Crams Icici Securities

INDIA
Pharmaceuticals:
Contract Research & Manufacturing Services
Crème de la CRAMS
Reason for report: Initiating coverage
f Manufacturing outsourcing from India to more-than-triple to US$3bn by ’12E

f Dishman Pharma (DPCL) and Divi’s Labs (DLL) are the top two pure Indian
CRAMS plays, given their IPR respecting & ‘non-compete with customer’ policy
f DPCL and DLL to clock-in impressive EPS CAGR of 47% and 29% respectively
through FY08-11E
f Fair value pegged at Rs214 for DPCL & Rs1,527 for DLL, implying 46% & 35%
potential upside respectively in the next 15-18 months
Please refer to important disclosures at the end of this report
Pharma – CRAMS, November 24, 2008 ICICI Securities
Valuations summary
Dishman Pharmaceuticals
Market Cap Rs11.7bn/US$232mn Year to March 2008 2009E 2010E 2011E
Bloomberg code DISH IN Revenue (Rs mn) 8,031 10,140 12,522 15,289
Shares Outstanding (mn) 80.3 Net Income (Rs mn) 837 1,477 1,987 2,631
52-week Range (Rs) 455/119 EPS (Rs) 10.3 18.2 24.4 32.3
Free Float (%) 39.3 % Chg YoY 1.5 76.6 34.5 32.4
FII (%) 12.6 P/E (x) 13.9 7.9 5.9 4.4
Daily Volume (US$'000) 370 CEPS (Rs) 16.4 26.2 34.3 44.0
Absolute Return 3m (%) (50.7) EV/E (x) 11.7 7.6 5.5 4.1
Absolute Return 12m (%) (45.8) Dividend Yield 0.8 0.9 1.0 1.4
Sensex Return 3m (%) (41.3) RoCE (%) 10.7 14.5 16.8 19.2
Sensex Return 12m (%) (54.4) RoE (%) 19.1 24.1 25.7 26.0
Divi’s Laboratories
Market Cap Rs73.3bn/US$1.5bn Year to March 2008 2009E 2010E 2011E
Bloomberg code DIVI IN Revenue (Rs mn) 10,435 13,086 16,193 19,963
Shares Outstanding (mn) 64.6 Net Income (Rs mn) 3,597 5,003 6,310 7,800
52-week Range (Rs) 1,930/890 EPS (Rs) 54.2 75.3 95.0 117.4
Free Float (%) 46.6 % Chg (YoY) 70.1 36.6 24.8 23.6
FII (%) 14.7 P/E (x) 20.4 14.9 11.9 9.7
Daily Volume (US$/'000) 4,450 CEPS (Rs) 61.2 84.9 107.1 133.0
Absolute Return 3m (%) (23.9) EV/E (x) 17.1 12.1 9.2 6.9
Absolute Return 12m (%) (26.1) Dividend Yield (%) 0.4 0.4 0.5 0.7
Sensex Return 3m (%) (41.3) RoCE (%) 43.4 41.8 36.5 32.4
Sensex Return 12m (%) (54.4) RoE (%) 51.5 45.7 38.8 34.1
Shareholding pattern
Dishman Pharmaceuticals Divi’s Laboratories
Mar Jun Sep Mar Jun Sep
’08 ’08 ’08 ’08 ’08 ’08
Promoters 61.5 60.7 60.7 Promoters 53.6 53.5 53.4
Institutional investors 29.4 30.2 29.1 Institutional investors 30.0 29.9 29.9
MFs and UTI 20.5 18.4 16.5 MFs and UTI 13.9 14.4 15.1
Insurance Cos. 0.0 0.0 0.0 Insurance Cos. 0.1 0.1 0.1
FIIs 8.9 11.8 12.6 FIIs 15.6 15.5 14.7
Others 9.1 9.2 10.3 Others 16.9 16.6 16.7
Price chart
Dishman Pharmaceuticals Divi’s Laboratories
450 2,000
400
350 1,600
300
(Rs)
(Rs)
250
200 1,200
150
100 800
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Nov-08
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Nov-08
Sep-08
Sep-08
All stock prices in this report are as on November 20, ’08

Equity Research
November 24, 2008 INDIA
BSE Sensex: 8451
Contract Research & Manufacturing Services
Pharmaceuticals Crème de la CRAMS

Indian Contract Research & Manufacturing Services (CRAMS) players are at the
Dishman Pharma
cusp of significant growth over the next decade, powered by favourable
BUY (Rs146)
outsourcing environment, introduction of Trade-Related Aspects of Intellectual
Property Rights (TRIPs), strong chemistry skill-set and one of the lowest costs
Divi’s Labs
globally. In our report, besides CRAMS’ industry analysis, we have focussed on
BUY (Rs1,134)
API/intermediates Contract Manufacturing Organisations (ACMOs) – Dishman
Pharmaceuticals & Chemicals (DPCL) and Divi’s Laboratories (DLL). Both
companies have an IPR-respecting business model (i.e. winning customer
confidence & trust) with strong operating cost discipline; thereby, they are well-
positioned to rapidly scale-up in the ACM space globally. We initiate coverage on
DPCL and DLL with BUY recommendation.
f Outsourcing of manufacturing from India set to explode. We believe that India
is ideally positioned to become a partner-of-choice for outsourcing of manufacturing
as regards API/intermediates including customs synthesis (CS). The global market
for contract manufacturing (CM) is estimated at US$22bn, to which India contributes
only 4.1% (US$900mn). With TRIPs in place from January ’05 and many Indian
pharma companies scaling-up their hardware & software in line with customers
needs, we expect India’s share to surge to 7.7% or US$3bn by CY12E.
f IPR-respecting strategy wins customers. The outsourcing customers (large &
mid-size pharma MNCs) require their service provider (i.e. CRAMO) to respect and
protect their invaluable IPRs and not be a competitor. Essentially, customers prefer
CRAMOs to operate as their satellite company, adding value to their business with
similar quality but at lower cost on a sustainable basis. Consequently, such
customers are willing to shut plants and outsource API/intermediates for new
chemical entities (NCEs), patented products and generics.
f Brightest jewels in Indian CRAMS. Coupled with an IPR-respecting and ‘non-
compete with customer’ policy, DPCL and DLL have un-stinted focus on the ACM
space, thereby edging over Indian peers. This combined with best-in-class
chemistry skill-set, frugal cost structure and world-class manufacturing infrastructure
makes them the preferred Indian partners for outsourcing. While DLL focusses on
organic growth, DPCL has complemented organic with inorganic growth to acquire
new skill-sets and customers.
f Initiating coverage on DPCL & DLL with BUY rating. We strongly believe that the
API/intermediates Contract Manufacturing (ACM) business from India is primed to
take-off and thus witness huge growth over the next decade, similar (~35% revenue
CAGR in the past decade) to IT Services. DPCL and DLL are the best two players in
Rajesh Vora the space and our fair value of Rs214 and Rs1,527 implies potential upside of 46%
rajesh_vora@isecltd.com and 35% respectively over the next 15-18 months.
+91 22 6637 7508

TABLE OF CONTENTS
Investment summary .......................................................................................................4

Risks..................................................................................................................................5
Pharma outsourcing – Opportunities galore ................................................................6
Why outsource ................................................................................................................6
Factors influencing outsourcing decision ......................................................................12
Outsourcing – Set to explode .......................................................................................13
Contract research outsourcing ......................................................................................15
Contract manufacturing – Greener pastures ................................................................17
Custom Synthesis – Lucrative opportunity....................................................................18
Key ingredients for success in CRAMS ......................................................................20
Respect for IPR.............................................................................................................20
Value addition to customer ...........................................................................................20
Strong scientific skill-set................................................................................................20
Competitive cost structure.............................................................................................20
Timely execution and communication...........................................................................21
Ability to scale-up skill set and infrastructure faster......................................................21
Management team ........................................................................................................21
Relationship with innovator ...........................................................................................21
India – At advantage ......................................................................................................22
Cost advantage .............................................................................................................22
Infrastructure .................................................................................................................22
Skills and capabilities ....................................................................................................23
Large patient population................................................................................................23
CROs – India in nascent stage .....................................................................................23
Contract manufacturing market in India ........................................................................25
Dishman & Divi’s versus global peers...........................................................................26
Company section ...........................................................................................................30
Dishman Pharmaceuticals & Chemicals .....................................................................31
Investment summary .....................................................................................................33
DPCL – Early bird in CRAMS ........................................................................................35
Significant transformation – From API to full-fledged CRAMS .....................................35
Robust contract pipeline................................................................................................35
Top quality customers ...................................................................................................35
Solvay – Stepping stone ...............................................................................................36
Custom Synthesis – On the rise ...................................................................................37
Strategic acquisitions – Empowering growth.............................................................38
Innovative Ozone Services – Niche contract research .................................................38
Synprotec acquisition – Entry into contract research....................................................38
2
CARBOGEN – Strengthening capabilities ....................................................................39
Going slow on acquisitions ...........................................................................................39
New avenues of growth.................................................................................................39
China facilities – Low cost advantage...........................................................................40
Strong management capabilities to drive growth ..........................................................40
Divi’s Laboratories.........................................................................................................42
Leaping ahead ................................................................................................................43
Investment summary .....................................................................................................44
DLL – Top-tier global ACMO from India ......................................................................46
Enjoys customer confidence .........................................................................................46
Array of services ...........................................................................................................47
Robust pipeline of projects............................................................................................47
Large capex driving growth ...........................................................................................47
Generics API business to see strong growth .............................................................48
Leadership position in top products ..............................................................................48
Strong product pipeline .................................................................................................48
Carotenoids – Long term opportunity .........................................................................50
Primer on carotenoids ...................................................................................................50
DLL set to capitalise on opportunity..............................................................................50
Attractive valuations......................................................................................................51
Financial summary ........................................................................................................54
Stellar growth in the past...............................................................................................54
H1FY09 performance – Impressive ..............................................................................54
Revenue and earnings set for multifold growth ............................................................54
Improving RoCE and EBITDA margin...........................................................................55
Annexure 1: Financials..................................................................................................56
Annexure 2: Index of Tables and Charts .....................................................................64
3
Investment summary
Outsourcing – Big opportunity for India. The pharma outsourcing opportunity in
India is set to explode in the coming years on the back of declining R&D productivity,
many blockbusters of global pharma majors nearing patent expiry, fewer blockbuster
products reaching markets, increased time to bring the drug to the market, fierce
competition from generic companies and continuous cost pressure on innovators. We
estimate that the size of the CRAMS business is set to grow to US$72bn in CY12
from US$37bn in CY07, a CAGR of 14%.
India has sustainable competitive advantage in CRAMS, with cost of

manufacturing in India 60-65% lower vis-à-vis western countries. Also, India has the
highest number of US FDA plants (~80) outside the US, with cost of setting
infrastructure in India ~30% lower than that in western countries. Moreover, India has
the largest pool of skilled labour (chemists) at 15-20% the cost in the US.
Outsourcing of API/intermediates to leapfrog. Notably, CM is a US$22bn market

and forms the largest pie (59%) in the global CRAMS market. Given India’s unique
skill-set, cost & speed advantage, we expect the CM space to grow significantly to
US$3bn by CY12E from US$900mn in CY07. DPCL and DLL, being top quality Indian
players in the ACM space, would reap maximum benefit. Besides, such business has
greater scalability, sustainability and predictability vis-à-vis pure research services-
based businesses (excluding clinical trials).
IPR-respecting strategy wins customers. DPCL and DLL are the most preferred
contract manufacturing companies as regards non-compromise on respecting &
protecting customers’ IPR. Further, their stated ‘non-compete with customer’ policy
and collaborative approach has won them customer confidence. Consequently,
customers (large & mid-size pharma MNCs) are willing to shut their plants, move
products and outsource API/intermediates for patent products, NCEs and generics.
Top-2 plays in CRAMS space from India. With combination of an IPR-respecting

strategy, un-stinted business focus, best-in-class chemistry skill-set, frugal cost
structure and world-class manufacturing infrastructure, both companies are the
preferred Indian partners for outsourcing. While DLL has focussed on organic growth,
DPCL has complemented organic with inorganic growth to acquire new skill-sets and
customers.
On high growth trajectory. DPCL and DLL are on a high growth path and expected
to register impressive EPS CAGR of 47% and 29% respectively through FY08-11E;
EBITDA margin of both companies is set to expand ~500bps each over the same
period. They enjoy one of the highest RoNWs in the sector, with DPCL at 19% and
DLL at 52% respectively. Our fair value for DPCL and DLL is Rs214 and Rs1,527,
implying potential upside of 46% and 35% respectively over the next 15-18 months.
4
Risks
High customer concentration
Usually, the top-5 customers contribute a major part of revenue (35-60%) to ACMOs.
While it may be difficult to significantly alter such concentration, it may be prudent to
manage this risk through larger customer, project, geographical and time horizon
spread.
Volatility in earnings
Revenue and profitability of a CM manufacturing business can often be volatile on
account of: i) lumpy contracts and delays or cancellations, ii) longer gestation of some
projects, iii) certain contracts such as CS leading to significant volumes and profits
when the drug enters phase III, reaches the market or wins many CS projects at a
time – e.g. DLL’s EPS CAGR over FY03-06 was only 9% vis-à-vis 127% through
FY06-08.
Intensifying competition
Competition from Asian countries continues to be on the rise, given that India and
China are the two key Asian nations offering CRAMS. In China, competition is more
from research services, with emergence of WuXi Pharma Tech (stock has crashed
~80% to US$6.3 from the peak; CY08 consensus revenue & PAT: US$262mn &
US$36mn respectively) compared with manufacturing. This places Indian ACMOs in
good stead. However, competition among Indian ACMOs and other competitive
dynamics could reduce EBITDA margin (41% for DLL and 19% DPCL for FY08) in the
medium-to-long term, as witnessed by the Indian IT outsourcing sector. Given the
huge global opportunity in the ACM space, there is ample scope for growth of new
and existing players from India and Asia.
Implementation of IPR
Notably, India has accepted TRIPs from January ’05. While TRIPs have a more direct
bearing on launch and marketing of patented dosage-form products in India as
against outsourcing deals, poor implementation may impact outsourcing as the
customer wants its IPR to be fully protected at all times. The recent patent battle in
India with respect to two cancer drugs – Roche’s Terceva and Novartis’ Glivec – is a
case in point.
Acquisition-related risk
Many Indian ACMOs such as DPCL follow an acquisition strategy that carries
associated risks such as extracting operational efficiencies and synergies, overpricing
intangibles, cultural differences, longer payback period and failure to retain key
customers and employees.
5
Pharma outsourcing – Opportunities galore
‘There is a tide in the affairs of men, when, taken at the flood, leads on to fortune;
omitted, all the voyage of their life is bound in shallows and in miseries. On such a full
sea are we now afloat, and we must take the current when it serves, or lose our
ventures.’’
– Sir William Shakespeare
Outsourcing is a mammoth opportunity for the Indian pharmaceutical industry. Post

the IT outsourcing industry’s significant success since the past 15-20 years, India is
now on the threshold of another big outsourcing opportunity viz. pharma outsourcing.
India’s low-cost manufacturing capabilities, strong chemistry skills and world-class
IPR laws offer significant opportunities in the CRAMS sector. The key catalyst for
boosting outsourcing from India was TRIPs becoming effective in India from January
’05. Consequently, we estimate Indian’s share in the global CRAMS market to surge
to 6.9% or US$5bn in CY12E from 3.2% or US$1.2bn in CY07.
Why outsource
Today, innovator pharmaceutical companies are facing tough times and grappling
with various issues that present significant threat to their business models and growth.
Such pharma companies are increasingly looking at outsourcing to reduce problems
and sustain in the fiercely competitive global markets. To comprehend the size of the
potential outsourcing opportunity and estimate growth of the CRAMS business, it is
necessary to understand why big pharma companies are increasingly outsourcing
research and manufacturing.
Chart 1: Factors leading to research outsourcing
De
cli ing
n
pro ing Ris cost
du res D
cti ea R&
vit rch
y
R&D
outsourcing
o
et St
tim g to r
ing ru re icte
reas w d t qu r U
e e ire S
Inc ing n ark m FD
br m en A
ts
Source: I-Sec Research
6
Declining research productivity. R&D productivity of big pharma companies is on
the decline mainly due to diminishing discoveries of path-breaking medicines (and,
hence, stagnancy), increasing cost of research and constantly raising the bar by the
US FDA. In 1996, the US FDA approved 65% of new drug applications (NDAs) filed
vis-à-vis just 25% in ’06. This is not due to increase in rejection by the US FDA but
primarily because the US FDA has been giving more Approvable designations, which
require additional clinical trials/studies, resulting in delays and higher costs.
Chart 2: NDA and NME* approvals by US FDA

140 NDA NME
120
100
80
(nos)
60
40
20
0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
*New molecular entity
Source: US FDA
Rising R&D cost. Cost of developing a new product has risen substantially in the
past few decades. This is partly due to stringent requirements from various regulatory
authorities for approving the drugs. On an average, ~70 clinical trials are undertaken
for each NDA as against 30 in early 1980s. Also, each NDA requires over 4,200
patients in present times compared with over 1,300 patients 20 years ago. This,
coupled with declining productivity, rising salary of scientists etc has led to steady rise
in R&D expenditure, to 17.5% of revenues in ’07 versus 11% in 1994. Also, cost of
bringing one new drug to the market has increased 7x to US$880mn from US$125mn
in the 1980s.
Chart 3: Pharma industry – R&D-to-sales

18
17
16
15
(%)
14
13
12
11
10
2007E
2008E
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source: Bloomberg
7
Chart 4: Drug development cost
1,000
880
900
800
700
600
(US$ mn)
500
500
400 359
300 231
200 125
100 54
0
1976 1980 1986 1990 1995 2002
Source: Tufts
Increasing time to bring new drug to market. Innovators are facing new challenges
in terms of reduced time of product exclusivity, declining R&D productivity and stricter
regulated requirements, leading to increase in time to bring a new drug to the market.
Notably, the 20-year patent protection clock starts ticking from the date of filing the
patent and, hence, more time consumption in discovery & development reduces
exclusivity time for the innovator. Also, a competitor may bring a similar drug in the
market soon after launch by the innovator company.
Chart 5: Time to bring new drugs to market

16 Preclinical Phase Clinical Phase Approval Phase
14 1.8
2.8
12
2.1
10
6.3
(Years)
5.5
8
2.4 4.4
6
2.5
4
5.9 6.1
5.1
2 3.2
0
1960s 1970s 1980s 1990s
Source: Deutsche Bank
8
Reasons for manufacturing outsourcing
Chart 6: Factors leading to manufacturing outsourcing
Even more Focus on

drugs going off core skills
patent and
capabilities
Rise of small
biotech companies
focussed on Cost control –
Manufacturing
research a key strategic
outsourcing
initiative of big
pharmas
Increasing
pressure on
Increasing
government to
competition
reduce healthcare
from generics
budgets
Drugs increasingly nearing patent expiry. Innovator companies are increasingly

losing patent protection on blockbuster products. Many drugs already having lost
patent protection (with more set to lose going forward) will create a huge dent in
revenues and profitability of big innovator pharma companies.
Chart 7: Market size of drugs going off patent
30 28 28
27
25
20 20 20
19
20 17
16
(US$ bn)
14
15
10
10
0
2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E
Source: Industry
Increasing competition from generics. Globally, generic companies are

increasingly launching products at risk and adopting aggressive strategies to
monetise para IV products, ahead of patent expiry. This has reduced huge profits and
cashflows from the patented product for innovator companies. Moreover, aggressive
ANDA filings by Indian companies have led to intense competition in the US generics
market, with a typical generic product witnessing price erosion of ~95% on the first
day (when the number of players is usually 6-8)
9
Chart 8: Number of ANDAs approved by US FDA
800
683
700
600 536
476 454
500
404
(nos)
400 367
314 305 320
300 265
237 242
200
100
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: US FDA
Increasing pressure on Government to reduce healthcare budgets. Increasingly,

global pharma majors are being pressurised to cut prices of drugs to cut high
healthcare budget of the Government in regulated markets. In many developed
countries, the healthcare budget ranges within 10-15% of GDP, which is a big strain
on Government financials. As a result, most countries have been giving more
incentives to use generics medicine in place of branded/patented medicines to lower
overall burden. Even affluent nations such as Japan cut medicine prices across the
board by 5-7% every 2-3 years. Government-mandated changes in Germany, the
largest generic market in the EU, have led to over 25% price-cut in the past two years.
In fact, North America, EU and Japan account for ~80% of world healthcare spending
while covering only 13% of the world population.
Chart 9: Healthcare spend in key countries
US
Germany
France
Canada
Italy
Japan
Spain
UK
0 2 4 6 8 10 12 14 16
(% of GDP)
Source: Industry
10
Cost control – Key strategic initiative of big pharmas. Innovator pharma
companies are looking to cut cost. Earlier, such companies enjoyed high margins due
to: i) presence of many blockbuster products, ii) longer product life-cycles, iii) pricing
power due to fewer substitutes, and iv) less generic competition. But, since the past
decade, things have worsened with rising and premature generic competition,
increasing cost of developing new drugs, pressure from Government to reduce prices
of drugs to cut the huge healthcare budgets. Consequently, EBITDA margins of
innovator companies have come under pressure, forcing them to cut costs for
generating better returns.
Chart 10: EBITDA margin of key innovator companies
CY03
Abbott
Novartis
Merck
CY05 Aventis
Eli Lilly
AstraZeneca
GSK
CY07 Pfizer
15 20 25 30 35 40 45
(%)
Source: Bloomberg
Focus on core skills and capabilities. Traditionally, big pharma companies have
gained competitiveness and enjoyed huge returns on the back of expertise in the field
of new drug discoveries and successful marketing of these drugs. Manufacturing has
always remained a secondary or non value-added activity. Moreover, in the past,
manufacturing expenses have formed a small part of overall cost (8-10% of sales).
But due to dwindling productivity of R&D currently, with less number of drugs reaching
markets and rising competition, most innovator companies are increasingly focussing
on developing new and better drugs and marketing them effectively to get maximum
benefit from the launched drug. Due to enhanced focus on core expertise, such
companies are increasingly outsourcing non-core activities such as manufacturing,
thereby minimising the capital invested in plants and production.
Rise of small & mid-size biotech companies focussed only on R&D. Number of
small & mid-size biotech companies, specialty companies and small R&D boutique
companies have been increasing. Consequently, number of drugs for approval for
these companies is also on the increase. Typically, such companies do not have own
manufacturing facilities to focus on core capabilities i.e. R&D. Thereby, there is rise in
demand for outsourcing of manufacturing and R&D services such companies. This
entails outsourcing of manufacturing work to contract manufacturing organisations
(CMOs).
11
Chart 11: NBEs* approved for mid-size companies
35 No. of approvals for mid-size companies 90%
% of total approvals (RHS) 80%
30
No. of approvals for mid-size

70%
(% of total approvals)
25
60%
companies
20 50%
15 40%
30%
10
20%
5
10%
0 0%
2001 2002 2003 2004 2005 2006
*New biological entities

Source: Industry
Factors influencing outsourcing decision

Decision-making for outsourcing involves decisions on processes and quantity to be
outsourced, geographies, selection of partner etc. Quality of service offered is the
most important factor in decision-making for outsourcing, followed by timeliness and
confidentiality (Chart 12).
Chart 12: Factors influencing outsourcing decision making
Timeliness
Specific Technology
Size of Provider
Relationships
References
Rapid availability
Quality
Provider's Financial Stability
Process Optimisation
One stop setup
GNP
Geography
Cost
Confidentiality
0 1 2 3 4 5
Source: Contract Pharma survey
12
Outsourcing – Set to explode

We believe that due to the aforementioned factors, outsourcing from big pharma will
see unprecedented growth in the coming years. Innovator companies have already
declared their intention to increase outsourcing going forward to enhance the cost
structure, profitability and R&D productivity. Further, CRAMS players have manpower,
time and experience to handle projects more effectively and at lower cost.
Chart 13: Market size of global CRAMS

CY07 CY12E
Contract
Research Contract
41% (US$15bn) Research
Contract 46% (US$33bn)
Contract Manufacturing
Manufacturing 54% (US$39bn)
59% (US$22bn)
(US$37bn) (US$72bn)
Source: Industry, I-Sec Research
13
Outsourcing plans of big pharma MNCs
Eli Lilly
In August ’08, Eli Lilly struck a path-braking deal to sell its 600,000sqft US laboratory
(which was almost a century old and used for toxicology and other studies) for
US$50mn to a Contract Research Organisations (CROs), Covance, which is set to
register guaranteed outsourcing revenues of US$1.6bn over the next 10 years. As per
Joe Herring, Covance’s Chairman and CEO, “Today's announcement represents an
innovative approach to the R&D productivity challenges our pharmaceutical clients
are facing", noting that it marks a conversion from the traditional fully-integrated
pharmaceutical company (FIPCO) model to a fully-integrated pharmaceutical network
(FIPNET). He added that it was the most significant development in the firm since it
went public 11 years ago, and “carves a new path to growth for both Covance and the
CRO industry”.
Besides, Eli Lilly has already finalised a few research deals with Indian pharma
companies such as Piramal Healthcare and Suven Lifesciences.
AstraZeneca
AstraZeneca is planning to outsource its entire drug manufacturing activities within 10
years and to gradually withdraw from making its own APIs (currently 85% of the total).
At present, AstraZeneca has 27 manufacturing sites in 19 countries. The company
has stated that it plans to shed 7,600 jobs in total or 11% of its 66,000-strong global
workforce
Pfizer
Pfizer is looking to cut costs via outsourcing as much as 30% of its manufacturing to
Asia, particularly India and China. The company outsources ~15% of its
manufacturing requirements at present. Earlier this year, the company announced
that it would save US$2bn by cutting its global work force 10%.
Sanofi Aventis
Sanofi-Aventis is working towards making India one of its largest base for clinical
research. The company is aiming to send ~100% of its feasibilities for phases II & III
trials to the Indian Clinical Research Unit.
Merck & Co
Merck plans to outsource a major part of its manufacturing process to the developing
world and India may get a large chunk of the business. Besides outsourcing its
manufacturing, the drug maker has plans to form research alliances in India. Merck
has decided to outsource 35% of its manufacturing process to countries such as
China and India to reduce production costs. It is targeting 30% cost reduction through
outsourcing and saving US$1.2bn in procurement by restructuring its manufacturing
process. Further, it aims to increase volume of clinical trials in India. Merck has
estimated 500 scientists working on full-time equivalent (FTE)-basis in India.
14
Contract research outsourcing
Drug discovery research involves discovery and development of a new medicine,
which is complex, long-drawn and fraught with a high degree of failure. Of the 5,000-
10,000 potential medicine compounds screened at the beginning of a clinical trial,
hardly one succeeds in reaching the market (Chart 14). Also, the drug could fail at any
stage of the discovery and development process.
Chart 14: Drug discovery research process
Source: PhRMA
15
Contract Research (CR) involves providing research services across the drug
discovery research (DDR) spectrum at lower cost but world-class quality level.
However, as aforementioned, worsening business dynamics on one hand and
expanding bouquet of services and quality at lower cost on the other have led to
growth in CR. Over the next decade, the momentum is expected to continue, driven
by factors such as large pharma companies looking to reduce R&D cost, improved
speed with which new drugs are brought to the market, reducing failure rate &
improving research productivity and proliferation of molecule development by small
pharma & biotech companies. Drug development cycle timelines have increased in
recent years due to a combination of factors related to greater emphasis on drug
safety, spurred by increasing data requirements on behalf of regulatory bodies that
has spurred growth in CR services. Also, many small pharma and biotech drug
discovery companies are becoming a major source of new drugs. Typically, these
smaller companies lack operational expertise and infrastructure to manage the drug
trials process in-house, resulting in greater dependence on outside providers.
Big pharma companies find such services complementary to their internal

infrastructure and capabilities, saving cost and ensuring faster results. Research
outsourcing has gained significant importance recently due to higher standards
offered by the CROs, their strength in therapeutic area, compliance with regulatory
authorities and savings in terms of cost and time. For example, as per industry
estimates, clinical trials conducted by CROs are completed 30% faster on an average,
resulting in US$100-150mn increase in revenue potential of clients.
Chart 15: CRO industry – Revenue split

CY07 CY12E
Preclinical
Preclinical
10% (US$1.5bn)
8% (US$2.5bn)
Drug discovery
Drug discovery
services
services
17%
17% (US$5.5bn)
(US$2.5bn)
Clinical Trials
Clinical Trials
services
services
75%
73%
(US$25bn)
(US$11bn)
16
CROs – Industry overview
The clinical research industry is highly fragmented, with service providers ranging
from very small (that focus on one aspect of the drug development process in a single
geography), to very large global firms (that offer a range of services across the
development spectrum). We believe that the current CRO market stands at
~US$15bn in ‘07. Table 1 shows the expected growth rate for each key activity in the
development process as well as our estimate of CRO penetration and market growth.
We expect CRO penetration to increase going ahead from the current ~22%.
Penetration rate is expected to grow to 30% in ’12. CROs represented 16.6% of total
drug development spending in ’02 vis-à-vis 21.7% in ’06.
Table 1: CRO industry – Penetration

Global market CRO industry CRO industry
Size (US$) Growth (%) Size (US$) Growth (%) penetration (%)
Drug discovery services 10 10 2.2 15 25
Preclinical 12 6 2.4 10 20
Phase I 5 12 1.7 22 36
Phase II 7 7 1.3 18 19
Phase III 17 8 3.6 18 22
Approval 5 6 1.0 12 20
Phase IV 9 12 1.7 17 19
Others 4 5 0.5 12 15
Total 69 8 15.0 16 22
Source: First Analysis
Contract manufacturing – Greener pastures

The CM business has been gaining importance globally due to heightened interest
from big pharma companies, whose business is under severe pressure from a flurry of
patent expiries, lack of new blockbusters, rising R&D costs etc. Thereby, big pharmas
prefer focussing on core functions such as R&D and marketing and partly outsource
manufacturing work. CM involves manufacturing of APIs/intermediates and dosage
form as per the specific requirements of innovator or generic companies. Currently,
the global CM industry is estimated at US$20bn. Typically, manufacturing cost
accounts for 7-8% of total revenues of big pharma companies. CM industry’s size is
estimated at US$22bn in ’07, dominated by Lonza, DSM, Degussa and Catalent.
Chart 16: Global Contract Manufacturing – Revenue split

CY07 CY12E
Dosage form
41% (US$9bn) Dosage form
44% (US$17bn)
API/Intermediates
API/Intermediates
59% (US$22bn)
59% (US$13bn)
(US$22bn)
(US$39bn)
17
Currently, outsourcing of API/intermediates manufacturing is a major opportunity,
followed by custom synthesis and dosage-form outsourcing. Also, percentage of
manufacturing outsourcing is estimated at 21% in ’07, which is expected to rise to
29% by ’10E.
Chart 17: Manufacturing outsourced
2007 2010
Biotech
Med Dev / Hosp
Generic
Branded
Total
0 5 10 15 20 25 30 35 40
(%)
Source: Industry
China and India gaining prominence

European contract manufacturers have always dominated the sector because of
strong IPR laws and lower cost vis-à-vis the US. However, in the past five years,
Asian (especially Indian and Chinese) players have emerged stronger, given
significant advantages of lower cost and faster speed at world-class quality. Over the
next decade, we expect Indian and Chinese companies to gain market share and
grow faster than established players in the global CM market. Moreover, given the
current strong competition, generic companies are likely to outsource API
requirements from low-cost destinations. Thereby, coupled with quantity, cost will
become a key factor in terms of choosing a manufacturing location.
Custom Synthesis – Lucrative opportunity

Custom Synthesis (CS) forms an important business sub-segment of CRAMS. CS
entails synthesis of compounds, as per customer specification/requirements. Thus, it
involves supplying initial material, reference compounds, derivatives of lead
compounds and intermediates, especially for molecules in the development stage or
drugs under patent. Many ACMOs offer services to manufacture customised APIs &
advanced intermediates, exclusively on behalf of pharma companies. Their services
encompass the entire life cycle of a drug – from the early clinical phase to market
launch and even when the drug becomes generic.
Besides cost benefits and saving time, diversifying work among various players helps
big companies maintain IPR confidentiality as, usually, the ACMO is not involved in
the total process of manufacturing a particular crucial compound. Except a few
compounds, pharma MNCs do not hand over the entire chemistry for an API for NCEs
under development to any Indian or Chinese ACMO at present. As Indian ACMOs
deliver well on chemistry, quality and time, they hold a better chance of being the full-
18
spectrum outsourcing partner for APIs – e.g. eprosartan mesylate API and SLV-306
(in phase II) of Solvay has been given to DPCL. The current global CS market is
dominated largely by ACMOs based in the EU, where IPR protection is in place and
diverse & cutting-edge chemistry skill-sets exist. We believe that key ability required
by the outsourcing partner is to gain confidence of the R&D-driven company as
against offering the lowest cost. European CS players now use Asian low-cost players
by outsourcing early synthesis work to them.
To fathom how an ACMO would benefit from a CS deal, we have assumed a typical
example of a drug that hits the market and attains peak annual sales of US$1bn. The
upside for an ACMO could be US$90-100mn in annual sales if it meets 100%
requirement of the innovator MNC.
Table 2: Typical CS project for a US$1bn innovator drug

Sales of ACMO % sales of FY08
Phase Quantity (US$ mn) (Rs mn) DPCL DLL
I 1 0.20 8 0.1 0.1
II 3 0.42 17 0.2 0.2
III 25 6.30 252 3.1 2.4
IV 50 95.00 3,780 47.1 36.3
CS proffers an opportunity to Indian CRAMS players to build long-term strategic

relationships with global R&D-driven companies. Indian companies can work with
innovator partners through the total process – of producing a small quantity of the
product in the early stage of research to large quantities, once the product is
commercialised. Moreover, the strong chemistry skillset, expertise in process
development and ability to improve processes gives Indian companies an added
advantage. The key is to build a strong pipeline of intermediate and APIs across
phases I-III. Notably, given the high degree of IPR sensitivity and importance of the
product to the customer, it is critical for ACMOs to develop high levels of trust and
confidence via IPR-respecting & protecting and ‘non-compete with customer’ policy to
be successful in CS projects. Currently, DLL and DPCL are estimated to have 8-10
and five drugs (API or intermediates) respectively in phase III of clinical trials with their
clients.
19
Key ingredients for success in CRAMS
As in any service industry, customer satisfaction is most critical for success. We
believe that key ingredients for success for a CRAMS company are:
Respect for IPR

Gaining trust and confidence of the innovator partner are the cornerstones of success
in the CRAMS business. This business is heavily dependent on creativity, innovation
and improving yield or process. In contract research & manufacturing, including CS,
the innovator company has to share the under-development and in-patent product
details with CRAMS players. Hence, confidentiality of such intellectual properties is
necessary to gain confidence of innovator companies, thereby securing incremental
long-term contracts from them. Also customers prefer pure outsourcing companies
(e.g. DLL and DPCL) as against hybrid companies (e.g. Matrix Labs and Shasun) to
avoid conflict of interest and competition with outsourcing companies.
Value addition to customer

Companies in the business need to continuously improve processes, enhance
productivity of innovator companies and reduce cost. They require performing rapid
chemical route development, effective/rapid characterisation and innovative
processes to break away from traditional chemical approaches to production.
Strong scientific skill-set

To bag contracts, CRAMS companies require a well-developed scientific skill-set. For
progress in the value chain, companies need to undertake many new process
initiations, process innovations and optimisations. They also require the ability to
perform complex chemical synthesis activities, thereby improving product yield and
reducing time of process.
Competitive cost structure

Cost is the major reason for outsourcing worldwide. To survive in the fiercely
competitive environment, every company tries to minimise the cost and expects the
same from the outsourcing partner. A competitive cost structure is imperative for a
CRAMS company for gaining long-term manufacturing contracts, particularly generic
API manufacturing. India and China are emerging as the most popular destinations for
CRAMS as they offer significant cost advantage of 60-65%.
20
Timely execution and communication
Innovator companies give significant weight to timely completion of a task or on-time
delivery of the product. When the drug is under patent, CRAMS players are required
to deliver the goods on time to the innovator company to meet market requirements.
Also, regular communication with innovator companies regarding development of the
product under R&D is important to gain customer confidence. Regular communication
with innovator companies makes processes transparent and more reliable.
Ability to scale-up skill set and infrastructure faster

To get incremental business from innovator companies, it is essential to scale up the
skill-set and infrastructure to meet demand. For instance, when a particular drug
moves from phase I to II, it requires higher quantities of drug to test on substantially
increased number of patients. At that time, CRAMS player should be able to set up
new infrastructure to meet increased demand from the innovator within a short time, if
required. The same is true for a typical manufacturing contract.
Management team
In the CRAMS business, a good management is imperative due to the highly technical
and complex nature of the business. The management should have a fundamental
understanding of the end-product to be delivered to a sponsor, thereby reducing
likelihood of over-promising but under-delivering. Also, attracting and retaining talent
is most critical for success.
Relationship with innovator

Establishing a strong relationship with the innovator takes several years, which at
times can act as a major entry barrier for other players. To be a successful CRAMS
player, being a preferred supplier for a client over the long term is important, which, in
turn, depends on the strength of the relationship, which is based on providing world-
class service at reasonable price consistently to the customer.
21
India – At advantage
India has emerged as the key outsourcing destination for innovator pharma
companies in recent times. It offers significant advantage to big innovator companies
in terms of cost, scientific skill-set, manufacturing facilities and regulatory knowledge.
Cost advantage
India offers significant cost advantage to innovator companies. Cost of manufacturing
in India as well as cost of manpower and setting up infrastructure is amongst the
lowest globally. Cost of manufacturing in India is 60-65% lower vis-à-vis western
countries. Also, cost of setting up a new plant is ~30% lower than developed
countries. Cost of employee in India is as low as ~15% that of the US. Developing an
NCE till the investigational new drug (IND)-filing stage is estimated to be ~US$5mn as
against 7-8x more (US$35-40mn) in the West.
Chart 18: Compensation of chemists
China
India
Hungary
Italy
Germanu
US
0 20 40 60 80 100 120
(Units)
Source: Industry
Table 3: Cost of manufacturing

Units
US 100
Europe 85-90
India
US FDA – Approved plants 35-40
Others 25-30
China 25-30
Source: CRISIL
Infrastructure
India has one of the best infrastructures for various requirements of a CRAMS
business. Many Indian companies have state-of-the-art R&D centres and
manufacturing facilities approved by various authorities in developed countries. India
has the highest number of US FDA approved plants (~80) outside the US.
22
Chart 19: US FDA approved plants outside USA
90
80
80
70
60 56
50
40
28
30 24
20
10 8
10 5
0
India Italy China Spain Taiw an Israel Hungary
Source: Industry
Skills and capabilities

India possesses high level of scientific skill-sets, which is a major requirement of the
business. The country has significant expertise in chemistry-based research. Also, it
has 7x the number of trained chemists in the US.
Large patient population

India provides major advantage in outsourcing of clinical trials due to availability of a
large patient population, with a heterogonous population mix and various disease
profiles. Such patients are available at low cost, thereby reducing cost of clinical trials
and time required to perform the same.
CROs – India in nascent stage
Revenues of Indian CROs slated to see ~7x jump

Given the nascent stage of Indian CROs at present and the fact that all of them
possess the ingredients (skill-set, lower cost and TRIPs) for success, we estimate size
of outsourcing from Indian CROs to leapfrog ~7x to US$2bn by ’12E. The CRO space
comprises of two key sub-segments viz. clinical trials and CR services (CRS).
23
Chart 20: Contract Research opportunity for India
2,500
Contract research services Clinical Trials services
2,000
(US$ mn)
800
1,500
1,000 CAGR 40%
1,200
500 CAGR 52%
150
0 150
2007 2012
CR 3.8% India’s 15%
share in
CT 1.4% 3.2%
world
Total 2.0%
market
6.1%
Clinical trials opportunity

India possesses few key advantages for conducting clinical trials, which are:
• availability of heterogeneous patient population with western disease profile
• Indian patient population in most cases are ‘therapy naïve’
• cost of enrolling and paying patients is among the lowest in the world
• time required to complete clinical trials is 30-50% lesser than western countries
• Many tertiary-care and specialty hospitals and availability of manpower
• No language barriers
• IT-based advantages
India has substantial capacity to meet the rapidly growing demand for clinical trials. It
has 300 universities, over 750 graduate and post-graduate programmes, and ~50mn
college graduates. There are over 700,000 medical professionals and over 600
ICH/GCP-compliant sites. Furthermore, the Indian Government and the clinical trial
industry have together taken major steps to strengthen the infrastructure for
conducting clinical trials.
Given these advantages, coupled with TRIPs in place from January ’05, India’s share
in the global clinical trial outsourcing market is estimated to surge from the current
1.4% or US$150mn to 3.2% or US$800mn in ’12E.
Despite these advantages, not many Indian companies have shown interest in the
segment, which is currently dominated by global clinical trial giants such as Quintiles,
Covance Kendle, PPD Inc and Parexel. Key challenges for clinical trial organisations
(CTOs) in India are:
• phase I currently not allowed on foreign drugs if they have not been tested on
humans abroad
24
• lack of trained manpower, e.g. GCP-trained investigators are just around 1,000
while demand is likely to be 6,000 by ‘12E
India does not provide ‘data exclusivity’ in clinical trials, unlike the US and EU
members
Contract research services opportunity
Unlike clinical trial companies in India that face few hurdles (as aforementioned),
Indian CRS providers (which do not face such problems) are expected to grow faster
(52% CAGR versus 40% for clinical trials). To this effect, there are many more CRS
players such as Syngene (subsidiary of Biocon), GVK BioSciences and Sai
Advantium that are growing over 30-35% annually, though none is listed on the stock
exchange.
Contract manufacturing market in India

Many Indian pharma companies have been undertaking CM assignments from
overseas companies e.g. DPCL bagged its first contract from Solvay in ’01. Since CM
is at the lower end of the value chain than dosage-form marketing for fully-integrated
pharma companies, the large Indian pharma companies have stayed away from such
business. On the other hand, mid-size companies did not have adequate financial
power to invest in manufacturing and R&D infrastructure for the CM business until a
few years ago. However, with introduction of TRIPs in India from January ’05 and
consequent surge in demand for CM from overseas companies, relatively larger mid-
size companies undertook investments and began focussing on CM business. In ’07,
size of CM by Indian companies stood at US$900mn or 4.1% of the global market.
With Indian pharma companies already boasting of the highest number of US FDA-
approved plants in India and being well recognised for quality and consistent
productions, the CM business is estimated to leapfrog over 3x to US$3bn or 7.7% of
the global CM market by ’12E.
Chart 21: Contract manufacturing opportunity for India

3,500
3,000
2,500 CAGR 40%

(US$mn)
2,000
1,500 3,000
1,000
500 900
0
2007 2012
India’s share in
CM 4.1% world market 7.7%
25
Table 4: Profile of Key Indian CRAMS players
(US$ mn)
Company Revenues Remark
CROs
GVK Biosciences 39 Largest Indian CRO and among fastest growing
Pioneer of CRO work in India and enjoys one of the highest
Syngene (Biocon) 37 margin
Quintiles 32 One of the largest players in the world. Strong in clinical trials
Sai Advantium 26 Rapidly growing chemistry focused CRO
Backed by, the Chatterjee Group (TCG), owned by
Chembiotek 20 Dr. Purnendu Chatterjee
Vimta Labs 18 Only listed CRO in India, focuses more on BE/BA studies
SIRO Clinpharm 14 The largest Indian CTO with strong focus on clientele
Clingine (Biocon) 4 Among the top Indian companies in clinical trials
Total CROs Revenues 189
CMOs Revenues* Remark

Nicholas Piramal 312 One of the largest CMOs in India for dosage form
Jubilant 304 Growing through acquisitions across CRAMS segment
Shasun 95 Acquired Rhodia's CM business for rapid scale up
Hikal 75 Presence across the CRAMs value chain
Suven Lifesciences 20 Presence across the CRAMs value chain
Others 100
Total CMOs Revenue 907
Total CRO+CMO Revenues 1,095

* Only estimated contract manufacturing revenues
Source: Industry, Company data, I-Sec Research
Dishman & Divi’s versus global peers

Table 5 presents our comparison of DLL and DPCL with global peers in the CMIA
(Contract Manufacturing of Intermediates and/or API) space on a few key parameters.
Lonza, the world’s #1 player in the space along with Cambrex and Patheon are also
presented for quick reference.
26
Table 5: DPCL & DLL versus global peers
Parameter Lonza Cambrex Dishman Divi’s Patheon Remarks
Year of commencement 1897 1981 1983 1990 1974 Lonza is the oldest
Ingredients, API/ API/ API/ Purely into Lonza has the broadest and the
Exclusive Intermediates/ Intermediates/ Intermediates/ dosage best model
synthesis, Generic API QUATs Generic API forms
Business model biopharma
Serving 10 out of Aggregate Integrated Works with 20 of Strong and
top 20 biotech revenue from CRAMS the top 25 expanding
companies products with player and pharma geographies,
FY06 sales growing by companies in the services &
>US$6mn is smart world, Enjoys one customers
37% acquisitions of the highest
Salient features profitability
Manufacturing Sites 19 3 3 3 12
No of products 125 120 1 NA 650 Patheon scores the best

commercialised
No. of APIs* 27 100 ~30 ~55 0
No. of projects 220 60 50-100 >100 187 Lonza is the best

Preclinical/Phase I 125 19 >45 >90 69
Phase II 25 1 10-15 78
95
Phase III 16 5 8-10 40
Indian companies are very close

Revenues (FY08/CY07) 2,870 253 161 209 677 to #2
Among APIs, Dishman has
CRAMS/Revenue (%) 58 50 74 50 100 highest
Revenue Mix (CRAMS)

Chemistry based (%) 100 100 54
43 100
Specialty (%) 0 0 29
Biotech (%) 57 0 0 0 17
No of customers 200-300 >500 >75 >50 258 Indian companies to catch up a

lot
No of top customers NA 2 5 5 10
Revenues from top
customers (%) NA 24 32 60 57 DLL derives maximum
No. of Employees 7,711 850 800 ~3,500 4,700

Revenue per employee 372 298 201 60 144 Lonza leads the pack
('000)
EBITDA (FY08/CY07) 336 30 31 86 78.0

EBITDA margin (%) 11.7 11.8 19.0 41.4 11.5 DLL enjoys the highest margin
PAT (FY08/CY07) 253 (14) 17 72 (74.8)
NPM (%) 8.8 (5.3) 10.4 34.5 (11.1)
RoCE 5.1 12.6 10.7 43.4 9.4
RoE 16.77 NA 19.1 51.5 NA DLL beats all by wide margin
R&D 70 0.12 0.62 2.52 NA Lonza spends the highest

R&D Expdt/sales (%) 2.4 0.0 0.4 1.2 NA
Valuations
Market Cap 3,468 71 232 1,451 62 Lonza is the largest
P/E (x)
FY08/CY07 13.8 (9.3) 14.2 20.9 (2.0)
FY09E/CY08E 9.5 5.8 8.0 15.1 (3.4)
FY10E/CY09E 10.9 4.6 6.0 11.9 3.4 DLL is the most expensive
Mcap/Sales (x) 1.2 0.3 1.1 7.0 0.1 DLL is the most expensive
EV/EBITDA (x) 14.7 7.0 7.6 12.1 6.3 Lonza is the most expensive
* filed/to be filed for regulated markets
Source: Company data, Industry, I-Sec Research
27
Pharma outsourcing versus IT outsourcing
Given India’s stupendous success in global IT outsourcing business, it would be
pertinent to compare pharma outsourcing with IT outsourcing. Notably, pharma CRO
business is similar to IT outsourcing, given skill-set and low-cost advantage thereof
being the key to scalability and success; the dynamics of pharma CMO business will
also have many such similarities. Since, Indian pharma outsourcing business is at the
early growth stage, there are important lessons to be learnt from the hugely
successful Indian IT story earlier. Table 6 encapsulates key variables of IT and
pharma outsourcing businesses.
Key learnings
• On many parameters, pharma outsourcing, which is in the early growth phase,
compares well with IT outsourcing
• India has key ingredients – low salaries and low cost of production/services – that
makes for a global player in the pharma outsourcing business as does IT
• Adequate availability of talent will enable pharma outsourcing companies to grow
rapidly
• Like Indian IT outsourcing companies, we expect pharma outsourcing companies
to seize opportunities, move up the value chain and become leading world-class
players
• Notably, market cap CAGR for IT outsourcing was 50% at the early stage (1992-
98) and 40% later (during 1998-’08) compared with 70% for pharma outsourcing
(only DLL & DPCL over FY05-08).
28
Table 6: Pharma outsourcing versus IT outsourcing
IT Services Pharma*
Parameters Early stage Current Current
1997-98 ’08
Period of commencement Early 90s Early ’00
Revenues (US$ mn) 1,700 40,000 1,200
Nature of business
Stickiness medium to high high lower
Level of repeat business (%) NA 90-95 50-60
Outsourced work for buyer non-core activity non-core activity + core core activity
Linkage with macro economy higher higher lower
Cost arbitrage
Salary differentials 1/5th 1/3rd 1/5th
Total cost advantage (%) 80 - 90 60 - 70 40-60
India's mkt share in world (%) 1.80 4.7 3.2
Customers
Revenues from top 5 customers (%) 25 - 50 15- 20 35-60
Employees
No. of Employees ('000) 280 865 14
Revenue per employee (US$)** 6,071 46,243 77,409
Cost per employee (US$) 2,125 18,497 7,741
Pharmacist/
Talent IT engineers IT Engineers Chemists
Availability of talent (lakhs) p.a. NA ~3 ~7
Required talent (lakhs) p.a. NA 1 - 1.5 ~1
Americas, EU & , US, EU and

Competitors Americas and EU South East Asia China
For Infosys
Financial parameters 1992-98 1998-08 FY03-08#
Sales (value) CAGR (%) ~ 95 ~ 52 37
Cost matrix
Raw material Costs/Sales (%) NA NA 39-48
Staff Costs/Sales (%) 30-40 30-50 6-14
Selling, Distribution & Administrative
Costs/ Sales (%) 20-32 12-20 8-11
Operating Margins (%) 25-40 35-44 28-32

Net Margins (%) 23-28 26-34 18-24
Capex gestation period 2-4 years 1-3 years 1-3 years
EPS CAGR (%) 53 52 44
Market Cap CAGR (%)*** 50 40 70
RoCE (%) 27-47 ~ 43 16-25

RoIC (%) NA 70-90 25-35
P/E (x) Trailing LTM 17-27x 19-40x 10-36x
EV/EBITDA (x) 15-30x 13-25x 14-22x
* in many cases, it pertains to only for DLL & DPCL
# DLL & DPCL combined
** Revenue/employee pertains to pharma CRO business only
*** For pharma, pertains to FY05-08
Source: Industry, Company data, I-Sec Research
29
Company section
30
Equity Research
Dishman Pharmaceuticals & Chemicals BUY
Spotlight beckons Rs146

Dishman Pharmaceuticals & Chemicals (DPCL) is a world-class player in the

CRAMS space, with revenues of Rs8bn or US$160mn. It has built strong
relationships with top innovator companies such as Solvay, AstraZeneca,
Novartis and GSK. Its IPR-respecting and ‘non-compete with customer’ policy has
won customer confidence and respect. DPCL has prudently followed the inorganic
route to complement its strong India advantage. The company has built an
impressive pipeline of contracts that, combined with aggressive focus on the US
market and entry into few other niche segments (such as sanitisation products
and dosage forms), would help it achieve revenues of US$500mn by FY12E.
Buoyed by improving revenue & customer mix and strict operating discipline,
DPCL is expected to clock-in an impressive EPS CAGR of 47% through FY08-11E.
At current market price of Rs146/share, the stock is trading at an attractive FY10E
P/E of 6x. We initiate coverage with a BUY rating and target price of Rs214/share,
which provides 46% upside potential from current levels.
f One of the best CRAMS players from India. Ahead of many peers, DPCL has
firmly established itself as a preferred partner for top-20 global pharma companies
such as Solvay, Astra Zeneca and GSK as well as a few Japanese pharma
companies. DPCL offers end-to-end services with its strong technology and
management capabilities, robust IPR-respecting & protection policy, best-in-class
chemistry skill-set, ‘adding-value-to-customer’ approach and world-class & low-cost
manufacturing capabilities. The company is likely to remain in a high-growth phase,
with revenue CAGR of 24% through FY08-11 vis-à-vis 48% in the past four years.
f Strategic acquisitions to benefit immensely. DPCL has made various strategic

acquisitions in the past, thereby becoming a significant player in the CRAMS
business and establishing presence across the value chain. In August ’06, the
company made its largest acquisition – CARBOGEN AMCIS (CARBOGEN) – for
US$75mn, thus becoming a major player in contract research (CR). We believe
DPCL has successfully built a healthy customer base through strategic acquisitions,
which will also drive growth going ahead.
f QUATs and specialty chemicals – Provide steady base. DPCL is a leading player
globally in the QUATs segment and, given increase in focus on niche QUATs, will
boost margins going ahead. QUATs saw robust revenue CAGR of 32% over the past
five years. With the recent acquisition of Solvay’s fine chemicals business and
revenues from the Marketable Molecules (MM) segment, the company is set to post
strong growth of 24% through FY08-11E.
f Attractively valued, BUY. At FY10E P/E of 6x, the stock is trading at significant
discount (50%) to peers. Given its strong growth trajectory (EPS CAGR of 47%
through FY08-11E) powered by robust growth in the CRAMS business, improving
Rajesh Vora
rajesh_vora@isecltd.com financials, de-risking business model and possibility of re-rating, we recommend
+91 22 6637 7508 BUY. Our 18-month fair value estimate is Rs214, implying 46% returns.

Background
DPCL was established in 1983 and commenced with manufacturing a range of phase
transfer catalysts and quaternary ammonium & phosphonium compounds (QUATs),
rapidly scaling-UP the business and becoming a meaningful global player in such
products on the back of its innovation as well as affordable products. In 1995, DPCL
formed a JV company with Schutz & Co, Germany for manufacturing various products
for the European market. In the same year, the company extended its activities to
develop many intermediates and APIs, post which it recognised the huge opportunity
in the contract manufacturing (CM) business. It commenced work on the CRAMS
business in 1997. The company achieved major breakthrough in the CM business by
signing a long-term contract with European pharma major Solvay for eprosartan
mesylate (EM) in ’01. To accelerate growth in the CRAMS sector and establish
presence across the CRAMS value chain, DPCL aggressively followed the M&A
strategy model with three global acquisitions, including CARBOGEN. Besides, to
diversify country-specific risks and take advantage of low-cost manufacturing, the
company established manufacturing presence in China via setting up of greenfield
facilities. As on date, DPCL has established itself as one of the best CRAMS players
from India.
Chart 22: Improving revenue mix
FY05 FY08E FY11E
21% 21%
33% 38%
4% 44%
8%
60% 7% 17%
20%
14% 13%
Carbogen Solvay Others - CM Vit D MM
Source: Company data, I-Sec Research
32
Investment summary
One of the best CRAMS players from India. Recognising potential of the
outsourcing business ahead of many peers, DPCL has firmly established itself as a
preferred partner for global pharma majors in the CRAMS space with revenues of
Rs8bn or US$160mn. DPCL offers end-to-end capabilities through contract research
& manufacturing. The company has developed a healthy customer base, with its
strong technology and management capabilities, robust IPR-respecting & protection
policy, sturdy chemistry skill-set, ‘adding-value-to-customer’ approach and state-of-
the-art & low-cost manufacturing capabilities. This coupled with value-accretive
acquisitions to fill gaps in skill-sets and acquire new customers has catapulted the
company into the top-players league, offering CM & CS services. The company
boasts healthy relationship with the top-20 global pharma companies such as Solvay,
Astra Zeneca, GSK and Merck as well as a few Japanese pharma companies. DPCL
is likely to remain in a high-growth phase, with revenue CAGR of 24% through FY08-
11E vis-à-vis 48% in the past four years bolstered by organic & inorganic growth.
Chart 23: DPCL – Key growth drivers

Big new contracts
from AstraZeneca,
Novartis, GSK and
Eli Lilly
1-2 API
US$500mn
reaching
sales by Acquisitions
market as new
FY12E (FY11-FY12)
medicines
Rising share of
revenues from Higher value added
custom synthesis contracts to
(35-40% in FY11E) improve margin
30-35%
Strategic acquisitions to benefit immensely. DPCL has successfully followed the

inorganic growth strategy over the past few years. To become a significant player in
the CRAMS business and establish presence across the value chain, the company
made various strategic acquisitions. In April ’05, DPCL acquired a UK-based CRO,
Synprotec, which has built a strong client base over the past two decades. In
February ’06, DPCL acquired another CRO, Innovative Ozone Services Inc, which is
a niche player in ozone chemistry and has an order book covering CR assignments
with various MNCs. In August ’06, the company made its largest acquisition, of
CARBOGEN, for US$75mn, thereby becoming a major player in CR. CARBOGEN
provides solutions to the world’s leading pharma & biotech companies. Through these
acquisitions, DPCL has now built a healthy customer base, which, we believe, will
drive growth.
33
QUATs and specialty chemicals – Provide steady base. DPCL is a leading player
in the QUATs segment. Since QUATs is an older technology and is commoditised,
DPCL is shifting focus to niche QUATs that have specialised applications and higher
price, to boost margin and growth. The company has built significant presence in the
segment across the world, especially in developed markets. Revenues from QUATs
have seen robust CAGR of 32% in the past five years. Revenues of QUATs are
included in Marketable Molecules (MM) segment, which enjoys EBIT margin of 10%
compared with 22% for CRAMS segment in FY08. With the recent acquisition of
Solvay’s fine chemicals, vitamin D and vitamin D analogue businesses and revenues
from the MM segment are set to post strong growth of 24% through FY08-11E.
Besides sharp rupee depreciation YTD vis-à-vis US dollar has helped DPCL raise
prices for QUATs ~10% and there is also healthy volume growth.
Attractively valued, BUY. At FY10E P/E of 6x, the stock is trading at significant
discount (50%) to Divi’s which we believe is unjustified. Given its strong growth
trajectory (EPS CAGR of 47% through FY08-11E) powered by robust growth in
CRAMS business, improving revenue mix and margin, expanding and improving list of
de-risking business model and possibility of re-rating, we recommend BUY. Our 18-
month fair value estimate is Rs214, implying 46% returns.
34
DPCL – Early bird in CRAMS
DPCL is one of the first and very few pharma companies that recognised importance
of and huge opportunity in CRAMS, as early as a decade ago. Consequently, in a
major breakthrough, the company signed its first CM agreement with Solvay in ’01,
thereby beginning its glorious journey in the CRAMS space.
Significant transformation – From API to full-fledged CRAMS

Since commencement, DPCL has directed efforts towards production of a range of
phase-transfer catalysts and QUATs, soon becoming the global market leader in
these products. This was primarily due to its research-led, innovative and affordable
products. In 1995, the company extended its activities for the development of many
intermediates and APIs. The company recognised the huge CM opportunity and
commenced work in the CRAMS business in 1997. The company achieved a major
breakthrough in the CM business by signing a long-term contract with European
pharma major, Solvay, for EM in ’01. To strengthen its presence in the US and
European markets, DPCL established two wholly-owned subsidiaries in these markets
in 1998. The company took a major step in the CR segment by acquiring CARBOGEN
in August ’06. Currently, DPCL is one of the best players from India in the CRAMS
segment, given various CR projects as well as manufacturing projects, with the largest
pharma MNCs in the world such as AstraZeneca and GSK in its kitty.
Robust contract pipeline

Over the years, DPCL has developed a strong pipeline of over 50 CRAMS
opportunities. The company focusses on CR business of APIs and intermediates for
patented drugs only and emerging as a strong CMO, working closely with global
chemical & pharmaceutical inventor-/patent-holder companies. It focusses on
manufacturing APIs & intermediates as against formulations. Currently, the company
has strong relations with Solvay and, thereby, acquired a contract for manufacturing
three intermediates and one API. Besides, the company has recently won a contract
from AstraZeneca to manufacture 14 APIs. The company is actively negotiating with
other pharma majors such as Novartis, GSK and Eli Lilly as well.
Top quality customers

We believe that DPCL customers are considerably satisfied with the quality, speed
and pricing of the company’s outsourcing. As a result, its client list comprises of 20 of
the top-25 pharma MNCs. The company continues to expand its impressive new-
customer list every year, thus adding credence to its business model and improving
growth visibility. Table 7 presents DPCL’s top-5 customers with revenues.
35
Table 7: Top customers of DPCL
% of % of % of
total total total FY08-12 FY09-12
FY08 revenue FY10E revenue FY12E revenue CAGR (%) CAGR (%)
Solvay 1,090 18 1,976 26 2,568 18 24 14
AstraZeneca 300 5 450 6 1,800 13 57 100
Customer 3 150 2 400 5 1,100 8 65 66
Customer 4 150 2 450 6 1,000 7 61 49
Japanese customers 250 4 550 7 1,500 10 57 65
Top 5 customers 1,940 32 3,826 50 7,968 55 42 44
Total CRAMS revenues 6,016 7,625 14,357 24 37

Solvay – Stepping stone
Eprosartan mesylate – First-ever CM deal

DPCL forayed into the CRAMS space by signing an agreement with Solvay in ’01,
receiving its first CM project in ’02 for supply of anti-hypertensive drug, API EM (sold
in the US by Biovail under the brand name Teveten and patented in 1993), and its
intermediates up to December ’08, extendable annually thereafter. DPCL began
commercial manufacturing of EM in ’03. The tablet has annual sales of €95mn; the
patent on the tablet expires in ’13. As per the agreement, Solvay buys 60% of its
requirements of EM from DPCL, 30% from a European supplier and the remaining
40% from either of these, on discretion. DPCL supplies 90mnte of raw material at
present, which is expected to go up to 250mnte by FY10E, given its lower cost of
production as well as high confidence & comfort with Solvay. DPCL is estimated to
have garnered ~Rs700mn revenues in FY08E from supply of the product, likely to rise
to ~Rs1,400mn in FY10E.
Daglutril (SLV-306) and other products of Solvay

DPCL is also working on Solvay’s anti-hypertensive molecule, daglutril (SLV-306),
which is currently in phase II. SLV306 is a dual endopeptidase inhibitor, in which it is a
frontrunner. Solvay estimates peak sales of ~US$250mn of the molecule. The
compound’s progress seems to have slowed in the past couple of years. Reportedly,
DPCL is negotiating with Solvay for a couple of other products. DPCL would supply
intermediates for one of Solvay’s leading hormone replacement therapy (HRT)
products. This could be finalised by end-FY09E and, thus, be an attractive medium-
term opportunity (with additional annual revenues of Rs500mn) for the company.
Decreasing dependence on Solvay

Of DPCL’s eight production units at Bavla (Ahmedabad), two are totally dedicated to
Solvay’s CM work. Till recently, DPCL was solely dependent on Solvay for its CM
revenues; but now, with new orders from other pharma majors such as AstraZeneca,
the company’s dependence on Solvay has declined to 14% in FY08 versus 36% in
FY03.
36
Acquisition of fine chemicals business from Solvay to drive segment
growth
DPCL acquired the fine chemicals vitamin D and vitamin D analogue businesses from
Solvay in July ’07. As per the deal, DPCL acquired all facilities located at Solvay’s
Veenendaal site in Netherlands as well as technology, patents and intellectual
property rights for the business. The sale was part of Solvay’s strategy to focus on the
main therapeutic area and hive off the non-core business. With the acquisition, DPCL
has increased its basket of offerings in the fine chemicals business along with
acquiring new customers. Revenues from this business (~Rs800mn for FY09E) are
included in DPCL’s MM segment.
Custom Synthesis – On the rise

Before the acquisition of CARBOGEN, DPCL had a small presence in the segment,
with less than Rs500mn in revenues. With the acquisition of CARBOGEN, DPCL has
become a significant player in the CS business with FY08E revenue of 25% (~Rs2bn
compared to Rs5bn for DLL) expected to come from the CS segment. CARBOGEN is
expected to contribute ~75% to total sales. Currently, the company has undertaken
~500 small research projects each in India and with CARBOGEN. We believe that
only a few of these projects would undergo clinical trials (phase I-III). Reportedly, ~5
projects are in phase III, which is promising as against estimated 8-10 for DLL. If any
project is successful and the drug reaches the market, it would give significant
revenue upside to the company.
37
Strategic acquisitions – Empowering growth
DPCL, with several recent acquisitions, repositioned itself as a serious and strong
player in the CRAMS segment with presence across the value chain. Post
establishing itself as a major player in the CM space, DPCL acquired several
companies to establish and strengthen its presence in the lucrative CR segment. We
believe that such acquisitions will help the company considerably on account of strong
synergies, widening customer base and availability of end-to-end capabilities.
Table 8: Acquisition at a glance

Time Target company Price Annual Price-to- Remarks
sales sales
Feb-06 Innovative Ozone ~US$2mn NA - Helped strengthening CRAMS in
Services the specialised field of ozone
chemistry
Apr-06 Synprotec OCR ~US$3.5mn NA - Strong customer base and R&D

and manufacturing facilities in the
UK
Aug-06 CARBOGEN AMCIS US$75mn US$65mn 1.1x Strong skill-set as well as

customer base among large
pharma and biopharma
companies
Innovative Ozone Services – Niche contract research

In February ’06, DPCL acquired a small company, Innovative Ozone Services Inc
(IOSI), based in Switzerland, for less than US$2mn. IOSI is the only company in the
world in the field of consultancy and research in ozone chemistry. It has a fully-
developed laboratory as well as a pilot plant for ozone-based reactions. IOSI has
created a strong IPR, having serviced few mid-size global pharma MNCs and
specialty chemical companies. At the time of acquisition it had an order book covering
CR assignments of several molecules for various MNCs. We believe that the
acquisition would strengthen the company's activities in CR and CM in the specialised
field of ozone chemistry as well as further improve its European and US interface with
customers.
Synprotec acquisition – Entry into contract research

DPCL acquired a Manchester (UK)-based CR company, Synprotec OCR (Synprotec)
in April ’06, leading to presence in the lucrative CR business; the acquisition was for
less than £2mn. Synprotec has contract R&D and manufacturing capabilities in the
UK, having created a strong customer base. Since the CR is the best way forward for
bagging CM business, Synprotec's strong customer relationship and skill-set would be
complementary to DPCL’s.
38
CARBOGEN – Strengthening capabilities
DPCL acquired CARBOGEN, a Swiss CRAMS company, in August ’06 for US$75mn,
this being its biggest-ever acquisition. CARBOGEN has state-of-the-art R&D facilities
at three sites in Switzerland. It differentiates itself by the quality of its technical
capabilities and integrated platform that provides seamless solutions to the world’s
leading pharma and biotech companies, of which it has thereby developed a strong
customer base. Notably, CARBOGEN generates ~90% revenue from repeat
customers. In CY05, it registered turnover of CHF81.8mn or Rs3bn. ~80% of
CARBOGEN’s sales are from the US market. In FY08, the company has generated
revenues of Rs3.5bn.
DPCL plans to enhance CARBOGEN’s business prospects via boosting synergies

between the two companies, expanding the product range and renewing focus on key
accounts; this will enhance the scale of operations by converting key projects from
purely research to manufacturing. Combined with CARBOGEN, DPCL can serve the
entire drug life cycle of 15-20 years. The acquisition will boost DPCL’s CM business
via CARBOGEN’s customers and, in turn, improve margins of the Swiss company by
leveraging its competency in operational efficiency in India.
Going slow on acquisitions

As per its acquisition history, DPCL has always looked to acquire a skill-set that it
lacks. This has been the most important factor behind its acquisition strategy in the
past. We expect the same to continue, with future acquisition targeted at specialised
areas such as peptides, oncology and other biologicals. DPCL’s strategy includes
acquiring only profitable and clean balance-sheet companies. However, in its recent
earnings call, the management stated that the company will not make acquisitions till
end-FY10E, in light of the ongoing global financial crises.
New avenues of growth

Table 9: Revenue growth drivers
(Rs mn)
FY10 FY11 FY12 Remarks
AstraZeneca 450 900 1,800 14 APIs such as omeprazole & esomeprazole could be
bigger than Solvay in 5 years
New cancer API facility 0 800 1,200 Commence production in Q4FY10 to feed CARBOGEN
Sanitisation Products 200 350 600 Project for 24 products planned with production to be
outsourced
Total 650 2,050 3,600
% boost to sales 5.2 13.4 18.8
In addition to the aforementioned growth drivers, DPCL is stepping up its ante on the
US market (the largest and most lucrative pharma market globally), which currently
contributes only 5% of total revenues as against EU contributing 80%. DPCL has
hired a team of experienced professionals to aggressively market services to US
customers and is in negotiations with top US-based innovator companies such as Eli
Lilly. To this end, the company has aggressively commenced filing DMFs since FY07
(Table 10).
39
Table 10: Dishman Pharmaceuticals – DMF list
Submit Date API
22-Sep-2008 Ropivacaine Hydrochloride Anhydrous
5-Sep-2008 Calcifediol
25-Feb-2008 Cholecalciferol
4-Feb-2008 Pralidoxime Chloride
18-Oct-2007 Bupivacaine Hydrochloride
24-Apr-2007 Bisacodyl
16-Mar-2007 Cetylpyridinium Chloride
7-Mar-2005 Eprosartan Mesylate
14-Jul-2003 Eprosartan Mesylate
20-Sep-2001 Tramadol Hydrochloride
16-Apr-1999 Calcitriol
Source: US FDA
Having established itself as a world-class CMO in the intermediates/API space, DPCL

may look at moving up the value chain via offering services for manufacturing dosage-
form to provide the full spectrum of CRAM services to the customer.
China facilities – Low cost advantage

In April ’04, DPCL started a wholly-owned subsidiary to set up a greenfield
manufacturing facility in China and source raw material of high quality at low cost.
This is DPCL’s first greenfield facility overseas, in which it has invested US$10mn.
While initially, the company had planned to transfer lower-end manufacturing
(QUATs) to its China facility, it now plans to have only CM business as customers
want to reduce geo-political risks of a single country (India) and take advantage of
China’s low-cost manufacturing. The unit is scheduled to commence in Q4FY09 and
the company expects revenues of over US$10mn in FY10E. The company hopes to
double this to US$20-25mn in FY11E.
Strong management capabilities to drive growth

DPCL’s phenomenal growth in the past decade and transformation from a mere API
manufacturer to a major player in the CRAMS business with end-to-end capabilities is
largely attributable to its strong management expertise. The company’s top
management is supported by a strong middle-level management as well as robust
scientific & technical staff across the company.
The company’s promoter, Mr Janmejay Vyas, is a first-generation entrepreneur. He

is a chemical technologist and has been associated with the pharma industry for the
past 22 years.
The company recruited Dr Henk Pluim as Director, International Marketing, in August

’03. Dr Pluim was earlier with Solvay for 18 years and occupied several important
positions, including Project Director of new APIs. He has been instrumental in bringing
many significant relationships such as Solvay, Merck, GSK and Novartis to the
company. We believe that his strong experience in the industry as well as relationship
with Solvay and many other European pharma companies will help DPCL gain major
contracts going forward.
40
Mr VVS Murthy joined DPCL in March ’07 as the Chief Financial Officer. He is a
Chartered Accountant with ~29 years of experience in various industries viz.,
Engineering, Chemicals, Sanitary ware, Cement, Fertilisers and Pharmaceuticals.
Prior to joining the DPCL Group, he has worked with Dr. Reddy's Laboratories from
1995 to February ’07 as Vice President Finance.
Arvind Joshi joined in October ’07 as President HR & Administration. He has a rich
32-year experience in HR field of textiles and pharmaceutical sectors. He has worked
earlier with Sun Pharma, Alembic and JB Chemicals. Prior to joining DPCL, he
worked as Vice President – HR, JB Chemicals, Mumbai.
Bob Koprowski was recruited as Head – US Marketing in November ’08. Prior to

joining DPCL, USA, he worked with Dr. Reddy's Laboratories as Head Marketing,
Custom Synthesis business in the US.
41
Equity Research
Divi’s Laboratories BUY

Best in class Rs1,134
Divi’s Laboratories (DLL) is India’s largest ACMOs with FY08 revenues of Rs10bn
or ~US$210mn. Unlike most competitors, DLL follows the strategy of collaborating
with customers as against an opportunistic business strategy. This combined
with its India-centric (no acquisitions) business model focussing on developing
API/intermediates with substantial cost advantage has led to EBITDA margin of
~40%, which is amongst the highest globally. We believe that the company would
maintain and improve margins over the next three years on the back of rising
revenues from the high-margin customs synthesis (CS) business. We expect the
company to register 29% EPS CAGR through FY08-11E. The stock is currently
trading at FY10E P/E of 12x. We initiate coverage with a BUY rating and 18-month
fair value of Rs1,527/share, implying potential upside of 35%.
f India’s top-tier CMO in global ACM space. With state-of-the-art R&D centres and
large manufacturing facilities, DLL undertakes custom manufacturing (CM) of APIs
and production of advanced intermediates over the entire lifecycle of the product and
has emerged as an ideal partner of choice in the global ACM space. DLL is a top-tier
Indian player in the API/intermediates ACM space globally.
f Strategy – To collaborate and ‘not compete with customer’. DLL follows the
strategy of collaborating with customers as against an opportunistic business
approach and, since inception, has produced APIs using non-infringing processes.
The company has always respected innovation and IPRs of global pharma
companies, thereby inspiring confidence in clients, which is the cornerstone of
success.
f Strong chemistry skill-set and unstinted focus. DLL has been strongly focussed
on R&D since inception; this is critical to success in the CR space. To this effect, the
company boasts of a strong chemistry skill-set and process development
capabilities. DLL’s research team is specialised in process design for new drug
compounds, scale of developing material – from gramme to kilogramme and
structural elucidation, impurity profile studies, process validation, process justification
to process optimisation, analytical methods development & validation, environment
impact analysis, safety studies and time cycle studies.
f India-centric low cost model. DLL has an India-centric business model that
develops and produces all API/intermediates with substantial cost advantage. DLL
enjoys EBITDA margin of ~40%, possibly the highest amongst peers globally. We
believe that the company would maintain and improve margins 500bps to 46% over
the next three years.
f Top-quality BUY. In FY08, DLL’s PAT almost doubled YoY every quarter, beating
consensus by a wide margin, which led to higher-than-historic P/E of 20-25x.
Rajesh Vora Currently, the stock is trading at attractive FY10E P/E of 12x, which is reasonable in
rajesh_vora@isecltd.com light of the strong EPS CAGR of 29% through FY08-11E.
+91 22 6637 7508

Leaping ahead
Background
In 1990, DLL commenced business with developing new processes for production of
API and intermediates, with focus on R&D. Within a short span, it increased scale of
operations to provide complete turnkey solutions to domestic pharma companies.
After successfully developing several commercial processes for intermediates and
bulk actives, DLL established its own manufacturing facilities in 1995. With setting up
manufacturing facilities, the company soon became a leading global player in
production of API/intermediates for key products such as naproxen,
dextromethorphan and diltiazem. Also, on the back of its strong R&D capabilities and
high respect for IPR, the company became a leading player in India in the CS space.
Further, DLL is currently well-established as a partner of choice from India for global
innovator companies as a contract manufacturer of API/intermediates for discovery
products, which are in various stages of research. DLL boasts of working with 20 of
the top-25 global pharma companies, with over 100 projects in the pipeline.
Chart 24: Improving revenue mix
FY05 FY08E FY11E

3%
2%
4% 2%
24% 37%
48%
50%
72% 58%
Generics Custom Synthesis Peptides Carotenoides
43
Investment summary
India’s top-tier CMO in global ACM space
DLL undertakes CM of APIs and production of advanced intermediates over the entire
lifecycle of the product. With state-of-the-art R&D centres and large manufacturing
facilities, DLL has emerged as an ideal partner for CS, process development and
mass manufacturing of customers’ discovery products. In the global ACM space, DLL
is one of the top-tier Indian players, with Rs10.4bn or US$210mn annual revenues.
Chart 25: DLL – Growth opportunities
Late stage product

Strong growth in commercialisation
existing and new ¤ boosting contract
generic APIs manufacturing
business
Divi ’s Lab
Rising share of
custom synthesis Carotenoids scale up
¤ Improvement in
margins
Strategy – To collaborate, and not compete, with customer

DLL’s key to success in outsourcing is its strategy of not competing with the customer.
DLL has always respected innovation and IPR of global pharma companies, thereby
inspiring confidence in its clients. Hence, since its inception, DLL has only focussed
on developing non-infringing processes. DLL’s strategy rests on collaborating with
customers as against opportunistic business strategy of many of its competitors such
as Matrix, Shasun, Jubilant, Strides and Alembic.
Strong chemistry skill-set and un-stinted focus

Since its establishment, the DLL management has given high importance to R&D as a
result of which the company boasts of a strong chemistry skill-set and process
development capabilities. We believe that research is key to success in the CR & CS
businesses. DLL’s research team is specialised in process design for new drug
compounds, scale of developing material – from gramme to kilogramme, structural
elucidation, impurity profile studies and process validation to process justification,
process optimisation, analytical methods development & validation, environment
impact analysis, safety studies and time cycle studies.
44
India-centric low cost model
DLL believes in the organic growth model vis-à-vis most peers. Also, its business
model is India-centric and aims at focussing on its strengths such as strong chemistry
skill-set, world-class infrastructure and lower costs. DLL develops and produces all
API/intermediates in India with substantial cost advantage, which is evident from its
leadership position in some API products such as naproxen, dextromethorphan and
diltiazem as well as EBITDA margin of ~40%, possibly the highest amongst peers
globally. We believe that the company would be able to maintain and improve its
margin over the next three years.
Strong EPS growth catching up with stellar price rise

Despite the recent 25% drop in DLL’s stock price in the past three months, it is up 3x
since the past three years versus Sensex at 1.4x. The rise was led by factors such as:
i) significantly higher-than-expected EPS growth (198% YoY in FY07 and 70% in
FY08) ii) consensus EPS estimate did not assume such a high EPS growth rate to be
sustainable and, hence, one-year forward P/E overshot to 20-25x iii) continuation of
operating leverage iv) rising FCF (over Rs2bn in FY09E) to lead to further capex and,
hence, growth. We believe that despite phenomenal returns in the past and given
earnings growth in the next three years (29% CAGR through FY08-11E), the stock is
trading at attractive valuations, offering 35% upside in the next 15-18 months.
45
DLL – Top-tier global ACMO from India
DLL has emerged as the largest player in the CS business in India on the back of
strong chemistry research skills, IPR protecting corporate philosophy and substantial
cost advantage. The company is working with 20 of the top-25 global pharma
companies on various projects. It boasts of the strongest CS pipeline of over 100
projects, of which at least 8-10 are in phase III. DLL’s CS business contributed ~24%
of total revenues in FY04 and leapfrogged to ~50% in FY08, which will further rise to
60% by FY11. This would see DLL’s operating margins increasing going forward as
CS is a typically high-margin business due to its customised nature and small-scale of
projects. The company incurred capex of ~Rs4bn over FY05-08, which is 60% of the
FY08 gross block, to establish new manufacturing facilities to execute more orders.
Chart 26: DLL – Custom synthesis revenue growth (CAGR: 57%)

14,000 (60%)
12,000
10,000
(Rs mn)
8,000
6,000 (50%)
4,000
2,000 ( 24%)
0
2005 2006 2007 2008 2009 2010 2011
Note: Figures in bracket are custom synthesis revenues as percentage of total

Enjoys customer confidence

Over the years, DLL has developed the broadest and best clientele vis-à-vis Indian
peers. Currently, the company is working with 20 of the top-25 innovator global
pharma companies. DLL’s philosophy of protecting the customer’s IPR, not competing
with customers and adding value has won customer confidence. This combined with
its wide-ranging chemistry skill-set and world-class infrastructure has enabled it to
position itself as the customer’s satellite manufacturing hub in India. Consequently,
large pharma MNCs have given their in-the-pipeline NCEs for customs synthesis as
well as manufacturing clinical trial quantities to DLL.
Ability to execute large new projects within a year

Over the years, DLL has developed capabilities for new projects, from drawing board
to commercial production, within a short time. On an average, the company has set
up new large-scale manufacturing plants, as per customer need, within 6-9 months.
We believe that globally, only a limited number of ACMOs possess such capabilities,
which is an advantage if a customer wants to outsource a particular product
expeditiously.
46
Array of services
Furthermore, DLL offers a wide array of services to its innovator partners that are:
• process design and development for new drug candidates
• process validation, justification and optimisation
• product manufacturing (very small to large quantities), as per customer need and
phase of clinical development
• generating reliable data for regulatory agencies and its documentation for
preparing draft drug master files (DMFs).
Robust pipeline of projects

DLL is one of the largest Indian players in the high-end CS business, with Rs5bn
revenue in FY08 compared with DPCL at Rs2bn. DLL boasts of the strongest CS
pipeline of over 100 projects, of which at least 8-10 are in phase III. DLL’s CS
business contributed ~24% of total revenues in FY04 and leapfrogged to ~50% in
FY08, which will further rise to 60% by FY11. Commercialisation of these projects
implies sustainable revenue for DLL over the long term (8-10 years, till the drug
becomes generic). On an average, DLL adds 8-12 products to its CS portfolio.
Large capex driving growth

DLL has incurred significant capex of Rs4bn, which is 60% of FY08 gross block on
manufacturing capacities in the past three years. Key investments were made for
setting up new units at existing plants and the 250-acre SEZ at Visakhapatnam; this
fuelled surge in revenue and profits in FY07 and FY08. More importantly, additional
revenue was ~Rs6bn, (which is 60% of FY08 sales), resulting in greater sweating of
assets and implying that the company is moving up the value chain. This is also
reflected in the EBITDA margin, which leapfrogged to ~40% from ~30% in FY05.
Given that the external environment is conducive to outsourcing from India and DLL
being one of the top-tier ACMOs from the country, we expect the company to benefit
immensely from continued huge orders and new projects.
47
Generics API business to see strong growth
Since inception, DLL has focussed on developing alternate, patent non-infringing
processes for APIs for leading generic pharma companies to manage the late life-
cycle of a drug. The company strategy for the generics API/Intermediates division
involves creating market leadership, as regards scale, cost and quality, which ensures
customer loyalty as well as higher pricing power. Besides, DLL also manufactures
products (without scale leadership) where it has advantage, either in terms of cost or
process yield.
Leadership position in top products

DLL enjoys global leadership in its top-5 products, namely dextromethorphan,
naproxen, Iopamidol, diltiazem and nabumetone. These products are estimated to
contribute ~37% to the company’s total revenue. Given unstinted focus on improving
yields and lowering cost, DLL has been not only increased market share but also
improved margin. The company derived 74% of its revenues from generic products in
FY04 as against an estimated 48% in FY08 mainly on account of significantly higher
growth in the CS business. Despite severe pricing pressure on the generic industry in
the past few years along with worsening situation in API space, DLL has reported
strong performance in its generic API business.
Strong product pipeline

DLL continues to add new products to its kitty. It has one of the best pipelines of
DMFs of 34. It works closely with its customers (top-tier generics companies as well
as innovators) for developing and improving API products, well ahead of patent
expiry.
48
Table 11: Divi’s Laboratories – DMF list
Submit Date API
29-Apr-2008 Vigabatrin
25-Nov-2007 Topiramate
25-Oct-2007 Quetiapine Fumarate
15-Oct-2007 Tripeptide, Drug Intermediate
15-Jul-2007 Boc Cor Succinate (Intermediate)
7-Jan-2007 TPE Alcohol
4-Sep-2006 Sibutramine Hydrochloride Monohydrate
17-May-2006 Desloratadine
4-Dec-2005 Gabapentin
25-Nov-2005 Tamsulosin Hydrochloride
25-Sep-2005 Fosphenytoin Sodium
25-Sep-2005 Risedronate Sodium
25-Sep-2005 Zolpidem Tartrate
17-Jul-2005 Verapamil Hydrochloride
5-Jul-2005 Niacin
24-Apr-2005 Bupropion Hydrochloride
6-Feb-2005 Proguanil Hydrochloride
6-Feb-2005 Iopamidol
3-Dec-2004 Levodopa
20-Nov-2004 Carbidopa
7-Nov-2004 Loratadine
19-Sep-2004 Methyldopa
19-Oct-2003 Phenylephrine Hydrochloride
5-Oct-2003 Leviteracetam
3-Sep-2003 Sulphazine
31-Jan-2002 5-Phenylhydantoin
2-Apr-2001 Nabumetone
26-Jan-2001 Diltiazem Hydrochloride
9-Aug-1999 Ketorolac Acid
27-Nov-1998 Naproxen
27-Nov-1998 Naproxen Sodium
4-Feb-1997 Dextromethorphan Hydrobromide
Source: US FDA
49
Carotenoids – Long term opportunity

Primer on carotenoids
Carotenoids are a class of natural fat-soluble pigments found principally in plants,
algae and photosynthetic bacteria. There are over 600 known carotenoids; these are
pigments that give colour to egg yolks, tomatoes, fungi, all green leaves, fruits and
flowers. They are also present in crustaceans, certain fish species, feathers and
insects. They are not produced within the body and must be obtained through diet.
Beta-carotene and other cartenoids are the main dietary source of vitamin A. More
recently, protective effects of carotenoids against serious disorders such as cancer,
heart disease and degenerative eye disease have been recognised as well as
stimulated intensive research in the role of carotenoids as antioxidants and as
regulators of the immune response system. Some important carotenoids include
betacarotene (used in foods and supplements), astaxanthin (pigmentation),
canthaxanthin (pigmentation) and lycopene (antioxidant). The global market size of
carotenoids is estimated at ~US$1bn, with DSM Pharmaceuticals being the leading
player. Growth of the carotenoid industry is impacted by pressure in Europe to reduce
pigmentation as well as increased competition, which is in turn pressurising prices.
DLL set to capitalise on opportunity

DLL has already developed manufacturing processes for various carotenoids
including major ones such as betacarotene, astaxanthin, lycopene and cantaxanthine.
DLL has entered into agreement with few customers for supply of carotenoids as
ingredients to start with, as formulating requires special technologies, which are
closely guarded by a couple of global majors such as DSM Pharmaceuticals. Given
the tough nature of the business, there have been delays in commercialisation of
products for DLL. However, management expects revenues to kick-start FY09
onwards. We expect revenue of ~US$15mn in FY11E from the product. The company
has set up two overseas subsidiaries (in the US and Switzerland) for marketing these
products.
50
Attractive valuations
Historic one-year forward P/E analysis
Since its listing in April ‘04, DPCL’s stock has traded at ≥14x one-year forward P/E,
except in the past two months, when the stock crashed 55% due to the company
registering Rs310mn forex loss in Q2FY09 along with global meltdown in equities.
This is an aberration and we expect the stock to bounce back to its normal P/E band
of 14-15x. We believe that given superior earnings growth going forward (47% CAGR
through FY08-11E), strong earnings visibility and improving financials will lead to re-
rating.
Chart 27: DPCL – One-year forward rolling P/E band

450
400
350
300
18x
250
(Rs)
200 14x
150 10x
100
6x
50
0
Jul-04
Dec-04
Feb-05
May-05
Jul-05
Oct-05
Dec-05
Mar-06
May-06
Oct-06
Jan-07
Mar-07
Jun-07
Nov-07
Jan-08
Jun-08
Nov-08
Sep-04
Sep-08
Apr-04
Aug-06
Aug-07
Apr-08
Since listing, DLL’s stock price has largely remained at ≥10x P/E, except for a brief
period in mid ’06. During over mid-CY07-Febraury ’08, the stock price saw exceptional
rise, largely trading at P/E of 20-25x on the back of the stellar quarterly PAT growth of
~100% and the ongoing bull market then.
Chart 28: DLL – One-year forward rolling P/E band

2,000
1,800
1,600
1,400
1,200 20x
(Rs)
1,000
15x
800
600 10x
400
5x
200
0
Jun-04
Nov-04
Jan-05
Jun-05
Nov-05
Jan-06
Jun-06
Nov-06
Jan-07
Jun-07
Nov-07
Jan-08
Mar-08
Jun-08
Nov-08
Apr-04
Aug-04
Apr-05
Aug-05
Apr-06
Aug-06
Apr-07
Aug-07
Aug-08
51
Performance since IPO
Given DPCL and DLL’s listing only 5-6 years ago, they have outperformed benchmark
indices. DLL has posted exemplary performance, registering a huge surge in market
cap of 32x (or 88% CAGR) and 7x in EPS (41% CAGR) compared with 2.7x in the
Sensex (or 20% CAGR). Sharp 55% fall in DPCL’s stock price in the past two months
has dented the company’s performance since its IPO listing, with market cap and EPS
having almost doubled compared with CNX mid-cap index at 1.4x or 8% CAGR.
Chart 29: Multi-fold surge in market cap and EPS

Divi’s Laboratories (~6 years) Dishman Pharmaceuticals (~5 years)
32x (88%) 2.2x (19%)
2x (11%)
1.4x (8%)
7x (41%)
2.7x (20%)
Market Cap EPS Sensex Market Cap EPS CNX Mid-cap
Figures in brackets represent CAGR since IPO price

Comparative valuations
As per comparison with peer group valuations (Table 12), DPCL seems inexpensive
on almost all parameters. The stock is trading at a hefty 33% discount to average
FY10E P/E and 50% to DLL. On the other hand, DLL appearing the most expensive
on almost all parameters is justified in light of it boasting of the highest EBITDA
margin, RoCE and significantly higher EPS growth since the past 10 quarters.
Table 12: Comparative valuations

Mkt Cap EPS (Rs) PER (x)
Price (US$ Sales EBITDA EV/E Mkt cap/ RoCE
Company (Rs) mn) (Rs mn) FY09 FY10 FY09 FY10 margin (%) (x) sales (x) (%)
Aurobindo Pharma 117 126 24,254 43.2 52.8 2.7 2.2 10.7 7.5 0.3 7.1
Dishman Pharma 146 233 8,031 18.2 24.4 8.0 6.0 19.0 11.7 1.4 12.3
Divi’s Labs 1,134 1,464 10,435 75.3 95.0 15.1 11.9 41.4 17.1 7.0 43.9
Jubilant Organosys 148 437 24,317 20.9 29.9 7.1 5.0 20.1 7.7 0.9 11.7
Matrix Labs 52 159 18,510 12.9 14.8 4.0 3.5 13.9 8.1 0.4 8.4
Piramal Healthcare 206 858 29,554 20.9 26.1 9.8 7.9 17.0 9.4 1.5 20.0
Shasun Chemicals 13 12 9,527 5.0 7.0 2.6 1.8 6.5 5.3 0.1 9.4
Suven Life Sciences 13 29 1,200 0.9 1.2 14.1 10.6 14.2 10.7 1.2 8.6
Average/Total 3,319 125,827 11.1 8.7 17.3 12.6 1.3 13.2
Source: Company data, Bloomberg, I-Sec Research
Table 13: Comparative with global peers

Price Mkt Cap Sales EPS EPS PER PER EBITDA EV/E Mkt cap RoCE
Company (US$) (US$ mn) (US$ mn) CY08 CY09 (x) (x) margin (%) (x) /sales (x) (%)
Albany Molecular 9.1 288 193 0.6 0.6 15.2 16.5 6.2 21.6 1.5 2.3
Cambrex 2.5 71 253 0.4 0.5 5.8 4.6 11.8 7.0 0.3 12.6
Lonza 68.8 3,468 2,870 7.2 6.3 9.5 10.9 11.7 14.7 1.2 5.1
Patheon 0.7 62 677 (0.2) 0.2 (3.4) 3.4 11.5 6.3 0.1 9.4
Wu-Xi Pharma 6.3 413 135 0.6 0.7 10.5 8.9 21.4 8.5 3.1 9.2
Average/Total 4,303 4,128 9.8 10.9 11.7 14.3 1.0
Source: Company data, Bloomberg, I-Sec Research
52
Fair value pegged at Rs214 for DPCL & Rs1,527 for DLL
Given DPCL and DLL’s high-growth phase combined with steady revenue stream, we
believe that DCF-based and PEG-based (versus P/E-based) valuations would be
more appropriate for arriving at fair value; we have assumed the average of the two
valuation methods. As regards PEG valuations methodology, we have largely used
current FY09 PEG (0.17x for DPCL and 0.55x for DLL) on FY10E EPS on account of
our fair value time-horizon being 15-18 months. As regards the DCF-based valuations
methodology, we have used risk-free rate of 8%, risk premium of 12% and long-term
sustainable growth rate of 5%. Table 14 shows resultant fair value of the two
companies. The past two-month sharp 55% drop in DPCL’s price has widened its P/E
and PEG discount with DLL. This may be attributable to the heavy Rs310mn forex
loss (80-90% of which is attributable to mark-to-market translation loss on foreign
currency loans) reported in Q2FY09 and the heavy selling in the global meltdown in
equities. We believe such high discount to be abnormal and expect the gap to narrow
over the next few quarters.
Table 14: Fair value estimates

Dishman Divi's Dishman Divi's
Rs/share M. Cap (US$ mn)
PEG based value 193 1,538 307 1,968
DCF based 234 1,516 372 1,940
Fair value (Average) 214 1,527 340 1,954
Current Market Price/ Cap 146 1,134 232 1,451

Potential upside (%) 46 35 46 35
53
Financial summary
Stellar growth in the past
Both DPCL and DLL have achieved strong growth in the past. While DPCL has
clocked-in revenue and PAT CAGRs of 46% and 39%, DLL has posted 32% and 46%
respectively in the past five years. The growth was driven by increasing demand for
outsourcing work from global pharma MNCs and their disciplined customer-centric
approach.
H1FY09 performance – Impressive

During H1FY09, both companies reported strong results; DLL maintained its PAT
growth of ~50%, with revenues rising 26% YoY, EBITDA margin expanding 512bps
YoY to 45.2% and net profit surging 47% YoY. On the other hand, DPCL achieved
revenue growth of 39%, with EBITDA margin surging 521bps to 24.4% powered by
price rise in top products such as EM & QUATs, better product mix and depreciating
rupee. Consequently, recurrent consolidated PAT surged 112% YoY to Rs782mn,
almost equivalent to FY08. Reported PAT in H1FY09 was significantly lower due to
forex loss of Rs484mn (of which ~80% is attributable to translation loss on account of
foreign currency debt). Thus, we expect growth momentum to continue in H2FY09E
and beyond.
Revenue and earnings set for multifold growth

DPCL and DLL are expected to register phenomenal growth in revenue through
FY08-11E. DPCL is expected to almost double its revenue in the next three years,
posting CAGR of 24% on the back of strong growth in both business segments viz.
CRAMS and QUATs. Growth in the CRAMS business will be driven mainly by
acquisition of new customers. DLL’s revenue is also set to double over the next three
years, registering CAGR of 24%. The growth will be mainly driven by CM business,
which is expected to grow 4x over FY08-11E.
DPCL’s PAT would increase 3x in the next three years, at CAGR of 47% on the back
of both topline growth and improvement in margins. DLL is expected to post a robust
PAT CAGR of 29% over FY08-11E.
Chart 30: Revenue and PAT
DPCL DLL
18,000 Revenue PAT 25,000
Revenue PAT
16,000
14,000 20,000
12,000
15,000
(Rs mn)
(Rs mn)
10,000
8,000
10,000
6,000
4,000 5,000
2,000
0 0
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E
54
Improving RoCE and EBITDA margin
DPCL’s EBITDA margin is set to expand ~5 percentage points (pps) to 25% in FY11E
due to improving revenue mix, price increase and cost control. DLL’s EBITDA margin
is also expected to expand ~5pps to 46% in FY11E due to growing contribution from
the high-margin CS business, which is set to contribute 60% to total revenue from the
current 50%. This combined with disciplined capex will lead to RoCE rising over 8pps
to 19% for DPCL compared with 10pps decline to 32% for DLL due to high free cash
balance of ~Rs10bn in FY11E. Given this, it would be prudent to view the RoIC of
DLL, which is expected to rise 4pps to 56% in FY11E.
Chart 31: Improving RoCE and EBITDA margin

DPCL DLL
30 EBITDA margins RoCE 50 EBITDA margins RoCE
25
45
20
40
(%)
(%)
15
35
10
30
5
0 25
FY07 FY08 FY09E FY10E FY11E FY07 FY08 FY09E FY10E FY11E
55
Annexure 1: Financials
Table 15: Dishman Pharma – Profit & Loss statement
(Rs mn, year ending March 31)
FY07 FY08 FY09E FY10E FY11E
Gross Sales 5,819 8,114 10,235 12,635 15,425
Less: Excise Duty 34 83 95 113 136
Net Sales 5,786 8,031 10,140 12,522 15,289
Domestic 727 945 1,182 1,418 1,702
Exports 5,058 7,085 8,959 11,104 13,587
Other Operating Income 0 0 0 0 0
Total Operating Income 5,786 8,031 10,140 12,522 15,289
Less:
Raw Materials consumed 2,066 3,017 3,194 3,832 4,678
Power and Fuel 170 237 294 363 459
Personnel Expenses 1,409 2,154 2,736 3,392 4,138
Selling and Distribution Expenses 180 174 233 313 382
Other Expenses 509 668 948 1,119 1,316
Research & development expenses 24 31 51 75 107
Repairs and maintenance 275 222 284 376 459
Total Operating Expenses 4,634 6,502 7,740 9,470 11,539
EBITDA 1,151 1,529 2,401 3,052 3,750

EBITDA margin (%) 19.9 19.0 23.7 24.4 24.5
Depreciation & Amortisation 263 472 612 749 878

Other Income 129 98 119 142 171
EBIT 1,018 1,155 1,907 2,445 3,043
Less: Gross Interest 162 305 393 397 330
Recurring Pre-tax Income 856 850 1,513 2,048 2,713
Extra Ordinary gains 104 379 0 0 0

Less: Extra ordinary expenses 11 18 (484) 0 0
Less: Taxation 32 13 36 61 81
--Current Tax 13 70 36 61 81
--Deferred Tax 19 (57) 0 0 0
Net Income (Reported) 917 1,197 993 1,987 2,631
Recurring Net Income 824 837 1,477 1,987 2,631
56
Table 16: Dishman Pharma – Balance sheet
Current Assets, Loans & Advances
Cash & Bank balance 355 371 72 611 485
Inventory 2,978 3,047 3,107 3,674 4,486
Sundry Debtors 1,252 2,042 2,664 3,393 4,226
Loans and Advances 839 1,127 1,542 1,904 2,536
Total Current Assets 5,424 6,587 7,385 9,582 11,733
Current Liabilities & Provisions

Current Liabilities 2,496 1,959 2,545 3,373 4,426
Sundry Creditors 656 603 848 1,167 1,581
Other Current Liabilities 1,840 1,356 1,696 2,205 2,845
Provisions 211 513 636 778 948
Total Current Liabilities and Provisions 2,707 2,472 3,181 4,151 5,374
Net Current Assets 2,717 4,115 4,204 5,431 6,359
Investments
Strategic & Group Investments 128 13 13 13 13
Other Marketable Investments 12 0 0 0 0
Equity 0 0 0 0 0
Debt 12 0 0 0 0
Total Investments 140 13 13 13 13
Goodwill 1,354 1,520 1,520 1,520 1,520
Fixed Assets
Gross Block 4,725 6,443 8,677 9,827 10,827
Less Accumulated Depreciation 699 1,118 1,730 2,480 3,357
Net Block 4,026 5,325 6,947 7,348 7,470
Add: Capital Work in Progress 650 1,485 750 600 600
Less: Revaluation Reserve 77 77 77 77 77
Total Fixed Assets 4,599 6,733 7,620 7,871 7,993
Total Assets 8,810 12,381 13,358 14,835 15,885
LIABILITIES AND SHAREHOLDERS' EQUITY

Borrowings
Short Term Debt 2,458 2,459 2,459 1,959 1,459
Long Term Debt 3,151 4,121 4,121 3,871 2,871
Total Borrowings 5,609 6,580 6,580 5,830 4,330
Deferred Tax Liability 109 149 149 149 149
Share Capital
Paid up Equity Share Capital 144 159 159 163 163
No. of Shares outstanding (mn) 72 79.7 79.7 81.3 81.3
Face Value per share (Rs) 2 2 2 2 2
Preference Share Capital (convertible)
Reserves & Surplus 3,039 5,575 6,546 8,770 11,320

Share Premium 933 2,300 2,300 2580 2580
General & Other Reserve 2,106 3,275 4,246 6,190 8,740
Less: Misc. Exp. not written off 15 6 0 0 0
Net Worth 3,092 5,652 6,629 8,856 11,406
Total Liabilities & Shareholders' Equity 8,810 12,381 13,358 14,835 15,885
57
Table 17: Dishman Pharma – Cashflow statement
Cash Flow from Operating Activities
Reported Net Income 917 1,197 993 1,987 2,631
Add:
Provisions 0 0 0 0 0
Deferred Taxes 109 40 0 0 0
Less:
Other Income 129 98 119 142 171
Net Extra-ordinary income 104 379 (484) 0 0
Operating Cash Flow before Working Capital change (a) 1,053 1,179 1,971 2,594 3,338
Changes in Working Capital

(Increase) / Decrease in Inventories (1,896) (70) (59) (568) (812)
(Increase) / Decrease in Sundry Debtors (388) (790) (622) (729) (833)
(Increase) / Decrease in Operational Loans & Adv. (390) (288) (415) (362) (632)
Increase / (Decrease) in Sundry Creditors 182 (53) 245 319 413
Increase / (Decrease) in Other Current Liabilities 1,709 (182) 463 651 810
Working Capital Inflow / (Outflow) (b) (783) (1,382) (388) (688) (1,054)
Net Cash flow from Operating Activities (a) + (b) 269 (203) 1,582 1,906 2,285
Cash Flow from Capital commitments

Purchase of Fixed Assets (4,165) (2,718) (1,500) (1,000) (1,000)
Purchase of Investments (65) (127) 0 0 0
Consideration paid for acquisition of undertaking 0 0 0 0 0
Cash Inflow/(outflow) from capital commitments (c) (4,231) (2,591) (1,500) (1,000) (1,000)
Free Cash flow after capital commitments (3,961) (2,794) 82 906 1,285
(a) + (b) + (c)
Cash Flow from Investing Activities

Purchase of Marketable Investments 0 0 0 0 0
(Increase) / Decrease in Other Loans & Advances 0 0 0 0 0
Sale of Fixed Assets 0 0 0 0 0
Sale of Investments 0 0 0 0 0
Consideration received for sale of division 0 0 0 0 0
Other Income 129 98 119 142 171
Net Cash flow from Investing Activities (d) 129 98 119 142 171
Cash Flow from Financing Activities

Issue of Share Capital during the year 7 15 0 3 0
Proceeds from fresh borrowings 2,355 970 0 (750) (1,500)
Repayment of Borrowings 0 0 0 0 0
Buyback of Shares 0 0 0 0 0
Dividend paid including tax (86) (94) (99) (119) (158)
Reserve Adjustments 456 1,442 83 356 77
Net Cash flow from Financing Activities (e) 2,732 2,333 (16) (510) (1,581)
Net Extra-ordinary Income (f) 104 379 (484) 0 0
Total Increase / (Decrease) in Cash (996) 16 (299) 539 (126)

(a) + (b) + (c ) + (d)+ (e) + (f)
Opening Cash and Bank balance 1,352 355 371 72 611

Closing Cash and Bank balance 355 371 72 611 485
Increase/(Decrease) in Cash and Bank balance (996) 16 (299) 539 (126)
58
Table 18: Dishman Pharma – Key ratios
(Year ending March 31)
Per Share Data (Rs)
EPS(Basic Recurring) 10.3 10.5 18.5 24.9 33.0
Diluted Recurring EPS 10.1 10.3 18.2 24.4 32.3
Recurring Cash EPS 13.6 16.4 26.2 34.3 44.0
Dividend per share (DPS) 1.1 1.2 1.2 1.5 2.0
Book Value per share (BV) 37.8 70.0 82.2 110.2 142.2
Growth Ratios (%)

Operating Income 109.6 38.8 26.3 23.5 22.1
EBITDA 81.5 32.8 57.0 27.2 22.8
Recurring Net Income 67.1 1.5 76.6 34.5 32.4
Diluted Recurring CEPS 76.6 20.4 59.7 31.0 28.2
Valuation Ratio (x)

PER 14.1 13.9 7.9 5.9 4.4
P/CEPS 10.7 8.9 5.6 4.3 3.3
P/BV 3.9 2.1 1.8 1.3 1.0
EV / EBITDA 14.7 11.7 7.6 5.5 4.1
EV / Operating Income 2.9 2.2 1.8 1.3 1.0
EV / Operating FCF 62.7 (88.1) 16.5 8.8 6.8
Operating Ratio
Raw Material/Sales (%) 35.7 37.6 31.5 30.6 30.6
SG&A/Sales (%) 11.9 10.5 11.6 11.4 11.1
R&D/sales 0.4 0.4 0.5 0.6 0.7
Other Income / PBT (%) 15.1 11.5 7.8 7.0 6.3
Effective Tax Rate (%) 3.7 1.6 2.4 3.0 3.0
NWC / Total Assets (%) 26.8 30.2 30.9 32.5 37.0
Inventory Turnover (days) 358.6 364.5 351.6 323.0 318.3
Receivables (days) 66.3 74.1 83.9 87.5 90.1
Payables (days) 99.7 76.1 82.9 96.0 107.2
D/E Ratio (%) 185.0 119.1 101.5 67.5 39.3
Return/Profitability Ratio (%)

EBITDA Margins 19.9 19.0 23.7 24.4 24.5
Recurring Net Income Margins 13.9 10.3 14.4 15.7 17.0
RoCE 14.1 10.7 14.5 16.8 19.2
RoNW 33.7 19.1 24.1 25.7 26.0
Dividend Payout Ratio 9.3 7.9 10.0 6.0 6.0
Dividend Yield 0.7 0.8 0.9 1.0 1.4
59
Table 19: Divi's Laboratories – Profit & Loss statement
Gross Sales 7,299 10,408 13,044 16,156 19,872
Less: Excise Duty 53 79 66 80 79
Net Sales 7,246 10,328 12,978 16,076 19,792
Domestic 442 516 822 1,002 994
exports 6,804 9,812 12,156 15,074 18,799
Other Operating Income 102 107 108 117 171
Contract Research Fees 27 9 10 14 20
Export benefits 75 98 98 103 151
Total Operating Income 7,347 10,435 13,086 16,193 19,963
Less:
Raw Materials consumed 3,231 4,096 4,542 5,554 6,828
Power and Fuel 250 383 493 603 742
Personnel Expenses 310 520 755 907 1,064
Selling and Distribution Expenses 127 242 260 354 435
Other Expenses 491 645 774 944 1,020
Research & development expenses 103 111 195 241 336
Repairs and maintenance 89 115 169 209 257
Total Operating Expenses 4,601 6,112 7,188 8,812 10,684
EBITDA 2,746 4,324 5,898 7,380 9,280

EBITDA margin (%) 36.5 40.8 44.6 45.2 46.0

Other Income 33 31 93 190 286
EBIT 2,555 3,998 5,508 6,961 8,776
Less: Gross Interest 106 102 82 80 80
Recurring Pre-tax Income 2,449 3,896 5,426 6,881 8,696
Extra Ordinary gains

Less: Extra ordinary expenses 257 121 0 0 0
Minority Interest 0 0 0 0 0
Less: Taxation 334 299 423 571 896
--Current Tax 334 178 288 399 678
--Deferred Tax (2) 105 136 172 217
--tax for earlier years 2 16 0 0 0
Net Income (Reported) 1,859 3,476 5,003 6,310 7,800
Recurring Net Income 2,115 3,597 5,003 6,310 7,800
60
Table 20: Divi's Laboratories – Balance sheet
Current Assets, Loans & Advances
Cash & Bank balance 183 142 2,600 5,780 9,680
Inventory 2,135 2,814 3,173 3,956 4,901
Sundry Debtors 1,617 2,095 3,038 3,984 5,172
Loans and Advances 302 574 715 1,107 1,361
Operational
Others
Other Current Assets 2 5 0 0 0
Total Current Assets 4,239 5,630 9,526 14,826 21,115
Current Liabilities & Provisions

Current Liabilities 1,245 1,564 2,265 2,945 3,659
Sundry Creditors 1,020 1,483 1,772 2,221 2,781
Other Current Liabilities 225 81 492 724 878
Provisions 20 366 433 579 732
Total Current Liabilities and Provisions 1,265 1,930 2,698 3,525 4,390
Net Current Assets 2,975 3,700 6,828 11,302 16,724
Investments
Strategic & Group Investments 0 0 0 0 0
Other Marketable Investments 0 556 700 900 1,000
Equity 0 0 0 0 0
Debt 0 556 700 900 1,000
Total Investments 0 556 700 900 1,000
Goodwill 0 0 0 0 0
Fixed Assets
Gross Block 4,909 6,422 7,773 9,653 11,973
Less Accumulated Depreciation 1,095 1,451 1,934 2,544 3,334
Net Block 3,814 4,971 5,838 7,108 8,639
Add: Capital Work in Progress 382 631 1,080 1,200 1,680
Total Fixed Assets 4,196 5,601 6,918 8,308 10,319
Total Assets 7,171 9,857 14,446 20,510 28,043
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings
Short Term Debt 653 190 150 300 300
Long Term Debt 886 642 482 300 300
Total Borrowings 1,540 861 632 600 600
Deferred Tax Liability 277 383 518 690 908
Share Capital
Paid up Equity Share Capital 129 129 131 133 133
No. of Shares outstanding (mn) 64.6 64.6 65.7 66.4 66.4
Face Value per share (Rs) 2 2 2 2 2
Reserves & Surplus 5,225 8,485 13,165 19,087 26,403

Share Premium 415 572 572 572 572
General & Other Reserve 4,810 7,913 12,593 18,515 25,831
Less: Misc. Exp. not written off 0 0 0 0 0
Net Worth 5,354 8,614 13,296 19,220 26,536
Total Liabilities & Shareholders' Equity 7,171 9,857 14,446 20,510 28,043
61
Table 21: Divi's Laboratories – Cashflow statement
Cash Flow from Operating Activities
Reported Net Income 1,859 3,476 5,003 6,310 7,800
Add:
Provisions 0 0 0 0 0
Deferred Taxes (2) 105 136 172 217
Less:
Other Income 33 31 93 190 286
Net Extra-ordinary income (257) (121) 0 0 0
Operating Cash Flow before Working Capital change (a) 2,305 4,027 5,528 6,901 8,521
Changes in Working Capital

(Increase) / Decrease in Inventories (297) (679) (359) (783) (945)
(Increase) / Decrease in Sundry Debtors (542) (478) (943) (946) (1,188)
(Increase) / Decrease in Operational Loans & Adv. 217 (272) (141) (392) (255)
(Increase) / Decrease in Other Current Assets 0 (3) 5 0 0
Increase / (Decrease) in Sundry Creditors 8 463 290 449 559
Increase / (Decrease) in Other Current Liabilities (54) 202 478 378 306
Working Capital Inflow / (Outflow) (b) (668) (767) (670) (1,294) (1,522)
Net Cash flow from Operating Activities (a) + (b) 1,637 3,260 4,859 5,607 6,999
Cash Flow from Capital commitments

Purchase of Fixed Assets 1,509 1,761 1,800 2,000 2,800
Purchase of Investments 0 556 144 200 100
Consideration paid for acquisition of undertaking
Cash Inflow/(outflow) from capital commitments (c) (1,509) (2,317) (1,944) (2,200) (2,900)
Free Cash flow after capital commitments 128 943 2,914 3,407 4,099
(a) + (b) + (c)
Cash Flow from Investing Activities

Purchase of Marketable Investments 0 0 0 0 0
(Increase) / Decrease in Other Loans & Advances 0 0 0 0 0
Sale of Fixed Assets 0 0 0 0 0
Sale of Investments 0 0 0 0 0
Consideration received for sale of division 0 0 0 0 0
Other Income 33 31 93 190 286
Net Cash flow from Investing Activities (d) 33 31 93 190 286
Cash Flow from Financing Activities

Issue of Share Capital during the year 1 0 2 1 0
Proceeds from fresh borrowings 38 (679) (229) (32) 0
Repayment of Borrowings 0 0 0 0 0
Buyback of Shares 0 0 0 0 0
Dividend paid including tax (147) (258) (323) (388) (485)
Reserve Adjustments 283 42 (0) (0) (0)
Net Cash flow from Financing Activities (e) 174 (895) (550) (418) (485)
Net Extra-ordinary Income (f) (257) (121) 0 0 0
Total Increase / (Decrease) in Cash 78 (41) 2,458 3,180 3,900

(a) + (b) + (c ) + (d)+ (e) + (f)
Opening Cash and Bank balance 105 183 142 2,600 5,780
Closing Cash and Bank balance 183 142 2,600 5,780 9,680
Increase/(Decrease) in Cash and Bank balance 78 (41) 2,458 3,180 3,900
62
Table 22: Divi's Laboratories – Key ratios
(Year ending March 31)
Per Share Data (Rs)
EPS(Basic Recurring) 32.7 55.7 76.1 95.0 117.4
Recurring Cash EPS 36.2 61.2 84.9 107.1 133.0
Dividend per share (DPS) 2.3 4.0 5.0 6.0 7.5
Book Value per share (BV) 82.9 133.3 205.8 297.5 410.8
Growth Ratios (%)

Operating Income 88.9 42.0 25.4 23.7 23.3
EBITDA 119.8 57.5 36.4 25.1 25.7
Recurring Net Income 197.6 70.0 39.1 26.1 23.6
Diluted Recurring CEPS 172.3 69.0 38.8 26.1 24.1
Valuation Ratio (x)

PER 34.6 20.4 14.9 11.9 9.7
P/CEPS 31.3 18.5 13.4 10.6 8.5
P/BV 13.7 8.5 5.5 3.8 2.8
EV / EBITDA 27.2 17.1 12.1 9.2 6.9
EV / Operating Income 10.2 7.1 5.4 4.2 3.2
EV / Operating FCF 45.6 22.7 14.7 12.1 9.2
Operating Ratio
Raw Material/Sales (%) 44.6 39.7 35.0 34.6 34.5
SG&A/Sales (%) 8.4 8.5 7.9 8.0 7.3
R&D/sales (%) 1.4 1.1 1.5 1.5 1.7
Other Income / PBT (%) 1.3 0.8 1.7 2.8 3.3
Effective Tax Rate (%) 13.6 7.7 7.8 8.3 10.3
NWC / Total Assets (%) 38.9 36.1 29.3 26.9 25.1
Inventory Turnover (days) 224.5 220.5 240.6 234.3 236.7
Receivables (days) 67.3 65.1 71.8 79.3 84.1
Payables (days) 114.8 111.5 130.8 131.2 133.7
D/E Ratio (%) 33.9 14.4 8.6 6.7 5.7
Return/Profitability Ratio (%)

EBITDA Margins 36.5 40.8 44.6 45.2 46.0
Recurring Net Income Margins 28.8 34.5 38.2 39.0 39.1
RoCE 35.9 43.4 41.8 36.5 32.4
RoNW 48.6 51.5 45.7 38.8 34.1
Dividend Payout Ratio 7.9 7.4 6.5 6.1 6.2
Dividend Yield 0.2 0.4 0.4 0.5 0.7
63
Annexure 2: Index of Tables and Charts

Tables
Table 1: CRO industry – Penetration ................................................................................................ 17
Table 2: Typical CS project for a US$1bn innovator drug................................................................. 19
Table 3: Cost of manufacturing......................................................................................................... 22
Table 4: Profile of Key Indian CRAMS players ................................................................................. 26
Table 5: DPCL & DLL versus global peers – Qualitative & quantitative profile ................................. 27
Table 6: Comparison of Pharma outsourcing with IT outsourcing..................................................... 29
Table 7: Top customers of DPCL...................................................................................................... 36
Table 8: Acquisition at a glance........................................................................................................ 38
Table 9: Revenue growth drivers ...................................................................................................... 39
Table 10: Dishman Pharmaceuticals – DMF list ............................................................................... 40
Table 11: Divi’s Laboratories – DMF list ........................................................................................... 49
Table 12: Comparative valuations .................................................................................................... 52
Table 13: Comparative with global peers.......................................................................................... 52
Table 14: Total fair value estimates .................................................................................................. 53
Table 15: Dishman Pharma – Profit & Loss statement ..................................................................... 56
Table 16: Dishman Pharma – Balance sheet ................................................................................... 57
Table 17: Dishman Pharma – Cashflow statement........................................................................... 58
Table 18: Dishman Pharma – Key ratios .......................................................................................... 59
Table 19: Divi's Laboratories – Profit & Loss statement ................................................................... 60
Table 20: Divi's Laboratories – Balance sheet.................................................................................. 61
Table 21: Divi's Laboratories – Cashflow statement ......................................................................... 62
Table 22: Divi's Laboratories – Key ratios......................................................................................... 63
Charts
Chart 1: Factors leading to research outsourcing ............................................................................... 6
Chart 2: NDA and NME* approvals by US FDA.................................................................................. 7
Chart 3: Pharma industry – R&D-to-sales........................................................................................... 7
Chart 4: Drug development cost ......................................................................................................... 8
Chart 5: Time to bring new drugs to market........................................................................................ 8
Chart 6: Factors leading to manufacturing outsourcing ...................................................................... 9
Chart 7: Market size of drugs going off patent .................................................................................... 9
Chart 8: Number of ANDAs approved by US FDA............................................................................ 10
Chart 9: Healthcare spend in key countries ...................................................................................... 10
Chart 10: EBITDA margin of key innovator companies..................................................................... 11
Chart 11: NBEs* approved for mid-size companies.......................................................................... 12
Chart 12: Factors influencing outsourcing decision making.............................................................. 12
Chart 13: Market size of global CRAMS ........................................................................................... 13
Chart 14: Drug discovery research process...................................................................................... 15
Chart 15: CRO industry – Revenue split........................................................................................... 16
Chart 16: Global Contract Manufacturing – Revenue split................................................................ 17
Chart 17: Manufacturing outsourced................................................................................................. 18
Chart 18: Compensation of chemists................................................................................................ 22
Chart 19: US FDA approved plants outside USA ............................................................................. 23
Chart 20: Contract Research opportunity for India............................................................................ 24
Chart 21: Contract manufacturing opportunity for India .................................................................... 25
Chart 22: Improving revenue mix...................................................................................................... 32
Chart 23: DPCL – Key growth drivers............................................................................................... 33
Chart 24: Improving revenue mix...................................................................................................... 43
Chart 25: DLL – Growth opportunities .............................................................................................. 44
Chart 26: DLL – Custom synthesis revenue growth (CAGR: 57%)................................................... 46
Chart 27: DPCL – One-year forward rolling P/E band ...................................................................... 51
Chart 28: DLL – One-year forward rolling P/E band ......................................................................... 51
Chart 29: Multi-fold surge in market cap and EPS............................................................................ 52
Chart 30: Revenue and PAT............................................................................................................. 54
Chart 31: Improving RoCE and EBITDA margin............................................................................... 55
64
ANALYST CERTIFICATION
We /I, Rajesh Vora, Grad. CWA, CFA analysts and the authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our
personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to
the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI
Securities Inc.
Disclosures:
ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing
group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have
investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research
professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons
reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.
The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained
herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to
any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information
herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (“ICICI Securities and affiliates”) are under no
obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-
rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or
ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.
This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy
or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or
solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers
may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes
investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities
discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgement by any recipient. The
recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange
rates or any other reason. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is
not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions
and may be subject to change without notice.
ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and
affiliates might have received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for
services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. ICICI Securities and
affiliates expect to receive compensation from the companies mentioned in the report within a period of three months following the date of publication of the research
report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that
Rajesh Vora, Grad. CWA, CFA research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the
preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking
and other business.
ICICI Securities or its affiliates collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month
preceding the publication of the research report.
It is confirmed that Rajesh Vora, Grad. CWA, CFA research analysts and the authors of this report or any of their family members does not serve as an officer, director
or advisory board member of the companies mentioned in the report.
ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities
and affiliates may act upon or make use of information contained in the report prior to the publication thereof.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other
jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any
registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category
of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.
This report has not been prepared by ICICI Securities, Inc. However, ICICI Securities, Inc. has reviewed the report and, in so far as it includes current or historical
information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.
EQUITIES
A Murugappan Executive Director +91 22 6637 7101 a_murugappan@isecltd.com
T S Baskaran Head Cash Equities +91 22 6637 7275 ts_baskaran@isecltd.com
Equity Research – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2448
ANALYST SECTOR ALLOCATION DIRECT NOS. E-MAIL
Girish Pai Head of Research – Strategy, Capital Goods +91 22 6637 7311 girish_pai@isecltd.com
Amit Mishra Oil & Gas, Petrochemicals +91 22 6637 7274 amit_mishra@isecltd.com
Gaurav Pathak Real Estate +91 22 6637 7339 gaurav_pathak@isecltd.com
Krupal Maniar, CFA Technology +91 22 6637 7254 krupal_maniar@isecltd.com
Novonil Guha Cement, Utilities +91 22 6637 7385 novonil_guha@isecltd.com
Pallav Agarwal Metals and Mining +91 22 6637 7314 pallav_agarwal@isecltd.com
Prakash Gaurav Goel Agriculture, Utilities +91 22 6637 7373 prakash_goel@isecltd.com
Rajesh Vora Pharmaceuticals +91 22 6637 7508 rajesh_vora@isecltd.com
Sandeep Shah Technology +91 22 6637 7114 sandeep_shah@isecltd.com
Sanjay Singh FMCG +91 22 6637 7386 sanjay_singh@isecltd.com
Shilpa Gupta Automobiles, Healthcare +91 20 6401 7125 shilpa_gupta@isecltd.com
Siddharth Teli Banking +91 22 6637 7298 siddharth_teli@isecltd.com
Sumeet Budhraja Construction, Capital Goods, Strategy +91 22 6637 7230 sumeet_budhraja@isecltd.com
Vikash Mantri, CFA Media, Telecom +91 22 6637 7161 vikash_mantri@isecltd.com
Gagan Dixit Sr. Associate (Oil&Gas, Petrochemicals) +91 22 6637 7480 gagan_dixit@isecltd.com
Nishant Bhargava Sr. Associate (Textiles, Engineering) +91 22 6637 7143 nishant_bhargava@isecltd.com
Suchitra WL Sr. Associate (Media, Telecom) +91 22 6637 7510 suchitra_wl@isecltd.com
Sunil Teluja Sr. Associate (Capital Goods, Engineering, Strategy) +91 22 6637 7312 sunil_teluja@isecltd.com
Swarit Dakalia Sr. Associate (Construction) +91 22 6637 7366 swarit_dakalia@isecltd.com
Abhijit Mitra Associate (Metals) +91 22 6637 7289 abhijit_mitra@isecltd.com
Abhishek Murarka Associate (Banking) +91 22 6637 7351 abhishek_murarka@isecltd.com
Hemant Joshi Associate (Automobiles) +91 22 6637 7380 hemant_joshi@isecltd.com
Sagar Thakkar Associate (Technology) +91 22 6637 7225 sagar_thakkar@isecltd.com
Sanket Maheshwari Associate (Infrastructure) +91 22 6637 7159 sanket_maheshwari@isecltd.com
Shaleen Silori Associate (Real Estate) +91 22 6637 7188 shaleen_silori@isecltd.com
Urmil Negandhi Associate +91 22 6637 7297 urmil_negandhi@isecltd.com
Prakriti Singh Editor +91 11 2439 0154 prakriti_singh@isecltd.com
Simmu Kahlon Editor +91 22 6637 7202 simmu_kahlon@isecltd.com
Hemant Jathar Production +91 22 6637 7135 hemant_jathar@isecltd.com
Ruben Fernandes Production +91 22 6637 7442 ruben_fernandes@isecltd.com
Equity Sales – Asia-Pacific – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2341
Rishikesh Joshi +91 22 6637 7229 rishikesh_joshi@isecltd.com
Hitesh Danak +91 22 6637 7131 hitesh_danak@isecltd.com
Kim Collaco Rath +91 22 6637 7367 kim_collaco@isecltd.com
Rishi Agrawal +65 6823 1557 rishi_agrawal@isecltd.com
Vinay Patel +65 6823 1557 vinay_Patel@icicisecurities.com
Equity Sales – Europe – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2341
Darshit Shah +91 22 6637 7152 darshit_shah@isecltd.com
Equity Sales – US – Telephone : +1 212-921-2344 / +1 212 453 670
Melrick D’Souza +1 646-701-4465 melrick_dsouza@icicisecurities.com
Equity Dealing – Telephone : +91 22 2281 4570 Fax: +91 22 2288 2341
Kishore Chinai +91 22 6637 7130 kishore_chinai@isecltd.com
Dharmesh Desai +91 22 6637 7227 dharmesh_desai@isecltd.com
Pinakin Mistry +91 22 6637 7279 pinakin_mistry@isecltd.com
Equity Derivatives – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2341
Dr. C. K. Narayan +91 22 6637 7365 ck_narayanan@isecltd.com
Vignesh Eswar +91 22 6637 7124 vignesh_eswar@isecltd.com
Ankur Jhaveri +91 22 6637 7118 ankur_jhaveri@isecltd.com
Darshan Seth +91 22 6637 7281 darshan_seth@isecltd.com
Manish Raval +91 22 6637 7489 manish_raval@isecltd.com
Mayank Mehta +91 22 6637 7358 mayank_mehta@isecltd.com
Rohit Dhundele +91 22 6637 7288 rohit_dhundele@isecltd.com
Samir Gilani +91 22 6637 7255 samir_gilani@isecltd.com
Sohil Shah +91 22 6637 7196 sohil_shah@isecltd.com
Sriram Jagdish +91 22 6637 7455 sriram_jagdish@isecltd.com
ICICI Securities Limited

ICICI Centre, H T Parekh Marg, Churchgate, Mumbai 400 020, Telephone: +91 22 2288 2460/70 Fax: +91 22 2288 2448
ICICI Securities Inc. ICICI Securities Inc.
Level 57, Republic Plaza, 9, Raffles Place, Singapore 048 619 1 Liverpool Street, London EC2M 7QD, United Kingdom.
Telephone: +65 6823 1556/57 Fax: +65 6823 1425 Tel (Board): +44 20 79562051,
Tel (Direct): +44 20 79562554 / 2555 Fax: +44 20 79562211
ICICI Securities Inc.
461, 5th Avenue, 16th Floor, New York, NY 10017, USA. Telephone: +1 212-921-2344 / +1 212 453 6704 Fax: +1 212-453-6710

Crams Icici Securities

Încărcat de

Informații document

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

Crams Icici Securities

Încărcat de

Drepturi de autor:

Formate disponibile

INDIA

f Manufacturing outsourcing from India to more-than-triple to US$3bn by ’12E

All stock prices in this report are as on November 20, ’08

Contract Research & Manufacturing Services

Pharmaceuticals Crème de la CRAMS

Please refer to important disclosures at the end of this report

Investment summary .......................................................................................................4

India has sustainable competitive advantage in CRAMS, with cost of

Outsourcing of API/intermediates to leapfrog. Notably, CM is a US$22bn market

Top-2 plays in CRAMS space from India. With combination of an IPR-respecting

Outsourcing is a mammoth opportunity for the Indian pharmaceutical industry. Post

Chart 1: Factors leading to research outsourcing

Source: I-Sec Research

Chart 2: NDA and NME* approvals by US FDA

Chart 3: Pharma industry – R&D-to-sales

Chart 5: Time to bring new drugs to market

Source: Deutsche Bank

Even more Focus on

Source: I-Sec Research

Drugs increasingly nearing patent expiry. Innovator companies are increasingly

Chart 7: Market size of drugs going off patent

Increasing competition from generics. Globally, generic companies are

Increasing pressure on Government to reduce healthcare budgets. Increasingly,

Chart 9: Healthcare spend in key countries

Chart 10: EBITDA margin of key innovator companies

No. of approvals for mid-size

*New biological entities

Factors influencing outsourcing decision

Chart 12: Factors influencing outsourcing decision making

Source: Contract Pharma survey

Outsourcing – Set to explode

Chart 13: Market size of global CRAMS

Outsourcing plans of big pharma MNCs

Chart 14: Drug discovery research process

Big pharma companies find such services complementary to their internal

Chart 15: CRO industry – Revenue split

Source: Industry, I-Sec Research

Table 1: CRO industry – Penetration

Contract manufacturing – Greener pastures

Chart 16: Global Contract Manufacturing – Revenue split

Chart 17: Manufacturing outsourced

Med Dev / Hosp

China and India gaining prominence

Custom Synthesis – Lucrative opportunity

Table 2: Typical CS project for a US$1bn innovator drug

CS proffers an opportunity to Indian CRAMS players to build long-term strategic

Respect for IPR

Value addition to customer

Strong scientific skill-set

Competitive cost structure

Ability to scale-up skill set and infrastructure faster

Relationship with innovator

Chart 18: Compensation of chemists

Table 3: Cost of manufacturing

Skills and capabilities

Large patient population

CROs – India in nascent stage

Revenues of Indian CROs slated to see ~7x jump

1,000 CAGR 40%

Source: Industry, I-Sec Research

Clinical trials opportunity

Contract manufacturing market in India

Chart 21: Contract manufacturing opportunity for India

2,500 CAGR 40%