Pharmaceuticals Initiating coverage - Spark...

Indian Pharmaceuticals

‘Down, but not out’

January 2016

DR HARITH AHAMED [email protected] +91 44 4344 0052

KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037

Pharmaceuticals – Initiating Coverage Sector Outlook

NEUTRAL

Index performance

1m 3m 12m

Sensex 0% 0% -5%

BSE HC 4% -5% 16%

Date 4 JAN 2016

Market Data

SENSEX 26161

Nifty 7963

BSETHC 16852

Relative performance

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Initiating Coverage



Recent USFDA actions on Indian companies for CGMP violations including Warning Letters for Sun, Dr Reddy's

and Cadila have raised concerns on sustainability of growth in the largest market for Indian pharmaceutical

companies. In the last two years, adverse outcomes in FDA audits have led to delays in approvals for key

products, impacting growth for several players. Going forward, we expect companies to step up to the challenge.

Leading players have raised the focus on CGMP practices and are roping in 3rd party consultants to oversee

their quality systems. Companies are investing in new facilities with the objective of diversifying key products

and filings across their manufacturing network. We also see increasing sourcing from 3rd party manufacturers

and CMOs, thereby de-risking key products from outcomes in FDA audits. Post the patent cliff, top Indian

players had acknowledged challenges to sustaining growth and had initiated transformational steps requiring

significant operational and financial resources. Sun’s acquisition of Ranbaxy, initiatives in branded segments,

Lupin’s forays into new segments such as injectables, inhalers and dermatology and Dr Reddy’s investments in

complex generics and biosimilars are examples. In the long-term, we believe the prospects for the sector are

more linked to success or failure in these transformational initiatives.

Initiating coverage on Aurobindo, Dr Reddy’s, Lupin and Sun: Aurobindo’s (BUY) backward-integrated business

model and manufacturing scale are underappreciated strengths and we expect the recent approval momentum in the US

to translate to significant earnings momentum. For Dr Reddy’s (ADD), we believe the risk of Import Alert (IA),

uncertainties around product launches and protracted resolution timelines should weigh on the stock in the near-to-

medium term. We believe Lupin’s (REDUCE) dependence on price increase driven upsides (gFortamet and gGlumetza)

and an unknown pipeline (Gavis) exposes the company to significant execution risks. We are positive on Sun (BUY) on

the back of our expectation for a quick resolution of the Warning Letter (WL) for Halol facility and the company’s initiatives

in US branded segments (ophthalmology and dermatology)

Key industry findings: In recent years, USFDA has stepped up inspections at non-US drug manufacturing facilities. For

instance, in 2015, USFDA inspected 240 drug facilities in India, ~2.5 times the number of facilities inspected in 2010.

Currently, India accounts for 29% and 36% of non-US API and formulations facilities, respectively. We note an increase in

the Indian share of CGMP WLs recently and an increase in the time interval between inspections and issuance of WLs

(as seen in WLs to Sun, Dr Reddy’s and Cadila). We see a rising trend of data integrity issues in WLs in recent years. We

also observed a rising correlation between data integrity issues and IAs. Imposition of IAs after the issuance of WLs was

noticed only in 25% of active IAs. This implies the probability of WLs for Sun, Dr Reddy’s and Cadila converting to IAs is

low. However, we do not rule out the possibility completely, especially in the case of Dr Reddy’s given the data integrity

related observations

Stock calls: ARBP (BUY, TP - Rs. 1056), BIOS (BUY, TP – Rs. 581), CDH (ADD, TP – Rs. 352), DIVI (SELL, TP – Rs.

1031), DRRD (ADD, TP – Rs. 3328), GRAN (ADD, TP – Rs. 157), LPC (REDUCE, TP – Rs. 1763), SUNP (BUY, TP –

Rs. 910), SYNG (ADD, TP – Rs. 438), TRP (BUY, TP – Rs. 1635)

‘Down, but not out’

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NEUTRAL

Summary of financials

Source: Company data, Spark Capital Research

Financial Summary

CompanyRevenues EBITDA Adj. PAT Adj. EPS

FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

ARBP 121,205 140,932 165,482 187,464 25,636 32,384 41,017 48,243 16,354 20,673 26,042 30,829 28.0 35.4 44.6 52.8

BIOS 30,898 34,730 39,026 44,834 6,958 8,390 9,539 11,482 4,081 4,589 4,931 5,599 20.4 22.9 24.7 28.0

CDH 86,513 99,522 110,868 129,390 17,557 23,162 24,457 29,401 11,506 14,577 16,389 20,004 11.2 14.2 16.0 19.5

DIVI 31,150 37,184 42,350 49,036 11,653 13,984 15,979 18,511 8,516 10,691 11,842 13,684 32.1 40.3 44.6 51.5

DRRD 148,189 160,649 176,395 199,094 33,469 41,262 42,976 50,321 22,179 25,607 27,157 31,606 129.8 149.8 158.9 184.9

GRAN 12,929 15,421 18,698 22,158 2,086 2,650 3,394 4,263 909 1,191 1,641 2,232 4.5 5.8 7.2 9.8

LPC 127,700 137,059 176,109 205,201 36,196 34,471 49,236 55,705 24,032 22,747 31,872 36,205 53.2 50.4 70.6 80.2

SUNP 274,334 283,270 329,624 375,347 80,636 86,706 114,290 132,754 47,784 53,245 72,220 86,746 19.9 22.1 30.0 36.1

SYNG 8,599 10,775 12,939 15,607 2,811 3,540 4,351 5,361 1,750 2,215 2,776 3,505 8.9 11.1 13.9 17.5

TRP 46,535 71,043 71,343 77,499 10,202 26,007 17,860 19,874 7,509 15,893 11,996 13,831 44.4 93.9 70.9 81.7

P/E EV/EBITDA RoCE CMP

(Rs.)

MCap

(Rs.mn)

Target

Price

(Rs.)

RatingFY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

ARBP 31.5 24.9 19.8 16.7 21.6 17.1 13.5 11.5 19.9% 20.6% 22.1% 22.4% 881 514,706 1,056 BUY

BIOS 25.4 22.6 21.0 18.5 15.0 12.4 10.9 9.1 10.1% 8.7% 10.7% 11.4% 518 103,620 581 BUY

CDH 29.6 23.4 20.8 17.0 20.3 15.4 14.6 12.1 18.9% 21.0% 21.5% 23.5% 333 340,599 352 ADD

DIVI 36.2 28.9 26.1 22.6 25.6 21.4 18.7 16.1 26.2% 27.7% 25.9% 25.5% 1,163 308,607 1,031 SELL

DRRD 24.0 20.8 19.6 16.8 15.6 12.6 12.1 10.4 15.9% 16.6% 15.5% 16.0% 3,109 530,127 3,328 ADD

GRAN 33.8 25.8 20.8 15.3 17.3 13.6 10.6 8.5 14.4% 15.1% 16.2% 18.3% 151 31,496 157 ADD

LPC 34.7 36.6 26.2 23.0 24.5 25.7 18.0 15.9 28.7% 17.6% 18.7% 19.8% 1,845 831,278 1,763 REDUCE

SUNP 41.1 36.9 27.2 22.6 24.1 22.4 17.0 14.6 20.9% 17.5% 20.4% 21.3% 816 1,962,708 910 BUY

SYNG 47.0 37.7 30.1 23.8 29.1 23.1 18.8 15.3 20.2% 22.1% 24.7% 27.2% 418 83,540 438 ADD

TRP 33.3 15.7 20.9 18.1 25.6 10.1 14.7 13.2 22.4% 30.5% 21.5% 23.3% 1,479 250,251 1,635 BUY

Industry Analysis

Industry Analysis

Increasing number of inspections per year at non-US drug facilities

Source: FDAzilla, Spark Capital Research; *YTD Dec 18, 2015; **Non-US includes the major

drug importers into the US - UK, Japan, Italy, India, Germany, France, China and Canada

USFDA’s drug inspections in India

Source: FDAzilla, Spark Capital Research; *YTD Dec 18, 2015

Types of FDA inspections at drug facilities

Source: FDAzilla, Spark Capital Research

Rising trend of FDA inspections at non-US drug facilities

According to FDAzilla, there are 3 types of drug facility inspections:

− Pre-Approval Inspections (PAI): The purpose of a PAI is to verify the

raw data included in drug filings and to confirm that the facility is

capable of manufacturing the drug (correct scale qualified equipment,

process validation, etc.)

− Routine GMP inspections: Periodically (every 2-3 years generally) the

FDA performs an unannounced GMP inspection for manufacturers who

import drugs into the US

− ‘For-cause’ inspections: Usually based on a Field Alert Report (FAR),

product recalls or other adverse events. These inspections are usually

focused on the particular event

Inspection of Indian drug facilities – rising trend

Source: FDAzilla, Spark Capital Research

The non-US number of inspections is based on FDAzilla data for the top-8

importers of drugs into the US – UK, Japan, Italy, India, Germany, France,

China and Canada

From 2006 to 2015, the number of inspections per year at US drug

facilities declined 16% while the number of inspections per-year at non-

US facilities increased 220%

As per data from FDAzilla, USFDA inspected 240 drug facilities in India in

2015, ~2.5x the number of facilities inspected in 2010

The increase in the number of inspections per year on Indian drug

facilities is in-line with FDA’s greater focus on facilities across all non-US

locations

2,097 1,976 1,994 2,096 2,365 2,390

2,169 1,857 1,845 1,758

206 289 306 461

402 495 555

512 706 660

500

1,000

1,500

2,000

2,500

3,000

CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15*

US Non-US**

38

7696

134108

149178

163

201

240

CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15*

USFDA inspections on Indian drug facilities

Industry Analysis

FDA Form 483 – often the first sign of trouble!

~2/3rd of Indian inspections resulted in Form 483s*

Source: FDAzilla, Spark Capital Research; *data for 2015

FDA Form 483 – often the first sign of trouble!

Source: USFDA, Spark Capital Research

An FDA Form 483 is issued to a firm’s management at the conclusion of

an inspection when an investigator observes any conditions that may

constitute violations of the Food, Drug and Cosmetic (FD&C) Act

At the conclusion of an inspection, the FDA Form 483 is presented and

discussed with the company’s senior management. Companies are

expected to respond to the FDA Form 483 in writing with their corrective

action plan and then implement the corrective action plan

The FDA Form 483 is considered, along with a written report called an

Establishment Inspection Report (EIR), all evidence or documentation

collected on-site, and any responses made by the company, before the

Agency determines further action on the facility

The number of Form 483s issued (for drug facilities) by the FDA has

remained more or less flat over the past several years, in-line with the

flat trend of total drug facility inspections (US + non-US)

Duration of inspection*

Source: FDAzilla, Spark Capital Research; *data for 2015

Top 10 observation types accounted for 36%


Number of Form 483s for drug facilities has remained flat*

Source: USFDA, Spark Capital Research; *FY-ending September

Form 483s -issued61%

Form 483s -

not issued39%

<5 days25%

5-10 days70%

>10 days5%

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

No. of 483s issued 649 572 498 594 746 758 787 690 645

Total no. of observations 3,503 3,388 2,702 3,326 3,797 4,105 3,828 3,527 2,997

Observations per 483 5.4 5.9 5.4 5.6 5.1 5.4 4.9 5.1 4.6

No. of observation types 221 223 210 227 219 223 235 246 239

Type of Observations FY06 FY10 FY14

Documentation of investigations findings 6.6% 6.6% 7.0%

Quality Control unit’s responsibilities 3.6% 4.3% 4.8%

Laboratory controls 2.4% 2.5% 3.6%

Procedures for sterile drug products 1.1% 1.3% 3.6%

Procedures for product & process control 4.0% 3.8% 3.5%

Inadequate training 3.3% 4.5% 3.2%

Validation of manufacturing performance 3.5% 3.0% 2.5%

Complaint handling procedures 3.1% 2.6% 2.5%

Written stability testing procedure 2.2% 2.3% 2.4%

SOPs for equipment maintenance 1.5% 2.1% 2.4%

Industry Analysis

12 12 19 26 2615 17

48

75

23

3021

29 19

FY09 FY10 FY11 FY12 FY13 FY14 FY15

CGMP WLs Other WLs

NAI, 146, 33%

OAI, 37, 8%

VAI, 260, 59%

OAI status, often a precursor for Warning Letters and Import Alerts

OAI status for 8% of inspections in 2010-2014*

Source: USFDA, Spark Capital Research; *of the 443 GMP

inspections on Indian pharmaceutical manufacturing facilities

for which FDA has disclosed the final inspection classification

WLs issued by CDER for non-US facilities*

Source: USFDA, Spark Capital Research; *FY-ending Sep

WLs issued by CDER in FY09-FY14*

Source: USFDA, Spark Capital Research; *FY-ending Sep

OAI status is often precursor for WLs and IAs


• Warning Letters for US drug facilities are

issued by FDA’s District Officers while

WLs for non-US drug facilities are issued

by CDER headquarters

• Our focus is on WLs which were issued for

CGMP violations. For instance, of the 44

WLs issued by CDER headquarters (for

non-US facilities) in FY14, 15 were for

CGMP violations

• In the period FY09-FY15, CGMP WLs

accounted for 127 out of the total 372 WLs

issued for non-US drug facilities

• After reviewing a firm’s response to the

Form 483, FDA classifies each inspection

into NAI (No Action Initiated), VAI

(Voluntary Action Initiated) and OAI

(Official Action Initiated)

• OAI status implies that that the facility will

require re-inspection before being

compliant again. OAI status is also a

precursor for further escalation, as seen in

recent WLs to Sun and Dr Reddy’s

• Of the 443 GMP inspections on Indian

pharmaceutical manufacturing facilities in

2010-2014 for which FDA has disclosed

the final inspection classification, 37 (8%)

were classified as OAI

WL + IA, 15, 40%

WL, 14, 38%

IA, 4, 11%

No escalation, 4, 11%

~90% of OAIs escalated

into WLs or IAs

6087

42 56 47 44

52

84

66 3939 50

FY09 FY10 FY11 FY12 FY13 FY14

CDER - District offices (US) CDER - HQ (non-US)

Industry Analysis

2 13 3

53

1 2

4

1

7

4

6

5

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16*

Indian CGMP WLs - Formulations facilities

Indian CGMP WLs - API facilities

Breakup of Indian CGMP Warning Letters

Source: USFDA, Spark Capital Research; FY- ending Sep,

*YTD Dec

A WL can cover more than

one facility. For instance,

recent WL to Dr Reddy’s

included 3 facilities

Indian facilities account for 29% of CGMP Warning Letters from FY09

CGMP WLs issued by CDER for non-US facilities

Source: USFDA, Spark Capital Research; FY-ending Sep,

*YTD Dec

And the 2nd highest number of formulations

facilities


India has the highest number of FDA approved

API facilities


• Of the 131 CGMP WLs issued to non-

US drug facilities from FY09, Indian

facilities accounted for 38 (29%)

• A WL can cover more than one facility.

For instance, the recent WL to Dr

Reddy’s included 3 facilities

• Of the 47 Indian facilities covered by

these 38 WLs, API facilities accounted

for 17 (36%). Increasing incidence of

483s and WLs for API facilities has

delayed approvals of key ANDAs and

missed launch opportunities for Indian

larger players

• As of June 2015, India accounted for

26% and 22% of API and formulations

facilities (29% and 36% excluding US

facilities), respectively

• The increase in the number of

inspections of Indian drug facilities is

in-line with FDA’s greater focus on

drug facilities across non-US locations

• We note an increase in Indian share of

CGMP WLs in recent years

India22926%

China16919%

USA11813%

Other38042%

India14722%

China456%

USA27040%

Other21632%

1 25

2

8 7 94

11 10

1424

18

88


CGMP WLs - India CGMP WLs - Others

Rising Indian

share of WLs in

recent years

Industry Analysis

Indian facilities have accounted for 29% of CGMP Warning Letters from FY09; higher share in recent years

Company Facility Type Last date of inspection Warning LetterData integrity

issues

Cadila HealthcareAhmedabad APIs 06-Dec-14

30-Dec-15No

Moraiya Formulations 05-Sep-14 No

Sun Pharmaceuticals Halol Formulations 19-Sep-14 17-Dec-15 No

Dr. Reddy's Laboratories

Srikakulam APIs 21-Nov-14

05-Nov-15 YesMiryalaguda APIs 31-Jan-15

Duvvada, Visakhapatanam Formulations 06-Mar-15

Sandoz PrivateNavi Mumbai Formulations 29-Aug-14

22-Oct-15 NoNavi Mumbai Formulations 28-Aug-14

Unimark Remedies Ahmedabad APIs 21-Mar-14 28-Sep-15 Yes

Pan Drugs Vadodara APIs 18-Jul-14 02-Sep-15 No

Mylan Laboratories

Bangalore Formulations 13-Feb-15

06-Aug-15 NoBangalore Formulations 03-Oct-14

Bangalore Formulations 08-Aug-14

Sipra Labs Hyderabad APIs 01-Mar-14 23-Jul-15 No

Mahendra Chemicals Ahmedabad Formulations 24-May-14 13-Jul-15 Yes

Cadila Pharmaceuticals Ankleshwar APIs 28-Mar-14 25-Feb-15 Yes

Apotex Research Bangalore Formulations 01-Jul-14 30-Jan-15 Yes

Micro Labs Goa Formulations 13-May-14 09-Jan-15 Yes

Sharp Global Gujranwala Town, New Delhi APIs 10-Mar-14 15-Oct-14 Yes

Marck Biosciences Kheda Formulations 01-Nov-13 08-Jul-14 Yes

Apotex Pharmachem India Bangalore APIs 31-Jan-14 16-Jun-14 Yes

Sun Pharmaceutical Industries Karkhadi Formulations 16-Nov-13 07-May-14 Yes

Smruthi Organics Solapur District, Maharashtra APIs 18-Oct-13 06-Mar-14 Yes

Canton Laboratories Baroda APIs 09-Apr-13 27-Feb-14 Yes

USV Mumbai Formulations 11-Jun-13 06-Feb-14 No

Wockhardt Chikalthana Formulations 30-Jul-13 25-Nov-13 Yes

Agila Specialties Bangalore Formulations 27-Jun-13 09-Sep-13 No

Promed Exports Solan, Himachal Pradesh Formulations 03-Apr-13 09-Aug-13 No

Posh Chemicals Hyderabad APIs 08-Mar-13 02-Aug-13 Yes

CGMP Warning Letters to Indian drug facilities (2009-2015)

Industry Analysis

Resolution time <2 years in ~70% of WLs


CGMP Warning Letters to Indian drug facilities (2009-2015)

Company Facility Type Last date of inspection Warning LetterData integrity

issues

Aarti DrugsPalghar Formulations 02-Nov-12

30-Jul-13 YesTarapur Formulations 07-Nov-12

Wockhardt Aurangabad Formulations 22-Mar-13 18-Jul-13 Yes

Fresenius Kabi Oncology Nadia, West Bengal APIs 18-Jan-13 01-Jul-13 Yes

Hospira Healthcare India Sriperumbudur Formulations 10-Oct-12 28-May-13 No

RPG Life SciencesThane APIs 31-Jan-13

28-May-13 YesAnkleshwar Formulations 24-Nov-12

Wintac Bangalore Rural Formulations 20-Sep-11 23-Feb-12 No

Xylo Chem Industries Nadiad APIs 16-Jul-11 15-Nov-11 No

Yag Mag Labs Medak District, Telangana APIs 02-Jul-11 12-Sep-11 Yes

Cadila Healthcare Moraiya Formulations 03-Feb-11 21-Jun-11 Yes

Aurobindo PharmaHyderabad (Unit III) Formulations 24-Sep-10

20-May-11 NoHyderabad (Unit VI) Formulations 22-Dec-10

Synbiotics Vadodara APIs 27-Aug-10 16-Dec-10 No

Claris Lifesciences Ahmedabad Formulations 16-Jun-10 01-Nov-10 No

Choksi Laboratory Panchkula, Haryana Formulations 24-Apr-10 30-Sep-10 No

Stericon Pharma Bangalore, Karnataka Formulations 17-Mar-10 23-Aug-10 No

Lupin Mandideep Formulations 12-Nov-08 07-May-09 No

Increasing interval between inspection and WL


• The time interval between inspections

and issuance of WLs has increased

substantially, as seen in recent WLs to

Sun, Dr Reddy’s and Cadila (WLs were

issued more than a year after

inspections)

• We looked at resolution timelines for 42

CGMP WLs (for non-US facilities) with

close-out letters. Resolution time was

less than 2 years in ~70% of WLs

0-12 months,

9%

12-18 months,

43%18-24 months,

19%

>24 months,

29%

Increasing interval between inspection and issuance of Warning Letter

Source: USFDA, The Gold Sheet, Spark Capital Research

176142 144 156 165

211

364

CY09 CY10 CY11 CY12 CY13 CY14 CY15

Inspection to WL - No.of days

Resolution

timelines for

CGMP WLs

Industry Analysis

Increasing incidence of data integrity issues in

WLs

Source: USFDA, The Gold Sheet, Spark Capital Research;

FY-ending Sep, *YTD Dec

Rising correlation between data integrity issues

and Import Alerts

Source: The Gold Sheet, Spark Capital Research; *YTD Aug

Increasing incidence of data integrity issues in CGMP Warning Letters in recent years

• Of the 131 CGMP WLs issued to non-

US drug facilities from FY09, we

noticed a rising incidence data integrity

issues

• Data integrity issues figured

prominently in 11 WLs (out of the 17

WLs) in FY15

• According to data from The Gold

Sheet, data integrity issues were cited

prominently in 56% of Import Alerts

imposed by the FDA in 2015

1 2 3 26

9 11

1

11 10

1624

20

66

3


WLs with no data integrity issuesWLs with data integrity issues

Of the 40 active Import Alerts on Indian drug facilities, 21 (52%) do not have corresponding WLs

Company Import Alert date Type of facility Place Warning Letter Warning Letter date

Pan Drugs 08-Dec-15 APIs Vadodara No –

Megafine Pharma 14-Oct-15 APIs Nashik No –

Polydrug Laboratories 11-Sep-15 APIs Mumbai No –

Akorn India 21-Aug-15 Formulations Paonta Sahib No –

Sri Krishna Pharmaceuticals - Unit II 13-Aug-15 Formulations Hyderabad No –

Emcure Pharmaceuticals 13-Jul-15 Formulations Pune No –

Pan Drugs 05-May-15 APIs Vadodara Yes 02-Sep-15

Ipca Laboratories 24-Mar-15 Formulations Pithampur No –

Ipca Laboratories 24-Mar-15 Formulations Silvasa No –

Aarti Drugs 23-Mar-15 APIs Tarapur, Mumbai Yes 30-Jul-13

Aarti Drugs 23-Mar-15 APIs Thane, Mumbai Yes 30-Jul-13

Ipca Laboratories 22-Jan-15 APIs Ratlam No –

Apotex Research 22-Sep-14 APIs Bangalore Yes 30-Jan-15

Micro Labs 19-Sep-14 Formulations Goa Yes 09-Jan-15

Aadivighnesh Chem 05-May-14 APIs Mumbai No –

Canton Laboratories 10-Apr-14 APIs Vadodara Yes 27-Feb-14

Apotex Pharmachem India 01-Apr-14 APIs Bangalore Yes 16-Jun-14

Marck Biosciences 12-Mar-14 Formulations Gujarat Yes 08-Jun-14

Sun Pharmaceutical Industries 12-Mar-14 Formulations Karkhadi Yes 07-May-14

24% 33% 41%56%

76% 67% 59%44%

CY12 CY13 CY14 CY15*

IAs with no data integrity issues

IAs with data integrity issues

Industry Analysis

Imposition of Import Alerts after the issuance of Warning Letters was noticed only in 25% of active IAs

Import Alert precedes Warning Letter in ~75% of active IAs


• Of the 40 active Import Alerts on Indian drug facilities, 21 (52%)

do not have corresponding WLs

• Imposition of Import Alerts after the issuance of Warning

Letters was noticed only in 25% of active IAs

• This implies the probability of WLs for Sun, Dr Reddy’s and

Cadila converting to IAs is low. However, we do not rule out the

possibility completely, especially in the case of Dr Reddy’s,

given the data integrity-related observations

Probability of WLs for Sun, Dr Reddy’s and Cadila converting to IAs is low

Company Import Alert date Type of facility Place Warning Letter Warning Letter date

Wockhardt 26-Nov-13 Formulations Chikalthana Yes 25-Nov-13

Ranbaxy Laboratories 13-Sep-13 Formulations Mohali No –

Micro Labs 21-Aug-13 Formulations Bangalore No –

Kamud Drugs 10-Jul-13 APIs Sangli, Maharashtra No –

Konduskar Laboratories 10-Jul-13 APIs Talandage, Maharashtra No –

Unique Chemicals 28-Jun-13 APIs Thane, Mumbai No –

Vignesh Life Sciences 28-Jun-13 APIs Hyderabad No –

Vignesh Life Sciences 28-Jun-13 Formulations Bellary, Karnataka No –

Sentiss Pharma 20-Jun-13 Formulations Solan Yes 09-Aug-13

RPG Life Sciences 11-Jun-13 Formulations Ankleshwar Yes 28-May-13

RPG Life Sciences 10-Jun-13 APIs Thane, Mumbai Yes 28-May-13

Smruthi Organics 03-Jun-13 APIs Solapur Yes 06-Mar-14

Wockhardt 22-May-13 Formulations Aurangabad Yes 18-Jul-13

Amsal Chem 11-Apr-13 APIs Ankleshwar No –

Nivedita Chemicals 23-Nov-11 APIs Mumbai No –

Yag Mag Labs 13-Sep-11 APIs Hyderabad Yes 12-Sep-11

Fleming Laboratories 11-Apr-11 APIs Hyderabad No –

Fleming Laboratories 08-Apr-11 APIs Hyderabad No –

Stericon Pharma 13-Jan-11 Formulations Bangalore Yes 23-Aug-10

Ranbaxy Laboratories 10-Sep-09 Formulations Paonta Sahib Yes 16-Sep-08

Ranbaxy Laboratories 10-Sep-09 Formulations Dewas Yes 16-Sep-08


IAs without WL, 21, 52%

IAs before WL, 9, 23%

IAs after WL, 10, 25%

Industry Analysis

Lupin: Strong record in recent inspections, Mandideep inspection will be key monitorable

FacilityLast

inspection

Type of

facilityComments

Tarapur Aug-15 APIs No observations in the last inspection

Pithampur (Indore) Aug-15APIs and

Formulations

Most oral contraceptive and ophthalmic filings from here. Facility has 3 units. All units inspected in CY15. Only

Unit 2 received Form 483 with observations

Goa Jul-15 FormulationsForm 483 with 9 observations issued post last inspection. Observations unlikely to be major as ANDA approvals

continue from here. Supplies 50+ products including gFortamet, gCelebrex, gTricor, gCymbalta

Chikalthana, Aurangabad Apr-15 Formulations Form 483 with observations issued post recent inspection. 5-6 ANDAs approved from the facility

Nagpur Mar-15 Formulations New facility. Inspected and certified in FY15. No observations in the last inspection

New Jersey, USA Jan-15 FormulationsGavis' facility. No observations in the last inspection. 60+ ANDAs filed. Key marketed products include

gMethergine, gRowasa Enema

Mandideep Oct-11APIs and

FormulationsManufactures all cephalosporin products including Suprax. WL received in May 2009 and closed-out in Jan 2010

Source: Company data, FDAzilla, Spark Capital Research

Aurobindo: Unit VII inspected in Mar 2015 with no Form 483 observations, penem approvals from Bhiwadi will be key monitorable

FacilityLast

inspection

Type of

facilityComments

Unit I NA APIs CVS, CNS, anti-allergics, cephalosporins (non-sterile)

Unit V Sep-11 APIs Penicillins (sterile & non-sterile)

Unit VIII Apr-14 APIs ARV, CVS, CNS (non-sterile)

Unit IX Mar-15 APIs Intermediates facility. Form 483 with observations issued post last inspection

Unit XI Apr-15 APIs Non-antibiotics. No observations in the last inspection

Unit III Jun-15 FormulationsOral solid facility. Form 483 with observations issued post recent inspection. Warning Letter issued in May 2011

and closed out in 2012. 117 ANDAs filed and 112 approved

Unit IV Sep-14 FormulationsInjectables (non-antibiotics) facility. 66 ANDAs filed and 15 approved (as of Sep 2015). New block for lyophilized

vials under construction

Unit VI B Sep-12 Formulations Oral cephalosporins. Warning Letter issued in May 2011 and closed out in 2012. 11 ANDAs filed, all approved

Unit VII Mar-15 FormulationsOral solid facility. Largest formulations facility. No observations in the last inspection. 141 ANDAs filed, 47

approved (as of Sep 2015)

Unit XII Jul-15 FormulationsOral and injectable penicillins facility. Form 483 with observations issued post recent inspection. 19 ANDAs filed,

all approved

Bhiwadi Sep-15 Formulations Penems facility (meropenem and doripenem filed). Form 483 with observations issued post recent inspection

New Jersey, USA Jul-11 Formulations Oral solids including controlled substances. 26 ANDAs filed, 10 approved


Overview of FDA approved manufacturing facilities – Aurobindo, Lupin

Industry Analysis

Cadila: Moraiya Warning Letter pushes key approvals further out. Site transfers for key products will be key monitorable

FacilityLast

inspection

Type of

facilityComments

Dabhasa Mar-15 API Successful audit in FY15, as per management

Ankleshwar FY15 API Successful audit in FY15, as per management

Ahmedabad Dec-14 API Oncology APIs. No external or captive sales. FDA issued Warning Letter in Dec 2015

Moraiya Sep-14 FormulationsOral solids, injectables, nasal, transdermals. Largest formulations facility and only injectables facility. ~60% of

US sales. FDA issued Warning Letter in Dec 2015

Baddi May-15 FormulationsOral solids. Form 483 with observations issued post last inspection. Per management, observations minor as

approvals continue (Amiloride HCl approved in Aug 2015)

Ahmedabad - Formulations Topicals. Awaiting first inspection

Ahmedabad SEZ Feb-15 Formulations Oral solids including oncology. EIR received in Q2FY16

Ahmedabad SEZ Apr-15 Formulations Cytotoxic injectables (erstwhile BSV JV). Form 483 with observations issued post last inspection

Ahmedabad SEZ FY15 Formulations Cytotoxic injectables (Zydus Hospira JV). Successful audit in FY15, as per management

Ahmedabad SEZ May-15 Formulations Transdermal facility (part of Zydus Technologies). No observations in the last inspection

St. Louis, USA May-15 FormulationsPart of Nesher (acquired in 2011). Form 483 with observations issued post last inspection. Under consent

decree since 2009. Product launches have resumed (morphine sulphate in Q1FY16)

Dr Reddy’s: Updates on Warning Letter resolution/escalation and status of Bachupally facility will be key monitorables

FacilityLast

inspection

Type of

facilityComments

Hyderabad (plant 1) Sep-12 APIs -


Hyderabad (plant 3) May-14 APIs -

Hyderabad (plant 4) Apr-15 APIs -

Nalgonda Jan-15 APIs Warning Letter received on Nov 5, 2015

Srikakulam Nov-14 APIs Dr Reddy’s largest API facility. Warning Letter received on Nov 5, 2015

Srikakulam (SEZ) - APIs Awaiting first inspection

Mexico NA APIsAcquired from Roche in 2005. Manufactures naproxen. Received WL (June 2011) and Import Alert (July 2011).

Closed-out in July 2012

Mirfield, UK NA APIs Acquired from Dow Pharma in 2005

Srikakulam Plant-1 (SEZ) FY15 Formulations Oral solid facility. First product approvals by USFDA in FY15. Key products include atorvastatin, clopidogrel

Visakhapatnam Plant-1

(SEZ)Mar-15 Formulations

Oncology facility. Warning Letter received on Nov 5, 2015. 4-5 ANDAs pending approval. Key marketed products

included azacitidine, decitabine, sirolimus

Shreveport (US) NA Formulations Acquired from BASF in 2008

Bristol (US) NA Formulations Acquired from GSK in 2011. Manufactures amoxicillin and related products

Hyderabad Plant-3

(Bachupally)Jul-15 Formulations

Form 483 with observations issued post last inspection. Observations minor and escalation unlikely, as per

management. Largest formulations facility. Key products include gNexium, gDepakote ER, gGeodon, gValcyte,

gToprol XL

Overview of FDA approved manufacturing facilities – Dr Reddy’s, Cadila


Industry Analysis

Sun: Quick resolution of Halol WL will be key for medium-term performance

FacilityLast

inspection

Type of

facilityComments

Panoli Jul-15 APIs No observations in the last inspection

Ahmednagar Jul-15 APIs Form 483 with observations issued post last inspection

Toansa (Ranbaxy) Jan-14 APIs Import Alert issued and facility brought under consent decree in Jan 2014

Karkhadi Nov-13APIs and

FormulationsCephalosporin facility. FDA imposed Import Alert in Mar 2014 and issued Warning Letter in May 2014

Dewas (Ranbaxy) Feb-08APIs and

Formulations

FDA issued Warning Letter and imposed Import Alert in Sep 2008. Department of Justice filed consent decree of

permanent injunction in Jan 2012

Halol Sep-14 FormulationsWarning Letter issued in Dec 2015. Contributed high single-digit percent of consolidated sales (~$350) in FY15.

All approved injectables including gDoxil manufactured at this facility

Dadra Jan-15 FormulationsForm 483 with observations issued post last inspection. Key marketed products include gNamenda, gSeroquel,

gComtan, gProscar and gMaxalt

Cranbury Aug-15 Formulations No observations in the last inspection. gGleevec (sole FTF launch in Feb 2016) was transferred to this facility

Paonta Sahib (Ranbaxy) Mar-08 FormulationsFDA issued Warning Letter and imposed Import Alert in Sep 2008. Department of Justice filed consent decree of


Mohali (Ranbaxy) Dec-12 Formulations FDA imposed Import Alert and brought the facility under consent decree in Sep 2013

New Jersey (Ranbaxy) Mar-14 Formulations Part of Ohm Laboratories (Ranbaxy). Form 483 with observations issued post last inspection

Wilmington May-15 FormulationsPart of Dusa Pharmaceuticals (acquired in Nov 2012). Manufactures Levulan, Dusa’s flagship product for actinic

keratosis (AK). No observations in the last inspection

Billerica NA Formulations Injectables facility, part of Pharmalucence (acquired in July 2014)

Aurora (URL) Feb-13 Formulations Part of URL (acquired from Takeda in Dec 2012). Doxycycline manufactured at this facility

Ontario, Canada (Taro) Feb-14 FormulationsDermatology facility. Key products include clobetasol, nystatin-triamcinolone, ketoconazole, lidocaine, clobetasol

and desoximetasone. Form 483 with observations issued post last inspection

Israel (Taro) NAAPIs and

FormulationsOral solid facility. Key products include warfarin, clomipramine, carbamazepine XR and carbamazepine


Torrent: Dahej approval should resolve capacity constraints

FacilityLast

inspection

Type of

facilityComments

Indrad Mar-15APIs and

Formulations

Only approved facility for US. Form 483 with observations issued post last inspection. As per management,

observations minor as approvals continue – gNexium (Oct 2015), gCelebrex (Dec 2015)

Dahej Apr-15APIs and

Formulations

New facility. Form 483 with observations issued post last inspection. Observations minor and EIR expected

shortly, as per management


Overview of FDA approved manufacturing facilities – Sun, Torrent

Industry Analysis

US formulations – rising contribution to sales and profitability of leading players


Aurobindo’s and Lupin’s strong recent ANDA approval track record attributable to compliant status of key facilities

Source: Company data, Spark Capital Research; *includes Taro

Recent ANDA approval track record reflects key facilities’ compliance status

1012 13

21

26

51

11

6

1215

6

35

3 2

22

9

3

Aurobindo Cadila Dr Reddy's Lupin Sun* Torrent

FY14 FY15 YTD FY16

27%39%

22% 39%

25%44%

35% 45%

38%50%

5% 18%

FY11 FY15 FY11 FY15 FY11 FY15 FY11 FY15 FY11 FY15 FY11 FY15

ARBP CDH DRRD LPC SUNP TRP

Domestic formulations US formulations API / CRAMS Other segmentsBreakup of sales

No. of ANDAs approved

Industry Analysis

Strong pipeline of pending ANDAs

Source: Company data, Spark Capital Research; *includes

Gavis; data as on 30th Sep 2015

Sales per approved ANDA

Source: Company data, Spark Capital Research; *1HFY16

sales annualized / ANDAs approved (as of Mar 2015)

5.56.3

7.6

6.4

4.6

9.6


Sales per approved ANDA* ($mn)

Investments in new segments driving higher R&D spending

R&D as % of sales – highest for Dr Reddy’s


Dr Reddy’s has the highest cumulative R&D spending in the last 5 years


Core margins higher for Dr Reddy’s, LPC, SUNP


24%27%

34%36% 36%

25%


% EBITDA margin (ex R&D expense)

11.5

21.1

48.5

35.6

42.0

6.3


Cumulative R&D expense (FY11-15) (Rs. Bn)

3.2%

5.6%6.8%

8.2%

5.4% 5.8%

2.9%

6.6%

11.8%

8.1%6.7%

3.4%


R&D as % of sales - FY11 R&D as % of sales - FY15

Torrent benefiting from gAbilify launch

196

168

76

161 154

23

ARBP CDH DRRD LPC* SUNP TRP

ANDAs pending approval

Company

Aurobindo Pharma CMP

Rs. 881

Target

Rs. 1,056

Rating

BUY

Stock performance

1m 3m 12m

ARBP 9% 15% 56%

Sensex 0% 0% -5%

BSEHC 4% -5% 16%

Financial Summary (Consolidated)

Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE ROCE

FY15 121,205 25,636 16,354 28.0 31.5 21.6 36.7% 19.9%

FY16E 140,932 32,384 20,673 35.4 24.9 17.1 34.2% 20.6%

FY17E 165,482 41,017 26,042 44.6 19.8 13.5 32.1% 22.1%

FY18E 187,464 48,243 30,829 52.8 16.7 11.5 28.8% 22.4%

Date 4 Jan 2016

Market Data

SENSEX 26161

Nifty 7963

Bloomberg ARBP IN

Shares o/s 584mn

Market Cap Rs. 515bn

52-wk High-Low Rs. 892-465

3m Avg. Daily Vol Rs. 1,320mn

Index member BSE100

Latest shareholding (%)

Promoters 53.9

Institutions 35.0

Public 11.1

Initiating CoverageOver the past couple of years Aurobindo has scaled up its US business substantially. A large product basket,

strong front-end leadership team, cost efficiencies from backward integration and manufacturing scale are the

company’s key strengths in the US. Aurobindo’s continued focus on profitability in ex US segments, especially

the acquired Actavis portfolio should drive further improvement in margins. Re-initiating coverage with ‘BUY’

Key investment thesis:

Recent approval momentum translates to high growth visibility: YTD FY16, Aurobindo has received significantly

higher number of ANDA approvals compared to peers (refer page 20). The recent approval momentum can be partially

attributed to the compliant status of the company’s key facilities. Post the resolution of CGMP violations at Unit III (WL)

and Unit VI (Import Alert) in 2011, Aurobindo has a strong track record in FDA inspections. Recent approvals for

gAbilify, gBaraclude, gEvista, gDilantin, injectables (eptifibatide, methylprednisolone) and olopatadine provides high

visibility for growth in H2FY16 and FY17. The company’s strong pipeline of 168 pending ANDAs and initiatives in newer

segments such as peptides (2 DMFs filed), penems (2 filings) and injectables (51 pending ANDAs) provide comfort on

long-term growth for the segment

Backward integration, large product basket and manufacturing scale – underappreciated strengths: Unlike

peers, Aurobindo has not allocated significant capital to specialty drugs/ complex generics/ NCEs till date and has

focused on the lower-hanging fruits in the US generics business. Cost efficiencies from backward integration and

manufacturing scale, as visible in the strong margins of its US business, are underappreciated strengths, in our view. As

per management, access to newer technologies, segments and geographies through acquisitions remain an option and

the company’s stronger balance sheet (compared to few years back) should support these initiatives

Ex US segments – focus on profitability: Topline growth across Aurobindo’s ex US businesses (EU formulations,

ARVs and APIs) will be modest as the company focuses on profitability in these segments. Margins at the acquired

Actavis portfolio which accounts for ~20% of the company’s business, should improve as the company shifts

manufacturing of more products to India

Improved balance sheet and return ratios, trading at discount to large cap peers: At CMP of Rs. 881, Aurobindo

trades at 20x and 17x of our FY17E and FY18E earnings, respectively. The company has substantially improved its

balance sheet (net debt/EBITDA of 1.6x) and RoCE (21%, in-line with large cap peers). We expect the discount to large

cap peers to narrow further and value the stock at 20x FY18E of Rs. 52.8, to arrive at a target price of Rs. 1,056. Re-

initiating coverage with a ‘BUY’ rating

Initiating coverage; ‘BUY’




Rs. 881

Target

Rs. 1,056

Rating

BUYSegmental sales and EBITDA

Margin improvement across segments

FY14 FY15 FY16E FY17E FY18EFY16E

Jun-15 Sep-15 Dec-15 Mar-16

Breakup of US sales

FTFs 85 55 - - - - - - -

Natrol - 30 102 120 135 24 26 25 27

Base 475 705 883 1,157 1,359

US sales $mn 560 790 985 1,277 1,494 225 227 251 281

Revenue breakup

US 34,028 48,317 63,991 82,074 95,972 14,295 14,775 16,477 18,444

EU – base 6,721 7,336 6,768 7,259 7,985 1,596 1,674 1,731 1,766

EU – Actavis - 24,611 24,922 26,725 29,397 5,821 5,969 6,474 6,659

Total EU 6,721 31,947 31,690 33,984 37,382 7,417 7,643 8,205 8,425

RoW 4,634 5,683 6,407 7,368 8,473 1,706 1,680 1,472 1,549

ARV 8,402 9,639 12,323 13,864 15,597 2,953 2,708 3,672 2,990

API 28,642 27,062 28,144 30,114 32,222 7,230 6,911 6,987 7,016

Gross revenue 82,427 122,648 142,555 167,404 189,645 33,601 33,717 36,812 38,424

Excise duty -1,594 -1,520 -1,662 -1,951 -2,211 -397 -391 -427 -446

Net revenue (ex dossier sales) 80,833 121,128 140,893 165,452 187,434 33,204 33,326 36,385 37,978

EBITDA breakup

FTF 4,562 1,793 - - - - - - -

% margin 89% 75% - - - - - - -

Natrol - 260 918 1,049 1,388 213 236 239 229

% margin - 14% 14% 16% 18% 14% 14% 14% 14%

EU - Actavis - -615 -131 668 1,323 -131 -67 - 67

% margin - -2.5% -0.5% 2.5% 4.5% -2.2% -1.1% 0.0% 1.0%

Base 19,354 27,587 35,624 44,036 51,068 8,119 8,573 9,295 9,636

% margin 25.0% 29.4% 32.1% 33.1% 33.7% 30.9% 32.9% 32.5% 32.0%

Core EBITDA 23,916 29,025 36,411 45,753 53,779 8,202 8,743 9,533 9,932

% margin 29.6% 24.0% 25.8% 27.7% 28.7% 24.7% 26.2% 26.2% 26.2%

Dossier sales 165 77 39 30 30 - 9 15 15

R&D expense -2,753 -3,466 -4,066 -4,766 -5,566 -955 -996 -1,037 -1,077

as % of sales 3.4% 2.9% 2.9% 2.9% 3.0% 2.9% 3.0% 2.8% 2.8%

EBITDA 21,328 25,636 32,384 41,017 48,243 7,247 7,756 8,512 8,870

% margin 26.3% 21.2% 23.0% 24.8% 25.7% 21.8% 23.3% 23.4% 23.3%



Rs. 881

Target

Rs. 1,056

Rating

BUY

US sales – quarterly trend


Recent approval momentum translates to high growth visibility


Significantly higher number of ANDA approvals vs. peers

Source: Company data, USFDA, Spark Capital Research

Ramp of sales from recent approvals to drive strong growth in the near-term

102 119155 165 166 186

32 2826 26 27

2875

9288

145183 168

FY11 FY12 FY13 FY14 FY15 1HFY16

Final approval Tentative approval Pending approval

35

3 2

22

9

3


ANDA approvals - YTD FY16

Key recent approvals; growth momentum to pick up from H2FY16


Active ingredient Brand Approval dateMarket size

($mn)

No. of

players

olopatadine HCl Patanol 18-Dec-15 235 9

methylprednisolone sod

succinateSolu-Medrol 15-Dec-15 102 5

eptifibatide Integrilin 8-Dec-15 137 3

risedronate sodium Actonel 30-Nov-15 113 6

tramadol ER Ultram ER 20-Oct-15 56 8

aripiprazole Abilify 8-Oct-15 7,300 6

telmisartan Micardis 3-Sep-15 92 11

raloxifene HCl Evista 28-Aug-15 404 5

entecavir Baraclude 26-Aug-15 294 5

entacapone Comtan 19-Jun-15 59 5

phenytoin sodium ER Dilantin 10-Jun-15 125 6

cefixime Suprax 14-Apr-15 123 2

118

150

181 187 194 194215

225 227

Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15

US sales ($mn)


Rs. 881

Target

Rs. 1,056

Rating

BUYCompliant status of key facilities to aid US growth

Ongoing investments to strengthen manufacturing network further


Facility-wise breakup of ANDAs

Source: Company data, Spark Capital Research; data as on 30th Sep

2015; *includes tentative approvals

Place Comments

Brownfield expansions

Unit IV New dedicated block for lyophilized vials

Auronext Commissioning of penems facility at Bhiwadi

Unit VII New formulations block at Jadcherla SEZ

Unit XI New API block

Aurolife USA Capacity expansions at existing facility in NJ

Greenfield expansions

Naidupet SEZ Unit X. Oral solid formulations facility

Visakhapatanam Formulations facility for European markets

Shamirpet, Hyderabad Eugia (JV with Celon) - Specialty products (hormones and oncology) facility

Hyderabad SEZ New antibiotic injectables unit

USA Automated warehouse and OTC liquids and packaging facility

Facility Dosage Filed Approved* Pending

Unit III Oral 117 112 5

Unit IV Injectable 66 15 51

Unit VI B Oral 11 11 0

Unit VII Oral 141 47 94

Unit XIIOral &

Injectable19 19 0

Aurolife USA Oral 26 10 16

Auronext Injectable 2 0 2

Total 382 214 168

Unit VII inspected in Mar 2015 with no Form 483 observations, penem approvals from Bhiwadi will be key monitorable

FacilityLast

inspection

Type of

facilityComments

Unit I NA APIs CVS, CNS, anti-allergics, cephalosporins (non-sterile)

Unit V Sep-11 APIs Penicillins (sterile & non-sterile)

Unit VIII Apr-14 APIs ARV, CVS, CNS (non-sterile)

Unit IX Mar-15 APIs Intermediates facility. Form 483 with observations issued post last inspection

Unit XI Apr-15 APIs Non-antibiotics. No observations in the last inspection

Unit III Jun-15 FormulationsOral solid facility. Form 483 with observations issued post recent inspection. Warning Letter issued in May 2011

and closed out in 2012. 117 ANDAs filed and 112 approved

Unit IV Sep-14 FormulationsInjectables (non-antibiotics) facility. 66 ANDAs filed and 15 approved (as of Sep 2015). New block for lyophilized

vials under construction

Unit VI B Sep-12 Formulations Oral cephalosporins. Warning Letter issued in May 2011 and closed out in 2012. 11 ANDAs filed, all approved

Unit VII Mar-15 FormulationsOral solid facility. Largest formulations facility. No observations in the last inspection. 141 ANDAs filed, 47

approved (as of Sep 2015)

Unit XII Jul-15 FormulationsOral and injectable penicillins facility. Form 483 with observations issued post recent inspection. 19 ANDAs filed,

all approved

Bhiwadi Sep-15 Formulations Penems facility (meropenem and doripenem filed). Form 483 with observations issued post recent inspection

New Jersey, USA Jul-11 Formulations Oral solids including controlled substances. 26 ANDAs filed, 10 approved



Rs. 881

Target

Rs. 1,056

Rating

BUY

Pipeline visibility lower compared to peers; para III filings could surprise


27 injectable ANDAs approved till date


Low borrowing costs benefiting RoE


Strong cash generation to continue

Source: Company data, Spark Capital Research; *net of interest paid

Injectables, penems and peptides will be key segments in the medium term

Active ingredient Brand Size Comments

esomeprazole Mg Nexium 4,000Sued in Dec 2013. Tentative approval in Dec 2015. Launch likely in

post 30 month expiry in June 2016. 5 player market currently

fondaparinux Arixtra 120 DMF filed in Jan 2014. Dr Reddy’s only generic player

octreotide acetateSandostatin

LAR750 Peptide product. DMF filed in June 2015. Patent expires in Jan 2017

meropenem Merrem 150 Approval expected in FY16. 5-player market currently

imipenem + cilastatin

sodiumPrimaxin 100 Filing in FY16. 4 player market currently

doripenem Doribax 50Sued in Jan 2015. Patent expiry in 2021. Management expects to

settle for early launch

ertapenem Invanz 250 Patent expiry in Nov 2017

linaclotide Linzess 450 Peptide product. DMF filed in Sep 2015. Patent expires in Jan 2024

atomoxetine HCl Strattera 450 Patent expiry in May 2017. 7 players with tentative approval

olmesartan +

amlodipine + HCTZTribenzor 250 Para III filing. Patents expire in Oct 2016

Anaesthetics18%

Anti-nausea

19%

Antibiotics37%

Others26%

Breakup of approved injectable ANDAs

6.5

12.416.5

20.8

27.3

-3.9

-14.5-11.0 -9.5 -10.5

1.6

-2.9

4.5

10.4

15.9

0.0

0.5

1.0

1.5

2.0

(20)

(10)

0

10

20

30

FY14 FY15 FY16E FY17E FY18E

OCF (Rs.bn) Capex (Rs.bn) FCF* (Rs.bn) Net debt/ EBITDA

43%

37%34%

32%29%

22% 20% 21% 22% 22%

0%

10%

20%

30%

40%

50%


RoE (%) RoCE (%)


Rs. 881

Target

Rs. 1,056

Rating

BUYFinancial Summary

Abridged Financial Statements (Consolidated) Key metrics

Rs. mn FY14 FY15 FY16E FY17E FY18E FY14 FY15 FY16E FY17E FY18E

Profit & Loss Growth ratios

Revenue 80,998 121,205 140,932 165,482 187,464 Revenue 38.3% 49.6% 16.3% 17.4% 13.3%

EBITDA 21,328 25,636 32,384 41,017 48,243 EBITDA 139.9% 20.2% 26.3% 26.7% 17.6%

Depreciation (3,125) (3,326) (3,769) (4,477) (5,167) Adjusted PAT 200.9% 18.9% 26.4% 26.0% 18.4%

EBIT 18,203 22,310 28,615 36,541 43,076 Margin ratios

Other Income 232 808 708 720 804 EBITDA 26.3% 21.2% 23.0% 24.8% 25.7%

Interest expense (1,079) (843) (949) (910) (835) Adjusted PAT 16.9% 13.4% 14.6% 15.7% 16.4%

Forex gain / (loss) (2,031) (596) (835) 0 0 Performance ratios

PBT 15,325 21,679 27,539 36,351 43,046 RoE 43.3% 36.7% 34.2% 32.1% 28.8%

PAT (after minority interest) 11,729 15,758 19,838 26,042 30,829 RoCE 21.7% 19.9% 20.6% 22.1% 22.4%

Adjusted PAT (after minority interest) 13,759 16,354 20,673 26,042 30,829 RoA 19.0% 17.2% 17.5% 19.2% 19.8%

Balance Sheet Fixed asset turnover (x) 1.9 2.3 2.2 2.2 2.2

Net Worth 37,758 51,817 69,495 93,025 120,990 Total asset turnover (x) 1.1 1.3 1.2 1.2 1.2

Deferred Tax 2,054 2,058 2,058 2,058 2,058 Financial stability ratios

Total debt 37,949 44,511 43,931 36,790 31,166 Net Debt to Equity (x) 0.9 0.8 0.5 0.3 0.1

Other liabilities and provisions 3,625 10,200 11,048 11,917 12,812 Net Debt to EBITDA (x) 1.5 1.6 1.2 0.7 0.3

Total Networth and liabilities 81,386 108,586 126,532 143,789 167,026 Current ratio (x) 3.4 2.7 2.7 2.7 2.7

Gross Fixed assets 44,927 58,658 69,658 79,158 89,658 Inventory and debtor days 228 217 222 222 222

Net fixed assets 30,314 41,253 48,484 53,507 58,840 Working capital days 166 155 157 157 157

Investments 198 198 198 198 198 Interest cover (x) 16.9 26.5 30.1 40.2 51.6

Cash and bank balances 5,795 4,691 6,040 7,150 15,010 Valuation metrics

Loans & advances and other assets 8,550 11,451 12,023 12,625 13,256 Fully Diluted Shares (mn) 583.2 583.6 584.0 584.0 584.0

Net working capital 36,529 50,994 59,786 70,309 79,721 Market cap (Rs.mn) 514,706

Total assets 81,386 108,586 126,532 143,789 167,026 Adjusted EPS (Rs.) 23.6 28.0 35.4 44.6 52.8

Cash Flows P/E (x) 37.4 31.5 24.9 19.8 16.7

Cash flows from Operations 6,463 12,368 16,467 20,770 27,279 EV (Rs.mn) 552,804

Capex (3,905) (14,543) (11,000) (9,500) (10,500) EV/ EBITDA (x) 25.9 21.6 17.1 13.5 11.5

Cash flows from Investing (4,178) (14,085) (11,000) (9,500) (10,500) BV/ share (Rs.) 64.3 88.4 118.6 159.0 207.0

Cash flows from Financing 1,176 932 (4,118) (10,160) (8,919) Price to BV (x) 13.7 10.0 7.4 5.5 4.3

Dr Reddy’s Laboratories CMP

Rs. 3109

Target

Rs. 3328

Rating

ADD

Stock performance

1m 3m 12m

DRRD 0% -25% -3%

Sensex 0% 0% -5%

BSEHC 4% -5% 16%



FY15 148,189 33,469 22,179 129.8 24.0 15.6 21.9% 15.9%

FY16E 160,649 41,262 25,607 149.8 20.8 12.6 21.0% 16.6%

FY17E 176,395 42,976 27,157 158.9 19.6 12.1 18.8% 15.5%

FY18E 199,094 50,321 31,606 184.9 16.8 10.4 18.7% 16.0%

Date 4 Jan 2016

Market Data

SENSEX 26161

Nifty 7963

Bloomberg DRRD IN

Shares o/s 171mn


52-wk High-Low Rs. 4,387-2,951


Index member BSE SENSEX


Promoters 25.5

Institutions 41.9

Public 32.6

Initiating CoverageThe recent Warning Letters for 3 manufacturing facilities of Dr Reddy’s is a major setback to the company’s

prospects in its largest market. Given the serious nature of CGMP violations raised in the WL including data

integrity related observations, escalation into Import Alert cannot be ruled out completely. While we remain

positive on the long-term prospects of the company’s pipeline of complex generics, biosimilars and 505b(2)

products, the risk of Import Alert, uncertainties around product launches and protracted resolution timelines

should weigh on the stock in the near-to-medium term. We re-initiate coverage with an ‘Add’ rating


Resolution of WL likely to be a long-drawn process: FDA’s Warning Letter for Dr Reddy’s in Nov 2015 covers 3

manufacturing facilities – Srikakulam (API), Nalgonda (API) and Vizag (oncology formulations including injectables).

Given the serious nature of CGMP violations raised in the WL including data integrity related observations, escalation

into Import Alert cannot be ruled out completely. We note that Dr Reddy’s responded to the WL on Dec 7, 2015 and

FDA’s decision would also depend on the completeness of the company’s response. As per management, the scope of

remediation activities required for resolution of WL will be significantly greater compared to the company’s original

remediation plan in response to the Form 483. FDA has also asked for implementation of corrective actions across the

company’s manufacturing network and for 3rd party validation of the same. All these imply that WL resolution will take

considerable time

Lack of approval to hurt, site transfers and 3rd party manufacturing to mitigate the impact partially: Given the

importance of Srikakulam facility, Dr Reddy’s is likely to have referenced APIs from the facility for significant number of

pending ANDAs. Though the WL per se does not block approvals from other facilities, FDAs decision on the same in not

clear yet and suspension of approvals from all facilities cannot be ruled out. We note that Dr Reddy’s has initiated site

transfers for few key ANDAs (gNexium approved in Sep 2015, prior to the WL) and has used 3rd party APIs for some of

its filings (gGleevec, gPropofol). Further, some of its key injectables such as gVidaza and gDacogen have approvals

from 3rd party CMO facilities and are hence de-risked from FDA actions on Vizag facility

Valuation and stock view: At CMP of Rs. 3109, Dr Reddy’s trades at 20x and 17x our FY17E and FY18E earnings,

respectively. We remain positive on the company’s pipeline of complex generics, biosimilars and 505b(2) products.

However, the risk of Import Alert, uncertainties around product launches and protracted resolution timelines should

weigh on the stock in the near-term. Re-initiating coverage with a target price of Rs. 3328 (18x FY18E EPS)

Initiating coverage; ‘ADD’




Rs. 3109

Target

Rs. 3328

Rating

ADDSegmental sales and EBITDA

Lack of new launches to impact growth and margins in FY17; gNexium relaunch to provides some respite

FY14 FY15 FY16E FY17E FY18E FY16E


Revenue breakup

US ($mn) 921 1,059 1,188 1,333 1,515 292 286 299 312

US (Rs. Mn) 55,302 64,734 77,098 85,616 97,348 18,515 18,563 19,584 20,436

Europe 6,970 7,181 8,818 9,799 10,975 1,912 2,124 2,213 2,569

India 15,714 17,870 20,562 23,646 27,193 4,756 5,464 4,934 5,408

Russia & CIS 19,819 17,714 15,064 16,482 18,954 3,100 3,944 4,301 3,719

RoW 7,359 13,057 10,822 9,653 10,224 2,676 2,673 2,874 2,599

Global Generics 105,164 120,556 132,363 145,196 164,694 30,959 32,768 33,906 34,730

PSAI 23,974 25,457 24,383 26,821 29,503 5,614 5,918 5,806 7,044

Proprietary Products 1,778 1,013 2,439 2,741 3,062 697 663 539 539

Other 1,255 1,163 1,462 1,638 1,834 306 540 288 328

Net revenues 132,171 148,189 160,647 176,395 199,094 37,576 39,890 40,539 42,642

EBITDA breakup

PSAI 4,847 5,709 5,942 6,670 7,485 1,332 1,526 1,394 1,691

% margin 20.2% 22.4% 24.4% 24.9% 25.4% 23.7% 25.8% 24.0% 24.0%

Global Generics 69,148 78,553 87,754 94,442 108,070 20,917 22,059 22,378 22,401

% margin 65.8% 65.2% 66.3% 65.0% 65.6% 67.6% 67.3% 66.0% 64.5%

Proprietary Products 1,606 812 2,051 2,467 2,756 577 561 456 456

% margin 90.3% 80.2% 84.1% 90.0% 90.0% 82.9% 84.6% 84.6% 84.6%

Other 200 329 813 983 1,101 121 323 173 196

% margin 15.9% 28.3% 55.6% 60.0% 60.0% 39.4% 59.9% 59.9% 59.9%

Gross Profit 75,802 85,403 96,560 104,562 119,411 22,947 24,469 24,400 24,744

% margin 57.4% 57.6% 60.1% 59.3% 60.0% 61.1% 61.3% 60.2% 58.0%

SG&A expenses -39,280 -42,585 -46,559 -52,146 -58,403 -10,973 -11,058 -12,162 -12,366

as % of sales 30% 29% 29% 30% 29% 29% 28% 30% 29%

R&D expenses -12,402 -17,449 -18,426 -20,269 -22,701 -4,387 -4,473 -4,662 -4,904

as % of sales 9% 12% 11% 11% 11% 12% 11% 12% 12%

EBIT 24,119 25,369 31,575 32,148 38,307 7,587 8,938 7,576 7,474

% margin 18.2% 17.1% 19.7% 18.2% 19.2% 20.2% 22.4% 18.7% 17.5%

Depreciation & amortization -7,095 -8,100 -9,687 -10,829 -12,014 -2,268 -2,466 -2,476 -2,476

EBITDA 31,214 33,469 41,262 42,976 50,321 9,855 11,404 10,053 9,951

% margin 23.6% 22.6% 25.7% 24.4% 25.3% 26.2% 28.6% 24.8% 23.3%



Rs. 3109

Target

Rs. 3328

Rating

ADD

Increasing contribution from complex generics


Strong Rx share in key injectable launches


5th largest player in the US generic injectables market

Source: Company data, Hikma, Spark Capital Research; *includes Hospira

Strength in OTC and injectables = less impact from channel consolidation


Active ingredient Brand Rx share

decitabine Dacogen 68%

azacitidine Vidaza 50%

sumatriptan succinate Imitrex STATdose 35%

fondaparinux Arixtra 51%

zoledronic acid Reclast 50%

19.3%

12.9%

8.8%

5.6% 5.0% 4.8%4.0% 3.9% 3.6% 3.5%

Pfizer* APP Sandoz Hikma DrReddy's

Mylan Grifols Baxter SagentWinthrop

US generic injectable market share (by value)

86% 80% 81%66% 61%

14% 20% 19%34% 39%

FY11 FY12 FY13 FY14 FY15

Retail channel Non-retail channels (OTC and health systems)

29% 33% 38%57%

71% 67% 62%43%

FY12 FY13 FY14 FY15

Complex generics Vanilla generics

Complex injectables – key growth driver in recent years


Rs. 3109

Target

Rs. 3328

Rating

ADD

Significant step up in R&D spending


Focus on complex APIs


Generics account for ~60% of R&D spending


Complex products account for >50% of pipeline


Capabilities across complex technologies


Generic60%Proprietary

products25%

Biologics14%

Others1%

Tech complexity

45%

IP complexity

40%

Others15%

TechnologyCurrent

pipeline

Future

products

Addressable

market ($bn)Key developments

Injectables

Microspheres 2 2 2.5 Leveraging capabilities from Octoplus

Liposomal 2 1 1.0 Two near term filings, one each in FY16 and FY17

Particulate

systems2 2 2.0 Proof-of-concept done through academic partnerships

Ready-to-use 4 Multiple 3.0Four near term filings, 505b(2) approach for several

candidates

Other technologies

Dermatology 7 >5 3.5 Filed three ANDAs in FY15

Transdermal 3 1 1.9 Two patches filed till date. Acquisition of Habitrol

Soft gels 3 3 1.0Commercialized isotretinoin in US - both branded and

generic

Respiratory 3 2 3.0 Launched levalbuterol

Capabilities in complex generics – ahead of peers

APIs under development

76%62% 56%

22%35%

31%

2% 3% 13%

FY11 FY13 FY15

Softgel, topical and resipiratory

Injectable

Oral solid drug

68 pending ANDAs and 3 NDAs

with 51% complex products

3.8 5.1 5.9 7.7 12.4 17.4

5.4%6.8%

6.1% 6.6%

9.4%

11.8%

0%

2%

4%

6%

8%

10%

12%

14%

-

5

10

15

20

FY10 FY11 FY12 FY13 FY14 FY15

R&D spend (Rs. bn) % of sales


Rs. 3109

Target

Rs. 3328

Rating

ADDRecent Warning Letter derails US growth

Import Alert usually precedes WL implying low

probability of Import Alert for Dr Reddy’sFacility mapping of top products; major oral solid drugs manufactured at Bachupally

IAs without WL, 21,

52%

IAs before WL, 9, 23%

IAs after WL, 10,

25%

Product Facility

amoxicillin / amox +

clavulanic acidBristol

atorvastatin Ca Srikakulam SEZ Plant-1

azacitidine Vizag SEZ Plant-1

decitabineVizag SEZ Plant-1, 3rd party

(Cipla)

divalproex Na ERBachupally (Hyderabad Plant-

3)

esomeprazole MgBachupally (Hyderabad Plant-

3)

fondaparinux sodium 3rd party (Gland)

isotretinoin 3rd party (Cipla)


Product Facility

metoprolol succinate

ERBachupally (Hyderabad Plant-3)

sirolimus Vizag SEZ Plant-1

sumatriptan succinate 3rd party (Gland)

tacrolimus Bachupally (Hyderabad Plant-3)

tizanidine hydrochloride Bachupally (Hyderabad Plant-3)

valganciclovir

hydrochlorideBachupally (Hyderabad Plant-3)

ziprasidone

hydrochlorideBachupally (Hyderabad Plant-3)

zoledronic acid

(gReclast/gZometa)

Vizag SEZ Plant-1, 3rd party

(Gland)

Source: Company data, USFDA, Spark Capital Research Source: USFDA, Spark Capital Research

Updates on Warning Letters resolution/ escalation and status of Bachupally facility will be key monitorables

Facility Last inspection Type of facility Comments



Hyderabad (plant 3) May-14 APIs -

Hyderabad (plant 4) Apr-15 APIs -

Nalgonda Jan-15 APIs Warning Letter received on Nov 5, 2015

Srikakulam Nov-14 APIs Dr Reddy’s largest API facility. Warning Letter received on Nov 5, 2015

Srikakulam (SEZ) - APIs Awaiting first inspection

Mexico NA APIs Acquired from Roche in 2005. Manufactures naproxen. Received WL (Jun’11) and Import Alert (Jul’11). Closed in Jul’12

Mirfield, UK NA APIs Acquired from Dow Pharma in 2005

Srikakulam Plant1 (SEZ) FY15 Formulations Oral solid facility. First product approvals by USFDA in FY15. Key products include atorvastatin, clopidogrel

Visakhapatnam Plant-

1 (SEZ)Mar-15 Formulations

Oncology facility. Warning Letter received on Nov 5, 2015. 4-5 ANDAs pending approval. Key marketed products included

azacitidine, decitabine, sirolimus

Shreveport (US) NA Formulations Acquired from BASF in 2008

Bristol (US) NA Formulations Acquired from GSK in 2011. Manufactures amoxicillin and related products

Hyderabad Plant-3

(Bachupally)Jul-15 Formulations

Form 483 with observations issued post last inspection. Observations minor and escalation unlikely, as per management.

Largest formulations facility. Key products include gNexium, gDepakote ER, gGeodon, gValcyte, gToprol XL

Data from 40

active Import

Alerts on Indian

drug facilities


Rs. 3109

Target

Rs. 3328

Rating

ADDFinancial Summary




Revenue 132,170 148,189 160,649 176,395 199,094 Revenue 13.7% 12.1% 8.4% 9.8% 12.9%

EBITDA 31,214 33,469 41,262 42,976 50,321 EBITDA 25.5% 7.2% 23.3% 4.2% 17.1%

Depreciation & amortization (7,095) (8,100) (9,687) (10,829) (12,014) Adjusted PAT 20.3% 5.5% 15.5% 6.1% 16.4%


Other Income 3,090 3,691 2,767 3,358 3,654 EBITDA 23.6% 22.6% 25.7% 24.4% 25.3%

Interest expense (1,274) (1,092) (1,948) (979) (701) Adjusted PAT 15.5% 14.6% 15.7% 15.1% 15.6%

Exceptional items / Forex gain / (loss) 497 0 0 0 0 Performance ratios

PBT 26,432 27,968 32,394 34,527 41,260 RoE 26.2% 21.9% 21.0% 18.8% 18.7%

PAT (after minority interest and associates) 21,515 22,179 25,607 27,157 31,606 RoCE 18.0% 15.9% 16.6% 15.5% 16.0%

Adjusted PAT 21,017 22,179 25,607 27,157 31,606 RoA 15.0% 13.4% 13.5% 13.1% 13.8%



Deferred Tax (3,310) (4,013) (4,013) (4,013) (4,013) Financial stability ratios

Total debt 44,742 43,126 41,704 29,871 32,147 Net Debt to Equity (x) 0.1 0.0 (0.1) (0.2) (0.2)

Other liabilities and provisions 21,433 27,895 29,563 31,625 34,511 Net Debt to EBITDA (x) 0.4 0.1 (0.2) (0.6) (0.9)




Investments 806 3,850 4,056 4,282 4,530 Interest cover (x) 18.9 23.2 16.2 32.8 54.6

Cash and short-term investments 33,534 39,653 50,872 55,037 75,578 Valuation metrics




Cash Flows P/E (x) 25.2 24.0 20.8 19.6 16.8


Capex (10,081) (15,327) (11,500) (12,000) (12,500) EV/ EBITDA (x) 16.7 15.6 12.6 12.1 10.4

Cash flows from Investing (16,620) (22,904) (9,778) (9,791) (10,110) BV/ share (Rs.) 531.9 651.1 777.6 910.9 1,067.8

Cash flows from Financing (217) (4,118) (7,356) (17,196) (3,208) Price to BV (x) 5.8 4.8 4.0 3.4 2.9

Lupin CMP

Rs. 1845

Target

Rs. 1,763

Rating

REDUCE

Stock performance

1m 3m 12m

LPC 3% -9% 29%

Sensex 0% 0% -5%

BSEHC 4% -5% 16%



FY15 127,700 36,196 24,032 53.2 34.7 24.5 30.4% 28.7%

FY16E 137,059 34,471 22,747 50.4 36.6 25.7 23.2% 17.6%

FY17E 176,109 49,236 31,872 70.6 26.2 18.0 26.4% 18.7%

FY18E 205,201 55,705 36,205 80.2 23.0 15.9 24.1% 19.8%

Date 4 Jan 2016

Market Data

SENSEX 26161

Nifty 7963

Bloomberg LPC IN

Shares o/s 450mn


52-wk High-Low Rs. 2,129-1,365




Promoters 46.6

Institutions 43.4

Public 10.0

Initiating Coverage

Initiating coverage; ‘REDUCE’



After a disappointing H1FY16 impacted by price erosions in several key products, we expect Lupin’s

performance to improve in H2FY16 on the back of price increase-driven upsides in gFortamet (Lupin has ~60%

Rx share) and gGlumetza (sole FTF launch in Feb 2016). Gavis which accounts for ~25% of Lupin’s incremental

EBITDA on our estimates in FY16-18 has a largely unknown pipeline, exposing Lupin’s earnings to significant

execution risks. We believe the risk-reward is unfavourable at current valuation of 26x FY17 earnings (which

include one-off FTF profits) and valuations do not reflect the inferior return ratios post Gavis acquisition. Re-

initiating coverage with ‘REDUCE’ rating


Near-term performance largely dependent on price increases: Lupin’s performance in H1FY16 was impacted by

price erosion in key products such as Suprax, gGeodon, gCymbalta and gNiaspan (refer page 32). EBITDA margin in

1HFY16 declined sharply to 23% (vs. 28% in FY15). Recovery in H2FY16 is largely dependent on price increase-driven

upsides in gFortamet (Lupin has ~60% Rx share) and expected sole FTF launch of gGlumetza. While Lupin took ~3x

price increase in gFortamet (which should reflect in US sales and margins from Q3FY16), Valeant increased brand

Glumetza prices by ~10x. We believe Lupin’s growth in FY17-FY18 depends heavily on the sustenance of price

increases in gFortamet and Glumetza, given the company’s initiatives in dermatology, biosimilars, injectables and

inhalers are in early stages and meaningful contributions from these segments are still few years away

Gavis – low pipeline visibility adds significant execution risks to earnings: Lupin has guided for Gavis’ sales to

grow to ~$300mn by FY18 (from ~$96mnn in CY14). Gavis’ pipeline is largely unknown with <10 para IV filings (out of

66 pending ANDAs) and no product with $50mn+ sales potential according to management. We have factored $190mn

and $250mn sales from Gavis in FY17 and FY18, respectively. On our estimates, Gavis contributes 26% of Lupin’s

incremental EBITDA in FY16-18. In our view, the high dependence on a largely unknown pipeline exposes Lupin’s

earnings to significant execution risks. We note that in H1FY16, Gavis received only one ANDA approval

Valuation and stock view: At CMP of Rs. 1845, Lupin trades at 26x and 23x of our FY17E and FY18E earnings,

respectively. We believe the price increase-driven upsides in gFortamet and gGlumetza are unlikely to sustain in the

long term. Further, the impact of the $800mn Gavis acquisition on return ratios is yet to reflect in the stock’s valuations.

We value the Lupin at 22x FY18E EPS of Rs. 80.2, to arrive at a target price of Rs. 1,763. Re-initiating coverage with

‘REDUCE’ rating

Lupin CMP

Rs. 1845

Target

Rs. 1,763

Rating

REDUCESegmental sales and EBITDA

EBITDA growth highly leveraged to gFortamet price increase, gGlumetza FTF launch and Gavis

FY14 FY15 FY16E FY17E FY18EFY16E


US sales breakup

FTFs 52 18 47 77 20 - - - 47

gFortamet 75 80 115 150 125 20 20 35 40

Gavis - - 40 190 250 - - - 40

US generics – base 595 713 591 826 1,105 142 139 149 161

US – branded 81 80 48 47 48 18 15 8 8

Total US $mn 803 891 841 1,289 1,548 180 174 192 296

Net sales breakup

US Rs. Mn 48,691 56,576 55,394 82,844 99,433 11,906 11,550 12,560 19,378

EU 3,115 3,279 4,131 4,919 5,903 856 1,158 953 1,164

Japan 12,954 13,239 13,535 14,849 16,334 3,231 3,234 3,648 3,423

Domestic formulations 24,796 29,679 33,775 39,179 45,448 8,851 8,738 8,554 7,633

Emerging markets 10,133 11,283 14,515 17,684 20,469 2,642 3,884 3,728 4,261

API 11,178 11,941 12,670 13,443 14,263 3,257 3,219 2,965 3,229

Net sales 110,867 125,997 134,020 172,918 201,850 30,743 31,783 32,407 39,087

EBITDA breakup

FTFs 2,812 986 2,766 4,445 1,128 - - - 2,766

% margin 90% 90% 90% 90% 90% 90% 90% 90% 90%

gFortamet 2,950 3,174 5,677 7,484 5,835 825 845 1,840 2,168

% margin 65% 65% 76% 78% 73% 65% 65% 80% 83%

Gavis - - 1,469 6,592 8,352 - - - 1,469

% margin - - 56% 54% 52% - - - 56%

Base (ex FTFs, gFortamet, Gavis) 31,214 40,545 35,628 46,032 58,246 9,546 8,118 8,733 9,231

% margin 30% 34% 29% 32% 33% 32% 27% 29% 30%

Core EBITDA 36,976 44,704 45,539 64,554 73,562 10,371 8,963 10,572 15,633

% margin 33.4% 35.5% 34.0% 37.3% 36.4% 33.7% 28.2% 32.6% 40.0%

Other operating income 1,999 1,703 3,039 3,191 3,351 759 1,430 600 250

R&D - Gavis - - -472 -1,831 -1,927 - - - -472

R&D - Lupin -8,948 -10,211 -13,635 -16,677 -19,279 -2,964 -3,671 -3,500 -3,500

Total R&D expense -8,948 -10,211 -14,107 -18,508 -21,207 -2,964 -3,671 -3,500 -3,972

% of sales 8.1% 8.1% 10.5% 10.7% 10.5% 9.6% 11.6% 10.8% 10.2%

EBITDA 30,028 36,196 34,471 49,236 55,705 8,166 6,721 7,672 11,911

% margin 26.6% 28.3% 25.2% 28.0% 27.1% 25.9% 20.2% 23.2% 30.3%


Lupin CMP

Rs. 1845

Target

Rs. 1,763

Rating

REDUCE

EBITDA margin – quarterly trend


Price erosion in key products impacted Lupin’s growth and margins in H1FY16

Source: Company data, Medicaid, Spark Capital Research

US sales – quarterly trend


193206

180167

215241

262

202217 211

180 174

Dec-1

2

Ma

r-1

3

Jun

-13

Se

p-1

3

Dec-1

3

Ma

r-1

4

Jun

-14

Se

p-1

4

Dec-1

4

Ma

r-1

5

Jun

-15

Se

p-1

5

US sales ($mn)

24% 25% 24% 25% 26%28%

33%

26% 28%26% 26%

20%

Dec-1

2

Ma

r-1

3

Jun

-13

Se

p-1

3

Dec-1

3

Ma

r-1

4

Jun

-14

Se

p-1

4

Dec-1

4

Ma

r-1

5

Jun

-15

Se

p-1

5

% EBITDA margin

Product Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15

Suprax 1.0x 0.8x

gCelebrex 1.0x 0.9x 0.7x

gCymbalta 1.0x 1.0x 0.5x 0.2x 0.2x 0.2x 0.2x

gTricor 1.0x 0.9x 0.8x 0.6x 0.7x 0.5x 0.5x 0.4x

gTrilipix 1.0x 1.0x 0.9x 0.8x 0.8x 0.8x 0.7x

gCombivir 1.0x 1.0x 1.0x 0.9x 0.9x 0.8x 0.8x 0.5x

gNiaspan 1.0x 1.0x 0.9x 0.8x 0.8x 0.6x

gGeodon 1.0x 1.0x 0.9x 0.9x 0.7x 0.5x 0.5x 0.5x

Price erosion in key products impacted Lupin’s growth and margins in H1FY16

Lupin CMP

Rs. 1845

Target

Rs. 1,763

Rating

REDUCE

Growth highly leveraged to gFortamet price increase, gGlumetza FTF launch and Gavis


Marginal decline in Glumetza volumes post price increase

Source: Bloomberg, Spark Capital Research

High pipeline visibility in the US


Gavis acquisition strengthens Lupin’s ANDA pipeline


320260

196 168

96154

76

65

Teva+ Allergan

Mylan Aurobindo Cadila Lupin +Gavis

Sun DrReddy's

ANDAs pending approval

Active ingredient Brand Est. launch date

ethinyl estradiol + norgestimate OrthoTricyclen Lo Jan-16

metformin ER Glumetza Feb-16

esomeprazole Mg Nexium Apr-16

lanthanum carbonate Fosrenol Apr-16

aripiprazole Abilify Jul-16

tolterodine tartrate Detrol LA Oct-16

sevelamer HCl Renagel Oct-16

colesevelam HCl Welchol - Suspension Oct-16

carvedilol phosphate Coreg CR Oct-16

sevelamer carbonate Renvela - Suspension Apr-17

sevelamer carbonate Renvela - Tab Apr-17

colesevelam HCl Welchol - Tab Apr-17

lapatinib ditosylate Tykerb Jul-17

oseltamivir phosphate Tamiflu Sep-17

8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 9%

0%

20%

40%

60%

80%

100%

Dec-1

4

Jan

-15

Fe

b-1

5

Ma

r-1

5

Ap

r-15

Ma

y-1

5

Jun

-15

Jul-

15

Au

g-1

5

Se

p-1

5

Oct-

15

Nov-1

5

Glucophage XR (inc Gx) Fortamet (inc Gx) Glumetza

17.7 18.0

1.50.3

1.51.7

2.3

4.02.8

2.8

19.3

26.2

0

5

10

15

20

25

30

1H

FY

16

FT

Fs

gF

ort

am

et

Gavis

Base

2H

FY

16

E

35.646.0

5.110.4

6.6

5.7

1.87.5

2.81.7

4.4

45.5

64.6

0

10

20

30

40

50

60

70

FY

16E

FT

Fs

gF

ort

am

et

Gavis

Base

FY

17E

Ex Gavis US pipeline – higher visibility vs. peers

Core EBITDA

Lupin CMP

Rs. 1845

Target

Rs. 1,763

Rating

REDUCENo adverse outcomes in recent FDA audits

M&As and partnerships – key focus area

Date Target / Partner Geography Type of transaction Rationale

Oct-15 Boehringer Ingelheim India Co-marketing alliance Co-market DPP-4 inhibitor linagliptin and linagliptin + metformin

Jul-15Specialty portfolio from

TemmlerGermany Product portfolio acquisition Strengthened presence in Germany with addition of 13 CNS products

Jul-15 Gavis US Acquisition$800mn transaction. 20+ approved and 66 pending ANDAs. One manufacturing

facility in the US

Jul-15 Biocom Russia Acquisition Entry into Russia

May-15 Medquimica Brazil Acquisition Foray into Brazil

Mar-15 Pharma Dynamics South Africa Acquisition Increased stake from 60% to 100%

Feb-15 Celon Pharma Multiple markets Co-developmentJointly develop gAdvair for USA, Canada, Mexico and other markets. Lupin

responsible for commercialization

Sep-14 Merck Serono Emerging markets Product devpt. & supply Lupin to develop products, provide dossiers and supply finished products

Sep-14 Salix Canada Product licensing Exclusive rights to market certain Salix products in Canada

Apr-14 Yoshindo Japan JV Formed JV YL Biologics for developing biosimilars

Mar-14 Grin S.A De C.V Mexico Acquisition Entry into Mexico

Feb-14 Nanomi Netherlands Acquisition Foray into complex injectables

Sep-13 Dermatologics LLC US Co-marketing alliance Exclusive rights to co-promote Locoid brand in the US

Aug-13 Romark Laboratories US Product licensing Acquired exclusive rights for Alinia oral suspension for US market


Strong record in recent inspections, Mandideep facility due for inspection

FacilityLast

inspection

Type of

facilityComments

Tarapur Aug-15 APIs No observations in recent inspection

Pithampur, Indore Aug-15APIs and

Formulations

Most oral contraceptive and ophthalmic filings from here. Facility has 3 units. All units inspected in CY15. Only

Unit 2 received Form 483 with observations

Goa Jul-15 FormulationsForm 483 with 9 observations issued post last inspection. Observations unlikely to be major as ANDA approvals

continue from here. Supplies 50+ products including gFortamet, gCelebrex, gTricor, gCymbalta

Chikalthana, Aurangabad Apr-15 Formulations Form 483 with observations issued post recent inspection. 5-6 ANDAs approved from the facility

Nagpur Mar-15 Formulations New facility. Inspected and certified in FY15. No observations in the last inspection

New Jersey, USA Jan-15 FormulationsGavis' facility. No observations in the last inspection. 60+ ANDAs filed. Key marketed products include

gMethergine, gRowasa Enema

Mandideep Oct-11APIs and

FormulationsManufactures all cephalosporin products including Suprax. WL received in May 2009 and closed-out in Jan 2010


Lupin CMP

Rs. 1845

Target

Rs. 1,763

Rating

REDUCEFinancial Summary




Revenue 112,866 127,700 137,059 176,109 205,201 Revenue 17.1% 13.1% 7.3% 28.5% 16.5%

EBITDA 30,028 36,196 34,471 49,236 55,705 EBITDA 32.3% 20.5% -4.8% 42.8% 13.1%

Depreciation (2,610) (4,347) (4,448) (5,768) (6,371) Adjusted PAT 39.7% 30.9% -5.3% 40.1% 13.6%



Interest expense (267) (98) (405) (921) (455) Adjusted PAT 16.1% 18.5% 16.3% 17.9% 17.5%

PBT 28,317 34,148 31,788 44,391 50,425 Performance ratios

PAT (after minority interest) 18,364 24,032 22,747 31,872 36,205 RoE 30.3% 30.4% 23.2% 26.4% 24.1%

Adj PAT (after minority interest) 18,364 24,032 22,747 31,872 36,205 RoCE 26.9% 28.7% 17.6% 18.7% 19.8%

Balance Sheet RoA 23.6% 24.9% 15.3% 16.4% 17.6%

Net Worth 69,985 88,982 107,464 134,827 166,264 Fixed asset turnover (x) 2.1 2.0 1.2 1.2 1.3

Deferred Tax 1,779 1,182 1,182 1,182 1,182 Total asset turnover (x) 1.4 1.3 0.9 0.9 1.0

Total debt 6,537 5,371 62,625 46,945 23,249 Financial stability ratios

Other liabilities 2,331 8,077 8,481 8,905 9,350 Net Debt to Equity (x) (0.0) 0.0 0.5 0.3 0.1

Provisions 4,779 7,363 7,964 9,306 10,373 Net Debt to EBITDA (x) (0.0) 0.0 1.6 0.7 0.2




Investments 1,785 16,584 12,584 10,584 8,584 Interest cover (x) 102.9 324.7 74.1 47.2 108.4





Cash Flows P/E (x) 45.2 34.7 36.6 26.2 23.0


Capex (5,286) (15,006) (75,143) (7,500) (8,350) EV/ EBITDA (x) 29.5 24.5 25.7 18.0 15.9


Cash flows from Financing (8,571) (1,969) 52,791 (20,930) (28,749) Price to BV (x) 12.0 9.4 7.8 6.2 5.0

Sun Pharmaceutical Industries CMP

Rs. 816

Target

Rs. 910

Rating

BUY

Stock performance

1m 3m 12m

SUNP 12% -6% -1%

Sensex 0% 0% -5%

BSEHC 4% -5% 16%



FY15 274,334 80,636 47,784 19.9 41.1 24.1 21.6% 20.9%

FY16E 283,270 86,706 53,245 22.1 36.9 22.4 19.4% 17.5%

FY17E 329,624 114,290 72,220 30.0 27.2 17.0 22.3% 20.4%

FY18E 375,347 132,754 86,746 36.1 22.6 14.6 22.1% 21.3%

Date 4 Jan 2016

Market Data

SENSEX 26161

Nifty 7963

Bloomberg SUNP IN

Shares o/s 2,407mn

Market Cap Rs. 1,963bn

52-wk High-Low Rs. 1,201-704




Promoters 54.7

Institutions 35.6

Public 9.7

Initiating CoverageSun had a challenging FY15 and 1HFY16 with lack of product approvals, impact of remediation measures on

output (both related to compliance status of Halol facility) and integration expenses related to Ranbaxy

acquisition impacting performance. Considering the significant remediation measures implemented by the

company since receiving the Form 483 in Sep 2014 and the nature of observations in the Warning Letter (no data

integrity issues), we expect Sun’s Halol facility to be back in compliance by 2HFY17. Product approvals and

growth should improve from 2HFY17. In the near-term gGleevec launch will drive growth and margins. We believe

Sun’s initiatives in the US branded segment hold huge potential. Re-initiate coverage with ‘BUY’


Halol Warning Letter, quick resolution likely: Halol facility accounts for 8-9% of Sun’s consolidated sales

(significantly higher share of profits) and is the company’s only facility with injectables manufacturing capabilities. We

note that the recently issued Warning Letter for Halol does not include any data integrity related issues and observations

are mostly related to sterile procedures and adherence to SOPs. We believe the risk of Import Alert is minimal and

expect Sun to resolve the Warning Letter in 9-12 months (by 2HFY17). Near-term performance will benefit from launch

of gGleevec (sole FTF, successfully transferred out of Halol to the company’s Cranbury site) in Feb 2016

Margins have bottomed out: Sun (ex Taro) has witnessed significant margin contraction from FY15, key reasons

being remediation measures at Halol, charges related to Ranbaxy integration and higher R&D spend on account of MK

3222 phase III clinical trials. We expect margins to recover from H2FY16 as production improves at Halol and Ranbaxy

integration progresses towards completion. In the medium-to-long term we expect significant margin improvement from

rationalization of Ranbaxy businesses, resolution of Ranbaxy consent decree and operational synergies from Ranbaxy

Initiatives to establish a US branded business, early days but huge potential: We are positive on Sun’s recent

steps towards establishing branded business in the US focused on dermatology and ophthalmology. We believe in-

licensing of tildrakizumab (novel biologic for plaque psoriasis), launch of Keveyis (Taro’s product for periodic paralysis),

acquisition of InSite Vision and in-licensing of SPARC products (Xelpros, Elepsia) are steps in the right direction

Valuation and stock view: At CMP of Rs. 816, Sun trades at 27x and 23x our FY17E and FY18E earnings,

respectively. We note that valuations off FY18 estimates do not reflect potential earnings upsides from tildrakizumab

(filing in CY17) and synergies from Ranbaxy. Our target price of Rs. 910 is 24x FY18E EPS of Rs. 36.1 plus Rs. 45 per

share for probability-adjusted NPV for tildrakizumab opportunity. Re-initiate coverage with ‘BUY’

Initiating coverage; ‘BUY’




Rs. 816

Target

Rs. 910

Rating

BUYSegmental sales and EBITDA

Sole FTF launch of gGleevec to drive performance in the near-term

FY14 FY15 FY16 FY17E FY18E FY16E


US sales breakup

Taro 669 777 845 917 1,039 194 191 223 238

Sun ex Taro – FTFs 40 - 67 162 - - - - 67

Sun ex Taro – Base 911 1,470 1,241 1,513 1,854 294 319 309 319

US sales ($mn) 1,620 2,247 2,153 2,592 2,893 488 510 532 623

Sales break up

US 97,844 137,196 139,776 166,536 185,883 30,906 33,158 34,851 40,861

India formulations 36,918 67,166 73,680 86,943 102,593 17,837 18,187 19,142 18,514

Other reg markets 8,777 23,320 21,768 24,300 27,402 5,749 4,968 5,736 5,315

Emerging markets 10,308 37,326 35,206 40,083 46,697 8,448 9,089 9,037 8,631

APIs 8,010 9,910 11,534 12,688 13,957 2,714 3,146 2,528 3,146

Other 138 792 756 794 833 214 142 200 200

Gross sales 161,995 275,709 282,720 331,344 377,364 65,868 68,689 71,496 76,667

Excise duty -1,951 -2,844 -2,748 -3,220 -3,667 -610 -656 -715 -767

Net sales 160,044 272,865 279,973 328,124 373,697 65,259 68,033 70,781 75,900

EBITDA breakup

Taro 30,577 37,348 42,543 46,308 52,967 9,693 9,589 11,291 11,970

% margin 66% 71% 70% 72% 73% 71% 70% 71% 71%

FTFs 2,178 - 3,934 9,372 - - - - 3,934

% margin 90% 90% 90% 90% 90% 90% 90% 90% 90%

Sun ex Taro - base 48,248 60,192 57,336 80,970 105,305 11,449 14,174 15,344 16,369

% margin 43% 27% 27% 32% 35% 22% 26% 28% 30%

Core EBITDA 81,003 97,540 103,813 136,650 158,272 21,142 23,762 26,635 32,273

% margin 50.6% 35.7% 37.1% 41.6% 42.4% 32.4% 34.9% 37.6% 42.5%

Other operating income (Sun ex Taro) 760 1,469 3,297 1,500 1,650 2,354 343 300 300

R&D - Taro -3,361 -4,012 -4,775 -5,110 -5,754 -922 -1,217 -1,279 -1,357

R&D - Sun ex Taro -6,501 -14,361 -15,629 -18,750 -21,413 -4,077 -3,552 -4,000 -4,000

Consolidated R&D expense -9,862 -18,373 -20,404 -23,860 -27,167 -4,999 -4,769 -5,279 -5,357

as % of sales 6.2% 6.7% 7.3% 7.3% 7.3% 7.7% 7.0% 7.5% 7.1%

EBITDA - Taro 27,216 33,336 37,768 41,197 47,213 8,771 8,372 10,013 10,613

EBITDA - Sun ex Taro 44,685 47,300 48,938 73,093 85,542 9,726 10,965 11,644 16,603

Consolidated EBITDA 71,901 80,636 86,706 114,290 132,754 18,497 19,337 21,657 27,216

% margin 44.7% 29.4% 30.6% 34.7% 35.4% 27.4% 28.3% 30.5% 35.7%



Rs. 816

Target

Rs. 910

Rating

BUYWe expect Halol Warning Letter resolution by 2HFY17

Resolution time <2 years in ~70% of WLs

Source: Company data, USFDA, FDAzilla, Spark Capital Research

0-12 months

9%

12-18 months

43%

18-24 months

19%

>24 months

29%

• We looked at resolution timelines for 42 CGMP WLs (for non-US facilities)

with close-out letters. Resolution time was less than 2 years in ~70% of WLs

• We note that the recently issued Warning Letter for Halol does not include

any data integrity related issues and observations are mostly related to

sterile procedures and adherence to SOPs. We believe the risk of Import

Alert is minimal and expect Sun to resolve the Warning Letter by 2HFY17

High dependence on Halol, quick resolution of Warning Letter critical for growth revival

FacilityLast

inspection

Type of

facilityComments

Panoli Jul-15 APIs No observations in the last inspection

Ahmednagar Jul-15 APIs Form 483 with observations issued post last inspection

Toansa (Ranbaxy) Jan-14 APIs Import Alert issued and facility brought under consent decree in Jan 2014

Karkhadi Nov-13APIs and

FormulationsCephalosporin facility. FDA imposed Import Alert in Mar 2014 and issued Warning Letter in May 2014

Dewas (Ranbaxy) Feb-08APIs and

Formulations

FDA issued Warning Letter and imposed Import Alert in Sep 2008. Department of Justice filed consent decree of


Halol Sep-14 FormulationsWarning Letter issued in Dec 2015. Contributed high single-digit percent of consolidated sales (~$350) in FY15.

All approved injectables including gDoxil manufactured at this facility

Dadra Jan-15 FormulationsForm 483 with observations issued post last inspection. Key marketed products include gNamenda, gSeroquel,

gComtan, gProscar and gMaxalt

Cranbury Aug-15 Formulations No observations in the last inspection. gGleevec (sole FTF launch in Feb 2016) was transferred to this facility

Paonta Sahib (Ranbaxy) Mar-08 FormulationsFDA issued Warning Letter and imposed Import Alert in Sep 2008. Department of Justice filed consent decree of


Mohali (Ranbaxy) Dec-12 Formulations FDA imposed Import Alert and brought the facility under consent decree in Sep 2013

New Jersey (Ranbaxy) Mar-14 Formulations Part of Ohm Laboratories (Ranbaxy). Form 483 with observations issued post last inspection

Wilmington May-15 FormulationsPart of Dusa Pharmaceuticals (acquired in Nov 2012). Manufactures Levulan, Dusa’s flagship product for actinic

keratosis (AK). No observations in the last inspection

Billerica NA Formulations Injectables facility, part of Pharmalucence (acquired in July 2014)

Aurora (URL) Feb-13 Formulations Part of URL (acquired from Takeda in Dec 2012). Doxycycline manufactured at this facility

Ontario, Canada (Taro) Feb-14 FormulationsDermatology facility. Key products include clobetasol, nystatin and triamcinolone, ketoconazole, lidocaine,

clobetasol and desoximetasone. Form 483 with observations issued post last inspection

Israel (Taro) NAAPIs and

FormulationsOral solid facility. Key products include warfarin, clomipramine, carbamazepine XR and carbamazepine

Resolution timelines

for CGMP WLs based

on data for 42 CGMP

WLs (for non-US

facilities) with close-

out letters


Rs. 816

Target

Rs. 910

Rating

BUYANDA approvals to resume post Halol resolution; gGleevec to drive recovery in FY17

gGleevec to drive recovery in ex Taro US sales in FY17


Taro – product concentration not significant

Source: Company data, Bloomberg, Spark Capital Research

ANDA approvals to resume post resolution of WL for Halol

Source: Company data, Spark Capital Research; *SPARC products

Margins decline post Ranbaxy acquisition


Active ingredient Brand Launch

tetrabenazine Xenazine Aug-15

dexmedetomidine Precedex Aug-15

imatinib mesylate Gleevec Feb-16

carvedilol phosphate ER Coreg CR Apr-16

metformin ER Glumetza Oct-16

valganciclovir HCl Valcyte Oct-16

aripiprazole Abilify Oct-16

esomeprazole Mg Nexium Oct-16

ethinly estradiol + norgestimate OrthoTricyclen Lo Oct-16

latanoprost BAK-free Xelpros* Oct-16

levetiracetam ER Elepsia* Oct-16

dexmethylphenidate HCl Focalin XR Jan-17

Product Form Brand InnovatorNo.

playersRx %

Ketoconazole Creams Ketoconazole Teva 3 43%

Clobetasol propionate Creams Cormax Hi Tech 3 27%

Nystatin +

Triamcinolone acetonideCreams - - 3 54%

Clobetasol propionate Ointments Temovate Fougera 5 20%

Desoximetasone Creams Topicort Taro 3 58%

Clomipramine HCL Capsules Anafranil Mallinckrodt 4 28%

Warfarin sodium Tablets Coumadin BMS 10 37%

Carbamazepine XR Tablets Tegretol XR Novartis 2 41%

Carbamazepine Tablets Tegretol Novartis 4 34%

911 1,470 1,241

1,513 1,854 40

67

162

669

777 845

917 1,039


Sun ex Taro - Base ($mn) Sun ex Taro - FTFs ($mn) Taro ($mn)

29.2 29.6 28.9

55.3

64.6

53.8

46.351.6

54.341%

44% 46%

33%

36%

31%

4%

22%26%

0%

10%

20%

30%

40%

50%

-

10

20

30

40

50

60

70

Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15

Net sales - ex Taro (Rs. bn) % Core EBITDA margin (pre R&D)


Rs. 816

Target

Rs. 910

Rating

BUY

Historical P/E band

M&A and product licensing activities have picked up in recent years

M&A transactions – last 5 years

Year Deals Geography Rationale

2015 Acquired InSite Vision Inc. US Pipeline of ophthalmic drugs

2015Acquisition of GSK's Opiates

business

Global

marketsVertical integration for controlled-substance drugs

2015Distribution agreement with

AstraZenecaIndia

For brand Axcer (brand of ticagrelor for acute

coronary syndrome

2015 Ranbaxy acquisitionGlobal

markets

Ranbaxy's strong presence in India, US and emerging

markets

2014 In-licensing of MK-3222Global

marketsNovel biologic for plaque psoriasis

2014 Acquired Pharmalucence US Sterile injectable capacity in the US

2013 Formation of Sun-Intrexon JV US JV for ocular therapies

2013Acquired URL’s generic

businessUS Adds 107 products to US portfolio

2012 Acquired DUSA Pharma, Inc. USAccess to branded dermatology product, Levulan, for

treatment of Actinic Keratosis

2011 Formation of Sun-MSD JVEmerging

marketsBranded generics in emerging markets

2010 Acquired Taro Israel Attractive basket of dermatology products

Summary of consolidated financials

FY14 FY15 FY16E FY17E FY18E FY15-18E CAGR

Taro 46,121 52,869 60,378 64,678 72,825 11%

Sun ex Taro 114,683 221,465 222,892 264,945 302,522 11%

Revenue 160,804 274,334 283,270 329,624 375,347 11%

Taro 27,216 33,336 37,768 41,197 47,213 12%

% margin 59.0% 63.1% 62.6% 63.7% 64.8%

Sun ex Taro 44,685 47,300 48,938 73,093 85,542 22%

% margin 39.0% 21.4% 22.0% 27.6% 28.3%

EBITDA 71,901 80,636 86,706 114,290 132,754 18%

% margin 44.7% 29.4% 30.6% 34.7% 35.4%

Taro 22,010 29,762 31,665 33,133 38,277 9%

Sun ex Taro 16,780 25,132 24,478 49,382 60,364 34%

PAT 38,790 54,894 56,143 82,515 98,641 22%

Minority interest (7,375) (9,488) (9,750) (10,295) (11,895) 8%

PAT after minority 31,415 45,406 46,394 72,220 86,746 24%


Source: Company data, Spark Capital Research Source: Bloomberg, Spark Capital Research

0

200

400

600

800

1,000

1,200

Ap

r-08

Se

p-0

8

Fe

b-0

9

Jul-0

9

Dec-0

9

Ma

y-1

0

Oct-

10

Ma

r-11

Au

g-1

1

Jan

-12

Jun

-12

Nov-1

2

Ap

r-13

Se

p-1

3

Fe

b-1

4

Jul-1

4

Dec-1

4

Ma

y-1

5

Oct-

15

12M fwd P/EC

MP

(Rs.)

32x

12x

16x

20x

24x

28x


Rs. 816

Target

Rs. 910

Rating





Revenue 160,804 274,334 283,270 329,624 375,347 Revenue 42.3% 70.6% 3.3% 16.4% 13.9%

EBITDA 71,901 80,636 86,706 114,290 132,754 EBITDA 46.8% 12.1% 7.5% 31.8% 16.2%

Depreciation (4,092) (12,948) (10,041) (10,574) (11,065) Adjusted PAT 63.6% -15.6% 11.4% 35.6% 20.1%



Interest expense (442) (5,790) (5,113) (4,431) (2,524) Adjusted PAT 35.2% 17.4% 18.8% 21.9% 23.1%

Exceptional items (25,174) (2,378) (6,852) - - Performance ratios

PBT 45,817 64,041 70,091 102,981 123,196 RoE 33.8% 21.6% 19.4% 22.3% 22.1%





Deferred Tax (9,110) (17,516) (17,525) (17,524) (17,524) Financial stability ratios

Total debt 25,609 89,939 74,067 44,176 9,138 Net Debt to Equity (x) (0.2) (0.1) (0.2) (0.3) (0.4)

Other liabilities and provisions 47,599 82,924 60,464 62,777 65,372 Net Debt to EBITDA (x) (0.7) (0.2) (0.7) (1.0) (1.4)




Investments 27,860 27,163 28,850 28,574 28,574 Interest cover (x) 153.4 11.7 15.0 23.4 48.2

Cash 75,902 109,980 133,386 161,719 200,747 Valuation metrics

Loans & advances and other assets 48,257 77,620 56,767 59,399 62,369 Fully Diluted Shares (mn) 2,071 2,406 2,406 2,406 2,406

Net working capital 39,952 78,265 81,028 94,325 107,335 Market cap (Rs.mn) 1,962,708


Cash Flows P/E (x) 29.8 41.1 36.9 27.2 22.6

Cash flows from Operations 39,592 53,219 60,867 79,557 94,162 EV (Rs.mn) 1,941,650

Capex (9,060) (23,659) (11,424) (11,386) (11,390) EV/ EBITDA (x) 27.0 24.1 22.4 17.0 14.6


Cash flows from Financing 5,066 (10,875) (29,675) (43,738) (47,703) Price to BV (x) 9.1 7.7 6.7 5.5 4.5

Biocon CMP

Rs. 518

Target

Rs. 581

Rating

BUY

Stock performance

1m 3m 12m

BIOS 13% 17% 23%

Sensex 0% 0% -5%

BSEHC 4% -5% 16%

Financial Summary


FY15 30,898 6,958 4,081 20.4 25.4 15.0 13.4% 10.1%

FY16E 34,730 8,390 4,589 22.9 22.6 12.4 13.6% 8.7%

FY17E 39,026 9,539 4,931 24.7 21.0 10.9 12.7% 10.7%

FY18E 44,834 11,482 5,599 28.0 18.5 9.1 13.3% 11.4%

Date 4 Jan 2016

Market Data

SENSEX 26161

Nifty 7963

Bloomberg BIOS IN

Shares o/s 200mn



3m Avg. Daily Vol Rs. 227mn

Index member BSE200


Promoters 61.0

Institutions 19.2

Public 19.8

Company Update

Unique play on biosimilars; maintain ‘BUY’

Recent developments from Biocon’s biosimilar portfolio has been positive with partner Mylan guiding for four

biosimilar filings (insulin glargine, trastuzumab, adalimumab and pegfilgrastim) in US and Europe in 2016.

Updates from ongoing global phase III trials for biosimilars will be key triggers for the stock in 2016. The muted

earnings growth ~11% in FY15-18 is partially on account of higher R&D expenses and higher depreciation post

commissioning of Malaysia facility. Maintain ‘BUY’ rating on the stock


Biosimilars – we remain bullish on the opportunity: Recent developments from Biocon’s biosimilar portfolio has

been positive with four biosimilars (insulin glargine, trastuzumab, adalimumab and pegfilgrastim) making progress in

global phase III trials. Filing for biosimilar pegfilgrastim is planned in H1CY16 while filings for insulin glargine,

trastuzumab and adalimumab are scheduled for H2CY16. Updates from ongoing global phase III trials for these

biosimilars will be key triggers for the stock in 2016. On the regulatory front, more clarity has emerged on several fronts

in recent months. USFDA recently approved the first biosimilar under the 351(k) pathway, Sandoz’s filgrastim product.

The first biosimilar analog insulin, Eli Lilly’s glargine product was recently approved under the 505b(2) pathway. The

opportunity for biosimilars in EMs remains huge with potential for volume expansion post biosimilar launches not

appreciated adequately, in our view

Valuation and stock view: At CMP Biocon trades at 21x and 19x, FY17E and FY18E earnings, respectively. We note

that the muted earnings growth ~11% in FY15-18 is partially on account of higher R&D expenses and higher

depreciation post commissioning of Malaysia facility. We believe Biocon is a unique play on the global biosimilars

opportunity. The company along with Dr Reddy’s is the only Indian player with significant exposure to this huge

opportunity. The potential for volume expansion in biologic drugs post biosimilar launches, especially in EMs, is

significant, in our view

Our SOTP-based target price of Rs. 581 includes: 1) Biocon ex Syngene valued at 16x FY18 earnings of Rs. 15.1

per share 2) 25% holding company discount to Biocon’s 73.5% stake in Syngene (valued at 25x FY18 EPS of Rs. 17.5

per share) 3) Probability adjusted per share NPV of Rs. 98 for the biosimilar portfolio of insulin glargine, trastuzumab,

adalimumab and pegfilgrastim. We believe the risk-reward is attractive given the significant potential of biosimilars

portfolio and maintain ‘BUY’ rating on the stock

Biocon CMP

Rs. 518

Target

Rs. 581

Rating

BUY

Core EBITDA (excluding R&D expense and licensing income) CAGR of 19% in FY15-18E

Off-P&L R&D spending to peak in FY16E and decline thereafter


FY14 FY15 FY16E FY17E FY18E FY15-18E CAGR

Small molecules 14,901 14,992 15,078 16,339 17,746 6%

Biosimilars 2,417 2,646 3,458 4,195 5,159 25%

Total Biopharma 17,318 17,638 18,536 20,534 22,905 9%

Branded formulations 3,914 4,296 4,540 5,221 6,056 12%

Syngene 6,871 8,427 10,568 12,689 15,357 22%

Other / Inter-segment 275 -202 -160 -317 -384 -

Net sales 28,378 30,159 33,484 38,126 43,934 13%

Biopharma – EBITDA 5,371 4,848 5,376 6,077 6,924 13%

% margin 31.0% 27.5% 29.0% 29.6% 30.2%

Branded formulation – EBITDA 235 430 748 1,011 1,347 46%

% margin 6.0% 10.0% 16.5% 19.4% 22.2%

Syngene – EBITDA 2,144 2,811 3,540 4,351 5,361 24%

% margin 31.2% 33.4% 33.5% 34.3% 34.9%

Core EBITDA 7,750 8,088 9,664 11,439 13,632 19%

% margin 27.3% 26.8% 28.9% 30.0% 31.0%

Licensing income 150 433 406 400 400 -3%

R&D expenses -1,229 -1,690 -2,300 -2,550 -2,800 18%

Other operating income 122 126 620 250 250 26%

EBITDA 6,793 6,958 8,390 9,539 11,482 18%

% margin 23.9% 23.1% 25.1% 25.0% 26.1%


R&D spending netted off with deferred revenue 205 295 250 250 250

Capitalized R&D spending 81 611 1,200 1,200 1,200

R&D spending expensed through P&L 1,229 1,690 2,300 2,550 2,800

Gross R&D spend 1,515 2,596 3,750 4,000 4,250

Adj. profit before tax (PBT) 5,377 5,190 6,638 7,165 8,273

R&D understatement as % of PBT 5% 17% 22% 20% 18%

Biocon capitalizes R&D spending on

biosimilar trastuzumab and biosimilar

glargine given proof-of-concept from their

Indian launches

Further, R&D spending on rh insulin is

netted against deferred revenue (received

from the terminated deal with Pfizer)

We expect off-P&L R&D spending to peak

in FY16 and decline thereafter

Segmental sales and EBITDA

Biocon CMP

Rs. 518

Target

Rs. 581

Rating

BUY

SOTP-based target price of Rs. 581

Source: Spark Capital Research

Investment phase continues


CommentsPer share

(Rs.)

Biocon ex SyngeneBiocon ex Syngene valued at 16x FY18

earnings of Rs. 15.1 per share242

Syngene

25% holding company discount to Biocon’s

73.5% stake in Syngene (valued at 25x FY18

EPS of Rs. 17.5 per share)

242

Biosimilar portfolio

Probability adjusted per share NPV of Rs. 98

for the biosimilar portfolio of insulin glargine,

trastuzumab, adalimumab and pegfilgrastim

98

Target price 581

Consolidation of Biocon (ex Syngene) and Syngene financials

Source: Company data, Spark Capital Research; *FY15 and FY16 includes exceptional incomes of Rs. 1,051mn and Rs. 3,070mn respectively

Rs. mn FY14 FY15 FY16E FY17E FY18E

Revenue – Biocon ex Syngene 21,503 22,501 24,115 26,405 29,611

Revenue – Syngene 7,270 8,397 10,615 12,621 15,223

Consolidated revenue 28,773 30,898 34,730 39,026 44,834

EBITDA – Biocon ex Syngene 4,649 4,147 4,850 5,188 6,121

EBITDA – Syngene 2,144 2,811 3,540 4,351 5,361

Consolidated EBITDA 6,793 6,958 8,390 9,539 11,482

PBT – Biocon ex Syngene 3,811 4,206 7,114 3,845 4,019

PBT – Syngene 1,566 2,035 2,594 3,321 4,254

Consolidated PBT 5,377 6,241 9,708 7,165 8,273

PAT – Biocon ex Syngene* 2,960 3,534 5,068 2,890 3,021

PAT – Syngene 1,348 1,750 2,215 2,776 3,505

Consolidated PAT* 4,308 5,284 7,283 5,666 6,526

Minority interest -170 -310 -666 -735 -927

Consolidated PAT after minority interest* 4,137 4,974 6,617 4,931 5,599

Our SOTP based target price of Rs. 581

Area of Investment Comment

Malaysia

Biocon recently commissioned its $200mn (phase I) facility

insulin manufacturing in Malaysia. The total cost including

phase II is estimated at $300mn

Formulations -

Bangalore

Construction of Biocon’s first oral solid dosage facility in

Bangalore. $25mn investment. Estimated completion in

CY17

Insulin facility -

Bangalore

Expansion of drug product facility in Bangalore initiated.

Expected completion in FY18

Monoclonal

antibodies

Expansion of existing mAb capacity in Bangalore, in-line

with launch timelines

Other Recently commissioned new devices facility in Bangalore

Biocon CMP

Rs. 518

Target

Rs. 581

Rating





Revenue 28,773 30,898 34,730 39,026 44,834 Revenue 17.2% 7.4% 12.4% 12.4% 14.9%

EBITDA 6,793 6,958 8,390 9,539 11,482 EBITDA 32.6% 2.4% 20.6% 13.7% 20.4%

Depreciation & amortization (2,036) (2,210) (2,454) (2,660) (3,377) Adjusted PAT 26.0% -1.4% 12.5% 7.5% 13.5%


Other Income 637 531 856 567 486 EBITDA 23.6% 22.5% 24.2% 24.4% 25.6%

Interest expense (17) (89) (153) (280) (318) Adjusted PAT 14.1% 13.0% 12.9% 12.5% 12.4%

Exceptional items - 1,051 3,070 - - Performance ratios

PBT 5,377 6,241 9,708 7,165 8,273 RoE 14.7% 13.4% 13.6% 12.7% 13.3%

PAT 4,137 4,974 6,617 4,931 5,599 RoCE 12.4% 10.1% 8.7% 10.7% 11.4%

Adjusted PAT 4,137 4,081 4,589 4,931 5,599 RoA 8.7% 7.2% 7.3% 7.2% 7.7%



Deferred Tax 450 417 417 417 417 Financial stability ratios

Total debt 8,637 11,172 11,638 10,317 11,488 Net Debt to Equity (x) (0.2) (0.0) (0.0) (0.0) 0.0

Other liabilities and provisions 13,857 13,444 12,188 11,897 11,773 Net Debt to EBITDA (x) (0.9) (0.1) (0.2) (0.0) 0.0




Long-term investments 645 - - - - Interest cover (x) 278.1 53.3 38.7 24.6 25.5

Cash and short-term investments 15,048 11,678 13,451 10,450 11,486 Valuation metrics

Loans and advances 3,511 4,506 4,877 5,244 5,612 Fully Diluted Shares (mn) 200.0 200.0 200.0 200.0 200.0

Other assets 1,230 2,273 1,962 1,651 1,342 Market cap (Rs.mn) 103,620

Net working capital 6,292 7,939 8,093 9,172 10,494 Adjusted EPS (Rs.) 20.7 20.4 22.9 24.7 28.0

Total assets 54,034 59,461 66,943 69,418 75,257 P/E (x) 25.0 25.4 22.6 21.0 18.5

Cash Flows EV (Rs.mn) 104,416

Cash flows from Operations 5,607 2,107 5,982 7,042 8,562 EV/ EBITDA (x) 15.4 15.0 12.4 10.9 9.1


Cash flows from Financing 4,260 1,862 3,741 (3,043) (727) Price to BV (x) 3.8 3.4 3.2 2.6 2.4

Cadila Healthcare CMP

Rs. 333

Target

Rs. 352

Rating

ADD

Stock performance

1m 3m 12m

CDH -17% -20% 3%

Sensex 0% 0% -5%

BSEHC 4% -5% 16%



FY15 86,513 17,557 11,506 11.2 29.6 20.3 29.9% 18.9%

FY16E 99,522 23,162 14,577 14.2 23.4 15.4 30.0% 21.0%

FY17E 110,868 24,457 16,389 16.0 20.8 14.6 26.9% 21.5%

FY18E 129,390 29,401 20,004 19.5 17.0 12.1 26.5% 23.5%

Date 4 Jan 2016

Market Data

SENSEX 26161

Nifty 7963

Bloomberg CDH IN

Shares o/s 1,024mn




Index member BSE200


Promoters 74.8

Institutions 15.1

Public 10.1

Company Update

Warning Letter delays key launches further; maintain ‘ADD’



The Warning Letter for Moraiya facility implies further delays to monetization of Cadila’s attractive pipeline in the

US. Approvals for key filings including gToprol XL, gAsacol HD, gPrevacid ODT, gLialda and gNexium, earlier

expected to kick in from early CY16, are now pushed out to CY17. Given no meaningful launches in FY17 except

authorized generic of Asacol HD and expected pricing pressure in HCQS, we believe FY17 will be a challenging

year for the company. The Warning Letters for Moraiya (2nd Warning Letter in ~4 years) and Ahmedabad adds to

the company’s recent execution woes, which include CRLs and approval delays for several complex products.

We lower our FY17 and FY18 earnings estimates by 9% and 5%, respectively. The stock has corrected ~15% since

the Warning Letter on Dec 30th. Maintain ‘ADD’ rating with a target price of Rs. 352 (18x FY18E EPS of Rs. 19.5)


Warning Letter to delay launch of key products in the US further: Driven by authorized generic products (from

Abbvie) and shortage-led price increase in HCQS (following Ipca’s exit) Cadila’s US business (accounting for ~40% of

the company’s topline in FY16E) has grown at a CAGR of 33% in FY13-16E. However, Cadila’s inability to meaningfully

monetize its high potential US pipeline has been a disappointment during this period. Cadila has significantly lagged

peers in timely approvals and launches in the US, impacting monetization of its attractive pipeline. Form 483

observations and suspension of approvals from Moraiya facility following an inspection in Sep 2014 have contributed to

the weak execution. The recent Warning Letter for the facility is likely to delay approvals for key products further. We

expect AG sales to flatten out and HCQS sales to decline as competition reenters

Diversified business model, but too early to attach meaningful value to initiatives in new technologies: With

significant presence in segments such as animal health, wellness and APIs, Cadila is among the most diversified Indian

pharmaceuticals companies. Cadila has made significant investments and progress in biosimilars, inhalers,

transdermals, topicals, vaccines and NCEs (Lipaglyn to commence phase II trials in the US). While acknowledging the

progress made by Cadila in these high-value segments, we believe it is too early to attach meaningful value to these

assets given monetization, especially in regulated markets, is unlikely in the next 2-3 years

Valuation and stock view: Following the Warning Letters for Moraiya and Ahmedabad facilities, we lower our FY17

and FY18 EPS estimates by 9% and 5%, respectively, and lower our target price to Rs. 352 (18x FY18E EPS of Rs.

19.5). Maintain ‘ADD’ rating on the stock


Rs. 333

Target

Rs. 352

Rating

ADD

Warning Letter and approval delays to impact growth and margins in FY17

Segmental sales and EBITDA

Rs. Mn FY13 FY14 FY15 FY16E FY17E FY18EFY15-18E

CAGR

Domestic formulations 23,232 24,645 26,772 29,730 34,189 39,318 14%

US 15,068 21,703 33,932 40,867 44,686 54,288 17%

Europe 3,697 3,900 3,376 3,246 3,386 3,725 3%

Japan 603 542 0 0 0 0

Latin America 2,384 2,438 2,348 2,062 2,227 2,672 4%

Emerging markets 3,134 3,693 4,075 4,953 5,944 7,133 20%

APIs 3,099 3,498 3,723 3,807 3,998 4,198 4%

Animal Health 2,462 2,864 3,217 3,291 3,620 3,982 7%

Alliances 138 418 980 1,829 2,232 2,566 37%

Core sales (ex Wellness & JVs) 53,817 63,701 78,423 89,786 100,282 117,882 14%

Zydus Wellness 4,100 4,296 4,430 4,679 5,147 5,765 9%

JVs 4,932 4,083 3,724 3,965 4,415 4,904 10%

Gross sales 62,849 72,080 86,577 98,430 109,844 128,551 14%

Excise duty -1,296 -1,479 -1,606 -1,802 -2,008 -2,337

Net sales 61,553 70,601 84,971 96,629 107,836 126,213 14%

EBITDA - Wellness 957 886 900 989 1,114 1,277 12%

EBITDA - JVs 2,452 1,695 1,215 1,293 1,487 1,725 12%

EBITDA - ex Wellness & JVs 10,523 12,389 19,509 25,058 26,911 32,687 19%

Core EBITDA 13,931 14,970 21,623 27,340 29,513 35,690 18%

% margin 22.6% 21.2% 25.4% 28.3% 27.4% 28.3%

Other operating income 2,025 1,640 1,542 2,893 3,032 3,177 27%

R&D expenses -4,706 -4,608 -5,608 -7,072 -8,088 -9,466 19%

EBITDA 11,251 12,001 17,557 23,162 24,457 29,401 19%

% margin 17.7% 16.6% 20.3% 23.3% 22.1% 22.7%



Rs. 333

Target

Rs. 352

Rating

ADDWarning Letter to delay launch of key products in the US further

ANDAs with tentative approvals (TAs), but delayed final approval

Drug Brand Innovator $mn Comments

sirolimus Rapamune Pfizer 208

Cadila launched 0.5mg in Jan 2014. Awaiting approval for higher strengths (tentative

approval in Jan 2014). Dr Reddy’s, only generic in the market for 1mg and 2mg,

received final approval in Oct 2014

amlodipine besylate / benazepril

HClLotrel Novartis 290

Cadila got tentative approval in Mar 2013. 8-9 players in the market including Dr

Reddy's (Apr 2010), Lupin (June 2011) and Aurobindo (Sep 2012)

glipizide extended release Glucotrol XL Pfizer 71Cadila got tentative approval in Sep 2014. 3 generic players – Watson, Mylan and Par

in the market

aripiprazole ODT Abilify Otsuka NA Cadila got tentative approval in July 2012. Alembic, only generic, launched in Apr 2015

desloratadine Clarinex Schering Plough 200 Cadila got tentative approval in May 2011. 9 players in the market

letrozole Femara Novartis 200Cadila got tentative approval in July 2012. More than 10 players in the market. Product

went generic in 2011

Launches delayed by Complete Response Letters (CRLs) and Form 483 observations at Moraiya facility

esomeprazole magnesium delayed

release capsuleNexium AstraZeneca 4,000

Teva, Dr Reddy's, Mylan, Hetero and Torrent have launched. Cadila’s filing from

Moraiya

azelastine nasal spray Astelin Meda 100Astelin – Sun, Apotex, Roxane, Breckenridge in the market. Cadila filed ANDA in Feb

2010. Sued on '194 patent which has since expired

aripiprazole tablet Abilify Otsuka 7,800Teva, Torrent, Alembic, Hetero, Apotex and Aurobindo Pharma have launched.

Cadila’s filing from Moraiya

metoprolol succinate extended

release tabletsToprol XL AstraZeneca 700

Only 4 generic players in the market (Wockhardt, Dr Reddy's, Mylan, Actavis). Cadila’s

ANDA filed from Moraiya

mesalamine 1.2gm delayed

release tabletsLialda Shire 520

Cadila sole FTF. Recently, Watson won patent litigation (‘720 patent expiring June

2020) against Shire in CAFC. In Cadila’s case, Markman ruling completed in July 2015.

Trial date awaited. Cadila received CRL from USFDA in 2014. Mylan, Amneal and

Osmotica are other known players. Management believes other players can enter only

after Cadila’s exclusivity period

lansoprazole delayed release;

orally disintegrating tablets

Prevacid

Solutab/ ODT Takeda 250

Cadila received favorable verdict on ‘994 patent (expiring in Nov 2019) from CAFC.

Cadila got CRL in 2014 to which company has responded. ANDA filed from Moraiya.

Teva and Sandoz (AG) launched in 2010 but withdrew in 2011. Lupin and Mylan are

other known filers

mesalamine 800mg delayed

release tabletsAsacol HD

Warner Chilcott

(Allergan)440

Cadila sole FTF. Litigation settled. Settlement allowed Cadila to launch on Nov 15,

2015 (if own ANDA approved) or on July 1, 2016 (authorized generic). Cadila yet to get

approval. No other known filer

Source: Company data, Bloomberg, Spark Capital Research


Rs. 333

Target

Rs. 352

Rating

ADDSite transfers for key products will be key monitorable

Monetization of transdermal filings key to long-term growth of US business

Drug Brand Innovator $mn Comments

estradiol (once-a-week)

transdermalClimara Bayer 60

Mylan only generic player. Launched in Feb 2000. No unexpired patents. Cadila received

CRL

estradiol (twice-a-week)

transdermalVivelle DOT Novartis 260

Mylan launched in Dec‘14. No other known player. No unexpired patents. Cadila received

CRL

lidocaine transdermal LidodermEndo

Pharmaceuticals1,100 Mylan (Aug 2015) and Actavis (Sep 2013) have launched. No unexpired patents

clonidine transdermal Catapres-TTSBoehringer

Ingelheim180

Actavis (May 2014), Teva (Aug 2010), Mylan (July 2010) and Aveva/Par (Aug 2009) are in the

market. No unexpired patents. Cadila received CRL

fentanyl transdermal Duragesic J&J 7506-player market – Actavis, Par, Mylan, Mallinckrodt, Lavipharm and Aveva. No unexpired

patents

rivastigmine transdermal Exelon Patch Novartis 250

Actavis lost patent litigation against Novartis on ‘023 and ‘031 patents (both expiring Jan

2019). Cadila sued in Aug 2014 on same patents. Mylan, Par, Novan and Alvogen other

known filers



Moraiya Warning Letter pushes key approvals further out. Site transfers for key products will be key monitorable

FacilityLast

inspection

Type of

facilityComments

Dabhasa Mar-15 API Successful audit in FY15, as per management

Ankleshwar FY15 API Successful audit in FY15, as per management

Ahmedabad Dec-14 API Oncology APIs. No external or captive sales. FDA issued Warning Letter in Dec 2015

Moraiya Sep-14 FormulationsOral solids, injectables, nasal, transdermals. Largest formulations facility and only injectables facility. ~60% of

US sales. FDA issued Warning Letter in Dec 2015

Baddi May-15 FormulationsOral solids. Form 483 with observations issued post last inspection. Per management, observations minor as

approvals continue (Amiloride HCl approved in Aug 2015)

Ahmedabad - Formulations Topicals. Awaiting first inspection

Ahmedabad SEZ Feb-15 Formulations Oral solids including oncology. EIR received in Q2FY16

Ahmedabad SEZ Apr-15 Formulations Cytotoxic injectables (erstwhile BSV JV). Form 483 with observations issued post last inspection

Ahmedabad SEZ FY15 Formulations Cytotoxic injectables (Zydus Hospira JV). Successful audit in FY15, as per management

Ahmedabad SEZ May-15 Formulations Transdermal facility (part of Zydus Technologies). No observations in the last inspection

St. Louis, USA May-15 FormulationsPart of Nesher (acquired in 2011). Form 483 with observations issued post last inspection. Under consent

decree since 2009. Product launches have resumed (morphine sulphate in Q1FY16)


Rs. 333

Target

Rs. 352

Rating

ADDFinancial Summary




Revenue 72,240 86,513 99,522 110,868 129,390 Revenue 13.6% 19.8% 15.0% 11.4% 16.7%

EBITDA 12,001 17,557 23,162 24,457 29,401 EBITDA 6.7% 46.3% 31.9% 5.6% 20.2%

Depreciation (2,012) (2,873) (2,971) (3,451) (3,870) Adjusted PAT 23.0% 43.2% 26.7% 12.4% 22.1%


Interest (1,181) (679) (448) (443) (280) EBITDA 16.6% 20.3% 23.3% 22.1% 22.7%

Other Income 507 554 856 895 937 Adjusted PAT 11.0% 13.2% 14.5% 14.7% 15.3%

Forex gain/(loss)/exceptional items 108 0 (43) 0 0 Performance ratios

PBT 9,422 14,559 20,556 21,458 26,188 RoE 24.8% 29.9% 30.0% 26.9% 26.5%





Deferred Tax 961 586 586 586 586 Financial stability ratios

Total debt 27,004 26,513 20,851 14,592 7,809 Net Debt to Equity (x) 0.6 0.4 0.2 0.1 (0.0)

Other liabilities and provisions 6,959 8,258 9,009 9,598 10,201 Net Debt to EBITDA (x) 1.8 1.1 0.6 0.3 (0.0)




Investments 866 1,544 1,544 1,544 1,544 Interest cover (x) 8.5 21.6 45.1 47.4 91.2


Loans & advances 8,346 9,486 10,399 10,919 11,465 Fully Diluted Shares (mn) 1,024 1,024 1,024 1,024 1,024


Total assets 70,757 79,562 86,178 93,574 103,809 EPS (Rs.) 7.8 11.2 14.2 16.0 19.5

Cash Flows P/E (x) 42.4 29.6 23.4 20.8 17.0


Capex (4,682) (5,124) (6,000) (7,000) (8,500) EV/ EBITDA (x) 29.7 20.3 15.4 14.6 12.1


Cash flows from Financing (5,287) (3,511) (9,060) (10,092) (10,762) Price to BV (x) 9.9 8.0 6.3 5.1 4.1

Torrent Pharmaceuticals CMP

Rs. 1479

Target

Rs. 1635

Rating

BUY

Page 51

Stock performance

1m 3m 12m

TRP 4% -2% 29%

Sensex 0% 0% -5%

BSEHC 4% -5% 16%



FY15 46,535 10,202 7,509 44.4 33.3 25.6 34.2% 22.4%

FY16E 71,043 26,007 15,893 93.9 15.7 10.1 49.9% 30.5%

FY17E 71,343 17,860 11,996 70.9 20.9 14.7 27.6% 21.5%

FY18E 77,499 19,874 13,831 81.7 18.1 13.2 25.8% 23.3%

Date 4 Jan 2016

Market Data

SENSEX 26161

Nifty 7963

Bloomberg TRP IN

Shares o/s 169mn


52-wk High-Low Rs. 1,720-1,030


Index member BSE200


Promoters 71.3

Institutions 18.5

Public 10.3

Company Update

Clinical execution; maintain ‘BUY’



Strong execution on low-competition opportunities in the US (such as gCymbalta and gAbilify) has been the

highlight of Torrent’s performance in the last two years. In the domestic market, the company’s focus on sales

force productivity and profitability by rationalizing bonus offers to the channel are steps in the right direction.

Despite weak growth in recent quarters on account BRL depreciation, Torrent’s business in Brazil remains

fundamentally strong. Strong free cash generation (>Rs. 30bn in FY16-18, according to our estimates) should

support inorganic growth initiatives, including product acquisitions in the US, as indicated by the management.

Maintain ‘BUY’ rating


Dahej approval along with gNexium and gDetrol LA to support US sales in FY17: Torrent’s execution on low-

competition product opportunities in the US has been near-perfect in recent years. To address its weak US pipeline

(only 19 ANDAs pending approval) the company is adding 550 people (to its existing R&D workforce of 600) and plans

to step up ANDA filings (18-20 per year) from 1HFY17, with focus on oncology, dermatology and ophthalmology.

Torrent’s new facility at Dahej was inspected by FDA in April 2015. Management expects EIR shortly and plans to

commercialize the facility from 4QFY16. This should ease capacity constraints and help improve Rx shares in existing

products. We expect Dahej approval along with gNexium and gDetrol LA to support US sales in FY17, partially offsetting

the expected price erosion in gAbilify

New product launches and improvement in productivity to boost India sales: After successful integration of the

acquired portfolio from Elder, Torrent has started focusing on portfolio expansion and profitability improvement in its

domestic business. Apart from restructuring its field force, the company has rationalized discounts and bonus offers to

the channel and these initiatives are expected to impact margins positively going forward. The company is currently

developing a product basket of 180 products across dermatology (cosmetic products), pain, nutraceuticals and

nephrology segments, which will be launched over the next five years. Following its recent launch of biosimilar rituximab

(licensed from Reliance Life Sciences), Torrent plans to launch biosimilar adalimumab in 4QFY16

Valuation and stock view: At CMP of Rs. 1,479, Torrent trades at 21x and 18x of our FY17E and FY18E earnings,

respectively. Strong free cash generation (>Rs. 30bn in FY16-18 according to our estimates) should support inorganic

growth initiatives, including product acquisitions in the US, as indicated by the management. We value the stock at 20x

FY18E EPS of Rs. 81.7 to arrive at a target price of Rs. 1,635. Maintain ‘BUY’


Rs. 1479

Target

Rs. 1635

Rating

BUY

Page 52

Weak ANDA pipeline, filings to pick up from H1FY17


Drug Brand Innovator $mnPatent

expiryComments

amlodipine; olmesartan

medoxomilAzor Daiichi Sankyo 166 Oct-16

Mylan lost litigation on '599 patent (expiring Oct 2016). Teva and Macleods are other

known players. All (inc. Torrent) have TAs

olmesartan medoxomil Benicar Daiichi Sankyo 350 Oct-16Mylan lost litigation on '599 patent (expiring Oct 2016). Apotex and Teva are other

known players. Torrent has TA

rosuvastatin calcium Crestor AstraZeneca 2,918 Jul-16Actavis settled to launch on May 2, 2016. 9 players with TAs. Torrent has TA for 5mg

tab

sildenafil citrate Viagra Pfizer 1,300 Apr-20Teva and Mylan settled litigations to launch in Dec 2017. Actavis, Apotex, Amneal

Pharmaceutical, Hetero and Invagen are other known players. Torrent has TA

valsartan;

hydrochlorothiazideDiovan HCT Novartis 170 Expired

7 players (Aurobindo, Mylan, Lupin, Watson, Alembic, Apotex and Macleods) already

launched. Torrent has TA, can launch on approval

nebivolol hydrochloride Bystolic Forest Labs 293 Dec-21Multiple players (including Torrent) settled for launch 3 months ahead of patent expiry

(Dec 2021)

rivaroxaban Xarelto J&J 830 Dec-20

Bayer and Janssen sued Aurobindo, Breckenridge, Micro, Mylan, Prinston,

Sigmapharm and Torrent in Oct 2015 on '456 (Feb 2021), '860 (Dec 2020) and '339

(Dec 2020) patents. 30-month stay expires in Apr 2018

roflumilast Daliresp AstraZeneca NA Mar-24

Takeda/AZN sued Mylan, Hetero, Citron, Breckenridge, Prinston, Apotex, Strides,

Cadila, Micro and Torrent in May 2015 on patents ‘206 (Mar 2024), ‘064 (Mar 2024)

and ‘142 (Mar 2024). 30-month stay expires in Nov 2017

fingolimod Gilenya Novartis 2,500 Feb-19‘283 (expiring in 2026) invalidated recently. Apotex and Mylan are other known filers.

Likely launch post expiry of compound patent in Feb 2019

candesartan cilexetil Atacand AstraZeneca 120 Expired Torrent has DMF. Sandoz (May 2013) and Apotex (Jan 2014) in the market

candesartan cilexetil; HCTZ Atacand HCT AstraZeneca 56 ExpiredTorrent has DMF. Apotex (Dec 2012), Dr Reddy’s (Jun 2013), Macleods (Feb 2015)

and Mylan (Dec 2012) in the market

darifenacin hydrobromide Enablex Allergan 170 Aug-16Torrent sued in Dec 2013. Teva, Par (FTFs) settled for Mar 2016 launch. Torrent

likely to launch after FTF exclusivity

lurasidone hydrochloride Latuda Sunovion 1000 Jul-18 Torrent has DMF. Teva, Emcure and Invagen have para IV filings

paliperidone Invega J&J 600 Expired Torrent has DMF. Actavis (Sep 2015) and Mylan (Sep 2015) in the market

quetiapine fumarate XR Seroquel XR AstraZeneca 738 Mar-17Torrent has DMF. Highly competitive (more than 10 para IV filers including Lupin and

Intas)


Rs. 1479

Target

Rs. 1635

Rating

BUY

Page 53

Strong growth in FY16 on the back of gAbilify

Dahej approval along with gNexium and gDetrol LA to support US sales in FY17, partially offsetting the expected price erosion in gAbilify


(Rs. mn) FY14 FY15 FY16E FY17E FY18E FY15-18E CAGR

India 11,610 16,090 18,570 21,634 25,204 16%

Brazil 5,330 6,060 5,180 5,525 6,520 2%

Others 3,050 3,210 3,460 3,875 4,340 10%

Branded 19,990 25,360 27,210 31,034 36,064 12%

US 7,760 8,320 29,894 25,170 24,654 43%

Others 10,160 9,900 9,408 10,467 11,723 6%

Generic 17,920 18,220 39,302 35,637 36,377 26%

Others (including contract manufacturing) 3,937 2,955 4,530 4,672 5,059 19%

Revenues 41,847 46,535 71,043 71,343 77,499 18%

% growth 30% 11% 53% 0% 9%

Impressive track record of monetizing low-competition opportunities


20 19 18 24 27 28 28 36 40 40 6

41 18

~100 ~70

1Q

FY

14

2Q

FY

14

3Q

FY

14

4Q

FY

14

1Q

FY

15

2Q

FY

15

3Q

FY

15

4Q

FY

15

1Q

FY

16

2Q

FY

16

Base sales ($mn) gCymbalta ($mn) gAbilify ($mn)

• Torrent’s new facility at Dahej was inspected by FDA in April 2015. Management

expects EIR shortly and plans to commercialize the facility from 4QFY16. This

should ease capacity constraints and help improve Rx shares in existing products

• Torrent’s US pipeline appears weak (vs. larger peers) with only 19 ANDAs

pending approval. The company is in the process of adding ~550 people (to its

existing R&D workforce of 600) and plans to step up ANDA filings (18-20 per

year) from FY17 with focus on oncology, dermatology and ophthalmology

• In our view, Torrent’s strong execution capabilities as evident from recent low-

competition launches is a key positive

o gAbilify – Torrent launched gAbilify at-risk in April’15; recorded sales of

~$170mn in 1HFY16

o gNexium – Torrent was the 5th generic company to launch the drug (launched

in Oct 2015)

o gDetrol LA – Torrent is the 3rd generic company to launch the product

(launched 2QFY16). We expect gDetrol LA to be a meaningful contributor in

2HFY16 and FY17


Rs. 1479

Target

Rs. 1635

Rating

BUY

Page 54

Financial Summary




Revenue 41,847 46,535 71,043 71,343 77,499 Revenue 30.3% 11.2% 52.7% 0.4% 8.6%

EBITDA 9,515 10,202 26,007 17,860 19,874 EBITDA 37.5% 7.2% 154.9% -31.3% 11.3%

Depreciation (870) (1,907) (2,450) (2,871) (3,195) Adjusted PAT 41.1% 13.2% 111.6% -24.5% 15.3%


Interest expense (590) (1,752) (1,960) (1,847) (1,121) EBITDA 22.7% 21.9% 36.6% 25.0% 25.6%

Other income 380 2,856 2,210 2,238 1,840 Adjusted PAT 15.7% 15.2% 21.7% 16.3% 17.4%

One-off income/(expense) 0 0 530 0 0 Performance ratios

PBT 8,435 9,398 24,337 15,380 17,398 RoE 39.9% 34.2% 49.9% 27.6% 25.8%

PAT after minority interest 6,635 7,509 16,423 11,996 13,831 RoCE 28.1% 22.4% 30.5% 21.5% 23.3%

Adjusted PAT after minority interest 6,635 7,509 15,893 11,996 13,831 RoA 21.2% 15.7% 23.9% 16.5% 18.9%



Deferred Tax (182) 1,047 1,047 1,047 1,047 Financial stability ratios

Total debt 11,318 27,404 25,737 16,017 5,173 Net Debt to Equity (x) 0.1 0.8 0.3 0.1 (0.1)

Other liabilities and provisions 5,586 6,632 7,103 7,588 8,086 Net Debt to EBITDA (x) 0.2 1.8 0.4 0.2 (0.3)




LT investments 0 1 0 0 0 Interest cover (x) 14.7 4.7 12.0 8.1 14.9

Cash and ST investments 9,551 8,650 14,323 12,621 10,692 Valuation metrics



Total assets 35,750 59,992 72,732 72,802 73,393 Adj EPS (Rs.) 39.2 44.4 93.9 70.9 81.7

Cash Flows P/E (x) 37.7 33.3 15.7 20.9 18.1


Capex (4,001) (22,026) (4,100) (4,100) (4,100) EV/ EBITDA (x) 27.5 25.6 10.1 14.7 13.2


Cash flows from Financing 864 12,123 (5,911) (14,055) (14,656) Price to BV (x) 13.2 10.0 6.4 5.2 4.2


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Absolute

Rating

Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCEStock expected to provide returns of <5% – -10% over a 1-year

horizon

ADDStock expected to provide positive returns of >5% – <15% over a 1-year

horizonSELL Stock expected to fall >10% over a 1-year horizon


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