MO Healthcare Oct 2013

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Sector Update | October 2013

Alok Dalal ([email protected]); +91 22 3982 5584

Hardick Bora ([email protected]); +91 22 3982 5432

Healthcare

Only the fittest thrive!



218 October 2013

Healthcare | Only the fittest thrive!


Sustainable business + Optimum geographic mix = OUTPERFORMANCE

Page No.

Summary ........................................................................................................................ 3-4

Sustainable businesses have three attributes ............................................................ 5-7

Depth in product mix

Continuous improvement in product mix

Cost efficiency

Right geographic mix essential to effectively monetize strengths ........................... 8-24

1. US: Strong pipeline and execution can lead to positive surprises

2. Russia: Market dynamics favor Indian generics companies

3. India: Short term hiccups; longer term story intact

4. Brazil: Government intervention diluting potential

Greater FDA vigilance, government interference in pricing here to stay .............. 25-35

Increasing regulatory vigilance of the US FDA

Analysis of US FDA inspections in the past

Government intervention in pharmerging markets

Valuations leave room for reasonable returns ........................................................ 36-39

Sector outperformance led by strong earnings growth over last two years

Consistent upgrade in consensus EPS estimates

Advocating basket approach to buying pharmaceuticals stocks

Annexure .................................................................................................................... 40-41

1: Consent decree related past instances ............................................. 40

2: Company snapshot - India formulations ............................................. 41

Companies .................................................................................................................. 42-81

Sun Pharma .......................................................................................... 42

Lupin .................................................................................................... 46

Dr. Reddy's Labs.................................................................................... 50

Cipla...................................................................................................... 54

Ranbaxy ................................................................................................ 58

Glenmark Pharma ................................................................................ 62

Cadila Healthcare ................................................................................. 66

Divi's Labs ............................................................................................. 70

IPCA Labs .............................................................................................. 74

Torrent Pharma .................................................................................... 78



Healthcare

18 October 2013 3


Sustainable business + Optimum geographic mix = OUTPERFORMANCE

Since the beginning of FY13, the BSE Healthcare index has outperformed the BSE Sensex

by as much as 26% in terms of absolute returns. Most large pharmaceuticals companies

are trading at the higher end of their historical valuations. In this backdrop, we try to

identify pharmaceutical companies that offer sustainable business opportunities,

predictable earnings growth and as a result would outperform over the next two years.

We prefer Dr Reddy’s, Sun Pharma and Lupin in the large-cap pharma space, while among

the mid-caps we prefer Divi’s Labs and Ipca Labs. We believe these companies have (a)

sustainable business models, (b) optimum geographic mix, and (c) ability to withstand

regulatory risks. Consequently, these companies have scope to positively surprise on

earnings growth over the next two years in our view. Despite the recent run-up, weexpect our top picks to continue to outperform the sector.

Sustainable businesses have three attributes

For the pharmaceuticals industry, sustainability of business models would come

from three key attributes in our view: (1) Depth in product offerings - helps gain

better visibility with the doctor/patient community and strengthens the company’s

position over distributor channel; (2) Focus on improving therapeutic mix - enables

entry into new markets, thereby building upon brand equity and widening its growth

prospects and (3) Cost competitiveness - to tackle competitive threats in existing

as well as new markets. Besides our preferred picks, Cipla offers many of the above

attributes.

Right geographic mix essential to effectively monetize strengths

Companies focused on geographies with strong growth prospects and relatively

unhindered by government intervention offer predictable earnings growth. We

believe that the US will continue to be the most important geography for large

Indian pharmaceuticals companies over the next two-three years. Within the US,

companies targeting complex product opportunities have the potential to grow

ahead of their peers in our view. Our analysis of the product pipelines of companies

under our coverage makes us believe that there is high probability of the US market

continuing to generate positive surprises. Emerging markets like India, Russia and

Brazil continue to be exciting in the longer run, but India and Brazil may face near-

term challenges due to changes in the regulatory systems. We believe Lupin, Dr.

Reddy’s, Sun Pharma and Glenmark have the right geographic mix.

Greater FDA vigilance, government interference in pricing here to stay

The US FDA has issued more than twice as many warning letters in the year till date

compared to the same period last year. While there has been an increase in

enforcement actions against Indian companies, our analysis suggests that there is

no bias towards India. With more resources in hand, the frequency of such

inspections is only going to increase. We believe companies will have to raise theirstandards for continued compliance with GMP guidelines laid down by the FDA.

Investors are advised to refer

through disclosures made at

the end of the Research

Report.

Sector Update



418 October 2013


We note that few Indian companies like Cipla, Glenmark, Divi’s Labs and Torrent

Pharma have had no issues with FDA so far, which is a tremendous achievement.

However, some companies like Sun Pharma, Dr. Reddy’s, Lupin and Cadila Healthcare

have proactively dealt with the US FDA issues in the past and thus are well placed to

counteract any future challenges in our view. Our analysis of the manufacturingfacilities of the companies supplying products to the US brings out interesting trends.

Local governments in key emerging markets are likely to continue interfering in the

pricing of essential drugs. We believe companies with the ability to develop products

with high entry barriers or companies with strong geographical spread, depth in

product mix and presence in free-priced markets like OTC will be eventual winners

in these markets.

Valuations leave room for reasonable returns; Advocate basket approach

We estimate the companies covered in this report to deliver a core earnings growthof 24% over FY13-15E, which is stronger than the 20% growth achieved over FY08-13.

This would be driven by an improving product mix and favorable currency. Based on

our valuations screen, we believe current valuations still leave room for reasonable

returns. However, given the risks associated with greater scrutiny by US FDA and

possibility of increase in span of price controls for key emerging markets like India,

Brazil and Russia, we recommend a basket approach to pharma sector allocation.

Our top large-cap picks are Dr. Reddy’s, Lupin and Sun Pharma, while our best mid-

cap picks are IPCA Labs and Divi’s Labs.

Valuation matrix

Company MCap TP Upside/ Rating EPS P/E EV/EBITDA Div. Yield RoE

USD b INR Downside CAGR (%) (x) (x) (%) (%)

FY13E FY14E FY15E FY14E FY15E FY15E FY14E FY15E

Market cap >USD2.5b

Sun Pharma 20.8 710 14% Buy 29.9 28.9 25.0 18.9 15.8 0.6 27.9 26.5

Lupin 6.5 1049 17% Buy 34.7 28.6 21.5 16.7 13.8 0.9 23.8 25.4

Dr. Reddy's Labs 6.5 2808 17% Buy 18.9 22.5 18.9 15.1 12.8 0.6 20.3 20.0

Cipla 5.5 452 7% Neutral 19.5 20.9 18.7 13.2 11.7 0.9 15.6 15.0

Ranbaxy 2.6 270 -30% Sel l 3.3 29.6 27.8 15.4 8.2 1.3 -4.7 28.8

Market cap <USD2.5b

Glenmark Pharma 2.4 623 11% Buy 31.6 22.0 17.5 14.1 11.9 0.7 20.5 21.1

Cadila Healthcare 2.2 828 25% Buy 13.9 18.5 16.0 13.0 11.1 1.6 22.8 22.3

Divi's Labs 2.2 1329 29% Buy 21.1 18.8 15.5 14.3 11.4 2.5 26.7 27.7

IPCA Labs 1.4 870 24% Buy 41.1 22.0 13.7 12.5 9.4 1.5 23.5 30.3

Torrent Pharma 1.1 519 24% Buy 11.6 13.8 12.0 9.4 8.2 2.1 31.2 28.6

*Prices as on 15 October 2013 Source: Company, MOSL



618 October 2013


Continuous improvement in product mix

We believe continuous improvement in product mix provides:

Entry barriers for competition

Improvement in efficiency of various units involved with these products

Increase in financial strength of the company

We analyze this aspect by studying the US filing and approval trends for the companies

under coverage. We see a trend of top Indian companies like Sun Pharma, Lupin and

Dr Reddy’s moving away from traditional generics to more complex products. In the

Indian market, Lupin and Ipca Labs have demonstrated a significant shift in their

therapy mix over the last decade. We note that many other Indian companies

attempted to decrease high dependence on one molecule (for Lupin: anti-TB, for

Ipca: anti-malaria) but did not do so successfully.

66% 74%65%

52%65%

47%

8%10%

19%28%

13%

13%

20% 9% 3% 9%2%

23%

5% 6%14% 12%

5% 5% 6% 3% 3% 3%2% 2%1%2% 3%

2008 2009 2010 2011 2012 2013

Ta bs ./Ca ps ./Sus p./Sol n. Modi fied Rel eas e Injecti ons Ora l Contra cepti ves Topi ca ls Ophtha lmi cs Na sal

Trend in ANDA approvals - Improving prodcut mix in US generic market

Source: US FDA, Company, MOSL

200513%

33%

2%23%

3%

26%

CVS

Anti-TB

Anti-Asthma

Anti-biotics

Anti-diabetic

Others

Improving prodcut mix in India formulations business

Source: Company, MOSL

201323%

9%

9%

16%

15%

28% CVS

Anti-TB

Anti-Asthma

Anti-biotics

Anti-diabetic

Others

28%

23%17%

11%

8%

7%6% CVS and anti di abetic

NSAID

Anti mal aria

Anti bacteria

GI

CNS

Others

29%

12%

22%

15%

10%

5%7%

CVS and anti di abetic

NSAID

Anti malaria

Anti ba cteria

GI

CNS

Others

LUPIN

IPCA

Not only have filings in

US moved towards

greater complexity,

product profile in India

has shifted towards fast

growing chronic areas



718 October 2013


Cost efficiency

We believe cost efficiency provides:

Ability to stay competitive in a commodity market

Better control in case of uncertain events like price controls

Stronger cash flows/balance sheet, strengthening ability to seize inorganic growthopportunities

We analyze the cost structure of the companies covered in this report to understand

this aspect better. Sun Pharma and Divi’s Labs are the most cost competitive, which is

a result of their judicious product mix, right geographical spread and organization

culture favoring cost efficiency.

Sun Pharma and Divi’s

Labs are the most cost

competitive, which is a

result of their judicious

product mix, right

geographical spread and

organization culture

145.5

95.3

78.464.8 63.9

57.344.1

36.5 35.8

I PCA La bs Dr Reddy's Lupi n Ca di laHealthcare

AurobindoPharma

Ranbaxy GlenmarkPharma

SunPharma

TorrentPharma

DMFs/ANDAs filed

Backward integrated ANDA filings

Source: US FDA, Company, MOSL

Trend in cost structure: Large companies

Sun Pharma Lupin Cipla Dr Reddy’s Ranbaxy*

FY05 FY09 FY13 FY05 FY09 FY13 FY05 FY09 FY13 FY05 FY09 FY13 FY05 FY09 FY13

Material cost 28.5 20.0 18.3 50.8 41.5 36.8 48.6 44.9 35.7 51.9 55.7 44.6 49.5 42.9 32.6

Staff cost 9.8 8.0 13.6 10.5 12.6 13 5.2 5.2 12.5 16.0 14.6 13.8 16.5 17.0 15.5

R&D cost 8.8 7.3 5.5 6.0 8.1 8.1 4.9 4.7 4.5 5.5 5.8 6.7 8.8 6.4 3.6

SG&A cost 16.5 21.1 19.3 21.7 18.7 18.6 19.0 21.8 20.8 23.8 10.6 13.6 41.0 25.8 32.7

*Y/E December Source: Company, MOSL

Trend in cost structure: Mid-sized companies

IPCA Labs Glenmark Pharma Torrent Pharma Cadila Healthcare Divi's Labs

FY05 FY09 FY13 FY05 FY09 FY13 FY05 FY09 FY13 FY05 FY09 FY13 FY05 FY09 FY13

Material cost 42.7 39.4 39.0 30.1 31.5 33 32.5 32.8 28.8 38.0 32.7 36.5 45.6 39.2 37.3

Staff cost 13.2 14.6 13.9 7.0 14.2 15.9 16.0 15.7 19.4 11.5 10.6 14.2 4.3 5.6 9.2

R&D cost 1.8 3.9 3.6 6.0 4.2 7.8 13.5 7.1 4.5 5.6 5.3 6.0 2.1 1.0 1.1

SG&A cost 25.0 20.8 21.3 28.5 33.9 22.1 24.4 26.0 25.7 26.1 30.7 25.6 17.9 10.3 14.5


For the US, we study the trend in ANDA filings by Indian companies with their own

DMF backing. This is important in the light of having significant competitive advantage

in a commodity market. Lupin, Dr Reddy’s, and Ipca have the highest percentage of

ANDAs backed by their own DMF filing, which makes them cost competitive versus

competitors.



1018 October 2013


ANDA filings backed by own DMF

DMF filings by Indian companies (no. of filings)


145.5

95.3

78.464.8 63.9

57.344.1

36.5 35.8

I PCA La bs Dr Reddy's Lupi n Ca di la

Healthcare

Aurobindo

Pharma

Ranbaxy* Glenmark

Pharma

Sun

Pharma

Torrent

Pharma

DMFs/ANDAs filed


Product pipelines have matured over the last five years

We have segregated the product filing and approval trends into two for Indian

companies: (1) Years 2003-08, and (2) Years 2008-13. 2003-08 were the initial years of

scale up in the US for most companies except Dr Reddy’s and Ranbaxy. During these

years, Indian companies’ filings and approvals were more geared towards the crowded

market products, with few exclusive filings and launches.

Key drug launches over 2003-08Company Year Brand Molecule Size (USDm) launch type

Dr Reddy's 2006 Allegra Fexofenadine 1400 Limited competition

2006 Proscar Finasteride 406 Authorised generic

2006 Zocor Simvastatin 3100 Authorised generic

2006 Zofran Ondansetron 639 180 day exclusivity

2008 Imitrex Sumatriptan s uccinate 1290 180 day exclusivity

Glenmark

Pharma 2007 Tri leptal Oxacrbazepine 643 Shared 180 day exclusivity

Ranbaxy* 2006 Zocor Simvastatin 4200 180 day exclusivity

2007 Pravachol Pravastatin (80mg) 209 180 day exclusivity

Sun Pharma 2007 Tri leptal Oxacrbazepine 643 Shared 180 day exclusivity

2008 Protonix Pantoprazole 2300 At risk launch

2008 Ethyol Amifostine 80 At risk launch


In the initial years of US

operations, filings were

more geared towards

crowded market products

122

62

32

106

3046

7489

70

6

172

114

37

184

6048

138 125 147

24

Aurobindo

Pharma

Cadila

Healthcare

D ivi 's La bs D r Re dd y's Gl en ma rk

Pharma

IPCA Labs Lupin Ranbaxy* Sun Pharma Torrent

Pharma

FY08 FY09 FY10 FY11 FY12 FY13



1118 October 2013


4570

45

932

142

69

11

76

128

83

14

78

138

261

43

Cadila

Healthcare

Dr Reddy's Glenmark

Pharma

IPCA Labs Lupin Ranbaxy* Sun Pharma Torrent

Pharma

2009 2010 2011 2012 2013

Starting 2008, Indian companies have collectively made over 800 filings with the US

FDA, which constitute ~50% of the global generic filings. These are geared towards

more complex products than those filed earlier. Besides, Indian companies are

aggressively targeting Para IV opportunities and companies like Sun Pharma and

Glenmark have also chosen to introduce products ‘at risk’. Several Indian companieshave started identifying niche areas for presence and have started developing their

product pipelines to add depth in their chosen areas.

Cumulative ANDA approvals over 2008-2013 (no. of approvals)


80% 77%100%

71%88%

50%

20% 23% 29%13%

25%

25%

2008 2009 2010 2011 2012 2013

Ta b s./Ca ps ./Sus p ./Sol n . Mo di fi e d R el e a se I nje cti o ns

67%82%

55% 57%74%

36%

8%

18%

36% 21%

26%

9%

25%9%

21%

55%

2008 2009 2010 2011 2012 2013

Ta bs ./Ca p s./Su s p./Sol n . Mo di fi e d R el e as e I nje cti on s

40%56%

37% 45%30%

57%

11%

26%18%

14%60%33% 21% 18% 20% 29%

50%

18%16%

2008 2009 2010 2011 2012 2013

Tabs ./Caps./Sus p./S ol n . Mo di fi e d Re l eas e

Oral Contraceptives Topicals

75% 100% 100%56% 64%

38%

25%31%

13%

44%36%

13% 6%

2008 2009 2010 2011 2012 2013

Ta bs ./Ca ps ./Su sp ./So ln. Mo di fi ed Re l ea s e

Oral Contraceptives Ophtha lmics

2008 2009 2010 2011 2012 2013

Tabs ./Caps ./Susp./Soln. Modi f ied Release

60% 63% 58%35%

77% 55%

4%25%

41% 14%

36% 31%8% 18% 8% 32%

6% 8% 6% 15%

2008 2009 2010 2011 2012 2013

Ta bs ./Ca ps ./Su sp./Sol n. Mo di fi e d Re le as e

Injections Ophtha lmics

Nasal

Trend in ANDA approvals: Changing product profile

Cadila Healthcare: Changing Product profile Dr. Reddy's: Changing Product profile

Indian companies

constitute ~50% of the

global generic filings

globally

Glenmark: Changing Product profile Lupin: Changing Product profile

Ranbaxy: Changing Product profile Sun Pharma: Changing Product profile



1218 October 2013


High impact launches over 2009-13

Company Year Brand Molecule Size (USDm) Launch type

Cadi la 2011 Taxotere Docetaxel 1200 Launched by partner Hospira

Healthcare with 180 day exclusivity

Dr Reddy's 2009 Omeprazole Mg OTC Omeprazole NA Limited competition

2010 Lotrel Amlodipine Besylate 800 Limited competition

2010 Prograf Tacrolimus 955 Limited competition

2010 Prevacid Lansoprazole 300 Limited competition

2011 Arixtra Fondaparinux 340 Limited competition

2011 Zyprexa Olanzapine 20mg 1100 180 day exclusivity

2012 Geodon Ziprasidone 1340 Shared exclusivity

2012 Toprol Metoprol Succinate 1130 Limited competition

2013 Propecia 1mg Finasteride 136 180 day exclusivity

2013 Reclast Zoledronic acid 355 Limited competition

2013 Dacogen Decitabine 260 Limited competition

2013 Vidaza Azacitidine 380 Limited competition

2013 Depakote Divalproex Sodium 194 Limited competitionGlenmark 2010 Tarka Trandolapril; Verapamil 60 180 day exclusivity

Pharma Hydrochloride

2011 Malarone Atovaquone and 56 180 day exclusivity

proguanil hydrochloride

2013 Bactroban Mupirocin 56 Limited competition

Lupin 2010 Lotrel Amlodipine Besylate 800 Limited competition

2010 Prograf Tacrolimus 955 Limited competition

2011 Fortamet Metformin 70 Limited competition

2012 Geodon Ziprasidone 1340 Shared exclusivity

2012 Combivir Lamivudine and Zidovudine 275 Limited competition

2012 Tricor Fenofibrate 1260 Limited competition

2013 Yasmin Drospirenone; Ethinyl Estradiol 100 Limited competition

Ranbaxy 2009 Valtrex Valaciclovir 2200 180 day exclusivity

2011 Aricept Donepezi l 3000 180 day exclusivity

2011 Lipitor Atorvastatin 6100 180 day exclusivity

2012 Actos Pioglitazone 2700 Authorised generic

2012 Absorica Isotretinoin 450 Limited competition

Sun Pharma 2010 Eloxatin Oxaliplatin 2300 Limited competition

2011 Imitrex Sumatriptan Succinate Injection 190 Limited competition

2011 Uroxatral ER Alfuzosin 250 Shared exclusivity

2012 Astel in Azelastine HCL 144 Limited competition

2012 Doxil Doxorubicin HCl Liposome injection250 Limited competition

2013 Prandin Repagl inide 200 180 day exclusivitySource: Industry; Company, MOSL



1318 October 2013


Strong pipeline and execution can lead to positive surprises

We acknowledge the threat of a patent cliff in the US; product opportunities might

start to decline over the next few years. However, in the medium term, we believe

Indian companies are well placed to sustain their growth momentum in the US. We

expect their margin profile to improve in the US on the back of improving product

mix. Stricter regulatory compliance, timely approvals and stronger execution may

even lead to positive surprises in US growth over the medium term.

Niche opportunities identified in US

Company Focus area Market Size Status of the filings

(USD b)

Ranbaxy Dermatology 19 N/A

Penems N/A N/A

Dr Reddy's Biosimilars 100 Current focus is India and emerging

markets. Partnered with Merck Serono for

US and EU markets

Sun Pharma Controlled substances 7 Eight products approved by US FDA

Derma 19 Presence through acquisition of Taro, 92

products approved by US FDA

Oncology 55 16 products approved by US FDA

Lupin Oral Contraceptives 4 Over 25 with US FDA

Ophthalmology 15 Filed seven products with US FDA

Derma 19 Filed one product with the US FDA

Respiratory 20 Launches beyond 2015

Cadi la Controlled substances 7 Presence through acquisition of NesherHealthcare Transdermal 10 Three products with US FDA

Na sa ls 20 Seven products with US FDA

Oncology 55 21 products with US FDA

Source: MOSL

212417

18425

443553 494

25

360

933

413

105

930774

1,848

116

Cadila

Healthcare

Dr Reddy's Glenmark

Pharma

IPCA La bs Lupin Ranbaxy* Sun Pharma Torrent

Pharma

FY11 FY12 FY13 FY14E FY15E


Scenario analysis of US growth

Company Revenue CAGR Base case gr. (%) Bull case gr. (%)

FY08-FY13 (%) FY14E FY15E FY14E FY15E

Cadila Healthcare 34.1 10.2 18.0 15.5 24.5

Dr Reddy's 27.6 20.5 14.6 25.0 20.0

Glenmark Pharma 17.4 12.2 18.5 18.2 22.3

IPCA Labs 65.4 30.2 101.2 38.5 125.0

Lupin 31.0 27.9 15.0 35.0 22.0

Ranbaxy* 19.3 -34.7 27.0 -20.0 37.5

Sun Pharma 26.3 42.9 19.8 45.0 25.5

Torrent Pharma 81.1 36.6 30.0 50.0 38.0


Trend in US sales for companies under coverage universe (USD m)

Indian companies are

well placed to sustain

their growth momentum

in the US with an

improving margin profile



1418 October 2013


In this section, we analyze the key products for each company from its filings. Some

of these products are assured launch with 180 day exclusivity while other products

are limited competition in nature due to the complexity in product development and

manufacturing.

The products discussed below account for less than 20% of the pending ANDA approvals

for each of these companies. The balance portfolio will continue to play a critical role in

driving growth in the US in the medium to longer term. For example, Dr Reddy’s has ~50

ANDAs pending approval with the US FDA, which are not part of the above discussion.

Assuming that the company is able to introduce 80% of these products over the next 3-

4 years and further assuming that it is able to sustain the current rate of USD5.3m/

product in the US, its revenue CAGR in the US would comfortably exceed 15%.

US – surprise factor

Company Potential

contribution

Pending Known Unknown over FY13-

ANDAs opportunities opportunities FY18

No Mkt size Mkt size Mkt size Sales

USD b) No (USD b) No (USD b) (USD m)

Cadila Healthcare 100 25 10 5 90 20 160

Dr Reddy's 65 32 13 8 52 24 192

Glenmark Pharma 53 23 15 6 38 17 136

Lupin 98 48 45 24 53 24 192

Ranbaxy* 20 6 3 4.9 17 1.1 8.8

Sun Pharma 142 50 30 23 112 27 216


Competition increasing, but will take many years to develop product depth

Given that the US is the world’s largest market for generics, we expect competition to

intensify further, as the third wave of Indian generic companies starts to make a

meaningful impact in the US. Intas Labs (privately held) is already a strong player in

the US (crossed sales of USD120m in FY13). We expect companies like Indoco Remedies

(INDR IN, Not Rated), Unichem Labs (UL IN, Not Rated) and privately held companies

like Macleods, Hetero Labs, Emcure Pharma, Alkem and Micro Labs to increasingly

focus on US generics. Given that near-term growth in India is likely to be subdued on

account of the recently implemented Drug Pricing Policy, these companies might feel

the urge to enter the US even more.

Strategy of the third wave of Indian companies entering the US

Company DMF filed ANDAs Strategy

approved

Unichem Labs 40 10 Para III products with focus on chronic products,

developing 25 products for the US

Intas Pharma 45 27 Focus on injectables, extended release and oral solids,

already crossed sales of USD100m in US

Alkem 7 8 Partnership model for the US

Macleods 33 11 Focus on oral solidsHetero 139 15 Filings include Injectables and extended

release technology

Source: MOSL, US FDA, Company

Although focushas been on complex

products/Para IV

opportunities which

constitute 20% of sales,

the balance 80% is yet to

be analysed which could

be the surprise factor

Fourth wave of Indian

companies are entering

the US but they may take

time to build scale and

regulatory compliance

could be more

challenging for them

then the established

players



1518 October 2013


Sun Pharma, Dr Reddy’s and Lupin can surprise positively

Among the companies under our coverage, we believe Sun Pharma, Dr Reddy’s and

Lupin have a strong pipeline for the US market. There is a high probability of these

companies sustaining their US growth momentum and generating positive surprises.

The following table highlights the potential high impact launches for these companies.

Potential high impact launches over the next three years

Company Timeline Brand Molecule Size (USD m) Nature of launch

Cadila Healthcare FY15 Toprol XL Metoprolo Succinate 700 Limited competition

FY15 Niaspan Niacin 1120 Competitive

FY16 Lialda Mesalamine 380 Potential FTF

FY16 Lidoderm Lidocaine topical patch 1222 Limited competition

Dr Reddy's Mar-14 Avelox Moxifloxacin 350 Limited competition

Nov-14 Nexium Esomeprazole 2272 Post exclusivity launch

Jan 15 Namenda Memantine 600 Shared exclusivity

Apr-15 Aloxi Palonosteron 450 Limited competitionEnd 2015 Diprivan Propofol 200 Limited competition

July 16 Zegerid Omeprazole+sodium bicarbonate 40 OTC launch

Glenmark Pharma End 2013 Locoid Hydrocortisone Butyrate 38 FTF launch

Dec 13 Vanos Fluocinonide 40 Limited competition

Feb 15 Tarka Trandolapril + verapamil 70 Limited competition

Dec-16 Zetia Ezetimibe 1350 Settlement

Lupin Feb-14 Niaspan Niacin ER 900 Limited competition

Feb-14 Renagel Sevelamer hydrochloride 449 Limited competition

FY14 Yaz Drospirenone + Ethinyl estradiol 330 Limited competition

FY14 Zymaxid Gatifloxacin 65 Limited competition

May-14 Lunesta Eszopiclione 780 Shared exclusivity

July-14 Lo Loestrin Fe Estradiol, norethindrone 20 FTF opportunity

Aug-14 Lumigan Bimatoprost 400 Limited competition

Sept-14 Renvela Sevelamer carbonate 400 FTF on suspension

Nov-14 Nexium Esomeprazole 2272 Post exclusivity launch

Feb-15 Apriso Mesalamine ER 80 FTF opportunity

Feb-16 Glumetza Metformin ER 140 FTF opportunity

FY17 Trizivir Abacavir + lamivudine +zidovudine 125 FTF opportunity

Ranbaxy Delayed Diovan Valsartan 2087 FTF opportunity

Delayed Tricor Fenofibrate 700 Limited competition

Delayed Valcyte Valganciclovir 300 FTF opportunity

May- 14 Nexium Esomeprazole 2272 FTF opportunity

Sun Pharma Feb-14 Temodar Temozolomide 400 Limited competitionMay-14 Lunesta Eszopiclone 800 Shared exclusivity

May-14 Ryzolt Tramadol ER 15 FTF opportunity

Nov-15 Coreg CR Carvedilol CR 210 Limited competition

Dec-15 Gleevec Imatinib 1800 Potential FTF opportunity

Source: US FDA, Industry; Company, MOSL



1618 October 2013


2. Russia: Market dynamics favor Indian generics companies

Russia is the 10th largest pharmaceuticals market in the world and is worth RUB818b

(USD26b). Having grown at a CAGR of 20% for the last seven years, it is one of the

fastest growing markets in the world. It is projected to almost triple to USD75b by

2020.

Russian pharma market: Growing fast Russian pharma market: Break-up of growth

Source: Pharmstandard Annual Report 2012, MOSL

283 321 409 506 647 818 2330150 158 224 698

12%6%

41%

26%

13%

27%24% 28%

8%

17%

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 2 0

Pha rma Ma rket (RUB b) Ma rket growth

11%16%

31% 28%

13%

27%21%

10% 11%

11%

1%

3%

28%

-2%

6%

-1%-11%

1%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Pri ce Growth Volume Growth

Oil and natural gas exports constitute ~60% of the Russian Federation’s exports and

~14% of its GDP. Per capita income in Russia has grown at a CAGR of 15% over 2007-

2012. With a financially strong economy, high per capita income and aging population,

we expect the Russian pharmaceuticals market to maintain its growth trajectory.

Source: Pharmstandard Annual Report 2012, CIA, MOSL

High per capita income An ageing population

3.0 4.1 5.3 6.9 9.1 11.7 10.7 13.3 14.0

8.6

-26

25

3830 30 32 28 24 24

6

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Per capita income (USD '000) Growth (%)

38.8 37.2

30.3 29.426.726.6 26.2

15.5 16.612.6

Russ ia Uni ted

States

Brazi l World India

Median age (in years) Popula tion ab ove 55 yea rs (%)

High dependence on imports

It is the unique dynamics of the Russian market that render it attractive for Indian

generics companies. Due to the lack of local manufacturing base, Russia’s dependence

on imported drugs is very high. According to industry reports, ~72% of the Russian

market in value terms comprises of imported drugs.

The high dependence on imports bestows bargaining power to foreign drug suppliers,

who are able to take healthy price increases. Consequently, 75% of market growthover the last five years has come from price increases. The government has taken

measures to increase the affordability of drugs (discussed in detail in the subsequent

According to industry

reports, ~72% of the

Russian market in value

terms comprises of

imported drugs

Consequently, 75% of

market growth over thelast five years has come

from price increases



1718 October 2013


chapter). As the first set of price control measures was implemented in 2010, we do

not expect a significant incrementally negative impact in this regard over the

foreseeable future.

At the same time, there is huge scope for Indian companies to monetize on thismarket. According to industry estimates, only ~3% of these imported drugs are from

India. The largest Indian company supplying to Russia, Dr Reddy’s, constitutes ~1% of

the market. Given their low cost advantage, Indian companies are better placed to

capitalize on this fast-growing market.

High dependence on imports Miniscule share of Indian companies

Source: Pharmstandard Annual Reports, Company, MOSL

79 78 74 73 72

21 22 26 27 28

2008 2009 2010 2011 2012

Imported drugs (%) Loca l ly produced (%) 6.3%

76.1%

2.0%1.0%

3.0%

3.2%3.4%

5.0% Novartis

Sanofi-AventisPharmstandard

Bayer Heal thcare

Teva

Dr. Reddy's

Other Indian cos.

Rest of the market

We are bullish on companies that have already spent time and capital in establishing

their front-end in Russia. Presence in the OTC market is also an important criterion

for this brand conscious market. We believe Dr Reddy’s and Glenmark are better

placed to capitalize on the Russian market over the next few years.

Presence of major Indian companies in Russia

Company Sales Russia business OTC presence

(USD m) as % of total sales

Dr. Reddy's 258 12% OTC constitutes 35% of the business

Glenmark 70 8% Just started OTC in FY13

Ranbaxy 83 5% OTC constitutes 30% of sales

IPCA Labs 25 5% None

Torrent Pharma 10 2% None


We believe Dr Reddy’s

and Glenmark are better

placed to capitalize on

the Russian market over

the next few years

Only 3% of importeddrugs in Russia are from

India of which Dr Reddy's

contributes 1%

Share of

Indian Cos



1818 October 2013


552480410340310274246213204196181

9.7

15.017.1

20.6

13.011.7

15.4

4.44.1

8.36.2

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

India Pharma market (In INR b) Growth (%)

3. India: Short term hiccups; longer term story intact

The Indian pharmaceuticals market showed all-round growth over 2002-12, clocking a

revenue CAGR of 12% to INR550b (USD12b). As at the end of 2012, India was the 14th

largest pharmaceuticals market in the world by revenue, a long way from being the

20th largest in 2002. Key reasons for the strong growth in India were (a) strong volumegrowth and contribution from new launches, coupled with modest contribution from

price increases, and (b) evolution in therapy mix, increasing drug penetration and

rising income levels.

Indian pharmaceuticals market growth

Source: Industry, MOSL

The structural growth drivers witnessed in the last decade are leading growth this

decade too. While McKinsey expects India to witness sales CAGR of 14.5% to USD55b

through 2020 in a base-case scenario, PWC estimates a market size of USD48.8b by

2020. We remain positive on the longer term story of the Indian pharmaceuticalsmarket. However, in the near term, the impact of the ongoing implementation of the

Drug Pricing Policy is likely to lead to slower growth for the industry.

Key long-term growth drivers

An under-penetrated market; increasing penetration to drive volume growth

Despite strong growth over the last decade, the Indian pharmaceuticals market remains

underpenetrated. According to media reports, the reach of modern medicine is

restricted to just 60% of India’s 1.2b population today. The lack of primary-care facilities

due to the absence of road connectivity is a major factor for under-penetration. We

expect penetration to increase, as the Indian government has been building basic

infrastructure and increasing spend on healthcare over the past few years.

Urban development Rising spend on healthcare

220 290 340 590636 750 815 880

26 2830

40

1991 2001 2008 2030E

Urban population (m)

Non urban population (m)

Urbanization rate (%)

348 415 454 521 632 739 907 997315286

10

17

1010

2

2321

15

9

19

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

He al th ca re expe nd itu re (I NR b) Gro wth (%)

Source: McKinsey, Union Budget document



2018 October 2013


Source: NCAER, MOSL

Rising prevalence of chronic diseases

Increasing urbanization, stressful lifestyles and improper food habits are likely to

lead to growing incidence of chronic diseases. The incidence of lifestyle diseases

such as diabetes and cardiovascular ailments will increase over the next few years.

Most notable among these ailments will be those under the broad umbrella of

‘metabolic disorders’. India has the largest diabetic population in the world. The

prevalence of diabetes is likely to rise to 3.7% in 2015 while coronary heart diseases

and obesity are likely to rise to 4.9% and 2.7%, respectively, according to McKinsey.

Rising income levels driving need for better healthcare

An increasing proportion of population in the working age group means a rise in

average income levels and affluence. The NCAER estimates that the proportion of

low income households in India has declined from 32.5% to 14.6% and that of lower-

middle households (“Aspirants” in NCAER’s terminology) has declined from 48% to41% in the last 10 years.

Rising income levels in India (% of total households)

33 27 21 15 6

4848

46

4125

18 23 3040

56

2 3 4 5 13

1998-99 2001-02 2004-05 2007-08 2015-16E

Low I ncome ($0-3000) As pi ra nts ($3000-6000)

Middle Class ($6000-30000) High Income (>$30000)

3.32.8 2.5

1.3

0.2

4.9

3.7

2.7 2.7

0.2

Coronary

heart

disease

Diabetes As thma Obes i ty Cancer

2005 2015

36

31 27

14

2

62

46

34 34

2.5

Coronary

heart

disease

Diabetes Asthma Obes ity Cancer

2005 2025

Prevalence of chronic disease (% of population) Disease profile undergoing material change (in millions)

Source: McKinsey

The prevalence of

diabetes is likely to rise

to 3.7% in 2015 while

coronary heart diseases

and obesity are likely to

rise to 4.9% and 2.7%



2118 October 2013


Growing insurance penetration

Penetration of life insurance is as low as 7% in India today. This is likely to double over

the next five years. Growing insurance penetration is one of the key drivers of growth

for the industry. The IRDA estimates that health insurance penetration will double by

2015 to cover 220m people.

Rising health insurance penetration in India Per capita premium has grown 5x

Source: IRDA

22.2 32.1 51.3 66.3 83.1

6%7%

10%

12%13%

FY06 FY07 FY08 FY09 FY10

Pre mi um (I NRb) Pre mi um (% of GDP)

20.3 28.9 45.4 57.9 71.5


Per capi ta premium (INR)



2218 October 2013


M&A in India to gain thrust over the next few years

We believe M&A in India will be an important focus area for investors and can

unlock value. Not only would foreign companies look at buyouts in India, Indian

companies too would consider acquisitions to consolidate their position. We believe

the following factors could lead to increasing M&A: Tougher regulatory standards making operating environment difficult for small/

medium-sized companies

Business interests outside healthcare

Attractive valuations

Succession issues

M&A/partnerships for the domestic market

Year Acquirer Target Deal size (USDm) EV/Sales (x)

2008 Daiichi Sankyo Ranbaxy 4600 4.5

2010 Abbott Ltd Piramal Healthcare 3200 9.02011 Sanofi India Universal Healthcare 100 4.5

2012 Zydus Cadila Biochem 120* 2.5

*Not verified by the company Source: Company; MOSL

Who can be a good acquisition candidate?

Mid-size companies in domestic market, with presence in emerging markets:

Companies falling in the top 25-50 rankings may be potential targets or select

brands of these companies may be good acquisition targets. Eg: Torrent Pharma,

Unichem Labs

Companies with strong market positioning in at least one high growth/high

margin chronic therapy or niche offering: Companies present in fast growing

therapy areas like CVS, CNS or niche offerings like NDDS products may be

potential targets. Eg: Lupin, Torrent Pharma, Unichem Labs

Companies whose owners have alternate business interests outside

pharmaceuticals: Several Indian promoters have diversified business operations.

Given that competitive intensity is likely to increase, promoters may want to

focus on other business interests and move away from pharmaceuticals.

Companies facing succession issues: One of the most important challenges facing

many Indian companies is succession planning. Most of them are family-owned

businesses and do not have a professional running the business. Our study

shows that many Indian companies neither have a succession plan so far and

neither are they prepared to appoint a professional to head the company. This

is particularly true for small/medium-sized Indian companies. These are

vulnerable to M&A. Eg: Biocon, Unichem.

Indian markets could be

entering a consolidation

phase over the next few

years. Torrent Pharma

and Unichem Labs could

be potential acquisitioncandidates as they have

good presence in fast

growing chronic areas

and trade at

inexpensive valuations



2418 October 2013


4. Brazil: Government intervention diluting potential

The Brazilian healthcare market is worth USD29b and is the sixth largest in the world

in terms of value. It is likely to grow to USD47b by 2016, becoming the fourth largest.

With a large portion of this market being out-of-pocket, Brazil is a very lucrative

market for Indian generics companies.

Largest pharmaceuticals market in Latin America (USD b) Majority of healthcare expenditure is out-of-pocket

Source: Sanofi Aventis IR presentation, MOSL

29.0

12.2

6.6

5.7

4.1

10.9Brazil

Mexico

Venezuela

Argentina

Colombia

Other LatAm40%

56%66%

84% 85% 89%

60%44%

34%16% 15% 11%

Co lo mb i a Arge nti n a Me xi co Ve ne zu el a Ecu a do r B ra zi l

Out-of-pocket Publ ic funding

However, there are a number of obstacles that need to be overcome to capitalize on

this opportunity. The greatest obstacle at the moment for major Indian companies

present in the market is the ‘Farmacia Popular’ government program aimed at

increasing the affordability of essential drugs.

Though this program began in 2004, its reach and scope has expanded over the years.The latest development was a provision to supply drugs in the anti-hypertension,

anti-diabetic and anti-asthma categories free of cost. This has slowed down the overall

market growth and is likely to impact companies present in these chronic therapies.

Given the populist nature of this program, we expect it to remain in force at least till

the next presidential election (to be held in October 2014).

Presence of major Indian companies in Brazil

Company Sales (USD m) Brazil business Therapeutic presence

as % of total sales

Torrent Pharma 92 15.6% 65%+ portfolio of CVS and anti-diabetics

Glenmark 40 4.3% Focus on developing products in oncology,

dermatology and respiratory products with

limited competition

Cadi la 44 3.8% Targest to be the leading player in

'cardiovascular, diabetes and neuro psychiatry'

Ranbaxy 41 2.5% Diversified presence


Further, the ANVISA has been delaying new product approvals over the last two years,

impacting the pace of new launches. Given the lack of clarity on the approval timelines,

we believe that the outlook for this market would remain subdued over the next 2-3years. Having said that, we expect companies like Glenmark, which are focusing on

fast growing therapies like derma, oral contraceptives, etc, to grow faster than peers.

Farmacia Popularprogram aimed at

increasing affordability of

essential drugs is a key

hindrance to the Brazil

pharma market growth



2518 October 2013


Greater FDA vigilance, government interference in

pricing here to stayAbility to withstand regulatory risks essential

The US FDA has issued more than twice as many warning letters in the year till date

compared to the same period last year. While there has been an increase in enforcement

actions against Indian companies, our analysis suggests that there is no bias towards India.

Indian companies like Cipla, Glenmark, Divi’s Labs and Torrent Pharma have had no issues

with FDA so far, which is a tremendous achievement. However, some companies like Sun

Pharma, Dr. Reddy’s, Lupin and Cadila Healthcare have proactively dealt with the US FDA

issues in the past and thus are well placed to counteract any future challenges in our view.

Our analysis of the manufacturing facilities of the companies supplying products to the US

brings out interesting trends.

For emerging markets, companies with the ability to develop products with high entry

barriers or companies with strong geographical spread, depth in product mix and presence

in free-priced markets like OTC are relatively insulated from government intervention.

Increasing regulatory vigilance of the US FDA

The US FDA is known for enforcing the most stringent regulatory yardsticks in the

pharmaceuticals business. Also, the pace of enforcement at the US FDA has increased over

the last three years, which is evident in the increasing number of warning letters issued.

Number of FDA enforcement actions: Country-wise data Increasing number of warning letters issued

85

12

14

18

23

17

4 4

25

-1India China Other

Countries

Total

2011 2012 So far in 2013

4 4

1

64 4 3

0

8

11

18

11

1619

22

17

2010 2011 2012 2013 YTD

India China Others Total

The US FDA has issued

more than twice as manywarning letters in the

year till date compared to

the same period last year

Indian companies relatively better than others in quality compliance

Source: US FDA, MOSL

The US FDA has issued more than twice as many warning letters in the year till datecompared to the same period last year. We believe the vigilance at US FDA is only

going to increase due to the implementation of the GDUFA. The agency estimates

that the fees paid by ANDA and DMF filers will enable it to hire and train at least 25%



2618 October 2013


of incremental staff in FY13, 50% in FY14, and complete its hiring goals in FY15. This

added strength will only increase the frequency of inspections and pace of ANDA

approvals.

Snapshot of some enforcement actions taken by the FDA in the past

Company FDA Action Unit Date of Date of Time MOSL Comments

action resolution taken for

resolution

(in months)

CASES OF PRO-ACTIVE TURNAROUND

Cipla Form Bangalore 20-Apr-09 31-Aug-09 4.4 Minor observations raised which were resolved

'483 without any major issues

Aurobindo Warning Unit III 23-May-11 4-Jun-12 12.6 GMP violations relating to packaging procedures

Letter which were resolved eventually.

Sun Pharma W ar ni ng A ble Labs 31-Aug-10 19-Sep-11 12.8 Observations included failure to comply with GMP

Letter guidelines. Hired consultants to resolve issues.

Cadila Warning Moraiya 6-Jun-11 17-Jul-12 13.6 Pre-inspection warning letter for the injectable plantLetter but affected approvals from the oral solids plant too.

Resolved subsequently.

Lupin Warning Mandideep 14-May-09 20-Jan-10 8.4 FDA observed 15 manufacturing deficiencies, which

Letter were successfully resolved.

Dr. Reddy's Import Alert Mexico 6-Jul-11 27-Jul-12 12.9 Impacted USD30m of sales p.a. until resolution

CASES WHERE RESOLUTION HAS BEEN DIFFICULT

Ranbaxy Warning Batamandi 17-Sep-08 x NA Significant deviations from GMP. Facility stopped

Letter supplies to USA.

Ranbaxy Warning Ohm Labs 24-Dec-09 x NA Significant deviations from GMP for the unit

Letter manufacturing liquid products. Unit subsequently

closed down.

Jubilant Life Warning Canada 27-Feb-13 x NA Significant deviations from GMP. sales impact of USD

Letter 10m, EBITDA impact of USD 2-3m. Responded in 15 days.

Awaiting FDA's response.

Strides Warning Bangalore 11-Sep-13 x NA Contributes 25% of Agila sales. Unclear about the

Arcolab Letter impact on Agila-Mylan deal.

Ranbaxy Import Dewas 17-Sep-08 x NA Significant deviations from GMP despite repeated

Alert warnings. Sales impact from Dewas + Paonta Sahib is

USD 400m. Signed consent decree and agreed to pay

fine of USD500m.

Ranbaxy AIP Paonta Sahib26-Feb-09 x NA Data integrity issues, AIP invoked by US FDA/DoJ

Ranbaxy Import Alert Mohali 13-Sep-13 x NA ~17-18 ANDAs filed from this plant. Will dent outlook

for topline growth and margin improvement. This unitwas setup after Daiichi Sankyo took over.

Taro Pharma W ar ni ng Brampton, 5-Feb-09 25-Apr-11 27.0 Observations included failure to complete

Letter Canada investigations of quality issues in a timely manner.

Hired consultants to resolve issues.

Aurobindo Import Unit VI 27-Feb-11 28-Mar-13 25.3 GMP violations relating to packaging procedures.

Alert Impacted sales of USD35m p.a. until resolution.

Sun Pharma Product M ichigan , 26-Jun-09 28-Aug-12 38.6 Significant deviations from GMP despite repeated

Seizure Caraco warnings. Impacted sales of USD100m p.a. and key

product Prandin. Resolution reached; 3 products being

manufactured.

Wockhardt Import Waluj, 24-May-13 x NA Significant GMP violations, allegations that the

Alert India company withheld truthful information, delayed and

limited the inspection. Sales impact of USD100m, 23

pending ANDAs affected.

Source: US FDA, Industry, MOSL



2718 October 2013


Analysis of US FDA inspections in the pastPlant locations Type Last 483s Comments

inspected issued

SUN PHARMA

In last 12 months

Chattanooga, USA API Jul 2013 N Controlled substance facility of Chattem Chemicals

acquired in 2008 for controlled substances

Bryan, Ohio, USA Formulations Jun 2013 Y Able Labs facility acquired in 2005, received a

warning letter in Aug-10, got a clearance in Sep-11

Detroit, USA Formulations May 2013 Y Caraco facility: Received 483s in Jun 2008 and May

Jan 2013 Y 2009; drugs seized by FDA marshals in Jun 2009;

Aug 2012 Y received approval for supply of two products in 2012.

New York, USA Formulations Apr 2013 Y Taro Pharma’s facilityTandalja, Gujrat Research centre Dec-12 N

Ahmednagar, Maharashtra API Sep-12 Y

Halol, Gujarat Formulations Sep-12 Y

Inspections in the past

Panoli, Gujrat API Jun 2012 Y

Philadelphia, USA Formulations Jan 2012 Y URL Pharma facility

Brampton, Canada Formulations Feb 2011 Y Taro plant in Canada, received a warning letter in

Feb 2009, got a clearance in April 2011

Haifa Israel API+Formulations May 2010 Y Taro facility

Cranbury, NJ, USA Formulations Jun 2011 Y

Other facilities

Karkhadi, Gujarat API+Formulations N/A N/A

Dadra, Dadra Nagar Haveli F ormulations N/A N/A

Hungary API+Formulations N/A N/A Valeant Pharma facility acquired in 2005

Chicago, USA Formulations N/A N/A URL Pharma facility

Wilmington, USA Formulations N/A N/A DUSA Facility


We tried to analyze the facilities of Indian companies

inspected by US FDA in the past. Our observations

reveals interesting trends:

Unpredictable frequency of re-inspection: As per

guidelines, the US FDA typically works on a 2-year

inspection cycle for formulation facilities and 3-year

cycle for API facilities. However, it has been noticed

that the re-inspections have taken place at much

shorter intervals as well. Caraco is one such example,

wherein there have been at least three inspections

within a span of 10 months (between August 2012 and

May 2013), as it is currently under the consent decree.

However, there are instances where FDA re-inspections

aren't as frequent. Therefore one cannot say with certainty

that a plant re-inspected today may not be inspected

before two or three years (as the case may be).

Most observations are BAU: The US FDA investigators

issue 483s immediately after an inspection, outlining

any observed deviations from GMP. Based on the data

analyzed and our discussions with companies,

apparently the issuance of a form 483 is very common

in these inspections. Not all of these observations

cumulate to an enforcement action (import alert/

warning letter/drug seizure). Companies like Glenmark

and Torrent Pharma have also been issued 483s in the

past, but they have stayed free of any FDA action till

date; a tremendous achievement.

On the other hand, companies like Sun Pharma, Lupin

and Dr. Reddy's have faced enforcement action in the

past but have managed to resolve them effectively.

We believe this puts them in a better position to

prevent such occurrences in future and tackle them

when needed.

Duration between 483s and enforcement actions

unclear: There is no regularity seen in the time taken

by the FDA to escalate a form 483 to an enforcement

action. We have observed instances where the regulator

has taken as short as 2 months (Aurobindo Pharma;

import alert on Unit VI) to as long as 9 months (Ranbaxy;

import alert on Mohali) to do so.



2818 October 2013



Plant locations Type Last 483s Comments

inspected issued

DR. REDDY'S

In last 12 months

Vishakapatanam Formulations Jan 2013 N Passed inspectionShreveport, USA Formulations Sep 2012 Y

Bristol, USA Formulations Oct 2012 N

New York, USA Formulations Oct 2012 N


Nalgonda District, AP API May 2012 Y

IDA Jeedimetla API Apr 2012 Y

IDA Bollaram, AP, India Formulations Jun 2012 Y API Plant 1 + Formulation Plant 1

Cuernavaca Plant, Mexico API Mar 2012 Y Inspected in Nov 2010; received an import alert in

June 2011; cleared in July 2012

Bachupally, RRD, API Formulations Nov 2011 Y

IDA Bollaram, AP, India API+Formulations Sept 2010 Y API Plant 3

Other facilities

Srikakulam, AP, India API N/A N/A

Srikakulam, AP, India API+Formulations N/A N/A

API Mirfield plant, UK API N/A N/A

Pondicherry, AP Formulations N/A N/A

Baddi, India Formulations N/A N/A

Baddi, India Formulations N/A N/A

Jiangsu Province, China N/A N/A N/A

LUPIN


Pithampur, Indore, India API+Formulations Jun 2012 Y

Baltimore, USA Sep 2011 Y

Mandideep, MP, India API+Formulations Sep 2011 Y Inspected in Nov 2008; received a warning letter in

May 2009; resolved in Dec 2009

Thane, India API Feb 2009 Y

Goa, India Formulations Feb 2010 Y

Kyowa, Japan N/A Nov 2012 Y

Other facilities

Chikalthana, Aurangabad Formulations N/A N/A

Ankleshwar, Gujrat API N/A N/A

RANBAXY

In last 12 months

Mohali API + Formulations Dec 2012 Y

Sep 2012

Ohm Labs Formulations Dec 2012 Y Received 483s in Dec 2012, company says it has

received a closing letter from US FDA last week

Toansa API Dec 2012 Y

New Delhi Research Dec 2012 N

Noida Research Dec 2012 Y

Ohm Labs, Brunswick Formulations Aug 2012 N


Paonta Sahib API + Formulations March 2008 Y Under import alert from the US FDA since 2008

Dewas API + Formulations Feb 2008 Y Under import alert from the US FDA since 2008



2918 October 2013



Plant locations Type Last 483s Comments

inspected issued

CIPLA

In last 12 months

Goa, India Formulations May 2013 YIndore SEZ, India Formulations Nov 2012 N


Bangalore, India API Jun 2012 Y

Kurkumbh, India API Dec 2011 Y

GLENMARK

In last 12 months

Mahwah, NJ, USA API Nov-2012 N

Baddi, India Formulations Aug 2012 N

Ankleshwar API Oct-2011 Y

Goa, India Formulations Oct-2011 Y


MIDC, Navi Mumbai R&D Centres Sep 2008 Y

Other facilities

Argentina Formulations N/A N/A

CADILA HEALTHCARE

In last 12 months

Nesher Pharma, USA Formulations 6-Dec-2012 Y Acquired by Cadila Healthcare in June 2011

Baddi, Himachal Pradesh Formulations Nov 2012 Y

SEZ, Ahmedabad Formulations Oct 2012 Y

Zydus Hospira, India Formulations 2Q FY13 Y Completed US FDA inspection in 2Q FY13

Moraiya, Ahmedabad Transdermals Aug-13 Y Nasal facility inspected in FY13


Moraiya, Ahmedabad Formulations Feb 2012 Y Nasal facility inspected in FY13, transdermals

in August 2013

Ankleshwar, India API Feb 2011 Y

New Jersey, USA N/A Feb-2011 Y

Sanand, Gujrat Toplical Nov 2008 Y

Vadodra, Gujrat APIs Dec 2009 Y

TORRENT PHARMA

Ahmedabad Formulations May 2013

IPCA LABS

In last 12 months

Pithampur, Indore SEZ Formulations April 2013


Si lvasa Formulations July 2012

Ratlam, India API Sept 2011

DIVI'S LABS

In last 12 months

Vizag N/A July 2012 Y

Nalgoanda, Hyderabad N/A Jul 2011 Y

Other facilities

DSN SEZ, Vizag N/A N/A N/A

Source: FDAZilla.com, US FDA, Company, MOSL



3018 October 2013


We do not view this as a game changer for Indian generics companies for two main

reasons:

Quality compliance has always been an integral part of their business

requirements. Most Indian companies understand the need for such compliance

and have not let negligence on this front hinder their operations. Notably,Glenmark, Cipla and Torrent Pharma have never come under the US FDA scanner.

Sun Pharma, Lupin, Dr Reddy’s and Cadila Healthcare have successfully resolved

US FDA issues in the past and are well placed to overcome regulatory challenges

in the future.

India is the largest supplier of generic medicines to the US. For an economy that

spends ~18% of its GDP on healthcare, increasing penetration of generics is of

great importance to the US. Currently, of the USD300b of market size, generics

constitute only 15%. With over 800 ANDAs pending approval for Indian companies

(half of the total ANDA filings with US FDA), they are expected to play an important

role in genericizing this market.

Pending ANDA approvals for Indian companies

90101

6553

18

91

40

133

24

Aurobindo Cadi la

Healthcare

Dr Reddy'sGl enma rk IPCA La bs Lupi n Ranba xy Sun

Pharma

Torrent

Pharma


We believe that all companies need to be prepared for greater scrutiny by the regulator

and make continued investments in quality control. This phase must be observed

attentively, as it would differentiate the winners from the losers on a very important

aspect of drug making – quality.

It is not possible to predict which companies can remain consistently untainted bythe FDA. However, some companies have ensured consistent quality compliance above

others over a period of time. We remain positive on these companies and believe

Divi’s Labs, Glenmark, Sun Pharma and Lupin are better prepared for the increasing

FDA vigilance.

GNP, CIPLA and TRP have

never come under the US

FDA scanner. SUNP, LPC,DRRD and CDH have

successfully resolved US

FDA issues in the past

and are well placed to

overcome regulatory

challenges in the future



3218 October 2013


Pharma 2020: Still some time away

The Russian Federation has charted out a plan, ‘Pharma 2020’, to promote the

development of local drug manufacturing base. Foreign companies wishing to

supply to the Russian market will need to set up manufacturing plants there. The

aim is to have 50% of the domestic demand (in value terms) manufactured locally.Currently, there is no clarity with respect to the extent of manufacturing setup –

last stage packaging or end-to-end production plant. Depending on the scale of

production, market incumbents will take a decision on the way forward. MNCs

have already started setting up shops in Russia, as they will enjoy some cost

advantage in Russia.

If Indian companies are required to set up end-to-end shops, it will increase their

recurring manufacturing costs, taking away their low cost advantage. On the positive

side, small players will have no choice but to exit, leaving room for large players

like Dr Reddy’s to increase their market share; i.e. if they choose to invest and

participate in the market.

Brazil: Government programs diluting the market potential

The Brazilian government has been praised for its initiatives to provide affordable

healthcare to its citizens. It has been providing free anti-retroviral drugs to HIV/AIDS

patients since 1996. The existing ‘Farmacia Popular’ program (‘Popular Pharmacies’

translated in English) was first started in June 2004, with the aim to provide medicines

at as high as 90% discount to all patients with a doctor’s prescription. Over the years,

the program has picked up in popularity and covers approximately 1.5 million patients

every month. The number of stores under the program and their volume offtake is on

the rise.

An important amendment to the program was made in February 2011, wherein the

government promised to provide certain drugs in the anti-hypertension, anti-diabetic

and anti-asthma space free of cost. As per the data on website of the Brazilian Ministry

of Health, the number of patients enrolled with program saw a whopping 67% growth

within a short span of two months of the amendment.

This was a critical development from the perspective of major companies that have

been focused on these therapeutic categories. Our discussions with the industry

incumbents indicate that there has been a drastic shift in prescriptions in these

therapeutic areas towards generics provided under the government programs.

Our view: Given the populist nature of the program and low impact on the fiscal

deficit, we expect this trend to continue at least till the current presidential term

(which expires in October 2014). Indian players focusing on therapeutic areas other

than CVS and anti-diabetics should outperform their peers over the next 2-3 years.

We are thus bullish on Glenmark and Sun Pharma for this market.

The Farmacia Popular

program has gained in

prominence and its

impact on fiscal deficit

means the program is

unlikely to get

discontinued



3318 October 2013


Drugs offered for free under the 'Farmacia Popular' Program

Hypertension Anti-diabetic Asthma

Captopril Gl ibenclamide Salbutamol

Enalapril Maleate Metformin Hydrochloride Ipratropium Bromide

Propranolol Hydrochloride Human Insulin Beclomethasone Dipropionate

Atenolol

Hydrochlorothiazide

Losartan

Source: Brazil Ministry Of Health

Presence of major Indian companies in Brazil

Company Sales Brazil business Therapeutic presence Pipeline

(USD m) as % of total

sales

Torrent Pharma 92 15.6% 65%+ portfolio of CVS and anti-diabetics 19 products in the branded space;

24 in the generic-generic space

Glenmark 40 4.3% Focus on developing products in oncology, N/A

dermatology and respiratory products with

limited competition

Cadila 44 3.8% Targest to be the leading player in About 60 product filings are

'cardiovascular, diabetes and neuro awaiting approval

psychiatry'

Ranbaxy 41 2.5% Diversified presence More than 60 products approved,

with 20+ pending approval.


India: The Drug Price Control Order 2013

The Ministry of Chemicals and Fertilizers issued the Drug Price Control Order (2013)on 15 May 2013. Below are the key features:

Pricing methodology: All strengths and dosages specified in the National List of

Essential Medicines (NLEM) 2011 will be under price control. Ceiling Prices (CP)

will be fixed on the basis of market-based data (MBD). Formula for computing CP

is the simple average price of all brands having MS (Moving Annual Turnover) of

1% or more. Manufacturers will be free to fix any price for their products equal to

or below CP.

Annual price increases: Automatic annual price adjustment (up or down) linked

to WPI for NLEM products is allowed. CP will be revised every five years or as and

when the NLEM is updated / revised. However, if there is a significant change inthe market structure of a product, the government will revise the CP even earlier.

CP will also apply to imported drugs under the NLEM. Annual price increase of up

to 10% for non-NLEM drugs is allowed.

Combinations outside the purview of price control: From the policy documents,

we believe that combination drugs have been kept outside the purview of price

control, as the policy states that “the Span of Price Control shall be as per the

dosages and strengths as listed in NLEM 2011”. This implies that all combinations

that are outside the NLEM will not be subjected to price controls. We await final

confirmation of this from the industry.

Existing DPCO drugs: Prices of existing DPCO products not in NLEM 2011 would be

frozen for one year, and thereafter, an increase of up to 10% per annum will be

allowed. This will be a key positive for MNCs over the long term.



3418 October 2013


New combinations: Any new combination of NLEM+NLEM or NLEM+Non-NLEM

will require price approval by the government. Any addition to NLEM 2011 by the

Ministry of Health will come under price control. The Department of

Pharmaceuticals will monitor production and availability of NLEM products.

Original research products having product/process patents and NDDS productsare exempted from price control for five years.

As of September 2013, the National Pharmaceutical Pricing Authority (NPPA) has

notified prices of some 350 drugs of the total 650. Based on the pricing methodology,

companies have indicated the potential impact the policy would have on their Indian

formulations sales.

Given the relatively low impact from the policy, we believe that Glenmark, Divi’s

Labs, Lupin and Dr Reddy’s are better placed than their peers.

Contribution from product launches to slow further: Product launches have been one

of the key contributors to the pharmaceuticals sector’s growth over the last decade.

However, the pace of launches has slowed over the past few years due to the lack of

innovative ideas, as most of the pre-1995 products have been introduced in the market

and there is intense competition. The Indian government has also decelerated the

pace of new drug approvals – it is asking for more clinical data before approving

products, particularly combination drugs (this comes post negative news flow in the

media that certain drugs were approved without proper clinical trials). Slower

contribution from product launches this decade is likely to stunt the sector’s growth

prospects.

Impact of DPCO 2013: A snapshot

Company India as % Revenue Revenue EPS Comments by the management

of overall sales impact (%) loss (INR m) impact (%)

Cadi la

Healthcare 37 4 929 11 Estimate a 4% impact on domestic formulations

Cipla 45 3 1104 5 Estimate a 3% impact on domestic formulations

Dr. Reddy's Labs 13 3 437 2 Expects 2% impact on domestic formulations

GSK Pharma 100 5 1300 17 Expects 5% impact on domestic formulations, assuming

price increase on certain drugs coming out of price control

and volume increase on exisiting brands.

Glenmark Pharma 26 0 0 0 Negligible impact due to low exposure to NLEM 2011

IPCA Labs 31 2 150 3 Expect INR100-150m impact on domestic formulations; as

price reduction on NLEM 2011 drugs will be offset by price

increases to be taken on non price-regulated drugs.

Lupin 25 2 500 2 Estimate INR400-450m impact on domestic formulationsRanbaxy 18 7 1516 21 Expect 7% revenue impact from the policy

Sun Pharma 26 2 500 1 Does not expect more than INR450-500m revenue impact

Torrent Pharma 32 2 205 3 Will have negligible impact


Indian government has

also decelerated the pace

of new drug approvals – it

is asking for more clinical

data before approving

products, particularly

combination drugs

The trade and companies

are likely to take time to

adjust to products with

revised prices and hence

growth in India could be

slower in the near term



3518 October 2013


India pharmaceuticals growth split (%)

Source: Industry, MOSL

Regulatory challenges – code of conduct on marketing, greater scrutiny of new drugs:

We see regulatory challenges as another major hurdle to the industry’s growth. Thesecould be in the form of: (1) introduction of a marketing code of conduct related to

distribution of drugs to prescribers, (2) greater scrutiny of new drugs ready for launch,

(3) price regulation of patented drugs in India, and (4) reduction in the quantum of

sub-standard drugs in the market.

Increasing preference for unbranded generic drugs: There is an increasing preference

for unbranded generic drugs in a few Indian states, led by Tamil Nadu and Rajasthan.

The government of Rajasthan is distributing free unbranded medicines in state-run

hospitals and clinics. Although this model may be negative for branded drugs, it would

increase drug penetration levels in the country.

11.59.1

6.9 6.8

3.02.6

5.17.0

1.8

2.3 2.0

2.2

FY09 FY10 FY11 FY12

I PM Vol ume growth Ne w l aunche s Pri ce i ncrea se

Rajasthan has taken a

lead in the unbranded

generic market in India



3618 October 2013


Valuations leave room for reasonable returnsAdvocate basket approach

We estimate the companies covered in this report to deliver a core earnings growth of

24% over FY13-15E, which is stronger than the 20% growth achieved over FY08-13. This

would be driven by an improving product mix and favorable currency.

Based on our valuations screen, we believe current valuations still leave room for

reasonable returns.

However, given the risks associated with greater scrutiny by US FDA and possibility of

increase in span of price controls for key emerging markets like India, Brazil and Russia, we

recommend a basket approach to pharma sector allocation.

Our top large-cap picks are Dr. Reddy’s, Lupin and Sun Pharma, while our best mid-cap

picks are IPCA Labs and Divi’s Labs.

Sector outperformance led by strong earnings growth over last two yearsOver the last two years, the India pharmaceuticals sector has outperformed the broader

markets by 26%. While the popular investor perception might be that the

outperformance was driven by a sharp re-rating of the sector, strong earnings growth

has played a more important role. We believe the US geography has played a key role

in the earnings outperformance of the large companies in our coverage universe. The

strong earnings growth for companies like Sun Pharma, Lupin, Dr Reddy’s and Glenmark

was driven by robust performance in the US and favorable currency. Mid-size

companies like Ipca Labs have demonstrated all-round growth over this period.

Five-year P/E band Ten-year P/E band

Strong outperformance

of the pharma sector is

led by a strong earnings

growth and not just

PE re-rating

25.9

16.0

23.2

Sensex v/s BSE Healthcare

120

164

50

90

130

170

210

O

c t - 1 1

D

e c - 1 1

F e b - 1 2

A

p r - 1 2

J u n - 1 2

A

u g - 1 2

O

c t - 1 2

D

e c - 1 2

F e b - 1 3

A

p r - 1 3

J u n - 1 3

A

u g - 1 3

O

c t - 1 3

BSE SENSEX BSE Heal thcare



3718 October 2013


Sun Pharma Dr Reddy's

Lupin IPCA

Consistent upgrade in consensus EPS estimates

Source: Bloomberg

Growth in earnings for our coverage universe Free cash flows continue to get stronger

12

29 29

68

40

59

116

FY09 FY10 FY11 FY12 FY13 FY14E FY15E

Sector Aggregate FCF* (INR b)

43 68 81 100 129 15437

‐7.2

15.8 18.9

29.423.5

19.5

55.8


Sector Aggregate Earnings* (INR b)

Earnings growth for the coverage universe (%)


Strong earnings growth is well reflected in the improving RoE and RoCE profile for the

sector. We expect return ratios to increase further, as the product/geographical mix

continues to improve for the sector.

0

8

16

24

32

Se p‐09 Sep‐10 Sep‐11 Sep‐12 Sep‐13

His torical Mean for FY14EHis torical Mean for FY15E

68

83

98

113

128

Jul ‐09 May‐10 Mar‐11 Jan‐12 Nov‐12 Sep‐13

Historical Mean FY14E


15

23

31

39

47

Se p‐09 Sep‐10 Sep‐11 Sep‐12 Sep‐13



15

23

31

39

47

Oct‐09 Oct‐10 Oct‐11 Oct‐12 Oct‐13





3818 October 2013


Aggregate RoE (%) for the companies in the report Aggregate RoCE (%) for the companies in the report


21.4

20.7

19.319.2

17.9


ROCE

24.623.522.821.9

19.5


ROE

Advocating basket approach to buying pharmaceuticals stocks

Based on our valuations screen, we believe current valuations still leave room for

reasonable returns. However, given the risks associated with greater scrutiny by US

FDA and possibility of increase in span of price controls for key emerging markets like

India, Brazil and Russia, we recommend a basket approach to pharma sector allocation.

Our top large-cap picks are Dr. Reddy’s, Lupin and Sun Pharma, while our best mid-cap

picks are IPCA Labs and Divi’s Labs.

Valuation matrix

Company MCap TP Upside/ Rating EPS P/E EV/EBITDA Div. Yield RoE

USD b INR Downside CAGR (%) (x) (x) (%) (%)

(%) FY13E FY14E FY15E FY14E FY15E FY15E FY14E FY15E

Market cap >USD2.5b

Sun Pharma 20.8 710 14 Buy 29.9 28.9 25.0 18.9 15.8 0.6 27.9 26.5

Lupin 6.5 1,049 17 Buy 34.7 28.6 21.5 16.7 13.8 0.9 23.8 25.4

Dr. Reddy's Labs 6.5 2,808 17 Buy 18.9 22.5 18.9 15.1 12.8 0.6 20.3 20.0

Cipla 5.5 452 7 Neutral 19.5 20.9 18.7 13.2 11.7 0.9 15.6 15.0

Ranbaxy 2.6 270 -30 Se l l 3.3 29.6 27.8 15.4 8.2 1.3 -4.7 28.8

Market cap <USD2.5b

Glenmark Pharma 2.4 623 11 Buy 31.6 22.0 17.5 14.1 11.9 0.7 20.5 21.1

Cadila Healthcare 2.2 828 25 Buy 13.9 18.5 16.0 13.0 11.1 1.6 22.8 22.3

Divi's Labs 2.2 1,329 29 Buy 21.1 18.8 15.5 14.3 11.4 2.5 26.7 27.7

IPCA Labs 1.4 870 24 Buy 41.1 22.0 13.7 12.5 9.4 1.5 23.5 30.3

Torrent Pharma 1.1 519 24 Buy 11.6 13.8 12.0 9.4 8.2 2.1 31.2 28.6

*Prices as on 15 October 2013 Source: Company, MOSL



4018 October 2013


Annexure-II

Company snapshot - India formulations

Company India Sales Acute/ Mkt sh. Key therapies Portfolio concentration MR Field

formln % (INR m) Chronic (%) (%) (%) strength force

of total (nos.) productivity

sales (INRm/MR)

Cadila Healthcare 38 23,232 73/37 4.5 CVS: 16%, GI: 15% Top 10 brands: 25.1% 5,200 4.5

Ant i- infect ive: 13%, 11-25 brands: 18.7%

Gynaec: 12% 26-50 brands: 14.9%

Respiratory: 9% Above 50 brands: 41.2%

Cipla 44 36,813 61/39 5.0 Respiratory: 30%, Top 10 brands: 26.3% 11-25 7,500 4.9

Anti- infective: 25%, brands: 18.0%, 26-50 brands:

CVS: 12%, Gynaec: 10% 15.9%, Above 50 brands: 39.8%

GI: 8%

Dr Reddy's 13 14,560 71/29 2.2 GI: 22%, CVS: 17%, Top 10 brands: 32.6%, 3,600 4.0

Anti-neoplastics: 13%, 11-25 brands: 20.6%,Pain: 9%, 26-50 brands: 15.6%,

A nt i- in fe ct iv es : 6 % Above 50 brands: 31.1%

Glaxo Pharma 100 25,999 91/9 4.4 Anti-infective: 30%, Top 10 brands: 43.5%, 3,300 7.9

Derma: 17% Pain: 11%, 11-25 brands: 21.2%,

Vitamins: 8%, 26-50 brands: 17.1%,

Hormones: 7% Above 50 brands: 18.2%

Glenmark 26 13,096 67/33 2.0 Derma: 30%, CVS: 22%, Top 10 brands: 36.5%, 3,200 4.1

Respiratory: 16%, 11-25 brands: 18.3%,

Ant i- infect ive: 15%, 26-50 brands: 16.2%,

Anti-diabetic: 5% Above 50 brands: 29.0%

IPCA Labs 32 8,781 73/27 1.6 Anti-malaria: 24%, Top 10 brands: 35.2% 4,500 2.0

Pain: 21%, 11-25 brands: 23.3%

CVS: 17%, GI: 9%, 26-50 brands: 18.6%

A nt i- in fe ct iv es : 8 % Above 50 brands: 22.9%

Lupin 25 23,644 56/44 3.0 Anti-infective: 27%, Top 10 brands: 21.0%, 4,800 4.9

CVS: 24%, 11-25 brands: 17.9%,

Respiratory: 11%, 26-50 brands: 18.4%,

A nti-diabetic: 8%, Above 50 brands: 40.5%

GI: 6%

Ranbaxy 18 21,661 82/18 4.1 Anti-infective: 31%, Top 10 brands: 33.6%, 5,200 4.2

Pain: 12%, Derma: 12% 11-25 brands: 17.5%,

CVS: 11%, Vitamins: 11% 26-50 brands: 13.6%,

Above 50 brands: 35.3%Sanofi India 100 14,939 46/54 2.1 CVS: 23%, Top 10 brands: 50.4%, 3,500 4.3

A nti -d ia be ti c: 21% , 11-25 brands: 26.4%,

Pain: 12%, CNS: 10% 26-50 brands: 12.5%,

Respiratory: 9% Above 50 brands: 10.7%

Sun Pharma 26 29,657 43/57 5.1 CNS: 26%, CVS:20%,GI:14%, Top 10 brands: 19.5%, 4,000 7.4

A nti -d ia be ti c: 11% , 11-25 brands: 15.5%,

Gynaec: 8% 26-50 brands: 15.2%

Above 50 brands: 49.8%

Torrent Pharma 34 10,240 40/60 1.7 CVS: 36%, CNS: 20% Top 10 brands: 27.3%, 3,700 2.8

GI: 18%, 11-25 brands: 18.8%,

A nti- in fe cti ve : 11% 26-50 brands: 17.7%,

Anti-diabetic: 6% Above 50 brands: 36.3%

Source: Industry, Company, MOSL



4118 October 2013


CompaniesBSE Sensex: 20,548 S&P CNX: 6,089 18 October 2013

Company Name Pg.

Market cap >USD2.5b

Sun Pharma 42

Lupin 46

Dr. Reddy's Labs 50

Cipla 54

Ranbaxy 58

Market cap <USD2.5b

Glenmark Pharma 62

Cadila Healthcare 66

Divi's Labs 70

IPCA Labs 74

Torrent Pharma 78



Sun PharmaceuticalsCMP: INR623 TP: INR710 Buy

Valuation summary (INR b)

Y/E March 2013 2014E 2015E

S a l es 112.4 156.4 183.7

EBITDA 48.4 66.0 76.7

PAT* 29.8 26.0 58.9

EPS (INR)* 14.4 12.5 28.4

Core PAT 30.5 44.6 51.6

Core EPS (INR) 14.8 21.6 24.9

EPS Gr. (%) 31.3 46.1 15.5

BV/Sh. (INR) 72.4 81.9 106.2

RoE (%) 22.5 27.9 26.5

RoCE (%) 31.5 25.5 39.8

Payout (%) 17.5 23.9 13.4

Valuations

P/E (x) 42.2 28.9 25.0

P/BV (x) 8.6 7.6 5.9

EV/EBITDA (x) 15.3 15.3 15.3

Div. Yield (%) 0.7 0.7 0.7

* Reported

18 October 2013

Sector Update | Healthcare

BSE SENSEX S&P CNX

20,548 6,089

Shareholding pattern (%)

As on Jun-13 Mar-13 Jun-12

Promoter 63.7 63.7 63.7

Dom. Inst 3.2 3.4 5.3

Foreign 22.9 22.7 20.6

Others 10.2 10.2 10.4

42

Master at workValuations reasonable in the light of strong US pipeline

Potential of SUNP's US pipeline continues to be under appreciated. SUNP's US revenue

estimated to witness a robust CAGR of 25% over FY13-15E.

Acquisition track record has been superb; past FDA issues make SUNP more vigilant

towards future challenges.

Valuations reasonable in the light of strong core earnings growth of 30% over FY13-

15E. Maintain Buy.

Potential of US pipeline continues to be under appreciated

SUNP's US pipeline is shaping up well, with an interesting mix of complex

products, branded generics and me-too products. We believe that SUNP's strong

pipeline in the US is well placed to deliver revenue CAGR of 25% to USD1.8b.

While a meaningful contribution to this growth is being led by Doxil and recently

acquired URL Pharma, we estimate that SUNP's own pipeline is set to witness

revenue CAGR of 40% to USD620m. We build flat sales growth for Taro as we

expect incremental competition to impact the market share for key Taro products.

If competition is delayed, our estimates may have room for positive surprise.

Acquisition track record has been superb, past FDA issues make SUNP

more vigilant towards future challenges

SUNP's acquisition track record and payback period have by far been the best

among Indian companies. Over the last decade, company acquired 16 assets,

majority of which have been turned around successfully. Also, SUNP has never

overpaid for inorganic growth, its turnaround time and value creation from

acquisitions are commendable. This shows managerial vision and bandwidth

for which we believe SUNP will continue to trade at premium valuations to its

peers. Over the past few years, company has faced three major issues with the

US FDA and resolved those successfully. Its ability to successfully resolve past

issues makes it well placed to counteract any future challenges.

Promising outlook with proven track record; valuations reasonable

Strong US pipeline, superior India positioning and an excellent management

track record translate into core earnings growth of 30% over FY13-15E. We value

SUNP on a SOTP basis and value its base business at 27x FY15E (25% premium to

the sector valuations and its historic trading average) to arrive at a fair value of

INR672/share. We add INR28/share for the Doxil opportunity and INR10/share

for other Para IV opportunities to arrive at a target price of INR710/share.

Bloomberg SUNP INEquity Shares (m) 2,071.2

M.Cap.(INR b)/(USD b) 1,290/20.9

52-Week Range ( INR) 650/328

1,6,12 Rel. Perf. (%) 6/2 6/6 5

Stock performance (1 year)

300

400

500

600

700

O c t - 1 2

J a n - 1 3

A p r - 1 3

J u l - 1 3

O c t - 1 3

Sun Pha rma-



Sun Pharmaceuticals

18 October 2013 43

US Generic Sales; driven by acquisitions and new launches

History of successful acquisitions

PE Chart

Story in charts

Company Facility/Products Cost (USDm) Date

Caraco Detroit formulations 52 Aug-97

facility

Women's 3 brands in US 5.4 Sep-04

Health Brands

Va l eant Formulations facility 10 Sep-05

Pharma in Ohio (USA)

Able Labs Formulations facility 23 Dec-05

in NJ (USA) & IP

Taro Pharma API & formulations facility 454 May-07

in Israel & Canda; US operations

Chattem Controlled facility in NA Nov-08

Tennessee,

Inwood Select products 3QFY10

DUSA Novel derma product; . 230 3QFY13

mfg unit

URL Pharma Generic product portfolio. 71 3QFY13

Source: Company, MOSL; Note: Acquisition costs are

approximate

26.8

21.3

27.1

17.3

14

18

22

26

30

O c t - 0

6

M a y - 0 7

O c t - 0

7

A p r - 0 8

O c t - 0

8

A p r - 0 9

O c t - 0

9

A p r - 1 0

O c t - 1

0

A p r - 1 1

O c t - 1

1

A p r - 1 2

O c t - 1

2

A p r - 1 3

O c t - 1

3

P/E (x) Avg(x) Peak(x) Mi n(x)

US FDA Track record

Plant locations Last inspected 483s issued?

In last 12 months

Chattanooga, USA Jul 2013 N

Bryan, Ohio, USA Jun 2013 Y

Detroit, USA May 2013, Jan 2013, Aug 2012 Y, Y, Y

New York, USA Apr 2013 Y

Tandalja, Gujrat Dec-12 N

Ahmednagar, Maharashtra Sep-12 Y

Halol, Gujarat Sep-12 Y


Panoli, Gujrat Jun 2012 Y

Philadelphia, USA Jan 2012 Y

Brampton, Canada Feb 2011 Y

Haifa Israel May 2010 Y

Cranbur y, NJ , USA Jun 2011 Y

Other facilities

Karkhadi, Gujarat N/A N/A

Dadra, Dadra Nagar Haveli N/A N/A

Hungary N/A N/A

Chicago, USA N/A N/A

Wilmington, USA N/A N/A

Key generics expected timeline

Brand Brand Sales Timeline

Cymbalta 3,918 Dec-13

Temodar 403 Feb-13

Niaspan 911 Mar-13

Reclast 350 FY14

Yaz 330 FY14

Lunesta 783 May-13

Zemplar 310 Dec-13

Namenda 600 Jan-13

Actonel 800 FY15

Abilify 2,102 Apr-13

Coreg CR 211 Nov-13

Gleevec 1,800 Dec-15

OrthoTricyclen Lo 450 Dec-15

Crestor 3,164 Jul-16

Focal in 500 >FY15

Strattera 384 May-17

Alimta 1,122 Jul-17

Lyrica 1,672 Dec-18

Angiomax 400 Dec-19

Lexapro 2,259 Delayed

337234

494

719

1,129

1,569

1,848


USD m



Sun Pharmaceuticals

18 October 2013 44

Financials and Valuation

Consoliated Income Statement (INR Million)

Y/E March 2011 2012 2013 2014E 2015E

Net Sales 57,214 80,095 112,388 156,374 183,672

Change (%) 42.8 40.0 40.3 39.1 17.5

Total Expenditure 37,648 48,152 64,036 90,386 106,994

% of Sales 65.8 60.1 57.0 57.8 58.3

EBITDA 19,566 31,944 48,352 65,988 76,678

Margin (%) 34.2 39.9 43.0 42.2 41.7

Depreciation 2,049 2,912 3,362 4,107 4,406

EBIT 17,518 29,032 44,991 61,880 72,272

Int. and Finance Charges 739 282 432 876 876

Other Income - Rec. 3,611 4,856 4,491 4,469 5,881

Extra-ordinary Exp 32 11 5,901 25,174 0

PBT 20,357 33,595 43,148 40,299 77,277

Tax 1,286 3,826 8,456 9,847 13,910 Tax Ra te (%) 6.3 11.4 19.6 24.4 18.0

Profit after Tax 19,072 29,769 34,693 30,452 63,367

Change (%) 41.6 56.1 16.5 -12.2 108.1

Margin (%) 33 37 31 19 35

Less: Mionrity Interest 913 3855 4863 4476 4476

Net Profit 18,158 25,914 29,830 25,976 58,891

Adj. PAT 14,039 23,270 30,550 44,644 51,554

Balance Sheet (INR Million)

Y/E March 2011 2012 2013 2014E 2015E

Equity Share Capital 1,036 1,036 1,036 2,071 2,071

Tot al Reserves 93,798 120,628 148,862 167,568 217,978

Net Worth 94,833 121,663 149,897 169,639 220,049

Minority Interest 8,472 11,616 16,351 20,826 25,302

Deferred Liabilities -3652 -5199 -7122 -7122 -7122

Tot al Loans 3,717 2,739 2,072 1,343 1,343

Capital Employed 103,370 130,820 161,197 184,686 239,572

Gross Block 39,128 46,542 56,026 63,839 70,495

Less: Accum. Deprn. 16,794 20,406 24,421 28,529 32,935

Net Fixed Assets 22,334 26,136 31,604 35,310 37,560

Capital WIP 2,355 3,447 5,626 3,313 2,157

Goodwill 10,599 13,378 24,870 24,870 24,870

Investments 22,297 22,129 24,116 26,116 28,116

Curr. Assets 61,146 90,681 113,420 143,511 195,656

Inventory 14,895 20,870 25,778 35,957 43,448

Account Receivables 11,049 19,261 27,108 37,566 44,089

Cash and Bank Balance 22,046 33,672 40,587 47,132 81,926

L & A and Others 13,156 16,878 19,948 22,857 26,193

Curr. Liability & Prov. 15,361 24,950 38,439 48,434 48,787

Account Payables 10,078 14,410 15,752 25,007 23,742

Provisions 5,283 10,541 22,687 23,427 25,045

Net Current Assets 45,785 65,730 74,981 95,077 146,869Appl. of Funds 103,371 130,820 161,198 184,686 239,572

E: MOSL Estimates



Sun Pharmaceuticals

18 October 2013 45


Ratios

Y/E March 2011 2012 2013 2014E 2015E

Basic (INR)

EPS 6.8 11.2 14.8 21.6 24.9

Fully Diluted EPS 6.8 11.2 14.7 21.6 24.9

Cash EPS 9.8 13.9 16.0 14.5 30.6

BV/Share 45.8 58.7 72.4 81.9 106.2

DPS 0.9 2.1 2.5 3.0 3.5

Payout (%) 12.6 17.2 17.5 23.9 13.4

Valuation (x)

P/E 42.2 28.9 25.0

P/BV 8.6 7.6 5.9

EV/Sales 10.9 7.8 6.4

EV/EBITDA 25.4 18.5 15.4

Dividend Yield (%) 0.4 0.5 0.6

Return Ratios (%)

RoE 16.2 21.5 22.5 27.9 26.5

RoCE 23.6 30.4 31.5 25.5 39.8

Working Capital Ratios

Fixed Asset Turnover (x) 3.2 3.3 3.9 4.7 5.0

Debtor (Days) 70 88 88 88 88

Inventory (Days) 95 95 84 84 86

Working Capital T/O (Days) 151 146 112 112 129

Leverage Ratio

Interest Cover Ratio 23.7 103.0 104.2 70.6 82.5

Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0

Cash Flow Statement (INR Million)

Y/E March 2011 2012 2013 2014E 2015E

OP/(Loss) bef. Tax 19,534 31,933 42,451 40,814 76,678

Int./Dividends Recd. 3,611 4,856 4,491 4,469 5,881

Direct Taxes Paid -4,048 -5,373 -10,379 -9,847 -13,910

(Inc)/Dec in WC -286 -8,319 -2,336 -13,551 -16,998

CF from Operations 18,811 23,096 34,227 21,884 51,651

(inc)/dec in FA -16,500 -10,585 -22,501 -5,500 -5,500

(Pur)/Sale of Invest. 9,367 169 -1,987 -2,000 -2,000

CF from investments -7,134 -10,416 -24,488 -7,500 -7,500

Change in networth 6,413 5,321 4,334 1,036 0

(Inc)/Dec in Debt 2,006 -978 -668 -729 0

Interest Paid -739 -282 -432 -876 -876

Dividend Paid -2,400 -5,115 -6,058 -7,270 -8,481

CF from Fin. Activity 5,280 -1,055 -2,824 -7,839 -9,357

Inc/Dec of Cash 16,957 11,626 6,915 6,545 34,794

Add: Beginning Balance 5,089 22,046 33,672 40,587 47,132Closing Balance 22,046 33,672 40,587 47,132 81,926

E: MOSL Estimates



LupinCMP: INR901 TP: INR1,049 Buy


Y/E March 2013 2014E 2015E

S a l es 93.7 112.6 128.6

EBITDA 20.0 24.2 28.9

Net Profit 10.3 14.1 18.8

Adj. EPS (INR) 23.1 31.5 41.9

EPS Gr. (%) 30.4 36.3 33.1

BV/Sh. (INR) 116.3 148.0 182.9

RoE (%) 22.5 23.8 25.4

RoCE (%) 33.3 33.5 33.1

Payout (%) 15.6 18.4 21.9

Valuations

P/E (x) 39.0 28.6 21.5

P/BV (x) 7.7 6.1 4.9

EV/EBITDA (x) 20.5 16.7 13.9

Div. Yield (%) 0.4 0.7 0.9

18 October 2013


BSE SENSEX S&P CNX

20,548 6,089


As on Sep-13 Jun-13 Sep-12

Promoter 46.8 46.8 46.9

Dom. Inst 12.1 12.4 15.4

Foreign 31.7 31.0 28.3

Others 9.5 9.9 9.5

46

Optimum geography mixUS generics to lead core earnings CAGR of 19% over FY13-15E

Most optimum geography mix among Indian companies.

Adequate risk management strategy in place for Suprax.

US generics to lead core earnings CAGR of 19% over FY13-15E. Maintain Buy.

What if the company achieves the vision of USD5b sales by 2018?

Most optimum geography mix among Indian companies

Lupin's sales mix comprises of US (40%), India (30%) and Japan (12%), which in

our view is the most optimum mix among Indian companies, thus well placing

Lupin to capitalize on all three exciting generic markets in the world. Over the

next two years, niche launches in the US are expected to be the biggest

contributor to sales growth for the company. We attribute LPC's US success to

judicious product mix, developing strong customer relationships and investment

in supply chain. In India, LPC is among the very few companies which has made

a successful transition from acute to more sticky chronic business. Over FY13-

15E, we expect LPC to grow ahead of the Indian pharma market comfortably.

While Japan continues to be the most promising generic market globally, its

pace of generic expansion continues to be slow, which has impacted LPC's growth

rates as well and the pace of margin expansion in Japan. We expect Japan to play

an important role in driving company's margins in the long run.

Adequate risk management strategy in place for Suprax

In our view, LPC derives ~6% sales and ~12% profits from Suprax, its leading

branded generic drug in the US. Suprax has been under constant threat from

entry of a generic competitor and hence it has been an ongoing area of concern

for investors. While LPC does not see a generic competitor on the horizon for

the next 12-18 months, to be prepared for a competing generic in Suprax, it has

diversified the franchisee by launching various line extensions for Suprax. We

believe even if a generic competitor were to enter, it will take the player some

time to destabilize a strong brand like Suprax, as it may not have the depth in

product offering like LPC.

US generics to lead core earnings CAGR of 19% over FY13-15E

We believe US generics will continue to lead core earnings CAGR of 19% over

FY13-15E, with support drivers being India and Japan. We would expect LPC to

target a large acquisition in emerging market with it strong cash flows and low

gearing. We value LPC at 25x FY15E (15% premium to the sector valuations and

its historic trading average) to arrive at a target price of INR1,049. We maintain a

Buy rating on the stock.

Bloomberg LPC INEquity Shares (m) 447.5

M.Cap. (INR b)/(USD b) 403.0/6.5


1,6,12 Rel. Perf. (%) 0/24/5 0


400

550

700

850

1,000

O c t - 1 2

J a n - 1 3

A p r - 1 3

J u l - 1 3

O c t - 1 3

LupinSensex - Rebase d



Lupin

18 October 2013 47

US business has room for positive surprise Sustained improvement in EBITDA margins

Domestic Formulations - Growth traction to recover M&A History

PE band

Story in charts

Target Market Year Price (USD m)

Multicare Pharma Philippines Mar-09 6

Pharma Dynamics South Africa Sept-08 20

Hormosan Pharma Germany Aug-08 7

Gereric Health Australia Aug-08 7

Kyowa Japan Oct-07 55

I'rom Japan Nov-11 73

US pipeline



Asacol 500 Dec-13

Niaspan 911 Feb-14

Renagel 377 Mar-14

Yaz 330 FY14

Lunesta 783 May-14

Celebrex 1887 May-14

TriLipix 300 Jul-14

Loestrin 24 Fe 250 Jul-14

Renvela 330 Sep-14

Nexium 2397 Nov-14

Namenda 600 Jan-15

Welchol 300 Jun-15

Prezista 400 Dec-15

Coreg CR 300 Apr-16

OrthoTricyclen Lo 450 May-16

Nuvigil 200 Jan-17

Seroquel XR 800 May-17

Viread 500 Jul-17

Truvada 2000 Jul-17

Lyrica 1424 Dec-18

Ranexa 160 May-19

Trizivir 114 FY17



Lupin

18 October 2013 48


Income Statement (INR Million)

Y/E March 2011 2012 2013 2014E 2015E

Net Sales 56,478 68,204 93,694 112,582 128,630

Change (%) 18.3 20.8 37.4 20.2 14.3


EBITDA 10,068 11,821 19,981 24,230 28,942

Margin (%) 17.8 17.3 21.3 21.5 22.5

Depreciation 1,712 2,275 3,322 2,725 3,048

EBIT 8,356 9,546 16,659 21,505 25,894


Other Income - Rec. 1,934 2,768 2,997 1,734 2,000

PBT before EO item 9,944 11,960 19,246 23,024 27,679

EO Expense/(Income) 0 0 0 -1,000 0

PBT after EO item 9,944 11,960 19,246 24,024 27,679

Tax 1,149 3,086 5,842 6,907 8,581 Tax Ra te (%) 11.6 25.8 30.4 28.8 31.0

Reported PAT 8,795 8,874 13,404 17,117 19,099

PAT Adj for EO items 8,795 8,113 10,610 14,400 19,099

Change (%) 25.7 -7.8 30.8 35.7 32.6

Margin (%) 15.6 11.9 11.3 12.8 14.8

Less: Minority Interest 148 196 263 300 325

Adj Net Profit 8,646 7,917 10,347 14,100 18,774


Y/E March 2011 2012 2013 2014E 2015E

Equity Share Capital 892 893 895 895 895

Tot al Reserves 31,919 39,236 51,147 65,345 80,977

Net Worth 32,811 40,129 52,042 66,240 81,873

Minority Interest 515 723 595 895 1,220

Deferred liabilities 1,412 1,442 1,632 1,632 1,632

Tot al Loans 11,463 15,557 10,240 10,240 10,240


Gross Block 25,835 36,274 41,138 47,692 53,594

Less: Accum. Deprn. 9,075 14,422 16,840 19,565 22,613

Net Fixed Assets 16,760 21,852 24,298 28,126 30,980

Capital WIP 4,904 4,437 3,107 1,804 1,152

Investments 32 28 21 21 21

Goodwill & Intangibles 3,810 5,644 5,704 5,704 5,704

Curr. Assets 35,359 47,393 55,305 66,559 83,452

Inventory 12,000 17,327 19,489 24,515 27,697



Others 6,601 8,241 9,597 8,886 9,260



Provisions 2,723 3,939 4,684 4,347 5,038

Net Current Assets 20,696 25,889 31,379 43,353 57,108

Appl. of Funds 46,200 57,851 64,509 79,008 94,965E: MOSL Estimates



Lupin

18 October 2013 49


Ratios

Y/E March 2011 2012 2013 2014E 2015E

Basic (INR)

EPS (Fully Diluted) 19.4 17.7 23.1 31.5 41.9

Cash EPS (Fully Diluted) 23.3 22.8 30.5 37.6 48.8

BV/Share 73.5 89.9 116.3 148.0 182.9

DPS 3.0 3.4 4.0 6.0 8.0

Payout (%) 17.9 20.0 15.6 18.4 21.9

Valuation (x)

P/E (Fully Diluted) 39.0 28.6 21.5

P/BV 7.7 6.1 4.9

EV/Sales 4.4 3.6 3.1

EV/EBITDA 20.5 16.7 13.9


Return Ratios (%)

RoE 29.6 21.7 22.5 23.8 25.4

RoCE 25.3 24.6 33.3 33.5 33.1



Debtor (Days) 81 95 85 82 97


Wkg. Capital Turnover (Days) 107 117 105 115 127

Leverage Ratio

Current Ratio 2.4 2.2 2.3 2.9 3.2


Debt/Equity (x) 0.4 0.4 0.2 0.2 0.1


Y/E March 2011 2012 2013 2014E 2015E

Oper. Profit before Tax 10,068 11,821 19,981 24,230 28,942

Interest/Dividends Recd. 1,934 2,768 2,997 1,734 2,000


(Inc)/Dec in WC -2,647 -5,370 -5,166 -8,487 -9,237


(inc)/dec in FA -4,545 -8,736 -4,497 -5,250 -5,250

(Pur)/Sale of Investments 233 4 7 0 0

CF from Investments -4,312 -8,733 -4,490 -5,250 -5,250

Change in Net Worth 174 430 475 524 1,047

Inc/(Dec) in Debt 64 4,094 -5,317 0 0

Interest Paid -345 -355 -410 -215 -215

Dividend Paid -1,575 -1,777 -2,095 -3,142 -4,189

CF from Fin. Activity -1,682 2,392 -7,348 -2,833 -3,357

Inc/Dec of Cash 2,187 -177 323 3,486 4,518

Add: Beginning Balance 2,015 4,202 4,025 4,349 7,835Closing Balance 4,202 4,025 4,348 7,835 12,353

E: MOSL Estimates



Dr Reddy's Laboratories

18 October 2013 52



Y/E March 2011 2012 2013 2014E 2015E

Net Sales 74,693 96,738 116,266 135,998 151,845

Change (%) 6.3 29.5 20.2 17.0 11.7

Other Income 1,118 1,669 3,634 1,484 1,483


EBITDA 15,660 23,742 24,763 28,761 33,406

Change (%) 10.3 51.6 4.3 16.1 16.1

Margin (%) 21.0 24.5 21.3 21.1 22.0

Depreciation & Amortization 4,147 6,254 6,237 6,712 7,440

EBIT 11,513 17,488 18,526 22,049 25,965

Net Interest Exp 189 118 188 315

Forex (Gains)/Losses 0 0 365 0 0

PBT after EO Expense 12,442 19,157 21,677 23,345 27,133

Tax 1,403 4,204 4,900 5,028 5,698 Tax Ra te (%) 11.3 21.9 22.6 21.5 21.0

Reported PAT 11,039 14,953 16,777 18,317 21,435

Adjusted Net Profit 11,099 12,428 15,150 17,981 21,435

Change (%) 939.2 12.0 21.9 18.7 19.2

Margin (%) 14.9 12.8 13.0 13.2 14.1


Y/E March 2011 2012 2013 2014E 2015E

Equity Share Capital * 840 840 840 840 840

Reserves 45,150 56,604 72,265 87,847 106,546

Net Worth 45,990 57,444 73,105 88,686 107,385

Loans 23,503 32,210 36,678 36,678 36,678

Deferred Liabi lities/Tax 87 -833 -1,669 -1,669 -1,669


Gross Block 38,359 44,064 52,958 62,493 70,960

Less: Accum. Deprn. 14,714 18,086 21,213 25,341 29,903

Net Fixed Assets 29,642 33,246 37,814 41,086 43,924

Investments 622 11,558 18,131 18,131 18,131

Goodwill/Intangible Assets 15,246 13,529 14,021 14,021 14,021

Curr. Assets 47,560 59,179 68,751 84,519 103,888

Inventory 16,059 19,352 21,600 27,836 30,926



Others 8,157 7,109 10,043 11,391 12,940



Other Current Liabilities 15,010 19,189 18,741 20,306 22,287


Appl. of Funds 69,580 88,821 108,114 123,695 142,395

E: MOSL Estimates



Dr Reddy's Laboratories

18 October 2013 53


Ratios

Y/E March 2011 2012 2013 2014E 2015E

Basic (INR)

EPS 66.1 74.0 90.2 107.1 127.7

Cash EPS 90.8 111.3 127.4 147.1 172.0

BV/Share 273.9 342.1 435.4 528.2 639.5

DPS 11.3 13.8 13.9 13.9 13.9

Payout (%) 20.2 18.2 16.3 14.9 12.8

Valuation (x)

P/E 26.7 22.5 18.9

P/BV 5.5 4.6 3.8

EV/Sales 3.6 3.1 2.7

EV/EBITDA 16.9 14.4 12.2


Return Ratios (%)

RoE 24.1 21.6 20.7 20.3 20.0

RoCE 16.8 19.7 17.2 18.0 18.5



Debtor (Days) 86 96 100 101 108


Working Capital (Days) 90 87 104 115 123

Leverage Ratio

Current Ratio (x) 2.0 2.1 2.2 2.5 2.8

Debt/Equity (x) 0.5 0.6 0.5 0.4 0.3


Y/E March 2011 2012 2013 2014E 2015E

Op. Profit/(Loss) befor e Tax 15,660 23,742 24,763 28,761 33,406

Interest/Dividends Recd. 929 1,669 3,151 1,296 1,168


(Inc)/Dec in WC -6,501 -4,768 -9,903 -9,726 -8,547


EO Expense 0 0 0 0 0

CF from Oper. incl EO Expense 8,685 16,439 13,111 15,303 20,329

(inc)/dec in FA -12,603 -8,141 -11,297 -9,984 -10,279

(Pur)/Sale of Investments 3,531 -10,936 -6,573 0 0


Change in networth -5,740 -780 1,620 0 0

(Inc)/Dec in Debt 8,847 8,707 4,468 0 0

Other Items -1,351 -920 -836 0 0

Dividend Paid -2,224 -2,719 -2,736 -2,736 -2,736

CF from Fin. Activity -468 4,288 2,516 -2,736 -2,736

Inc/Dec of Cash -855 1,650 -2,243 2,583 7,314Add: Beginning Balance 6,584 5,729 7,379 5,136 7,719

Closing Balance 5,729 7,379 5,136 7,719 15,034

E: MOSL Estimates



CiplaCMP: INR423 TP: INR452 Neutral

18 October 2013


BSE SENSEX S&P CNX

20,548 6,089



Promoter 36.8 36.8 36.8

Dom. Inst 10.8 10.2 16.2

Foreign 27.7 28.0 21.6

Others 24.7 25.0 25.4

54

In transition phaseLimited near term triggers exist

Business in a transition phase, see near term pressure on margins.

Inhaler opportunities in EU and the US many years away.

Limited near term triggers for the stock, maintain Neutral.

Business in a transition phase, see near term pressure on margins

Cipla is undergoing a significant transition in its business model. Company is

looking at setting up front-ends in key markets (recently acquired Cipla Medpro

in South Africa for USD510m), filing own ANDAs in the US and a more aggressive

approach in its India operations. These changes are happening under the new

CEO. While Cipla is heading in the right direction, we believe the impact of

these changes is likely to result in near term margin pressure for the company as

it reinvests some of the profits in establishing front-end activities and R&D

expenses for product filings in the US. We model a margin contraction of ~200bp

over FY13-15E for the company.

Inhaler opportunities in EU, US many years away

The market has started to assign an option value to Cipla's inhaler pipeline in

the US and EU. In our view, each of these opportunities is many years away. Cipla

stated it has 10 inhaler products for the EU of which five are approved, two are

pending approval while three are under development. Pertinently, Cipla has

not yet filed combination inhalers in the EU so far which means the upside is at

least three years away. We believe the US upside is even beyond that.

Cipla Medpro (CMSA) acquisition to provide front-end in South Africa,

accretive by 6-8%.

CMSA is one of South Africa's top 10 pharmaceutical groups. For CY12, it reported

revenue of USD280m, EBITDA of USD45m (EBITDA margins of 16.3%) and PAT of

USD20m. The deal values Cipla Medpro at 9x CY13 EV/EBITDA. Though we awaitsome clarity on the accounting intricacies of this consolidation, we have factored

the upside from this acquisition in our estimates. The CMSA acquisition is

accretive by 6-8% in our estimates.

Limited near term triggers for the stock, maintain Neutral

In the near term, Cipla is likely to feel the impact of drug pricing policy (estimated

hit of INR900m-1.2b) but it is likely to be partially offset by a favorable currency.

The recently-concluded Cipla Medpro acquisition is likely to play a key role in

earnings growth of 20% over FY13-15E. We value Cipla at 20x FY15E earnings to

arrive at a target price of INR452/share. We see limited near term triggers forthe stock. We maintain a Neutral rating.

Bloomberg CIPLA INEquity Shares (m) 802.9

M.Cap. (INR b)/(USD b) 339.7/5.5


1,6,12 Rel. Perf. (%) - 8/ -4/5


Financials & Valuation (INR b)

Y/E March 2013 2014E 2015E

S a l es 82.8 106.1 121.9

EBITDA 22.0 24.7 27.3

Net Profit 12.7 16.3 18.2

Adj. EPS (INR) 15.8 20.2 22.6

EPS Gr. (%) 16.4 27.8 11.7

BV/Sh. ( INR) 112.2 130.1 150.4

RoE (%) 14.1 15.6 15.0

RoCE (%) 19.4 19.2 18.9

Payout (%) 12.1 17.3 20.7

Valuations

P/E (x) 26.7 20.9 18.7

P/BV (x) 3.8 3.3 2.8

EV/EBITDA (x) 15.8 14.1 12.7

Div. Yield (%) 0.5 0.7 0.9

325

355

385

415

445

O c t - 1 2

D e c - 1 2

F e b - 1 3

A p r - 1 3

J u n - 1 3

A u g - 1 3

O c t - 1 3

Cipla-



Cipla

18 October 2013 56



Y/E March 2011 2012 2013 2014E 2015E

Net Income 63,238 70,207 82,793 106,136 121,922

Change (%) 12.4 11.0 17.9 28.2 14.9


EBITDA 13,692 16,589 21,979 24,730 27,311

Change (%) 1.2 21.2 32.5 12.5 10.4

Margin (%) 21.7 23.6 26.5 23.3 22.4

Depreciation 2,733 3,122 3,305 3,716 3,848

EBIT 10,959 13,466 18,674 21,014 23,462

Int. and Finance Charges 173 238 276 1,138 1,251

Other Income - Rec. 711 722 1,323 1,800 2,000

PBT before EO Items 11,497 13,950 19,721 21,676 24,211

Extra Ordinary Expense -90 -369 -1,233 0 0

PBT but after EO Exp. 11,586 14,319 20,954 21,676 24,211Tax 1,914 2,907 5,443 5,419 6,053

Tax Ra te (%) 16.5 20.3 26.0 25.0 25.0

Reported PAT 9,673 11,412 15,511 16,257 18,158

Adj PAT 9,598 10,927 12,719 16,257 18,158

Change (%) -5.4 13.9 16.4 27.8 11.7

Margin (%) 15.2 15.6 15.4 15.3 14.9


Y/E March 2011 2012 2013 2014E 2015E


Reserves 64,966 74,694 88,491 102,870 119,149

Net Worth 66,661 76,389 90,187 104,565 120,844

Loans 5,410 135 9,971 11,376 11,376

Deferred Liabilities 2131 2332 2805 2805 2805


Gross Block 42,406 46,269 53,279 79,012 84,931

Less: Accum. Deprn. 11,464 14,111 17,076 20,792 24,640

Net Fixed Assets 30,942 32,158 36,203 58,221 60,291

Capital WIP 2,853 3,712 3,674 2,837 2,419

Investments 5,908 12,688 25,324 22,688 28,688

Curr. Assets 46,263 44,945 51,376 65,607 75,683

Inventory 19,061 18,501 23,871 28,927 31,209


Cash and Bank Balance 960 905 1,430 1,563 3,764

Others 11,334 10,003 9,387 9,962 10,596



Provisions 2,203 2,432 2,824 5,452 5,769


Appl. of Funds 74,202 78,856 102,963 118,746 135,026

E: MOSL Estimates



Cipla

18 October 2013 57


Ratios

Y/E March 2011 2012 2013 2014E 2015E

Basic (INR)

EPS 12.0 13.6 15.8 20.2 22.6

Cash EPS 15.4 17.5 20.0 24.9 27.4

BV/Share 82.9 95.0 112.2 130.1 150.4

DPS 3.3 1.7 2.0 3.0 4.0

Payout (%) 30.8 14.3 12.1 17.3 20.7

Valuation (x)

P/E 26.7 20.9 18.7

PEG (x) 1.6 0.8 1.6

Cash P/E 21.2 17.0 15.4

P/BV 3.8 3.3 2.8

EV/Sales 4.2 3.3 2.8

EV/EBITDA 15.8 14.1 12.7


Return Ratios (%)

RoE 14.4 14.3 14.1 15.6 15.0

RoCE 15.7 18.0 19.4 19.2 18.9



Debtor (Days) 86 81 74 87 90

Inventory (Days) 110 96 105 99 93


Leverage Ratio (x)

Current Ratio 3.9 3.1 3.8 2.1 2.4

Debt/Equity 0.1 0.0 0.1 0.1 0.1


Y/E March 2011 2012 2013 2014E 2015E


Interest/Dividends Recd. 711 722 1,323 1,800 2,000


(Inc)/Dec in WC -2,630 4,145 -6,937 2,893 -6,426


EO expense -90 -369 -1,233 0 0CF from Oper. incl EO Expense 10,289 19,119 12,627 24,004 16,831

(inc)/dec in FA -9,574 -5,197 -7,313 -24,897 -5,500

(Pur)/Sale of Investments -3,444 -6,780 -12,636 2,636 -6,000


Issue of Shares 866 -51 166 940 1,879

Inc/(Dec) in Debt 5,359 -5,275 9,836 1,405 0

Interest Paid -173 -238 -276 -1,138 -1,251

Dividend Paid -2,983 -1,633 -1,879 -2,818 -3,758

CF from Fin. Activity 3,068 -7,197 7,847 -1,611 -3,130

Inc/Dec of Cash 339 -55 525 133 2,201

Add: Beginning Balance 621 960 905 1,430 1,563

Closing Balance 960 905 1,430 1,563 3,764

E: MOSL Estimates



Ranbaxy LaboratoriesCMP: INR385 TP: INR270 Sell


Y/E Dec 2012 2013E 2014E

S a l es 124.6 115.8 138.2

EBITDA 19.4 13.5 23.7

Net Profit 5.5 5.5 5.9

Rep. EPS (INR) 30.2 -4.3 33.9

Adj. EPS (INR) 13.0 13.0 13.9

EPS Gr. (%) -7.7 0.0 6.7

BV/Sh. (INR) 96.4 89.8 117.9

RoE (%) 31.4 -4.7 28.8

RoCE (%) 21.0 12.6 20.1

Payout (%) 0.0 18.0 42.2

Valuations

P/E (x) 25.9 25.9 24.3

P/BV (x) 3.5 3.7 2.9

EV/EBITDA (x) 8.5 15.3 8.2

Div. Yield (%) 0.0 0.6 1.5

Note: Estimates include upside

from FTF opportunities

18 October 2013

Sector Update |Healthcare

BSE SENSEX S&P CNX

20,548 6,089



Promoter 63.5 63.5 63.6

Dom. Inst 9.0 10.4 10.6

Foreign 13.7 13.1 13.1

Others 13.7 13.1 12.6

58

Consolidation phase continuesUS FDA issues affect growth visibility

US growth lacks visibility due to ongoing US FDA issues. India to feel the impact of price

controls.

Operating margin expansion to industry levels a difficult task with ongoing US FDA

issues.

Consolidation phase continues, expensive valuations, maintain Sell.

US growth lacks visibility due to ongoing US FDA issues; India to feel

the impact of price controlsRBXY's business mix in the US is being driven by: a) Para IV opportunities, b)

branded generics and c) difficult to manufacture generics. The ongoing US FDA

issues, where three of the four plants are under import alert, have resulted in

lack of clarity on the US pipeline, including monetization of Para IV opportunities

like Diovan, Valcyte and Nexium. However, these continue to be a part of our

estimates. RBXY has exceeded our expectations in its only branded generic drug

launched so far (Absorica through partner Cipher) and it is early days for this

segment to scale up. Although Absorica has captured 17% share in the USD500-

550m Isotretinoin market in less than 12 months, its premium pricing due to

superior efficacy may not be sustainable once the product enters thereimbursement list. India growth continues to get impacted due to execution

challenges and key products coming under price control.

Operating margin expansion to industry levels - a difficult task with

ongoing US FDA issues

RBXY's operating margins are in single digit s currently, with the company planning

to scale them up to industry standards over the next three years. One of the key

levers of margins expansion was a reduction in remediation costs from end-

CY14. With US FDA issues unlikely to resolve in the near term, we believe scaling

up margins to industry standards may be a challenging proposition.

Consolidation phase continues, maintain Sell

We continue to see RBXY's operations in a consolidation phase over the next 12-

18 months. We estimate core earnings growth of less than 10% over CY12-14E.

The stock trades at 27.0x CY13 and 25.3x CY14 estimates, which are at a significant

premium to the sector and not justified with the mid teens growth forecast. We

value RBXY's base business at 18x CY14E to arrive at a fair value of INR249/share

and add INR21/share as the DCF value of the Para IV opportunities for a target

price of INR270/share. We maintain a Sell rating due to expensive valuations.

Bloomberg RBXY INEquity Shares (m) 422.9

M.Cap. (INR b)/(USD b) 162.7/2.6


1,6,12 Rel. Perf. (%) -20/-23/-39


200

320

440

560

680

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Ra nbaxy LabsSense x - Rebas ed



Ranbaxy Laboratories

18 October 2013 59

US sales growth led by Para IV opportunities (USD m) India sales will be affected by DPCO 2013 in the short run

US FDA track record SG&A expenses (% of sales) higher than industry average

PE Band

Story in charts

230 246 306 350513 590163

307

406

59497

235

CY09 CY10 CY11 CY12 CY13E CY14E

Core US sa les One‐offs

16,300 17,593 19,154 21,661 22,591 25,291

9%8%

9%

4%

12%

13%

CY09 CY10 CY11 CY12 CY13E CY14E

India sales Growth YoY (%)

20.0

25.0

30.0

35.0

40.0

CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13ECY14E

Ra nbaxy Sun Pha rmaLupin Gle nma rk PharmaTorrent Pharma

Plant locations Last inspected 483s issued?

In last 12 months

Mohali Dec 2012, Sep 2012 Y

Ohm Labs Dec 2012 Y

Toansa Dec 2012 Y

New Delhi Dec 2012 N

Noida Dec 2012 Y

Ohm Labs, Brunswick Aug 2012 N


Paonta Sahib March 2008 YDewas Feb 2008 Y

30.8

37.4

108.1

13.30

30

60

90

120

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P/E (x) Avg(x) Pe ak(x) Min(x)



Avalide/Avapro 124 Delayed

Diovan 2,087 Delayed

TriCor 1,578 Delayed

Clarinex 200 Delayed

Actoplus met 478 DelayedValcyte 400 Delayed

Nexium 2,272 May-14

Hepsera 140 Sep-14

Namenda 600 Jan-15

OrthoTricyclen 450 Dec-15

Opana ER 450 Unknown

Oxycontin 3,150 Unknown

Rapamune 200 Unknown

Uroxatral 200 Unknown

Levaquin 1,312 Unknown

Solodyn 370 Unknown

(INR m)



Ranbaxy Laboratories

18 October 2013 61


Ratios

Y/E December 2010 2011 2012 2013E 2014E

Basic (INR)

EPS (Fully diluted)* 29.9 14.1 13.0 13.0 13.9

Cash EPS 43.0 -59.4 37.8 3.3 42.5

BV/Share 132.9 67.8 96.4 89.8 117.9

DPS 2.0 2.0 0.0 2.0 5.0

Payout (%) 20.8 16.6 0.0 18.0 42.2

Valuation (x)

P/E (Fully di luted) 25.9 25.9 24.3

Cash P/E 8.9 102.6 7.9

P/BV 3.5 3.7 2.9

EV/Sales 1.3 1.8 1.4

EV/EBITDA 8.5 15.3 8.2


FCF per share 19.8 -91.6 37.9

Return Ratios (%)

RoE 22.5 -101.3 31.4 -4.7 28.8

RoCE 18.4 20.9 21.0 12.6 20.1



Debtor (Days) 69 110 61 82 71


Working Capital (Days) 55 -47 -27 88 68

Leverage Ratio (x)

Current Ratio 2.1 1.2 1.5 1.9 1.9

Debt/Equity 0.8 1.4 1.2 1.5 1.1


Y/E December 2010 2011 2012 2013E 2014E

Op.Profit/(Loss) bef. Tax 18,653 17,000 19,379 13,493 23,744

Interest/Dividends Recd. 5,200 1,444 2,732 1,682 1,416

Direct Taxes Paid 316 -2,116 -2,921 -1,916 -5,040

(Inc)/Dec in WC -6,330 25,625 -3,627 -36,361 1,926

CF from Operations 17,838 41,953 15,563 -23,101 22,047

EO Expense 2,646 3,228 2,391 9,658 0CF frm Op.incl EO Exp. 15,192 38,725 13,172 -32,759 22,047

(Inc)/Dec in FA -3,693 -5,218 -4,784 -6,000 -6,000

(Pur)/Sale of Investments 422 4,002 193 0 0


Change in networth 2,736 -34,881 371 -203 -5

Inc/(Dec) in Debt 7,167 -2,857 8,214 7,894 115

Interest Paid -614 -795 -1,796 -2,012 -2,136

Dividend Paid -982 -987 0 -990 -2,474

CF from Fin. Activity 8,307 -39,520 6,789 4,690 -4,500

Inc/Dec of Cash 20,229 -2,010 15,369 -34,070 11,547

Add: Beginning Balance 12,416 32,644 30,634 46,003 11,934

Closing Balance 32,644 30,634 46,003 11,934 23,480

E: MOSL Estimates



Glenmark PharmaceuticalsCMP: INR559 TP: INR623 Buy


Y/E March 2013 2014E 2015E

S a l es 50.1 60.1 70.2

EBITDA 10.6 12.0 14.1


Adj. EPS (INR) 18.4 25.4 31.9

EPS Gr. (%) 53.9 37.6 25.8

BV/Sh. (INR) 102.0 123.9 151.1

RoE (%) 18.1 20.5 21.1

RoCE (%) 16.1 18.5 19.9

Payout (%) 10.2 13.3 14.5

Valuations

P/E (x) 30.3 22.0 17.5

P/BV (x) 5.5 4.5 3.7

EV/EBITDA (x) 16.4 14.1 11.9

Div. Yield (%) 0.4 0.5 0.7

18 October 2013


BSE SENSEX S&P CNX

20,548 6,089



Promoter 48.3 48.3 48.3

Dom. Inst 7.4 7.1 6.7

Foreign 34.0 34.3 33.7

Others 10.4 10.3 11.3

62

NCE research, a forteStronger balance sheet key to stock's re-rating

US and emerging markets continue to shine, India potential being realized.

Longer term focus on NCE research and building depth in hormones, derma and

oncology areas.

Stronger balance sheet key to further re-rating of the stock.

GNP expects to achieve sales CAGR of 20% over the next few years;

US, emerging markets and India hold the key

Company has guided to achieve sales CAGR of 20% over the next few years, with

an improving margin profile. GNP is banking on the US, emerging markets and

revival in the India business to achieve this growth, where it has already done

the necessary groundwork. Analyzing the pipeline of US market, we estimate

GNP to achieve sales CAGR of 15% to USD413m over FY13-15E, while new

approvals in emerging markets are expected to drive sales CAGR of 15% to

USD315m over the same period. Revival in India growth over the last two years

and no impact from the drug pricing policy is expected to lead to sales CAGR of

16% to INR17.6b over FY13-15E.

Longer term focus on NCE research and building depth in hormones,

derma and oncology areas

GNP's longer term focus is on NCE research (it has five molecules under

development) and is particularly excited about its biologic molecules currently

in early stages of development. GNP has been the most successful Indian

company in NCE research (has earned licensing income of USD205m till date). It

expects R&D costs to be in the range of 9% of sales, with 4-4.5% allocated towards

NCE/NBE development. Also, company is working on building its product

portfolio in high margin/low competition therapies like hormones (full basket

of OCs to be introduced over the next 12-15 months), derma and oncology (four

products filed) areas.

Stronger balance sheet key to further re-rating of the stock

GNP's PE valuation has seen a material re-rating from 13x one-year forward

earnings to 16x one-year forward earnings over the last 12 months. While we

are confident on strong earnings growth for the company over the next two

years, we believe strengthening the balance sheet from free cash flow would

be critical for further re-rating of the stock. We value GNP's base business at

INR606/share (19x FY15E earnings ) and add INR17/share as DCF value of

Crofelemer and other FTF opportunities to arrive at a target price of INR623/

share. Maintain Buy.

Bloomberg GNP INEquity Shares (m) 269.8

M.Cap. (INR b)/(USD b) 151.5/2.4


1,6,12 Rel. Perf. (%) 0/6/26


350

425

500

575

650

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Glenmark Pharma-



Glenmark Pharmaceuticals

18 October 2013 63

US Revenue ramp-up (USD m) Sustained growth in India formulations business

Strong growth seen in semi-regulated markets (INRb) PE Band

R&D Pipeline

Story in charts

161 153184

253

310

350

413


6 , 3

7 2

7 , 5

2 9

8 , 4

4 7

1 0 , 0

2 1

1 3 , 0

9 6

1 5 , 0

6 0

1 7 , 6

2 0

15.0 17.0

30.7

18.6

12.2

18.116.8


DF revenue (INR m) Growth (%)

3,864 5,926 8,122

11,918

10,093

4,070

2,355

18.124.3

37.1

45.6

5.3

64.1

15.4


Semi‐regulated Ma rkets (I NR m)YoY Growth (%)

Molecule Clinical trial progress Partner

Revami last (GRC 4039) Undergoing Phase-I Ib None

for Asthma in

Europe and Asia

GRC 17536 Ph-I completed in None

Netherlands. Toinitiate Ph-II in

Europe and India

GRC 15300 Phase II in UK Sanofi

mPGES-1 inhibitors Pre-clinical phase Forest labs

GBR 500 Commenced Ph-II for Sanofi

ulcerative colitis in US

& EU in Sep-12

GBR 900 Pre-clinical phase; will None

initiate Ph-1 in FY14

GBR 830 Pre-clinical phase; will None

initiate Ph-1 in FY14

Crofelemer NDA approved in USA; Sal ix

Phase IIb in India

19.4

32.7

138.5

12.50

50

100

150

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P/E (x) Avg(x) Peak(x) Min(x)



Locoid 38 End 2013

Vanos 40 Dec-13

Clarinex 200 FY14

Lunesta 783 May-14

Tarka 70 Feb-15Welchol 300 Apr-15

OrthoTricyclen Lo 450 Dec-15

Zetia 1350 Dec-16


Strattera 384 May-17

Finacea 95 Nov-18

Bystolic 400 Sep-21




18 October 2013 64



Y/E March 2011 2012 2013 2014E 2015E

Net Sales 29,491 40,206 50,123 60,095 70,162

Change (%) 19.8 36.3 24.7 19.9 16.8

EBITDA 5,923 9,860 10,610 12,018 14,087

Change (%) -0.7 66.5 7.6 13.3 17.2

Margin (%) 20.1 24.5 21.2 20.0 20.1

Adjusted EBITDA 5,028 7,325 10,117 12,018 14,087

Margin (%) 17.6 19.4 20.4 20.0 20.1

Depreciation 947 979 1,270 1,384 1,660

EBIT 4,976 8,882 9,340 10,634 12,428

Interest 1,566 1,466 1,600 1,995 1,839

OI & forex gains/losses 1,405 -1,218 -403 168 202

PBT before EO Expense 4,816 6,198 7,337 8,807 10,790

Change (%) 25.4 28.7 18.4 20.0 22.5PBT after EO Exp. 4,816 4,881 7,337 8,807 10,790

Tax 237 238 1,107 1,673 2,050

Tax Ra te (%) 4.9 4.9 15.1 19.0 19.0

Reported PAT 4,578 4,643 6,230 7,134 8,740

Adj PAT** 3,548 3,244 4,992 6,871 8,640

Change (%) 7.2 -8.6 53.9 37.6 25.8

Margin (%) 12.4 8.6 10.1 11.4 12.3

**Excl upside from NCE out-licensing and FTFs


Y/E March 2011 2012 2013 2014E 2015E


Fully Diluted Eq Cap 271 271 271 271 271

Reserves 20,102 23,746 27,359 33,279 40,652

Net Worth 20,372 24,016 27,630 33,550 40,923

Minority Interest 267 250 244 244 244

Loans 21,258 23,225 28,500 28,500 26,000

Deferred liabilities -1081 -2674 -3803 -3803 -3803


Gross Block 25,899 28,384 32,968 36,218 39,218

Less: Accum. Deprn. 4,876 4,137 5,286 6,670 8,330

Net Fixed Assets 21,023 24,235 26,634 29,548 30,889

Capital WIP 1,100 656 1,689 1,689 1,689

Investments 309 298 323 323 323

Intangibles (net) 9,723 11,253 12,136 11,286 10,496

Curr. Assets 25,988 29,472 37,493 48,711 55,840

Inventory 8,070 7,877 8,435 10,702 12,687



Others 4,651 5,958 6,605 8,232 9,611



Provisions 44 509 1,011 1,200 1,350Net Current Assets 18,384 19,629 23,925 26,930 30,462

Appl. of Funds 40,816 44,817 52,571 58,491 63,363

E: MOSL Estimates




18 October 2013 65


Ratios

Y/E March 2011 2012 2013 2014E 2015E

Basic (INR)

EPS (Fully diluted)* 13.1 12.0 18.4 25.4 31.9

Cash EPS 16.6 15.6 23.1 30.5 38.0

BV/Share 75.4 88.8 102.0 123.9 151.1

DPS 0.7 2.0 2.0 3.0 4.0

Payout (%) 5.2 13.6 10.2 13.3 14.5

Valuation (x)

P/E (Fully di luted) 30.3 22.0 17.5

PEG (x) 0.6 0.6 0.7

Cash P/E 24.2 18.4 14.7

P/BV 5.5 4.5 3.7

EV/Sales 3.5 2.8 2.4

EV/EBITDA 16.4 14.1 11.9


Return Ratios (%)

RoE 17.4 13.5 18.1 20.5 21.1

RoCE 13.4 11.4 16.1 18.5 19.9



Debtor (Days) 140 113 119 120 122



Leverage Ratio (x)

Current Ratio 3.4 3.0 2.8 2.2 2.2

Debt/Equity 1.0 1.0 1.0 0.8 0.6


Y/E March 2011 2012 2013 2014E 2015E


Interest/Dividends Recd. 1,405 -1,218 -403 168 202


(Inc)/Dec in WC 1,530 -3 -1,445 962 -3,461


CF frm Op.incl EO Exp. 6,829 5,492 6,527 11,474 8,778

(Inc)/Dec in FA 810 -3,746 -4,703 -4,298 -3,000

CF from Investments 682 -3,735 -4,728 -4,298 -3,000

Change in Networth -7,521 -366 -1,982 -263 -100

Inc/(Dec) in Debt 2,701 1,950 5,268 0 -2,500

Interest Paid -1,566 -1,466 -1,600 -1,995 -1,839

Dividend Paid -236 -633 -634 -951 -1,268

CF from Fin. Activity -6,621 -515 1,052 -3,209 -5,707

Inc/Dec of Cash 890 1,242 2,851 3,968 72Add: Beginning Balance 1,069 1,959 3,201 6,052 10,019

Closing Balance 1,959 3,201 6,052 10,019 10,091

E: MOSL Estimates



Cadila HealthcareCMP: INR664 TP: INR828 Buy

18 October 2013


BSE SENSEX S&P CNX

20,548 6,089



Promoter 74.8 74.8 74.8

Dom. Inst 9.0 9.9 11.6

Foreign 6.0 5.7 5.0

Others 10.2 9.6 8.6

66

In a prolonged consolidation phaseRevival in quality US approvals holds the key

Business mix has reached a point where diversification is hurting growth, while ongoing

investments and capex are hurting the balance sheet.

Revival in quality US approvals is a key trigger for a spurt in earnings growth, which

have failed to move over the last three years.

Stock trades at 18.5x FY14E of INR35.8 and 16.0x FY15E of INR41.4. Maintain Buy.

Business mix undergoing prolonged consolidation phase

CDH's business mix consists of presence across diversified fields like

formulations, APIs and contract manufacturing, with presence in major markets

across the globe either directly or through a p artner. CDH is no w feeling the

pinch of this over diversification as key verticals are growing slow, while its

investments and capex in areas like vaccines, transdermal, biosimilars are

unlikely to generate cash flows in the near term. We believe the company is

likely to feel the impact of this situation in the medium term.

Revival in quality FDA approvals is a key near term trigger; India likely

to grow slower as effect of price control kicks in

Over the last 15 months, CDH received 20 approvals from the US FDA. But the

approvals have been for products with high competitive intesnsity and hence it

is not resulting in growth in the US market. Revival in quality approvals holds

the key as India's performance is likely to slow down in the medium term due to

the impact of drug price controls, while other businesses are unlikely to bridge

this gap. Hence, operating margins are unlikely to expand significantly unless

quality US approvals flow through.

FY14E seen as a lackluster year, all eyes on FY15E performance

We expect FY14E to be yet another lackluster year impacted by lack of quality

FDA approvals and price controls in India. Thus, the company is expected to

report a muted 5% growth in FY14E earnings YoY. We believe FY15E could be the

start of a turnaround year for CDH as we expect some key approvals to flow in

and the impact of the drug policy would be fully realized. We thus expect 15%

earnings growth in FY15E over FY14E. The stock trades at 18.5x FY14E of INR35.8

and 16.0x FY15E of INR41.4. The stock is trading at the lower end of its five years

trading range. We value CDH at 20x FY15E earnings, which is in line with the

sector valuations, to arrive at a target price of INR828.

Bloomberg CDH INEquity Shares (m) 204.7

M.Cap. (INR b)/(USD b) 136.0/2.2


1,6,12 Rel. Perf. (%) -4/-22/-32


Financials & Valuation (INR b)

Y/E March 2013 2014E 2015E

S a l es 63.6 71.2 81.3

EBITDA 11.3 12.4 14.4Net Profit 6.5 7.3 8.5

Adj. EPS (INR) 31.9 35.8 41.4

EPS Gr. (%) 15.5 12.2 15.6

BV/Sh. ( INR) 143.8 170.0 200.6

RoE (%) 23.7 22.8 22.3

RoCE (%) 17.9 17.6 18.6

Payout (%) 30.5 25.3 24.8

Valuations

P/E (x) 20.8 18.5 16.0

P/BV (x) 4.6 3.9 3.3

EV/EBITDA (x) 13.9 13.0 11.0

Div. Yield (%) 1.0 1.3 1.6

600

700

800

900

1,000

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Cadi la Hea l th-



Cadila Healthcare

18 October 2013 68



Y/E March 2011 2012 2013 2014E 2015E

Net Sales 46,306 52,633 63,579 71,161 81,301

Change (%) 25.6 13.7 20.8 11.9 14.2


% of Sales 77.8 79.4 82.3 82.6 82.2

EBITDA 10,262 10,838 11,252 12,405 14,445

Margin (%) 22.2 20.6 17.7 17.4 17.8

Depreciation 1,269 1,579 1,847 1,966 2,340

EBIT 8,993 9,259 9,405 10,439 12,105

Int. and Finance Charges 699 1,211 1,262 1,439 1,442

Other Income - Rec. 131 -107 -55 415 499



Current Tax 1,064 1,130 1,188 1,648 2,232Tax 1,064 1,130 1,188 1,648 2,232

Tax Ra te (%) 12.6 14.2 14.7 17.5 20.0

Reported PAT 7,361 6,811 6,900 7,767 8,930

Less: Mionrity Interest 251 286 364 433 450

Net Profit 7,110 6,525 6,536 7,334 8,480

PAT Adj for EO Items 6,333 5,660 6,536 7,334 8,480


Y/E March 2011 2012 2013 2014E 2015E


Tot al Reserves 20,691 24,712 28,421 33,787 40,053

Net Worth 21,715 25,736 29,445 34,811 41,077


Deferred liabilities 1127 1185 1005 1005 1005

Tot al Loans 11,034 21,307 27,946 30,946 28,946


Gross Block 24,004 35,612 38,726 48,904 56,493

Less: Accum. Deprn. 5,331 6,786 8,470 10,436 12,776

Net Fixed Assets 18,673 28,826 30,256 38,468 43,717

Capital WIP 3,963 4,492 7,356 4,178 2,589

Investments 207 242 1,145 371 371

Curr. Assets 23,263 30,232 34,965 42,490 46,693

Inventory 8,119 10,905 12,136 16,544 18,763



Loans & Advances 4,540 5,798 7,440 7,719 8,026



Provisions 2,182 2,281 2,473 2,994 3,416


Appl. of Funds 34,545 49,132 59,589 68,388 73,103

E: MOSL Estimates



Cadila Healthcare

18 October 2013 69


Ratios

Y/E March 2011 2012 2013 2014E 2015E

Basic (INR)

EPS 30.9 27.6 31.9 35.8 41.4

Cash EPS 40.9 39.6 40.9 45.4 52.8

BV/Share 106.1 125.7 143.8 170.0 200.6

DPS 6.3 6.1 6.9 8.7 10.9

Payout (%) 20.8 27.1 30.5 25.3 24.8

Valuation (x)

P/E 20.8 18.5 16.0

Cash P/E 16.2 14.6 12.6

P/BV 4.6 3.9 3.3

EV/Sales 2.5 2.3 2.0

EV/EBITDA 13.9 13.0 11.0


Return Ratios (%)

RoE 37.4 27.5 23.7 22.8 22.3

RoCE 30.4 22.9 17.9 17.6 18.6


Asset Turnover (x) 1.3 1.1 1.1 1.0 1.1


Debtor (Days) 60 60 54 65 66


Working Capital Turnover (Days) 69 76 86 103 96

Leverage Ratio (x)

Current Ratio 2.0 2.1 2.5 2.5 2.3


Debt/Equity 0.4 0.7 0.8 0.8 0.6


Y/E March 2011 2012 2013 2014E 2015E

Oper. Profit/(Loss) before Tax 10,262 10,838 11,252 12,405 14,445

Interest/Dividends Recd. 131 -107 -55 415 499


(Inc)/Dec in WC -2,067 -2,156 -4,088 -5,172 -1,234


(inc)/dec in FA -4,460 -12,261 -6,141 -7,000 -6,000

(Pur)/Sale of Investments 0 -35 -903 774 0


Change in Networth -401 -945 -1,086 -433 -450

Inc/(Dec) in Debt 406 10,508 6,928 3,433 -1,550

Interest Paid -699 -1,211 -1,262 -1,439 -1,442

Dividend Paid -1,530 -1,845 -2,105 -1,968 -2,214

Others -132 58 -180 -1 0

CF from Fin. Activity -2,356 6,565 2,294 -408 -5,656

Inc/Dec of Cash 445 1,714 1,172 -634 -178Add: Beginning Balance 2,507 2,952 4,666 5,838 5,204

Closing Balance 2,952 4,666 5,838 5,204 5,026

E: MOSL Estimates



CMP: INR1,032 TP: INR1,329 Buy


Y/E March 2013 2014E 2015E

S a l es 21.4 24.7 30.2

EBITDA 8.1 9.6 11.9


Adj. EPS (INR) 45.4 54.8 66.5

EPS Gr. (%) 12.9 20.8 21.3

BV/Sh. (INR) 188.4 221.3 257.8

RoE (%) 26.0 26.7 27.7

RoCE (%) 33.1 34.9 35.7

Payout (%) 38.7 40.0 45.0

Valuations

P/E (x) 22.7 18.8 15.5

P/BV (x) 5.5 4.7 4.0

EV/EBITDA (x) 16.9 14.3 11.4

Div. Yield (%) 1.5 1.8 2.5

18 October 2013


BSE SENSEX S&P CNX

20,548 6,089



Promoter 52.2 52.2 52.2

Dom. Inst 12.5 13.3 17.2

Foreign 15.6 14.8 11.0

Others 19.7 19.7 19.6

70

Strong track record; Poised for high growthStock trades at attractive valuations

An opaque business model but strong track record gives us confidence.

Confident of growing at least 15% revenue over the forecast period but option value

from a molecule commercializing could be huge.

Stock is trading at a material discount to its historic valuations, despite strong earnings

growth.

An opaque business model but strong track record gives us confidence

Divi's Labs is India's number one CRAMS company based on almost all

parameters. The business mix is equally divided between custom syntheses(CCS) and API. Of the two, CCS is a high margin business but highly opaque as

DIVI does not share its product pipeline nor does it give its customer profile. In

such a scenario, why should the stock's long term PE of 20x be in line with the

sector average? The answer lies in strong management track record and ability

to develop complex molecules, thus creating an entry barrier for competition.

Company has a consistent dividend payout history, has not diluted equity in the

last 20 years and there has been no unwarranted capex by the management,

which resulted in a near zero debt company unlike peers. Pertinently, DIVI has

developed a strong relationship with 20 of the top 25 innovators and is working

at an early stage of product development with them, which has created asignificant entry barrier for competitors.

Confident of growing at least 15% revenue over the forecast period

but option value from a molecule commercializing could be huge

DIVI has guided for a 15% sales growth for FY14, over FY13, and is confident of

maintaining margins at current levels of 38%. It has invested INR5b in its SEZ in

Vizag, which is yet to be fully commercialized. With full commercialization

expected in FY15, we believe DIVI has the potential to grow faster than the

current fiscal, next year. Moreover, it continues to develop products in clinical

stages with innovator partners. While we do not have details about the products

and at its current stage of development, a molecule commercializing in the

future can create huge upside as DIVI is likely to be the preferred partner to

supply adequate quantities of the product. This, we believe, is a significant

option value in the stock.

Stock trading at material discount to its historic valuations; strong

earnings growth, comfortable valuations, Buy

DIVI is trading at 16x one-year forward earnings, which is at 20% discount to its

historic valuations. With strong earnings CAGR of 21% over FY13-15E and trading

at the lower end of the PE band, we believe valuations are extremely comforting.

Maintain Buy.

Bloomberg DIVI INEquity Shares (m) 132.7

M.Cap. (INR b)/(USD b) 136.9/2.2

52-Week Range (INR) 1,233/905

1,6,12 Rel. Perf. (%) -1/-12/-19


Divi's Laboratories

900

1,000

1,100

1,200

1,300

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Di vis Labs-



Divi's Laboratories

18 October 2013 71

Increasing dividend payout trend Declining product/customer concentration (%)

Revenue mix (INR m) EBITDA margins expected to expand going forward

Free cash flow to increase FY14E onwards (INR m) PE Band

Story in charts

456 925 1,549 2,006 2,329 2, 908 3,970

11

27

36 38 39 40

45

FY09 F Y10 F Y11 FY12 FY13 F Y14E FY15E

Dividend ( INR m) D ividend Payout (%)

4,074 5,100 6,023 4,604 6,350 10,218

8,921

11,710

14,286

8,855 11,648

14,211

2,761

10,272

6,1004,454

5,5805,0723,074

849

1,680

1,333

910810

621

358

200

FY06 FY07 FY08 F Y09 FY10 F Y11 FY12 FY13 FY14E FY15E

Ge n eri cs CRAMS Ne u tra ce uti ca ls

16.8

19.3

30.3

11.2

6

13

20

27

34

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P/E (x) Avg(x) Pea k(x) Min (x)

1,942

3,576

2,472

5,749

7,580

1,290

2,040

FY0 9 F Y1 0 F Y1 1 F Y1 2 F Y13 FY1 4E F Y1 4E

Cash flow impacted

due to customer

inventory de-stocking

& large capex

19%

61%

51%

17%

48% 45%

Con tributi on from

top produ ct (%)

Co ntributio n from

top 5 products (%)

Co ntributi o n from

top 5 clie nts (%)


5, 178 4,053 4,915 6,850 8,102 9,556

43.943.0

38.737.9

36.937.6

FY09 FY10 FY11 FY12 FY13 FY14E

E BI TD A (I NR m) Ma rg i n (% )



Divi's Laboratories

18 October 2013 72



Y/E March 2011 2012 2013 2014E 2015E

Net Sales 13,071 18,586 21,399 24,692 30,177

Change (%) 38.8 42.2 15.1 15.4 22.2

EBITDA 4,915 6,850 8,102 9,556 11,926

Margin (%) 37.6 36.9 37.9 38.7 39.5

Depreciation 534 621 769 958 1,071

EBIT 4,381 6,229 7,333 8,598 10,855


Other Income - Rec. 365 615 497 995 629


Current Tax 405 1,474 1,792 2,296 2,635

Deferred Tax 26 0 0 0 0

Tax Ra te (%) 9.1 21.7 22.9 24.0 23.0

Reported PAT 4,293 5,333 6,020 7,270 8,821PAT Adj for EO Items 4,293 5,333 6,020 7,270 8,821

Change (%) 26.1 24.2 12.9 20.8 21.3

Margin (%) 32.8 28.7 28.1 29.4 29.2

Less: Mionrity Interest

Net Profit 4,293 5,333 6,020 7,270 8,821

No of Shares (Mn - FV: Rs5) 132.6 132.7 132.7 132.7 132.7

Adj EPS 32.4 40.2 45.4 54.8 66.5


Y/E March 2011 2012 2013 2014E 2015E


Tot al Reserves 17,710 21,050 24,740 29,103 33,954

Net Worth 17,975 21,315 25,006 29,368 34,220


Tot al Loans 230 617 331 331 331


Gross Block 8,857 10,921 13,383 16,568 17,068

Less: Accum. Deprn. 2,958 3,536 4,296 5,308 6,379

Net Fixed Assets 5,899 7,384 9,087 11,260 10,689

Capital WIP 1,293 1,820 3,034 500 500

Investments 5,256 4,770 4,078 6,478 9,478

Curr. Assets 10,299 13,592 15,188 18,848 23,436

Inventory 5,717 6,790 8,357 9,877 12,071


Cash and Bank Balance 177 309 409 823 1,406

Loans & Advances 731 1,542 1,302 1,975 2,414



Provisions 1,618 2,099 2,358 3,138 4,233


Appl. of Funds 18,706 22,541 26,129 30,491 35,343

E: MOSL Estimates



Divi's Laboratories

18 October 2013 73


Ratios

Y/E March 2011 2012 2013 2014E 2015E

Basic (INR)

EPS 32.4 40.2 45.4 54.8 66.5

Cash EPS 36.4 44.9 51.2 62.0 74.5

BV/Share 135.6 160.6 188.4 221.3 257.8

DPS 10.0 13.0 15.0 18.7 25.6

Payout (%) 36.1 37.6 38.7 40.0 45.0

Valuation (x)

P/E 22.7 18.8 15.5

Cash P/E 20.2 16.6 13.8

P/BV 5.5 4.7 4.0

EV/Sales 6.4 5.5 4.5

EV/EBITDA 16.9 14.3 11.4


Return Ratios (%)

RoE 25.9 27.1 26.0 26.7 27.7

RoCE 28.2 34.1 33.1 34.9 35.7



Debtor (Days) 104 98 88 93 93

Inventory (Days) 160 133 143 146 146


Leverage Ratio (x)

Current Ratio 2.5 2.7 2.9 2.9 2.7

Debt/Equity 0.0 0.0 0.0 0.0 0.0


Y/E March 2011 2012 2013 2014E 2015E

Op.Profit/(Loss) bef. Tax 4,915 6,850 8,102 9,556 11,926

Interest/Dividends Recd. 365 615 497 995 629

Direct Taxes Paid -405 -1,474 -1,792 -2,296 -2,635

(Inc)/Dec in WC -813 -2,177 -1,263 -1,910 -1,839


EO Expense / (Income) 0 0 0 0 0


(inc)/dec in FA -1,591 -2,523 -3,504 -596 -500

(Pur)/Sale of Investments -844 486 692 -2,400 -3,000


Change in networth 53 14 0 0 0

Inc/(Dec) in Debt -98 387 -286 0 0

Interest Paid -22 -37 -18 -27 -27

Dividend Paid -1,549 -2,006 -2,329 -2,908 -3,970

CF from Fin. Activity -1,616 -1,643 -2,633 -2,935 -3,997

Inc/Dec of Cash 12 133 99 414 583Add: Beginning Balance 165 177 309 409 823

Closing Balance 177 310 409 823 1,406

E: MOSL Estimates



Ipca LaboratoriesCMP: INR700 TP: INR870 Buy


Y/E March 2013 2014E 2015E

S a l es 28.1 33.2 41.1

EBITDA 6.2 7.5 9.8


Adj. EPS (INR) 25.7 31.9 51.2

EPS Gr. (%) 17.4 24.0 60.7

BV/Sh. (INR) 123.1 148.6 189.6

RoE (%) 23.1 23.5 30.3

RoCE (%) 25.2 25.0 32.9

Payout (%) 18.1 20.0 20.0

Valuations

P/E (x) 27.2 22.0 13.7

P/BV (x) 5.7 4.7 3.7

EV/EBITDA (x) 14.9 12.5 9.4

Div. Yield (%) 0.7 0.9 1.5

18 October 2013


BSE SENSEX S&P CNX

20,548 6,089



Promoter 45.9 45.9 45.9

Dom. Inst 13.5 15.8 21.4

Foreign 23.4 21.2 10.9

Others 17.3 17.2 21.9

74

High earnings growth to sustainExport formulations expected to witness robust growth

IPCA's recipe for growth has been the deep vertical integration.

Strong 30% CAGR in export formulations will be led by US generics and institutional

business.

We believe that increasing contribution from these high margin businesses can result

in 160bp margin expansion over FY13-15E.

Deep vertical integration: Recipe for success

IPCA's focus on backward integration has been its key differentiator. Thisequipped it with cost competitive abilities that allow to attain higher share in

markets it enters and maintain high profit margins. Simultaneously, management

believes that there is huge scope to reduce the production cost in APIs through

technological enhancement, as opposed to the limited scope in formulations.

US formulations: Capacity constraints removed

Strategy for the US market is to target old, mature products, wherein if the

costing is right, IPCA believes it can achieve high growth through market share

gains. The recent approval for its Indore SEZ unit resolves capacity constraints

and paves way for commercialization of at least 8 ANDAs filed from this facility.We expect the company to report 70% revenue CAGR in US generics over FY13-

15E, thereby the segment will constitute 15% of total sales (7% currently).

Institutional tender business: Significant potential for ramp-up

IPCA has WHO's pre-qualification to supply Artemether-Lumefantrine (anti-

malaria), which is a USD400m market with only four other players. It currently

holds 20% share in this market, with Novartis leading. Besides, IPCA also has

approval for Artesunate-Amodiaquine, which is a fast growing market. With

funding for next two years already tied in, we believe this segment could report

over 17% CAGR over FY13-15E. Moreover, company plans to launch the injectionformat of Artemether-Lumefantrine in FY15, which could present a positive

surprise to our estimates.

Valuations and view: Strong long term structural story

We view IPCA as a long term structural growth story and expect the earnings

growth to sustain. Our estimates reflect 21% CAGR in sales over FY13-15E led by

export formulation. Domestic formulation is likely to grow 15%, while API growth

will be 12% due to high captive consumption. We expect 160bp EBITDA margin

expansion on improving sales mix and capacity ramp-up. High growth coupled

with strong return ratios (between 25-30%) makes IPCA our top pick among mid

caps. Maintain Buy with a target price of INR870 (17x FY15E).

Bloomberg IPCA INEquity Shares (m) 126.2

M.Cap. (INR b)/(USD b) 88.3/1.4


1,6,12 Rel Perf. (%) - 4/28/43


400

520

640

760

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IPCA Lab s

S e n s e x - R e b a s e d



Ipca Laboratories

18 October 2013 75

Most vertically integrated ANDA filings (%) High growth in US led by Indore SEZ approval

Potential for significant ramp-up in Institutional business Domestic formulation market expected to post 15% CAGR

Story in charts

DMFs/ANDAs File d

64 65

95

44

7857

36 36

145

A u r o b i n d o

C a d i l a

D r R e d d y ' s

G l e n m a r k

I P C A L a b s

L u p i n

R a n b a x y *

S u n

T o r r e n t

6,212

3,119

2,1521,780

1,159664

24221 45

99

54

75

174

674

FY09 F Y10 FY11 F Y12 FY13 FY14E F Y15E

Revenue ( INR m) Growth (%)

5,314

4,621

3,916

2,996

1,220

270 151831

146

352

FY10 FY11 FY12 FY13 FY14E FY15E

Revenues (INR M) Growth (%)

1,817 2,653 3,335 3,761 5,135

6,232 7,482

9,787

23.822.522.221.819.821.320.6

17.1

FY 08 F Y0 9 F Y1 0 F Y1 1 F Y1 2 FY 13 FY 14E F Y1 5E

EBITDA (INR m) EBITDA Ma rgin (%)

4,766 5,978 6,964 7,534 8,781 10,010 11,612

16.014.0

16.6

8.2

16.5

25.4

10.4

FY09 F Y10 FY11 FY12 FY13 FY14E F Y15E

DF Revenues ( INR m) Growth (%)

Margin expansion led by improving sales mix PE band

16.3

13.0

18.9

4.02

6

10

14

18

22

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Ipca Laboratories

18 October 2013 76


Consoliated Income Statement (INR Million)

Y/E March 2011 2012 2013 2014E 2015E

Net Revenues 18,969 23,587 28,131 33,203 41,098

Change (%) 21.4 24.3 19.3 18.0 23.8

EBITDA 3,761 5,135 6,232 7,482 9,787

Margin (%) 19.8 21.8 22.2 22.5 23.8

Depreciation 558 671 867 1,023 1,188

EBIT 3,203 4,464 5,365 6,459 8,599


Other Income - Rec. 518 -408 -488 -812 132


EO Expense/(Income) 0 0 0 0


Current Tax 770 754 927 1,164 1,762

Deferred Tax 14 127 372 106 168Tax 784 881 1,299 1,270 1,930

Tax Ra te (%) 23.0 24.2 28.6 24.0 23.0

Reported PAT 2,623 2,762 3,243 4,021 6,461

Less: Minority Interest -5 0 0 0 0

Net Profit 2,628 2,762 3,243 4,021 6,461

Adj PAT 2,628 2,762 3,243 4,021 6,461


Y/E March 2011 2012 2013 2014E 2015E


Tot al Reserves 10,265 12,288 15,285 18,502 23,671

Net Worth 10,516 12,540 15,538 18,754 23,923


Tot al Loans 5,308 5,326 5,234 5,734 4,734


Gross Block 9,884 13,386 15,791 18,791 21,291

Less: Accum. Deprn. 2,892 3,945 4,748 5,772 6,960

Net Fixed Assets 6,992 9,441 11,042 13,019 14,331

Capital WIP 1,132 945 1,292 1,292 1,292

Investments 408 341 90 90 90

Curr. Assets 10,586 12,547 14,545 17,682 22,178

Inventory 4,664 6,699 7,410 8,964 11,097


Cash and Bank Balance 104 122 582 471 651

Loans & Advances 1,182 2,235 2,374 3,048 3,773



Provisions 420 377 544 627 777


Appl. of Funds 16,625 18,798 22,075 25,898 30,234

E: MOSL Estimates



Ipca Laboratories

18 October 2013 77


Ratios

Y/E March 2011 2012 2013 2014E 2015E

EPS (INR) 20.9 21.9 25.7 31.9 51.2

Cash EPS 25.3 27.2 32.6 40.0 60.6

BV/Share 83.7 99.4 123.1 148.6 189.6

DPS 3.7 3.7 4.7 6.4 10.3

Payout (%) 17.9 17.0 18.1 20.0 20.0

Valuation (x)

P/E 27.2 22.0 13.7

P/BV 5.7 4.7 3.7

EV/Sales 3.3 2.8 2.2

EV/EBITDA 14.9 12.5 9.4


Return Ratios (%)

RoE 27.4 24.0 23.1 23.5 30.3

RoCE 25.6 24.1 25.2 25.0 32.9



Debtor (Days) 87 54 54 57 59



Leverage Ratio (x)


Debt/Equity 0.5 0.4 0.3 0.3 0.2


Y/E March 2011 2012 2013 2014E 2015E


Interest/Dividends Recd. 518 -408 -488 -812 132

Direct Taxes Paid -770 -757 -927 -1,164 -1,762

(Inc)/Dec in WC -1,203 39 -1,119 -1,957 -2,845



(inc)/dec in FA -1,821 -3,315 -2,752 -3,000 -2,500(Pur)/Sale of Investments -83 68 251 0 0


Issue of shares 1 1 0 0 0

(Inc)/Dec in Debt 762 25 -93 500 -1,000

Interest Paid -314 -413 -334 -356 -340

Dividend Paid -468 -468 -589 -804 -1,292

Others -388 111 279 0 0

CF from Fin. Activity -407 -744 -736 -661 -2,632

Inc/Dec of Cash -4 18 461 -111 179

Add: Beginning Balance 108 104 122 582 471Closing Balance 104 122 582 471 651

E: MOSL Estimates



Torrent PharmaCMP: INR417 TP: INR519 Buy


Y/E March 2013 2014E 2015E

S a l es 32.1 38.8 43.9

EBITDA 6.9 7.4 8.5


Adj. EPS (INR) 27.8 30.2 34.6

EPS Gr. (%) 43.1 8.7 14.5

BV/Sh. ( INR) 84.9 108.8 133.3

RoE (%) 35.8 31.2 28.6

RoCE (%) 33.5 30.0 29.0

Payout (%) 52.3 28.1 29.3

Valuations

P/E (x) 15.0 13.8 12.1

P/BV (x) 4.9 3.8 3.1

EV/EBITDA (x) 10.3 9.4 8.2

Div. Yield (%) 5.5 1.8 2.1

18 October 2013


BSE SENSEX S&P CNX

20,548 6,089



Promoter 71.5 71.5 71.5

Dom. Inst 9.5 9.7 12.1

Foreign 7.7 7.3 5.3

Others 11.3 11.6 11.2

78

India growth back on trackStrong presence in the chronic space in India makes it a good M&A

candidate

India growth back on track but potential to achieve more.

US, Europe grow strongly in exports; outlook for Brazil appears challenging.

Reasonable valuations; potential acquisition candidate, due to its presence in emerging

markets, makes TRP an a ttractive bet. Maintain Buy.

India growth back on track but potential to achieve more

TRP's India portfolio comprises of 60% sales from chronic products. Despite this

strong positioning, TRP's growth has lagged industry growth rate for a prolonged

period. With the appointment of a new India head last year and greater focus on

field force productivity, company's India growth over the last two quarters has

turned out to be better-than-expected. We expect this trend to sustain and

estimate revenue CAGR of 11.5% over FY13-15E, ahead of the 9.5% revenue

CAGR witnessed over the last five years.

US, Europe expected to lead exports growth, outlook for Brazil appears

challenging

TRP's US business has 28 products awaiting ANDA approvals, which are expected

to lead revenue CAGR of 33% to USD116m over FY13-15E. EU has reported over

40% YoY growth over the last two quarters led by Germany and Dossier business.

Brazilian division however is expected to continue to face difficulty in the near

term on account of (1) slowdown in product approvals by ANVISA and (2) TRP's

concentration in the CVS and anti-diabetic therapies, which are being impacted

by the local government's initiative to provide free medication in these areas.

Strong presence in India, emerging markets make TRP a good

acquisition candidate

With over 70% sales coming from emerging markets, being a mid-sized companyin India, strong positioning in fast growing chronic segment and reasonable

valuations make TRP a good acquisition candidate for a player seeking presence

in emerging markets. We believe this may lead to potential value unlocking in

the future.

Reasonable valuations in the light of mid teens earnings growth over

FY13-15E

TRP trades at a significant discount to its nearest peer IPCA Labs and the overall

pharma sector. With reasonable valuations supported by earnings CAGR of 12%

over the next two years and being a potential acquisition candidate, TRP looksattractive from current levels. Maintain Buy with a target price of INR519.

Bloomberg TRP INEquity Shares (m) 169.2

M.Cap. (INR b)/(USD b) 70.6/1.1


1,6,12 Rel. Perf. (%) -9/13/16


270320

370

420

470

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Torrent Pharma

18 October 2013 79

Chronic products account for over 60% of sales India to build on FY13 growth momentum

Outlook for Brazil looks subdued US revenues growth trend - High growth to continue

PE Band Chart

Story in charts

36

818

9

18

11

Ca rd ia c

Anti ‐diabetic

CNS

Anti ‐infective s

GI

others

6 , 2

8 2

7 , 2

5 4

8 , 3

7 7

9 , 0

9 0

1 0 , 2

4 0

1 1 , 3

8 9

1 2 , 4

7 4

8.5 9.5

11.2

7.0

15.5 15. 5

12.7

FY09 F Y10 F Y11 FY12 FY13 FY14E F Y15E

Revenues (INR m) Growth (%)

2,5663,012

3,612

4,770 5,020 5,113

5,689

11%

2%5%

32%

20%17%

50%

FY09 F Y10 FY11 F Y12 FY13 F Y14E FY15E

B ra zi l ( INR m ) Gro wth Y oY ( %)

909 1,143 2,162 3,550 5,410 6,947

28.4

52.4

64.2

89.2

25.7

FY10 FY11 FY12 FY13 FY14E FY15E

US reve nues (USD m) Growth (%)

US pipeline-28 ANDAs await approval


Seroquel 2,900 Not launched

Diovan HCT 1,700 Delayed


Luvox CR 50 Aug-13

Avelox 350 Sep-14

Exforge HCT 110 Oct-14

Nexium 2,272 Nov-14

Detrol LA 590 FY15


Seroquel XR 800 May-17

Bystolic 450 Sep-21

12.9

11.0

17.1

3.92

6

10

14

18

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P/E (x) Avg(x) Pe ak(x) Min (x)



Torrent Pharma

18 October 2013 80



Y/E March 2011 2012 2013 2014E 2015E

Net Sales 21,978 26,961 32,120 38,774 43,880

Change (%) 15.4 22.7 19.1 20.7 13.2


% of Sales 82.4 80.6 78.4 80.8 80.7

EBITDA 3,878 5,218 6,930 7,445 8,469

Margin (%) 17.6 19.4 21.6 19.2 19.3

Depreciation 626 817 830 898 1,003

EBIT 3,252 4,400 6,100 6,547 7,465


Other Income - Rec. 347 445 430 450 495


EO Expense/(Income) -168 863 370 -200 0

PBT after EO Expense 3,376 3,588 5,820 6,842 7,606Current Tax 751 690 1,470 1,528 1,749

Deferred Tax -15 40 0 0 0

Tax 736 730 1,470 1,528 1,749

Tax Ra te (%) 22.9 16.4 23.7 23.0 23.0

Reported PAT 2,640 2,858 4,350 5,315 5,857

Less: Minority Interest 0 23 20 0 0

Net Profit 2,640 2,835 4,330 5,315 5,857

Adj PAT 2,702 3,287 4,705 5,115 5,857


Y/E March 2011 2012 2013 2014E 2015E


Tot al Reserves 9,801 11,515 13,947 17,566 21,709

Net Worth 10,224 11,938 14,370 18,412 22,556



Tot al Loans 5,720 5,786 6,930 6,931 6,931


Gross Block 9,643 11,990 14,960 17,560 20,322

Less: Accum. Deprn. 3,287 4,022 4,852 5,750 6,753

Net Fixed Assets 6,355 7,968 10,108 11,811 13,569

Capital WIP 1,799 1,188 1,094 1,047 1,023

Investments 1,460 1,240 605 605 605

Curr. Assets 15,742 20,081 25,861 27,210 31,446

Inventory 5,048 5,315 9,239 7,984 10,026



Loans & Advances 2,502 2,795 3,475 3,822 4,204



Provisions 1,427 1,807 3,720 3,193 3,432Net Current Assets 6,826 7,878 9,755 12,253 14,662

Appl. of Funds 16,440 18,274 21,561 25,715 29,859

E: MOSL Estimates



Torrent Pharma

18 October 2013 81


Ratios

Y/E March 2011 2012 2013 2014E 2015E

Basic (INR)

EPS 16.0 19.4 27.8 30.2 34.6

Cash EPS 19.3 21.6 30.5 36.7 40.5

BV/Share 60.4 70.5 84.9 108.8 133.3

DPS 8.0 8.5 23.0 7.6 8.7

Payout (%) 29.8 29.2 52.3 28.1 29.3

Valuation (x)

P/E 26.1 21.5 15.0 13.8 12.1

Cash P/E 21.6 19.3 13.7 11.4 10.3

P/BV 6.9 5.9 4.9 3.8 3.1

EV/Sales 3.3 2.6 2.2 1.8 1.6

EV/EBITDA 18.5 13.4 10.3 9.4 8.2

Dividend Yield (%) 1.9 2.0 5.5 1.8 2.1

Return Ratios (%)

RoE 29.2 29.7 35.8 31.2 28.6

RoCE 24.4 28.8 33.5 30.0 29.0


Asset Turnover (x) 1.3 1.5 1.5 1.5 1.5


Debtor (Days) 55 71 78 76 75



Leverage Ratio (x)

Current Ratio 1.8 1.6 1.6 1.8 1.9


Debt/Equity 0.6 0.5 0.5 0.4 0.3


Y/E March 2011 2012 2013 2014E 2015E


Interest/Dividends Recd. 347 445 430 450 495

Direct Taxes Paid -755 -696 -1,727 -1,416 -1,749

(Inc)/Dec in WC 190 902 -2,349 -1,507 -1,669


EO Expense / (Income) -168 863 370 -200 0


(inc)/dec in FA -2,214 -1,736 -2,876 -2,554 -2,738

(Pur)/Sale of Investments -48 220 636 0 0


(Inc)/Dec in Debt 512 85 1,112 1 0

Interest Paid -391 -395 -340 -354 -354

Dividend Paid -787 -836 -2,273 -1,496 -1,713

Others 5 -390 354 -200 0

CF from Fin. Activity -661 -1,535 -1,146 -1,626 -2,067

Inc/Dec of Cash 905 1,955 -473 991 740

Add: Beginning Balance 3,883 4,788 6,743 6,270 7,261

Closing Balance 4,788 6,743 6,270 7,261 8,001

E: MOSL Estimates



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