now). However, the number of approvals declined in the

first two years. There is the expectation of an improvement in the approval rate in

Year 3 (starting from Oct-2014) as the performance metric is applicable for the

ANDAs submitted in the cohort year. For ANDAs submitted in the year starting Oct-

2014, the USFDA targets to complete its review of 60% within 15 months. After a

very low rate of approval in Nov-14 (the lowest since our data from 2010), there

was a sequential improvement. But reduction in approval time remains the key

to help new product launches and growth, in our view.

Figure 7: ANDA approvals lagging the pace of filings

Source: US FDA. Year ending October, so FY14 is year ended October 2014.

Figure 8: Leading to N increase in backlog and approval time

Source: US FDA. Year ending October, so FY14 is year ended October 2014.

Figure 9: Approval rate slowed considerably in November, which implies a probable delay in

improvement

Source: USFDA and J.P. Morgan.

Growth dependent on the pace of approvals

Longer waiting time for ANDA approval has affected growth for some Indian

companies given the lack of new product launches. As seen in the chart below,

307

766 813893

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968

1473

310

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440 406

0

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600

800

1000

1200

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FY01 FY05 FY10 FY11 FY12 FY13 FY14

No of ANDAs submitted Approvals (incl tentative)

18.9 18.4 18.417.3 16.3 16.3

16.5

18.8

21.7

25.0

27.9

29.5

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15.0

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14


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

ANDA approvals so far in FY15 are well below the recent past for some companies.

This was especially aggravated in the Sep-14 quarter for Indian generic firms, with

the industry witnessing price erosion from channel consolidation in the US with the

upside from new launches. Glenmark was particularly affected by the lack of

approvals in 1H FY15, and a further slowdown could hurt its US growth

further. Any pick-up in approvals would be a key driver of growth for Indian

generic firms in the near term, in our view. While the progress so far in Year 3

implies a continued tepid trend in approvals, a delayed ramp-up in approvals

could potentially see launches getting bunched up in FY16/FY17.

Figure 10: ANDA approval slower than last year

Source: US FDA and Company reports. Year ending March.

Figure 11: But pending pipeline remains strong

Source: US FDA and Company reports. Note: Pending ANDA as of Sep-14.

Several Indian companies witnessed an increase in ANDA filings over the last two

years, particularly in the 1H CY14, as ANDA filings required three batches per

strength and six months of accelerated stability (vs. one batch and three months

previously) before filing from 20-Jun-2014. The higher level of ANDA filings in

the last two years does not necessarily imply higher approvals in the medium

term as the GDUFA did not outline any metrics for ANDAs submitted during

Year 1 and Year 2 (FY13 and FY14) except para IV submissions. As a backlog

metric, the GDUFA outlined that the FDA will review and act on 90% of all backlog

applications pending on 1-Oct-2012 by the end of FY17. Given the pending

ANDAs before GDUFA implementation and the large filing in the last few

years, it would require significant investment by the USFDA (in terms of

reviewer and funding) to ensure that the target for Year 3-Year-5 and the

backlog for the last few years are addressed effectively.

Table 12: ANDA filing run-rate has picked up over the past two years but approval remain tepid

FY10 FY11 FY12 FY13 FY14 1HFY15

Dr. Reddys 14 7 17 19 13 11

Sun Pharma 30 28 22 13 29 15

Lupin 37 21 25 21 20 8

Glenmark 13 13 12 18 20 11

Cadilla 14 24 21 25 50 23

Aurobindo 13 24 30 34 78 42


9

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FY13 FY14 YTD FY15

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153139

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ARBP CDH SUNP LPC DRRD GNP

Pending ANDAs


15


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Regulatory scrutiny - Increasing investor

sensitivity

Regulatory headwinds remain one of the key risks to the Indian Pharmaceutical

sector, especially in light of the increasing scrutiny by the USFDA to ensure quality

and compliance. The number of facility inspections by the USFDA has increased

since the new Food and Drug Administration Safety and Innovation Act (introduced

in Jul-12), which states that the US regulator has to achieve the same inspectional

schedule for facilities outside the US as it does for domestic facilities. Therefore, the

FDA has added more drug inspectors in India (seven more inspectors to its 12-

member team currently) to meet this mandate. Further, the USFDA has also

enhanced its presence in India by setting up another office in Hyderabad. Given

Indias share of the US generic market, the increasing on-the-ground oversight

by the regulatory authorities is unlikely to abate. Further, the impact from

warning letters in the past has increased investor sensitivity to news-flow related

to inspections, in our view.

While the cost of compliance will continue to increase for the Indian companies

(GDUFA fees increase, more sample batches for approval, inspection/re-

inspections fees), we believe the cost of non-compliance is a bigger risk to the

sector given significant revenue exposure to the US. In our view, companies

would likely witness an increase in the focus, cost and investment associated with the

USFDA oversight, which is unlikely to be prohibitive. We believe that the focus on

compliance would be a key variable in an increasingly competitive market with

limited opportunities and short product life cycle and, therefore, stocks are

likely to see continued volatility based on regulatory news flow.

Figure 12: Number of warning letters issued to companies over the last five years

Source: USFDA and J.P. Morgan estimates.

0

1

2

3

4

5

Cipla Glenmark Aurobindo Cadila Dr Reddy's Lupin Sun

Pharma

Wockhardt Ranbaxy


16


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Hospitals Strong demand fundamentals

but focus on margins and returns

While India has made progress in growth healthcare spending and infrastructure,

with increased investment from private firms, it continues to lag behind peers on

various parameters, which should help provide a significant demand driver for

growth of the private sector. The sector remains a growing market in a country that

has 20% of the worlds disease burden (and growing) and an inadequate healthcare

system to meet the growing demand (given just 6% of the global number of hospital

beds and 8% of the worlds doctors). We believe that the growing demand outlook

for healthcare requires India to step up its efforts and bridge the gap through

higher spending (especially by government), increase insurance penetration (to

reduce out-of-pocket spending), and boost investment in building healthcare

delivery systems on par with peers.

Figure 13: Healthcare expenditure as a percentage of GDP (2010)

Source: World Health Statistics 2013.

Figure 14: Healthcare expenditure through private prepaid plans is

17


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Figure 15: Limited govt. spending and low insurance penetration has led to high out-of-pocket expenditure in EM and India

Source: World Health Statistics 2013. Note: Data for 2010.

While the demand potential of the healthcare services industry is well

understood, we believe there will be an increasing focus on the profitability and

return outlook of existing facilities as capacity and revenue growth remain a

constant. Bed addition in new markets, penetration into Tier II/III cities, and

increasing insurance penetration will continue to drive growth for the sector.

However, as private firms invest in growing their presence, we believe there will be a

focus on balancing growth and margins as competition increases in their home

markets. We believe an increasing number of companies will shift their focus to

profitable expansion to maintain margins despite capacity addition. We have seen

commentary from Apollos management over the last year on recalibrating bed

addition to ensure a faster ramp-up of new hospitals. So far, the asset-heavy nature

of the sector and continued investment in growth has depressed RoIC. Apollos RoIC

for the hospitals business declined from 16% in FY10 to 10.4% in FY14. Companies

are focusing on newer models of growth with higher returns and a lower pay-back

period, such as single-specialty, and hub-and-spoke models, and a separate focus on

high-volume, low-value businesses.

Figure 16: Fwd EV/EBITDA vs. EBITDA CAGR for global hospital stocks

Source: Bloomberg and J.P. Morgan. Note: All companies except APHS based on Bloomberg consensus

While growth capital was easily available in the sector given the large

investment through the Private Equity route in the last few years, we are likely

to witness the exit by existing investors through a potential stake sale to

international players or access to primary market increasing the focus on these

parameters. Furthermore, given the sharp re-rating of stocks in India and their

86.0

13.9

55.8 57.8

69.175.8 76.8 77.2

87.8 89.9

22.732.2

49.0 51.453.1

59.4

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Out-of-pocket expenditure (% of private expenditure on health)

APHS IN

RFMD SP

BH TB

BGH TB

IHH MKKPJ MK

RHC AUCYH US

THC US

LPNT US

HLS US

ANH LN

NMC LN

LHC SJMDC SJ

0.0

5.0

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3-Y

ear E

BIT

DA

CA

GR

FY16/CY15 EV/EBITDA


18


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

current valuation vs. regional peers, the profitability and return argument will

be keys areas of focus, in our view.

Figure 17: Fwd P/BV vs. RoE for global hospital stocks

Source: Bloomberg and J.P. Morgan. Note: All companies except APHS based on Bloomberg consensus

Government regulation on health insurance Long-term

positive but at a cost

Excerpts from our note Universal health coverage - Boon or Bane to operating

model of private hospitals in India published on 4-Dec-2014

The government sponsored health insurance schemes (GSHIs) both at the Center

(CGHS, RBSY) and states (South India states, HP, Delhi) are not new for Indias

private hospitals. However, compared to the existing schemes, the much talked about

new initiatives such as the National Health Assurance Mission (NHAM) focus on

covering broader healthcare needs for the entire population rather than certain

segments. This would require resource allocation to strengthen the public health

infrastructure for primary/secondary care and a higher dependence on private players

given the limited capacity in public tertiary care facilities. While such initiatives

help drive volumes into the private hospitals, there have been concerns about a

pricing discount, receivables period and limited tariff revision that have led to

many firms reducing exposure to existing GSHIs. There is ambiguity in the

timeline for NHAM implementation, and we believe that allocation in the

upcoming budget would give us some clarity on the roll-out. In our view, this

could be a risk to long-term profitability of the sector that has seen limited

regulatory impact so far.

What is NHAM? Universal health coverage is a key component of the NHAM that

plans to integrate the existing GSHIs such as Rashtriya Swasthya Bima Yojana

(RSBY) to cover the entire population and broaden the healthcare needs covered

(primary, secondary and tertiary). While the poor are likely to get free treatment

(funded by the government), the rest of the population will have to pay a minimum

premium based on age and income categories. The government plans to offer more

than 50 free essential drugs, 30 alternative medicines (AYUSH), and 12-15

diagnostic treatments in the package. Further, tertiary care services are likely to be

provided through an insurance-based model. Media reports (ET, BS) have indicated

the rollout of NHAM could happen as early as Apr-2015 and be implemented in

phases to cover the entire population by Mar-2019.

APHS IN

RFMD SP

BH TB

BGH TBIHH MK

KPJ MK

RHC AU

CYH US

THC US

LPNT US

HLS US

ANH LN

NMC LNLHC SJ

MDC SJ

0.0

5.0

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0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

FY

16/C

Y1

5 R

oE

FY16/CY15 Price/BV


19


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

GSHIs not new for private hospitals in India: Our conversation with industry

participants suggests the revenue contribution from existing GSHIs (center & state)

is limited to 5-15%, with a sharp price discount for GSHIs (30- 50%) vs.

cash/insurance patients. Recently, media reports (ToI, Hindu) have highlighted the

withdrawal of cashless scheme in certain private hospitals for CGHS (for

government and PSU employees) patients due to large pending bills, low tariff rates

that have not been revised for a few years, and the deduction of an additional rebate

on treatment charges for early payment despite the dues. These are the reasons that

are also leading to private firms trying to limit the exposure to GSHIs especially in

more mature facilities.

but increasing scope may require changes in operating model: In our view,

the key objective of NHAM to roll out health coverage for the entire population is

positive for OP/IP volume growth in hospitals, particularly given the increasing bed

capacity by most private players aiding operating leverage. However, lower prices

and margins on the services provided to the government-funded patients are a key

factor that private hospitals will have to consider in the longer term. While there is

still uncertainty about the timeline for the rollout of the initiative, we believe large

private hospitals may look at differentiated branding to target key segments

(premium or general category) or cities (Tier I or Tier II/III). This would allow the

companies to incorporate differentiated price and service levels to maintain margins.


20


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Dr. Reddy's Laboratories Limited

Focus on delivering on R&D investment

Company Data

Shares O/S (mn) 170

Market Cap (Rs mn) 521,689

Market Cap ($ mn) 8,226

Price (Rs) 3,065.55

Date Of Price 06 Jan 15

Free Float(%) 65.4%

3M - Avg daily vol (mn) 0.34

3M - Avg daily val (Rs mn) 1,094.64

3M - Avg daily val ($ mn) 17.3

BSE30 2,7842.32

Exchange Rate 63.42

Price Target End Date 31-Mar-16

Price Target (Rs) 3,600.00

Dr. Reddy's Laboratories Limited (Reuters: REDY.BO, Bloomberg: DRRD IN)

Rs in mn, year-end Mar FY13A FY14A FY15E FY16E FY17E

Revenue (Rs mn) 116,266 132,170 145,590 164,894 188,839

Net Profit (Rs mn) 16,777 21,515 21,933 26,747 32,977

EPS (Rs) 98.44 126.04 128.49 156.69 193.19

Core EPS (Rs) 74.56 96.76 91.01 125.11 170.77

DPS (Rs) 14.95 17.94 18.29 22.30 27.50

Revenue growth (%) 20.1% 13.7% 10.2% 13.3% 14.5%

EPS growth (%) 17.2% 28.0% 1.9% 21.9% 23.3%

ROCE 15.9% 16.8% 15.1% 17.0% 19.0%

ROE 19.5% 20.2% 15.5% 17.8% 20.1%

Core P/E (x) 41.1 31.7 33.7 24.5 18.0

EV/EBITDA (x) 17.8 14.6 13.8 11.2 8.9

Dividend Yield 0.5% 0.6% 0.6% 0.7% 0.9%

Source: Company data, Bloomberg, J.P. Morgan estimates.

Dr Reddys is our top pick in the sector, with its improving earnings growth after a

tepid FY15 (20+% in FY16E-17E), continued focus on transitioning its portfolio to

complex segments (R&D/Sales highest among peers at ~11%), and option value of

proprietary product filing over the next six months. In 2H FY15-FY16, US revenue

growth should be supported by new launches and a turnaround in PSAI business, but

growth in Russia/Ukraine could be adversely affected by currency movements.

Furthermore, upside from the launch of major products such as gNexium and

gCopaxone has not yet been included in our estimates given the uncertainty on

timing. DRRD trades at 20x FY16E EPS, which is at a discount to large-cap peers

(23-26x). We remain OW with a new PT of Rs3600 as we roll forward our timeframe

to Mar-16. Our PT implies 17% upside from the current share price.

R&D spend in building complex portfolio to pressure NT margins but drive

growth in the US. We believe that the margin expansion is likely to be invested

in R&D given DRRDs guidance of R&D at 10-11% of revenue in FY15 (11.2%

in 1H FY15 vs. 9.4% last year). DRRD has indicated three areas of focus for

R&D spend Complex generics (~65% of spend), Proprietary products, and Bio-

similars. The company is focusing on transitioning its pipeline towards limited

competition and higher-margin niche product categories (injectables, patches, and

topicals which require development and PK studies), which should drive growth

in the US business over FY15-17 (~10% to $1.2bn).

Monetization of R&D likely from FY17 onwards: In our view, execution of

the ongoing R&D program to create revenue-generating opportunities is

becoming a significant catalyst for the company. DRRD has guided to $300mn in

proprietary products (derma, neurology) and $150mn in bio-similars (early-stage

trials but ahead of peers) over 3-4 years as long-term opportunities for the

company. DRRD expects two NDA filing related to proprietary products over the

next year (first NDA filing before the end of FY15) with market potential of $50-

100mn each, which are not included in our estimates.

Earnings growth to improve over FY16/17: While the Ruble decline could hurt

growth in the near term (5% change affects EPS by ~1%), earnings should

improve given recent new launches in the US (gValcyte, gRapamune, gDocetaxel

inj), a turnaround in the PSAI business, and stable growth expected in the India

business. We expect EPS growth of 20-23% in FY16-17 vs. 4% in FY15.

gNexium and gCopaxone could provide further upside (not in our estimates).


21


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Key catalysts for the stock price: Upside risks to our view: Downside risks to our view:

Better-than-expected growth in the

US

Large complex drug ANDA filings in

the US

Bio-similar launch in Russia

Earlier-than-expected launch of bio-similars in

Russia

Large complex drug ANDA filings in the US

Better-than-expected performance of recently

launched complex generics

Margin improvement despite increase in R&D

Potential regulatory/litigation risks

Delay in product launches in the US

Adverse foreign exchange fluctuations

Protracted slowdown in the Indian Pharmaceutical market

Key financial metrics FY14A FY15E FY16E FY17E Valuation and price target basis

Revenues (LC) 132,170 145,590 164,894 188,839 Our Mar-16 price target of Rs3600 is based on SOTP, with the core business valued at

Rs3467, at 20x P/E, in line with the domestic peer group, and FTF/complex products

at Rs129/share.

Key downside risks include any potential regulatory issues (USFDA related/Russia),

delays in product launches in the US, and adverse foreign exchange fluctuations.

Revenue growth (%) 13.7 10.2 13.3 14.5

EBITDA (LC) 32,640 33,480 39,820 47,934

EBITDA margin (%) 24.7 23.0 24.1 25.4

Tax rate (%) 19.3 21.0 21.0 21.0

Net profit (LC) 21,515 21,933 26,747 32,977

EPS (LC) 123.9 128.5 156.7 193.2

EPS growth (%) 28.9 3.7 21.9 23.3 DRRDs elevated R&D spending Opportunity to monetize in the MT

DPS (LC) 18.0 18.4 22.4 27.6

BVPS (LC) 531.9 639.1 769.7 930.7

Operating cash flow (LC mn) 19,463 25,375 28,033 33,206

Free cash flow (LC mn) 2,843 13,875 18,283 25,456

Interest cover (X) na na na na

Net margin (%) 16.3 15.1 16.2 17.5

Sales/assets (X) 0.8 0.8 0.8 0.9

Debt/equity (%) 0.5 0.3 0.2 0.1

Net debt/equity (%) 0.1 0.0 -0.1 -0.2

ROE (%) 26.3 21.9 22.2 22.7

Key model assumptions FY14E FY15E FY16E FY17E

US Revenue growth in USD 24.9 7.2 11.7 12.7

PSAI revenue growth -21.9 5.4 9.1 10.8

R&D as % of Sales 9.4 11.3 11.0 11.0

Source: Company and J.P. Morgan estimates. Source: Bloomberg, Company and J.P. Morgan estimates.

Sensitivity analysis EBITDA EPS JPMe vs. consensus, change in estimates

Sensitivity to FY15E FY16E FY15E FY16E EPS FY15E FY16E

5% chg in US revenue growth 3% 2% 3% 3% JPMe old 136.8 159.7

1% change in generic margin 3% 3% 4% 4% JPMe new 128.5 156.7

5% chg in PSAI growth 1%

22


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Investment Thesis, Valuation and Risks

Dr. Reddy's Laboratories Limited (Overweight; Price Target:

Rs3,600.00)

Investment Thesis

DRRDs approval and filings for complex generics underline the companys focus on

transition to growth driven by its niche product portfolio in the US supporting

medium-term growth. While margin expansion is likely to be invested in R&D, we

believe DRRD's focus on bio-similars in complex generic, proprietary products and

bio-similars will support long-term growth. In the near term, US revenue growth

supported by new (including few complex) launches, turnaround in PSAI business

over next few quarters and momentum in EM will step up growth from FY16.

Valuation

Our Dec-15 price target of Rs3,600 is based on a sum-of-the-parts valuation

methodology, with the core business valued at Rs3,467/share at 20x P/E, in line with

the domestic peer group, and FTF/complex products at Rs129/share.

Table 13: DRRD SOTP summary

Rs/share Comments

Base EPS 170.8

Target P/E Multiple 20 In-line with current domestic peer group

Base Target Price 3467

US Opportunities 34.2

Settlements 17.4

Complex Generics/Limited

Competition 77.7

Total US Opportunities 129.4

DRRD Target price (Rs/share) 3600 Rounded Off

Source: J.P. Morgan estimates.

Risks to Rating and Price Target

Key downside risks include any potential regulatory issues (USFDA related/Russia),

delays in product launches in the US, and adverse foreign exchange fluctuations.


23


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Dr. Reddy's Laboratories Limited: Summary of FinancialsIncome Statement Cash flow statement

Rs in millions, year end Mar FY13 FY14 FY15E FY16E FY17E Rs in millions, year end Mar FY13 FY14 FY15E FY16E FY17E

Revenues 116,266 132,170 145,590 164,894 188,839 PBT 21,677 26,606 27,705 33,784 41,653

% change Y/Y 20.1% 13.7% 10.2% 13.3% 14.5% Depr. & amortization 5,549 7,106 6,493 6,857 7,222

Gross Profit 60,579 75,802 84,558 96,488 112,823 Change in working capital (13,146) (10,389) (3,551) (6,121) (7,593)

% change Y/Y 13.6% 25.1% 11.6% 14.1% 16.9% Other 4,138 1,234 500 550 600

EBITDA 26,662 32,640 33,480 39,820 47,934 Cash flow from operations 13,318 19,463 25,375 28,033 33,206

% change Y/Y 13.5% 22.4% 2.6% 18.9% 20.4%

EBIT 21,112 26,032 26,988 32,962 40,713 Capex (7,018) (10,513) (11,500) (9,750) (7,750)

% change Y/Y 15.5% 23.3% 3.7% 22.1% 23.5% Other (5,180) (6,107) 0 0 0

EBIT Margin 18.2% 19.7% 18.5% 20.0% 21.6% Free cash flow (626) 2,843 13,875 18,283 25,456

Net Interest 460 400 0 0 0

Earnings before tax 21,677 26,606 27,705 33,784 41,653 Equity raised/(repaid) 1 2 0 0 0

% change Y/Y 17.2% 22.7% 4.1% 21.9% 23.3% Debt raised/(repaid) 2,293 3,957 (6,895) (9,500) (7,500)

Tax (4,900) (5,094) (5,772) (7,038) (8,676) Other (1,372) (1,191) (500) (550) (600)

as % of EBT 22.6% 19.1% 20.8% 20.8% 20.8% Dividends paid (2,714) (2,985) (3,650) (4,451) (5,488)

Net income (reported) 16,777 21,515 21,933 26,747 32,977 Beginning cash 7,460 5,054 8,452 11,281 15,063

% change Y/Y 17.4% 28.2% 1.9% 21.9% 23.3% Ending cash 5,136 8,451 11,280 15,062 26,930

Shares outstanding 170 171 171 171 171 DPS 14.95 17.94 18.29 22.30 27.50

EPS (reported) 98.44 126.04 128.49 156.69 193.19

% change Y/Y 17.2% 28.0% 1.9% 21.9% 23.3%

Balance sheet Ratio Analysis


Cash and cash equivalents 5,136 8,451 11,280 15,062 26,930 Gross margin 52.1% 57.4% 58.1% 58.5% 59.7%

Accounts receivable 31,972 33,037 36,391 41,216 47,201 EBITDA margin 22.9% 24.7% 23.0% 24.1% 25.4%

Inventories 21,600 23,992 26,428 29,932 34,279 Operating margin 18.2% 19.7% 18.5% 20.0% 21.6%

Others 10,043 13,185 15,208 16,979 19,176 Net margin 10.9% 12.5% 10.7% 13.0% 15.4%

Current assets 85,714 103,747 114,390 128,272 152,668

Sales per share growth 20.0% 13.5% 10.2% 13.3% 14.5%

LT investments 472 806 806 806 806 Sales growth 20.1% 13.7% 10.2% 13.3% 14.5%

Net fixed assets 37,814 44,424 50,105 54,461 56,492 Net profit growth 17.4% 28.2% 1.9% 21.9% 23.3%

Total Assets 142,369 170,223 185,874 202,648 227,573 EPS growth 17.2% 28.0% 1.9% 21.9% 23.3%

Liabilities Interest coverage (x) NM NM - - -

Payables 11,862 10,503 11,569 13,103 15,006

Others 17,731 19,558 22,755 25,200 28,232 Net debt to equity 43.1% 40.0% 24.4% 10.1% (3.8%)

Short-term debt 24,053 24,002 20,607 17,607 14,607 Working Capital to Sales 27.6% 37.6% 40.8% 43.9% 50.2%

Total current liabilities 53,646 54,063 54,931 55,910 57,845 Sales/assets 0.9 0.8 0.8 0.8 0.9

Long-term debt 12,625 20,740 17,240 10,740 6,240 Assets/equity 2.0 1.9 1.8 1.6 1.5

Other liabilities 2,993 4,620 4,620 4,620 4,620 ROAE 19.5% 20.2% 15.5% 17.8% 20.1%

Total Liabilities 69,264 79,423 76,791 71,270 68,705 ROACE 15.9% 16.8% 15.1% 17.0% 19.0%

Shareholders' equity 73,085 90,800 109,083 131,379 158,868

BVPS 428.82 531.94 639.05 769.67 930.71



24


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Sun Pharmaceutical Industries Ltd.

Integration and turnaround of Ranbaxy a key driver

Company Data

Shares O/S (mn) 2,071

Market Cap (Rs mn) 1,674,640


Price (Rs) 808.55


Free Float(%) 52.8%


3M - Avg daily val (Rs mn) 1,903.56


BSE30 2,7842.32

Exchange Rate 63.42


Price Target (Rs) 925.00

Sun Pharmaceutical Industries Ltd. (Reuters: SUN.BO, Bloomberg: SUNP IN)


Revenue (Rs mn) 112,389 160,044 184,065 204,573 241,174

Net Profit (Rs mn) 29,831 31,415 65,915 73,104 87,710

EPS (Rs) 14.40 15.17 31.83 35.30 42.35

Core EPS (Rs) 13.36 19.85 27.22 31.63 37.12

DPS (Rs) 2.50 3.94 4.57 5.04 5.99

Revenue growth (%) 40.4% 42.4% 15.0% 11.1% 17.9%

EPS growth (%) 12.3% 5.3% 109.8% 10.9% 20.0%

ROCE 26.8% 32.3% 28.8% 25.8% 25.0%

ROE 20.3% 24.5% 26.5% 24.2% 22.8%

Core P/E (x) 60.5 40.7 29.7 25.6 21.8

EV/EBITDA (x) 30.3 20.9 17.4 15.5 12.7

Dividend Yield 0.3% 0.5% 0.6% 0.6% 0.7%


SUNPs stock has underperformed its peers recently (down 11.6% since mid-

November, vs. -4% for BSE Healthcare and -2% for Sensex) given delays in the

RBXY deal closure, concerns about the outcome of Form 483s issued to the Halol

facility and investment in an innovative R&D pipeline. We believe the recent

correction is overdone and would buy the stock on the current weakness to play the

integration and turnaround of RBXY (EPS accretive from Year 2 or FY17, by our

estimates). We remain OW on the stock with a Mar-16 PT of Rs925, which implies

14% upside from the current share price.

RBXY Turning around a strong underlying business: While the recent

conditional CCI approval on the merger removes some overhang, the deal is awaiting

approval from the FTC in the US. The key focus areas for SUNP after the deal

completion would be to turnaround the operation at RBXY by bringing facilities into

compliance, improving operating performance to reduce the timeframe for achieving

the $250mn synergies (vs. being back-end-weighted over the next three years) and

streamlining the integrated operations in functions such as R&D. The $250mn

synergies over three years imply improvement in RBXYs margins from 7.5% in

FY14 to 16-18%, in our view. We believe the potential transaction could be mid-

single-digit EPS-dilutive in the first year after completion; however, execution of the

deal will be a key medium-term driver.

Risk profile increasing?: On the innovative R&D investment ($250mn spent over

five years on late-stage NBE Tildrakizumab), while this increases the risk of

SUNPs R&D pipeline, the potential success of the drug would help strengthen its

derma portfolio (DUSA) and its position as a specialty company in the US. The other

risk is a potential adverse outcome of Form 483s at the Halol facility. However, we

believe that the few ANDA approvals for SUNP over the last two months should

help alleviate some concerns. Furthermore, management efforts to avoid potential

risk of data integrity issues in other facilities after the Karkhadi warning letter

reduces the risk of such observation in Halol, in our view.

Balance sheet Still supports potential M&A, but large deal unlikely soon:

SUNPs earnings growth (~19% CAGR), FCF generation ($3+bn over FY15-17 in

SUNP ex RBXY), and net cash balance sheet ($1.3bn in Sep-14 and $630Mn

including RBXY debt) will continue to support the companys inorganic growth

strategy and premium valuation. However, given the complexity of the recent RBXY

deal, we see limited bandwidth for any large acquisition in the near term.


25


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]


Better-than-expected growth in the

US (Taro and ex. Taro)

Integration and improvement in

RBXY performance

Continued revenue growth from

price increases in Taro

Better-than-expected ramp-up of DUSA sales

Continued INR weakness

Longer-than-expected pricing benefit in Taro

aiding margins

Potential value-accretive acquisitions

Potential regulatory/litigation risks

Delay in product launches in the US

Adverse foreign exchange fluctuations

Protracted slowdown in the Indian Pharmaceutical market

Downside risk to Taro margin as pricing benefit declines


Revenues (LC) 160,044 184,065 204,573 241,174 Our Mar-16 price target of Rs925 is based on SOTP, at a P/E of 24x base EPS, a 20%

premium to the domestic peer group, and FTF opportunities. Note: we do not factor in

RBXY pending deal completion. Downside risks include adverse regulatory rulings,

delays in US product launches, higher-than-expected margin contraction in Taro and

delays in completion and improvement of RBXY.

Revenue growth (%) 42.4 15.0 11.1 17.9

EBITDA (LC) 69,257 81,241 88,204 103,257

EBITDA margin (%) 43.3 44.1 43.1 42.8

Tax rate (%) 9.9 10.0 10.0 10.0

Net profit (LC) 31,415 65,915 73,104 87,710

EPS (LC) 25.3 31.8 35.3 42.3

EPS growth (%) 51.1 25.7 10.9 20.0 SUNPs strong fundamental should support valuation premium

DPS (LC) 3.9 4.6 5.0 6.0

BVPS (LC) 89.4 115.9 145.3 180.7

Operating cash flow (LC mn) 39,592 66,299 77,119 87,540

Free cash flow (LC mn) 15,924 55,799 67,619 80,040

Interest cover (X) 156.7 204.2 445.9 522.0

Net margin (%) 40.0 40.3 40.0 40.3

Sales/assets (X) 0.6 0.6 0.5 0.5

Debt/equity (%) 0.1 0.1 0.0 0.0

Net debt/equity (%) -0.4 -0.5 -0.6 -0.6

ROE (%) 38.2 34.9 30.3 28.8

Key model assumptions FY14A FY15E FY16E FY17E

US Revenue growth in USD 43.1 13.7 9.2 18.3

India revenue growth 24.5 20.0 15.0 20.0

R&D as % of Sales 6.1 6.8 7.4 7.8

Source: Company and J.P. Morgan estimates. Source: Bloomberg, Company and J.P. Morgan estimates.

Sensitivity analysis EBITDA EPS JPMe vs. consensus, change in estimates

Sensitivity to FY15E FY16E FY15E FY16E EPS FY15E FY16E

5% chg in Taro growth 1% 2% 1% 1% JPMe old 31.8 35.3

5% chg in ex Taro US growth 2% 2% 2% 2% JPMe new 31.8 35.3

5% change in India growth 1% 1% 1% 1% % chg - -

1% chg in R&D / Sales 2% 2% 3% 3% Consensus 30.3 35.4

Source: J.P. Morgan estimates. Source: Bloomberg, J.P. Morgan.

Note: EPS here excludes extraordinary gain/loss

83.6

298.3

558.0676.2

800.4

516.6710.0

1,146.0

1,698.1

2,351.5

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

FY13 FY14 FY15E FY16E FY17E

FCF (Rs bn) Net Cash (Rs bn)


26


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Investment Thesis, Valuation and Risks

Sun Pharmaceutical Industries Ltd. (Overweight; Price Target:

Rs925.00)

Investment Thesis

SUNP trades at a premium to domestic peers, which we believe is justified by its

strong profitability (40%+ EBITDA margin ex. RBXY vs. 20-25% for other Indian

companies), robust balance sheet, and successful acquisitions. The integration of

RBXY and improvement in operating performance are key potential drivers in the

medium term. While the deal is likely to be EPS-dilutive in the first year after

completion, improvements in trend and expected synergies should add value to

SUNPs existing business.

Valuation

Our Mar-16 PT of Rs925 is based on SOTP, assuming a P/E of 24x base EPS, a 20%

premium to the domestic peer group, plus FTF opportunities at Rs17 per share.

SUNP SOTP summary

Rs/share

Base EPS 37.2

Target P/E multiple 24 20% premium to current domestic peer group average

Base PT 907

U.S. opportunities

FTF 8.0

Other opportunities 9.2

SUNP PT 925

Source: J.P. Morgan estimates.

Risks to Rating and Price Target

Key downside risks include adverse regulatory rulings, delays in U.S. product

launches, higher-than-expected declines in Taro margins and delays in the

completion and improvement of RBXY.


27


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Sun Pharmaceutical Industries Ltd.: Summary of FinancialsIncome Statement Cash flow statement


Revenues 112,389 160,044 184,065 204,573 241,174 PBT 49,050 71,005 82,461 90,950 107,987

% change Y/Y 40.4% 42.4% 15.0% 11.1% 17.9% Depr. & amortization 3,362 4,092 5,921 6,479 6,851

Gross Profit 91,655 132,251 152,657 169,580 199,763 Change in working capital (9,463) (24,240) (14,234) (11,413) (16,698)

% change Y/Y 44.0% 44.3% 15.4% 11.1% 17.8% Other 2,584 6,508 8,300 8,751 9,478

EBITDA 48,353 69,257 81,241 88,204 103,257 Cash flow from operations 33,566 39,592 66,299 77,119 87,540

% change Y/Y 51.6% 43.2% 17.3% 8.6% 17.1%

EBIT 44,991 65,165 75,320 81,725 96,406 Capex (8,318) (8,971) (10,500) (9,500) (7,500)

% change Y/Y 55.2% 44.8% 15.6% 8.5% 18.0% Other (1,618) (14,697) 0 0 0

EBIT Margin 40.0% 40.7% 40.9% 39.9% 40.0% Free cash flow 7,215 15,924 55,799 67,619 80,040

Net Interest (432) (442) (398) (198) (198)

Earnings before tax 49,050 71,005 82,461 90,950 107,987 Equity raised/(repaid) 0 0 0 0 0

% change Y/Y 46.1% 44.8% 16.1% 10.3% 18.7% Debt raised/(repaid) (749) 22,749 (5,719) (10,000) 0

Tax (8,456) (7,022) (8,246) (9,095) (10,799) Other (786) (11,628) (398) (198) (198)

as % of EBT 17.2% 9.9% 10.0% 10.0% 10.0% Dividends paid (5,115) (6,055) (11,075) (12,215) (14,503)

Net income (reported) 29,831 31,415 65,915 73,104 87,710 Beginning cash 40,022 54,911 75,902 114,509 159,716

% change Y/Y 12.3% 5.3% 109.8% 10.9% 20.0% Ending cash 40,587 75,901 114,509 159,716 225,054

Shares outstanding 2,071 2,071 2,071 2,071 2,071 DPS 2.50 3.94 4.57 5.04 5.99

EPS (reported) 14.40 15.17 31.83 35.30 42.35

% change Y/Y 12.3% 5.3% 109.8% 10.9% 20.0%

Balance sheet Ratio Analysis


Cash and cash equivalents 40,587 75,902 114,509 159,716 225,054 Gross margin 81.6% 82.6% 82.9% 82.9% 82.8%

Accounts receivable 27,108 22,004 30,642 34,071 40,176 EBITDA margin 43.0% 43.3% 44.1% 43.1% 42.8%

Inventories 25,778 31,230 35,936 39,958 47,117 Operating margin 40.0% 40.7% 40.9% 39.9% 40.0%

Others 11,491 37,744 39,856 44,316 48,909 Net margin 24.6% 25.7% 30.6% 32.0% 31.9%

Current assets 118,016 186,865 240,929 298,045 381,241

Sales per share growth 40.4% 42.4% 15.0% 11.1% 17.9%

LT investments 11,064 7,876 7,876 7,876 7,876 Sales growth 40.4% 42.4% 15.0% 11.1% 17.9%

Net fixed assets 50,771 58,242 62,821 65,841 66,490 Net profit growth 12.3% 5.3% 109.8% 10.9% 20.0%

Total Assets 208,812 293,708 353,935 415,426 501,680 EPS growth 12.3% 5.3% 109.8% 10.9% 20.0%

Liabilities Interest coverage (x) 112.0 156.7 204.2 445.9 522.0

Payables 13,565 13,283 15,284 16,995 20,040

Others 16,388 21,491 23,583 24,947 26,625 Net debt to equity (30.7%) (34.4%) (42.8%) (50.4%) (56.0%)

Short-term debt 1,445 25,122 19,403 9,403 9,403 Working Capital to Sales 77.1% 79.3% 99.2% 120.6% 134.8%

Total current liabilities 31,398 59,896 58,270 51,345 56,068 Sales/assets 0.6 0.6 0.6 0.5 0.5

Long-term debt 1,153 487 487 487 487 Assets/equity 1.4 1.5 1.5 1.4 1.4

Other liabilities 10,014 28,864 27,577 26,353 25,200 ROAE 20.3% 24.5% 26.5% 24.2% 22.8%

Total Liabilities 42,564 89,247 86,334 78,185 81,755 ROACE 26.8% 32.3% 28.8% 25.8% 25.0%

Shareholders' equity 149,897 185,250 240,090 300,978 374,185

BVPS 72.37 89.44 115.92 145.32 180.66



28


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]

Lupin Ltd.

Business development key driver over medium term

Company Data

Shares O/S (mn) 448

Market Cap (Rs mn) 625,316


Price (Rs) 1,395.85




BSE30 2,7842.32

Exchange Rate 63.42


Price Target (Rs) 1,400.00

Lupin Ltd. (Reuters: LUPN.NS, Bloomberg: LPC IN)


Revenue (Rs mn) 94,616 110,866 131,666 152,111 174,697

Net Profit (Rs mn) 13,142 18,364 23,438 26,832 31,756

EPS (Rs) 29.26 40.79 52.06 59.59 70.53

Core EPS (Rs) 23.79 33.65 34.40 43.85 61.78

DPS (Rs) 3.99 5.97 7.94 9.09 10.75

EPS growth (%) 51.2% 39.4% 27.6% 14.5% 18.3%

ROCE 22.5% 25.9% 27.1% 25.1% 23.9%

ROE 23.2% 25.0% 19.6% 19.8% 22.5%

P/E (x) 47.7 34.2 26.8 23.4 19.8

Core P/E (x) 58.7 41.5 40.6 31.8 22.6


Lupin's strong generic pipeline in the US is reflected in its key launches over the last

year. We believe that Lupins transition into a highly differentiated specialty

business should provide an opportunity for growth (20% EPS CAGR), sustainable

margin expansion (28-29%), and improving return ratio (ex cash RoCE of 38%).

However, these are reflected in the current valuation of 23x FY16E EPS, in our view.

In 2015, we believe that business development opportunities pursued by the

company will be a key driver of the stock given the comfortable balance sheet. We

remain Neutral with a new PT of Rs1400 as we roll forward our timeframe to Mar-16

and increase our estimates slightly.

Business development is an important catalyst for the stock, in our view.

Lupins $5bn revenue target for FY18 is likely to be driven by organic growth,

with acquisition being an important lever to augment this growth. M&A activity

in the space has increased (India & International), but Lupin has restricted itself

to small tuck-in deals over the last few years. The company has indicated

potential acquisitions to fill portfolio gaps (geographical spread, technology,

brands). We believe the strong balance sheet (net cash of Rs9bn as of Sep-14)

and steady cash flow (FCF generation of Rs54+bn over FY15E-17E) provide an

opportunity to leverage its balance sheet to purse larger deals.

Growth in US generics to offset recent concerns. The strong growth in the US

generic business has been supported a robust pipeline. Most recently, the launch

of gCelebrex on Day 1 as Authorized Generic (AG) is ahead of our expectation of

a Jun-2015 launch. The exclusivity sales from gCelebrex should help offset

concerns about growth in US generic revenue given last years high base

(gCymbalta launched in Dec-13), slowing ANDA approvals, and impact from

price erosion last quarter. Therefore, we expect US revenue growth to pick up

from 2Q levels ($202mn vs. the 2H quarterly run-rate of $230+mn, in our view).

The strong US pipeline (15-20 launches pa with ~95 pending ANDAs) should

support 15+% CAGR over FY15-17. Lupins R&D spending to improve the

quality of filings should also support growth and expand margins over time.

Japan the next big market? Lupin is one of the few Indian players with a

sizeable presence in Japan (12% of revenue). Japan provides a significant

opportunity for LPC, given government focus on increasing generic penetration,

large patent expiry pipeline, and the companys efforts to build in-house

products. We expect a revenue CAGR of 16% over FY15-17 (in JPY terms)

driven by continued strong performance in Kyowa and a turnaround in Irom.

Japan could surprise on growth and margin performance over the next few years.


29


07 January 2015

Neha Manpuria

(91-22) 6157-3589

[email protected]


Ramp-up of new brands and

acquisition of brands for its US

business

Progress of upcoming niche launches

in the US

Improvement in growth trend in Japan

Faster-than-expected ramp up of US-Branded

business

Big-ticket approval for the US Generic

business

Growth from Japan exceeding expectations

given the drugs going off-patent in the medium

term

Delay in approvals of products in the US

Protracted slowdown in the domestic pharma market

Regulatory/Litigation risks

Continued weakness in its Japanese business (especially I'rom)

INR appreciation could hurt non-INR revenue (~40% of revenue

in US$)


Revenues (LC) 110,866 131,666 152,111 174,697 Our Mar-16 PT of Rs1400 is based on SOTP, at a P/E of 22x on base EPS, a 10%

premium to the domestic peer group (given its strong growth profile & higher return

ratios), and historical valuation and pipeline opportunities at Rs47/share.

Key risks include faster-

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