Pharma1 260710

India – Pharma
Dr India 2Q2010
Aiming high in the US generics market

India - Pharma
Dr Bino Pathiparampil
bino@iiflcap.com
(91 22) 4646 4648
Ankit Jain
ankit.jain@iiflcap.com
(91 22) 4646 4675
Contents
Executive summary .................................................................. 1

Structural growth in base business ............................................ 2
Special products drive near-term growth .................................... 7
The right strategy, relevant competencies ................................. 11
Appendix .............................................................................. 20
Companies
Biocon .................................................................................. 25
Cipla Ltd ............................................................................... 29
Dr Reddy’s Laboratories .......................................................... 33
GlaxoSmithKline Pharma ........................................................ 37
Glenmark Pharma Ltd ............................................................. 41
Lupin Ltd .............................................................................. 45
Opto Circuits ......................................................................... 49
Ranbaxy Laboratories ............................................................. 53
Sun Pharma .......................................................................... 57
bino@iiflcap.com
India - Pharma
Executive summary
Sensex vs BSE Healthcare
We expect 20%-plus revenue CAGR coupled with significant
220
Sensex BSE Healthcare margin expansion for Indian generics players in the US over the
200
next five years. This phase of growth would be driven by: 1)
180 structural factors that favour an increase in Indian pharmas’
160 share of the US generics market from the current 9% by
140 revenue; 2) large product-specific opportunities from US$96bn
120 worth of patent expiries; 3) unique opportunities with low
100 competition for extended periods; and 4) strong competencies
80 that will help them capitalise on these. We estimate upsides
from disclosed patent challenge exclusivities in the US at about
Dec-09
Jun-09
Oct-09
Feb-10
Jun-10
Apr-09
Apr-10
Aug-09
US$2.5bn over the next five years. Undisclosed opportunities

and unique products could throw up more positive surprises,
Source: IIFL Research
supporting Indian pharmas’ premium valuations. An expanding
product basket and wider distribution reach would accelerate
market share gains in the base business as well. Our top picks
are Dr Reddy’s Labs and Sun Pharma.
Underlying business to get stronger: The base business of Indian

players in the US will continue to be strong, notwithstanding
concerns on competition, price erosion, FDA quality control, and a
longer FDA approval process. The imperative to reduce healthcare
costs will ensure that adoption of generics in the US market
continues to increase. Indian players still account for less than 9% of
the market, and we expect significant market share gains organically
as well as inorganically.
Special products provide further upside: Over CY10-14, Ranbaxy,

Sun Pharma and Dr Reddy’s could generate revenues of US$1.6bn,
US$230m and US$202m, respectively, from market exclusivities in
the US related to already-disclosed patent challenges. The patent cliff
involves a US$96bn market at innovator prices, and we expect more
upsides from undisclosed opportunities. Early indicators of these
upsides are Sun Pharma’s strong growth guidance for FY11, and Dr
Reddy’s revenue target of US$3bn for FY13.
The right focus and competencies: The US contributes a third of

the topline of the top five Indian generics firms by revenue. These
firms’ US revenue has registered 28% CAGR over FY06-10 vs overall
topline growth of 18% annually. Indian players already possess best-
in-industry competencies in product development, regulation,
manufacturing and patent litigation. We see further improvement in
the product basket and distribution reach. Biosimilars could be a
support for long-term growth.
Valuation matrix
Target FY11ii FY11ii base business FY10-12ii
CMP Mkt cap
price Rev EBITDA EPS Rev EBITDA EPS Adj* base
(Rs) (US$ m) Reco P/E
(Rs) (Rs m) (Rs m) (Rs) (Rs m) (Rs m) (Rs) P/E EPS growth
Biocon 304 1,304 ADD 342 27,286 5,380 18.3 16.6 27,286 5,380 15.3 18.1 17.9%
Cipla 338 5,828 REDUCE 328 62,031 15,877 14.1 24.0 62,031 15,877 13.5 24.9 13.6%
Dr Reddy’s 1,422 5,154 BUY 1,803 78,293 18,358 66.3 21.4 77,051 17,364 63.3 21.7 44.6%
Glaxo 2,078 3,779 ADD 2,232 21,668 7,497 67.6 30.7 21,668 7,497 56.8 32.7 14%
Glenmark 262 1,521 SELL 252 29,034 8,086 16.7 15.7 29,034 8,086 15.8 16.4 31.4%
Lupin Ltd 1,879 3,591 REDUCE 1,807 58,430 11,658 89.4 21.0 58,430 11,658 88.5 21.1 17.7%
Opto Circuits 230 902 BUY 293 13,065 4,311 18.9 12.2 13,065 4,311 16.9 13.2 29.2%
Ranbaxy 436 3,939 SELL 411 89,715 17,506 30.5 14.3 76,519 5,930 2.2 164.4 NA
Sun Pharma 1,702 7,526 BUY 2,111 43,239 14,270 68.6 24.8 40,443 12,294 46.5 31.3 46.0%
Source: IIFL Research. Priced as at close of business on 15 June 2010. *Adjusted for non-recurring income and value thereof.
bino@iiflcap.com 1
India - Pharma
Structural growth in base business

Large homogenous market helps faster penetration
Indian players can The US generic market represents an immense growth opportunity
significantly benefit from for Indian generics players with world-class expertise, but modest
the US market, which resources compared to their Western big-pharma counterparts. They
accounts for over 40% of
can penetrate the US generics market faster and easier than any
the US$80bn global
generics market other pharmaceutical market in the world. The US market also offers
large scope for scaling up operations, as the country accounts for
more than 40% of the US$80bn global generics market. Although
emerging markets’ growth will likely outpace that of the US market
in the medium to long term, these markets are fragmented, with
each country having its own separate regulatory framework,
distribution network and legal structure. In contrast, the US is one
large market that offers the following advantages that can
significantly benefit Indian players:
• approval from a single agency can open up a large US$35bn
market;
• as the market is dominated by ‘generic generics’, it is easier to
penetrate than the branded-generic markets in the emerging
world;
• there is no need of large upfront investments in sales and
marketing infrastructure—an efficient chain of distributors
already exists; and
• the gestation period is shorter, as there is no need to build
relationships with physicians.
Figure 1: The US accounts for 40% of the global generics market

Global generics market (US$ bn)
Europe, 27
Others, 18
US, 35
Total market size(2008)-US$80bn
Source: Teva, IMS, IIFL research
Cost saving ensures continued ‘genericisation’

Reduction in healthcare costs is an imperative throughout the
developed world, not least the US. The US was one of the first
countries to promote reduction in prescription-drug costs through
adoption of generics. This has already taken generics’ share of
volumes to over 60%. That said, there is still considerable room for
growth from: 1) further increase in generics’ share of the pharma
market; and 2) extension of healthcare coverage to hitherto
uncovered Americans as part of healthcare reforms. At present,
about 15% of the US population has no medical insurance and thus
has virtually no access to formal healthcare services. When the
healthcare reform brings them under some form of coverage, 47m
bino@iiflcap.com 2
India - Pharma
Americans will be added to the potential consumers of healthcare.

Most of them would be covered under low-end policies—an ideal
market for generics.
Expenditure on prescription
drugs is a prime target for Savings from use of generics are too large to be ignored by
healthcare cost reduction policymakers—according to data from the Generic Pharmaceutical
Association (GPhA), generic drugs saved the American healthcare
system more than US$734 billion over 1999-2008, with ~US$121
billion in savings in 2008 alone. Healthcare costs have already
crossed 16% of GDP in the US; if this growth continues unchecked,
they will reach 20% by 2017, according to the Centre for Medicare
and Medicaid Studies. Expenditure on prescription drugs is one of the
fastest-growing components of healthcare costs, and hence is a
prime target for cost reduction.
Figure 2: US generics penetration will continue to improve
US Generic penetration by value US Generic penetration by prescription volume
70%
60%
50%
40%
30%
20%
10%
0%
2001 2002 2003 2004 2005 2006 2007
Source: Teva
Figure 3: Rising healthcare costs continue to spur increases in generics’ penetration

Health expenditure as percent of GDP
25%
20%
15%
10%
5%
0%
1960 1970 1980 1990 2000 2006 2012e 2017e
Source: Centre for Medicare & Medicaid services
bino@iiflcap.com 3
India - Pharma
Figure 4: Prescription-drug cost is growing faster than overall healthcare costs
Prescription drug expenditure grow th (annualised)

Health expenditure grow th (annualised)
14%
12%
10%
8%
6%
4%
2%
0%
1970 1980 1990 2000 2006 2012e
Source: Centre for Medicare & Medicaid services
Figure 5: Large savings from use of generics in US cannot be ignored

(US$ bn) Annual savings from
Annual savings from useuse of generics
of generics
140
120
100
80
60
40
20
0
1994 1999 2000 2008
Source: GPhA
Small base to help high growth for Indian players

Indian companies have low Notwithstanding rapid growth over the past decade, Indian players
market share, in our view, are still small in the US generics market. Only Lupin and Dr Reddy’s
as they were late entrants Labs have market shares of over 2% in the market; all Indian
in the US market…
companies together have only 9% share of the market. The main
reason for Indian companies’ low market share, in our view, is that
they were small players who entered late in the US market—they
made a major entry almost a decade after market leaders like Teva,
Sandoz, Mylan and Watson. By the time Indian companies developed
the necessary competencies to effectively compete in the market,
the leading global players had already built large product portfolios
and wide distribution networks. There was also significant
consolidation in the market, which has so far largely evaded the
Indian players. Indian companies had neither the size to acquire
other firms, nor significant presence in the US market to make them
attractive targets.
... but they have significant This is changing—a relatively small base, together with competencies
scope for growth that can match any of the leading players, can help Indian players
maintain their high growth rates in the US market in the long term.
Furthermore, Indian companies have become significant enough in
the market to start active participation in the consolidation process,
though big-ticket acquisitions are some time away. Gains from
exploiting the patent cliff over the next 4-5 years will add to this
structural growth momentum, in our view.
bino@iiflcap.com 4
India - Pharma
Figure 6: Indian players have substantial scope for growth in the US

Market share - US generic companies (2008)
25%
20%
15%
10%
5%
0%
Mallinckrodt
Dr. Reddy's
Mylan
Greenstone
Qualitest
Teva/Barr
Par
Ranbaxy
Actavis US
Watson
Lupin
Lannett
Sandoz
KV
Apotex
Corp
Source: Dr Reddy’s Labs, IIFL Research
Figure 7: Indian companies yet to gain breadth of product offering

(nos) No of products in the US
500
405
400
300
204 200
200 150 142
83
100 50 48 39
Glenmark
Pharma
Teva
Mylan
Ranbaxy
Reddy's
Watson
Lupin
Sandoz
Sun
Source: Teva, IIFL Research Dr
The ramp-up is fast and visible

Indian players are among Indian companies are ramping up quickly in the US market—in a
the most prolific ANDA decade, we expect to see at least a couple of them among the top
filers in the US five generics players in the US. They are choosing higher-value and
niche products to break through to US distributors and from there
on, gain more share in commoditised products. At the same time,
they are also expanding their product basket so that they can
compete effectively with the market leaders in the race for large–
scale purchases by nationwide distributors. According to data from
Pharmabiz, Indian companies accounted for 408 of the 1,394 ANDAs
approved by the US FDA over the last three years. In 2009 alone,
Indian companies accounted for 132 of the 419 ANDA approvals by
US FDA. This represents a share of roughly 30% in ANDA
approvals—compared to Indian companies’ current combined
revenue share of the total market at 7-9%. The large number of
ANDAs pending approval with US FDA for Indian companies also
indicates that they are well-positioned to capture a significant share
of the pie.
bino@iiflcap.com 5
India - Pharma
Figure 8: Indian companies hold a large share of FDA generic filings

(nos) Pending ANDA approvals
140
120
100
80
60
40
20
0
Sun Pharma Lupin Dr Reddy's Ranbaxy Cipla Glenmark
Source: Company reports, IIFL Research
bino@iiflcap.com 6
India - Pharma
Special products drive near-term growth

An overwhelmingly huge Adding to the structural growth story of Indian generic players in the
number of patented drugs US market is the “patent cliff”—the overwhelmingly huge number of
are going off-patent patented drugs going off-patent between 2010 and 2014, compared
between 2010 and 2014
to other periods. This throws open a large part of the market to
generics companies, apart from the generation of several one-off
opportunities of market exclusivity for some companies in select
drugs.
Drugs with about US$96bn in cumulative annual sales, accounting

for almost 40% of the total US pharma market in 2009, will go off-
patent over the next five years. Assuming average price erosion of
60% and average 5-month market exclusivity for first-to-file players,
the market size of one-off opportunities itself works out to about
US$19bn. Indian generics players have cornered about US$2.5bn, or
about 16% of this market. This is a significant improvement over
Indian companies’ current overall share of less than 9% in the US
generics market.
Indian players will corner a Further, beyond the period of market exclusivity for selected players,
much larger share of the the market will open up for the gamut of generics companies.
market for new generics Competition will intensify and prices will collapse. Even if we assume
90% price erosion, the market for these new generics would be
worth annual sales of some US$10bn—an addition of 29% to the
current market of US$35bn annually. Considering the 16% share in
the exclusivities upside and the 30%-plus share in current ANDA
approvals, we believe Indian players will corner a much larger share
of the market for new generics (compared to their current share of
9%). Thus, we expect Indian players to expand their overall market
share significantly over the next 4-5 years.
bino@iiflcap.com 7
India - Pharma
Figure 9: Major drugs facing new generic competition in the US over 2010-15
US sales Expected
Innovator
Generic name Brand name Therapy area (2009) First Para IV filer generic entry
company
(US$ m) date
Donepezil Aricept Alzheimer's disease Pfizer/Eisai 1,886 Teva 2010
Thrombosis,
Enoxaparin Lovenox Sanofi Aventis 2,264 Amphastar Pharma 2010
pulmonary embolism
Venlafaxine Effexor XR Depression Pfizer 1,899 Teva 2010
Johnson &
Levofloxacin Levaquin Quinilone antibiotic 1,745 Mylan 2010
Johnson
Docetaxel Taxotere Oncology Sanofi Aventis 1,235 Hospira 2010
Atorvastatin Lipitor Cholesterol Pfizer 5,650 Ranbaxy 2011
Clopidogrel Plavix Anti-platelet Sanofi Aventis 4,000 Apotex 2011
Montelukast Singulair Asthma/COPD Merck 3,750 Teva 2011
Pioglitazone Actos Diabetes Takeda 3,000 Mylan 2011
Quetiapine Seroquel Schizophrenia Astra Zeneca 3,400 Teva 2011
Olanzapine Zyprexa Schizophrenia Eli Lilly 3,000 Ivax 2011
Losartan Diovan Hypertension Novartis 1,860 Ranbaxy 2012
Escitalopram Lexapro Depression Forest 2,750 Ivax 2012
Ziprasidone Geodon Schizophrenia Pfizer 1,160 Lupin 2012
Modafinil Provigil Narcolepsy Cephalon 925 Teva, Mylan, Barr, Ranbaxy 2012
Sildenafil Viagra Erectile Dysfunction Pfizer 1,000 Teva 2012
Oxycodone ER OxyContin Pain Purdue 2,900 Endo (10, 20, 40 mg); Teva (80 mg) 2013
Fibromyalgia, Impax, Actavis, Sandoz, Wockhardt,
Duloxetine Cymbalta Eli Lilly 2,850 2013
depression Cobalt, Lupin, Aurobindo, Sun, Anchen
Barr, Cobalt, Lupin, Orchid, Teva,
Memantine Namenda Alzheimer's disease Forest 1,100 Upsher-Smith , Wockhardt, Dr. Reddy's, 2013
Mylan, Amneal ,Genpharm
Otsuka and Teva, Sandoz, Barr,
Aripiprazole Abilify Schizophrenia 1,556 2014
BMS Apotex, Synthon
Boehringer and
Tiotropium Spiriva COPD 1,003 NA 2014
Pfizer
Celecoxib Celebrex Osteoarthritis Pfizer 880 Teva 2014
Imatinib Gleevec Oncology Novartis 1,088 Sun Pharma 2015
Ezetimibe Zetia Cholesterol Merck 1,500 Glenmark 2015
Figure 10: Key product exclusivities for Ranbaxy in the US market

Innovator
Probable
Generic name Brand Innovator Therapy area market size
launch date
(US$ m)
Donepezil Aricept Eisai / Pfizer Alzheimer's 1,886 2010
Atorvastatin Lipitor Pfizer Anti-Cholesterol 5,650 2011
Antiviral, CMV retinitis, prophylaxis
Valganciclovir Valcyte Roche 240 2011
in immunosuppressed patients
Pioglitazone Actos Takeda Diabetes 3,000 2012
Valsartan Diovan Novartis Cardiovascular 1,860 2012
Modafinil Provigil Cephalon Narcolepsy 925 2012
Sirolimus Rapamune Wyeth- now Pfizer Transplant-rejection 201 2013
Esomeprazole magnesium Nexium AstraZeneca Gastric ulcer 1,850 2014
Figure 11: Key product exclusivities for Dr Reddy’s Labs in the US market
Innovator
Probable
launch date
(US$ m)
Rosiglitazone Avandia GSK Diabetes 520 2012
Rivastigmine Exelon Novartis Alzheimers 180 2012
desloratadine +
Clarinex D24 Merck Allergy 22 2012
pseudoephedrine
desloratadine +
Clarinex D12 Merck Allergy 15 2012
pseudoephedrine
Desloratadine Clarinex reditabs Merck Allergy 8 2012
Finasteride Propecia Merck Hair loss 150 2013
bino@iiflcap.com 8
India - Pharma
Figure 12: Key product exclusivities for Sun Pharma in the US market
Innovator
Probable
launch date
(US$ m)
Carbidopa, leveodopa
Stalevo Orion/Novartis Parkinson's 217 2010
and entacapone
Tiagabine Gabitril Cephalon anticonvulsant 51 2011
Atomoxetine Strattera Lilly ADHD 446 2012
Rivastigmine Exelon Novartis Alzheimers 150 2012
Memantine Namenda Forest Alzheimers 1,100 2015
Imatinib Gleevev Novartis oncology 1,088 2015
neuralgia, neuropathy,
Pregabalin Lyrica Pfizer 1,600 2018
anxiety disorder
Figure 13: Key product exclusivities for Lupin in the US market

Innovator
Probable
launch date
(US$ m)
Metformin ER Fortamet ER Andrx (Watson) diabetes 50 2011
Ciprofloxacin oral
Cipro DS Bayer anti-infective 30 2011
suspension
Ethinyl
Loseasonique Teva/Barr OCP 5 2012
estradiol/levonorgestrel
Memantine Namenda Forest Lab Alzheimers 1100 2015
Metformin HCL Glumetza Depomed diabetes 35 2016
neuralgia, neuropathy,
Pregabalin Lyrica Pfizer 1600 2018
anxiety disorder
Lanthanum Fosrenol Shire kidney disease 86 2018
Figure 14: Key product exclusivities for Glenmark in the US market

Innovator
Probable
launch date
(US$ m)
Trandolapril +
Tarka Abbott cardiovascular 64 2014
Verapamil
Ezetimibe Zetia MRK/SGP cholesterol 1,500 2016
Unique products offer large value in small opportunities

Indian players have Indian pharma companies have adopted a new strategy for the US
adopted a new strategy of market over the past couple of years, identifying products in which
targeting unique competition remains low for extended periods. This is a shift from
opportunities with limited
their earlier model, which concentrated only on large products that
competition in the
marketplace get commoditised soon. These unique products usually have three
features in common:
● they address niche segments of the market, where a larger
player may not be interested in investing resources;
● they are relatively small-revenue products (usually US$25m-
100m annual revenue) that do not attract significant competition;
and
● the technological barriers to entry are higher, making these
products inaccessible to low-end players competing on price.
We view this as an important strategic shift to a higher stage in the

value chain—identifying such gaps in the market and investing on
them in a timely manner calls for superior competencies like market
foresight, advance planning, acquiring necessary technological
capabilities, additional regulatory experience and product portfolio
management. These competencies are typically attributes of
innovator companies.
bino@iiflcap.com 9
India - Pharma
The types of unique opportunities vary significantly across products

and companies—there is no set pattern. This makes it an even more
commendable achievement—Indian players have employed early at-
risk launches, niche product filings with few or no competitors,
differentiated delivery systems, marketing of branded products and
development of technologically challenging products to gain unique
low-competitive environments in the market. We list some of these
products that are already contributing revenues and some that are
likely to contribute in future.
Figure 15: Unique products demonstrate the move up the value chain
Company Product Key feature
Private-label supply of OTC drug; in market long before patent expiry; low competition for up to two
Prilosec OTC
years
Technologically challenging product; patents expired, but hardly any other generic filer; still growing
generic Arixtra
market; low competition for 2-3 years
Dr Reddy's
Allegra D24 Potential at-risk launch, no other known generic filers, up to three years of low competition
Technologically challenging extended-release formulations of desloratadine—small in market size,
Clarinex D12/24/Reditabs but Dr Reddy's has settled with innovator for first generic launch and will have an extended period of
high profitability.
Has been selling as branded generic for four years, under a brand name acquired from Wyeth. No
Suprax
other generics approved till now.
Lupin Aerochamber Inhalation device product acquired from Forest Labs, sold through physician sales force
Antara Patented product, bought from Oscient, being sold through a physician-focussed sales force
Allernaze Patented new product, expected to be launched soon and sold through prescriptions
Launched at risk in February 2008; had been driving Sun Pharma’s US revenues for almost two
generic Protonix
years before discontinuation in May 2010.
Sun Pharma Sun developed a tablet form of Wyeth's Effexor XR capsules; this could have been a long-term
Generic Effexor XR opportunity if it had succeeded in getting timely FDA approval. But it got entangled in a citizen's
petition to FDA and has not got approval till date.
Competition in dermatology products is normally low, and this therapeutic area is generally
Glenmark Vanos considered niche. Glenmark does not have the first-to-file exclusivity for this product, but could be the
second entrant, and achieve significant share and maintain it for an extended period.
bino@iiflcap.com 10
India - Pharma
The right strategy, relevant competencies

Strong focus on the US market paying off
Indian pharma companies’ The US generics business is a major source of revenues for all large
revenues from the US Indian pharma players, except Glaxo Pharma and Piramal
market have grown faster Healthcare, who sell formulations only in the domestic market. It is
than their overall revenues
particularly important for Dr Reddy’s Labs and Sun Pharma, which
derived 24% and 28%, respectively, of their FY10 revenues from the
US. With more product acquisitions and launches in the US, the
market has increasingly become important for Lupin, which has built
a strong branded-product business there. We expect the US’s
contribution to Lupin’s revenue to increase from 34% in FY10 to 38%
in FY11. Ranbaxy has historically been the largest Indian player in
the US market, with more than US$400m revenue in CY08, but has
been hit by manufacturing quality issues at several of its facilities.
Figure 16: US formulations is a major revenue contributor

US formulations as a % of total revenues -FY10/CY09
40%
33.9%
35%
29.1%
30% 27.5%
25.6%
23.9%
25%
20%
15.0%
15%
10%
5%
0%
Lupin Glenmark Sun Pharma Ranbaxy Dr Reddy's Cipla
Indian companies’ focus on the US has paid off handsomely: over

the last four years, most companies’ revenues from that market
have grown faster than their overall revenues. We expect this trend
to continue for the next 4-5 years as well.
Figure 17: US revenues have grown faster than the rest of the business*
Total revenues CAGR (4 year) US revenues CAGR (4 year)
100%
89%
79%
80%
64%
60%
36%
40% 31%
28% 25% 25%
20%
8%
3%
0%
Dr Reddy's Glenmark Lupin Ranbaxy Sun Pharma
* Revenue addition from major acquisitions excluded from the data

bino@iiflcap.com 11
India - Pharma
Fast catching up on market share drivers

The US market is dominated by ‘generic generics’—drugs are more
commoditised than in a ‘branded–generic’ market. In such
commoditised markets, there are various classes of customers that
wield considerable bargaining power—such as insurance companies,
governments and patients themselves. Thus, prices are the most
important factor in driving sales. That said, price is not the only
factor—players’ market shares are also sensitive to perception of
quality, reliability of supply to distributors, distribution reach, size of
product basket and relationships with customers (mainly
distributors). These attributes take time to develop, which explains
the lag between Indian players and the large players in the US
generics market. We believe that Indian players are well on course
and will increasingly improve their score on all parameters over the
next few years. Inorganic opportunities may also play a significant
role.
The right competencies in place; distribution and product

basket have to expand
Indian players match other Over the past decade, Indian companies have made significant
global players in generic progress in acquiring and developing the competencies needed to
product development skills operate in the highly-competitive and rigorously regulated US
and regulatory and legal
market. Indian firms can now match most of their larger global peers
experience; market reach is
improving and product in product development, regulatory experience, legal expertise and
basket expanding quality manufacturing at competitive cost. But they have quite a way
to go before they can match their larger rivals in sales and
distribution. We expect this gap to be bridged over the next five
years through a mix of organic and inorganic routes. Sun Pharma’s
ongoing effort to acquire Taro Pharma in the US is a classic example
of how Indian companies can ramp up their sales and distribution
reach to match their larger competitors.
Figure 18: Indian companies have developed significant competencies for the US
market over the last decade
Competencies for success Where Indian players are
in US generics market
Product development skills Indian players have good chemistry and formulation skills, but have
some way to go before they can match the largest global
competitors.
Regulatory experience Large Indian pharma players have accumulated significant
regulatory experience over the past decade and can match any
competitor globally in this respect.
Legal experience Indian companies have mastered the legal aspects related to
patents and have emerged as major challengers to IP rights of big
innovator pharma companies.
Market reach Indian companies have considerable scope for improvement in this
area—their larger rivals such as Teva and Sandoz have much
wider sales networks and deeper customer relationships. We
expect Indian player to bridge this gap through organic as well as
inorganic routes.
Manufacturing issues are transient; no long-term concerns

A number of Indian pharma players were recently pulled up by the
US FDA on manufacturing and product-quality-related issues. In our
view, however, this issue has been overdone: a look at US FDA’s
record shows that such quality-related notifications are quite
common, and have been served on several global players from time
to time. The list of companies that have received warning letters
from the FDA include some of the leading global innovator pharma
companies, among them Wyeth, Merck and Abbott. Among the large
bino@iiflcap.com 12
India - Pharma
generic players in the US market, Teva, Sandoz and Apotex have

received warnings from the FDA.
Figure 19: FDA warning letters to Indian companies – last five years
Company Date Facility US FDA’s charges against the company
Ranbaxy Dec-10 Ohm Laboratories, NY, USA Improper investigation into a failed batch; failure to comply with the written
procedure to test stability and determine expiry dates; inadequate quality control
systems and checks; questionable entries by quality dept regarding checks;
failure to report to FDA complaints on products in the market
Lupin Ltd May-09 Mandideep, Bhopal, India Improper maintenance of records; inadequate aseptic training to staff;
inadequate response on quality systems and record-keeping; inadequate
investigation of sanitation issues in the facility; inadequate investigation of failed
batches
Dabur Oncology plc Apr-09 Bordon, UK Inadequate precaution against microbial contamination; inadequate investigation
of contamination; poor maintenance and calibration of equipments and utensils;
lax acceptance criteria in quality control checks; improper record-keeping
Caraco Oct-08 Detroit, Michigan, USA Inadequate review of products by quality control unit; inadequate investigation
Pharmaceuticals into discrepancies in product; contamination of products with other drug
chemicals; release of products against standard operating procedure; change in
operating procedure without adequate checks; improper record maintenance;
poor maintenance of equipment; up to three repeat violations of 2005, 2006 and
2008 observations
Ranbaxy Sep-08 Dewas, India Poor separation of penicillin and non-penicillin products; inadequate systems to
monitor contamination by beta-lactam products; poor production and quality
control, record-keeping: inadequate investigations into deviations; poor
organisational structure, procedures, resources and activities of the quality
control unit; poor aseptic precautions
Ranbaxy Sep-08 Paonta Sahib, India Inaccurate records of equipment-cleaning; persons recorded to have supervised
equipment-cleaning were absent on the day when it was carried out; potential
contamination of products
Ranbaxy Jun-06 Paonta Sahib, India Improper record maintenance; practice of discarding / disregarding data;
inadequate stability-testing programme; improper documentation of quality
sampling; erroneous process of quality sampling; inadequate laboratory
resources at the quality control unit; unexplained different markings on the same
product
Source: USFDA, IIFL Research
Figure 20: FDA warning letters to non-Indian companies – last five years
Company Date Facility US FDA’s charges against the company
Apotex Inc. Mar-10 Toronto, Canada Lack of adequate processes and quality systems at the corporation level - issues
at multiple plants; manufacture of formulations from API that was found to be
contaminated; repackaging and assigning new batch numbers to products that
failed quality tests; returning defective material back to inventory; re-releasing
failed material without sufficient corrective action; inadequate investigation of
discrepancies; improper equipment cleaning and maintenance system; foreign
materials in tablets; non-reporting of key quality findings regarding released
drugs to FDA in a timely manner
Baxter Biosciences Jan-10 Lessines, Belgium Inadequate investigation of a glitch in the production process of a particular drug;
non-conformation to written protocols; failure to inform USFDA about change in
production process
Hospira Inc Aug-09 Morgan Hill, California Insufficient action regarding faulty power codes used in infusion pumps
Abbott Molecular Aug-09 Des Plaines, Illinois In-vitro diagnostics: inadequate procedures for quality checks; use of failed and
quarantined material for quality tests; Continuation of production and distribution
despite knowing of a circuit flaw in the product; inadequate procedures for
corrective actions
Apotex Inc Jun-09 Etobicoke, Ontario, Canada Improper investigation into failed batches; non-reporting of key quality findings
regarding released drugs to FDA on a timely manner
Taro Feb-09 Brampton, Ontario, Canada, inadequate stability testing programme; inadequate investigation of
Pharmaceuticals, Inc discrepancies in the product; release of products by quality control unit without
adequate checks
Sandoz Aug-08 Wilson, North Carolina Failure to establish and follow written procedures for production and quality
control; inadequate investigation of discrepancies; inadequate record-keeping
bino@iiflcap.com 13
India - Pharma
Company Date Facility Issues

Merck & Company, Apr-08 West Point, Pennsylvania, Inadequate investigation of discrepancies; inadequate systems to handle product
Inc. USA related complaints; failure to establish and follow written procedures for
production and quality control; lack of proper process for inspection and
calibration of equipments; failure to quarantine products that were associated
with faulty equipments; improper storage systems
Abbott Laboratories, Mar-07 Irving, Texas, USA Diagnostics: inadequate quality control systems; failure to identify defects and
Inc. correct them in the manufacturing process
Wyeth May-06 Guayama Inadequate investigation of discrepancies; failure in cleaning and maintenance of
Pharmaceuticals packing equipment; non-reporting of key quality findings regarding released
Company drugs to USFDA in a timely manner
Merck & Company, Jul-05 Riverside, PA, US Change in production process without intimating USFDA
Inc.
Consolidation will help Indian players

Indian companies will be There is already a wave of consolidation underway in the US generics
part of the consolidation market, and we expect the large Indian players to emerge
process rather than being beneficiaries of the process. Between 1997 and 2007, market share
sidelined by larger players
of the top four companies has increased from 35% to 61%. Teva,
the market leader, has done 15 acquisitions in the last 13 years. We
expect this consolidation process to continue, as a broad product
basket and wider customer reach can enhance capabilities in
intelligently bundling products. Cross-subsidising and cross-selling of
products are key strategies to gain market share in the highly-
competitive US market.
We expect Indian companies to benefit from the ongoing wave of

consolidation, be they buyers or sellers. In our view, they are more
likely to be buyers than sellers, as they have focused promoters,
global business ambitions, strong balance sheets and the requisite
competencies for the US market. Our view is supported by Sun
Pharma’s acquisition of Caraco and continuing efforts to gain control
of Taro Pharma and Lupin’s acquisition of brands.
That said, Indian players are becoming potential acquisition targets

of large innovator companies or larger generics companies keen to
consolidate their position. In any case, shareholders of Indian
companies that are strong in the US stand to benefit. In other words,
we believe that the Indian players will be part of the consolidation
process and will benefit from it, rather than being sidelined and
pushed behind by the larger players.
bino@iiflcap.com 14
India - Pharma
Figure 21: Consolidation continues in the US market

US generic market share (prescription volume)
Teva
Others 21%
30%
8%
12%
8%
2008 1997 Mylan
65% 7% 13%
Actavis Apoth-econ
4% 0%
Ivax
Mallinck-rodt 0%
5% Watson
Barr
Sandoz 11%
6%
10%
Source: Teva
Biosimilars—adding to the competencies

Biologics are advanced, Biologic drug development capabilities of Indian companies add to
very expensive drugs their long-term growth outlook in the US market, which is
increasingly moving to biologic drugs. Historically, pharmaceuticals
have been dominated by small-molecule drugs that are essentially
simple chemicals of non-organic (not from living sources) origin.
However, the advent of biologics—first as hormonal drugs and later,
advanced monoclonal antibodies—changed the pharmaceutical
business in many ways. These products raised the technological bar
in the industry, commanded high premium pricing and altered
manufacturing costs. Biologics are much more complex molecules,
with up to 50,000 atoms per molecule, and have to be manufactured
from living sources (bacteria, cell cultures, etc). They are typically
administered parenterally.
Figure 22: Biologics are much more complex molecules

Small-molecule drug Small biologic Large biologic
lgG Antibody
~ 25,000 atoms
hGH
~3,000 atoms
Aspirin
21 atoms
Source: Genentech
The molecules’ complexity also adds to the intensity of the R&D

process. Often, only a small area of a molecule is therapeutically
relevant and the rest just functions as a substrate that carries the
active part. Often, the effects of every part of a molecule are not
completely understood, causing surprise effects from minor
variations in the structure of the molecule. This means that
investments in research and production facilities for biologics are
significantly higher than those required for small molecules.
bino@iiflcap.com 15
India - Pharma
Figure 23: Biologics are more technology-intensive and costly

Small molecule drugs Biologics
Typically molecules of 20-100 atoms Small biologic molecules of 200-3,000 atoms and large biologic molecules of 5,000-
50,000 atoms
Produced by chemical manufacturing processes Produced through biological processes such as recombinant-DNA technology
Low cost of mass production High cost of manufacturing on a large scale
Low complexity of the molecule; typically, only the number Complex; alignment and 3-dimensional orientation matters, as does the number and
and type of atoms matter type of atoms and their sequence in the molecule
Usually low level of specific targeting leading to wide range Highly targeted therapies, towards the exact diseased part or pathogenic process in
of effects in the body the body
Low immunogenicity and hence chance of fatal reactions in High immunogenicity leading to increased chance of fatal immunologic reactions
the body
Biologics account for more Biologics form an increasingly important part of the global
than 10% of prescription-
therapeutics market. Fierce Biotech, a consultancy, estimates global
drug spends
biologics sales in 2007 at US$75bn, more than 10% of the global
prescription drug market of US$712bn in the same year. Amgen and
Genentech together commanded 42% of the biologics market in
2007. The share of biologics in the pharmaceutical market is
increasing rapidly; sales of biologics grew 12.5% in 2007, twice as
fast as the total pharmaceutical market. According to IMS Health,
the number of biologics with annual sales greater than a billion
dollars has risen from 44 in 2000 to 105 in 2006, doubling their
share of the growing blockbuster pharmaceutical market to 20%.
With more of the global pharma giants chasing biologics pipelines,
we believe that the biologics market’s growth is likely to accelerate
over the next ten years. Schering Plough’s acquisition of Organon
Biosciences, Astra Zeneca’s purchase of MedImmune and Merck
KGaA’s acquisition of Serono were the major ones among scores of
deals over the last couple of years in which the traditional small-
molecule pharma companies picked up biologics companies.
Figure 24: Dominant players in the biologics market
J&J
8% Novo Nordisk
Genentech /
8%
Roche
21% Eli Lilly
5%
Sanofi Aventis
Abbott 4%
4%
Merck KGaA
Schering 4%
Amgen Plough
21%
Wyeth 3%
3%
Others
19%
Source: Fierce Biotech
bino@iiflcap.com 16
India - Pharma
Figure 25: Top-selling innovator biologic products

Brand Compound Company 2007 Global Sales
(US$ m)
Mabthera / Rituxan Rituximab Roche / Genentech 4,753
Neupogen / Neulasta Filgastrim Amgen 4,277
Herceptin Trastuzumab Roche 4,181
Aranesp Darbepoietin alfa Amgen 3,614
Avastin Bevacizumab Roche / Genentech 3,538
Remicade Infliximab J&J 3,300
Enbrel Etanercept Amgen 3,230
Procrit / Eprex Epoietin alfa J&J 2,900
Epogen Epoietin alfa Amgen 2,489
Avonex Epoietin alfa Biogen Idec 1,900
Neorecormon/Epogin Epoietin beta Roche 1,804
Erbitux Cetuximab Imclone/BMS/Merck Serono 1,300
The biosimilars opportunity

Biosimilars to evolve into The evolution of the biologics markets is likely to present a
multi-billion-dollar market
significant opportunity for generics companies with biologics
in 5-10 years
capabilities. However, the exact size of the opportunity and timelines
still remain vague, given the technological and regulatory risks
involved. Biosimilars may not present an explosive growth
opportunity for generics companies in the near term, but we expect
the segment to evolve into a high-growth multi-billion-dollar market
in 5-10 years. From then on, rapid penetration of the global
pharmaceutical market by novel biologics and gradual expiry of their
patents will help the biosimilars market sustain its high growth rates
for well over a decade.
Given the significantly higher technological complexity and capital

requirement compared to small-molecule generics, and longer
learning curves, companies who gear themselves up in advance will
emerge as major players. Global generics leaders have already
marked their entry through biosimilar approvals and launches in
Europe. Indian companies are fast catching up with emerging market
launches and development work for regulated markets. Institution of
the US regulatory mechanism for biosimilars would be a near-term
fillip for the market.
Figure 26: Market dynamics to be different for small-molecule generics and biosimilars
Small-molecule generics Biosimilars / follow-on biologics (FOB)
Low technological and clinical entry barrier for generic competition High technological and clinical entry barrier for generic competition
Automatic interchangeability and substitutability can be assumed Interchangeability and substitutability have to be proved through costly
clinical trials
Large price discount (up to 95%) to the innovator, as the cost and Smaller price discounts to the innovator drug (25-35%), as the cost and
technology risk of getting the generic to market are significantly lower technology risk are high
Only limited clinical trials (only bio-availability / bio-equivalence to the More extensive clinical trials needed to prove safety and efficacy, as the
reference drug) required for regulatory approval biologics produced from different organic lines can vary significantly in
structure
Proper regulatory frame work in place in most developed markets for Only Europe has so far put together an approval process. US is still in the
generic approval process of legislation.
bino@iiflcap.com 17
India - Pharma
Figure 27: Biosimilar market will evolve as a large high-growth market in 5-10 years
16,000
Biosimilars market sales (US$ m)
14,000
12,000
Follow on rltuxan & herceptin
10,000
achieve block buster status
8,000
US starts
6,000
approving
First biosimilar More biosimilars get launched in
4,000
approval in EU oncology, immunology and
2,000 other areas
0
2000 2005 2010 2015 2020 2025 2030 2035 2040
Figure 28: Biosimilar approvals in Europe

Biosimilar brand Company Reference product Innovator brand Innovator company Approval/positive
opinion date
Omnitrope Sandoz Somatropin (Growth Hormone) Genotropin Pfizer April 2006
Valtropin** Biopartners Somatropin (Growth Hormone) Humatrope Eli Lilly April 2006
Binocrit Sandoz Epoetin alpha (Erythropoietin) Eprex/Erypro Janssen-Cilag August 2007
Epoetin alpha Hexal Hexal Epoetin alpha (Erythropoietin) Eprex/Erypro Janssen-Cilag August 2007
Abseamed Medice Epoetin alpha (Erythropoietin) Eprex/Erypro Janssen-Cilag August 2007
Retacrit** Hospira Epoetin alpha (Erythropoietin) Eprex/Erypro Janssen-Cilag December 2007
Silapo Stada Epoetin alpha (Erythropoietin) Eprex/Erypro Janssen-Cilag December 2007
Ratiogastrim* Ratiopharm Filgrastim (G-CSF) Neupogen Amgen February 2008
Biogastrim* CT Arzneimittel Filgrastim (G-CSF) Neupogen Amgen February 2008
Tevagastrim* Teva Generics Filgrastim (G-CSF) Neupogen Amgen February 2008
*Positive opinion received from the advisory boards, approval expected.
**Not currently marketed
Moving ahead with the biosimilar opportunity
Some generics companies Several generics companies are already aware of the significant
have obtained biosimilar
potential of the biosimilar market and have made early investments.
approvals in Europe
The leading ones are Sandoz, Hexal and Arzneimittel, which have
already garnered approvals from EMEA. They are closely followed by
Teva, Ratiopharm and Stada, which are likely to get approvals near
term. A host of companies, including several Indian ones, are not far
behind. Most of them have already secured marketing authorisations
for biosimilars in the semi-regulated markets, a launchpad for the
developed markets.
Indian companies have mostly concentrated on insulin,

erythropoietin, filgrastim and interferons. An exception is Dr Reddy’s
Labs, which is concentrating on high-molecular-weight cell-culture-
based products like monoclonal antibodies. It has already launched
in India, the first generic version globally, of the multi-billion-dollar
Rituxan for rheumatoid arthritis and lymphoma. However, it will have
to wait several years before an advance into the regulated markets
because of regulatory and patent issues.
Currently, there are five biologics with patents expired, that can be
developed for the regulated markets—Erythropoietin, Growth
Hormone, Filgrastim, Insulin and Interferon. The most prominent
biologics that are still under patent protection include the insulin
analogs and monoclonal antibodies used in oncology and
immunology. As these products lose patent protection over the
bino@iiflcap.com 18
India - Pharma
years, the market for biosimilars is likely to see rapid growth.

Generic penetration could be much faster in these product segments
due to higher costs involved.
Figure 29: Leading players in biosimilars

Company Approved / launched in EU Approved/launched in semi- In pipeline
regulated markets
Barr Pharma (now part of Teva) Erythropoietin Filgrastim
Insulin
human Growth Hormone
Biocon In early stages of working towards Insulin Insulin analogs
filing for insulin in EU Erythropoietin human Growth Hormone
Filgrastim Reteplase
Streptokinase
Nimotuzumab (similar to Erbitux)
Biopartners Growth Hormone Interferon
Erythropoietin
Cipla (in partnership with Biosimilars in immunology &
Avesthagen) oncology
CT Arzneimittel Filgrastim has received positive
opinion
Dr Reddy's Labs Filgrastim Interferon alpha
Rituximab Undisclosed monoclonal
antibodies
Hexal Erythropoietin
Hospira Erythropoietin
Intas Biopharma Filgrastim is in final clinical study Filgrastim Monoclonal antibodies
for filing PEG-Filgrastim
Erythropoietin
Interferon alfa
Medice Erythropoietin
Prolong Pharmaceuticals PEG-Erythropoietin
Other PEG-proteins
Ranbaxy (in partnership with Filgrastim Interleukin-2
Zenotech Labs) Molgramostim
Ratiopharm Filgrastim has received positive
opinion
Sandoz (part of Novartis) Growth Hormone Growth Hormone Filgrastim
Erythropoietin Erythropoietin other undisclosed products
Shantha Biotech Interferon alpha Monoclonal antibodies
Erythropoietin Pegylated proteins
Stada Erythropoietin Filgrastim
Teva Filgrastim has received positive Filgrastim Insulin?
opinion Growth Hormone Erythropoietin
Interferon alpha Interleukins
Wockhardt Erythropoietin Interferon
Insulin Filgrastim
Insulin glargine
bino@iiflcap.com 19
India - Pharma
Appendix
Figure 30: Business model matrix – Indian pharma space
Developed Emerging
M Cap Domestic Drug Medical
Company market market CRAMS Biosimilars Vaccines
(US$ m) generics discovery devices
generics generics
Sun Pharma 8,045
Cipla 6,109
Dr Reddy's Lab 4,784
Ranbaxy 4,408
GlaxoSmithKline Pharma 3,271
Lupin Ltd 3,223
Cadila Healthcare 2,494
Piramal Healthcare 1,958
Divi's Lab 1,935
Glenmark Pharma 1,504
Biocon 1,302
Aurobindo Pharma 1,182
Jubilant Organosys 1,130
Torrent Pharma 982
Aventis 927
Opto Circuits 898
Ipca Laboratories 755
Pfizer 626
Sterling Biotech 597
AstraZeneca 480
Sun Pharma Advanced

441
Research Co
Novartis 402
Dishman Pharma 383
Unichem Labs 353

bino@iiflcap.com 20
India - Pharma
Figure 31: Business model matrix – Indian pharma space

Developed Emerging
M Cap (US$ Domestic Drug Medical
Company market market CRAMS Biosimilars Vaccines
m) generics discovery devices
generics generics
Wockhardt Ltd 342
Solvay 324
Panacea Biotech 320
Strides Arcolab 309
Plethico Pharma 286
Abbott 277
Orchid Chemicals 248
Merck 232
Nectar Lifesciences 185
Elder Pharma 151
Alembic 149
JB Chemicals 138
Indoco Remedies 105
Parenteral Drugs 92
Ankur Drugs 86
Zenotech Labs 86
Natco Pharma 84
Suven Life Sciences 83
Piramal Life Sciences 77
Shasun Chemicals 55
Venus Remedies 49
Ajanta Pharma 48
Marksans Pharma 40
Ind-Swift Labs 40
SMS Pharma 36
Wanbury Ltd 24
Figure 32: Several segments contribute meaningfully to the topline

(Rs m) US formulations Non US/Intl formulations Domestic formulations
APIs/CRAMS Others
80,000
FY10 revenue break up
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
Ranbaxy Dr Reddy's Cipla Lupin Sun Glenmark Glaxo
Pharma
bino@iiflcap.com 21
India - Pharma
This page is intentionally left blank
bino@iiflcap.com 22
India - Pharma
Companies
bino@iiflcap.com 23
India - Pharma
This page is intentionally left blank
bino@iiflcap.com 24
India - Pharma
CMP Rs 304
Biocon ADD
Target 12m Rs342 (13%)
Market cap (US$ m) 1304
Growth picking up
Bloomberg BIOS IN
Sector Pharmaceuticals Biocon is set for robust growth over the near-medium term,
with growth in the legacy biopharmaceuticals business
picking up and the Axicorp subsidiary in Germany benefitting
16 June 2010 from the AOK contracts. Growth in the biopharma business is
driven by new immunosuppressant products in the US and
52Wk High/Low (Rs) 311/185
Diluted o/s shares (m) 200 increasing contribution from the fast-growing domestic
Daily volume (US$ m) 4 formulations business. Furthermore, licensing fees picked up
Dividend yield FY11ii (%) 0.5 in FY10 after a year’s slump, and we expect growth to
Free float (%) 39.1 sustain. We continue to be optimistic on Biocon’s pipeline for
Shareholding pattern (%) the large biosimilars opportunity in regulated markets. ADD.
Promoters 60.9
FIIs 3.9 New products, domestic formulations add momentum to
DIIs 13.2 legacy portfolio: Biocon’s new products have started delivering
Others 22.0
robust growth in the legacy biopharmaceuticals API business. Growth
Price performance (%) is mainly driven by the new immunosuppressant products—
1M 3M 1Y mycophenolate mofetil (MMF) and tacrolimus. The relatively new
Biocon 6.4 12.1 47.8
domestic formulations business is also increasing its share of overall
Rel. to Sensex 4.0 10.7 30.7
revenue growth—this business now accounts for more than 10% of
Jubilant Organ 1.1 1.9 106.5
Divis Lab 10.0 22.5 36.0 the company’s revenues (excluding Axicorp). The newly launched
Orchid Chem 8.7 -2.9 27.0 glargine insulin product should boost growth further.
Stock movement
Axicorp benefitting from turmoil in the German market:
Shares (000') Volume (LHS)
Price (RHS)
(Rs)
Biocon’s German acquisition, Axicorp, has been a beneficiary of the
5,000 350
300
turmoil in the German generics market. As the incumbent players
4,000
3,000
250 suffered major revenue losses on account of the market’s shift
200
2,000 150 towards a tender-based system, Axicorp, which was not a major
1,000
100
50 player in the generics space, won a contract to supply metformin for
0 0 AOK, a large German insurance company. As a result, Axicorp’s
Jun-10
Jun-09
Aug-09
Jan-10
Jul-09
Sep-09
Oct-09
Nov-09
Dec-09
Feb-10
Mar-10
Apr-10
May-10
performance has beaten our expectations. The company has made

its intent clear to go with more bids in subsequent floating of tenders
Biopharma shows improvement in by AOK or other insurance companies.
growth
(Rs m) Biopharmaceuticals (LHS) Reasonable valuation; biosimilars could present upsides:
12,000
Grow th rate (RHS)
30% Biocon is trading at 18x FY11ii core earnings, at 10-20% discount to
10,000 25% frontline pharma stocks. Our price target of Rs342 is 18x FY12ii core
8,000 20% earnings plus cash per share. We have not included any separate
6,000 15% value for the large biosimilars opportunity in regulated markets; any
4,000 10% positive developments there could provide significant upsides.
2,000 5%
0 0% Financial summary
Y/e 31 Mar FY09A FY10ii FY11ii FY12ii FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A
Revenues (Rs m) 16,087 23,678 27,286 30,739 34,651

EBITDA Margins (%) 20.8 20.2 19.7 20.0 20.4
Source: Company, IIFL Research
Pre-Exceptional PAT (Rs m) 931 2,933 3,665 4,187 5,008
Reported PAT (Rs m) 931 2,933 3,665 4,187 5,008
Dr Bino Pathiparampil Reported EPS (Rs) 4.7 14.7 18.3 20.9 25.0
bino@ i i f l c a p . c o m 215.0 25.0 14.2 19.6
Growth (%)
(91 22) 4646 4648
PER (x) 65.3 20.7 16.6 14.5 12.1
Ankit Jain ROE (%) 6.2 16.7 17.9 17.3 17.3
ankit.jain@ i i f l c a p . c o m Debt/Equity (x) 0.3 0.3 0.2 0.0 0.0
(91 22) 4646 4675
EV/EBITDA (x) 18.7 12.7 11.6 9.6 7.8
Price/Book (x) 4.0 3.5 3.0 2.5 2.1
www.iiflcap.com
Source: Company, IIFL Research. Price as at close of business on 15 June 2010.
bino@iiflcap.com 25
Biocon Ltd - ADD
Company snapshot
Biocon was launched in 1978 in Bangalore, as a manufacturer of
industrial enzymes. Over the past decade, it shifted its focus to
biopharmaceuticals; for several years, it was a leading global
supplier of statins (cholesterol drug) API. The company focuses on
technology-intensive products and processes in pharmaceuticals. It
also has a strong contract-research business, including a long-term
relationship with BMS. The company has successfully developed
several biosimilar products, among them recombinant insulin,
glargine insulin and GCSF. These products have been launched in
semi-regulated markets, and clinical development is underway in
regulated markets. Biocon has also developed a strong domestic
pharma business with an emphasis on lifestyle diseases.
Management
Name Designation Remarks / management description
Founded the company in 1978. Has a graduate honours
degree in zoology. Has spearheaded the company’s
Kiran
Chairman and evolution from an industrial enzymes company to a fully-
Mazumdar
Managing Director integrated biopharmaceuticals enterprise. Has been voted
Shaw
by Nature Biotechnology as ‘The Most Influential in Bio-
business’ person outside Europe and USA.
Alumnus of IIT Mumbai and MIT, Boston. Joined the
Dr Arun Chief Operating
company in 1990. Covers all aspects of Biocon’s business,
Chandavarkar Officer
with a specific emphasis on strategic management.
Revenue break-up between domestic and international –FY10 Shareholding pattern
Others
Contract Axicorp 22%
research 38%
12%
Promoters
DIIs 61%
Licensing 13%
fees
2%
Biopharma
48% FIIs
4%
Growth prospects improving

Strong revenue growth in (Rs m) Total operating revenue (LHS) Grow th rate (RHS)
FY09-10 was driven mainly
by an acquisition 40,000 60%
35,000
50%
30,000
40%
25,000
20,000 30%
15,000
20%
10,000
10%
5,000
0 0%
FY06A FY07A FY08A FY09A FY10A FY11ii FY12ii FY13ii
bino@iiflcap.com 26
Biocon Ltd - ADD
Biopharma – growth accelerating Licensing fees picked up in FY10 – likely to sustain

Biopharmaceuticals (LHS) Grow th rate (RHS) (Rs m) Licensing fees
12,000 30% 600
(Rs m)
10,000 25% 500
8,000 20% 400
6,000 15% 300
4,000 10% 200
2,000 5% 100
0 0% 0
FY06A FY07A FY08A FY09A FY10A FY07A FY08A FY09A FY10A
Source: Company reports, IIFL Research Source: Company reports, IIFL Research
Contract research – on a secular growth path Axicorp revenues pick up on AOK tender supply in Germany
(Rs m) Contract research revenues (Rs m) Axicorp revenues
5,000 3,000
2,500
4,000
2,000
3,000
1,500
2,000
1,000
1,000 500
0 0
2Q 3Q 4Q 1Q 2Q 3Q 4Q
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A
FY09A FY10A
EBITDA margins to remain steady Improving working-capital cycle

EBITDA margin EBITDA margin ex license fees & Axicorp Net w orking capital as a % of revenues
30%
35%
30% 25%
25%
20%
20%
15% 15%
10% 10%
5%
5%
0%
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A
0%
FY07A FY08A FY09A FY10A
bino@iiflcap.com 27
Biocon Ltd - ADD
Financial summary
Income statement summary (Rs m)
Y/e 31 Mar FY09A FY10A FY11ii FY12ii FY13ii
Revenue 16,087 23,678 27,286 30,739 34,651
Business prospects
EBITDA 3,346 4,774 5,380 6,159 7,061
looking up with better
EBIT 2,243 3,373 3,902 4,625 5,530
pricing in statins, strong
growth in domestic Treasury income -938 311 723 575 585
business and AOK tender Interest expense 177 169 154 94 7
business in Germany Profit before tax 1,128 3,515 4,470 5,106 6,108
Taxes 118 487 715 817 977
Minorities and other 79 96 89 102 122
Net profit 931 2,933 3,665 4,187 5,008
Cashflow summary (Rs m)

Profit before tax 1,044 3,515 4,470 5,106 6,108
Depr. & amortization 1,103 1,401 1,478 1,535 1,531
Tax paid 169 445 715 817 977
Working capital ∆ -1,282 -290 -3,585 -844 -949
Other operating items 256 -142 -568 -482 -578
Operating cashflow 951 4,038 1,080 4,498 5,134
Capital expenditure -3,649 -1,020 -2,500 -1,500 -1,500
Major capex planned in Free cash flow -2,698 3,018 -1,420 2,998 3,634
FY11 would mean a dip in Investments 211 256 0 0 0
free cashflow Debt financing/disposal 2,111 -103 -2,008 -2,880 48
Dividends paid -585 -702 -819 -351 -351
Other items -432 142 568 482 578
Net change in cash -1,393 2,611 -3,679 249 3,909
Balance-sheet summary (Rs m)

Strong balance sheet with Cash & equivalents 3,403 5,314 1,635 1,884 5,793
cash Sundry debtors 3,667 4,461 6,276 7,070 7,970
Inventories - trade 3,192 3,716 5,457 6,148 6,930
Other current assets 947 1,343 1,637 1,844 2,079
Fixed assets 12,205 12,439 13,461 13,426 13,395
Intangible assets 1,631 1,695 1,695 1,695 1,695
Other term assets 391 391 391 391 391
Total assets 25,436 29,359 30,552 32,458 38,253
Sundry creditors 4,375 5,799 6,064 6,912 7,880
Long-term debt/CBs 5,239 5,136 3,128 248 296
Other long-term liabs 466 508 508 508 508
Minorities/other equity 248 338 427 530 652
Net worth 15,107 17,578 20,424 24,260 28,918
Total liabs & equity 25,436 29,359 30,552 32,458 38,253
Ratio analysis
Revenue growth (%) 52.7 47.2 15.2 12.7 12.7
Strong growth in FY09-10 Op Ebitda growth (%) 12.1 42.7 12.7 14.5 14.6
was due to acquisition in Op Ebit growth (%) 9.6 50.4 15.7 18.5 19.6
Germany; organic growth Op Ebitda margin (%) 20.8 20.2 19.7 20.0 20.4
accelerating in FY10-11ii Op Ebit margin (%) 13.9 14.2 14.3 15.0 16.0
Net profit margin (%) 5.8 12.4 13.4 13.6 14.5
Dividend payout (%) 64.4 23.9 8.2 7.2 6.0
Tax rate (%) 10.5 13.9 16.0 16.0 16.0
Net debt/equity (%) 12.2 -1.0 7.3 -6.7 -19.0
Net debt/op Ebitda (x) 0.5 0.0 0.3 -0.3 -0.8
Return on equity (%) 6.2 16.7 17.9 17.3 17.3
ROCE (%) 10.8 14.5 16.2 18.5 18.6
Return on assets (%) 3.7 10.0 12.0 12.9 13.1
bino@iiflcap.com 28
India - Pharma
CMP Rs 338
Cipla Ltd REDUCE
Target 12m Rs328 (-3%)
High price for low growth
Bloomberg CIPLA IN
Cipla has a robust stable of businesses that includes its
Sector Pharmaceuticals
domestic branded-formulations business, which leads the
market with over 5% share by revenue. In exports, Cipla has
16 June 2010 a partnership-based model, and the company has an
emphasis on emerging markets rather than developed ones.
52Wk High/Low (Rs) 364/240 Thus, a pick-up in overall sales from one or two new products
Diluted o/s shares (m) 803
Daily volume (US$ m) 11 with high potential is rather unlikely. Sales of CFC-free
Dividend yield FY11ii (%) 0.8 inhalers in Europe and high-value APIs in the US market
Free float (%) 63.2 remain potential opportunities, but we would prefer to wait
for more visibility before factoring them into our estimates.
Shareholding pattern (%)
Promoters 36.8 We estimate an earnings CAGR of 13% over FY10-13ii—a rate
FIIs 16.8 of growth which, in our view, does not justify the large cash-
DIIs 16.6 burn and high P/E of 24x FY11ii. REDUCE.
Others 29.8
Revenue growth to trail that of peers: We estimate Cipla’s
Price performance (%)
1M 3M 1Y revenue growth at 10% annualised over FY10-12—significantly
Cipla 7.9 7.5 32.5 slower than the ~20% CAGR in organic businesses that we expect
Rel. to Sensex 5.5 6.1 15.4 from its peers. There is increased competition in the domestic
Ranbaxy -4.7 -6.3 51.4 market, especially in the respiratory segment, which has long been
Dr Reddy's 10.1 18.4 101.6 Cipla’s stronghold. In Africa, prices of HIV drugs—another key
Sun Pharma 6.9 4.8 33.1 market for Cipla—have fallen significantly. A sizeable deal with a
Stock movement Western pharma major to sell generics in emerging markets is likely,
Volume (LHS)
but we do not expect a rapid ramp–up following such a deal.
Shares (000') (Rs)
Price (RHS)
10,000 400 High capex not yielding results: Cipla has spent about Rs27bn
8,000 300 over FY06-10 on capacity expansion and other enhancements.
6,000
4,000
200 However, these investments show no signs of paying off, going by
2,000 100 the company’s 8-10% revenue growth guidance, despite the new
0 0 Sikkim facility ramping up and the Indore facility coming online. Staff
cost has been growing faster than revenues for the last three years—
Jun-10
Jun-09
Aug-09
Jan-10
Jul-09
Sep-09
Oct-09
Nov-09
Dec-09
Feb-10
Mar-10
Apr-10
May-10
which means EBITDA margins would have fallen, were it not for the
Growth takes a beating rupee’s depreciation. There is little visibility of operating leverage
Total operating revenue (LHS) setting in when the Indore facility is fully operational.
Grow th rate (RHS)
80,000 (Rs m) 40% Valuations are still rich: Despite lacklustre growth and large cash
burn, Cipla’s trading at 25x FY11ii core earnings—at a premium to Dr
60,000 30%
Reddy’s Labs and Lupin. We see little room for appreciation from this
40,000 20% level, unless new and unexpected growth drivers show up. We retain
REDUCE, with a price target of Rs328 (21x FY12ii core earnings).
20,000 10%
Any significant rupee depreciation or a major partnership deal with a
0 0% big MNC pharma company could pose risks to our call.
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A
Financial summary
Source: Company, IIFL Research Revenues (Rs m) 52,570 56,300 62,031 68,656 75,999
EBITDA Margins (%) 23.9 24.9 25.6 25.9 26.3
Pre-Exceptional PAT (Rs m) 7,608 9,870 11,313 12,956 14,669
Reported PAT (Rs m) 7,608 10,820 11,313 12,956 14,669
Dr Bino Pathiparampil EPS (Rs) 9.8 12.3 14.1 16.1 18.3
bino@ i i f l c a p . c o m Growth (%) 8.5 25.6 14.6 14.5 13.2
(91 22) 4646 4648
PER (x) 34.5 27.5 24.0 20.9 18.5
Ankit Jain ROE (%) 17.5 18.3 16.6 16.5 16.2
(91 22) 4646 4675 21.6 19.4 17.0 15.0 13.1
EV/EBITDA (x)
Price/Book (x) 6.0 4.6 4.0 3.4 3.0
www.iiflcap.com
bino@iiflcap.com 29
Cipla Ltd – REDUCE
Company snapshot
Cipla, established in 1935, is one of the largest and oldest
pharmaceutical companies in India. It has maintained its revenue
market share at ~5% for several years. The company is the largest
maker of anti-asthma drugs in the country, controlling more than
70% of the inhaler market. Cipla is the world’s third largest
manufacturer of inhalers, and it continues to invest heavily in inhaler
facilities. It is also the world’s largest producer of anti-retroviral
drugs used in the treatment of AIDS. Exports account for 50% of the
company’s turnover. Africa and the US are its key export markets.
Cipla has a partnership-based business model for its export market.
It does not maintain its own front-end, but supplies bulk and finished
dosages to its partners, who then market these products in their
respective countries.
Management
Doctorate in chemistry from Cambridge, he joined Cipla in
Dr Yusuf Chairman and 1960 as an officer in charge of research and
Hamied Managing Director development. Has been awarded the Padma Bhushan by
the Government of India in 2005.
Joint Managing Chartered accountant by training, he manages the overall
Mr Amar Lulla Director and operations of the company; has been instrumental in
Executive Director driving the company’s growth.
Revenue break-up between domestic and international (FY10) Shareholding pattern
Domestic
Export APIs formulations DIIs Others
10% 44% 17% 30%
Technology
fees FIIs
3% 17%
Export Others
formulations Promoters
2%
41% 36%
Growth takes a beating

(Rs m) Total operating revenue (LHS) Grow th rate (RHS)
80,000 35%
70,000 30%
60,000
25%
50,000
20%
40,000
15%
30,000
10%
20,000
10,000 5%
0 0%
bino@iiflcap.com 30
Moderating growth in formulations exports API exports has been a laggard in growth
Exports - formulations (LHS) Grow th rate (RHS) Exports - APIs (LHS) Grow th rate (RHS)
36,000 45% 8,000 80%
(Rs m) (Rs m)
32,000 40% 7,000
28,000 35% 60%
6,000
24,000 30%
5,000 40%
20,000 25%
4,000
16,000 20%
3,000 20%
12,000 15%
8,000 10% 2,000
0%
4,000 5% 1,000
0 0% 0 -20%
FY11ii
FY12ii
FY13ii
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A
FY06A
FY07A
FY08A
FY09A
FY10A
Domestic formulations business has been growing slower Volatile technology and licensing fees
than the overall market
Domestic fomulations (LHS) Grow th rate (RHS) (Rs m) Technology/Consulting fees
40,000 25% 2,400
(Rs m)
35,000 2,100
20%
30,000
1,800
25,000 15% 1,500
20,000
10% 1,200
15,000
900
10,000
5%
5,000 600
0 0% 300
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A
0
FY06A FY07A FY08A FY09A FY10A
Margin very sensitive to rupee rate Large capex over the years – free cashflow remains
negative
EBITDA margin (Rs m) Capital expenditure
30% 8,000
25% 7,000
20% 6,000
5,000
15%
4,000
10%
3,000
5% 2,000
0% 1,000
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A
0
bino@iiflcap.com 31
Financial summary
Significant slowdown in Revenue 52,570 56,300 62,031 68,656 75,999
business growth despite EBITDA 12,538 13,996 15,877 17,815 19,976
large capex EBIT 10,832 12,109 13,579 15,202 17,076
Interest income -1,640 482 600 600 600
Interest expense 340 237 37 2 2
Exceptional items 0 950 0 0 0
Taxes 1,245 2,485 2,828 2,844 3,005
Net profit 7,608 10,820 11,313 12,956 14,669

Tax paid 648 2,485 2,828 2,844 3,005
Working capital ∆ -7,112 -3,684 -3,524 -3,991 -4,428
Other operating items 817 -1,196 -563 -598 -598
Operating cashflow 3,732 7,828 9,525 10,980 12,544
Free cashflow has been
Free cash flow -3,266 2,778 3,525 4,980 6,544
negative for several years
owing to large capex— Equity raised 0 6,692 0 0 0
expect a pick-up ahead Investments 839 0 0 0 0
Debt financing/disposal 3,948 -8,783 -592 0 0
Dividends paid -1,819 -1,819 -2,255 -2,442 -2,630
Other items -100 246 563 598 598
Net change in cash -397 -885 1,241 3,136 4,512

Cash & equivalents 1,334 449 1,690 4,826 9,338
Sundry debtors 18,529 20,268 22,331 24,716 27,360
Other current assets 11,133 12,621 13,881 15,339 16,954
Fixed assets 23,588 27,700 31,402 34,789 37,889
Total assets 68,568 76,239 86,054 98,208 112,061
Equity financing in FY10
Long-term debt/CBs 9,402 620 28 28 28
used to pay off debt
Other long-term liabs 1,642 1,641 1,641 1,641 1,641
Net worth 43,478 59,172 68,230 78,744 90,783
Ratio analysis
Revenue growth (%) 24.9 7.1 10.2 10.7 10.7
Op Ebitda growth (%) 47.6 11.6 13.4 12.2 12.1
Growth rates take a deep Op Ebit growth (%) 50.7 11.8 12.1 12.0 12.3
dip—high growth in FY09, Op Ebitda margin (%) 23.9 24.9 25.6 25.9 26.3
mostly from rupee Op Ebit margin (%) 20.6 21.5 21.9 22.1 22.5
depreciation Net profit margin (%) 14.5 17.5 18.2 18.9 19.3
Dividend payout (%) 20.4 17.8 18.5 17.4 15.3
Tax rate (%) 14.1 18.7 20.0 18.0 17.0
Net debt/equity (%) 18.6 0.3 -2.4 -6.1 -10.3
Net debt/op Ebitda (x) 0.6 0.0 -0.1 -0.3 -0.5
Return on equity (%) 17.5 18.3 16.6 16.5 16.2
ROCE (%) 19.9 19.7 19.4 18.9 18.5
Return on assets (%) 11.1 12.9 13.1 13.2 13.1
bino@iiflcap.com 32
India - Pharma
CMP Rs 1422
Dr Reddy’s Laboratories BUY
Target 12m Rs1803 (27%)
Thoroughbred
Bloomberg DRRD IN
Dr Reddy’s offers the best earnings growth visibility and
potential for further upsides in the Indian pharma space, in
our view. Its US generics business, will be boosted by
16 June 2010
market-share gains in generic Prilosec OTC and more
52Wk High/Low (Rs) 1517/670 potential high-value launches. Generic fondaparinux, if
Diluted o/s shares (m) 169 approved and launched, could provide up to 10% upside to
Daily volume (US$ m) 15 our estimates. The emerging-market business is gaining
Dividend yield FY11ii (%) 0.4
Free float (%) 74.2 strength, with increased growth in the domestic market,
continued strength in the Russian market, and the budding
Shareholding pattern (%) partnership with GSK. The pharma-services business will
Promoters 25.8 benefit significantly from the large number of drugs going
FIIs 27.3
DIIs 18.0 off-patent in the US over the next 2-3 years. Superior
Others 28.9 technological capabilities, well-qualified professional
management and good corporate governance practices add to
1M 3M 1Y our confidence. We retain BUY with a target price of Rs1803.
Dr Reddy's 10.1 18.4 101.6
US—the main growth driver: Dr Reddy’s growth in the US
Rel. to Sensex 7.6 17.0 84.5
continues unabated: revenues rose by over 40% in FY09, and a
Ranbaxy -4.7 -6.3 51.4
Sun Pharma 6.9 4.8 33.1 further 18% in FY10, despite a product recall in September 2009. We
Cipla 7.9 7.5 32.5 expect 25-30% growth to sustain over the next 2-3 years. Generic
fondaparinux, another low-competition product, if approved, could
Stock movement
provide Rs5-6 upside to our earnings projections on an annualised
Shares (000') Volume (LHS)
Price (RHS)
(Rs) basis and could be a growing long-term opportunity.
3,000 2,000
2,500
1,500
Rightly positioned for the emerging markets: After two years of
2,000
1,500 1,000
modest performance, the company’s growth in the domestic market
1,000
500
is picking up pace on the back of new product introductions and a
500
0 0
streamlined distribution system. The Russian business is continuing
its strong growth, despite a slowdown in the overall market. The
Jun-09
Jun-10
Aug-09
Jan-10
Sep-09
Oct-09
Nov-09
Dec-09
Feb-10
Mar-10
Apr-10
Jul-09
May-10
recent partnership with GSK for emerging markets should prove to

be another major contributor to growth in the coming years—our
Unique products and cost control
will lead to operating margin projections from these markets may prove to be too conservative.
expansion No major concerns; strong growth ahead: Dr Reddy’s continues
25%
Operating margin to face headwinds in the German business, but that has become less
significant for the company. The company has successfully managed
20% debtors in Russia through the financial crisis. We estimate 35-40%
15%
organic FY10-13ii CAGR in core earnings. Dr Reddy’s stock is trading
at 22x FY11ii core earnings. Our price target of Rs1,803 is 21x FY12ii
10% core earnings plus cash and other values per share.
5% Financial summary
0% Revenues (Rs m) 69,441 70,277 78,293 92,197 110,822
FY11ii
FY12ii
FY13ii
FY08A
FY09A
FY10A
EBITDA Margins (%) 23.4 20.8 23.4 24.9 27.5

Source: Company. IIFL Research Reported PAT (Rs m) -5,168 1,068 11,276 14,986 21,664
EPS (Rs) -30.5 6.3 66.3 88.0 126.9
Growth (%) NA NA 32.7 44.3
bino@ i i f l c a p . c o m PER (x) -46.6 226.0 21.4 16.2 11.2
(91 22) 4646 4648 ROE (%) -12.3 2.6 22.1 23.2 25.5
Debt/Equity (x) 0.5 0.2 0.2 0.1 0.1
Ankit Jain
EV/EBITDA (x) 15.7 16.8 13.2 10.2 7.2
ankit.jain@ i i f l c a p . c o m
(91 22) 4646 4675 Price/Book (x) 5.7 5.8 4.7 3.7 2.9
www.iiflcap.com
bino@iiflcap.com 33
Dr Reddy’s Laboratories – BUY
Company snapshot
The Hyderabad-based Dr Reddy’s Laboratories was founded by Dr K
Anji Reddy as a bulk-drugs player. Incorporated in 1984 with an
initial capital outlay of Rs2.5m, it rapidly moved up the value chain
to become a major generics company with global operations. It is
India’s second-largest pharmaceutical company in revenues. Its
product portfolio spans a wide range of therapeutic categories,
including ulcer medicines, antibiotics, pain relievers, antidepressants
and cardiovascular drugs. The company also has significant
capabilities in the biological-therapeutics space and has already
launched three biosimilar products in India. It markets its products in
more than 100 countries, but the main markets are the US, Europe,
India and Russia. The company employs over 10,000 personnel of
over 40 nationalities.
Management
Founded the company in 1984; has been a pioneer and
trendsetter in the Indian pharma Industry. Currently, serving
Dr K Anji Reddy Chairman
member of Prime Minister’s Council on Trade & Industry.
Has been a recipient of several awards and honours.
Vice Chairman Widely credited as the architect of DRL’s successful global

G V Prasad generics strategy; an Illinois Institute of Technology and
and CEO Purdue University alumnus; leads the core team at DRL.
Looks after the company’s pharma services and global
Satish Reddy MD and COO generic business; has played an instrumental role in the
company’s transition up the pharma value chain.

APIs/CRAM
Domestic
S DIIs Others
formulations
29% 18% 29%
14%
Others
2%
Intl Promoters
FIIs
formulations US 26%
31%
27%
formulations
24%
Company target of US$3bn in FY13 makes upgrades to our estimates possible

(Rs m) Total operating revenue (LHS) Grow th (RHS)
120,000 200%
100,000
150%
80,000
100%
60,000
50%
40,000
0%
20,000
0 -50%
FY05A FY06A FY07A FY08A FY09A FY10A FY11ii FY12ii FY13ii
bino@iiflcap.com 34
US generics business is the most important growth driver Betapharm revenues likely to decline, but the company’s
share in DRL’s overall revenues is now much less
important
(Rs m) US base business revenues US - exclusivities (Rs m) Betapharm revenues
30,000 12,000
25,000 10,000
20,000 8,000
15,000 6,000
10,000 4,000
5,000 2,000
0 0
FY08A FY09A FY10A FY11ii FY12ii FY13ii FY07A FY08A FY09A FY10A FY11ii FY12ii FY13ii
Russia business beats all market concerns Company back on the growth track in the domestic
business
(Rs m) Russia business revenues (Rs m) Domestic formulations revenues
14,000 21,000
12,000 18,000
10,000 15,000
8,000 12,000
6,000 9,000
4,000 6,000
2,000 3,000
0 0
FY11ii
FY12ii
FY13ii
FY11ii
FY12ii
FY13ii
FY05A
FY06A
FY07A
FY08A
FY09A
FY10A
FY05A
FY06A
FY07A
FY08A
FY09A
FY10A
CRAMS business will benefit from patent expiries in the US Unique products and cost control will drive EBIT margin
expansion
(Rs m) Pharma Services & API EBIT margin
25%
35,000
30,000
20%
25,000
20,000 15%
15,000
10%
10,000
5,000 5%
0
FY11ii
FY12ii
FY13ii
FY05A
FY06A
FY07A
FY08A
FY09A
FY10A
0%
FY08A FY09A FY10A FY11ii FY12ii FY13ii
bino@iiflcap.com 35
Financial summary
Revenue 69,441 70,277 78,293 92,197 110,822
Our projections are short EBITDA 16,226 14,597 18,358 22,967 30,524
of the company’s FY13 EBIT 12,412 10,538 13,824 18,245 25,685
target of US$3bn topline; Interest income -405 1,354 635 847 1,744
upside surprise possible Interest expense 1,034 788 383 383 383
Exceptional items -14,992 -9,099 0 0 0
Profit before tax -4,019 2,005 14,077 18,709 27,046
Taxes 1,173 985 2,815 3,742 5,409
Minorities and other -24 -48 -14 -19 -27
Net loss in FY09 due to Net profit -5,168 1,068 11,276 14,986 21,664
write-off of intangibles
related to Betapharm Cashflow summary (Rs m)
acquisition Y/e 31 Mar FY09A FY10ii FY11ii FY12ii FY13ii
Net profit -5,168 1,068 11,276 14,984 21,636
Tax paid 1,619 0 0 0 0
Working capital ∆ -8,267 3,963 -4,473 -3,502 -5,137
Other operating items 15,745 8,037 -253 -464 -1,361
Good operating cash flows Free cash flow -3,719 12,927 4,084 9,740 13,977
would make the company Equity raised 5 0 0 0 0
robust and resilient to Investments -155 -1,900 0 0 0
adverse market conditions Debt financing/disposal -662 -10,132 0 0 0
Dividends paid -738 -1,232 -2,221 -1,236 -1,239
Net change in cash -5,269 -337 1,862 8,504 12,738

Cash & equivalents 6,126 6,355 8,470 17,438 31,537
Sundry debtors 14,592 11,947 13,310 15,673 18,829
Strong unlevered balance
sheet will open up Fixed assets 20,882 22,502 25,442 27,089 28,538
opportunities for Intangible assets 22,179 13,997 13,524 13,154 12,866
inorganic growth Other term assets 1,721 1,721 1,721 1,721 1,721
Total assets 83,792 74,852 85,229 101,868 125,669
Short-term debt 9,569 9,569 9,569 9,569 9,569
Other current liabs 10,997 11,649 12,571 14,420 16,596
Long-term debt/CBs 10,132 0 0 0 0
Other long-term liabs 5,062 5,062 5,062 5,062 5,062
Net worth 42,045 41,881 50,935 64,683 85,081
Ratio analysis
Revenue growth (%) 38.9 1.2 11.4 17.8 20.1
Op Ebitda growth (%) 92.5 -10.0 25.8 25.1 32.8
EBITDA margins to
Op Ebit growth (%) 146.3 -15.1 31.2 32.0 40.6
improve significantly as
new low-competition Op Ebitda margin (%) 23.4 20.8 23.4 24.9 27.5
products are introduced Op Ebit margin (%) 17.9 15.0 17.7 19.8 23.2
Dividend payout (%) -20.4 177.8 9.4 7.1 4.9
Tax rate (%) -29.2 49.1 20.0 20.0 20.0
Net debt/equity (%) 32.3 7.7 2.2 -12.2 -25.8
Net debt/op Ebitda (x) 0.8 0.2 0.1 -0.3 -0.7
Return on equity (%) -12.3 2.6 22.1 23.2 25.4
ROCE (%) 18.6 18.6 21.1 23.0 25.7
Return on assets (%) 11.7 13.6 13.2 14.7 17.2
Source: Company data, IIFL Research
bino@iiflcap.com 36
India - Pharma
CMP Rs 2078
GlaxoSmithKline Pharma ADD
The domestic story
Bloomberg GLXO IN
GlaxoSmithKline Pharma’s strong brand franchise in the high-
growth Indian market makes it a compelling play. Add to it
the large free cashflow generation, strong debt-free balance
16 June 2010 sheet and operations with negative net working capital—the
result is a company with ROIC of over 800% in a market that
52Wk High/Low (Rs) 2271/1150
is in a long-term secular growth phase. It offers modest
Daily volume (US$ m) 2 growth compared to generics players, but its growth is more
Dividend yield CY10ii (%) 1.6 steady, predictable and profitable. Recent acceleration in the
Free float (%) 49.3 domestic market and better-than-expected pick-up in newly
launched products such as Tykerb and Rotarix could deliver
Promoters 50.7 positive surprises—growth rates could pick up from historical
FIIs 15.0 rates of 10-12% to 14-16%. About US$400m cash on books
DIIs 17.0 provides potential upside through acquisitions. ADD.
Others 17.3
Price performance (%) Focus on domestic pharma: Glaxo is a pure play on the high-
1M 3M 1Y growth domestic pharma market. As such, it is one of the best-
GlaxoSK Pharma -2.9 22.4 65.0 positioned players in India to benefit from the industry’s acceleration
Rel. to Sensex -5.4 20.9 47.9 in growth to 15%, from 11% in the previous few years. Introduction
Ranbaxy -4.7 -6.3 51.4 of new patented products from the parent (GSK Plc) or other
Cipla 7.9 7.5 32.5 innovator companies and consolidation in the domestic market could
Pfizer 4.9 21.7 32.8
further accelerate Glaxo’s growth over the next few years.
Stock movement
Volume (LHS)
Well-positioned to participate in industry consolidation: The
Shares (000') (Rs)
Price (RHS) domestic pharma industry is highly fragmented, with over 20,000
300 2,500
250 2,000
companies, and the market leader having a share of just about 5%
200
1,500 by revenue. The advent of the patent regime, increasing regulatory
150
100
1,000 hurdles and growth pressures for big pharma in the developed
50 500
markets have triggered a round of M&A activity in the industry. GSK,
0 0
with ~US$400m cash in hand and its ability to price products at
Jun-10
Jun-09
Aug-09
Jan-10
Jul-09
Sep-09
Oct-09
Nov-09
Dec-09
Feb-10
Mar-10
Apr-10
May-10
significant premium is well positioned to benefit from M&A.

Robust free cashflow Premium valuations to sustain: Glaxo’s strong brand franchise
(Rs m) Free cashflow offers several benefits, among them: 1) a stable business; 2) ~25%
7,000 premium pricing; and 3) negative working capital. Thus, Glaxo can
6,000 be viewed as a highly visible stream of future cash flows. Together
5,000 with potential inorganic upsides, these factors will help sustain the
4,000 stock’s high valuation, in our view. Glaxo shares trade at 32.7x
3,000 CY10ii core earnings; our price target of Rs2,232 is 30x CY11ii core
2,000 earnings plus cash per share.
1,000
0
Financial summary
Y/e 31 Dec CY08A CY09A CY10ii CY11ii CY12ii
CY10ii
CY11ii
CY12ii
CY06A
CY07A
CY08A
CY09A
Revenues (Rs m) 16,604 18,708 21,668 24,918 28,406

EBITDA Margin (%) 34.8 35.0 34.6 34.7 34.7
Source: Company, IIFL Research 4,484 5,049 5,728 6,600 7,562
Pre-Exceptional PAT (Rs m)
Reported PAT (Rs m) 5,766 5,123 5,728 6,600 7,562
bino@ i i f l c a p . c o m Growth (%) - 12.6 13.5 15.2 14.6
(91 22) 4646 4648 39.3 34.9 30.7 26.7 23.3
PER (x)
Ankit Jain ROE (%) 36.6 28.7 27.7 27.6 27.4
(91 22) 4646 4675 27.6 24.0 20.6 17.4 14.8
EV/EBITDA (x)
Price/Book (x) 11.2 9.9 8.5 7.4 6.4
www.iiflcap.com
bino@iiflcap.com 37
GlaxoSmithKline Pharma – ADD
Company snapshot
GlaxoSmithKline Pharmaceuticals, established in 1924 in India, is
one of the oldest and largest pharmaceuticals companies in India.
Over the last four years, it has divested its fine-chemicals and
animal-health businesses, and shut most of its manufacturing
facilities; most of its new products are outsourced. Its product
portfolio has historically been heavy on anti-infectives, vaccines and
acute therapies, but of late it has started concentrating on diabetes,
oncology and cardiovascular diseases. The company employs over
3,500 sales representatives in India, among the largest sales forces
in the Indian pharma industry. The UK-based GSK Plc owns 51% of
the company and sells products developed by it through Glaxo India.
Management
On the board of the company. Previously worked with
Dr H B
Chairman Johnson & Johnson. Is in charge of the company’s overall
Joshipura
operations.
Senior Executive In charge of finance, legal & corporate affairs, corporate
M B Kapadia
Director communications and administration.
Revenue break-up between domestic and international (CY10) Shareholding pattern
Others
APIs /
17%
CRAMS
4%
Others
5% Promoters
DIIs
51%
17%
Domestic
formulations
91% FIIs
15%
Revenue growth has picked up sharply in recent years

32,000 18%
28,000 16%
24,000 14%
12%
20,000
10%
16,000
8%
12,000
6%
8,000 4%
4,000 2%
0 0%
CY05A CY06A CY07A CY08A CY09A CY10ii CY11ii CY12ii
bino@iiflcap.com 38
Industry-leading margins Robust free cashflow

EBITDA margin (Rs m) Free cashflow
36% 7,000
35%
6,000
34%
5,000
33%
4,000
32%
3,000
31%
30% 2,000
29% 1,000
28% 0
CY06A CY07A CY08A CY09A CY10ii CY11ii CY12ii CY06A CY07A CY08A CY09A CY10ii CY11ii CY12ii
Works on negative working capital Domestic formulations will remain the growth driver
Net w orking capital as % of total revenues (Rs m) Iodex
0% Exports - external contract manufacturing
Total domestic pharma
-2% 30,000
-4%
25,000
-6%
20,000
-8%
15,000
-10%
10,000
-12%
5,000
-14%
-16% 0
CY05A CY06A CY07A CY08A CY09A CY06A CY07A CY08A CY09A CY10ii CY11ii CY12ii
High-potential product launches over 2007-09 should continue to drive growth

Product Year of launch Therapeutic area
Zemetril 250 mg 2007-08 Antibiotic, Anti-infective
Arixtra 2.5mg/0.5 ml 2007-08 Anticoagulant
Inflapen Tablets 2007-08 Anti-inflammatory
Benitec -40 2007-08 Cardiology
Augmentin DDS 2007-08 Antibiotic
Tykerb 2007-08 Breast cancer
Carzec Tablets 2007-08 Cardiology
Esblanem 1g 2009 Injectable anti-biotic
Dermocalm Lotion 2009 Dermatology
Cervarix 2009 Cervical cancer vaccine
Rotarix 2009 Gastro-enteritis vaccine
Infanrix 2009 Pediatric
bino@iiflcap.com 39
Financial summary
Revenue 16,604 18,708 21,668 24,918 28,406
EBITDA 5,777 6,546 7,497 8,647 9,857
Strong performance
mirrors the pick-up in the EBIT 5,614 6,383 7,301 8,440 9,640
domestic pharma market Interest income 1,186 1,202 1,390 1,560 1,817
Exceptional items 1,282 74 0 0 0
Taxes 2,315 2,536 2,962 3,400 3,895
Net profit 5,766 5,123 5,728 6,600 7,562

Depr. & amortization 163 164 196 207 217
Tax paid 2,464 1,854 2,962 3,400 3,895
Working capital ∆ -326 205 413 422 467
Other operating items -1,083 -1,011 -1,390 -1,560 -1,817
Capital expenditure -242 -358 -250 -250 -250
Very strong free Free cash flow 3,059 4,757 4,698 5,419 6,179
cash flow Investments 1,469 138 0 0 0
Debt financing/disposal -2 -2 0 0 0
Dividends paid -3,549 -3,943 -2,942 -3,351 -3,861
Other items 870 1,011 1,390 1,560 1,817
Net change in cash 1,848 1,961 3,145 3,627 4,135

Debt-free balance Cash & equivalents 16,863 18,824 21,968 25,596 29,731
sheet with Sundry debtors 579 537 650 748 852
~US$400m cash Inventories - trade 2,330 2,573 3,033 3,488 3,977
Fixed assets 1,004 1,142 1,196 1,239 1,271
Total assets 22,816 24,453 28,755 33,263 38,331
Long-term debt/CBs 57 54 54 54 54
Other long-term liabs -298 -449 -449 -449 -449
Net worth 15,755 17,861 20,647 23,896 27,596
Ratio analysis
Revenue growth (%) 5.3 12.7 15.8 15.0 14.0
Op Ebitda growth (%) 7.5 13.3 14.5 15.3 14.0
Growth picked up Op Ebit growth (%) 7.7 13.7 14.4 15.6 14.2
from CY09 onwards Op Ebitda margin (%) 34.8 35.0 34.6 34.7 34.7
Op Ebit margin (%) 33.8 34.1 33.7 33.9 33.9
Dividend payout (%) 58.8 49.6 50.0 50.0 50.0
Tax rate (%) 28.7 33.1 34.1 34.0 34.0
Net debt/equity (%) -106.7 -105.1 -106.1 -106.9 -107.5
Net debt/op Ebitda (x) -2.9 -2.9 0.0 0.0 0.0
High return ratios—
they would have Return on equity (%) 36.6 28.7 27.7 27.6 27.4
been higher, but for ROCE (%) 36.2 36.5 36.1 35.9 35.4
high cash in hand Return on assets (%) 19.7 20.6 19.9 19.8 19.7
bino@iiflcap.com 40
India - Pharma
CMP Rs 262
Glenmark Pharma Ltd SELL
Yet to excite
Bloomberg GNP IN
Glenmark has recovered significantly from a severe cash
crunch and its impact on business, but our original concerns
about significant capitalisation of expenses still remain—the
16 June 2010 company continues to burn cash. This, combined with the
withdrawal of its plan to float an IPO for its generics
52Wk High/Low (Rs) 304/190 subsidiary, could limit upside on the stock. Business growth
Daily volume (US$ m) 6 in most geographies remains lacklustre, except in the
Dividend yield FY11ii (%) 0.2 domestic market, where the company has so far maintained
Free float (%) 51.6 steady annual growth of ~20%. NCE licensing revenues have
started flowing in with the outlicensing of a pain molecule to
Promoters 48.4 Sanofi, but the profitability of that business remains unclear.
FIIs 26.8 Although the stock is trading at a 20–30% discount to peers,
DIIs 7.9 we remain cautious and await more balance-sheet details to
Others 16.9 assess the company’s future potential. SELL.
1M 3M 1Y Balance sheet remains weak: Notwithstanding a strong reported
Glenmark -5.3 9.9 19.4 performance for FY10, our concerns regarding significant
Rel. to Sensex -7.7 8.5 2.3 capitalisation of expenses still persist. Despite an EBITDA of Rs1.8bn
Ranbaxy -4.7 -6.3 51.4 in 4QFY10, Glenmark’s net debt climbed to Rs17.5bn from Rs15.8bn
Dr Reddys 10.1 18.4 101.6 immediately after the Rs4bn QIP in 3QFY10. The increase in
Sun Pharma 6.9 4.8 33.1 intangibles and CWIP was higher than the company’s EBITDA in
Stock movement FY09, as brand-related intangibles went up by Rs3.1bn and CWIP,
Volume (LHS)
which includes capitalised R&D, went up by Rs2.1bn. We await more
Shares (000') (Rs)
15,000
Price (RHS)
350
details on the balance sheet as at end-FY10.
300
10,000 250 Mixed business performance: Glenmark’s business performance
200
150 remains mixed. In the US, its revenues declined in FY10, and we
5,000 100
50
don’t expect any significant growth in FY11. The domestic business
0 0 remains robust, with revenue growth of ~20% in FY10. The
company’s performance in other markets continues to be volatile,
Jun-10
Jun-09
Aug-09
Jan-10
Jul-09
Sep-09
Oct-09
Nov-09
Dec-09
Feb-10
Mar-10
Apr-10
May-10
and there is no clarity on the profitability of the NCE business.

Moderating growth rates Revenues from the Latin American business declined in FY10, while
(Rs m) Total operating revenue (LHS) those from other semi-regulated markets grew by more than 60%,
Grow th rate (RHS) though on a small base.
40000 80%
Valuation remains low, but not necessarily attractive:
30000 60% Glenmark is trading at 16.3x FY11ii core earnings, at a 20-40%
discount to peers. We believe that the discount is justified, given the
20000 40%
lack of clarity on capitalised expenses. Our price target of Rs252 is
10000 20% 13x FY12ii core earnings, which include US$20m as NCE licensing
income.
0 0%
Financial summary
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A

Revenues (Rs m) 21,162 24,848 29,034 33,260 37,870
Source: Company, IIFL Research EBITDA Margins (%) 22.9 26.1 27.9 28.1 27.8
Reported PAT (Rs m) 1,917 3,310 4,567 5,679 6,566
bino@ i i f l c a p . c o m Growth (%) -52.1 60.5 37.7 24.1 15.4
(91 22) 4646 4648
PER (x) 34.7 21.6 15.7 12.7 11.0
Ankit Jain ROE (%) 12.0 14.2 16.5 17.1 16.5
(91 22) 4646 4675 17.9 13.7 10.9 9.4 8.2
EV/EBITDA (x)
Price/Book (x) 4.2 3.1 2.6 2.2 1.8
www.iiflcap.com
bino@iiflcap.com 41
Glenmark Pharma – SELL
Company snapshot
Glenmark, which was originally engaged almost exclusively in the
domestic generics market, has over the last decade expanded its
operations into the US generics market and other semi-regulated
markets. The company also has developed a drug-discovery division,
which develops early-stage molecules for further out-licensing to
larger partners. After a series of failed drug-discovery partnerships,
the company has recently outlicensed a molecule to Sanofi Aventis.
Glenmark has twelve manufacturing facilities in four countries, and
has five R&D centres. It recently carved out part of its business into
a subsidiary, Glenmark Generics Limited, to market generic generics,
mainly in the US. Plans to take this subsidiary public have been
shelved for the time being.
Management
Joined the company in 1998. Oversees the entire
operations of the organisation. A pharmacy graduate and
Glenn Managing Director & a MBA from Stern, he has worked with Eli Lilly and PWC
Saldanha CEO in the US before joining Glenmark. He has transformed
the company from a branded-generics player to a
research-driven innovation-led company.
Joined the company in January, 1984. Responsible for
Director –
A S Mohanty the strategic growth of the company’s branded
Formulations
formulations business across the world.
Domestic Others
Intl 17%
formulations formulations
29% 30%
DIIs
8%
Promoters
48%
APIs /
CRAMS
11%
US
Others FIIs
formulations
1% 27%
29%
Moderating growth rates

40,000 80%
35,000 70%
30,000 60%
25,000 50%
20,000 40%
15,000 30%
10,000 20%
5,000 10%
0 0%
bino@iiflcap.com 42
Growth in the US business remains modest API revenues have picked up from the FY09 slump
(Rs m) Total US revenues (Rs m) API revenues
8,000 3,000
7,000
2,500
6,000
2,000
5,000
4,000 1,500
3,000
1,000
2,000
500
1,000
0 0
FY07A FY08A FY09A FY10A FY06A FY07A FY08A FY09A FY10A
Latin America remains volatile; other semi-regulated Domestic business continues to be strong
markets show strength
(Rs m) Latin America (ex Argentina) Semi regulated markets (Rs m) Domestic formulations
4,500 14,000
4,000
12,000
3,500
10,000
3,000
8,000
2,500
2,000 6,000
1,500 4,000
1,000 2,000
500 0
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
0 FY10A
FY07A FY08A FY09A FY10A
Licensing income from NCEs remains volatile Major cash-burn is a concern

(Rs m) R&D license fee/ milestones (Rs m) Free cashflow
3,000 0
2,500
(2,000)
2,000
(4,000)
1,500
(6,000)
1,000
(8,000)
500
0 (10,000)
FY05A FY06A FY07A FY08A FY09A FY10A FY06A FY07A FY08A FY09A
bino@iiflcap.com 43
Financial summary
Revenue 21,162 24,848 29,034 33,260 37,870
Growth rates have
EBITDA 4,847 6,486 8,086 9,338 10,514
moderated significantly
from historical rates EBIT 3,820 5,280 6,654 7,764 8,790
Interest income 1,443 200 240 280 300
Interest expense 1,405 1,640 1,416 1,438 1,415
Exceptional items -1,170 0 0 0 0
Taxes 754 529 912 928 1,109
Net profit 1,917 3,310 4,567 5,679 6,566

Tax paid 1,395 529 912 928 1,109
Working capital ∆ -3,877 -3,272 -2,057 -2,963 -3,418
Other operating items 1,715 1,441 1,176 1,158 1,115
Operating cashflow 159 2,685 5,117 5,447 5,987
Assuming there is no Free cash flow -9,403 285 2,117 1,947 2,487
significant capitalisation, Equity raised 351 4,133 0 0 0
we expect free cashflow Investments 6 0 0 0 0
to improve from FY11 Debt financing/disposal 9,839 -2,450 -1,573 -275 -1,151
onwards Dividends paid 0 -126 -127 -127 -127
Other items -1,389 -1,441 -1,176 -1,158 -1,115
Net change in cash -596 401 -759 387 94

Cash & equivalents 896 1,297 538 925 1,019
Sundry debtors 9,553 10,831 12,933 14,771 16,891
Fixed assets 21,117 22,310 23,879 25,805 27,581
Total assets 42,089 47,608 51,125 57,234 63,484
Debt remains high, Sundry creditors 4,563 5,215 5,865 6,698 7,660
despite equity funding of Long-term debt/CBs 20,944 18,494 16,920 16,645 15,494
Rs4.1bn in FY10 Other long-term liabs 569 569 569 569 569
Minorities/other equity 32 32 32 32 32
Net worth 15,982 23,298 27,738 33,290 39,729
Ratio analysis
Revenue growth (%) 6.8 17.4 16.8 14.6 13.9
Op Ebitda growth (%) -39.8 33.8 24.7 15.5 12.6
Growth rates have picked Op Ebit growth (%) -47.9 38.2 26.0 16.7 13.2
up in FY10 over a low Op Ebitda margin (%) 22.9 26.1 27.9 28.1 27.8
base; we expect them to Op Ebit margin (%) 18.1 21.2 22.9 23.3 23.2
moderate in the years
ahead
Dividend payout (%) 5.2 3.3 2.4 1.9 1.7
Tax rate (%) 28.0 13.8 16.6 14.0 14.5
Net debt/equity (%) 125.4 73.8 61.0 50.0 39.0
Net debt/op Ebitda (x) 4.1 2.7 2.1 1.8 1.5
Return on equity (%) 12.0 14.2 16.5 17.1 16.5
ROCE (%) 10.2 12.5 14.7 15.4 15.8
Return on assets (%) 7.3 7.0 8.9 9.9 10.3
bino@iiflcap.com 44
India - Pharma
CMP Rs 1879
Lupin Limited REDUCE
Target 12m Rs1807 (-4%)
Take a breather
Bloomberg LPC IN
Lupin has created a unique business model of its own by
establishing a strong branded-generics franchise in the US,
acquiring well-chosen products there, and making value-
16 June 2010 accretive acquisitions in other markets. Its US revenues have
grown 10.5x in the last four years, aided by the low base and
52Wk High/Low (Rs) 1908/755 comparatively large product acquisitions. The domestic
Daily volume (US$ m) 7 business has also done well, consistently clocking 20%-plus
Dividend yield FY11ii (%) 0.8 revenue growth in the last five years. While we continue to
Free float (%) 52.9 believe in the management and its strategy, we are
increasingly concerned about the steep growth expectations
Promoters 47.1 on the street. We believe it is now time to move to the
FIIs 17.3 sidelines and wait for further clarity on the company’s near-
DIIs 24.2 term growth potential. REDUCE.
Others 11.4
Expectations look stretched: While Lupin has demonstrated strong
1M 3M 1Y capabilities in building a branded-drug business in the US, the
Lupin 4.6 17.5 118.5 company’s lacklustre organic growth over the last few quarters
Rel. to Sensex 2.1 16.1 101.5 suggest that consensus growth expectations are stretched. Lupin’s
Ranbaxy -4.7 -6.3 51.4 consolidated revenue growth over the last few years had a substantial
Dr Reddy's 10.1 18.4 101.6 contribution from acquisitions: against the reported consolidated
Sun Pharma 6.9 4.8 33.1 revenue growth of 34% in FY08, 40% in FY09 and 26% in FY10, its
Stock movement standalone growth rates in these years were 27%, 19% and 16%,
Volume (LHS)
respectively. Nevertheless, organic growth in the domestic business
Shares (000') (Rs)
2,000
Price (RHS)
2,000
continues to be strong, at above 20%.
1,500 1,500 Some risks in sight: Rapid expansion of the company’s sales force in
1,000 1,000 the US, to promote Antara to general practitioners, could raise some
500 500 margin pressure in the near term. The Suprax brand, which contributes
0 0 almost 30% of Lupin’s US revenues from branded drugs, could face
competition from generics in 2HFY11. The consequent fall in revenues
Jun-10
Jun-09
Aug-09
Jan-10
Jul-09
Sep-09
Oct-09
Nov-09
Dec-09
Feb-10
Mar-10
Apr-10
May-10
could be too large to be offset by Allernaze (to be launched in August

The US business has been a key 2010) and other in-house products. On the other hand, any acquisition of
growth driver so far larger products in the US could take a toll on return ratios.
(Rs m) US - branded bus ines s
US - generic generic Valuations—little room for re-rating: Lupin is trading at 21x FY11ii
12,000
core earnings, in line with Dr Reddy’s. Any further returns from the
10,000
stock would have to be driven by earnings growth. Our price target of
8,000
Rs1,807 is 18x FY12ii core earnings, plus other value per share.
6,000
Generic competition to Suprax and a slower-than-expected pick-up in
4,000
new products are downside risks, while value-accretive acquisitions
2,000 could provide upside risk to our projections.
0
Financial summary
FY06A
FY07A
FY08A
FY09A
FY10A

Revenues (Rs m) 38,666 48,708 58,430 67,806 80,058
EBITDA Margins (%) 20.0 20.2 20.0 20.0 21.1
Reported PAT (Rs m) 5,015 6,816 8,047 9,406 12,053
bino@iiflcap.com Growth (%) 35.8 17.9 16.8 28.0
(91 22) 4646 4648 33.6 24.8 21.0 18.0 14.1
PER (x)
Ankit Jain ROE (%) 35.2 29.5 27.0 25.0 25.0
(91 22) 4646 4675 23.3 18.1 15.2 12.9 10.1
EV/EBITDA (x)
Price/Book (x) 11.8 7.3 5.7 4.5 3.5
www.iiflcap.com
bino@iiflcap.com 45
Lupin Ltd – REDUCE
Company snapshot
Established in 1968 as an API manufacturer, Mumbai-based Lupin has
grown to become a fully-integrated pharmaceutical company. It has
products in many major therapeutic areas: cardiovascular, diabetes,
respiratory, paediatrics, neurology, gastro-intestinal, anti-infectives
and painkillers. The company is one of the world’s largest players in
anti-tuberculosis drugs and cephalosporins. Its products reach over 70
countries and it has direct marketing presence in several geographies,
including the US, Europe and Japan.
Management
Dr Desh Bandhu Founded the company in 1968. Has an honorary Doctor
Chairman
Gupta of Science with a master’s degree in chemistry.
Alumnus of IIT Kanpur, JBIMS, IIT Mumbai and Harvard
Dr Kamal K
Managing Director University, he has more than three decades’ experience
Sharma
in the pharmaceuticals and chemical industries.
A chemical engineer and Wharton alumnus, he is in
Group President & charge of all research, including drug discovery, process
Nilesh Gupta
Executive Director and formulation research, and IP group. He also oversees
the supply chain, regulatory, quality and project functions.
Pharmacy graduate and Kellogg alumnus. Has been
Vinita Gupta Director instrumental in the company’s entry into the advanced
markets of the USA and Europe.
Chartered accountant and London Business School
Ramesh President- Finance &
alumnus, he functions as the CFO. Has worked with
Swaminathan Planning
Standard Chartered Bank and Henkel.

US
formulations Intl FIIs
formulations DIIs
34% 17%
20% 24%
Others Others
3% 12%
Domestic
APIs /
formulations Promoters
CRAMS
27% 47%
16%
Growth rate may moderate if acquisitions don’t come through

80,000 50%
40%
60,000
30%
40,000
20%
20,000
10%
0 0%
Source: Company reports, IIFL
bino@iiflcap.com 46
The US business has been a key growth driver so far Domestic formulations business continues to grow at 20%+
(Rs m) US - branded business US - generic generic (Rs m) Domestic formulations
12,000 25,000
10,000
20,000
8,000
15,000
6,000
10,000
4,000
5,000
2,000
0
FY11ii
FY12ii
FY13ii
FY05A
FY06A
FY07A
FY08A
FY09A
FY10A
0
API revenues have picked up after the slump in FY09 Expect EBITDA margin to remain stable
(Rs m) Total API revenues EBITDA Margin
9,000 22%
8,000 21%
7,000
20%
6,000
5,000 19%
4,000 18%
3,000
17%
2,000
16%
1,000
0 15%
FY05A FY06A FY07A FY08A FY09A FY10A FY07A FY08A FY09A FY10A FY11ii FY12ii FY13ii
Acquisitions kept free cashflow low; set to improve ahead Acquisitions have contributed significantly to reported
growth figures
(Rs m) Total Free cash flow 45% Novodigm extra contribution (acquired
2QFY08)
8,000 40%
South-Africa extra contribution
35% (acquired 3QFY09)
6,000 Kyow a Japan - extra contribution
30%
(acquired 3QFY08)
4,000 25% Hormosan Germany - extra
20% contribution (acquired in 2QFY09)
2,000 Aerochamber extra contribution
15% estimate (acquired 2Q09)
0 10% Lotrel contribution (not acquired, but
one-off in 4QFY10)
(2,000) 5%
Antara contribution estimate
0% (acquireded 3QFY10)
(4,000) Organic grow th
FY07
FY08
FY09
FY10
bino@iiflcap.com 47
Financial summary
Strong revenue growth, Revenue 38,666 48,708 58,430 67,806 80,058
both organically and EBITDA 7,715 9,839 11,658 13,529 16,871
through acquisitions EBIT 6,835 8,600 10,064 11,655 14,741
Interest income 46 142 105 132 144
Exceptional items -322 0 0 0 0
Taxes 983 1,360 1,553 1,815 2,326
Net profit 5,015 6,816 8,047 9,406 12,053

Net profit 6,060 8,357 9,707 11,346 13,366
Depr. & amortization 880 1,239 1,594 1,873 2,130
Tax paid 1,068 1,360 1,553 1,815 2,139
Working capital ∆ -1,739 -2,265 -2,260 -2,229 -2,585
Other operating items 562 243 358 309 202
Frequent acquisitions
Free cash flow -258 46 2,845 4,484 5,974
have historically kept free
cashflow subdued Equity raised 54 0 0 0 0
Investments -88 0 0 0 0
Debt financing/disposal -246 2,701 -551 -2,366 -3,469
Dividends paid -983 -1,211 -1,404 -1,562 -1,564
Other items -458 -243 -358 -309 -202
Net change in cash -1,978 1,294 533 247 739

Cash & equivalents 811 2,104 2,637 2,884 3,624
Sundry debtors 10,349 12,664 15,192 17,629 20,456
Inventories – trade 9,572 12,177 14,607 16,951 19,670
Fixed assets 14,252 19,180 22,586 25,712 28,582
Total assets 41,342 53,211 62,808 71,638 81,576
Other current liabs 1,827 1,827 1,827 1,827 1,827
Strong balance sheet with Long-term debt/CBs 12,233 11,645 11,095 8,729 5,260
low debt—can support Other long-term liabs 1,387 1,387 1,387 1,387 1,387
more acquisitions Minorities/other equity 143 323 430 554 702
Net worth 14,248 23,142 29,785 37,629 47,145
Ratio analysis
Growth significantly aided Revenue growth (%) 34.7 26.0 20.0 16.0 18.1
by several acquisitions Op Ebitda growth (%) 28.5 27.5 18.5 16.0 24.7
Op Ebit growth (%) 27.6 25.8 17.0 15.8 26.5
Op Ebitda margin (%) 20.0 20.2 20.0 20.0 21.1
Expect margins to remain
stable Op Ebit margin (%) 17.7 17.7 17.2 17.2 18.4
Dividend payout (%) 20.6 17.6 16.6 14.2 11.1
Tax rate (%) 16.2 16.3 16.0 16.0 16.0
Net debt/equity (%) 80.2 41.2 28.4 15.5 2.8
Return on equity (%) 35.2 29.5 27.0 25.0 25.0
ROCE (%) 24.5 23.8 23.8 24.4 26.9
Return on assets (%) 12.9 12.8 12.8 13.1 14.6
bino@iiflcap.com 48
India - Pharma
CMP Rs 230
Opto Circuits BUY
Finger on the pulse
Bloomberg OPTC IN
After a few quarters of a lull, Opto Circuits is set for another
stage of rapid growth. The company’s invasive and Criticare
businesses registered a surge in revenues in 4QFY10,
16 June 2010 growing 28% YoY and 30% YoY, respectively. Opto’s
revenues grew 50% annually over FY05-10, but in our view,
52Wk High/Low (Rs) 248/131 it has barely scratched the surface of the huge opportunity in
Daily volume (US$ m) 3 the global medical-devices market. Opto has single-digit
Dividend yield FY11ii (%) 2.6 market share in most of the markets in which it operates, and
Free float (%) 72.5 has demonstrated its ability to gain share rapidly, both
organically and through acquisitions. We project 26%
Promoters 27.5 earnings CAGR over FY10-13ii. We retain BUY with a target
FIIs 34.6 price of Rs293 (14x FY12ii core EPS).
DIIs 2.7
Others 35.2 World-wide reach enables growth through market share gains:
Opto has developed a strong global distribution reach in the medical-
1M 3M 1Y devices business. Yet, its share in most markets is still in single digits,
Opto Circuits Ltd 0.7 3.3 43.1 and we see significant room for growth. Distribution reach is also key to
Rel. to Sensex -1.7 1.8 26.1 the company’s inorganic growth strategy: Opto acquires product
Ranbaxy -4.7 -6.3 51.4 companies and accelerates sales growth by ramping up penetration of
Dr Reddy's 10.1 18.4 101.6 various geographies. Its legacy business of selling sensors for pulse
Biocon 6.4 12.1 47.8 oximeters to original equipment manufacturers (OEMs) and distributors
Stock movement continues to grow by gaining share. Its OEM customers include Philips,
Volume (LHS)
GE Healthcare and Nonin. The acquisition of Eurocor widened its
Shares (000') (Rs)
12,000
Price (RHS)
300
product basket in the high-entry-barrier interventional cardiology
10,000 250 market, and sales in this segment ramped up rapidly through Opto’s
8,000 200 distribution chain. Acquisition of Criticare added more products to its
6,000 150
4,000 100 non-invasive portfolio.
2,000 50
0 0 Enhancing the product portfolio: Eurocor, Opto’s subsidiary in the
interventional coronary devices business, recently launched a cobalt
Jun-10
Jun-09
Aug-09
Jan-10
Jul-09
Sep-09
Oct-09
Nov-09
Dec-09
Feb-10
Mar-10
Apr-10
May-10
chromium drug-coated stent. These stents are stronger and more

The growth story radio-opaque, providing several benefits over the traditional
(Rs m) Total operating rev enue (LHS) stainless-steel stents. This launch has added considerable growth
21,000
Grow th rate (RHS)
100% momentum to Opto’s invasives business. The Criticare subsidiary in
18,000
80%
the US has launched a gas bench, whose sales have been picking up,
15,000 adding to the growth in non-invasive portfolio.
12,000 60%
9,000 40% Valuations continue to be attractive: Opto is trading at 13x
6,000
20% FY11ii core earnings. This, we believe, is an attractive valuation for a
3,000
0 0%
company whose earnings we expect to grow at 26% annually over
FY10-13ii. Our price target of Rs293 is 14x FY12ii core earnings.
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A
Financial summary
Source: Company, IIFL Research Y/e 31 Mar FY09A FY10ii FY11ii FY12ii FY13ii
Revenues (Rs m) 8,185 10,776 13,065 15,511 18,112
EBITDA Margins (%) 31.2 33.7 33.0 33.0 33.0
Reported PAT (Rs m) 2,087 2,601 3,548 4,196 4,965
bino@ i i f l c a p . c o m Growth (%) 7.1 36.4 18.3 18.3
(91 22) 4646 4648 PER (x) 17.8 16.6 12.2 10.3 8.7
Ankit Jain ROE (%) 40.4 23.5 25.7 25.1 24.4
(91 22) 4646 4675 EV/EBITDA (x) 16.3 12.1 10.1 8.4 7.0
Price/Book (x) 7.2 3.9 3.1 2.6 2.1
www.iiflcap.com Source: Company, IIFL Research. Price as at close of business on 15 June 2010.
bino@iiflcap.com 49
Opto Circuits – BUY
Company snapshot
Originally started in 1982 as a supplier of hardware parts to the
computer industry, Opto soon shifted its focus to medical devices.
Original products were mainly OEM supplies of sensors to large
medical-device players of the West. At present, the company’s non-
invasive product portfolio includes digital thermometers, pulse
oximeters, fluid warmers, patient monitoring systems and medical
sensors. The company has manufacturing units in Bangalore and
Vizag. In 2006, it entered the invasive vascular-intervention
segment through the acquisition of Eurocor in Germany. Another
acquisition—Criticare in the US in 2008—enhanced its non-invasive-
products portfolio. The company has a wide customer base spanning
the USA, Europe, Middle East, Far East and South Africa.
Management
Chairman and Mechanical engineer by training, oversees the entire
Vinod Ramnani
Managing Director operations of Opto; very hands-on management style.
A Swiss-born American citizen and co-promoter of Opto.
Thomas An electronics engineer by training; has extensive
Promoter Director
Dietiker experience in business development, products and wide
range of related electronic assemblies.
Engineer by training, has been instrumental in product
Jayesh Patel Promoter Director design and conception of a multitude of opto-electronic
products for the company.
Revenues by business segment (FY10) Shareholding pattern
Mediaid + Others
Domestic IT- Promoters
Opto 35%
AMDL 27%
international
2% 55%
Domestic
healthcare -
AMDL
3%
DIIs
Invasive / FIIs
Criticare 3%
Eurocor 35%
17%
23%
The growth story

21,000 100%
18,000
80%
15,000
12,000 60%
9,000 40%
6,000
20%
3,000
0 0%
bino@iiflcap.com 50
Legacy non-invasives business continues to grow Criticare – revenue growth has gained momentum
(Rs m) Legacy non-invasive business (Rs m) Criticare revenues
10,000 700
600
8,000
500
6,000 400
300
4,000
200
2,000 100
0 0
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A
FY09 FY10
Eurocor is getting back on the growth track EBITDA margin stays steady, despite acquisition of low-
margin Criticare business
(Rs m) Invasive/Eurocor revenues EBITDA margin
1,200 36%
34%
1,000
32%
800
30%
600 28%
400 26%
24%
200
22%
0 20%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A
FY09A FY10A
Working-capital situation is improving Tax rate likely to rise as tax exemption for EOU expires
Inventories as a % of revenues (LHS) Tax rate
Sundry debtors as a % of revenues (RHS) 12%
60% 60%
10%
50% 50%
8%
40% 40%
6%
30% 30%
20% 20% 4%
10% 10% 2%
0% 0% 0%
FY11ii
FY12ii
FY13ii
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A
FY06A
FY07A
FY08A
FY09A
FY10A
bino@iiflcap.com 51
Financial summary
Strong revenue growth Revenue 8,185 10,776 13,065 15,511 18,112
continues EBITDA 2,555 3,637 4,311 5,119 5,977
EBIT 2,417 3,359 4,040 4,765 5,548
Interest income 288 -76 98 72 81
Taxes 75 299 268 367 434
Net profit 2,087 2,601 3,548 4,196 4,965

Depr. & amortization 138 197 271 353 429
Tax paid 75 299 268 367 434
Working capital ∆ -1,953 -1,513 -1,366 -1,517 -1,612
Other operating items 840 458 205 179 122
Operating cashflow is Operating cashflow 1,153 1,744 2,677 3,235 3,931
strong; negative free
Capital expenditure -3,941 -940 -1,300 -1,300 -1,300
cashflow in FY09 due to
Free cash flow -2,788 804 1,377 1,935 2,631
Criticare acquisition
Equity raised 175 4,079 0 0 0
Investments -400 0 0 0 0
Debt financing/disposal 4,367 -3,359 -348 -323 -1,144
Dividends paid -755 -755 -856 -1,284 -1,284
Other items -516 -458 -205 -179 -122
Net change in cash 83 311 -32 149 81

Cash & equivalents 916 1,227 1,195 1,344 1,425
Sundry debtors 4,060 4,428 5,357 6,360 7,426
Fixed assets 2,167 2,910 3,939 4,886 5,757
Total assets 14,391 17,667 20,968 24,584 28,214
Proceeds of equity issue Long-term debt/CBs 5,379 2,020 1,672 1,350 206
in FY10 used to repay part Other long-term liabs 3 3 3 3 3
of debt issue Minorities/other equity 134 135 154 177 204
Net worth 5,166 11,090 13,782 16,694 20,375
Ratio analysis
Potential upsides to our Revenue growth (%) 74.9 31.7 21.2 18.7 16.8
growth rate projections Op Ebitda growth (%) 88.9 42.3 18.6 18.7 16.8
Op Ebit growth (%) 87.4 39.0 20.3 17.9 16.4
Op Ebitda margin (%) 31.2 33.7 33.0 33.0 33.0
Op Ebit margin (%) 29.5 31.2 30.9 30.7 30.6
Dividend payout (%) 30.9 28.1 30.9 26.2 22.1
Tax rate (%) 3.5 10.3 7.0 8.0 8.0
Net debt/equity (%) 86.4 7.2 12.1 8.1 1.0
Return on equity (%) 40.4 23.5 25.7 25.1 24.4
ROCE (%) 22.9 25.6 26.1 26.4 27.0
Return on assets (%) 14.5 14.7 16.9 17.1 17.6
bino@iiflcap.com 52
India - Pharma
CMP Rs 436
Ranbaxy Laboratories SELL
Running ahead of reality
Bloomberg RBXY IN
Ranbaxy’s large first-to-file exclusivity opportunities in the
US market that started kicking in from CY09 have driven a
strong rally in the stock. While the exclusivity earnings
16 June 2010 momentum may keep the stock buoyant, we believe the
upside is limited, as gaps between exclusivity revenue
52Wk High/Low (Rs) 538/236 streams will bring upsides due to investors’ focus on the
Daily volume (US$ m) 11 lacklustre performance in the base business and the
Dividend yield CY10ii (%) 1.2 unsustainability of the exclusivity. With new management in
Free float (%) 36.1 place and the manufacturing quality situation and general
operational matters improving, we do expect steady
Promoters 63.9 improvement in the base business; however, these factors, in
FIIs 7.6 our view, are already priced in. We retain SELL.
DIIs 11.6
Others 16.9 Shaping base business is not easy: According to Ranbaxy’s
guidance, its base business—excluding one-off exclusivity upsides in
1M 3M 1Y the US—will continue to make operating losses in CY10. A clean chit
Ranbaxy -4.7 -6.3 51.4 from the US FDA on manufacturing plants would bolster revenue
Rel. to Sensex -7.2 -7.8 34.3 growth rates in CY11 and CY12, but EBITDA margins are unlikely to
Sun Pharma 6.9 4.8 33.1 better historical levels of 12-13%. Meanwhile, the growth outlook in
Dr Reddy's 10.1 18.4 101.6 most markets is bleak; one exception is Africa, but this market is yet
Cipla 7.9 7.5 32.5 to deliver stable growth that can reflect on the company’s overall
Stock movement topline. We continue to expect steady improvement in overall
Volume (LHS)
operations, but consider the stock price to have run ahead of time.
Shares (000') (Rs)
20,000
Price (RHS)
600
The Japan generics opportunity and other synergies with Daiichi
15,000
500 Sankyo will take several years to play out, in our view.
400
10,000 300 Resolution of US FDA issues will take time; risk of losing
200
5,000
100
exclusivity opportunities: Of the two Ranbaxy plants implicated in
0 0 the US FDA quality issues, we expect Dewas to get clearance within
the next 3-4 months. However, the AIP (application integrity policy)
Jun-10
Jun-09
Aug-09
Jan-10
Jul-09
Sep-09
Oct-09
Nov-09
Dec-09
Feb-10
Mar-10
Apr-10
May-10
applied on the Paonta Sahib facility is more critical and could take 1-
Base business margins remain 2 years to be completely resolved. The company will have to take up
subdued each of the ANDAs filed from the facility and determine the extent of
30% EBITDA margin remedial measures required in each case. This could even risk the
EBITDA margin excl exclusivity loss of one or more of the large exclusivity opportunities in its bag.
25%
20%
Valuation remains very expensive: Ranbaxy is trading at 30x
CY12ii core earnings, adjusted for the value of exclusivities and non-
15% recurring earnings per share. Our CY12 numbers assume near-
10% complete resolution of US FDA issues. Our price target of Rs411 is
22x CY12ii core earnings plus the value of one-off exclusivities.
5%
Financial summary
0%
CY10ii
CY11ii
CY12ii
CY06A
CY07A
CY08A
CY09A
Revenues (Rs m) 74,214 75,970 89,715 105,540 137,125

EBITDA Margins (%) 7.7 8.1 19.5 21.6 27.7
Source: Company, IIFL Research Pre-Exceptional PAT (Rs m) -9,512 2,027 13,053 15,218 26,982
Reported PAT (Rs m) -9,512 2,965 13,053 15,218 26,982
Dr Bino Pathiparampil EPS (Rs) -22.6 4.7 30.5 35.5 62.8
bino@ i i f l c a p . c o m Growth (%) -121.0 543.1 16.4 77.1
(91 22) 4646 4648 PER (x) -19.3 92.0 14.3 12.3 6.9
Ankit Jain ROE (%) -22.1 6.8 23.1 22.0 29.6
(91 22) 4646 4675 EV/EBITDA (x) 35.4 34.0 12.1 9.2 5.4
Price/Book (x) 4.3 4.3 3.3 2.7 2.1
bino@iiflcap.com 53
Ranbaxy – SELL
Company snapshot
Ranbaxy is India’s leading pharma company, with a global footprint
in 46 countries. It is one of the largest players in the domestic
market, with a share of ~5% by revenue, and has products across
most therapeutic areas. In 2008, Daiichi Sankyo, a leading Japanese
innovator pharma company, acquired majority stake in Ranbaxy.
Ranbaxy has manufacturing facilities in seven countries and employs
over 12,000 people of 50 nationalities. It is one of the most
successful companies to gain from the system of 180-day exclusivity
for first generic player in any particular drug in the US market, under
the Hatch-Waxman Act; it has exclusivity rights to Lipitor generic, a
US$7bn drug at innovator prices. However, it has been plagued by
manufacturing quality issues at its plants that have weighed on its
US sales for the last two years.
Management
A graduate from Hokkaido University and a PhD in
Chairman, Non
Dr Tsutomu Microbiology, he was inducted on the board of Ranbaxy in
Executive & Non
Une Dec, 2008. He has been with Daiichi for close to four
Independent Director
decades holding many important managerial positions.
An alumnus of IIM-A and St Stephens College, he worked
with Xerox and Hero Honda prior to joining Ranbaxy in
CEO & Managing
Atul Sobti Oct, 2005. He is responsible for the global business
Director
operations encompassing pharma, consumer healthcare,
API, manufacturing and R&D.
A chartered accountant by profession, he joined the
company in 1989.He head the Finance function,
Omesh Sethi President & CFO
Secretarial, Global Taxation, Treasury, Insurance and
Forex operations.
Revenue break-up between domestic and international (CY09) Shareholding pattern

Domestic
formulations
19% Others
17%
APIs/CRAMS
7%
Intl DIIs Promoters
formulations 12% 63%
Others
44%
4%
US FIIs
formulations 8%
26%
US FDA clearance of manufacturing facilities will spur growth

160,000 35%
140,000 30%
120,000 25%
100,000
20%
80,000
15%
60,000
40,000 10%
20,000 5%
0 0%
CY06A CY07A CY08A CY09A CY10ii CY11ii CY12ii
bino@iiflcap.com 54
Ranbaxy – SELL
Expect a pick-up in the domestic business Expect OTC business to continue robust growth
(Rs m) Domestic formulations (Rs m) Global consumer healthcare
25,000 4,000
3,500
20,000
3,000
15,000 2,500
2,000
10,000 1,500
1,000
5,000
500
0 0
CY08A CY09A CY10ii CY11ii CY12ii CY08A CY09A CY10ii CY11ii CY12ii
CIS business declined in CY09 Asia-Pacific revenues will decline in CY10 as some
businesses are being wound up
(Rs m) CIS revenues (Rs m) Asia-Pacific revenues
6,000 6,000
5,000 5,000
4,000 4,000
3,000 3,000
2,000 2,000
1,000 1,000
0 0
CY06A CY07A CY08A CY09A CY06A CY07A CY08A CY09A CY10ii
US revenues to pick up as manufacturing issues get sorted Base business margins remain subdued
out
(Rs m) North America revenues EBITDA margin EBITDA margin excl exclusivity
60,000 30%
50,000 25%
40,000 20%
30,000 15%
20,000 10%
10,000 5%
0 0%
CY06A CY07A CY08A CY09A CY10ii CY11ii CY12ii CY06A CY07A CY08A CY09A CY10ii CY11ii CY12ii
bino@iiflcap.com 55
Ranbaxy – SELL
Financial summary
Revenue 74,214 75,970 89,715 105,540 137,125
US FDA clearance of
EBITDA 5,731 6,187 17,506 22,831 38,018
facilities could lead to a
EBIT 2,906 3,510 14,437 19,657 34,731
pick-up in business
Interest income -15,852 6,360 5,491 800 800
Interest expense 2,055 710 395 902 855
Exceptional items 0 938 0 0 0
Taxes -5,651 6,991 5,803 4,107 7,282
Net profit -9,512 2,965 13,053 15,218 26,982

Tax paid 1,360 2,426 5,803 4,107 7,282
Working capital ∆ -3,235 -939 -4,435 -5,346 -12,264
Other operating items 14,373 -12,239 -9,096 102 55
Operating cashflow -2,397 -2,831 2,671 13,379 18,472
Expect free cashflow to Capital expenditure -7,224 -4,382 -4,600 -4,800 -5,000
remain negative in CY10 Free cash flow -9,621 -7,213 -1,929 8,579 13,472
Equity raised 36,146 13 0 0 0
Investments 647 6,237 -4,000 -4,000 -4,000
Debt financing/disposal -4,497 -4,460 20,259 -28,056 -5,315
Dividends paid -2,620 0 0 -2,463 -4,932
Other items -1,686 -770 5,096 -102 -55
Net change in cash 18,369 -6,192 19,426 -26,041 -830

Sundry debtors 13,310 18,399 19,737 23,219 30,167
Fixed assets 49,607 51,136 52,667 54,293 56,006
Other term assets -21,329 -11,262 -3,262 738 4,738
Total assets 95,200 99,959 134,182 122,787 145,674
Balance sheet continues Sundry creditors 20,678 24,443 25,273 28,948 34,688
to be levered; large Long-term debt/CBs 43,114 36,295 56,554 28,499 23,184
liabilities related to forex Other long-term liabs -12,229 -4,746 -4,746 -4,746 -4,746
derivatives compound the Minorities/other equity 675 533 613 844 1,256
problem Net worth 42,962 43,434 56,487 69,242 91,292
Ratio analysis
Revenue growth (%) 9.4 2.4 18.1 17.6 29.9
Op Ebitda growth (%) -19.7 8.0 183.0 30.4 66.5
Op Ebit growth (%) -41.3 20.8 311.3 36.2 76.7
Op Ebitda margin (%) 7.7 8.1 19.5 21.6 27.7
Expect margins to show Op Ebit margin (%) 3.9 4.6 16.1 18.6 25.3
major improvement, Net profit margin (%) -12.8 2.7 14.5 14.4 19.7
mainly due to one-off Dividend payout (%) 0.0 0.0 16.1 27.7 15.6
exclusivity-related upside Tax rate (%) 37.7 69.2 30.6 21.0 21.0
Net debt/equity (%) 44.6 55.0 100.1 41.2 25.4
Return on equity (%) -22.1 6.8 23.1 22.0 29.6
ROCE (%) 3.9 4.7 13.3 21.1 31.7
Return on assets (%) -10.0 2.0 9.7 12.4 18.5
bino@iiflcap.com 56
India - Pharma
CMP Rs 1702
Sun Pharma BUY
Target 12m Rs2111 (24%)
Undisputed leadership
Bloomberg SUNP IN
Sun Pharma will retain its premium valuation, in our view, by
virtue of superior margins, better ROE, strong balance sheet
and cash flows, high promoter shareholding, and the
16 June 2010 increasing involvement of professional management. Sun has
a strategic focus on the US market and has 123 ANDAs
52Wk High/Low (Rs) 1853/1050 pending approval—the largest such portfolio among Indian
Daily volume (US$ m) 9 players. Revenues from the domestic and other emerging
Dividend yield FY11ii (%) 0.8 markets are set to grow more than 20% in FY11. The strong
Free float (%) 36.3 18-20% growth guidance for FY11 and signs of a quick
resolution of quality issues at Caraco facilities in the US make
Promoters 63.7 us confident about the continuing growth momentum in the
FII 20.2 company’s businesses. We retain BUY with a target price of
DIIs 5.5 Rs2,111.
Others 10.6
Strong guidance despite loss of Protonix revenue: Sun
1M 3M 1Y Pharma’s guidance of 18-20% topline growth and maintenance of
Sun Pharma 6.9 4.8 33.1 profitability for FY11 is a major surprise on the upside, considering
Rel. to Sensex 4.4 3.4 16.0 the large base of FY10 that included generic Protonix in US
Ranbaxy -4.7 -6.3 51.4 (~US$140m in FY10). Following an adverse jury opinion in the
Dr Reddy's 10.1 18.4 101.6 patent litigation, Sun has discontinued selling the product from May
Cipla 7.9 7.5 32.5 2010. Our projections are still 8-9% below company guidance, but
Stock movement we see potential for earnings upgrades, as we get more visibility on
Volume (LHS)
growth during the course of the year.
Shares (000') (Rs)
Price (RHS)
4,000 2,000 Optimism on Caraco: For the first time since the US FDA action at
3,000 1,500 Caraco’s facilities in Detroit, Sun Pharma’s management has
2,000 1,000 expressed optimism on resolution of the quality issues well ahead of
1,000 500 end-FY11. This deadline is at the near end of the time frame we had
0 0 expected, and will contribute to growth and margin recovery. We
expect revenues from the products shifted to other facilities to start
Jun-10
Jun-09
Aug-09
Jan-10
Jul-09
Sep-09
Oct-09
Nov-09
Dec-09
Feb-10
Mar-10
Apr-10
May-10
flowing in as early as 1HFY11.

Market leader in margins
Potential earnings upgrades; premium valuations to stay: Sun
Sun Pharma Dr Reddy's Pharma trades at 31x FY11ii core earnings, adjusted for cash and
Glenmark Cipla
Ranbaxy one-off upsides. This is a 20-30% premium to peers, but with the
50%
loss of Protonix revenues and impact of manufacturing halt at Caraco
40% already priced in, we see no downside to Sun Pharma’s premium
30% valuation. Our price target of Rs2,111 is 28x FY12ii core earnings
plus cash and other values per share. Improvement in visibility about
20%
achieving the guidance and positive developments on the Taro
10% acquisition front could provide further upside.
0% Financial summary
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A

Revenues (Rs m) 42,723 39,938 43,239 52,496 61,451
EBITDA Margins (%) 43.6 33.3 33.0 34.6 35.7
Source: Company reports, IIFL research
Reported PAT (Rs m) 18,177 13,511 14,218 18,177 22,264
EPS (Rs) 87.8 65.2 68.6 87.8 107.5
bino@ i i f l c a p . c o m Growth (%) -25.7 5.2 27.8 22.5
(91 22) 4646 4648 PER (x) 19.4 26.1 24.8 19.4 15.8
ROE (%) 25.8 16.8 15.5 17.1 17.8
Ankit Jain
(91 22) 4646 4675 EV/EBITDA (x) 17.5 23.7 21.5 16.3 12.8
Price/Book (x) 5.0 4.4 3.9 3.3 2.8
bino@iiflcap.com 57
Sun Pharma – BUY
Company snapshot
Founded by Dilip Shanghvi in Kolkata in 1983, with just five
psychiatry products and a 10-member team, Sun Pharma has grown
to become the largest Indian pharma company by market
capitalisation. In the domestic market, the company concentrates on
high-growth lifestyle therapeutic segments such as CVS, CNS, GI
and pain management. Sun Pharma has a strategy to enter the high-
barrier niche segments in India and the international markets. Sun
entered the US generics market through the acquisition of Caraco in
2002. Over the past few years, the company has built a 123-strong
pipeline of ANDA filings. Currently, the company is trying to acquire
Taro Pharma in the US. Sun has 17 manufacturing plants across
three continents, 8,000 employees, two world-class research
centres, and leadership brands selling in markets worldwide.
Management
Founded the company in 1982. Has extensive industrial
Chairman and experience in the pharmaceutical industry and is actively
Dilip Shanghvi
Managing Director involved in international pharmaceutical markets and
R&D functions of the company.
Fellow member of Institute of Chartered Accountants of
Sudhir Valia Executive Director India. Joined Sun in 1994 and has more than two
decades of taxation and finance experience.
Former GSK India MD; joined Sun from April this year,
has been inducted on the board as an additional director
Kal Sundaram Chief Executive Officer
and will look after the worldwide operations of the
company.
APIs/CRAMS FIIs
Domestic (14%) (4%)
formulations
(44%)
Others DIIs
(3%) (13%)
Promoters
(61%)
US
formulations
Intl
(27%) Others
formulations
(22%)
(12%)
Strong growth momentum to continue; FY10 numbers adversely affected by high

exclusivity base of FY09 and Caraco facility shutdown in the US
(Rs m) Total operating revenue (LHS) Grow th rate (RHS) (%)
70,000 70%
60,000 60%
50,000 50%
40%
40,000
30%
30,000
20%
20,000 10%
10,000 0%
0 -10%
FY04A FY05A FY06A FY07A FY08A FY09A FY10A FY11ii FY12ii FY13ii
bino@iiflcap.com 58
Sun Pharma – BUY
Secular growth in the domestic market Revenues from Caraco products set to rebound as
manufacturing quality issues get sorted out
Domestic formulations revenue (LHS) Grow th rate (%) (Rs m) Caraco - ow n products
35,000 50% 7,000
(Rs m)
40% 6,000
28,000
5,000
30%
21,000 4,000
20%
14,000 3,000
10%
2,000
7,000 0% 1,000
0 -10% 0
FY11ii
FY12ii
FY13ii
FY11ii
FY12ii
FY13ii
FY04A
FY05A
FY06A
FY07A
FY08A
FY09A
FY10A
FY06A
FY07A
FY08A
FY09A
FY10A
Secular growth in the US base business, with additional Emerging market business growing fast as well
benefits from product exclusivities
Sun's revenue excluding Caraco US exclusivities revenue (Rs m) Non-US international formulations
10,000
10,000
(Rs m) 8,000
8,000
6,000
6,000
4,000
4,000
2,000
2,000
0
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A
0
Industry-leading EBITDA margins Strong cashflow generation

Sun Pharma Dr Reddy's Glenmark (Rs m) Free cashflow
Cipla Ranbaxy
50% 16,000
40% 12,000
30% 8,000
20% 4,000
10% 0
0% (4,000)
FY11ii
FY12ii
FY13ii
FY11ii
FY12ii
FY13ii
FY06A
FY07A
FY08A
FY09A
FY10A
FY06A
FY07A
FY08A
FY09A
FY10A
bino@iiflcap.com 59
Sun Pharma – BUY
Financial summary
Revenue 42,723 39,938 43,239 52,496 61,451
EBITDA 18,639 13,302 14,270 18,155 21,962
Our projections are 8-9% EBIT 17,406 11,769 12,691 16,514 20,245
below management Interest income 2,229 3,143 2,907 3,603 4,364
guidance; there is Interest expense 143 0 143 143 143
potential for upgrades Exceptional items 0 -764 0 0 0
Taxes 712 679 927 1,198 1,468
Minorities and other 603 -41 309 599 734
Net profit 18,177 13,511 14,218 18,177 22,264

Tax paid 1,690 679 927 1,198 1,468
Working capital ∆ 31 226 -1,495 -4,544 -4,411
Other operating items 2,585 -3,143 -2,764 -3,460 -4,221
Robust free cashflow will Capital expenditure -6,556 -1,700 -2,000 -2,400 -2,400
aid growth through Free cash flow 15,095 10,386 9,848 10,013 13,683
acquisitions Investments -205 0 0 0 0
Debt financing/disposal 351 0 0 0 0
Dividends paid -2,422 -3,332 -3,332 -3,332 -3,332
Other items 857 3,143 2,764 3,460 4,221
Net change in cash 13,675 10,197 9,280 10,141 14,572

About US$800m cash in Sundry debtors 8,811 9,984 10,810 13,124 15,363
hand; more acquisitions Inventories - trade 9,757 9,186 9,945 12,074 14,134
possible even after Other current assets 7,425 7,389 7,999 9,712 11,368
completion of Taro deal Fixed assets 16,196 16,363 16,784 17,543 18,226
Investments 6,719 6,719 6,719 6,719 6,719
Total assets 80,728 91,658 103,554 120,609 141,819
Long-term debt/CBs 1,789 1,789 1,789 1,789 1,789
Other long-term liabs -679 -679 -679 -679 -679
Minorities/other equity 1,970 1,929 2,238 2,838 3,572
Net worth 70,449 80,628 91,514 106,359 125,291
Ratio analysis
Revenue growth (%) 27.3 -6.5 8.3 21.4 17.1
Op Ebitda growth (%) 20.2 -28.6 7.3 27.2 21.0
Op Ebit growth (%) 19.7 -32.4 7.8 30.1 22.6
Consistently high
margins, with occasional Op Ebitda margin (%) 43.6 33.3 33.0 34.6 35.7
upside from product Op Ebit margin (%) 40.7 29.5 29.4 31.5 32.9
exclusivities in the US; Net profit margin (%) 42.5 35.7 32.9 34.6 36.2
base margins will improve Dividend payout (%) 15.7 21.1 20.0 15.7 12.8
further as Caraco facilities Tax rate (%) 3.7 4.8 6.0 6.0 6.0
re-start production Net debt/equity (%) -47.5 -54.2 2.0 1.7 1.4
Net debt/op Ebitda (x) -1.8 -3.3 0.1 0.1 0.1
Return on equity (%) 25.8 16.8 15.5 17.1 17.8
ROCE (%) 24.3 14.4 13.7 15.4 16.0
Return on assets (%) 22.5 15.6 13.7 15.1 15.7
bino@iiflcap.com 60
India - Pharma
Key to our recommendation structure
BUY - Absolute - Stock expected to give a positive return of over 20% over a 1-year horizon.
SELL - Absolute - Stock expected to fall by more than 10% over a 1-year horizon.
In addition, Add and Reduce recommendations are based on expected returns relative to a hurdle rate. Investment horizon
for Add and Reduce recommendations is up to a year. We assume the current hurdle rate at 10%, this being the average
return on a debt instrument available for investment.
Add - Stock expected to give a return of 0-10% over the hurdle rate, ie a positive return of 10%+.
Reduce - Stock expected to return less than the hurdle rate, ie return of less than 10%.
Published in 2010. © India Infoline Ltd 2010

This report is for the personal information of the authorised recipient and is not for public distribution. This should not be
reproduced or redistributed to any other person or in any form. This report is for the general information of the clients of IIFL, a
division of India Infoline, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. MICA (P)
024/11/2009.
We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it
relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our
current opinions as of the date appearing in the material and may be subject to change from time to time without notice.
India Infoline or any persons connected with it do not accept any liability arising from the use of this document. The recipients
of this material should rely on their own judgment and take their own professional advice before acting on this information.
India Infoline or any of its connected persons including its directors or subsidiaries or associates or employees shall not be in
any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information
contained, views and opinions expressed in this publication.
India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction
as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. India Infoline generally prohibits
its analysts from having financial interest in the securities of any of the companies that the analysts cover. In addition, the
company prohibits analysts from conducting F&O transactions or holding any shares for a period of less than 30 days.
bino@iiflcap.com
www.iiflcap.com
IIFL – India IIFL - Singapore IIFL - USA

India Infoline Ltd IIFL Securities Pte Ltd IIFL Inc.
10th Floor, One IBC, 20, Collyer Quay, 1114 Avenue of the Americas,
841 Senapati Bapat Marg, #21-03, 34th Floor,
Lower Parel (W), Tung Centre, New York,
Mumbai - 400013 Singapore - 049319 NY - 10036
Tel +91-22-4646-4600 Tel +65-6511-6160 Tel +1-212-221-6800
Fax +91-22-4646-4700 Fax +65-6224-0650 Fax +1-212-221-6818

Pharma1 260710

Încărcat de

Informații document

Descriere originală:

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Pharma1 260710

Încărcat de

Drepturi de autor:

Formate disponibile

India – Pharma

Aiming high in the US generics market

Executive summary .................................................................. 1

US$2.5bn over the next five years. Undisclosed opportunities

Underlying business to get stronger: The base business of Indian

Special products provide further upside: Over CY10-14, Ranbaxy,

The right focus and competencies: The US contributes a third of

Structural growth in base business

Figure 1: The US accounts for 40% of the global generics market

Source: Teva, IMS, IIFL research

Cost saving ensures continued ‘genericisation’

Americans will be added to the potential consumers of healthcare.

Figure 3: Rising healthcare costs continue to spur increases in generics’ penetration

Figure 4: Prescription-drug cost is growing faster than overall healthcare costs

Prescription drug expenditure grow th (annualised)

Source: Centre for Medicare & Medicaid services

Figure 5: Large savings from use of generics in US cannot be ignored

Small base to help high growth for Indian players

Figure 6: Indian players have substantial scope for growth in the US

Figure 7: Indian companies yet to gain breadth of product offering

Source: Teva, IIFL Research Dr

The ramp-up is fast and visible

Figure 8: Indian companies hold a large share of FDA generic filings

Source: Company reports, IIFL Research

Special products drive near-term growth

Drugs with about US$96bn in cumulative annual sales, accounting

Figure 10: Key product exclusivities for Ranbaxy in the US market

Figure 13: Key product exclusivities for Lupin in the US market

Figure 14: Key product exclusivities for Glenmark in the US market

Unique products offer large value in small opportunities

We view this as an important strategic shift to a higher stage in the

The types of unique opportunities vary significantly across products

The right strategy, relevant competencies

Figure 16: US formulations is a major revenue contributor

Source: Company reports, IIFL Research

Indian companies’ focus on the US has paid off handsomely: over

* Revenue addition from major acquisitions excluded from the data

Fast catching up on market share drivers

The right competencies in place; distribution and product

Manufacturing issues are transient; no long-term concerns

generic players in the US market, Teva, Sandoz and Apotex have

Company Date Facility Issues

Consolidation will help Indian players

We expect Indian companies to benefit from the ongoing wave of

That said, Indian players are becoming potential acquisition targets

Figure 21: Consolidation continues in the US market

Biosimilars—adding to the competencies

Figure 22: Biologics are much more complex molecules

The molecules’ complexity also adds to the intensity of the R&D

Figure 23: Biologics are more technology-intensive and costly

Figure 24: Dominant players in the biologics market

Source: Fierce Biotech

Figure 25: Top-selling innovator biologic products

The biosimilars opportunity

Given the significantly higher technological complexity and capital

Source: IIFL Research

Figure 28: Biosimilar approvals in Europe

Indian companies have mostly concentrated on insulin,

years, the market for biosimilars is likely to see rapid growth.

Figure 29: Leading players in biosimilars

Dr Reddy's Lab 4,784

GlaxoSmithKline Pharma 3,271