Pharma-MoSL by icestar

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									                                                             August 2011
                                Thematic Report | Sector: Pharmaceuticals

            Domestic Formulations




                              New peaks
Nimish Desai (NimishDesai@MotilalOswal.com); Tel: +91 22 3982 5406
     Amit Shah (Amit.Shah@MotilalOswal.com); Tel: +91 22 3982 5423
                                                                                  Domestic Formulations | New Peaks



Domestic Formulations

                                                                                              Page No.
New peaks - USD21b opportunity by 2015 ...................................... 1-5

4 A's and 4 Ailments ............................................................................ 6-8

A #1 - Affordability ............................................................................. 9-11

A #2 - Access ................................................................................... 12-13

A #3 - Awareness .................................................................................. 14

A #4 - Ailments ................................................................................. 15-17

4 Buys - Cipla, Lupin, Torrent and GSK Pharma.......................... 18-22

Ailments ........................................................................................... 23-30
        Infection ............................................................................. 24
        CVS Disease .................................................................... 25
        Diabetes ........................................................................... 26
        CNS Diseases .................................................................. 27
        Pain .................................................................................. 28
        Gastro-intestinal (GI) Problems ......................................... 29
        Respiratory Diseases ....................................................... 30

Annexure ......................................................................................... 31-36

Company ....................................................................................... 37-142
        Cipla ............................................................................ 38-49
        Lupin ............................................................................ 50-61
        Torrent Pharma ............................................................. 62-71
        GSK Pharma ................................................................ 72-79
        Sun Pharma ................................................................. 80-91
        Cadila ........................................................................ 92-103
        Ranbaxy ................................................................... 104-115
        Dr Reddy's Labs ...................................................... 116-127
        Glenmark.................................................................. 128-142
                                                                                                                                                          Domestic Formulations market will be USD21b in 2015, 2x over 2010. Buy Cipla, Lupin, Torrent, GSK Pharma
The Indian Pharma Story                                                                                                                                   The India domestic pharma story is founded on 4 pillars, what we call the 4 A's - Affordability,
                                                                                                                                                           Access, Awareness and Ailments. These 4 A's will enable the market to be 2x - from USD10b
                                                                                                                                                                                                                                                           the number of players who will share the pie. Companies with a strong presence in these
                                                                                                                                                                                                                                                                                                                                                                                                ailment segments are therefore better placed. Most companies with a meaningful presence

4 A’s. 4 Ailments. 4 Buys
                                                                                                                                                           in 2010 to USD21b in 2015. A significant share of the market delta is explained by                                                                                                                                                   in Indian market will clock healthy growth in sales and profits. We have identified winning
                                                                                                                                                           4 Ailments - CVS, Diabetes, CNS and Infection. These ailment segments rank high on                                                                                                                                                   stocks based on a combined approach of conventional P/E-based valuation and our proprietary
                                                                                                                                                           what we call the Attractiveness Factor, measured as incremental market size divided by                                                                                                                                               MEDICINES Score. Our 4 Buys are Cipla, Lupin, Torrent and GSK Pharma.


                                                                                                                                                                                                                        4 A’s                                                                                                                                                                                4 Ailments                                                                                                                                                       4 Buys
                                                                                                                                                A#1: Affordability                                                                                                                                                                                      CVS, Diabetes, CNS and Anti-infectives                                                                                                          Presence in high-potential segments
                                                                                                                                                Medicines are becoming more affordable led by (1) Rising per capita income, (2) Urban-                                                                                                                  We believe that CATS like Cardiovascular (CVS), Diabetes, Central Nervous System (CNS)                                                          The chart below maps the positioning of pharmaceutical players in the key therapeutic
                                                                                                                                                ization, and (3) Higher penetration of health insurance. This is driving the growth in the                                                                                                              will account for a major chunk of the incremental market over the next 5 years. Also, with                                                      segments of CVS, Diabetes, anti-infectives and CNS. We have plotted the dominance of
                                                                                                                                                domestic pharma market.                                                                                                                                                                                 rising income levels in the rural areas, anti-infectives will also record good growth over                                                      each player in these respective segments using prescription market share as the key
                                                                                                                                                2015 Indian pharma market estimate: Affordability approach                                                                                                                                              the same period. We believe these four will be the key segments of the future.                                                                  measure of dominance.
                                                                                                                                                                     Per capita                                   Per capita                                       Multiplier                                      Pharma                               2015 Indian pharma market estimate: Ailment approach (INR b)                                                                                    Company mapping with respect to therapeutic classes
                                                                                                                                                                             GDP                             pharma conspn.                                              (x)                                     market                                                                        2010                                                     2015E               Incr. mkt                                                        Sun Pharma,         Abbott, U S V,        Ranbaxy, Alkem,         Sun Pharma,              Cipla, GSK
                                                                                                                                                                   INR         CAGR (%)                     INR      CAGR (%)                                                                                INR b   CAGR (%)                                                       Mkt size Share (%)                   CAGR (%)      Mkt size         Share (%) CAGR (%) 2015 on 2009                                                      Torrent, Cadila,
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    High                         Aventis, Sun          Aristo, Cipla,          Intas, Torrent,          Pharma
                                                                                                                                                                    (1)          (2)                        (3)         (4)                                    (5) = (4) / (2)                                (6)       (7)                             Anti-diabetic                  27       5.8                       22.1           83               8.6       25          56                                                           Cipla, Unichem,     Pharma                GSK, Piramal            Abbott, Piramal
                                                                                                                                                FY01  20,786                            -                   140                          -                                              -                     151                                -      CVS                                  53            11.3               17.1       137             14.2                21              84                                              Ranbaxy, Lupin




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         Dominance
                                                                                                                                                FY06  33,827                         10.2                   212                        8.7                                            0.8                     230                              8.9      CNS                                  26             5.6                9.4        65              6.7                20              39                                           Aventis, U S V,                              Alembic, Mankind,       Aventis,                 Cadila, Piramal,
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 Eli Lilly, Piramal,
                                                                                                                                                FY11  60,048                         12.2                   390                       12.9                                            1.1                     465                             15.1      Gastrointestinal                     51            11.1               16.2       103             10.8                15              52                                    Medium Emcure, Piramal,       Micro Labs,           FDC, Macleods,          Ranbaxy,                 Ranbaxy
                                                                                                                                                FY16 105,668                         12.0                   784                       15.0                                            1.3                     983                             15.0      Respiratory                          41             8.8               13.5        82              8.5                15              41                                           Dr Reddy’s,            Lupin                 Lupin                   Unichem,
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          Intas, Micro Labs                                                    Micro Labs
                                                                                                                                                                                                                                                                                                                                                        Dermatology                          25             5.4               15.1        51              5.3                15              26

                                                                                                                                                A#2: Access                                                                                                                                                                                             Anti-infectives
                                                                                                                                                                                                                                                                                                                                                        Gynaecology
                                                                                                                                                                                                                                                                                                                                                                                             80
                                                                                                                                                                                                                                                                                                                                                                                             26
                                                                                                                                                                                                                                                                                                                                                                                                           17.2
                                                                                                                                                                                                                                                                                                                                                                                                            5.7
                                                                                                                                                                                                                                                                                                                                                                                                                              11.2
                                                                                                                                                                                                                                                                                                                                                                                                                              26.9
                                                                                                                                                                                                                                                                                                                                                                                                                                         147
                                                                                                                                                                                                                                                                                                                                                                                                                                          49
                                                                                                                                                                                                                                                                                                                                                                                                                                                         15.3
                                                                                                                                                                                                                                                                                                                                                                                                                                                          5.1
                                                                                                                                                                                                                                                                                                                                                                                                                                                                             13
                                                                                                                                                                                                                                                                                                                                                                                                                                                                             13
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             67
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             22                                     Low
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             IPCA Labs,
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             AstraZeneca,
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     Panacea,
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     Ranbaxy
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           Novartis, Cipla,
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           Lupin
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Pfizer, Mankind,
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Dr Reddy’s,
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             Pfizer                                                                                     Sun Pharma,
                                                                                                                                                People's access to medicines is improving given (1) Rising government spend on healthcare,                                                                                                              Pain/Analgesic                       40             8.6               14.3        68              7.0                11              28                                                                                                                                         Glenmark, Biocon
                                                                                                                                                (2) India's improving medical infrastructure, and (3) Companies' thrust on increasing                                                                                                                   Vitamins/Minerals                    36             7.7                5.4        58              6.0                10              22
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   CVS                   Diabetes      Anti-infectives                CNS                   Others
                                                                                                                                                rural reach. All are combined to further expand the domestic pharma market.                                                                                                                             Others                               59            12.8               27.6       119             12.4                15              60
                                                                                                                                                                                                                                                                                                                                                        Total                               465          100.0                15.1       962            100.0               15.6          496
                                                                                                                                                India’s medical infrastructure among the weakest in the world
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Attractiveness of international business
                                                                                                                                                   Russia                                97                                                                                                                                                  43         CVS, Anti-infectives, Diabetes and CNS: Key segments with relatively fewer players
                                                                                                                                                      Italy                                                                              39                                                                                                  42                                                                                                                                                         It is imperative to map the domestic and the non-domestic businesses of companies to
                                                                                                                                                                                                                                                                                                                                                                                0                     20                       40                  60                        80                   100
                                                                                                                                                 Germany                                       83                                                                                                                             34                                                                                                                                                                        take an overall view on them, as depicted below.
                                                                                                                                                  France                                                     72                                                                                                               34                                           0
                                                                                                                                                        US                                                                                      31                                                                    26                                                                                                                Diabetes                                                        Company mapping: Attractiveness of domestic and international business
                                                                                                                                                                                                                                                                                                                                                                                                                         CNS            AF - 396
                                                                                                                                                 Australia                                                                               39                                                                          25                                                    10                                                                              AI                 CVS
                                                                                                                                                                                                                                                                                                                                                                                                                        AF - 215                                                                                                                                                                                             Sun Pharma, Cipla,
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               Dr Reddy




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          International Business
                                                                                                                                                        UK                                                                               39                                                                         23                                                                                                                                  AF - 337             AF - 400                                                      Favourable




                                                                                                                                                                                                                                                                                                                                                          No. of Players
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             Lupin, Cadila,
                                                                                                                                                    Japan                    139                                                                                                                                   20                                                                                 Dematology
                                                                                                                                                                                                                                                                                                                                                                           20                                                                                                                                                                                                                                                Torrent Pharma
                                                                                                                                                    Brazil                                                                                                    24                                          12
                                                                                                                                                    China                                   Doctors/10,000                                       30                                                       11                                                                                                                         Respiratory                                                                                                                                                                             Ranbaxy,
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                Glenmark Pharma
                                                                                                                                                     India                                  Hospital beds/10,000                                                         9                            5                                                                                                                               AF - 147                                                                                              Neutral                                                                          GSK Pharma
                                                                                                                                                                                                                                                                                                                                                                           30       Gynaecology
                                                                                                                                                                                                                                                                                                                                                                                                                                                  GI
                                                                                                                                                2015 Indian pharma market estimate: Access approach                                                                                                                                                                                     Vitamines                                              AF - 109
                                                                                                                                                                                                                                                                                                                                                                           40                                          Pain
                                                                                                                                                Year              Pharmacies                                CAGR               Mkt (INR b) Mkt/Pharmacy (INR)                                                                CAGR (%)                                                                                                                                                                                                  Unfavourable
                                                                                                                                                2000                  322,023                                  -                       151            467,420                                                                       -                                                                         Increm ental m kt size (Rs b) 2010-15E
                                                                                                                                                2005                         410,992                              5.0                          230                                      559,622                                               3.7                                                                                                                                                       Note: Only companies
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Unfavorable                    Neutral                        Favorable
                                                                                                                                                2010                         550,000                              6.0                          465                                      846,018                                               8.6       Note: AF=Incremental market size divided by number of players                                                                                   covered in this report
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           Domestic Business
                                                                                                                                                2015                         736,024                              6.0                          936                                    1,272,121                                               8.5                                                                                                                                                       have been mapped

USD21b opportunity by 2015                                                                                                                      A#3: Awareness
                                                                                                                                                                                                                                                                                                                                                        CVS (2001-10 CAGR - 15.9%)                                                   Diabetes (2001-10 CAGR - 17.8%)


We estimate the 2015 Indian domestic market size at Rs960b (USD21b) i.e. a CAGR of
                                                                                                                                                Health awareness in India is rising on the back of (1) Improving literacy, and (2) Rising
                                                                                                                                                                                                                                                                                                                                                         2010
                                                                                                                                                                                                                                                                                                                                                                                        11
                                                                                                                                                                                                                                                                                                                                                                                                                                53
                                                                                                                                                                                                                                                                                                                                                                                                                                      2010
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  27    Earnings growth v/s valuation
                                                                                                                                                                                                                                                                                                                                                                                                                                                            6
16% over 2010-15 (FY11-16) founded on 4 pillars what we call as 4 A's viz. Affordability,                                                                                                                                                                                                                                                                                                                                                                                                               We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR and
                                                                                                                                                penetration of media. This serves as an undercurrent for sustaining pharma demand.
Access, Awareness and Ailments.                                                                                                                                                                                                                                                                                                                                                                                         45                                                                              FY11 P/E as depicted below. Based on the same, the top picks are Torrent, Cipla & Lupin.
                                                                                                                                                High correlation of literacy with per capita pharma consumption                                                                                                                                          2009                                                                                                                           22
                                                                                                                                                                                                                                                                                                                                                                                        11                                            2009
Accelerating growth in domestic formulation market (USD b)                                                                                                                                                                                                                                                                                                                                                                                                  5                                           Company mapping with respect to earnings growth and valuation
                                                                                                                                                 100                                                                                                                                                                                              800
                                                                                                                                                                       Literacy rate (%)                              Per Capita Pharma spend (Rs)                                                                                                                                                                                                                                                      FY11 P/E                                                                                                            Ranbaxy (53%, 65x) 
 Indian pharma mkt size-INR b                                                                                                        21.0                                                                                                                                                                                                                                                                         38                                                               18
                                                                                                                   R                                                                                                                                                                                                                                     2008                                                                         2008                                                               40
 Approach 1                                    983                                                              CAG                               85                                                                                                                                                                                              600                                   11                                                                  5
 Approach 2                                    936                                                        15.6%
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     Sun
 Approach 3                                    962                                                                                                70                                                                                                                                                                                              400                                                                                                                                                                                                         GSK
                                                                        GR                                                                                                                                                                                                                                                                                                                          24                                                                 10                                     30
 Average                                       960                  % CA                                                                                                                                                                                                                                                                                 2005                                                                         2005
                                                                14.2                     10.2                                                                                                                                                                                                                                                                                        10                                                                 4                                                                                                            Cadila
                                 GR                                                                                                               55                                                                                                                                                                                              200                                                                                                                                                                                Dr Reddy
                          9.3% CA                               7.5 7.9 8.3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Glenmark
                                                        6.0                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  Lupin         Cipla
                                                5.2                                                                                                                                                                                                                                                                                                                                         14                                                               6                                                20
  3.3    3.5      3.7        4.1 4.7                                                                                                              40                                                                                                                                                                                              0      2001                                                                         2001                             Segm ent Size (INR b)
                                                                                                                                                                                                                                                                                                                                                                                    9             Segm ent Size (INR b)                                 4                                                                                                                                              Torrent
                                                                                                                                                                                                                                                                         Tamil Nadu
                                                                                                                                                                                          UP
                                                                                                                                                         Orissa




                                                                                                                                                                               Gujarat




                                                                                                                                                                                                Rajasthan




                                                                                                                                                                                                                         Karnataka


                                                                                                                                                                                                                                     Pradesh




                                                                                                                                                                                                                                                               Pradesh



                                                                                                                                                                                                                                                                                            Haryana

                                                                                                                                                                                                                                                                                                          Punjab




                                                                                                                                                                                                                                                                                                                               Maharashtra
                                                                                                                                                                                                                                                West Bengal
                                                                                                                                                                                                              Assam



                                                                                                                                                                                                                                     Madhya




                                                                                                                                                                                                                                                                                                                    Kerala




                                                                                                                                                                                                                                                                                                                                                                                                                                                                       Contribution to Industry (%)
                                                                                                                                                                     Bihar




                                                                                                                                                                                                                                                               Andhra




                                                                                                                                                                                                                                                                                                                                                                                                  Contribution to Industry (%)
                                                                                                                                                                                                                                                                                                                                                                                        13                                                               5                                                    10
                                                                                                                                                                                                                                                                                                                                                         2000                                                                         2000
  2000

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                                                                                                                                                                                                                                                                                                                                                                                    9                                                               3                                                           10.0                                   14.0                     18.0                22.0                     26.0                    30.0
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           FY11-13E EPS CAGR (%)


Acute larger, but chronic faster                                                                                                                A#4: Ailments                                                                                                                                                                                           CNS (2001-10 CAGR - 14.4%)                                                   Anti-infectives (2001-10 CAGR - 12.4%)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Top picks: Cipla, Lupin, Torrent and GSK
Historically, in the Indian pharma market, the acute ailments therapy segment was the                                                           As a trend, incidence of chronic/lifestyle ailments (cardiovascular, central nervous system,                                                                                                                                                                                    26                                                                      We have identified nine key success factors (KSFs) for shortlisting Indian pharma
                                                                                                                                                                                                                                                                                                                                                         2010                                                                                                                                80
largest in terms of sales, although it experienced slower growth rates than some of the                                                         diabetes) is rising compared to acute ailments. Medicine demand from these segments                                                                                                                                                     6                                             2010
                                                                                                                                                                                                                                                                                                                                                                                                                                                            17                                          companies and their stocks. These success factors correspond to the initials of the word
chronic therapies. Nevertheless, almost all therapy areas experienced double-digit growth.                                                      will grow faster than the rest of the Indian pharma market.                                                                                                                                                                                                                                                                                             "MEDICINES". We have rated the companies on these KSFs to arrive at a final
                                                                                                                                                                                                                                                                                                                                                                                                                        22
                                                                                                                                                                                                                                                                                                                                                         2009                                                                                                                           70              MEDICINES Score out of a maximum possible 100.
                Therapeutic mix - 2000                                                  Therapeutic mix - 2010                                  Share of chronic ailments segment is on the rise (%)                                                                                                                                                                                    6                                             2009
                                                                                                                                                                                                                                                                                                                                                                                                                                                            17
             A ntidiabeti                                                                                                                                                                        Acute segment                                                Chronic segment                                                                                                                                                                                                                           Indian domestic pharma players: The MEDICINES scorecard
                                              A ntiinfec-                A ntidiabeti                                A ntiinfec-
  CNS                                                                                                                                                                                                                                                                                                                                                                                                             19
                   c                             tives                                           Others                 tives                                                                                                                                                                                                                            2008                                                                                                                      61                                                                   M            E          D      I       C           I          N             E        S    Total
   5%                     Others                                               c
                                                                                                                                                                                                                                                                                                                                                                                        5                                             2008
                 3%                               18%                                             13%                    16%                                      16                                                                                                                                                                                                                                                                                        18
                           12%                              Gastro in         6%                                                                                                                             22                                                    23                                                                                                                                                                                                                                   Sun                                              7           9          8      6        9          9           7            9       13        77
                                                                                                                                   Gastro in-                                                                                                                                                                            30
Dermato lo                                                  testinal                                                                testinal                                                                                                                                                                                                                                                                                                                                                            Cipla                                            6           7          8      6        6          7           5            7       14        66
   gy                                                         10%          CNS
                                                                                                                                       1
                                                                                                                                      1%
                                                                                                                                                                                                                                                                                                                                                                                                            17                                                               47
                                                                                                                                                                                                                                                                                                                                                         2005                                                                         2005                                                              GSK Pharma**                                     4           9          7      3        6          9           -            6       14        64
   6%                                                                       6%                                                                                                                                                                                                                                                                                                               7                                                                  20
                                                                        Dermato lo
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        Lupin                                            5           6          6      6        8          5           6            6       14        62
                                                                                                                                   Respirato
                                                                           gy                                                                                     84                                         78                                                    77                                                                                                                                                                                                                                   Torrent Pharma                                   6           7          6      5        6          3           6            8       14        61
Gynaeco lo                                                                                                                             y
                                                                                                                                                                                                                                                                                                                         70                                                                  8                                                                       28
                                                                           5%
                                                                                                                                      9%                                                                                                                                                                                                                 2001                                                                         2001                                                              Cadila                                           6           7          7      5        6          5           6            6       12        60
   gy                                                   Respirato r                                                                                                                                                                                                                                                                                                                 5             Segment Size (INR B)                                      18        Segment Size (INR B)
   6%                                                       y            Gynaeco lo                                                                                                                                                                                                                                                                                                               Contribution to Industry (%)                                                                          Dr. Reddy's Labs                                 4           6          6      4        6          2           7            5       12        52
                             P ain/           Vitamins/    1%
                                                           1                                            P ain/             Vitamins/
                                                                                                                                                                                                                                                                                                                                                                                                                                                                      Contribution to Industry (%)
                                                                            gy               Cardiac
                                                                                                                                                                                                                                                                                                                                                                                            7                                                                                                           Glenmark                                         2           3          5      6        6          5           3            9       10        49
                          A nalgesic          M inerals                                              A nalgesic            M inerals                                                                                                                                                                                                                     2000                                                                                                        29
         Cardiac                                                            6%                  1
                                                                                               1%
                                                                                                                                                                                                                                                                                                                                                                                    5
                                                                                                                                                                                                                                                                                                                                                                                                                                      2000                                                              Ranbaxy                                          6           5          7      5        6          3           5            3        9        49
           9%
                             10%                 10%                                                     9%                    8%                                                                                                                                                                                                                                                                                                                            19
                                                                                                                                                                  2000                                       2005                                               2010                                                 2015E
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        ** GSK Pharma total MEDICINES score pro-rated as rating for Non-domestic business is not applicable



                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              August 2011
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Indian Power Sector: Story in Pictures

                                                                                                                      Attractiveness Factor - Our key test to check health of ailment segments
The 4 Ailments                                                                                                         Usually, size is considered as the key criteria for the attractiveness of any market
                                                                                                                          or market segment.
                                                                                                                                                                                                                         AF = Incremental market size / No. of players. Obviously, higher the AF, better
                                                                                                                                                                                                                           the prospects of incumbents.
                                                                                                                                                                                                                                                                                                                                                                                                              Of the 4 key segments, the AF ranking is (1) CVS - 400, (2) Diabetes - 396, (3)
                                                                                                                                                                                                                                                                                                                                                                                                                       Infection - 337, and (4) CNS - 215.
Lifestyle ailments will grow faster than others                                                                        But to arrive at the 4 key ailment segments, we have used the measure of
                                                                                                                          Attractiveness Factor (AF).
                                                                                                                                                                                                                         Thus, Gastro and Respiratory will have higher incremental market than CNS. But
                                                                                                                                                                                                                           the same will be shared among a very large number of players, diluting the
                                                                                                                                                                                                                                                                                                                                                                                                              CVS, Infection and Diabetes (in that order) rank higher than all other segments,
                                                                                                                                                                                                                                                                                                                                                                                                                       both in terms of incremental market size and AF.
                                                                                                                                                                                                                           segments' attractiveness.                                                                                                                                                          Market share of the 4 key ailments set to rise from 40% in 2010 to 45% in 2015




The 4 Buys                                                                                                             MEDICINES Score - Criteria, maximum score (in brackets) & rating methodology
                                                                                                                       M - Mix & Market share (10): Strong presence in lifestyle segments rated higher                  I - Introductions (10): Higher contribution from new launches are rated higher                                                                                            N - Non-domestic business (10): Attractive overseas opportunity (incl one-offs) is
Based on detailed MEDICINES Score ranking                                                                              E - Equity with doctors (10): Higher prescription share and rankings rated higher
                                                                                                                       D - Distribution & reach (10): Wider distribution and reach in relevant
                                                                                                                                                                                                                        C - CAGR & scale-up (10): Consistent high growth is rated higher
                                                                                                                                                                                                                        I - Improvement in MR productivity (10): Consistently high or improving Sales/
                                                                                                                                                                                                                                                                                                                                                                                                      rated higher
                                                                                                                                                                                                                                                                                                                                                                                                  E - Earnings growth (10): High long-term earnings growth (FY05-13) is rated higher
                                                                                                                           geographies are rated higher                                                                     MR is rated higher                                                                                                                                                    S - Stock attractiveness (20): Captures outlook, valuation, and our overall view.


                                                              Mix                                            Equity with doctors                                   Distribution & reach                     Introductions                   CAGR & Scale-up (%) - Sales                                       Improvement in productivity                                                                               Non domestic                                            Earnings Growth                          Stock
                          MEDICINES            Chronic therapy               Score      Comment                                                 Score     Metro/Tier I    MR strength   Score     In last        Contbn to    Score                                                                                (Sales/MR, INR m)                                                                                       business                                                 (FY11-13)                       attractiveness
                              Score            contribution (%)                                                                                           (% of sales)                           4 years        growth (%)                FY05-11         FY11-13                 Score                       2004           2010      Score                                                                      Favorability    Score                                      Comment (%)      Score           Comment           Score
     Sun                           77                    61                      7      Leader in CNS, Gynaec and 2nd in CVS, Anti-diabetics          9       73              2,600         8       124             56             6        23              18                        9                        3.2            7.8          9                                                                      High                7                                           22              9           Neutral              13
     Cipla                         66                    42                      6      Market leader in AI and Respiratory                           7       63              5,100         8       304             45             6        14              13                        6                        4.8            4.9          7                                                                      Medium              5                                           21              7           Top pick             14
     Lupin                         62                    43                      5      Leader in Anti-TB segment                                     6       70              3,682         6       266             69             6        22              19                        8                        3.6            3.6          5                                                                      High                6                                           13              6           Top pick             14
     Torrent Pharma                61                    62                      6      Ranks 2nd in CNS and 7th in CVS                               7       73            3,600           6      151             49              5        19              18                              6                 1.5                                       2.3                                     3                 High                                                   6         22                 8       Top pick                       14
     GSK Pharma **                 64                    5                       4      Market leader in Derma, Vit and Pain Mgmt                     9       60            2,500           7      21              15              3         8              14                              6                 6.5                                       7.1                                     9                 Not applicable                                         0         16                 6       Buy                            14
     Cadila                        60                    31                      6      Among top 3 players in CVS and GI                             7       65            4,500           7      197             37              5        12              15                              6                 4.1                                       3.6                                     5                 High                                                   6         21                 6       Neutral                        12
     Dr. Reddy's Labs              52                    28                      4      Ranks 3rd in GI and Pain Mgmt                                 6       68            3,165           6      89              31              4        18              16                              6                 3.6                                       3.2                                     2                 High                                                   7         12                 5       Neutral                        12
     Glenmark                      49                    24                      2      Ranks 2nd in Dermatology                                      3       70            2,078           5      105             52              6        19              17                              6                 3.1                                       3.6                                     5                 Low                                                    3         24                 9       Neutral                        10
     Ranbaxy                       49                    21                      6      Among the leaders in AI and Dermatology                       5       66            4,500           7      255             50              5        10              16                              6                 4.6                                       3.6                                     3                 Medium                                                 5         55                 3       Sell                           9
    ** GSK Pharma total MEDICINES score pro-rated as rating for Non-domestic business is not applicable


Domestic formulations companies - Comparative valuations (INR)
Company         Target    Upside               EPS (INR)                     P/E (X)               EV/EBITDA (X)                    ROE (%)
                                                                                                                                                            Sector performance vis-a-vis benchmark                                                           Domestic Formulations (DF) Index is an outperformer over 5 years ...                                                                                                                                                           ... and also in the last 1 year

(CMP)            Price       (%)    FY11        FY12E         FY13E   FY11   FY12E     FY13E    FY11    FY12E    FY13E      FY11    FY12E FY13E             Outperformer post the credit crisis                                                                                                      Sensex                                       BSE Healthcare Index                                                      DF Index
                                                                                                                                                                                                                                                                                                                                                                                                                                                                             130

Top Picks                                                                                                                                                                                                                                                         250
Cipla (281)        361        28        12.0      13.4         16.4   23.3    21.0      17.1     17.4     14.5     12.1     14.5      14.4     15.6          The DF index has consistently outperformed the Sensex and the BSE                                                                                                                                                                                                                                               120

Lupin (450)        514        14        19.3      22.3         25.7   23.3    20.2      17.5     19.5     16.8     13.8     29.3      27.1     25.7          Healthcare index as well from Sep-2009 onwards. In fact the DF index                                 200
Torrent (589)      762        29        31.9      40.1         47.6   18.4    14.7      12.4     12.4      9.6      8.0     29.2      29.3     27.7          commenced its outperformance vis-à-vis the BSE Healthcare index                                                                                                                                                                                                                                                 110

GSK (2,155)       2,330        8        68.6      77.5         89.6   31.4    27.8      24.1     21.9     20.2     17.2      30.1     31.3     33.4          immediately post the credit crises of 2008.                                                          150
                                                                                                                                                                                                                                                                                                                                                                                                                                                                             100
Others
Sun (464)          524        13        13.6      17.3         20.9   34.2    26.8      22.2     22.4     20.8     16.7      16.2     17.7     18.5          We believe that the outperformance reflects the relatively defensive                                 100
                                                                                                                                                                                                                                                                                                                                                                                                                                                                              90
Cadila (824)      907         10        30.9      28.3         41.1   26.6    29.1      20.0     17.2     17.2     14.0     37.5      27.3     27.6          nature of the DF business coupled with reasonable growth and good
DRRD* (1,446)   1,670         15        65.6      68.6         81.1   21.6    20.7      17.5     16.7     17.1     14.4     24.1      22.5     23.5          profitability. The outperformance is also aided by the fact that the DF                                50
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Glenmark (318)    310         -3        12.5      16.1         19.7   25.5    19.7      16.1     17.7     10.4     11.1     17.4      17.0     17.1




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Ranbaxy ## (468) 412         -12        25.8      11.9         16.7   15.2    33.0      23.3     11.1     23.0     18.5     19.4      11.4     10.4
                                                                                                                                                             other pharma businesses.
* Dr. Reddy's
## - Adjusted for Rs77/sh of DCF value of FTF; Dr. Reddy's Labs & Ranbaxy core valuations adjusted for DCF value of Para-IV upsides                                                                                                                              All indices re-based to 100




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  August 2011
                                                                            Thematic Report | Sector: Pharmaceuticals




                                                  Domestic Formulations
                            New peaks - USD21b opportunity by 2015
      Summary
                            4 A's. 4 ailments. 4 buys


                            4 A's - Lead to USD21b opportunity by 2015
                            The India domestic pharma story is founded on 4 pillars, what we call the 4 A's -

                            A #1 - Affordability
                            Medicines are becoming more affordable led by (1) Rising per capita income, (2)
                            Urbanization, and (3) Higher penetration of health insurance. This is driving the growth in
                            the domestic pharma market.

                            A #2 - Access
                            People's access to medicines is improving given (1) Rising government spend on healthcare,
                            (2) India's improving medical infrastructure, and (3) Companies' thrust on increasing rural
                            reach. All are combined to further expand the domestic pharma market.

Companies covered
                            A #3 - Awareness
Top buys                    Health awareness in India is rising on the back of (1) Improving literacy, and (2) Rising
 Cipla                     penetration of media. This serves as an undercurrent for sustaining pharma demand.
 Lupin
 Torrent Pharma            A #4 - Ailments
 GSK Pharma
                            As a trend, incidence of chronic/lifestyle ailments (cardiovascular, central nervous system,
Others
 Sun Pharma
                            diabetes) is rising compared to acute ailments. Medicine demand from these segments
 Cadila                    will grow faster than the rest of the Indian pharma market.
 Ranbaxy
 Dr. Reddy's Labs          Based on the past data and present trends, we have estimated the 2015 (FY16) Indian
 Glenmark                  pharma market using three different approaches -
                             Approach 1 (Affordability-based): Correlation between per capita GDP and per

Indian pharma mkt (INR b)      capita pharma consumption
Approach 1 (pg 5)     983    Approach 2 (Access-based): Trend in pharmacies and sales per pharmacy
Approach 2 (pg 6)     936    Approach 3 (Ailment-based): Summation of various ailment segment sizes.
Approach 3 (pg 6)     962
Average               960   Averaging the figure using the three approaches, we estimate the 2015 Indian domestic
  USD b                21   market size at INR960b (USD21b) i.e. a CAGR of 16% over 2010-15 (FY11-FY16).


                            4 ailments - CVS, anti-diabetics, anti-infectives and CNS are high
                            potential segments
                            We believe that chronic therapies like Cardiovascular (CVS), anti-diabetics and Central
                            Nervous System (CNS) will account for a major chunk of the incremental market over
                            the next 5 years. Also, with rising income levels in the rural areas, anti-infectives will also
                            record good growth over the same period. We believe these four will be the key segments
                            of the future, and garner more than 50% of the delta in the Indian formulations market,
                            2015 over 2010.

August 2011                                                                                                              1
                                                                                                             Domestic Formulations | New Peaks



                                  We juxtaposed the incremental opportunity of various therapeutic segments against the
                                  number of existing players in each of these segments, to arrive at the following plot.

                                  CVS, Anti-infectives, Diabetes and CNS are large segments with relatively fewer players

                                                                                  Increm ental m kt size (INR b) 2010-15E
                                                          0                20                40                   60              80         100
        Top 4 ailment                                0
        segments are                                                                                    Diabetes
                                                                                          CNS           AF - 396
       mainly based on                               10                                                                   AI       CVS
                                                                                         AF - 215
    Attractiveness Factor,                                                                                                        AF - 400
                                    No. of Players



                                                                                                                       AF - 337
     which is highest for                                                  Dermatology
                                                     20
    CVS, Diabetes, Anti-                                                                            Respiratory
     infectives and CNS                                                                              AF - 147
                                                     30       Gynaecology
         in that order                                                                                          GI
                                                                Vitamins                                     AF - 109
                                                     40                              Pain




                                   Note: AF is Attractiveness Factor of segment, which is defined by the incremental size of the opportunity
                                  per player                                                                        Source: Industry/MOSL


                                  Our key conclusions from this chart:
                                  1. As discussed before, CVS, Anti-infectives, Diabetes and CNS will record maximum
                                     share of incremental market (the size of bubble indicates this).
                                  2. We also note that the attractiveness factor (i.e. incremental segment market size
                                     divided by number of players) is most favorable for these segments.
                                  3. Hence, companies which enjoy strong positioning in these segments will be able to
                                     generate maximum value from their respective domestic formulations businesses.


Valuation summary                 4 buys - Cipla, Lupin, Torrent Pharma and GSK Pharma
          EPS CAGR      P/E (x)   Having identified the most attractive ailment segments, we have adopted two approaches
           (FY11-13)    (FY13)
                                  to arrive at our top plays on India's domestic formulations opportunity:
Cipla            16.7     17
                                   Approach 1: 3-screen shortlisting process as follows:
Lupin            15.3     18
Torrent Pharma   22.1     12           Screen #1: Identify companies with dominating presence in high-potential ailment
GSK Pharma       14.2     24                             segments
Sun Pharma       24.1     22
                                       Screen #2: Of the above, exclude companies with unfavorable non-domestic
Cadila           15.3     20
Ranbaxy          53.1     23
                                                         business
DRL              11.2     18           Screen #3: Juxtapose the Screen #2 surviving companies vis-à-vis earnings growth
Glenmark         25.8     16                             and valuation
                                   Approach 2: MEDICINES score, based on nine key success factors for picking
                                      domestic formulation stocks

                                  Approach 1: 3-screen shortlisting process
                                  Screen #1: Identify companies with dominating presence in high-potential ailment
                                              segments
                                  The chart below maps the positioning of pharmaceutical players in the key therapeutic
                                  segments of CVS, Diabetes, anti-infectives and CNS. We have plotted the dominance of
                                  each player in these respective segments using prescription market share as the key
                                  measure of dominance.
August 2011                                                                                                                                    2
                                                                                                                  Domestic Formulations | New Peaks



Company mapping with respect to therapeutic classes

                           Sun Pharma,                               Abbott, U S V,        Ranbaxy, Alkem,      Sun Pharma, Intas,   Cipla, GSK Pharma
                  High     Torrent, Cadila,                          Aventis,              Aristo, Cipla,       Torrent, Abbott,
                           Cipla, Unichem,                           Sun Pharma            GSK Pharma,          Piramal
                           Ranbaxy, Lupin                                                  Piramal
   Dominance




                           Aventis, U S V,                           Eli Lilly, Piramal,   Alembic,Mankind,     Aventis, Ranbaxy,     Cadila, Piramal,
                           Emcure, Piramal,                          Micro Labs, Lupin     FDC, Macleods,       Unichem,              Ranbaxy
                Medium
                           Dr Reddy's, Intas,                                              Lupin                Micro Labs
                           Micro Labs

                           IPCA Labs,                                Panacea,                                   Novartis, Cipla,     Pfizer, Mankind,
                           AstraZeneca,                              Ranbaxy                                    Lupin                Dr Reddy's,
                  Low      Pfizer                                                                                                    Sun Pharma,
                                                                                                                                     Glenmark, Biocon

                                  CVS                                    Diabetes          Anti-infectives          CNS               Others

Companies in bold have been covered in this report                                                                                           Source: MOSL




                                          Screen #2: Most Indian companies are not pure-plays; view on non-domestic
                                                        business is also important
                                          It is imperative to map the domestic and the non-domestic businesses of companies to
                                          take an overall view on them, as depicted below.

                                          Company mapping relative to the attractiveness of domestic and international business
                                                                                                                                     Sun Pharma,
                                                                          Favourable                                                 Cipla, Lupin,
                                                                                                                    Dr Reddy
                                                                                                                                     Cadila,
                                            International Business




                                                                                                                                     Torrent Pharma


                    3 of our 4                                                                  Glenmark                             Ranbaxy,
                 top picks are                                              Neutral             Pharma                               GSK Pharma
               favorably placed
                  in both their
                domestic and
                 international                                           Unfavourable
                  businesses


                                           Note: Only companies                                  Unfavourable          Neutral         Favourable
                                           covered in this report have
                                           been mapped                                                          Domestic Business
                                                                                                                                             Source: MOSL



                                          Screen #3: Juxtapose the Screen #2 shortlisted companies vis-à-vis earnings
                                                        growth and valuation
                                          We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR and
                                          FY11 P/E as depicted below. Based on the same, the top picks are Cipla, Lupin and
                                          Torrent Pharma. We are also positive on GSK Pharma as we believe it deserves premium
                                          valuation due to strong parentage (giving access to large product pipeline), brand-building
                                          ability, industry-best RoCE of over 45% and likely positioning in post patent era.



August 2011                                                                                                                                              3
                                                                                                              Domestic Formulations | New Peaks



Earnings growth v/s Valuation: Cipla, Torrent, Lupin on top ...               ... GSK merits rich valuation due to superior return ratios
      FY11 P/E (x)                            Ranbaxy (53%, 65x)                                 RoCE (%)              Adj. RoCE (%)                 Very high due
 40
                                                                                                                                                       to -ve capital
                                                   Sun                                                                                                   employed
                          GSK
 30
                                                                                 25                                                                                   26
                            Cadila                                                                                             22        23
        Dr Reddy                                                                                    19                                          47
                                                           Glenmark                     16                                                                 14
                      Lupin Cipla                                                                                        28
 20                                                                           22                                   7                  27                            25
                                                                                      17           16         13                                       15
                                             Torrent




                                                                                                                                                         Glenmark
                                                                                                    DRL




                                                                                                                                                 GSK
                                                                                       Cipla




                                                                                                                             Cadila




                                                                                                                                                                     Torrent
                                                                                                               Ranbaxy
                                                                                Sun




                                                                                                                                        Lupin
 10
   10.0            14.0         18.0      22.0         26.0            30.0
                          FY11-13E EPS CAGR (%)
Note - Adj. RoCE - RoCE adjusted for other income in P&L and Cash in Balance sheet                                                                      Source: MOSL
       RoCE and Adj. RoCE are average of FY11-13

                                     Approach 2: The MEDICINES score
                                     We have identified nine key success factors (KSFs) for shortlisting Indian pharma
                                     companies and their stocks. These success factors correspond to the initials of the word
                                     "MEDICINES". We have rated the companies on these KSFs to arrive at a final
                                     "MEDICINES Score" out of a maximum possible 100. The companies with the highest
                                     MEDICINES Score are the most attractive investment ideas.

                                     We have considered the following KSFs for evaluating the domestic formulations business
                                     (see box on page 21 for explanation). Our MEDICINES Scorecard is given below.

                                      M      Mix & Market share
   MEDICINES                          E      Equity with doctors
          Measures                    D      Distribution & reach
                                      I      Introductions
                                      C      CAGR & scale-up
                                      I      Improvement in MR productivity
                                      N      Non-domestic business
                                      E      Earnings growth
                                      S      Stock attractiveness


                                     Indian domestic pharma players: The MEDICINES scorecard
                                                           M           E         D             I          C              I             N          E             S   Total
          4 of the top 5             Sun                    7          9        8        6       9        9                            7         9       13      77
       MEDICINES score               Cipla                  6          7        8        6       6        7                            5         7       14      66
           companies                 GSK Pharma **          4          9        7        3       6        9                            -         6       14      64
        correspond with              Lupin                  5          6        6        6       8        5                            6         6       14      62
         Approach 1. We              Torrent Pharma         6          7        6        5       6        3                            6         8       14      61
       are Neutral on Sun            Cadila                 6          7        7        5       6        5                            6         6       12      60
         only due to rich            Dr. Reddy's Labs       4          6        6        4       6        2                            7         5       12      52
           valuations                Glenmark               2          3        5        6       6        5                            3         9       10      49
                                     Ranbaxy                6          5        7        5       6        3                            5         3        9      49
                                     ** GSK Pharma score   pro-rated   as rating for Non-domestic business is not                     applicable        Source: MOSL

                                     4 buys: Cipla, Lupin, Torrent, GSK Pharma
                                     4 of the top 5 MEDICINES score companies correspond with Approach 1. Thus, combining
                                     both Approaches 1 and 2, our top picks are Cipla, Lupin, Torrent and GSK Pharma.
                                     We are Neutral on Sun Pharma only due to rich valuations.

August 2011                                                                                                                                                                    4
                                                                                                                                                                                                               Domestic Formulations | New Peaks



Financial & valuation summary

Company                             Year                      Net Sales                        PAT                              EPS                   EPS                             P/E               P/BV            RoE                 RoCE            EV/                   EV/
                                    End                        (INR M)                       (INR M)                           (INR)                 GR. (%)                          (X)                (X)            (%)                  (%)           Sales               EBITDA
Cipla                               03/11A                        63,145                           9,671                       12.0                       -3.7                        23.3              3.4             14.5                15.8                3.6                 17.4
                                    03/12E                        69,193                       10,760                          13.4                       11.1                        21.0              3.0             14.4                17.2                3.3                 14.5
                                    03/13E                        79,041                       13,177                          16.4                       22.2                        17.1              2.7             15.6                18.8                2.8                 12.1

Lupin                               03/11A                        57,068                           8,582                       19.3                       25.9                        23.3              6.1             29.3                25.1                3.6                 19.5
                                    03/12E                        64,784                           9,913                       22.3                       15.5                        20.2              5.0             27.1                28.2                3.2                 16.8
                                    03/13E                        74,127                       11,418                          25.7                       15.2                        17.5              4.1             25.7                27.1                2.7                 13.8

Torrent                             03/11A                        22,265                           2,702                       31.9                        0.8                        18.4              4.9             29.2                24.1                2.3                 12.4
Pharma                              03/12E                        25,596                           3,392                       40.1                       25.6                        14.7              3.8             29.3                24.9                1.9                      9.6
                                    03/13E                        29,817                           4,029                       47.6                       18.8                        12.4              3.1             27.7                25.1                1.6                      8.0

GSK Pharma                          12/10A                         21,116                          5,814                       68.6                       15.2                        31.4              9.5             30.1                44.8                7.6                 21.9
                                    12/11E                        23,740                           6,567                       77.5                       12.9                        27.8              8.7             31.3                46.3                6.8                 20.2
                                    12/12E                        26,921                           7,586                       89.6                       15.5                        24.1              8.0             33.4                49.5                5.9                 17.2

Sun Pharma                          03/11A**                      57,214                       18,161                          17.5                       34.4                        26.5
 ** Includes                        03/12E                        65,601                       17,952                          17.3                       27.9                        26.8              4.4             17.7                20.5                6.6                 20.8
 Para-IV/one-
                                    03/13E                        75,976                       21,626                          20.9                       20.5                        22.2              3.9             18.5                22.2                5.5                 16.7
 off upsides

Cadila                              03/11A                        46,302                           6,334                       30.9                       26.4                        26.6              7.8             37.5                30.5                3.8                 17.2
                                    03/12E                        51,717                           5,801                       28.3                       -8.4                        29.1              6.2             27.3                25.4                3.4                 17.2
                                    03/13E                        59,983                           8,419                       41.1                       45.1                        20.0              5.0             27.6                27.2                2.9                 14.0

Ranbaxy                             12/10A                        89,608                       10,855                          25.8                       467.1                       15.2              2.9             19.4                15.9                2.3                 11.1
                                    12/11E                        85,242                           4,991                       11.9                       -54.0                       33.0              2.7             11.4                10.7                2.4                 23.0
                                    12/12E                        93,005                           7,052                       16.7                       41.3                        23.3              2.4             10.4                11.1                2.2                 18.5

Dr. Reddy's                         03/11A                        74,693                       11,099                          65.6                           -                       21.6              5.3             24.1                16.7                3.5                 16.7
                                    03/12E                        81,754                       11,615                          68.6                        7.8                        20.7              4.7             22.5                15.4                3.2                 17.1
                                    03/13E                        90,323                       13,725                          81.1                       18.2                        17.5              4.2             23.5                17.0                2.9                 14.4

Glenmark                            03/11A                        29,491                           3,548                       12.5                        7.2                        25.5              4.2             17.4                13.4                3.6                 17.7
                                    03/12E                        37,007                           4,584                       16.1                       29.2                        19.7              3.2             17.0                15.3                2.8                 10.4
                                    03/13E                        40,693                           5,612                       19.7                       22.4                        16.1              2.6             17.1                16.3                2.5                 11.1


Domestic Formulations (DF) Index is an outperformer over 5 years ...                                                                                                                                    ... and also in the last 1 year

                                   Sensex                                       BSE Healthcare Index                                                      DF Index                                       130
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                                                                                                                                                                                                               Aug-10




                                                                                                                                                                                                                                                       Apr-11




                                                                                                                                                                                                                                                                                Aug-11
        Aug-06




                                            Aug-07




                                                                                 Aug-08




                                                                                                                      Aug-09




                                                                                                                                                           Aug-10




                                                                                                                                                                                               Aug-11




 All indices re-based to 100



August 2011                                                                                                                                                                                                                                                                                5
                                                                                   Domestic Formulations | New Peaks



                              4 A's and 4 Ailments
    Main Report
                              To drive USD21b opportunity by 2015, 2x over 2010

                              The India domestic pharma story is founded on 4 pillars, what we call the 4 A's -

                     A #1     Affordability
                              Medicines are becoming more affordable led by (1) Rising per capita income, (2)
                              Urbanization, and (3) Higher penetration of health insurance. This is driving the growth in
                              the domestic pharma market (see page 9).

                     A #2     Access
                              People's access to medicines is improving given (1) Rising government spend on healthcare,
                              (2) India's improving medical infrastructure, and (3) Companies' thrust on increasing rural
                              reach. All are combined to further expand the domestic pharma market (see page 12).

                     A #3     Awareness
                              Health awareness in India is rising on the back of (1) Improving literacy, and (2) Rising
                              penetration of media. This serves as an undercurrent for sustaining pharma demand (see
                              page 14).

                     A #4     Ailments
                              As a trend, incidence of chronic/lifestyle ailments (cardiovascular, central nervous system,
                              diabetes) is rising compared to acute ailments. Medicine demand from these segments
                              will grow faster than the rest of the Indian pharma market (see page 15).

                              USD21b opportunity by 2015
                              Based on the past data and present trends, we have estimated the 2015 (FY16) Indian
                              pharma market using three different approaches -
                               Approach 1 (Affordability-based): Correlation between per capita GDP and per
                                 capita pharma consumption
                               Approach 2 (Access-based): Trend in pharmacies and sales per pharmacy
                               Approach 3 (Ailment-based): Summation of various ailment segment sizes.

                              Averaging the market size arrived using each approach, we estimate the total India market
                              size at USD21b by 2015. We discuss below the methodology under the three approaches.


                              Approach 1: Affordability-based
                              Correlation between per capita GDP and per capita pharma consumption

                              We see a strong correlation between India's per capita GDP and per capita pharma
                              consumption. With rising income, pharmaceuticals accounts for a higher share of overall
                              household spend, as indicated by the rising multiplier of per capita pharma consumption
  Approach 1: Affordability   CAGR to per capita GDP CAGR. Thus, FY01-06, per capita pharma consumption CAGR
    Market size: INR983b      was 8.7%, 0.8x of per capita GDP CAGR. Over the next five years (FY06-11), per capita
                              pharma consumption CAGR rose to 12.9%, and the multiplier increased to 1.1x.



August 2011                                                                                                             6
                                                                                        Domestic Formulations | New Peaks



                           We estimate FY11-16 per capita GDP CAGR of 12%. Applying a 1.3x multiplier, we
                           arrive at FY16 per capita pharma spend of INR784. Multiplying by the then expected
                           population, we estimate the pharma market size at INR983b, a CAGR of 15% from current
                           level of INR465b.

                           2015 Indian pharma market estimate: Affordability approach
                                          Per capita                   Per capita          Multiplier              Pharma
                                             GDP                   pharma conspn.             (x)                  market
                                       INR    CAGR (%)             INR     CAGR (%)                          INR b   CAGR (%)
                                        (1)          (2)            (3)           (4)     (5) = (4) / (2)      (6)         (7)
                           FY01    20,786              -           140              -            -            151             -
                           FY06    33,827           10.2           212            8.7          0.8            230           8.9
                           FY11    60,048           12.2           390          12.9           1.1            465          15.1
                           FY16   105,668           12.0           784          15.0           1.3            983            15.0
                                                                                                            Source: Industry/MOSL



                           Approach 2: Access-based
                           Trend in pharmacies and sales per pharmacy

                           Our methodology here is as follows -
                            Consider the growth in number of pharmacies in 2005 over 2000, and 2010 over 2005
                            Calculate the CAGR in average market size per pharmacy over 5-year time frames
                            Extrapolate both of the above for 2015 to arrive at the pharma market size.


                           2015 Indian pharma market estimate: Access approach
    Approach 2: Access
                           Year      Pharmacies                CAGR                 Mkt       Mkt/Pharmacy                CAGR
    Market size: INR936b
                                                                 (%)             (INR b)              (INR)                 (%)
                           2000           322,023                    -                151            467,420                   -
                           2005           410,992                  5.0                230            559,622                 3.7
                           2010           550,000                  6.0                465            846,018                 8.6
                           2015           736,024                  6.0                936          1,272,121                 8.5
                           Note: As precise data on pharmacies is not available, we have back calculated number of pharmacies for
                           2005 and 2000 based on the 2010 estimate of 550,000 pharmacies and long-term CAGR of 4.5%
                                                                                                           Source: Industry/MOSL



                           Approach 3: Ailments-based
                           Summation of various ailment segment sizes

                           The Indian pharma market can be broken down into 10 major therapeutic segments. We
   Approach 3: Ailments
                           have analyzed the 2000-2010 growth trend in each of these segments. Going forward, we
    Market size: INR962b   believe the growth will accelerate, especially in chronic ailment therapeutic segments
                           such as CVS, CNS and anti-diabetics.

                           Adding up the individual segments in 2015, we arrive at the total Indian pharma market
                           size of INR962b.




August 2011                                                                                                                    7
                                                                                                                                                                             Domestic Formulations | New Peaks



                                                          2015 Indian pharma market estimate: Ailment approach (INR b)
                                                                                                                  Market                                       CAGR                                              Mkt                   Incremental
                                                                                                                   size                                         (%)                                              size                   mkt - 2015
                                                                                                   2000            2005            2010                  00-05   05-10 10-15E                                   2015E                    over 2010
                                                          Anti-diabetic                               5                   10            27                17.2                22.1             25                   83            56
                                                          CVS                                        13                   24            53                13.3                17.1             21                  137            84
                                                          CNS                                         7                   17            26                19.6                 9.4            20                    65            39
                                                          Gastrointestinal                           17                   24            51                 8.0                16.2             15                  103            52
                                                          Respiratory                                16                   22            41                 6.5                13.5             15                   82            41
                                                          Dermatology                                 8                   13            25                 8.7                15.1             15                   51            26
                                                          Anti-infectives                            29                   47            80                10.5                11.2             13                  147            67
                                                          Gynaecology                                 9                    8            26                -2.3                26.9             13                   49            22
                                                          Pain/Analgesic                             14                   21            40                 7.6                14.3             11                   68            28
                                                          Vitamins/Minerals                          15                   28            36                12.9                 5.4             10                   58            22
                                                          Others                                     19                   18            59                -1.3                27.6             15                  119            60
                                                          Total                                     151                  212           406                 7.1                13.8           15.7                  962          436
                                                                                                                                                                                                                 Source: Industry/MOSL



                                                          2015 Indian domestic pharma market of USD21b
                                                          Average of the three approaches

Indian pharma mkt (INR b)                                 Averaging the figure arrived using the three approaches, we estimate the 2015 Indian
Approach 1                                 983            domestic market size at INR960b (USD21b) i.e. a CAGR of 16% over 2010-15 (FY11-
Approach 2                                 936
                                                          FY16).
Approach 3                                 962
Average                                    960
  USD b                                     21            Independently, McKinsey has also estimated the Indian domestic pharma market after
                                                          considering factors like income demographics, medical infrastructure, disease incidence
                                                          and penetration of health insurance. It estimates 2015 market size of USD20b (INR920b
                                                          @ INR/USD of 46). In the process, India will improve its global rank in terms of value
                                                          from 14 currently to top 10 by year 2015.


Accelerating growth in domestic formulation market                                                                             India will be among world's top 10 pharma markets by 2015

 (USD b)                                                                                                                               2015 market size (US$b)                                        Grow th over 2005 (x)
                                                                                                   R             21.0                                                                                                                                    3.3
                                                                                            C   AG                              444
                                                                                                                                                                                                       2.9
                                                                                        %
                                                                                   .6
                                                                              15                                                                                                                                         2.2                    2.1
                                                                                                                                                                                             1.9                1.9               1.9
                                                                                                                                 1.8                                          1.7 1.8
                                                         R
                                                      AG 10.2                                                                                   1.4
                                                   %C                                                                                   1.2               1.2 1.3
                                              14.2
                                                        8.3
                                                7.5 7.9
               CAGR                                                                                                                     82
          9.3%       5.2
                                           6.0                                                                                                  46 38                25 32           25      25 38              19 20             15 15                  20
             4.1 4.7
 3.3 3.5 3.7
                                                                                                                                                           Germany




                                                                                                                                                                                                                                                Turkey
                                                                                                                                 US




                                                                                                                                                                              UK
                                                                                                                                        Japan

                                                                                                                                                France




                                                                                                                                                                                             Canada

                                                                                                                                                                                                        China

                                                                                                                                                                                                                Mexico




                                                                                                                                                                                                                                                         India
                                                                                                                                                                     Italy




                                                                                                                                                                                                                         Brazil
                                                                                                                                                                                     Spain




                                                                                                                                                                                                                                  South Korea
 2000
        2001
               2002
                      2003
                             2004
                                    2005
                                           2006
                                                  2007
                                                         2008
                                                                2009
                                                                       2010
                                                                               2011
                                                                                            2012
                                                                                                   2013
                                                                                                          2014
                                                                                                                  2015




                                                                                                                                                                                                                Source: Mckinsey/MOSL


                                                          We proceed to discuss the key issues under each of the 4 As, culminating in the
                                                          MEDICINES framework to zero-in on our top picks.


August 2011                                                                                                                                                                                                                                                      8
                                                                                                                                                                                   Domestic Formulations | New Peaks



                                          A #1 - Affordability
                                          Rising per capita income, urbanization, and health insurance penetration will drive
                                          pharma spend
A #1 Affordability




                                          India's NTD journey will steadily drive up per capita income
                                          In 2007, we published our first note on the concept of NTD (next trillion dollar of India's
                                          GDP). The core NTD thesis is this: It took India about 60 years post independence to
                                          clock the first trillion dollar of GDP. With nominal GDP growth of 14-15%, at constant
                                          exchange rates, India's next trillion dollar (NTD) will come in just 4-5 years.

                                          Every successive trillion dollar GDP would take lesser time and by 2020 India would
                                          comfortably reach a USD5t GDP assuming 8% real GDP growth coupled with 5% estimated
                                          inflation.

                                          India's NTD era — next trillion dollar of GDP getting added in successively lower time (USD b)




                                                                                                                                                                                                                                                                                   5,456
                                                                                                                                                                                                                       5th USD tn
                                                                                                                                                                                                                        1.5 years




                                                                                                                                                                                                                                                                           4,811
                                                                                                                                                                                            4th USD tn




                                                                                                                                                                                                                                                               4,243
                           By FY20                                                                                                                                                            2 years




                                                                                                                                                                                                                                                       3,741
                     India GDP would                                                                                                                          3rd USD tn




                                                                                                                                                                                                                                            3,299
                                                                                                                                                               3.5 years




                                                                                                                                                                                                                                   2,909
                       triple from the




                                                                                                                                                                                                                           2,566
                                                                                                                                   2nd USD tn




                                                                                                                                                                                                               2,263
                     current level and



                                                                                                                                                                                                       1,969
                                                                                                                                    4 years


                                                                                                                                                                                            1,728
                       be almost ~5                                                                1st USD tn                                                                      1,314
                                                                                                                                                              1,230
                                                                                                                                                                           1,214

                     times the level of                                                             58 years
                                                                                                                                                      946
                                                                                                                                             837
                                                                                                                                    721




                             FY08
                                                                                                                            600
                                                                                                                508
                                                                                                461
                                                                                                         479
                                                                                       451
                                                                                293
                                                                      150
                                            21
                                                      33
                                                              57




                                                                                                                                                                                                       FY12E
                                                                                                                                                                                                               FY13E
                                                                                                                                                                                                                           FY14E
                                                                                                                                                                                                                                   FY15E
                                                                                                                                                                                                                                            FY16E
                                                                                                                                                                                                                                                       FY17E
                                                                                                                                                                                                                                                               FY18E
                                                                                                                                                                                                                                                                           FY19E
                                                                                                                                                                                                                                                                                   FY20E
                                            FY51
                                                      FY60
                                                              FY70
                                                                      FY80
                                                                                FY90
                                                                                       FY00
                                                                                                FY01
                                                                                                         FY02
                                                                                                                FY03
                                                                                                                            FY04
                                                                                                                                    FY05
                                                                                                                                             FY06
                                                                                                                                                      FY07
                                                                                                                                                              FY08
                                                                                                                                                                           FY09
                                                                                                                                                                                   FY10
                                                                                                                                                                                            FY11




                                                                                                                                                                                                                                            Source: MOSPI/MOSL


                                          With population growing at a much lower rate than GDP, India's per capita GDP will keep
                                          rising steadily for the next several years.

                                          India's per capita GDP is steadily rising (INR)




                           India's                                                                                                                                    R
                                                                                                                                                             CAG
                     rising per capita                                                                                                       11.5%
                                                                                                                                                                                                                                                                                   105,668




                     GDP augurs well
                                                                                                                                                                                                                                                                  94,320
                                                                                                                                                                                                                                                    84,215




                        for domestic
                                                                                                                                                                                                                                   75,214
                                                                                                                                                                                                                  67,195




                      pharma market
                                                                                                                                                                                                    60,048
                                                                                                                                                                                   53,679
                                                                                                                                                                  48,696
                                                                                                                                                    43,844
                                                                                                                                    38,519
                                                                                                                   33,827
                                                                                                       30,017
                                             20,786

                                                             22,156

                                                                         23,476

                                                                                       25,929
                                             FY01

                                                             FY02

                                                                             FY03

                                                                                        FY04

                                                                                                       FY05

                                                                                                                   FY06

                                                                                                                                     FY07

                                                                                                                                                    FY08

                                                                                                                                                                  FY09

                                                                                                                                                                                    FY10

                                                                                                                                                                                                    FY11

                                                                                                                                                                                                                   FY12

                                                                                                                                                                                                                                   FY13

                                                                                                                                                                                                                                                    FY14

                                                                                                                                                                                                                                                                  FY15

                                                                                                                                                                                                                                                                                   FY16




                                                                                                                                                                                                                                            Source: MOSPI/MOSL




August 2011                                                                                                                                                                                                                                                                                  9
                                                                                                                                                                            Domestic Formulations | New Peaks



                                                                     Higher per capita income will boost spend on pharmaceuticals
                                                                     There is a direct co-relation between per capita income and spend on healthcare, including
                                                                     pharmaceuticals. Currently, India has one of the world's lowest per capita spend on
                                                                     pharmaceuticals. As India's per capita income grows going forward, healthcare spend is
                                                                     expected to witness one of the highest growth rate among all categories over the next two
                                                                     decades. Healthcare spend is expected to grow to 13% of GDP by 2025.


India has one of the lowest per capita spend on pharmaceuticals                                                                                               % of avg. household income spent on healthcare

 700                                                                                                                                    (USD)                        US                                       15.7
        620                                                                                                                                                     France                              11

                 490                                                                                                                                          Germany                              10.4
                           450
                                      420                                                                                                                       Canada                             10.1
                                                370
                                                                                                                                                               Australia                     8.9
                                                        280
                                                                220 200                                                                                             Italy                    8.7
                                                                                 130 120                                                                          Brazil                 8.4
                                                                                                   60 60                                        55
                                                                                                                     20 10              8                            UK                  8.4
                                                                                                                                                                 Japan                   8
                                                                                                                                                BRICS (avg)
                                                                       Romania




                                                                                                                             Pakistan
                                      Germany




                                                                                          Turkey
                                                                UK
         Japan




                                                                                                            Mexico
                  Canada

                            France




                                                                                 Russia




                                                                                                                     China



                                                                                                                                        India
                                                        Italy




                                                                                                   Brazil
  USA




                                                Spain




                                                                                                                                                                 Russia            5.4
                                                                                                                                                                  China          4.3
                                                                                                                                                                   India         4.1

                                                                                                                                                                                                   Source: Industry/MOSL



                                                                     Large population with low healthcare penetration presents huge
                                                                     opportunity
                                                                     India has 16% of the world's population, yet only accounts for 1% of the total amount
BRICs healthcare as % of GDP
India is the lowest                                                  spent on health globally. India's expenditure on health amounted to 4% of GDP (2008),
                                                                     substantially lower than developed markets and even BRIC peers - Brazil (8.4%), Russia
   8.4
                                                                     (5.2%) and China (4.3%).
                 5.2
                                     4.3          4.0                Further, public health expenditure accounted for less than 30% of India's total healthcare
                                                                     costs (2008), reflecting the very basic level of healthcare provided by the government,
                                                                     which is insufficient to meet the health needs of the entire population. In comparison,
                                                                     BRIC peer governments accounted for ~50% of their respective country's healthcare
  Brazil Russia China                           India
                                                                     spend.

                                                                     Going forward, economic growth coupled with improving government finances should
                                                                     narrow the gap, implying growth in pharma demand.
Share of tier-1 markets in
pharma demand (%)
Rising urbanization is a positive                                    Urbanization: a positive for pharma demand
                                                   63                Increasing urbanization leads to higher demand for pharma products based on factors
                                       62
                                                                     such as (1) higher affordability, (2) better medical infrastructure, and (3) wider prevalence
                           61
  60         60                                                      of chronic diseases. Share of India's tier-1 markets has increased from 60% in 2006 to
                                                                     63% in 2010. Thus, the trend of rising urbanization in India is a key positive for growth in
                                                                     pharma demand.
 2006 2007 2008 2009 2010

August 2011                                                                                                                                                                                                          10
                                                                                                       Domestic Formulations | New Peaks



Metro and Tier-1 cities market share up from                         India - population distribution
60% in 2006 to 63% in 2010

    METROS             CLASS I TOWNS      CLASS II TO VI     RURAL                      Urban population (%)                 Rural Population (%)
                                                                        72       71     70      70     68     66
     21                 21        20           18           17                                                        63
                                                                                                                             60      57
                                                                                                                                            53     51      54
     19                 19        19           19           20                                                                              47
                                                                                                                             40      43
                                                                                                              34      37                           49
                                                                       28               30      30     32                                                   46
                                                                                29


            }
     33                 31        32           32            32
              Tier-1
              mkt
     28                 29        29           30            31




                                                                        2000

                                                                                 2005

                                                                                         2009

                                                                                                2010

                                                                                                       2015

                                                                                                              2020

                                                                                                                      2025

                                                                                                                             2030

                                                                                                                                     2035

                                                                                                                                            2040

                                                                                                                                                   2045

                                                                                                                                                           2050
   CY2006          CY2007       CY2008       CY2009        CY2010

                                                                                                                                    Source: Industry/MOSL



                                       Rising health insurance penetration to improve affordability
                                       Currently around 300 million people in India are covered under health insurance, and this
                                       number is expected to double by 2020. Going forward, health insurance should get a boost
                                       by way of various regulatory reforms like non-life tariff deregulation, lower capital
                                       requirements for players, increase in FDI limit, etc.

                                       Increasing penetration of health insurance over the next few years will spur demand for
                                       pharmaceuticals as it becomes possible for patients to afford more sophisticated and more
                                       expensive therapies.


Health insurance penetration in India is rising                      Per capita premium almost quadruples in 5 years (INR)

       Premium (INRb)
               (Rs b)           Premium (% of GDP)                                                                                                  71.5
                                                           0.13%
                                              0.12%                                                                                 57.9
                                0.10%
                                                                                                                   45.4
                       0.07%
    0.06%                                                                                       28.9
                                                            83.1
                                               66.3                            20.3
                                 51.3
                       32.1
     22.2


    FY06               FY07      FY08         FY09         FY10             FY06                FY07            FY08                FY09           FY10


                                                                                                                                       Source: IRDA/MOSL




August 2011                                                                                                                                                  11
                                                                                                                             Domestic Formulations | New Peaks



                                                          A #2 - Access
                                                          Rising government spend on healthcare, better infrastructure will improve
                                                          availability


                                                          Rising government spend on healthcare
     A #2 - Access




                                                          Healthcare for all is high on the agenda of the present Indian government. This was
                                                          demonstrated in the union budget for 2010-2011, when the healthcare expenditure outlay
                                                          was increased to USD5.95b from less than a USD5.17b allocated in 2009-10. The budget
                                                          allocation has been significantly increased for rural healthcare, with the government also
                                                          announcing plans to set up six "All India Institute of Medical Sciences "(AIIMS) institutions
                                                          across the country.

                                                          Government spending on healthcare will play a major role in increasing the penetration of
                                                          pharmaceuticals especially in rural areas. Government spend has grown at 18% CAGR
                                                          over FY06-09 and is translating into higher level of access in Tier II and rural markets.
                                                          Under Rashtriya Swasthya Bima Yojna (National Health Insurance Scheme), the
                                                          government plans to create health cover for approximately 400m people; 19m families
                                                          have already been covered and implementation seems to be on track.

                                                          Going forward, the government has announced plans to take its spending on healthcare to
                                                          3% of GDP from the current level of about 1%. Rising government spend on healthcare
                                                          improves people's access to medicines, helping pharma demand.

Rising government spend on healthcare                                                                  Allocation under National Rural Health Mission (INR b)

                     Helathcare Exp (Rs b)
                     Healthcare Exp (INR b)                        Grow th (%)                                                                             140.5
                                                                                         22.7
                                                                        21.3                                                                  119.3
                                                19.3                                                                              108.9
                                                                                 16.9
                                                                                                                        90
                                                               14.7
                                                                                                10.0
                                                                                                           67.3
                              10.1 10.5                 9.5

                     2.1
   280




                                  315

                                         348

                                                 415

                                                        454

                                                                 521

                                                                          632

                                                                                  739

                                                                                         907

                                                                                                997
                            286
   FY01

                     FY02

                                  FY03

                                         FY04

                                                 FY05

                                                        FY06

                                                                 FY07

                                                                          FY08

                                                                                  FY09

                                                                                         FY10

                                                                                                FY11




                                                                                                           FY06       FY07        FY08        FY09         FY10

Source: Economic Survey, Union Budget 2011                                                                                            Source: Ministry of Health/MOSL

                                                          Improving healthcare infrastructure
                                                          The healthcare infrastructure in India is likely to improve and will be a critical growth
                                                          driver for pharmaceuticals. Currently, India's healthcare infrastructure is at nascent stage
                                                          compared to western countries. India has only 9 hospital beds per 10,000 people compared
                                                          to 30-40 in US and Western Europe. Even other developing countries like Brazil, China
                                                          and Thailand fare much better than India with 24-30 beds per 10,000. Industry data suggests
                                                          the number of hospital beds in India is likely to double by 2015.

                                                          Likewise, India's current doctor-population ratio at 5 per 10,000 is the lowest among major
                                                          countries. However, with rising number of students gaining admission to medical colleges,
                                                          this ratio is set to improve going forward. Further, diagnostic laboratory services market
                                                          (estimated at USD750m) is expected to grow @ 20-25% p.a. over the next few years.
August 2011                                                                                                                                                        12
                                                                                                                             Domestic Formulations | New Peaks



Hospital beds per 10,000 - India among world's lowest                                      Doctors per 10,000 people - India the lowest the among
                                                                                           world majors
    Japan                                                                        139              Rus s ia                                                              43
   Rus s ia                                                                                           Italy                                                            42
                                                               97
                                                                                                Germany                                                     34
 Germany                                             83
                                                                                                 Fr anc e                                                   34
   Franc e                                      72                                                                                                    30
                                                                                            A r gentina
 A us tralia                           39                                                           US                                          26
        Italy                          39                                                       A us tr alia                                   25
         UK                            39                                                               UK                                   23
                                                                                                  Mex ic o                              20
  Canada                          34
                                                                                                   Japan                                20
         US                       31
                                                                                                    Br az il                  12
     China                       30
                                                                                                    China                    11
     Braz il                 24                                                                 Pakis tan               7
        India         9                                                                              India          5


                                                                                                                                                                 Source: WHO
Students entering medical colleges and number of                                           No. of allopathic doctors registered with state medical
colleges - rising trend                                                                    councils - Rising trend here as well

                          No of medical colleges in India                                                                                                         757,377

                          No of students entering medical colleges ('000)                                                                           736,743

                                                                                35                                                 708,043
                                                                     33
                                               29         30
                            25          26                                                                         682,080

                18                                                                                660,856
                                                                     289       300
                                        242   262        266
                            229
    7           189
   165

  FY96          FY01       FY05        FY06   FY07       FY08       FY09       FY10                 2005            2006            2007             2008             2009

                                                                                                                                             Source: National Health Profile


                                              Companies are focusing on increasing their rural reach
                                              Currently around 67 per cent of India's population or 742 million people live in rural areas,
                                              but rural markets contribute to only 17 per cent of the overall pharmaceutical market's
                                              sales. In the last few years both MNCs and Indian pharma companies are increasing their
                                              attention to tier 2 markets. The above-mentioned factors, namely, increasing government
                                              spend on healthcare, improvement in healthcare infrastructure, and growing health
                                              awareness etc is expected to drive pharma growth in these markets.

                                              Growth in tier-2 markets showing signs of catching up (%)

                                                          METROS                       CLASS I TOWNS                          CLASS II TO VI                     RURAL
                                                                                                                                                     26
                                                                                                                                                                 23
                                                                                                                                                            21
                                                    18                                             18                   18                                             17
                                                                                           16                                16
                                                                          14          15
                                                                                                                                   13
                                                                    11
                                                                                                               9
                                                          8

                                                                                                                                        2


                                                          CY2007                           CY2008                            CY2009                         CY2010

                                                                                                                                                     Source: Industry/MOSL

August 2011                                                                                                                                                                  13
                                                                                                                                                                                                                                    Domestic Formulations | New Peaks



                                                                                           A #3 - Awareness
                                                                                           Rising literacy levels and media penetration is improving health awareness
                A #3 - Awareness




                                                                                           High correlation between literacy and per capita pharma consumption
                                                                                           We believe literacy is one of the key factors driving awareness about healthcare in general
                                                                                           and pharmaceuticals in particular. In fact, literacy also has an indirect impact on pharma
                                                                                           consumption. Higher literacy typically leads to higher per capita income (i.e. A #1,
                                                                                           affordability), which in turn drives pharma demand.

                                                                                           Our study of pharmaceutical consumption and literacy rates among various states of India
                                                                                           confirms a strong correlation between literacy rate and pharma demand. As seen in the
                                                                                           graph below, states with high literacy rates like Kerala, Maharashtra, Punjab and Haryana
                                                                                           have higher per capita spend on pharmaceuticals compared to states with low literacy
                                                                                           rates like Bihar, UP, Rajasthan and Assam.

High correlation of literacy with per capita pharma consumption                                                                                                                      Literacy rate in India is rising

                 Literacy rate (%)                                                         Per Capita Pharma spend (Rs)                                                                                 Literacy rate (%)                                                      Per CapitaGDP (Rs)
 100                                                                                                                 800                                                       100                                                                                                                                                             80,000

  85                                                                                                                                                                     600   75                                                                                                                                                              60,000
  70                                                                                                                                                                     400
                                                                                                                                                                               50                                                                                                                                                              40,000
  55                                                                                                                                                                     200
                                                                                                                                                                               25                                                                                                                                                              20,000
  40                                                                                                                                                                     0
                                                                                                                                                                                0                                                                                                                                                              0
                                                                                                                  Tamil Nadu
                                             UP




                                                                      Karnataka
       Orissa




                                                  Rajasthan




                                                                                  Madhya




                                                                                                                               Haryana
                                                                                                                                         Punjab


                                                                                                                                                           Maharashtra
                                   Gujarat




                                                                                           West Bengal
                                                              Assam




                                                                                                                                                  Kerala
                Bihar




                                                                                                         Andhra




                                                                                                                                                                                                                                                                                        Tamil Nadu
                                                                                                                                                                                                                   UP




                                                                                                                                                                                                                                                                                                               Punjab
                                                                                                                                                                                       Orissa




                                                                                                                                                                                                                                                        Madhya




                                                                                                                                                                                                                                                                                                     Haryana



                                                                                                                                                                                                                                                                                                                                 Maharashtra
                                                                                                                                                                                                                        Rajasthan
                                                                                                                                                                                                        Gujarat




                                                                                                                                                                                                                                            Karnataka


                                                                                                                                                                                                                                                                 West Bengal
                                                                                                                                                                                                                                    Assam




                                                                                                                                                                                                                                                                                                                        Kerala
                                                                                                                                                                                                Bihar




                                                                                                                                                                                                                                                                               Andhra




                                                                                                                                                                                                                                                                                                     Source: Industry/MOSL


                                                                                           Rising media penetration also leads to higher awareness
                                                                                           Penetration of all forms of media is rising in India - print, TV, radio and internet. Higher
                                                                                           media exposure leads to better awareness on a whole range of issues including healthcare,
                                                                                           thus favourably influencing pharma demand.

Rising media penetration is a positive for healthcare awareness and pharma demand

                                     Total TV HH (m)                                                     TV penetration (%)                                                               C&S HH (m)                                           C&S penetration (% of TV Household)

                                                                                                                                  58.4                            60.2                                                                                                                                                                         81
                                                                53.6                           56.3                                                                                                                                                                            73                               77
   51.4                                 52.1                                                                                                                                                                                                66
                                                                                                                                                                                                                  63
                                                                                                                                                                                     57



                                                                                                129                               136                            142                                                                                                                                                                           115
                                                                118                                                                                                                                                                                                                                            105
    108                              112                                                                                                                                                                                                                                       94
                                                                                                                                                                                                              70                            78
                                                                                                                                                                                     62



   2005                             2006                       2007                          2008                               2009                         2010                2005                      2006                        2007                                2008                                2009                            2010


Note: HH stands for Households                                                                                                                                                                                                                                                                       Source: Industry/MOSL


August 2011                                                                                                                                                                                                                                                                                                                                           14
                                                                                                   Domestic Formulations | New Peaks



                                             A #4 - Ailments
                 A #4 - Ailments             Lifestyle drugs and anti-infectives hold the biggest potential


                                             India has so far been an acute ailments market
                                             Ailments can be of two types - acute and chronic. An acute ailment can be described as
                                             a condition of rapid onset and severe symptoms of brief duration e.g. infectious disease
                                             like common cold, fever etc. Acute ailments may turn chronic if they remain unresolved.

                                             Chronic ailments can be described as conditions that, with current medical knowledge,
                                             can be alleviated but not cured. Unlike acute ailments, chronic ailments (1) do not usually
                                             resolve of their own accord, and (2) are of longer duration e.g. diabetes, asthma, blood
                                             pressure, etc.

                                             Due to relatively poor sanitation conditions, drugs addressing infectious diseases are
                                             predominant in most developing countries. Hence, the proportion of acute to chronic is
                                             higher in developing countries compared with developed countries.


Therapeutic mix of major countries (%):                                      Trend in India's therapeutic mix (%)
India currently is an acute ailments market                                  Share of chronic ailments segment is on the rise

                                   Chronic   Acute                                        Acute segment           Chronic segment

                                                                                    16             22
    35                                                                                                            23              30
                42                  45         45
                                                        65
                                                                  73


                                                                                    84             78             77              70
    65          58                  55         55
                                                        35
                                                                  27


    US        Germany              Japan      UK       China      India            2000           2005           2010            2015E

                                                                                                                       Source: McKinsey/MOSL


                                             Changing disease profile to boost demand for chronic therapies
                                             India is undergoing a transition in terms of disease profile. The incidence and prevalence
                                             of non-communicable diseases is rapidly increasing due to demographic changes (e.g.
                                             urbanization) and lifestyle changes resulting from socioeconomic development (e.g. obesity,
                                             stress). Higher prevalence coupled with higher prescription compliance (due to improved
                                             affordability) is likely to drive much stronger growth in chronic ailment therapeutic segments
                                             (CATS). In 2006, the share of CATS stood at 22% of pharmaceutical market in India
                                             versus 55-65% in developed markets like US, UK and Japan. By 2015, the share of CATS
                                             is expected to rise to 30% of the then Indian market. (See pages 24-30 for profiles of
                                             major ailments in India.)




August 2011                                                                                                                              15
                                                                                                                                                                                                       Domestic Formulations | New Peaks



Prevalence rates of key chronic ailments to rise                                                                                                                           Market sizes of major corresponding therapies (INR b)

                    4.9                                                        2005                2015                          (% of population)                                           2005
                                                                                                                                                                                             Market size 2005 (Rs b)     2015
                                                                                                                                                                                                                         Market Size 2015 (Rs b)
                                                                                                                                                                                            137
                                                         3.7
        3.3
                                             2.8
                                                                                      2.5 2.7                                  2.7
                                                                                                                                                                                                                   83                       82

                                                                                                                   1.3

                                                                                                                                                  0.2 0.2                          24                                               22
                                                                                                                                                                                                             10
  Coronary                                 Diabetes                                  Asthma                      Obesity                          Cancer
    heart                                                                                                                                                                       Coronary heart               Diabetes              Respiratory
   disease                                                                                                                                                                         disease

                                                                                                                                                                                                                              Source: Industry/MOSL


India: Therapeutic trend (2000 to 2010)
Historically, in the Indian pharma market, the acute ailments therapy segment was the largest in terms of sales, although
it experienced slower growth rates than some of the chronic therapies. Nevertheless, almost all therapy areas experienced
double-digit growth over the 2000-10 period. This is attributed to the preceding three As - Affordability, Access and
Awareness.

Among key therapies, anti-diabetics was the fastest growing in terms of sales with CY00-10 CAGR of 19.6% followed
by CVS (cardiovasculsar system) at 15%. In terms of therapeutic segment market share, both anti-diabetics and CVS
gained ~2.5% share each over CY00-10, whereas anti-infectives and vitamins & minerals lost 2% share each.
Trend in major therapeutic segments                                                                                                                                        Indian pharma market therapeutic mix (2000)

                                         Market Size (Rs b)                                                   2000-10 CAGR (%)                                                           Antidiabetic Others                      Antiinfec-
                                                                                                                                                        19.6                   CNS           3%        12%                          tives
                                                                                                    15.2                                         14.4                          5%                                                   18%
  10.8               12.0                                                                                       11.3            11.8
                                           9.9            9.1                    10.9
                                                                                                                                                                                                                                          Gastroin
                                                                                                                                                                            Dermatology                                                    testinal
                                                                                                                                                                                6%                                                           10%
  80                 51                    41             36                      40               53           26               25              26     27
                                                                                                                                                  CNS
                                                                                                                                 Dermatology
                      Gastrointestinal




                                                           Vitamins/Minerals




                                                                                                    Cardiac
                                           Respiratory




                                                                                                                 Gynaecology
                                                                                  Pain/Analgesic




                                                                                                                                                                            Gynaecology
                                                                                                                                                            Antidiabetic
   Antiinfectives




                                                                                                                                                                                6%                                                       Respiratory
                                                                                                                                                                                                                          Vitamins/         11%
                                                                                                                                                                                                           Pain/
                                                                                                                                                                                             Cardiac                      Minerals
                                                                                                                                                                                                         Analgesic
                                                                                                                                                                                               9%                           10%
                                                                                                                                                                                                           10%

Indian pharma market therapeutic mix (2005)                                                                                                                                Indian pharma market therapeutic mix (2010)

                     Antidiabetic                                               Others                                                         Antiinfec-                                         Others                        Antiinfec-
                                                                                 8%                                                              tives                       Antidiabetic                                         tives
   CNS       4%                                                                                                                                                                                    13%
                                                                                                                                                 21%                             6%                                               16% Gastroin-
    7%
 Dermatology                                                                                                                                                                     CNS                                                       testinal
                                                                                                                                                Gastrointes-
     5%                                                                                                                                                                          6%                                                          11%
                                                                                                                                                   tinal
                                                                                                                                                   11%
 Gynaecology                                                                                                                                                               Dermatology
     3%                                                                                                                                                                        5%                                                        Respiratory
                                                                                                                                                                                                                                            9%
                                                                                                                                                  Respiratory
          Cardiac                                          Pain/                                                Vitamins/                                                    Gynaecology                            Pain/       Vitamins/
                                                                                                                                                     9%
           10%                                           Analgesic                                              Minerals                                                         6%                Cardiac        Analgesic     Minerals
                                                            9%                                                    13%                                                                               11%             9%             8%

                                                                                                                                                                                                                              Source: Industry/MOSL


August 2011                                                                                                                                                                                                                                           16
                                                                                                        Domestic Formulations | New Peaks



                             CVS, Diabetes, CNS and Anti-infectives will be the high potential segments
                             We believe that CATS like Cardiovascular (CVS), Diabetes, Central Nervous System
                             (CNS) will account for a major chunk of the incremental market over the next 5 years.
                             Also, with rising income levels in the rural areas, anti-infectives will also record good
                             growth over the same period. We believe these four will be the key segments of the
                             future, and garner more than 50% of the delta in the Indian formulations market, 2015
                             over 2010.

                             We juxtaposed the incremental opportunity of various therapeutic segments against the
                             number of existing players in each of these segments, to arrive at the following plot.

                             CVS, Anti-infectives, Diabetes and CNS are large segments with relatively fewer players

                                                                             Increm ental m kt size (INR b) 2010-15E
                                                     0                20                40                   60              80              100
        Top 4 ailment                           0
        segments are                                                                               Diabetes
                                                                                     CNS           AF - 396
       mainly based on                          10                                                                   AI       CVS
                                                                                    AF - 215
                                                                                                                             AF - 400
                               No. of Players




    Attractiveness Factor,                                                                                        AF - 337
     which is highest for                                             Dermatology
                                                20
    CVS, Diabetes, Anti-                                                                       Respiratory
     infectives and CNS                                                                         AF - 147
                                                30       Gynaecology
         in that order                                                                                      GI
                                                           Vitamins                                      AF - 109
                                                40                              Pain



                             Note: AF is Attractiveness Factor of segment, which is defined by                               Source: Industry/MOSL
                             the incremental size of the opportunity per player


                             Our key conclusions from this chart:
                             1. As discussed before, CVS, Anti-infectives, Diabetes and CNS will record maximum
                                share of incremental market (the size of bubble indicates this).
                             2. We also note that the attractiveness factor (i.e. incremental segment market size
                                divided by number of players) is most favorable for these segments.
                             3. Hence, companies which enjoy strong positioning in these segments will be able to
                                generate maximum value from their respective domestic formulations businesses.




August 2011                                                                                                                                   17
                                                                                         Domestic Formulations | New Peaks



                                       4 Buys
                                       Cipla, Lupin, Torrent and GSK Pharma

                                       Having identified the most attractive ailment segments, we have adopted two approaches
                                       to arrive at our top plays on India's domestic formulations -
                                        Approach 1: 3-screen shortlisting process as follows:
                                            Screen #1 - Identify companies with dominating presence in high-potential ailment
                                               segments
                                            Screen #2 - Of the above, exclude companies with unfavorable non-domestic
                                               business
                                            Screen #3 - Juxtapose the Screen #2 surviving companies vis-à-vis earnings growth
                                               and valuation
                                        Approach 2: MEDICINES score, based on nine key success factors for picking
                                           domestic formulation stocks

                                       The final list from both the approaches is - Cipla, Lupin, Torrent and GSK Pharma.

                                       Approach 1: 3-Screen shortlisting process

                    Screen #1          Identify companies with dominating presence in high-potential ailment
                                       segments
                                       The chart below maps the positioning of pharmaceutical players in the key therapeutic
                 Presence in high      segments of CVS, Diabetes, anti-infectives and CNS. We have plotted the dominance of
               potential segments      each player in these respective segments using prescription market share as the key
                                       measure of dominance. Given the fragmented nature of the Indian formulations market,
                                       we have defined 5% as the minimum threshold market share which qualifies as high
                                       dominance while market share of between 3-5% qualifies as medium category.

Company mapping with respect to therapeutic classes

                        Sun Pharma,           Abbott, U S V,        Ranbaxy, Alkem,    Sun Pharma, Intas,   Cipla, GSK Pharma
                High    Torrent, Cadila,      Aventis,              Aristo, Cipla,     Torrent, Abbott,
                        Cipla, Unichem,       Sun Pharma            GSK Pharma,        Piramal
                        Ranbaxy, Lupin                              Piramal
   Dominance




                        Aventis, U S V,       Eli Lilly, Piramal,   Alembic,Mankind,   Aventis, Ranbaxy,    Cadila, Piramal,
                        Emcure, Piramal,      Micro Labs, Lupin     FDC, Macleods,     Unichem,             Ranbaxy
               Medium
                        Dr Reddy's, Intas,                          Lupin              Micro Labs
                        Micro Labs

                        IPCA Labs,             Panacea,                                Novartis, Cipla,     Pfizer, Mankind,
                        AstraZeneca,           Ranbaxy                                 Lupin                Dr Reddy's,
                Low     Pfizer                                                                              Sun Pharma,
                                                                                                            Glenmark, Biocon

                               CVS                Diabetes          Anti-infectives        CNS              Others

Companies in bold have been covered in this report                                                                 Source: MOSL




August 2011                                                                                                                    18
                                                                                             Domestic Formulations | New Peaks



                                 Sun, Cipla, Lupin, Abbott, GSK best placed to capture the opportunity
                                 We note that these companies are best placed to capture the incremental opportunity in
                                 the high-growth life-style and anti-infectives segments by virtue of:
                                 1. Strong presence in these key segments
                                 2. High prescription market share of at least 5%
                                 3. Brand-building ability of these companies

                                 Ranbaxy, Cadila and Aventis also reasonably well placed
                                 These companies are also relatively well placed in the Indian formulations market and
                                 form the 2nd-tier of companies which should be focused on as participants in this large
                                 opportunity.

                                 Dr. Reddy's & Glenmark need to further strengthen their positioning
                                 The chart above indicates that DRL and Glenmark have a lot of catching-up to do to
                                 qualify as companies which will be able to exploit the large opportunity in the domestic
                                 formulations business. These companies suffer from relatively lower prescription market
                                 share in the high growth therapeutic segments.


                Screen #2        Most Indian companies are not pure-plays; view on non-domestic business
                                 is also important
                                 It is well-known that most Indian pharmaceutical companies are not pure-plays on the
   Non-domestic business         domestic opportunity given their strong focus on international generic businesses. Hence,
                                 it becomes imperative to map the domestic and the non-domestic businesses of these
                                 companies to take an overall view on these companies. The chart below depicts the matrix
                                 of these two businesses:

                                 Company mapping relative to the attractiveness of domestic and international business
                                                                                                               Sun Pharma,
                                                             Favourable                                        Cipla, Lupin,
                                                                                              Dr Reddy
                                                                                                               Cadila,
                                   International Business




                                                                                                               Torrent Pharma


            3 of our 4                                                     Glenmark                            Ranbaxy,
         top picks are                                        Neutral      Pharma                              GSK Pharma
       favorably placed
          in both their
        domestic and
         international                                      Unfavourable
          businesses


                                   Note: Only companies                     Unfavourable        Neutral          Favourable
                                   covered in this report have
                                   been mapped                                             Domestic Business
                                                                                                                      Source: MOSL


                Screen #3        Juxtapose the Screen #2 shortlisted companies vis-à-vis earnings growth
                                 and valuation
                                 We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR and
              Earnings growth    FY11 P/E as depicted below. Based on the same, the top picks are Cipla, Lupin and
                 v/s Valuation   Torrent.


August 2011                                                                                                                     19
                                                                                                               Domestic Formulations | New Peaks



Earnings growth v/s Valuation: Cipla, Torrent, Lupin on top ...               ... GSK merits rich valuation due to superior return ratios
      FY11 P/E (x)                            Ranbaxy (53%, 65x)                                  RoCE (%)              Adj. RoCE (%)                 Very high due
 40
                                                                                                                                                        to -ve capital
                                                   Sun                                                                                                    employed
                          GSK
 30
                                                                                 25                                                                                    26
                            Cadila                                                                                              22        23
        Dr Reddy                                                                                     19                                          47
                                                           Glenmark                      16                                                                 14
                      Lupin Cipla                                                                                         28
 20                                                                           22                                    7                  27                            25
                                                                                       17           16         13                                       15
                                             Torrent




                                                                                                                                                          Glenmark
                                                                                                     DRL




                                                                                                                                                  GSK
                                                                                        Cipla




                                                                                                                              Cadila




                                                                                                                                                                      Torrent
                                                                                                                Ranbaxy
                                                                                Sun




                                                                                                                                         Lupin
 10
   10.0            14.0         18.0      22.0         26.0            30.0
                          FY11-13E EPS CAGR (%)
Note - Adj. RoCE - RoCE adjusted for other income in P&L and Cash in Balance sheet                                                                       Source: MOSL
       RoCE and Adj. RoCE are average of FY11-13

                                     Approach 2: The MEDICINES score
                                     We have identified nine key success factors (KSFs) for shortlisting Indian pharma
                                     companies and their stocks. These success factors correspond to the initials of the word
                                     "MEDICINES". We have rated the companies on these KSFs to arrive at a final
                                     "MEDICINES Score" out of a maximum possible 100. The companies with the highest
                                     MEDICINES Score are the most attractive investment ideas.

                                     We have considered the following KSFs for evaluating the domestic formulations business
                                     (see box on page 21 for explanation). Our MEDICINES Scorecard is given below.

                                      M      Mix & Market share
   MEDICINES                          E      Equity with doctors
          Measures                    D      Distribution & reach
                                      I      Introductions
                                      C      CAGR & scale-up
                                      I      Improvement in MR productivity
                                      N      Non-domestic business
                                      E      Earnings growth
                                      S      Stock attractiveness


                                     Indian domestic pharma players: The MEDICINES scorecard
                                                           M           E           D            I          C              I             N          E             S   Total
          4 of the top 5             Sun                    7          9        8        6       9        9                             7         9       13      77
       MEDICINES score               Cipla                  6          7        8        6       6        7                             5         7       14      66
           companies                 GSK Pharma **          4          9        7        3       6        9                             -         6       14      64
        correspond with              Lupin                  5          6        6        6       8        5                             6         6       14      62
         Approach 1. We              Torrent Pharma         6          7        6        5       6        3                             6         8       14      61
       are Neutral on Sun            Cadila                 6          7        7        5       6        5                             6         6       12      60
         only due to rich            Dr. Reddy's Labs       4          6        6        4       6        2                             7         5       12      52
           valuations                Glenmark               2          3        5        6       6        5                             3         9       10      49
                                     Ranbaxy                6          5        7        5       6        3                             5         3        9      49
                                     ** GSK Pharma score   pro-rated   as rating for Non-domestic business is not                      applicable        Source: MOSL

                                     4 buys: Cipla, Lupin, Torrent, GSK Pharma
                                     4 of the top 5 MEDICINES score companies correspond with Approach 1. Thus, combining
                                     both Approaches 1 and 2, our top picks are Cipla, Lupin, Torrent and GSK Pharma.
                                     We are Neutral on Sun Pharma only due to rich valuations.

August 2011                                                                                                                                                                     20
                                                                                      Domestic Formulations | New Peaks




MEDICINES Score - Criteria & rating methodology
We briefly explain below the KSFs and the rating criteria.       C - CAGR and scale-up                 Maximum score: 10

M - Mix & Market share                Maximum score: 10          CAGR & scale-up captures the past and future growth in
                                                                 the domestic formulations portfolio driven by various factors
Mix & Market share indicates the therapeutic mix for the         like therapeutic mix, brand equity, productivity of sales
company in the domestic formulations market. We have             force, new launches, etc. Companies with consistent high
identified life-style segments (CVS, Diabetes & CNS) and         growth are rated higher.
Anti-infectives as the most attractive segments for driving
future growth and profitability. Companies with strong           I - Improvement in MR productivity          Max. score: 10
presence in these segments will be rated higher.
                                                                 MR (medical representative) productivity captures the ability
                                                                 of a company to drive growth in its domestic formulations
E - Equity with doctors               Maximum score: 10
                                                                 portfolio through improvement in productivity of the sales
                                                                 force (measured as Sales/MR). Companies with
Equity with doctors implies the brand equity which the
                                                                 consistently high or improving sales force productivity are
company enjoys with doctors. We have used prescription
                                                                 rated higher.
market share and prescription rankings as the proxy to
measure brand equity with doctors. Companies with higher
                                                                 N - Non-domestic business             Maximum score: 10
prescription share and better prescription rankings are rated
higher.                                                          This captures our view on the other businesses of the
                                                                 company including one-off option values. Companies
D - Distribution & reach              Maximum score: 10          expected to do well in these businesses are rated higher.

This measures the distribution strength of a company in          E - Earnings growth                   Maximum score: 10
terms of its presence in metros, Tier-I cities, towns, and
rural areas. Companies with wider distribution reach in          We have considered overall earnings growth, and not just
relevant geographies are rated higher.                           from the domestic business. Companies with high long-
                                                                 term earnings growth (FY05-13) are rated higher.
I - Introductions                     Maximum score: 10
                                                                 S - Stock Attractiveness              Maximum score: 20
Introductions measures the ability of a company to drive
                                                                 Stock attractiveness has a higher weight of 20 compared
sales from new launches in the Indian formulations market
                                                                 to others, and captures our view on the stock including
(since this is an important growth contributor for most Indian
                                                                 issues such as depth of management, corporate
companies). Companies with higher contribution from new
                                                                 governance, return ratios, and valuations. Companies with
launches are rated higher.
                                                                 favorable outlook are rated higher.




August 2011                                                                                                                21
                                                                                                        Domestic Formulations | New Peaks



Detailed MEDICINES Score
                                                       Mix                                                Equity with doctors
                    MEDICINES           Chronic therapy               Score          Comment                                                 Score
                        Score           contribution (%)
 Sun                       77                  61                         7          Leader in CNS, Gynaec and 2nd in CVS, Anti-diabetics        9
 Cipla                     66                  42                         6          Market leader in AI and Respiratory                         7
 Lupin                     62                  43                         5          Leader in Anti-TB segment                                   6
 Torrent Pharma            61                  62                         6          Ranks 2nd in CNS and 7th in CVS                             7
 GSK Pharma **             64                  5                          4          Market leader in Derma, Vit and Pain Mgmt                   9
 Cadila                    60                  31                         6          Among top 3 players in CVS and GI                           7
 Dr. Reddy's               52                  28                         4          Ranks 3rd in GI and Pain Mgmt                               6
 Glenmark                  49                  24                         2          Ranks 2nd in Dermatology                                    3
 Ranbaxy                   49                  21                         6          Among the leaders in AI and Dermatology                     5


                     Distribution & reach                               Introductions                         CAGR & Scale-up (%) - Sales
             Metro/Tier I   MR strength   Score             In last          Contbn to          Score
             (% of sales)                                  4 years          growth (%)                      FY05-11         FY11-13          Score
 Sun             73             2,600         8               124               56                  6         23              18                 9
 Cipla           63             5,100         8               304               45                  6         14              13                 6
 Lupin           70             3,682         6               266               69                  6         22              19                 8
 Torrent Pharma 73              3,600         6               151               49                  5         19              18                 6
 GSK Pharma ** 60               2,500         7                21               15                  3          8              14                 6
 Cadila          65             4,500         7               197               37                  5         12              15                 6
 Dr. Reddy's     68             3,165         6                89               31                  4         18              16                 6
 Glenmark        70             2,078         5               105               52                  6         19              17                 6
 Ranbaxy         66             4,500         7               255               50                  5         10              16                 6


                Improvement in productivity                    Non domestic                 Earnings Growth                      Stock
                     (Sales/MR, INR m)                            business                      (FY11-13)                   attractiveness
                     2004        2010 Score             Favorability     Score            Comment (%)     Score        Comment          Score
 Sun                  3.2         7.8      9            High                  7               22              9        Neutral             13
 Cipla                4.8         4.9      7            Medium                5               21              7        Top pick            14
 Lupin                3.6         3.6      5            High                  6               13              6        Top pick            14
 Torrent Pharma       1.5         2.3      3            High                  6               22              8        Top pick            14
 GSK Pharma **        6.5         7.1      9            Not applicable     N.A.               16              6        Buy                 14
 Cadila               4.1         3.6      5            High                  6               21              6        Neutral             12
 Dr. Reddy's          3.6         3.2      2            High                  7               12              5        Neutral             12
 Glenmark             3.1         3.6      5            Low                   3               24              9        Neutral             10
 Ranbaxy              4.6         3.6      3            Medium                5               55              3        Sell                 9
** GSK Pharma total MEDICINES score pro-rated as rating for Non-domestic business is not applicable


Domestic formulations companies - Comparative valuations (INR)
Company       Target Upside                   EPS (INR)                    P/E (X)                 EV/EBITDA (X)                   ROE (%)
(CMP)           Price   (%)           FY11     FY12E FY13E       FY11     FY12E FY13E            FY11 FY12E FY13E          FY11    FY12E FY13E
Top Picks
Cipla (281)       361    28            12.0     13.4    16.4     23.3         21.0       17.1    17.4      14.5    12.1     14.5      14.4     15.6
Lupin (450)       514    14            19.3     22.3    25.7     23.3         20.2       17.5    19.5      16.8    13.8     29.3      27.1     25.7
Torrent (589)     762    29            31.9     40.1    47.6     18.4         14.7       12.4    12.4       9.6     8.0     29.2      29.3     27.7
GSK (2,155)     2,330     8            68.6     77.5    89.6     31.4         27.8       24.1    21.9      20.2    17.2     30.1      31.3     33.4
Others
Sun (464)           524         13     13.6     17.3    20.9     34.2         26.8       22.2    22.4      20.8    16.7     16.2      17.7     18.5
Cadila (824)        907         10     30.9     28.3    41.1     26.6         29.1       20.0    17.2      17.2    14.0     37.5      27.3     27.6
DRRD* (1,446) 1,670             15     65.6     68.6    81.1     21.6         20.7       17.5    16.7      17.1    14.4     24.1      22.5     23.5
Glenmark (318)      310         -3     12.5     16.1    19.7     25.5         19.7       16.1    17.7      10.4    11.1     17.4      17.0     17.1
Ranbaxy ## (468) 412           -12     25.8     11.9    16.7     15.2         33.0       23.3    11.1      23.0    18.5     19.4      11.4     10.4
* Dr. Reddy's
## - Adjusted for Rs77/sh of   DCF value of FTF; Dr. Reddy's Labs & Ranbaxy core valuations adjusted for DCF value of Para-IV upsides


August 2011                                                                                                                                     22
                                  Domestic Formulations | New Peaks




                                   Ailment Profiles



Ailments

Infection

CVS Disease

Diabetes

CNS Diseases

Pain

Gastro-intestinal (GI) Problems

Respiratory Diseases




August 2011                                                     23
                                                                                                      Domestic Formulations | New Peaks

       Ailment & Therapy profile



      Infection                                                                                             Anti-infectives
       Ailment snapshot                                                              Therapy snapshot

An infection is the colonization of a host organism by a                      Anti-infective drugs are used to suppress/cure the infection.
parasite species. Infecting parasites seek to use the host's                  Four types of anti-infective or drugs exist: antibacterial
resources to reproduce, often resulting in disease.                           (antibiotic), antiviral, antitubercular, and antifungal.
Colloquially, infections are usually considered to be caused                  Depending on the severity and the type of infection, the
by microscopic organisms or microparasites like viruses,                      antibiotic may be given by mouth, injection or may be
prions, bacteria, and viroids, though larger organisms like                   applied topically. Severe infections of the brain are usually
macroparasites and fungi can also infect.                                     treated with intravenous antibiotics. Sometimes, multiple
                                                                              antibiotics are used to decrease the risk of resistance
Hosts normally fight infections themselves via their immune                   and increase efficacy. Antibiotics only work for bacteria
system. Mammalian hosts react to infections with an                           and do not affect viruses. Antibiotics work by slowing down
innate response, often involving inflammation, followed by                    the multiplication of bacteria or killing the bacteria.
an adaptive response. Pharmaceuticals can also help fight
infections.


          Key Drugs                                                                 Key Brands
Penicillins, Cephalosporins, Aminoglycosides, Macrolides,                    Augmentin - GSK, Zifi - FDC, Taxim - Alkem, Mox - Ranbaxy
Quinolones, Tetracyclines                                                    Azithral - Alembic

 Anti-infectives Segment (2001-10 CAGR - 12.4%)                              Anti-infectives Segment - Prescription Rankings

           Segment Size (INR B)           Contribution to Industry (%)       Company            Jan-07     Jan-08   Jan-09       Jan-10        Oct-10
                             20                                              Cipla                    1        1            1          1           1
                                                                        80
                                                                             Mankind                  5        4            4          3           2
                                                      70
     19                                                                      Ranbaxy                  2        2            3          2           3
                                         61
                                                                             FDC                      3        3            2          4           4
                  18           47                                            Piramal (Abbott)         7        7            5          5           5
                                           18
                                                       17
                                                                        17   Macleods                10       10           10          9           6
     29            28                                                        Unbranded                6        6            7          7           7
                                                                             Alkem                    8        8            8          8           8
                                                                             Alembic                  4        5            6          6           9
                                                                             GSK                      9        9            9         10          10
    2000         2001          2005     2008         2009          2010


 Anti-infective segment - Value market share (%) - 2010                      Anti-infective segment-prescription market share (%) - 2010

                                                Ranbaxy,                                                        Cipla, 8.4
                                                  10.8                                                                          Mankind, 8.3
    Others, 32.5
                                                      Alkem, 10.5                                                                  Ranbaxy,
                                                                                                                                     7.8
                                                            Aristo, 7.3          Others, 44.8
                                                                                                                                   FDC, 7.1

   Macleods,                                               Cipla, 6.7                                                              Piramal
     4.8                                                                                                                        (Abbott), 5.4
                                                             GSK, 6
                                                                                                                                     Macleods,
          Alembic, 5                                Piramal                                                                             4.5
                                                                                       Aristo, 2.8                         Alkem, 4.0
                                                  (Abbott), 5.7
                    FDC, 5.1     Mankind, 5.6                                                   GSK, 2.9    Alembic, 4.0


                                                                                                                           Source: Industry/MOSL



August 2011                                                                                                                                         24
                                                                                                     Domestic Formulations | New Peaks

         Ailment & Therapy profile



         CVS Disease                                                                                               CVS Drugs
         Ailment snapshot                                                            Therapy snapshot

Cardiovascular disease are the class of diseases that                         Cardiovascular medications are used as a means to control
involve the heart or blood vessels (arteries and veins).While                 or to prevent certain forms of heart disease. Many people
the term technically refers to any disease that affects the                   with advanced heart disease may take several of these
cardiovascular system, it is usually used to refer to those                   drugs. Types of cardiovascular drugs may be broken into
related to atherosclerosis (arterial disease). These                          groups depending upon their action or what they treat.
conditions usually have similar causes, mechanisms, and                       Categories that might describe drug actions include the
treatments. In practice, cardiovascular disease is treated                    following: statins (for cholesterol), diuretics (for blood
by cardiologists, thoracic surgeons, vascular surgeons,                       pressure), anticoagulants (for blood thinning), anti-platelet
neurologists, and interventional radiologists, depending on                   (for removing bold clots), beta-blockers (for preserving
the organ system that is being treated.                                       normal heart rhythm after a heart attack and for lowering
                                                                              high blood pressure), digitalis drugs (for cardiac failure),
                                                                              vasodilators (for facilitating blood supply to the heart),
                                                                              calcium channel blockers (for angina & high blood pressure)
                                                                              and ACE inhibitors (for high blood pressure).
          Key Drugs                                                                 Key Brands
Angiotensin II Receptor Blockers, Angiotensin-Converting                     Storvas - Ranbaxy, Cardace - Sanofi, Aten - Cadila, Losar-
Enzyme (ACE) Inhibitors, Antiarrhythmics, Antiplatelet                       H - Unichem, Minipress-XL - Pfizer


 CVS Segment (2001-10 CAGR - 15.9%)                                          CVS Segment - Prescription Rankings
          Segment Size (INR B)          Contribution to Industry (%)         Company            Jan-07    Jan-08   Jan-09    Jan-10       Oct-10
                                                                             USV                     1         1        1          1          1
                             10                                         11
                 9                     11            11                      Sun                     2         2        2          2          2
     9                                                                       Piramal (Abbott)        4         4        3          3          3
                                                                             Cipla                   5         5        4          4          4
                                                                             Lupin                   9         7        7          6          5
                                                                   53        Torrent                 8         8        6          5          6
                                                    45
                                       38                                    Zydus-Cadila            3         3        5          7          7
                             24                                              Sanofi                  7         6        9          9          8
    13          14                                                           Unichem                 6         9        8          8          9
                                                                             Micro Labs             11        10       10         11         10
   2000        2001         2005      2008         2009          2010


 CVS Segment - Value market share (%) - 2010                                 CVS Segment - Prescription market share (%) - 2010

                        Sun, 7.1                                                                      USV, 9.3
                                               Torrent, 6.8                                                            Sun, 6.8
                                                     Zydus-                                                                   Piramal
     Others, 41.1                                  Cadila, 6.5                                                            (Abbott), 5.3
                                                     Unichem,
                                                                                                                             Cipla, 5.1
                                                        6.2                     Others, 48.2
                                                                                                                             Lupin, 5.0
                                                      Cipla, 5.9
                                                       Ranbaxy,                                                             Torrent, 4.6
                                                           5.8                                                                Zydus-
              Emcure, 4.8                       Lupin, 5.6
                                                                                            Micro Labs,                    Cadila, 4.5
                                    USV, 5.1                                                                Unichem,   Sanofi, 4.0
                      Sanofi, 5.1                                                               3.3            4.0
                                                                                                                       Source: Industry/MOSL



August 2011                                                                                                                                    25
                                                                                                  Domestic Formulations | New Peaks

         Ailment & Therapy profile



         Diabetes                                                                                         Anti-diabetic
          Ailment snapshot                                                    Therapy snapshot

Diabetes mellitus, often simply referred to as diabetes, is             Anti-diabetic medications treat diabetes mellitus by
a group of metabolic diseases in which a person has high                lowering glucose levels in the blood. With the exceptions
blood sugar, either because the body does not produce                   of insulin, exenatide, and pramlintide, all are administered
enough insulin, or because cells do not respond to the                  orally. There are different classes of anti-diabetic drugs,
insulin that is produced.                                               and their selection depends on the nature of the diabetes,
There are three main types of diabetes: Type 1                          age and situation of the person, as well as other factors.
diabetes: results from the body's failure to produce insulin,           Type 1 diabetes can only be controlled with the help of
and presently requires the person to inject insulin. Type 2             injected insulin. Type 2 diabetes treatments include (1)
diabetes: results from insulin resistance, a condition in               agents which increase the amount of insulin secreted by
which cells fail to use insulin properly, sometimes                     the pancreas (Secretagogues), (2) agents which increase
combined with an absolute insulin deficiency. Gestational               the sensitivity of target organs to insulin (Insulin
diabetes: is when pregnant women, who have never had                    sensitizers), and (3) agents which decrease the rate at
diabetes before, have a high blood glucose level during                 which glucose is absorbed from the gastrointestinal tract
pregnancy. It may precede development of type 2 diabetes.               (Alpha-glucosidase inhibitors).
          Key Drugs                                                           Key Brands
Insulin, Alpha-glucosidase inhibitors, Glimepiride, Insulin            Human Mixtrad - Novo, Lantus - Sanofi, Glycomet GP -
sensitizers, Secretagogues                                             USV, Novomix - Novo, Amaryl - Sanofi


 Diabetes Segment (2001-10 CAGR - 17.8%)                               Diabetes Segment - Prescription Rankings
                                                                       Company            Jan-07     Jan-08    Jan-09      Jan-10    Oct-10
          Segment Size (INR B)          Contribution to Industry (%)
                                                                       USV                     1          1          1           1        1
                                                                5.8    Sun                     2          2          2           2        2
                                       5.3         5.4
                                                                       Abbott                  3          3          3           3        3
                            4.3
                 4.0                                                   Sanofi                  4          4          6           4        4
    3.3                                                                Micro Labs              5          7          7           6        5
                                                                27     Lupin                   8          8          8           8        6
                                                   22                  Franco                  7          6          5           7        7
                                        18
                                                                       Piramal (Abbott)        6          5          4           5        8
                            10
     5            6                                                    Eris                   NA         NA         NA          12        9
                                                                       Glenmark                9          9          9          10       10
   2000         2001       2005       2008        2009       2010


 Diabetes Segment - Value market share (%) - 2010                      Diabetes Segment - Prescription market share (%) - 2010

                                                                                                                   USV, 14.2
                Others,                        Abbott, 20
                 29.6                                                                                                    Sun, 7.8
                                                                          Others, 40.9
                                                     USV, 12.4                                                             Abbott, 6.6
          Franco, 2.7                                                                                                      Sanofi, 5.2
          Wockhardt,                                                                                                    Micro Labs,
                                                  Sanofi, 9.1
             3.2                                                                                                             5.2
          MSD, 3.2                             Sun, 7.8                        Glenmark,
                                                                                                                     Lupin, 4.9
            Lupin, 3.8 Micro Labs, Piramal                                        2.9
                                                                                      Eris, 3.3      Piramal        Franco, 4.6
                                   (Abbott),
                            4                                                                      (Abbott), 4.5
                                     4.2

                                                                                                                     Source: Industry/MOSL



August 2011                                                                                                                              26
                                                                                                   Domestic Formulations | New Peaks

       Ailment & Therapy profile



       CNS Diseases                                                                                                   CNS Drugs
       Ailment snapshot                                                           Therapy snapshot

A central nervous system disease can affect either the                     The key central nervous system drugs obtainable in the
spinal cord (myelopathy) or brain (encephalopathy), both                   market are antidepressant, ergot derivative, sedative,
part of the central nervous system. The central nervous                    antipsychotic, benzodiazepine and antiemtic. Out of the
system controls behaviors in the human body, so this can                   whole central nervous system drugs market;
be a fatal illness. Common CNS diseases include                            antidepressants, antipsychotics and anti epileptics are
Encephalitis, Meningitis, Alzheimer's disease, Parkinson's                 the largest growing segments.
disease, Multiple sclerosis and depression.




          Key Drugs                                                               Key Brands
Phenytoin sodium, Mecobalamin, Gabapentin, Citalopram,                     Eptoin - Abbott, Nurokind Plus - Mankind, Vertin - Solvay
Alprazolam.                                                                Alprax - Torrent, Trika - Unichem

 CNS Segment (2001-10 CAGR - 14.4%)                                        CNS Segment - Prescription Rankings
                                                                           Company             Jan-07     Jan-08      Jan-09   Jan-10        Oct-10
          Segment Size (INR B)           Contribution to Industry (%)
                                                                           Sun                     1           1           1           1           1
                                                                     6     Intas                   3           3           3           2           2
                                         5             5
                                                                           Torrent                 2           2           2           3           3
                  4          4                                             Piramal (Abbott)        5           4           4           4           4
      3                                                                    UCB                     6           6           5           5           5
                                                                    27     Micro Labs              7           7           7           6           6
                                                      22                   Local companies        NA          NA          12           8           7
                                        18
                                                                           Unichem                 4           5           6           7           8
                            10
      5           6                                                        Abbott                  9           9           9           9           9
                                                                           Wockhardt              10          10          10          11          10
     2000       2001        2005        2008         2009          2010


 CNS Segment - Value market share (%) - 2010                               CNS Segment - Prescription market share (%) - 2010
     Others, 24.2                                    Sun, 20.7                                                         Sun, 12.1
                                                                                                                                   Intas, 8.2
                                                                            Others, 43.7
                                                                                                                                      Torrent, 8.1
    Micro Labs,                                              Intas, 12.2
        3.5                                                                                                                            Piramal
    Ranbaxy,                                                                                                                         (Abbott), 5.5
        3.8
    Unichem,                                               Torrent, 8.6                                                                    UCB, 5.0
        3.9
                                                                            Cipla, 2.9                                              Micro Labs,
            Pfizer, 4.2      Piramal
                                               Abbott, 7.6                                                                              4.2
              Sanofi, 4.8   (Abbott),                                             Wockhardt,                           Unichem,
                               6.5                                                   3.1                Abbott, 3.5       3.8

                                                                                                                          Source: Industry/MOSL



August 2011                                                                                                                                       27
                                                                                                   Domestic Formulations | New Peaks

       Ailment & Therapy profile



      Pain                                                                                  Pain/NSAIDS Drugs
       Ailment snapshot                                                            Therapy snapshot

Pain, by itself, is not a disease, but is an indicator of                    The key pain management drugs obtainable in the market
temporary or long-lasting damage to the human body. It is                    are aSalicylates (like Aspirin), Propionic acid derivatives
a major symptom in many medical conditions. Pain is                          (like Ibuprofen, Naproxen), Acetic acid derivatives (like
usually transitory, lasting only until the noxious stimulus                  Diclofenac), Oxicam derivatives, Fenamates, Cox-2
is removed or the underlying damage or pathology has                         Inhibitors, Sulphonanilides.
healed, but some painful conditions, such as rheumatoid
arthritis, peripheral neuropathy, cancer and idiopathic pain,
may persist for years. Pain that lasts a long time is called
chronic, and pain that resolves quickly is called acute.
Acute pain is usually managed with medications while
management of chronic pain, is much more difficult and
may require the coordinated efforts of doctors,
physiotherapists along with medicines.


          Key Drugs                                                                Key Brands
Salicylates, Propionic acid derivatives, Acetic acid                        Voveran - Novartis, Calpol - GSK, Spamo-Proxyvon -
derivatives, Oxicam derivatives, Fenamates, Cox-2                           Wockhardt, Combiflam - Sanofi, Volini - Ranbaxy
Inhibitors, Sulphonanilides

 Pain/NSAIDS Segment (2001-10 CAGR - 11.2%)                                 Pain/NSAIDS Segment - Prescription Rankings
                                                                            Company            Jan-07   Jan-08       Jan-09       Jan-10       Oct-10
            Segment Size (INR B)            Contribution to Industry (%)
                                                                            GSK                     1          1          2            2           1
                  10.0                                                      Generic-generics        2          2          1            1           2
                                                                            Dr. Reddy's             3          3          3            3           3
      9.3                                                                   Micro Labs              9          9          8            7           4
                               9.0                                          Local Companies       NA         NA          11            4           5
                                            8.7        8.7         8.6      Cipla                   4          5          5            5           6
                                                                            Ipca                   11         11         12           10           7
                                                                            Mankind               15         12           9            6           8
     14           16          21            30         35          40       Alkem                   7          8         10           12           9
                                                                            Sanofi                  6          4          4            9          10
    2000         2001         2005       2008        2009        2010


 Pain/NSAIDS Segment - Value market share (%) - 2010                        Pain/NSAIDS Segment - Prescription market share (%) - 2010

                                Novartis,                                                           GSK, 7         Dr. Reddy's,       Micro Labs,
                                                  Ranbaxy, 7
                                  7.2                                                                                   4.1               3.9
                                                        GSK, 6.4                                                                  Cipla, 3.4

                                                         Alkem, 5.8                                                           Ipca, 3.3

                                                                                                                               Mankind, 3.2
  Others, 47.5                                              Piramal                                                                 Alkem, 3.1
                                                          (Abbott),
                                                                                                                               Sanofi, 3.0
                                                              5.5
                                                                             Others, 63.5
                                                          Sanofi, 4.6                                                         Novartis, 2.7
                                                                Ipca, 4.3
                                                                                                                             Piramal
                                     Zydus-          Dr. Reddy's,
                 Elder, 3.7                                                                                                (Abbott), 2.7
                                     Cadila, 4             4
                                                                                                                          Source: Industry/MOSL



August 2011                                                                                                                                        28
                                                                                                Domestic Formulations | New Peaks

       Ailment & Therapy profile



      Gastro-intestinal (GI) Problems                                                                                 GI Drugs
       Ailment snapshot                                                       Therapy snapshot

Diseases/problems related to the GI tract mainly affect                The key GI drugs obtainable in the market are Antacids,
the stomach and the intestines in humans. While the most               Anti-reflux agents, Antiulcerants, GIT regulators,
common problems are acidity/ulcers, other more serious                 Antiflatulents, Anti-inflammatories, Anti-spasmodics,
diseases include Cancer, Cholera, Colorectal cancer,                   Laxatives, Purgatives, Digestives, Anti-emetics
Gastroenteritis, Inflammatory bowel disease, Irritable bowel
syndrome, Pancreatitis, Peptic ulcer disease,
Gastroesophageal reflux disease (GERD), etc. While some
of these problems are temporary in nature and can be
cured by medicines, diet alterations, etc., many of these
problems are chronic in nature and generally require long-
term treatments by way of medicines and
gastroenterologists consultations.



          Key Drugs                                                          Key Brands
Antacids, Anti-reflux agents, Antiulcerants, GIT regulators            Zinetac - GSK, Omez - DRL, Digene - Abbott, Aciloc -
Antiflatulents, Anti-spasmodics, Laxatives, Purgatives                 Cadila, Gelusil MPS - Pfizer


 GI Segment (2001-10 CAGR - 17.1%)                                     GI Segment - Prescription Rankings
                                                                       Company             Jan-07      Jan-08   Jan-09      Jan-10    Oct-10
          Segment Size (INR B)      Contribution to Industry (%)
                                                                       Mankind                  2           1          1          1            1
     11.3                   10.6    10.8         10.9        11.1      Cadila                   1           2          2          2            2
                                                                       Dr. Reddy's              5           3          4          4            3
                  8.0                                                  JB Chem                  3           4          3          3            5
                                                                       Torrent                  7           6          5          6            6
                                                                       Local Companies         NA         NA          14          5            7
                                                                       Piramal (Abbott)         6           5          6          7            8
                                                                       Alkem                   13          11         10          9            9
                                                                       Generic-generics         9           8          7          8           10
     17           12         24      37           43         51

    2000        2001       2005     2008        2009        2010


 GI Segment - Value market share (%) - 2010                            GI Segment - Prescription market share (%) - 2010

                  Abbott, 7.2               Zydus-                                                            Cadila           Dr. Reddy's,
                                           Cadila, 6.5                                  Mankind, 6.9
                                                      Dr. Reddy's,                                          Pharma, 4.5             4.4
                                                           5.6                                                                     Zydus-
                                                                                                                                 Cadila, 4.2
                                                    Alkem, 5.3                                                                JB Chem,
   Others, 49.9
                                                    Mankind, 5.2                                                                 4.0
                                                                                                                                Torrent, 3.6
                                                        Sun, 4.7
                                                                         Others, 60.1                                            Piramal
                                                         Aristo, 4.6                                                           (Abbott), 3.5
                                                     Piramal
                                                                                                                                 Alkem, 3.4
                   Torrent, 3.6    Ranbaxy,         (Abbott),
                                      3.6              3.8                                                 Sun, 2.7        FDC, 2.9

                                                                                                                      Source: Industry/MOSL




August 2011                                                                                                                                    29
                                                                                                         Domestic Formulations | New Peaks

       Ailment & Therapy profile



      Respiratory Diseases                                                                         Respiratory Drugs
       Ailment snapshot                                                               Therapy snapshot

Respiratory disease is the term for diseases of the                             The key Respiratory Drugs obtainable in the market are
respiratory system. These include diseases of the lung,                         Common cough & cold medicines, Corticosteroids,
pleural cavity, bronchial tubes, trachea, upper respiratory                     Bronchodilators, Mechanical ventilation.
tract and of the nerves and muscles of breathing.
Respiratory diseases range from mild and self-limiting such
as the common cold to chronic diseases like asthma/
COPD and life-threatening such as bacterial pneumonia
or pulmonary embolism. They are a common and important
cause of illness and death.




          Key Drugs                                                                  Key Brands
Common cough & cold medicines, Corticosteroids,                                Corex - Pfizer, Phensedyl - Piramal (Abbott), Asthalin -
Bronchodilators, Mechanical ventilation                                        Cipla, Seroflo - Cipla, Aerocort - Cipla


 Respiratory Segment (2001-10 CAGR - 11.4%)                                    Respiratory Segment - Prescription Rankings
                                                                               Company            Jan-07       Jan-08   Jan-09   Jan-10        Oct-10
          Segment Size (INR B)            Contribution to Industry (%)
                                                                               Cipla                    1          1         1           1          1
                                                                               Generic-generics         4          4         4           4          2
     10.0          10.0
                                                                               Zydus-Cadila             3          3         2           2          3
                                9.4                                            GSK                      2          2         3           3          4
                                              8.8          8.9          8.8    Mankind                 22         22        12           6          5
                                                                               Local Companies         NA         NA        10           5          6
                                                                               Centaur Labs             7          7         6           7          7
                                                                               Indoco                   8          8         7           8          8
     15           16            22        30              36           41
                                                                               Sanofi                   9         10         9          11          9
                                                                               Alembic                  6          6         8          10         10
    2000         2001       2005        2008             2009          2010



 Respiratory Segment - Value market share (%) - 2010                           Respiratory Segment - Prescription market share (%) - 2010

                                                         Cipla, 22.1                              Cipla, 6.1               Zydus-
                                                                                                                          Cadila, 4.9        GSK, 4.9
  Others, 33.3
                                                                                                                                    Mankind, 3.6
                                                                    Piramal                                                              Centaur
                                                                   (Abbott),                                                            Labs, 3.0
  Sanofi, 2.7                                                         9.4                                                             Indoco, 3.0

  Glenmark,                                                                                                                        Sanofi, 2.8
     2.8                                                         Pfizer, 7.8                                                       Alembic, 2.7
                                                                                  Others, 63.9
   Wockhardt,                                                     Zydus-                                                                Dr. Reddy's,
                                                                 Cadila, 5.4                                              Piramal            2.6
      3.2
                 Alembic, 3.4    Lupin, 4.8         GSK, 5.1                                                            (Abbott), 2.5

                                                                                                                            Source: Industry/MOSL




August 2011                                                                                                                                         30
                                                                       Domestic Formulations | New Peaks



              Annexure 1: Evolution of the market and state of the
              industry

              Till 1970, due to product patent regime, multinational pharmaceutical companies dominated
              the domestic market and enjoyed 80% market share. However, with the introduction of
              process patent law in 1970, the scenario changed dramatically in the last 4 decades.
              Today the domestic market is dominated by Indian companies with market share of ~80%.
              During the same period, in the absence of product patent, many multinational companies
              exited the country while many others followed cautious approach in terms of new product
              launches.


              Dominance of local companies
              Domestic pharmaceutical companies are dominant in India. Due to strong chemistry skills,
              local companies have managed to garner ~80% market share in India. Currently, the
              market is a fragmented market with the largest player holding 7% market share. The
              presence of small and regional players has increased significantly over the years. Due to
              intensified competition, prices of the drugs in India are one of the lowest in the world.
              However, with the introduction of new product patent law in 2005 as per WTO commitment,
              MNCs have started focusing on Indian operations. Many MNCs have shown interest in
              expanding their presence in India through organic and inorganic growth means.

              We believe that, in the coming years, MNCs will see their market share increasing gradually
              on led by Patented product pipeline of parent, strong brand equity among physicians,
              strong financial muscles and increased focus of large MNCs on emerging markets as a
              next growth driver in light of dwindling revenues in developed countries.

              Market share of MNCS in Emerging markets (%)

                                                      MNCs     Local

                      21                23
                                                          36

                                                                               74               78

                      79                77
                                                          64

                                                                               26               22

                    Poland            Russia             Brazil               China            India

                                                                                      Source: McKinsey/MOSL




August 2011                                                                                             31
                                                                    Domestic Formulations | New Peaks



              Branded generic nature of the industry
              Indian pharmaceutical market is largely a branded generic market where the same molecule
              is sold by number of companies under different brand name. Nearly 80% of the Indian
              retail market is made up of branded generics while rest is distributed between OTC and
              generic drugs. Due to the branded generic nature of the business, trade power lies with
              the physicians. Here, the relationship and brand equity of the pharmaceutical companies
              with physicians is a key determinant of success. The share of branded generics is in India
              is higher that some of the other emerging markets. In Brazil and Russia, branded generics
              account for 60% and 40% of the market.

              We believe that, going forward the markets will be dominated by branded generic segment
              while patented products will contribute 10% to the market demand in 2015. Indian companies
              have large options for launch of new generics from the basket of pre-1995 drugs. (The
              total no of such products is more than 200). Further, domestic players have opportunity to
              develop new combination and formulation of the products that are already in the market.
              Also it is likely that a proportion of post 1995 molecules will not get full patent protection
              due to relatively narrow definition of patentability in the India patent act.


              Low pricing levels
              Prices of medicines in India are one of the lowest in the world. Prices of drugs in India are
              at around 10-12% of US prices and for some products, prices are lower than those in
              neighbouring countries such as Sri Lanka, Pakistan and Bangladesh. Severe competition
              has resulted in such low prices. On an average there are 50 brands for any major molecule.
              The level of specialization of molecule is important driver of pricing premium.
              We believe that with the reduction in competition going forward on back of consolidation
              in the industry and shift toward specialty therapy segments, prices are likely to stabilize at
              current levels if not improve.




August 2011                                                                                              32
                                                                   Domestic Formulations | New Peaks



              Annexure 2: Regulatory framework of the Indian
              formulations industry

              Product patent regime begun from 2005
              India adopted product patent regime in 2005. Earlier, as per original Indian patent act
              1970, patents were granted on the basis of process and not products, which helped to build
              the basis of a strong and competitive domestic pharmaceutical industry. Indian
              pharmaceutical industry had price control mechanism that helped to deliver medicines at
              affordable prices to patients in India. Further, the burden of proof in case of infringement
              was on the patent holder.

              However, due to WTO commitments, India made two important amendments to the patent
              act. The first amendment introduced the mailbox system to grant exclusive marketing
              rights to post 1995 patent holders in other markets. The second amendment extended
              patent term to 20 years and shifted the burden of proof to the patent infringer.

              In 2005, the new Indian patent act was introduced to grant product patents to
              pharmaceuticals. The act defines the scope of patentability and pre-grant, post-grant
              opposition provisions, compulsory licensing and regulatory data protection

              Patentability: The patent act established product patent protection for the period of 20
              years. The act precludes salts, esters, isomers, polymorphs, metabolites, pure form, particle
              size, combinations, derivatives of know substances etc. from patent protection unless they
              differ significantly in efficacy, thus effectively restricting patentability only to the NCEs

              Pre and Post grant opposition: Both pre and post-grant opposition have been introduced
              allowing oral hearing. Opposition can be filed any time from the date of publication of the
              patent to the date of grant. This could result into several pre-grant oppositions being filed
              causing delay in patent granting process.

              Pre-grant oppositions have proven to be a big impediment to patent issuance in India. This
              allows anyone to file opposition patents on any of 11 potential grounds for 6 months after
              a patent application is published but before the patent is granted. India is the only country
              in the world with such a system. Multinational companies claim that domestic companies
              are using sequential filings to delay patents, and point to there being no mechanism to
              dismiss even the most frivolous oppositions. PhRMA reports than 200 pre-grant oppositions
              were pending as of early 2009 and most of these concerned pharmaceuticals (PhRMA,
              2009). In addition, there is no mechanism for the applicant to respond and this is likely to
              be of significant concern to branded pharmaceutical companies.




August 2011                                                                                             33
                                                                     Domestic Formulations | New Peaks



              Compulsory licensing: Under Paragraph 6 of the DOHA Declaration on TRIPS and
              Public Health (from 2001), India is permitted to use compulsory licenses under which the
              government forces a patent holder to grant use of a given product to the state. The patent
              holder will be entitled for compensation from licensee. CL will be available for export to
              developing countries such as in Africa which have insufficient or no manufacturing capacity
              in cases of national health emergencies. Thus Indian generics industry has benefited from
              compulsory licenses issued in other developing markets. Scope of compulsory licensing
              has been broadened to include affordability, non-working of patent etc. The Department
              of Industrial Policy and Promotion is considering developing new guidelines to enable the
              use of compulsory licensing beyond emergencies, such as in view of anti-competition law
              and high drug prices. This could threaten the companies in the long term, particularly if
              licenses are used in situations other than emergencies, suggesting they could be used
              more liberally.

              Regulatory data protection: Regulatory data protection is an integral part of IPR.
              Lack of the provision will be a disincentive to R&D based companies and innovators. The
              issue is in active consideration.

              Since the Patent Amendment Act of 2005, product in addition to process patents are
              recognized in India. However, from the perspective of the research-based drug industry,
              there are several problems with the IP environment in India. Pharmaceuticals are fighting
              to enforce patent linkage in India and meanwhile a string of product patent rejections have
              reduced confidence in the Indian market. Despite improvements to the patent legislation,
              issues over ever-greening mean that some brands may not necessarily receive patent
              protection in India - a move that is detrimental to branded players, but provides a significant
              opportunity for domestic generics manufacturers. So far certain drug classes, such as
              those that are viewed as expensive life-saving drugs, including cancer and HIV
              medication, have been most affected indicating for such drugs it may be more difficult to
              patent in India as the legal system is more likely to apply its discretion in the interpretation
              of the law and prevent those drugs from being patented.

              Roche was the first company to have a patent granted in India under the new patent
              regime in February 2006, a patent for Pegasus (paginated interferon alpha-2a) was granted.
              However, since then several different product patent applications for other drugs have
              been refused. Most recently, the Indian Patent Office rejected Roche's product patent for
              its new formulation of the cytomegalovirus infection treatment Calcite (valganciclovir). In
              August 2009, India rejected patent applications for Viread (tenofovir, Gilead) - a frontline
              drug against human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/
              AIDS) in developing countries. Such patent rejections will undoubtedly lower confidence
              in the Indian market as such occurrences are no longer seen as isolated events.

              This indicates that certain drug classes, such as those that are viewed as expensive life-
              saving drugs, including cancer and HIV medication, may be more difficult to patent in
              India as the legal system is more likely to apply its discretion in the interpretation of the
              law and prevent those drugs from being patented. This could have a significant impact on
              the pharmaceutical companies' choice of products to be marketed in India. However, it is
              not all bad news for pharmaceutical players, with some companies managing to emerge
August 2011                                                                                                34
                                                                    Domestic Formulations | New Peaks



              from the patent system triumphant. In February 2008, Johnson & Johnson secured a key
              patent for its antiretroviral drug Intelence (etravirine), making it the second antiretroviral
              therapy to attain exclusivity in India after Pfizer's Selzentry (maraviroc). This strengthened
              the company's position in the Indian market, and is likely to have given the pharmaceutical
              industry in general some hope.


              Pricing regulations and role of NPPA
              National Pharmaceutical Pricing Authority (NPPA) is responsible for pricing decisions in
              India. This body falls under the Ministry of Chemicals and Fertilizers and was established
              in 1997. The NPPA is responsible for setting and regulating the prices of bulk drugs and
              monitoring the availability of treatments in the market to identify shortages and take remedial
              steps. The body also maintains data on exports and imports as well as market shares and
              the profitability of individual companies. NPPA regulates the prices of certain drugs/
              formulations known as 'controlled bulk drugs', while also keeping a tab on the prices of
              drugs not in this list so that they are maintained at reasonable levels. Two main criteria are
              used for identifying controlled drugs: the drug should be of a mass consumption nature and
              there should be an absence of sufficient competition for the drug.

              As per the Drugs Prices Control Order (DPCO) of 1997, the NPPA is responsible for
              fixing and revising the prices of certain controlled bulk drugs and formulations. In 1970,
              the first DPCO was introduced, bringing in direct controls on the profitability of
              pharmaceutical businesses: a maximum of 15% pre-tax profit alongside an indirect control
              on prices. A revision introduced in 1979 established a price ceiling for certain controlled
              bulk drugs and formulations. This revision tried to regulate the retail prices by permitting a
              mark-up on ex-factory costs and around 370 drugs were implicated with direct price
              controls, a measure that affected 80% of the companies in the market.
              The subsequent revisions to the legislation reduced the number of controlled drugs to 142
              in 1987, 76 in 1995 and 74 in 1997.

              Pricing: The DPCO fixes ceiling price for some of the APIs and formulations. The APIs
              and formulations falling under the purview of the legislation are called scheduled drugs.
              The NPPA is responsible for the collection of data and study of pricing structures of APIs
              and formulations, and provides recommendation to the Ministry of Chemical and Fertilizers.
              Currently, 74 bulk drugs and the formulation thereof are under the preview of price control.

              Pricing of scheduled bulk drugs: Scheduled bulk drugs are allowed prices (excluding
              local taxes) that results in post tax return of 14% on net worth (share capital + free
              reserves - value of investments not related to bulk drug business), or a 22% return on
              capital employed (fixed asset + working capital). Vis-à-vis a new plant an internal rate of
              return based on long term marginal costing is allowed. For a bulk drug produced from the
              basic stage, a post tax return of 18% on net worth or a return of 26% of capital employed
              is allowed. The NPPA sanctions prices after reviewing detailed supporting calculations,
              and only when the approval is sanctions can players go ahead with the sale of the drug.
              Sanctioned prices can not be revised without prior approval. When there is one manufacturer
              of the bulk drug, the maximum sale price is fixed at 2/3rd of the cutoff level or weighted
              average price, depending upon the situation.

August 2011                                                                                               35
                                                                    Domestic Formulations | New Peaks



              Pricing of scheduled formulations manufactured in India: Scheduled formulations are based
              on the formula:


              RP = (MC+CC+PM+PC) x (1+MAPE/100) + ED
              RP:    Retail Price
              MC:    Material Cost
              CC:    Conversion Cost
              PM:    Packaging Material
              PC:    Packaging Charges
              MAPE: Maximum Allowable Post Manufacturing Expenses
              ED:    Excise Duty

              MAPE is intended to cover all the costs incurred by a manufacturer after packing - that is,
              transport, manufacturer's profit, dealer/retailer's profit etc. As per current order MAPE
              should not exceed 100%. Local taxes are added on at the wholesaler/retailers level and
              are not part of retail price as above.

              Further, the margins earned by distributors and retailers are also regulated. The maximum
              margin that a distributor can take is 8% of the maximum retail price; the highest permitted
              margin is 16% for retailers. In the case of decontrolled drugs, the margin set for distributors
              is 10%, while for retailers it is 20%. The NPPA further ensures that manufacturers do not
              remove the price-controlled brands from the market so that essential medicines are still
              available for customers. In spite of these regulations, however, violations have been observed
              quite frequently. For instance, a study noted that companies market products with price-
              controlled ingredients without getting the price fixed by the NPPA, even though theoretically
              they are required to obtain an official price from the NPPA every time the price of the
              controlled ingredient is revised.


              Proposed new pharmaceutical policy
              The proposed pharmaceutical policy talks about bringing 354 essential drugs under the
              purview of the DPCO. Reportedly, this account for ~50% of the industry sales. The new
              policy is likely to allow MAPE of 150% with an additional 50% margin for the companies
              that invest sufficient on new drug research.

              Currently, there is lot of pressure being built on the government by players and key
              pharmaceutical associations to revoke the new draft, as the industry views this policy as
              regressive in nature. However, it is difficult to comment on the implications of the proposed
              price control order before the final verdict is in place. If implemented in the current form,
              the new policy will have significant adverse impact on the domestic formulations players.




August 2011                                                                                               36
                     Domestic Formulations | New Peaks




                             Companies


Companies
Top buys
 Cipla
 Lupin
 Torrent Pharma
 GSK Pharma
Others
 Sun Pharma
 Cadila
 Ranbaxy
 Dr. Reddy's Labs
 Glenmark




August 2011                                         37
                                                                                                  Domestic Formulations | New Peaks




                                                                                                             MEDICINES
    MEDICINES                      CAPSULE                                                                    Score       66/100
                                                                  Cipla
                                                                                            CMP: INR281                    CIPLA IN
     Improving asset utilization                                                            TP: INR361                          Buy
        M: Mix                                                  6/10        E: Equity with doctors                              7/10

               Cipla offers a balanced play on chronic and acute                 Cipla has strong brand equity in some of the largest
               therapeutic segments.                                             therapeutic segments in the industry and ranks
                                                                                 first in the respiratory segment, fourth in the anit-
               Cipla derives 42% revenue from chronic therapeutic
                                                                                 infective and fifth in the CVS segments.
               areas and has a dominant presence in large
               segments like anti-infective and CVS.                             Based on prescription ranking, Cipla is the market
                                                                                 leader in the anti-infective and respiratory segments
               It has leadership position in the respiratory
                                                                                 and it is among the leaders in the pain management
               segment.
                                                                                 and CVS segments.




        D: Distribution & reach                              8/10           I: Introductions                                    6/10

               Cipla derives 63% of its revenue from metros and                  Cipla has been one of the most aggressive players
               tier-I cities. Distribution in metros and tier-I towns            in launching new products.
               increased over time and Cipla is expanding its
                                                                                 It launched 76 new products a year over the past
               reach in tier-II to tier-VI towns.
                                                                                 four years.
               It has one of the largest field force in the industry
                                                                                 The ramp-up in domestic formulations revenue has
               with an MR strength of 5,100.
                                                                                 been driven by existing products and new launches
                                                                                 over the past four years.




  Stock info                                 Financial & valuation summary
                                             Year     Net Sales PAT     EPS   EPS           P/E   P/BV   RoE     RoCE     EV/    EV/
  Equity Shares (m)                  802.9
                                             End       (INR M) (INR M) (INR) GR. (%)        (X)    (X)   (%)      (%)    Sales EBITDA
  52-Week Range (INR)             381/275
                                             03/10A    56,057    10,050   12.5    25.0     22.4    3.8   17.0     20.6    4.0    16.4
  1,6,12 Rel. Perf. (%)              2/3/0   03/11A    63,145    9,671    12.0    -3.7     23.3    3.4   14.5     15.8    3.6    17.4
  M.Cap. (INR b)                     225.6   03/12E    69,193    10,760   13.4    11.1     21.0    3.0   14.4     17.2    3.3    14.5
  M.Cap. (USD b)                       4.9   03/13E    79,041    13,177   16.4    22.2     17.1    2.7   15.6     18.8    2.8    12.1
  Background




                        Cipla is a leading player in the domestic formulations market and has a presence across most therapeutic
                        areas. The company also has robust exports to several markets including Europe, South Africa, Australia,
                        US and the Middle East. Cipla's strategy for regulated markets (Europe and US) exports is built around
                        supply tie-ups with global players.



August 2011                                                                                                                              38
                                                                                                                               Cipla




    Chairman Profile
  Chairman




                      Barring the past two years, Cipla has been one of the most consistent performers amongst the Indian
                      pharmaceutical companies. It was promoted by Dr K A Hamied and is currently managed by
                      Dr Yusuf Hamied, the founder's son. Establishing a strong presence in India and emerging markets
                      organically coupled with a low-risk conservative approach is his key achievement.


       C: CAGR and scale-up                                  6/10       I: Improvement in productivity                     7/10

             Cipla reported in line industry performance, posting            Cipla did not improve its MR productivity over 2004-
             revenue CAGR of 14% over FY05-11. The company                   10 as sales growth was in line with MR additions.
             scaled up the business rapidly over the years and
                                                                             MR growth was 13.4% and revenue growth was
             gained market share from competitors, in certain
                                                                             13.7% over 2004-10
             key segments.
                                                                             Revenue per MR has been stagnant at INR4.9m
             We expect Cipla to post revenue CAGR of 12%
                                                                             over 2004-10 years. However, even at this level,
             over FY11-13, which is lower than the industry
                                                                             productivity is above the industry average.
             average, mainly due to a high base and intensifying
             competition in the anti-infection segment.
             Rapid scale-up in revenue will be difficult given the
             high base and sizable presence in highly
             competitive and slow growing acute segments.


       N: Non-domestic business                             5/10        E: Earnings growth                                 7/10
             We are positive on Cipla's international business,              We expect overall top-line CAGR of 12% over FY11-
             given its strong chemistry skills, large underutilized          13, leading to EPS CAGR of 17%.
             capacities and strong generic pipeline.
                                                                             EPS growth is higher than top-line growth mainly
             Short-term performance may be muted until                       due to our expectation of increased capacity
             international regulatory authorities approve the new            utilization at Indore SEZ leading to better cost
             Indore SEZ.                                                     absorption.
             We expect the international business to post 13%
             revenue CAGR over FY11-13 led by 14% CAGR
             for formulation exports.
             Option values (approval for CFC-free inhalers and
             potential MNC contracts) can upgrade FY13 EPS.


       S: Stock Attractiveness                                                                                            14/20
             Cipla has one of the most conservative                   Stock performance (1 year)
             managements among Indian pharma companies.                                  Cipla         Sensex - Rebased
                                                                       400
             Return ratios are muted pending utilization of
                                                                       360
             significant capex over the past 2-3 years.
                                                                       320
             Cipla is valued at 21.0x FY12E and 17.1x FY13E
                                                                       280
             consolidated earnings.
                                                                       240
             Reiterate Buy with a target price of INR361 (22x           Aug-10       Nov-10       Feb-11     May-11       Aug-11
             FY13E EPS) excluding potential upsides.


August 2011                                                                                                                         39
                                                                                                                              Cipla



India formulations                     Improving asset utilization
snapshot                               Balanced play on chronic and acute therapeutic segments
Domestic formulations the
                                       Cipla, a leading company in the domestic formulations space, has a strong presence in
largest business segment
                                       therapeutic segments such as AI, respiratory and CVS. Cipla has outperformed market
for Cipla : The domestic
formulations business is the           growth over the past four years and has consistently improved its market share. Cipla offers
leading revenue contributor to         a balanced play on lifestyle and acute therapeutic segments.
Cipla's top-line though the
contribution has fallen from           1. Mix:                                                                               6/10
75% in FY01 to 44% in FY11. It
is Cipla's most profitable             Respiratory, AI, CVS, gynecology dominate sales
segment, with EBITDA
                                       The top four therapeutic segments, the respiratory, AI, CVS and gynecology segments,
contribution estimated at 44%.
This business grew at 14%              contribute ~70% of Cipla's domestic formulation revenue. Cipla is the market leader in
CAGR over the past six years.          two of the largest therapy segments, AI and respiratory segments, though dependence on
                                       AI has fallen over the years. Cipla derives 58% of its revenue from acute therapies and
EBITDA Contribution
                                       the rest from chronic therapeutic areas. Cipla's sizable presence in these segments makes
   Non-DF                  DF
                       EBITDA,44%
                                       it an attractive play in the domestic formulations business.
 EBITDA, 56%
                                       Cipla: Therapeutic break-up

                                        Gynae       GI Pain FY01                                           FY11
                                        cology                                         Dermatol
                                                    3% Mgmt            Respira                                Others
                                         2%                                            ogy 3%     CNS 3%
                                                        6%              tory                                   8%
                                                                                                                          Respirat
                                         CVS                                           HIV 3%
The largest Indian player in                                            29%                                               ory 31%
                                         15%
the industry                                                                           Ophthal
Before Abbott took over                                                                mology
                                                                                        3%
Piramal Healthcare's domestic
formulations business, Cipla
                                                                                       Pain 4%
was the leader in the domestic
formulations market for a few                                     AI
                                                                                       GI 6% Gynaec     CVS             AI 20%
years. Although Cipla occupies                                   45%                          7%        12%
second position in the
pharmaceuticals industry, it is                                                                       Source: Company/Industry/MOSL
the largest Indian company in
the domestic formulations
space. Cipla holds 5.24%               2. Equity with doctors:                                                               7/10
market share in the
pharmaceuticals industry ,             Good brand equity with physicians; strong positioning in respiratory, AI,
which has grown from 5.05%
                                       CVS segments
in 2006. It posted revenue of
14% CAGR over the past six
                                       Cipla has been a dominant player in the AI, respiratory and CVS segments, three of the
years in line with the                 largest therapeutic segments of the industry. Cipla ranks first in the respiratory segment
industry's CAGR of 14%.                and fourth in the AI segment with market shares of 22.1% and 6.7% respectively. It ranks
Market Share & growth                  fifth in the CVS segment with market share of 5.9%. In most of these segments, Cipla has
              Mkt Share (%)            grown in line with market growth over the past two years.
              Grow th (%)
                                19.8
 16.2            16.5                  In terms of the number of prescriptions written, Cipla ranks first in the AI and respiratory
        13.3             13.4
                                       segments with a prescription market share of 8.4% and 6.1% respectively and it ranks
                 5.3




                                5.2
                         5.3
        5.1
  5.1




                                       fourth and sixth in the CVS and pain management segments with a prescription market
                                       share of 5.1% and 3.4% respectively. In the AI, respiratory and CVS segments Cipla has
 2006 2007 2008 2009 2010
                                       maintained or improved its market ranking but in the other therapeutic segments it has lost
                                       out on ranking.

August 2011                                                                                                                      40
                                                                                                                                                 Cipla



Market share in key therapies (%) (2010)                              Growth comparison (%) (2010)

                             22.1                                                              Avg Gr - Company         Avg Gr - Industry

                                                                                                                           38.9




                                                                                          18.4                                           19.9
                                            8.2                                                   17.9                            18.1          18.4
                                                                          15.9                              15.0 16.2
     6.7                                                                         14.6
                 5.9
                                                           3.3



      AI         CVS      Respiratory Gynaecology Dermatology               AI                 CVS        Respiratory Gynaecology Dermatology


* Average growth over 2009-2010                                                                                              Source: Industry/MOSL

                                  Cipla's prescription ranking
                                                                 Jan-07           Jan-08             Jan-09              Jan-10             Oct-10
                                  Anti-infectives                    1                   1                   1                 1                1
                                  Respiratory                        1                   1                   2                 1                1
                                  CVS                                5                   5                   4                 4                4
                                  Pain Mgmt                          4                   5                   5                 4                5
                                  CNS                                8                   8                   8                10               11
                                  GI                                11                  10                   8                11              13
                                  Derma                             10                  12                  15                15              12
                                  Vit                               11                  11                  14                13              13
                                  Gynaec                             -                   -                  21                18              21
                                                                                                                             Source: Industry/MOSL


                                  Top 10 brands contribute 30% of revenue
                                  Cadila's top 10 brands contribute ~30% to total revenue, indicating lower brand
                                  concentration. All Cipla's top 10 brands feature among the top 300 brands of the industry.
                                  Its No1 brand Asthalin (Salbulamol, in the respiratory segment) ranks fourteenth in the
                                  industry and reported growth of 11.7% CAGR over the past four years . Cipla's top four
                                  brands belong to the respiratory segment.
                                  Cipla's top 10 brands
                                  Brand             Drug                     Product Launch              Sales (INR m)     YoY Gr (%)       CAGR (%)
                                  Seroflo        Salmeterol+Fluticasone                 2000                  925                7.0          8.2
                                  Asthalin       Salbutamol                             1993                 1,268               9.8         11.7
                                  Aerocort       Salbutamol+Beclomethasone              2008                  836               12.4            -
                                  Foracort       Formoteral+Budesonide                  2001                  761               23.2         22.0
                                  Mt pill        Mifepriston                            2002                  654               -4.8         14.6
                                  Novamox        Amoxycillin                            1980                  878               14.2          9.3
                                  Ciplox         Ciprofloxacin                          1989                  818               11.4          8.9
                                  Duolin         Salbutamol+Ipratropium                 2006                  503               26.3         60.1
                                  Amlopres-at    Atenolol+Amlodipine                    1996                  439                4.1          8.4
                                  Budecort       Budesonide                             1994                  423               24.7         18.5
                                  CAGR through 2006-10                                                                       Source: Industry/MOSL



                                    3. Distribution and reach:                                                                                  8/10
                                  Cipla derives 63% of its revenue from metros and class-I towns, in line with the industry
                                  average. Over the past four years, Cipla's revenue CAGR in rural and metro areas, has
                                  been better than that of industry average.
August 2011                                                                                                                                          41
                                                                                                                                          Cipla



Cipla: Geographical distribution of revenues (%)                         Industry: Geographical distribution of revenues (%)

     METROS      CLASS I TOWNS            CLASS II TO VI     RURAL           METROS     CLASS I TOWNS         CLASS II TO VI       RURAL

     23.0        24.2            22.3             19.2      18.3            20.6        20.9           20.0           18.1          17.3

                                 18.0             17.9      18.6            19.2                       19.5           19.4          19.6
     17.9        18.4                                                                   19.0


     29.6                        28.8             30.1      30.3                                                      32.5          32.0
                 27.9                                                       32.6        31.3           31.6


     29.6        29.5            30.8             32.8      32.7            27.6        28.9           28.9           30.0          31.0


    CY06         CY07            CY08           CY09        CY10            CY06        CY07           CY08           CY09         CY10


Cipla: Geography-wise growth rates (%)                                   Industry: Geography-wise growth rates (%)

              METROS                       CLASS I TOWNS                              METROS                   CLASS I TOWNS
              CLASS II TO VI               RURAL                                      CLASS II TO VI           RURAL                 26.2
                                                             25.0                                                                    23.5
                        21.6                                                                                                         20.7
                                           20.7                  20.5
      19.2                                                                                     17.5            17.7
                                                                  19.5      17.6                                                     17.5
   16.5                  20.3                                                                     15.6
                                           18.6                                                                16.4
                                                                 14.4       14.0
   13.0                   14.2                                                                  14.7
                                           12.3                             11.1                               13.0
                    7.7                                                                        9.5
     7.0                                                                     7.9

                                                                                                                     2.5
                                                -2.6
      CY07              CY08              CY09             CY10               CY07             CY08           CY09              CY10

                                                                                                                      Source: Industry/MOSL


                                        4. Introductions:                                                                                6/10
                                     Among the most aggressive players in the industry in product launches;
                                     revenue-per-new-launch rises
                                     Over the past four years, Cipla launched 76 new products (including line extensions)
                                     annually and the average revenue per new launch almost doubled, suggesting better
                                     penetration of launched brands. Overall, revenue growth was driven by existing products
                                     and new launches.

Cipla: New launches                                                      Cipla: Growth composition (%)

                        No. Of launches in last 2 yrs                                 New Launches               Existing Brands
                        Avg sales per launch (INR m)
                                                             105.0


                                          85.6                                                                                  12.1
                                                                                               11.0            3.4
                                                                               8.0
      54.2              53.8

                                                                                                               9.9
                                                                                                                                   7.7
                                                                               5.3             5.6
      131               157               205              147

     CY07               CY08              CY09             CY10               CY07             CY08           CY09              CY10

                                                                                                                      Source: Industry/MOSL

August 2011                                                                                                                                 42
                                                                                                                                                         Cipla



                                5. CAGR and scale up:                                                                                              6/10
                                We expect Cipla's domestic formulations business to post 12% CAGR over FY11-13, led
                                by one of the largest field forces and rapid new launches but partly tempered down by a
                                large base effect and increasing competition in some of the acute therapeutic segments.
                                This is below our forecast of 15-16% CAGR for the industry. Cipla is likely to maintain its
                                leadership in the sector given its high market share in some of the largest therapeutic
                                segments. Although Cipla employs the largest field force in the industry, its focus on
                                enhancing workforce productivity must be enhanced, for more profitable growth.

                                Cipla: Domestic formulations performance

                                                                      DF Revenue (INR m)                  YoY Grow th (%)

                                     17.7             16.7
                                                                               15.2
                                                                12.9                                                                           13.5
                                                                                                                  12.2
                                                                                                 10.2                          10.0
                                     15,014




                                                       17,523




                                                                 19,783




                                                                                22,786




                                                                                                 25,113




                                                                                                                   28,178




                                                                                                                                30,995




                                                                                                                                                35,180
                                    FY06              FY07      FY08          FY09              FY10             FY11         FY12E            FY13E


                                                                                                                             Source: Company/MOSL



                                6. Improvement in MR productivity:                                                                                 7/10
                                Sales force additions drive top-line growth
                                Over FY04-10, Cipla's domestic formulations business posted revenue CAGR of 13.7%
                                while its sales force grew at a CAGR of 13.4%, implying marginal productivity improvement
                                of the salesforce. In 2004, Cipla derived INR4.8m revenue per MR, which increase
                                marginally to INR4.9m in FY10, which is still above industry average.

Cipla: Sales force productivity (2004-10)

               No. of MRs     Revenue per MR (INR m)                                            Sales force addition CAGR (%)
                                                                                                Productivity Improvement CAGR (%)
                                                  4.9




                                                                                                                                     11.5
                                                                                         13.4
                  4.8


              2,400                           5,100
                                                                                                                                         1.9
                                                                                         0.3
              2004                            2010                                       Cipla                                  Industry

                                                                                                                      Source: Industry/Company/MOSL




August 2011                                                                                                                                                43
                                                                                                                           Cipla



                                    7. Non-domestic business:                                                            5/10
                                    Cipla's non-domestic business
                                    Positives
                                     Strong presence in emerging markets through partners.
                                     Strong chemistry skills and fully backward integrated low-cost operations.
                                     Low-risk partnership model
                                     Large underutilized capacities.
                                     Has one of the largest global CFC-free inhaler capacities.
                                     Potential tie-ups with MNCs.


                                    Risks and concerns
                                     Temporary mismatch between expenses on new SEZ without commensurate revenue
                                       streams pending regulatory approval.
                                     Working capital intensive.
                                     Lack of succession planning.
                                     Delay in planning capacity expansions for future growth.

                                    Key news flow/triggers
                                      Regulatory approvals for a new SEZ.
                                     Regulatory approvals for CFC-free inhalers in Europe.
                                     Signing of supply agreements with MNCs.

                                    Impact assessment
                                     We are positive on Cipla's international business given its strong chemistry skills, large
                                      underutilized capacities and strong generic pipeline.
                                     Short-term performance may be muted until international regulatory authorities approve
                                      the new Indore SEZ.
                                     Expect international business to record 13% CAGR over FY11-13, led by 14% CAGR
                                      of formulation exports.
                                     Option values (approval for CFC-free inhalers and potential MNC contracts) can
                                      upgrade FY13 EPS.

Sales mix (INR m)                                                                   EBITDA Contribution
                          FY09      FY10       FY11    FY12E    FY13E    FY11-13
                                                                                       Non-DF                           DF
                                                                        CAGR (%)
                                                                                       EBITDA                         EBITDA
Domestic                 22,786    25,113    28,178    30,995    35,180      11.7                                      44%
                                                                                        56%
  % of revenues            43.0      44.4      44.3      44.4       44.2
Exports                  27,430    29,004    33,548    36,971    42,645      12.7
  % of revenues            51.8      51.3      52.8      53.0       53.5
Formulations             21,635    23,188    26,756    29,431    34,729      13.9
APIs                      5,795     5,816     6,792     7,539     7,916       8.0
Other Operating Income    2,737     2,462     1,842     1,775     1,838      -0.1
  % of revenues              5.2       4.4       2.9       2.5       2.3
Total Revenues           52,953    56,579    63,567    69,741    79,663      11.9
                                                             Source: Company/MOSL                         Source: Company/MOSL




August 2011                                                                                                                    44
                                                                                                                                                                    Cipla



                               8-9. Earnings growth and stock attractiveness:                                                                                21/30
                               We believe Cipla has one of the strongest generic pipelines among Indian companies.
                               After a long delay, we believe Cipla's CFC-free inhaler pipeline is likely to be gradually
                               commercialized in Europe and upsides from high-margin opportunities like Seretide can
                               potentially come through over the next two years (our estimates do not include these
                               upsides).

                               Cipla's large manufacturing infrastructure, strong chemistry skills and huge inhaler capacity
                               make it a partner of choice for global MNCs that are ramping up their generics and
                               presence in emerging markets. This, along with its low-risk strategy and a strong capex
                               (currently underutilized) should ensure good long-term potential.

                               Temporary slow-down in overall growth, increased expenses to maintain its Indore SEZ
                               without commensurate revenue and increasing working capital requirements are our key
                               concerns.

                               We estimate base-case EPS CAGR at 17% over FY11-13 with potential upsides from
                               MNC supplies and CFC-free inhalers. The growth will be led by 13% CAGR for the
                               international business, tempered by reducing technology licensing income.

                               We are positive on Cipla's long-term prospects (especially upsides from MNC contracts
                               and commercialization of CFC-inhalers). Cipla's management has officially confirmed
                               that it is negotiating supply contracts with MNCs. However, it is taking time to consummate
                               the deal. When details of such contracts are made public, we expect an upgrade in earnings
                               to take into account upsides from such contracts. Maintain Buy with a target price of
                               INR361 (22x FY13E EPS).

Cipla RoE & RoCE (%)                                           Cipla one year forward P/E
                       RoE         RoCE                        32                     P/E (x)            Avg(x)                 Peak(x)                 Min(x)

    19.1               17.0
                                                     18.8                                                         29.5
              17.9                                             27
                                          14.4
                                 14.5
   18.7                                                                                                           22.8
              17.1     20.6
                                15.8                  15.6     22
                                           17.2


                                                               17                                                                                                   19.1

                                                                                                                  15.4
                                                               12
                                                                             Mar-07




                                                                                                Feb-08




                                                                                                                    Feb-09




                                                                                                                                      Feb-10




                                                                                                                                                           Feb-11
                                                                    Aug-06




                                                                                       Aug-07




                                                                                                         Aug-08




                                                                                                                             Aug-09




                                                                                                                                               Aug-10




                                                                                                                                                                     Aug-11




     2008      2009     2010      2011     2012E     2013E




August 2011                                                                                                                                                             45
                                                                                                         Cipla



              Annexure: Cipla non-domestic business
              Strong generic pipeline
              In the US, Cipla entered into partnership for 118 products with 22 partners. The number of
              partners increased from 17 to 22 over the past 18 months. Of the pipeline of 110 ANDAs
              filed so far, 64 have been approved and 46 are awaiting approval.

              Strengthening US parnerships (nos)

                                                                                            22

                                                                      17

                                               12

                           8




                          FY07                FY08                  FY09                   FY10

                                                                                    Source: Company/MOSL

              Strong capex…
              Over the past three years, Cipla invested INR18b in expanding its formulations, API and
              R&D capacities. A large portion is this capex is underutilized pending facility/product
              approvals from international regulatory authorities.
              Cipla's gross block (INR b)

                                                                                                  43.3

                                                                                   35.8
                                                                      30.6
                                                         24.3
                                             18.7
                                 14.5
                   10.9




                  FY05           FY06       FY07         FY08         FY09         FY10           FY11

                                                                                    Source: Company/MOSL

              …can lead to INR36b in revenue over the next few years
              Going by Cipla's past asset-turnover ratios, we estimate this large capex can generate
              INR36b in revenue in the next few years. This compares favorably with reported revenue
              of INR56b in FY10 and revenue of INR63b in FY11. Cipla's management is known for its
              conservative, low-risk strategy, which implies it would not have embarked on such a large
              capex without reasonable revenue visibility.

              Significant expenses on Indore SEZ; commensurate revenue to ramp-up
              Cipla has invested significant amounts of money, on setting up facilities, over the past 2-3
              years. One of its large investments has been in the INR8b Indore SEZ, commissioned in
              1QFY11. This is one of the largest investments in an SEZ by a pharmaceutical company.

August 2011                                                                                                46
                                                                                                                                           Cipla



                                      The company is incurring expenses of INR250m-300m per quarter on this SEZ without
                                      commensurate revenue, pending regulatory approvals. We believe the company is facing
                                      a temporary mismatch between timing of such expenses and commensurate revenue
                                      streams from this investment.

                                      The Cipla management has indicated regulatory authorities from the UK, Australia and
                                      South Africa had recently inspected this facility. It expects exports to these markets to
                                      ramp-up up gradually in forthcoming quarters. The US FDA inspection is yet to take
                                      place. The management also indicated it expected this SEZ to contribute 10-12% to overall
                                      sales by the end of FY12. This is a key factor impacting Cipla's operational performance.

                                      Potential MNC contracts can upgrade earnings, negotiations ongoing
                                      Cipla is negotiating with some MNCs like Pfizer, GSK and Boehringer for long-term
                                      supply agreements. Generally, such deals span many products and multiple markets. These
                                      potential contracts are likely to raise earnings for FY13 (not included in our estimates).
                                      We believe Cipla is well positioned to emerge as a key supplier of generic products to
                                      global MNC companies due to its large manufacturing infrastructure, strong chemistry
                                      skills and large capacity for inhalers.
                                      Pfizer Partnership: Potential Upsides
                                      Pfizer's generic revenue (USD b)                         10
                                      Estimated mark up over outsourced products (%)          25
                                      Outsourced products (percentage of total) - assumed      50
                                      Cost of outsourced products for Pfizer (USD b)            4
                                      Upside for Cipla                                 Low Case      Moderate Case           High Case
                                      Cipla's contribution to Pfizer's outsourcing (%)          1                  5                  10
                                      Sales (USD m)                                           40                200                 400
                                      INR/USD - assumed                                       43                 43                  43
                                      Sales (INR m)                                        1,720              8,600              17,200
                                      PAT Margin (%) - assumed                                 15                 15                  15
                                      PAT (INR m)                                            258              1290                2580
                                      Incremental EPS                                         0.3                1.6                 3.2
                                                                                                                   Source: Company/MOSL

                                      CFC-free inhalers a key long-term trigger
                                      Cipla has the third largest global capacity for inhalers and has been the domestic market
                                      leader in the segment over years. Cipla has the advantage of strong chemistry skills and
                                      low-cost of production in this segment.


Inhaler capacity has increased...                                        ... but utilization is at the lowest

          Aerosols/Inhalation Devices Capacity (m)            143                   Aerosols/Inhalation Devices Capacity Utilization (%)
                                                                             89
                                                                                      80
                                                                                                          77
                                            96       96
                                                                                                67
                                                                                                                    64
                       71        71
                                                                                                                              56
               54
    46

                                                                                                                                           38



   FY05       FY06    FY07     FY08        FY09      FY10    FY11          FY05      FY06     FY07      FY08      FY09      FY10      FY11

                                                                                                                     Source: Company/MOSL
August 2011                                                                                                                                     47
                                                                                                           Cipla



              Cipla is developing eight inhalers and has the third largest inhaler manufacturing capacity
              globally. It has commercialized some of its inhalers in the UK, Germany, Spain and Portugal.
              While the launch of these inhalers is a key long-term trigger, the visibility of launch time-
              lines is poor. The management expects its range of eight inhalers to be commercialized in
              Europe over the next 2-3 years and it expects 3-6 players for each product in this category,
              implying that this will be a low-competition, high-margin opportunity.

              Through its partner, Neo Labs, Cipla filed for regulatory approval of a generic Seretide
              Inhaler (GSK's US$6.5b global brand with US$250m sales in the UK) in September 2008
              in the UK, after the expiry of GSK's data exclusivity. We believe that approval for this
              product is likely to come through over the next few quarters. Our estimates do not include
              these upsides.
              CFC-free Inhalers: Potential Upside
              Current global market size of inhalers (USD b)          17
              No of generic players including Cipla (assumed)          6
              Price erosion (%) (assumed)                          70%
              Addressable market size (USD b)                        5.1
              Upside for Cipla                                Low Case       Moderate Case           High Case
              Cipla's market share (%)                                 1                   3                    5
              Sales (USD m)                                           51                153                  255
              INR/US dollar (assumed)                                 43                  43                   43
              Sales (INR m)                                       2,193               6,579               10,965
              PAT margin (%) (assumed)                                20                 20                    20
              PAT (INR m)                                           439               1,316                2,193
              Incremental EPS                                        0.5                 1.6                  2.7
                                                                                            Source: Industry/MOSL

              Reducing technology licensing income
              Given Cipla's partnership model, it earns licensing income from its partners. This income
              has been a key contributor to Cipla's earnings and it recorded 26% CAGR to INR1.5b
              over FY07-10. However, this has fallen to INR637m by FY11, adversely impacting Cipla's
              earnings growth (licensing income has 100% contribution to the company's PBT).
              Reducing licensing income
                                                   Tech Licensing Income (INR m)
                                                             2,178


                                                  1,534                 1,538



                                        765
                                                                                    637
                  415        424                                                               510       510




                 FY05       FY06       FY07       FY08       FY09          FY10     FY11     FY12E      FY13E

                                                                                           Source: Company/MOSL
              Forex cover - currently under hedged
              Cipla's management continues with its policy of hedging net exposure on a monthly basis.
              Current forex hedges are US$190m (down from USD230m in September 2010), which
              we believe will be inadequate if the rupee were to appreciate significantly against the US
              dollar. We believe Cipla is under-hedged, given its annual net exposure of ~US$300m as
              well as some exposure to the euro.
August 2011                                                                                                     48
                                                                                                                                Cipla



Financials and valuations: Cipla


Income Statement                                    (INR Million)   Ratios
Y/E March                    2010      2011     2012E      2013E    Y/E March                     2010      2011    2012E     2013E
Gross Sales                54,117    61,798    67,966     77,825    Basic (INR)
   Change (%)                  7.8     14.2       10.0       14.5   EPS                           12.5       12.0     13.4      16.4
Exports                    29,004    33,548    36,971     42,645    Cash EPS                      14.6       15.2     17.3      20.7
Net Domestic Sales         24,592    27,755    30,447     34,558    BV/Share                      73.5       82.9     93.0     105.3
Other Operating Income      2,462     1,842      1,775      1,838   DPS                            4.7        6.5      5.7       7.0
Net Income                 56,057    63,145    69,193     79,041    Payout (%)                    19.8       30.8     25.0      25.0
   Change (%)                  7.1     12.6         9.6      14.2
Total Expenditure          42,315    49,927    53,550     60,726    Valuation (x)
EBITDA                     13,742    13,218    15,643     18,315    P/E                                      23.0     20.7      16.9
   Margin (%)                24.5      20.9       22.6       23.2   PEG (x)                                  -6.1      1.8       0.8
Depreciation                1,671     2,542      3,144      3,476   Cash P/E                                 18.2     16.0      13.4
EBIT                       12,071    10,677    12,499     14,839    P/BV                                      3.3      3.0       2.6
Int. and Finance Charges      230       173        283        126   EV/Sales                                  3.6      3.2       2.8
Other Income - Rec.           469     1,122      1,234      1,357   EV/EBITDA                                17.2     14.3      12.0
PBT before EO Items        12,311    11,625    13,450     16,070    Dividend Yield (%)                        2.4      2.1       2.5
Extra Ordinary Expense       -950          0          0         0
PBT but after EO Exp.      13,261    11,625    13,450     16,070    Return Ratios (%)
Tax                         2,435     1,954      2,690      2,893   RoE                           17.0       14.5     14.4      15.6
   Tax Rate (%)              18.4      16.8       20.0       18.0   RoCE                          20.6       15.8     17.2      18.8
Reported PAT               10,826     9,671    10,760     13,177
Adj PAT                    10,050     9,671    10,760     13,177    Working Capital Ratios
   Change (%)                29.4       -3.8      11.3       22.5   Fixed Asset Turnover (x)        2.8       2.5       2.2      2.4
   Margin (%)                17.9      15.3       15.6       16.7   Debtor (Days)                  102         86        93       89
                                                                    Inventory (Days)                98       110       107       103
Balance Sheet                                       (INR Million)   Working Capital (Days)         201       195       191       183
Y/E March                    2010      2011     2012E      2013E
Equity Share Capital        1,606     1,606      1,606      1,606   Leverage Ratio (x)
Reserves                   57,410    64,966    73,036     82,918    Current Ratio                   3.6       4.0      3.7       3.7
Revaluation Reserves           90        90         90         90   Debt/Equity                     0.0       0.1      0.0       0.0
Net Worth                  59,106    66,661    74,731     84,614
Loans                          51     5,719      3,719        480   Cash Flow Statement                                  (INR Million)
Deferred Liabilities         1792      2131       1351        869   Y/E March                      2010     2011     2012E     2013E
Capital Employed           60,948    74,511    79,801     85,962    Op. Profit/(Loss) before Tax 13,742   13,218    15,643    18,315
                                                                    Interest/Dividends Recd.        469    1,122      1,234     1,357
Gross Block                28,973    42,411    47,411     51,911    Direct Taxes Paid            -2,285   -1,614    -3,470    -3,375
Less: Accum. Deprn.         8,861    11,465    14,609     18,085    (Inc)/Dec in WC              -1,289   -2,889    -2,367    -3,359
Net Fixed Assets           20,112    30,946    32,802     33,826    CF from Operations           10,637    9,837    11,039    12,938
Capital WIP                 6,842     2,853     2,853      2,853    EO expense                     -950        0          0         0
Investments                 2,464     5,904     5,904      5,904    CF from Oper. incl EO Exp. 11,587      9,837    11,039    12,938

Curr. Assets               43,673    46,599    52,259    59,620     (inc)/dec in FA             -5,037     -9,386   -5,000    -4,500
Inventory                  15,126    19,062    20,318    22,209     (Pur)/Sale of Investments   -1,651     -3,440        0         0
Account Receivables        15,666    14,908    17,690    19,190     CF from Investments         -6,688    -12,826   -5,000    -4,500
Cash and Bank Balance         621     1,010      2,077     3,855
Others                     12,260    11,619    12,175    14,367     Issue of Shares              6,912        867        0         0
Curr. Liability & Prov.    12,144    11,791    14,017    16,241     Inc/(Dec) in Debt           -9,352      5,668   -2,000    -3,239
Account Payables           12,144    11,791    14,017    16,241     Interest Paid                 -230       -173     -283      -126
Net Current Assets         31,530    34,808    38,242    43,380     Dividend Paid               -2,139     -2,983   -2,690    -3,294
Appl. of Funds             60,948    74,511    79,801    85,962     CF from Fin. Activity       -4,809      3,379   -4,973    -6,660
                                               E: MOSL Estimates
                                                                    Inc/Dec of Cash                 91        390    1,066     1,779
                                                                    Add: Beginning Balance         530        621    1,010     2,077
                                                                    Closing Balance                621      1,010    2,077     3,855


August 2011                                                                                                                        49
                                                                                                       Domestic Formulations | New Peaks




                                                                                                                   MEDICINES
    MEDICINES                      CAPSULE                                                                          Score         62/100
                                                                   Lupin
     Transformed transnational                                                                  CMP: INR450
                                                                                                TP: INR514
                                                                                                                                       LPC IN
                                                                                                                                       Buy
        M: Mix                                                   5/10          E: Equity with doctors                                   6/10

               Lupin is a balanced play on the domestic chronic                     Lupin has moderate brand equity in the
               and acute therapeutic segments.                                      pharmaceutical industry but good brand equity in
                                                                                    select segments like the anti-TB segment, in which
               The company derives 43% revenue from chronic
                                                                                    it ranks No1 in the industry.
               therapeutic areas. The respiratory, AI, CVS and
               Anti-TB segments contribute 56% to Lupin's                           Lupin has been gradually improving its brand equity
               domestic formulation revenue.                                        in the CVS and anti-diabetes segments and has
                                                                                    improved its prescription ranking in the segments
                                                                                    considerably over the past four years.




        D: Distribution & reach                                  6/10          I: Introductions                                         6/10

               Lupin derives 70% of its revenue from metros and                     Lupin has been aggressive in launching new
               tier-I cities.                                                       products over the past four years, compared with
                                                                                    its peers. It launched 67new products and line
               Distribution reach in metros and tier-I towns
                                                                                    extensions a year over the past four years.
               increased significantly and the contribution of other
               geographies to revenue has reduced over the past                     New launches contributed significantly to Lupin's
               four years.                                                          revenue growth over the past few years.
               Lupin has a field force of 3,682 MRs.




  Stock info                                  Financial & valuation summary
  Equity Shares (m)                  446.2    Year     Net Sales PAT     EPS         EPS        P/E    P/BV    RoE      RoCE     EV/    EV/
                                              End       (INR m) (INR m) (INR)       Gr. (%)     (x)     (x)    (%)       (%)    Sales EBITDA
  52-Week Range (INR)             520/348
                                              03/10A    47,405     6,816    15.3     34.8       29.4    7.8    34.1     27.5     4.4     24.6
  1,6,12 Rel. Perf. (%)           12/20/29
                                              03/11A    57,068     8,582    19.3     25.9       23.3    6.1    29.3     25.1     3.6     19.5
  M.Cap. (INR b)                     200.8    03/12E    64,784     9,913    22.3     15.5       20.2    5.0    27.1     28.2     3.2     16.8
  M.Cap. (USD b)                        4.4   03/13E    74,127     11,418   25.7     15.2       17.5    4.1    25.7     27.1     2.7     13.8
  Background




                        Lupin is a second tier company actively targeting the regulated generics markets. Historically very strong in
                        the anti-TB segment, it has over the years built up expertise in fermentation-based products and segments
                        like cephalosporins, prils and statins. It is also in the process of building a niche portfolio of oral contraceptives
                        and branded products in the US market.



August 2011                                                                                                                                      50
                                                                                                                                   Lupin
                                                                                                                                   Lupin




    Chairman Profile
  Chairman




                       Lupin is promoted by Dr. D. B. Gupta (Chairman), a first generation entrepreneur supported by a team of
                       senior professionals including Dr. Kamal Sharma (MD). Rapid scale-up in the US market (despite being
                       a relatively late entrant), significant improvement in the product and geographical mix over the past 5 years
                       coupled with strong backward integration skills are the key achievements.


       C: CAGR and scale-up                                  8/10         I: Improvement in productivity                       5/10

             Lupin significantly outperformed the industry with                Lupin was not able to improve MR productivity over
             revenue CAGR of 21% over FY05-11. It has scaled                   2004-10.
             up the business rapidly though on a very low base.
                                                                               Revenue per MR was stagnant at INR3.6m over
             However, the main growth driver was the tripling of
                                                                               2004-10. At this level the productivity is in line with
             its field force and aggressive new launches, rather
                                                                               the industry average.
             than an increase in productivity.
             We expect Lupin to post 18% revenue CAGR over
             FY11-13 outperforming the industry, led by a rapidly
             expanding presence in the fast growing chronic
             therapeutic areas like CVS and anti-diabetes
             segments, an increase in the field force and
             aggressive new launches.


       N: Non-domestic business                              6/10         E: Earnings growth                                   6/10
             We are positive about Lupin's international                       We expect overall top-line CAGR of 14% over FY11-
             business, given its strong and differentiated portfolio           13 leading to EPS CAGR of 15.3%.
             in the US and its gradually expanding presence in
                                                                               Regulated markets and India formulations will be
             Japan.
                                                                               key growth drivers.
             We expect Lupin's international business to post
             13% CAGR over FY11-13, excluding upsides from
             Para-IV sales.
             Option values include upsides from Para-IV
             products in the US.




       S: Stock Attractiveness                                                                                                14/20
             Cautious approach to international expansion               Stock performance (1 year)
             coupled with a highly profitable US business has                               Lupin        Sensex - Rebased
                                                                         520
             ensured good return ratios in the past. We expect
                                                                         465
             this to sustain in future.
                                                                         410
             Lupin is valued at 20.2x FY12E and 17.5x FY13E
                                                                         355
             consolidated earnings.
                                                                         300
             Reiterate Buy with a target price of INR514 (20x             Aug-10        Nov-10       Feb-11      May-11       Aug-11
             FY13E EPS) excluding potential one-off upsides.



August 2011                                                                                                                              51
                                                                                                                                       Lupin



India formulations                     Transformed transnational
snapshot                               Transiting from acute to chronic, generic to branded
Domestic        formulations:
                                       Lupin is among the leading Indian companies in the domestic formulations segment. The
Meaningful contributor to
                                       company holds a leading position in the anti-TB segment and is among the leaders in the CVS
revenue, profitability
The domestic formulations              and anti-diabetes segments. Lupin's revenue growth over the past few years has been
business is a meaningful               driven by an augmented sales force and new launches. Lupin derives a large part of its
contributor to Lupin's revenue         revenue from metros and class-I towns. It is expected to sustain its out-performance to the
and EBITDA with contribution           industry in future.
of ~25%. Unlike some leading
companies in the domestic
formulations space, we                 1. Mix:                                                                                        5/10
believe Lupin's profitability in
this business is lower than its        Respiratory, AI, CVS, anti-TB dominate sales
peers due to a significant
presence in anti-TB segments
                                       The top four therapeutic segments, CVS, AI, respiratory and anti-TB contribute ~56% to
and rapid expansion of sales           Lupin's domestic formulations revenue. Lupin derives ~43% of its domestic formulations
force. The business posted             revenue from chronic therapeutic segments. It used to derive about half its domestic
revenue CAGR of 21.5% over             formulations revenue from the Anti-TB segment 10 years ago. However, Lupin's
the past six years.
                                       dependence on the segment has fallen considerably and it now contributes ~10% to
EBITDA Contribution                    revenues. Meanwhile, It has increased its presence in the CVS and respiratory segments
                       DF EBITDA       over the past 10 years.
                          25%
                                       CVS, AI, Respiratory and Anti-TB dominates the therapy mix


                                                               FY01                                                   FY05
    Non-DF                               Pain                                                        Others
                                                      Others                                          20%
  EBITDA, 75%                             4%                                    AI                                            CVS       AI
                                                       9%         CVS
                                       VMN                                     21%                                            11%      23%
                                                                  5%                               Pain
                                       11%                                        Respira          3%
Among the top 10 players
                                                                                   tory
in the industry                        CNS
                                                                                    0%
Lupin ranks among the top 10           1%
players in the domestic
                                                                                               Diabetes
formulations industry in terms           GI
                                                                                                  5%                                Respira
of revenues. It commands                1%
                                                                                                           GI                        tory
2.69% market share, which                                  Anti-TB                                                Anti-TB
                                                                                                          3%                          2%
                                                            48%                                                    33%
has grown from 2.32% in
2006. Lupin has outperformed
the industry over the past six
years with revenue CAGR of                                                Others            FY11
                                                                                                                    CVS
21.5% against the industry                                                 22%
                                                        Pain                                                        21%
CAGR of 14%.
                                                        2%
Lupin
                                          Gynaecology
               Mkt Share (%)                  3%
               Grow th (%)
                                                                                                                               AI
  25.0 24.2                                                                                                                   16%
                 22.7
                                18.7
                         12.3                   CNS
                                                4%                                                              Respiratory
                                                               Diabetes       GI
                                                                                        Anti-TB                    9%
                                                                  7%
  2.32




                         2.75

                                2.69




                                                                              6%
         2.5

                 2.8




                                                                                         10%

 2006 2007 2008 2009 2010                                                                                       Source: Company/Industry/MOSL



August 2011                                                                                                                               52
                                                                                                                    Lupin



              2. Equity with doctors:                                                                              6/10
              Brand equity among physicians strong in some therapeutic segments
              Lupin's brand equity is strong in some therapeutic segments like anti-TB, in which it ranks
              No1, but overall it has average brand equity. In CVS, respiratory and the anti-diabetes
              segment, Lupin ranks No. 7, No. 6 and No. 7 with market share of 5.6%, 4.8% and 3.8%
              respectively. It has been improving its market share in these segments over the past few
              years, outperforming the segments' growth.

              Market share in key therapies (%)                         Growth comparison (%) (2010)

                     5.6                                                    Avg Gr - Company          Avg Gr - Industry
                                   4.8                                                                      39.5

                                                       3.8
                                                                                         27.7
                                                                                                                 23.3
                                                                            17.917.9
                                                                                               16.2




                     CVS        Respiratory        Anti-Diabetic             CVS        Respiratory       Anti-Diabetic


              * Average growth over 2009-2010                                                    Source: Industry/MOSL



              In terms of the number of prescriptions written, Lupin has consistently led the anti-TB
              segment with a prescription market share of 51%. It has been gradually improving its
              brand equity in the CVS and anti-diabetes segments and improved its prescription ranking
              in these segments over the past four years. It ranks fifth in the CVS segment with a
              prescription market share of 5% and ranks sixth in the anti-diabetes segment with a market
              share of 4.9%.

              Lupin's prescription ranking
                                      Jan-07                 Jan-08           Jan-09           Jan-10            Oct-10
              Anti-TB                          1                    1               1              1                1
              CVS                              9                    7               7              6                5
              Anti-diabetic                    8                    8               8              8                6
              CNS                             13                   13              17             13               13
              Anti-infectives                 13                   12              13             14               15
              Respiratory                     17                   16              16             17               15
                                                                                                 Source: Industry/MOSL



              Top 10 brands contribute 20% of the revenues
              Lupin's top 10 brands contribute ~20% to its revenue, indicating low brand concentration.
              None of these feature in the top 100 brands of the industry. Its No1 brand, Tonact,
              (Atorvastatin, CVS) ranks No101 in the industry and it reported 19% growth over the past
              four years. The absence of big brands indicates Lupin's limited brand building ability in
              segments other anti-TB therapy.



August 2011                                                                                                               53
                                                                                                                                                    Lupin



                                     Lupin's top 10 brands
                                     Brand               Drug                  Product Launch               Sales (INR m)    YoY Gr (%)       CAGR (%)
                                     Tonact         Atorvastatin                        2000                    476               18.4         19.1
                                     Ramistar       Ramipril                            2001                    273               13.5         11.0
                                     Gluconorm-g    Glimepiride+Metform.                2003                    262               43.8         38.6
                                     R-cinex        Anti-TB                             1986                    257               -8.3          -6.6
                                     Budamate       Formoteral+Budesonide               2004                    252               20.3         30.3
                                     L-cin          Levofloxacin                        2002                    245                2.1           9.2
                                     Odoxil         Cefadroxil oral                     1989                    214              -10.9           2.2
                                     Esiflo         Salmeterol+Fluticasone              2004                    207               13.4         14.1
                                     Rablet         Rabeprazole                         2002                    197               18.6         20.4
                                     Percin         Other quino                         2007                    194               23.1             -
                                     CAGR through 2006-10                                                                      Source: Industry/MOSL



                                       3. Distribution and reach:                                                                               6/10
                                     Lupin derives 70% of its revenue from metros and class-I towns compared with 63% of
                                     the industry average. Over the past four years, revenue CAGR for various geographies
                                     has been much higher than that of industry average except for in rural areas. The out-
                                     performance is significant in metros and class-I towns. The contribution of the metro
                                     region to the sales grew from 28% to 34% over the past five years.


Lupin: Geographical distribution of revenues (%)                          Geographical distribution of revenues: Industry (%)

     Metros       Class I Tow ns        Class II to VI        Rural            Metros           Class I Tow ns           Class II to VI        Rural


                                15.4             13.3           11.9          20.6             20.9              20.0          18.1           17.3
     17.3         17.0
                                19.2             18.2           17.6                                                           19.4           19.6
     19.3         18.9                                                        19.2             19.0              19.5

                                                 36.7           36.3                                                           32.5           32.0
     35.5         34.7          35.9                                          32.6             31.3              31.6



     27.8         29.5          29.5             31.9           34.2          27.6             28.9              28.9          30.0           31.0


    CY06          CY07          CY08           CY09            CY10           CY06             CY07             CY08           CY09           CY10


Lupin: Geography-wise growth rates (%)                                    Industry: Geography-wise growth rates (%)

         Metros     Class I Tow ns           Class II to VI       Rural         Metros           Class I Tow ns             Class II to VI       Rural

     31.4                                                                                                                                      26.2
                          27.2                                                                                                                 23.5
    22.2                      25.2                               27.2                                                                          20.7
                                         21.7                                                         17.5              17.7
  21.2                                                                       17.6                        15.6                                  17.5
                     22.7                                        17.6                                                   16.4
      21.0                                                       15.1        14.0
                                          14.7                                                         14.7             13.0
                                                                             11.1
                    10.6                                                                              9.5
                                                                 6.2
                                                                              7.9
                                         6.0
                                                                                                                             2.5
                                               -3.0

     CY07                CY08           CY09                  CY10             CY07               CY08                  CY09                 CY10


                                                                                                                               Source: Industry/MOSL




August 2011                                                                                                                                            54
                                                                                                                                Lupin



                               4. Introductions:                                                                                6/10
                              Lupin has been among the most aggressive players in launching new
                              products
                              Lupin has aggressively launched new products over the past four years, compared with its
                              peers. It launched 67 new products annually (including line extensions) over the past four
                              years. However average revenue per new launches has been stable over the period. New
                              launches contributed significantly to Lupin's revenue growth over the past few years though
                              average revenue per new launch declined from INR104m in CY07 to INR65m in CY10.

Lupin: New launches                                                Lupin: Growth composition (%)

                  No. Of launches in last 2 yrs                                    New Launches             Existing Brands
                  Avg sales per launch (INR m)
      104.4
                      97.3
                                                                           7.0
                                    73.2                                                     11.0
                                                  64.5
                                                                                                                          7.8

                                                                          17.2
                                                                                                       14.0
                                                                                             11.7                        10.8
      100             91           177            175
                                                                                                       -1.6
      CY07        CY08            CY09            CY10                    CY07               CY08      CY09              CY10


                                                                                                              Source: Industry/MOSL



                               5. CAGR and scale up:                                                                            8/10
                              We expect Lupin's domestic formulations to post revenue of 18% CAGR over FY11-13
                              led by a rapidly expanding presence in fast growing chronic therapeutic areas like CVS
                              and anti-diabetes, increase in its field force and new launches. We believe Lupin will
                              continue its out-performance of the industry as historically it has grown much faster than
                              the industry, clocking revenue of 21.5% CAGR over FY05-11.

                              Lupin: Domestic formulations revenue rampup

                                                          India Formulation Sales (INR M)           Grow th (%)
                                           26.1

                                                         20.2                               19.4
                                                                                                     18.0              18.0
                                                                         16.4

                                                                                                                      22,087
                                                                                                    18,718
                                                                                        15,863
                                                    11,412              13,281
                                         9,496


                                         FY08           FY09            FY10                FY11    FY12E             FY13E

                                                                                                             Source: Company/MOSL




August 2011                                                                                                                       55
                                                                                                                       Lupin



                                   6. Improvement in MR productivity:                                                  5/10
                                  Lupin's top-line growth is driven by additions to its sales force, but has not
                                  been able to improve productivity
                                  Lupin's domestic formulations business revenue posted 20.4% CAGR over FY04-10 and
                                  its sales force grew by 20.2% CAGR, implying stagnant MR productivity. In 2004, Lupin
                                  derived revenue of INR3.6m per MR, which was the same in FY10. Compared with the
                                  average of companies covered in this report, Lupin's performance was below average.


Lupin: Sales force productivity

                No. of MRs        Revenue per MR (INR m)                        Sales force addition CAGR (%)
                                                                                Productivity Improvement CAGR (%)
               3.6                            3.6




                                             3,682                            20.2
                                                                                                             11.5

              1,219
                                                                               0.1                            1.9
              2004                           2010                             Lupin                         Industry


                                                                                                Source: Company/Industry/MOSL



                                   7. Non-domestic business:                                                           6/10
                                  Lupin's non-domestic business snapshot
                                  Positives
                                   Lupin has demonstrated one of the fastest ramp-ups in the US, led by branded and
                                     generic products, and gradually increasing precription share.
                                   Trying to build a differentiated portfolio in the US by targeting niche segments of oral
                                     contraceptives and ophthalmology, coupled with some branded products.
                                   It is the only Indian player to have a branded presence in the US and has been an early
                                     entrant in Japan through Kyowa acquisition.
                                   It is highly cost competitive due to backward integration for most of its products.


                                  Risks & concerns
                                   Generic competition for Suprax (a key product) in US.
                                   Delays in receiving US FDA approval for oral contraceptives.
                                   No major progress on NCE research despite working on it for many years.


                                  Key news flows/triggers
                                    Ramp-up in Antara sales in the US.
                                   US FDA approvals for oral contraceptives.
                                   Potential acquisitions in Japan and Latin America.




August 2011                                                                                                               56
                                                                                                                       Lupin



                             Impact assessment
                              We are positive about Lupin's international business, given its strong and differentiated
                               portfolio in the US and its gradually expanding presence in Japan.
                              We expect international business to record 12% CAGR over FY11-13, excluding
                               upsides from Para-IV sales. Our estimates factor in the potential competition for
                               Suprax in US.
                              Option values include upsides from Para-IV products in the US.


Sales mix (INR m)                                                             EBITDA Contribution
                     FY09     FY10     FY11     FY12E    FY13E FY11-13E
                                                              CAGR (%)                                               DF
                                                                                                                   EBITDA
India
                                                                                                                    25%
   APIs              2,192    2,302    2,514    2,640     2,772       5.0
   Formulations     11,412   13,281   15,863   18,718    22,087      18.0
Total               13,604   15,583   18,377   21,358    24,859      16.3
% of sales            35.6     32.7     32.0     32.8      33.3
Regulated
   APIs                650      543      597      579       562      -3.0
   Formulations     17,341   23,234   28,229   31,385    35,539      12.2
                                                                                Non-DF
Total               17,991   23,777   28,826   31,965    36,101      11.9
                                                                                EBITDA
% of sales            47.1     49.9     50.2     49.0      48.4                  75%
Un-regulated
   APIs              4,296    4,565    5,477    5,751    6,039       5.0
   Formulations      1,930    3,204    4,393    5,711    7,139      27.5
Total                6,226    7,769    9,870   11,462   13,177      15.5
% of sales            16.3     16.3     17.2     17.6      17.7
Others                 417      550      348      390       437
Grand Total         38,238   47,678   57,422   65,175   74,574      14.0
                                                    Source: Company/MOSL




                              8-9. Earnings growth and stock attractiveness:                                        20/30
                             Lupin is likely to gradually improve its fundamentals, led by an expanding US generics
                             pipeline, niche/Para-IV opportunities in the US, strong performance in emerging markets
                             (including India) and sustained traction in the Japanese business.

                             While our estimates factor in generic competition for Suprax from FY13 onwards, any
                             out-of-court settlement for Suprax patent litigation is likely to raise our earnings forecast
                             for FY13.

                             Lupin continues to target niche, low-competition opportunities to drive growth and improve
                             profitability. Its initiatives in the US oral contraception space are efforts in this direction.

                             The stock trades at, 19.7x FY12E and 17.1x FY13E EPS with a sustained ~25-30% RoE.
                             Our estimates do not include one-time upsides for Lupin's FTF pipeline in the US. Maintain
                             Buy with a target price of INR514 (20x FY13E EPS).




August 2011                                                                                                                 57
                                                                                                                                                                     Lupin



Lupin RoE & RoCE                                                 Lupin one year forward P/E

                      RoE (%)          RoCE (%)                   29                     P/E (x)              Avg(x)                    Peak(x)              Min(x)
      37.1
               34.1
                                                                  23                                          23.9
                                29.3       27.1
                                                       25.7
               27.5                        28.2                   17                                                                                                 19.5
     25.6                       25.1                  27.1                                                     14.6

                                                                  11

                                                                                                                      7.8
                                                                   5




                                                                                Mar-07




                                                                                                    Feb-08




                                                                                                                      Feb-09




                                                                                                                                          Feb-10




                                                                                                                                                            Feb-11
                                                                       Aug-06




                                                                                           Aug-07




                                                                                                             Aug-08




                                                                                                                               Aug-09




                                                                                                                                                   Aug-10




                                                                                                                                                                      Aug-11
      2009     2010             2011       2012E       2013E



                                  Lupin non-domestic business: key trends, triggers & risk
                                  US generics: One of the fastest entries by an Indian player
                                  Lupin has the distinction of achieving the fastest ramp-up in the US by any Indian company.
                                  This was achieved through brand acquisition/in-licensing, focusing on niche, low-competition
                                  products, supported by an aggressive pace of filings in the US market. Lupin, which
                                  entered the US market in FY05, posted FY11 US revenues of INR20b, a growth of 9x
                                  over FY06-11.

                                  Targeting niche opportunities resulted in better profitability
                                  Lupin has differentiated itself from other Indian generic companies in the US by:
                                  1. Focusing on branded innovator products - it is the only Indian company to do so.
                                  2. Launching at least one low-competition/patent challenge product in the US every year
                                     over the past few years.

                                  A few years ago, Lupin in-licensed Suprax brand from Fujisawa (the latter had stopped
                                  promoting this brand in the US) and ramped-up sales of the product through price increases,
                                  volume growth and the launch of line extensions of the brand. While Lupin does not
                                  disclose Suprax revenues separately, we estimate they contributed USD80m-90m to its
                                  FY11 US revenues.

                                  Expanding brand portfolio in the US through acquisitions/in-licensing
                                  After its success with Suprax, Lupin has attempted to expand its brand portfolio in the US
                                  by acquiring the Antara brand in FY10 and in-licensing a couple of brands from other
                                  players. While it is yet to replicate the Suprax success for Antara, we believe the brand
                                  holds promise. The other two brands are likely to contribute to revenue in the long-term.

                                  Lupin's niche initiatives in the US have helped it to achieve two main objectives.
                                  1. It rapidly ramped up US revenues with 9x growth CAGR over FY06-11 to INR20b.
                                  2. It significantly improved the profitability of its US operations since branded innovator
                                     products and low-competition/patent challenge generic products enjoy higher profitability
                                     compared with normal generic products.

                                  Niche/patent challenge upsides in the US to continue
                                  The trend of launching niche products in the US will continue. After the contribution from
                                  generic Lotrel during FY11, Lupin has scheduled similar launches in FY12. The
                                  commercialization of its oral contraceptive (a US$4.5b market in the US) products will
                                  add to its protfolio from FY13.
August 2011                                                                                                                                                                    58
                                                                                                        Lupin



              The management has guided for 12 new launches in the US in FY12 of which 3-4 are
              expected to be oral contraceptives (with branded market size of USD300m-500m). The
              remaining products will target a branded US market worth about USD5b.

              Lupin has made 23 filings in the oral contraceptives segment as part of its strategy to
              exploit niche and low-competition segments. To strengthen this portfolio, it is focusing on
              filing products in the ophthalmology and dermatology segments.

              Given that Lupin will be a new player in the oral contraceptives market, we have
              conservatively factored in upsides from this opportunity from FY13 despite the management
              guidance of launching 3-4 products in FY12.

              These potential low-competition launches along with a steady ramp-up in its branded
              revenue in the US (sales force strength increased from 70 to 160 MRs) will enable Lupin
              to sustain double-digit growth.

              We factor in 9% revenue CAGR for Lupin's US operations (over FY11-13) after factoring
              in the slowdown in the US branded business and potential competition from generic Suprax.
              Our estimates exclude potential one-off opportunities.

              Japan can be a large opportunity in the long term
              Japan is the new emerging opportunity in the global generics market with the Japanese
              government trying to reduced overall healthcare costs in the US$70b Japanese
              pharmaceutical market. The government has, in the past two years, legislated to encourage
              the use of generics.

              However, given the Japanese market's concern for quality products and a brand-conscious
              mentality, progress has been gradual for generic products. We, however, believe the Japanese
              market holds huge long-term potential for generic players who can convince the Japanese
              population about the quality of their products. A successful presence in such a market will
              require tie-ups/associations with known local names since Indian companies are still
              unknown entities in Japan.

              One of the few companies to access Japan's generics market
              Given Lupin's entry in the Japanese generic market through the Kyowa acquisition, it is
              better positioned to exploit the Japanese generics opportunity compared with its peers.
              Lupin acquired Kyowa in October 2007 and ramped-up the business to INR6.2b by FY11.
              We estimate 17% revenue CAGR for the Japanese operations, led mainly by new launches.

              Gradually expanding profitability of Japanese operations
              Lupin expanded gross margins for Kyowa from 33% to 40% over the past two years and
              is shifting part of its manufacturing to its Indian facilities, which is likely augment margins.
              In FY12 Lupin will shift some of trhe API production to India and the formulation
              manufacturing will be gradually shifted to India from FY13. These initiatives are likely to
              gradually expand the profitability of Lupin's Japanese operations in the long-term.




August 2011                                                                                                59
                                                                                                                                 Lupin



Financials and valuations: Lupin


Income Statement                                     (INR Million)   Ratios
Y/E March                        2010     2011    2012E     2013E    Y/E March                       2010     2011    2012E    2013E
Net Sales                      47,405   57,068   64,784    74,127    Basic (INR)
   Change (%)                    25.5     20.4      13.5      14.4   EPS (Fully Diluted)              15.3     19.3     22.3     25.7
Total Expenditure              38,869   46,410   52,590    59,521    Cash EPS (Fully Diluted)         18.1     23.2     26.7     30.7
EBITDA                          8,536   10,659   12,194    14,605    BV/Share                         57.7     73.5     90.5    108.6
   Margin (%)                    18.0     18.7      18.8      19.7   DPS                               2.8      3.2      6.0      6.4
Depreciation                    1,239    1,755     1,955     2,248   Payout (%)                       21.2     18.9     28.6     28.6
EBIT                            7,297    8,903   10,239    12,357
Int. and Finance Charges          385      325       304       232   Valuation (x)
Other Income - Rec.             1,445    1,341     2,921     1,625   P/E (Fully Diluted)                       23.3     20.2     17.5
                                                                     Cash P/E (Fully Diluted)                  19.4     16.9     14.6
PBT before EO item              8,357    9,920   12,857    13,750    P/BV                                       6.1      5.0      4.1
PBT after EO item               8,357    9,920   12,857    13,750    EV/Sales                                   3.6      3.2      2.7
Tax                             1,360    1,169    1,928     2,063    EV/EBITDA                                 19.5     16.8     13.8
  Tax Rate (%)                   16.3     11.8     15.0      15.0    Dividend Yield (%)                         0.7      1.3      1.4
Reported PAT                    6,997    8,750   10,928    11,688
PAT Adj for EO items            6,997    8,750   10,163    11,688    Return Ratios (%)
  Change (%)                     37.8     25.1     16.1      15.0    RoE                              34.1     29.3     27.1     25.7
  Margin (%)                     14.8     15.3     15.7      15.8    RoCE                             27.5     25.1     28.2     27.1
Less: Minority Interest           180      168      250       270
Adj Net Profit                  6,816    8,582    9,913    11,418    Working Capital Ratios
                                                                     Fixed Asset Turnover (x)          2.3     2.3       2.3      2.2
Consolidated Balance Sheet                           (INR Million)   Debtor (Days)                      90      87        87       85
Y/E March                        2010     2011    2012E     2013E    Inventory (Days)                  75       77       77        77
Equity Share Capital              889      892       892       892   Wkg. Capital Turnover (Days)     122      131      127       125
Fully Diluted Equity Capital      889      889       889       889   Leverage Ratio
Other Reserves                 24,789   31,918   39,473    47,551    Debt/Equity (x)                   0.4      0.4      0.2      0.1
Total Reserves                 24,789   31,918   39,473    47,551
Net Worth                      25,678   32,811   40,366    48,444    Cash Flow Statement                                  (INR Million)
Minority Interest                 255      515       515       515   Y/E March                     2010        2011    2012E    2013E
Deferred liabilities            1,435    1,411     1,411     1,411   Oper. Profit/(Loss) before Tax 8,536    10,659   12,194   14,605
Total Loans                    11,399   11,624     8,624     5,624   Interest/Dividends Recd.       1,445     1,341    2,921    1,625
Capital Employed               38,767   46,361   50,916    55,994    Direct Taxes Paid             -1,090    -1,193   -1,928   -2,063
                                                                     (Inc)/Dec in WC               -4,478    -2,401   -1,497   -2,794
Gross Block                    22,937   26,389   30,889    35,389    CF from Op. incl EO Exp.       4,414     8,405   11,690   11,374
Less: Accum. Deprn.             7,072    9,075   11,030    13,278
Net Fixed Assets               15,865   17,313   19,859    22,110    (inc)/dec in FA                -6,454   -4,996   -4,500   -4,500
Capital WIP                     3,579    5,312    5,312     5,312    (Pur)/Sale of Investments         -49      233        0        0
Investments                       264       32       32        32    CF from Investments            -6,503   -4,763   -4,500   -4,500
Goodwill & Intangibles          3,197    3,255    3,255     3,255
Curr. Assets                   27,755   34,967   39,049    44,034    Change in Net Worth             6,029      300     -250     -270
Inventory                       9,715   12,000   13,605    15,567    Inc/(Dec) in Debt                -834      226   -3,000   -3,000
Account Receivables            11,266   12,558   14,252    16,308    Interest Paid                    -385     -325     -304     -232
Cash and Bank Balance           2,015    4,201    4,714     4,747    Dividend Paid                  -1,483   -1,658   -3,123   -3,340
Others                          4,759    6,208    6,478     7,413    CF from Fin. Activity           3,327   -1,457   -6,677   -6,841
Curr. Liability & Prov.        11,893   14,518   16,591    18,748
Account Payables                9,649   11,800   12,957    14,825    Inc/Dec of Cash                1,238     2,186      513       33
Provisions                      2,243    2,718    3,634     3,923    Add: Beginning Balance           778     2,015    4,201    4,714
Net Current Assets             15,862   20,449   22,459    25,285    Closing Balance                2,015     4,201    4,714    4,747
Appl. of Funds                 38,767   46,361   50,916    55,994
E: MOSL Estimates




August 2011                                                                                                                         60
                              Domestic Formulations | New Peaks




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August 2011                                                  61
                                                                                                  Domestic Formulations | New Peaks




                                                                                                            MEDICINES
    MEDICINES                      CAPSULE                                                                   Score        61/100
                                                      Torrent Pharma
     All's in place                                                                        CMP: INR589
                                                                                           TP: INR762
                                                                                                                                TRP IN
                                                                                                                                Buy
        M: Mix                                                  6/10       E: Equity with doctors                                7/10

               Torrent is one of the better plays on remedies for               Torrent enjoys good brand equity with specialist in
               high-growth lifestyle segments of CNS, CVS and                   the CNS and CVS segments.
               diabetes. It derives 59% of its revenue from chronic
                                                                                In the CNS segment, Torrent Pharma ranks 3rd
               lifestyle segments.
                                                                                with a prescription market share of 8.1% and in
               CVS is the highest contributor with 35% contribution             the CVS segment its ranks seventh with a
               followed by CNS (21%) and Gastro Intestinal (17%).               prescription market share of 4.6%.
                                                                                Torrent Pharma has either maintained or improved
                                                                                its prescription ranking in the most of the
                                                                                therapeutic segments in which it operates.




        D: Distribution & reach                                 6/10       I: Introductions                                      5/10

               Torrent Pharma derives 73% of its revenue from                   Torrent Pharma's new product launch rate has been
               metros and tier-I cities.                                        good compared with its peers in the industry. It
                                                                                launched 38 new products a year (including line
               The contribution of rural areas to revenue has fallen
                                                                                extensions) over the past four years.
               over the past five years from 18.2% to 12.8%.
                                                                                It's revenue growth is driven by its existing products
               Over the past four years, revenue CAGR for all
                                                                                as well as new launches.
               geographies has been below the industry average
               except in Metro's.
               Torrent Pharma has a field force of 3,600




  Stock info                                 Financial & valuation summary
                                             Year     Net Sales PAT     EPS      EPS       P/E    P/BV   RoE     RoCE    EV/    EV/
  Equity Shares (m)                   84.6
                                             End       (INR m) (INR m) (INR)    Gr. (%)    (x)     (x)   (%)      (%)   Sales EBITDA
  52-Week Range (INR)             687/497
                                             03/10A    19,040    2,680   31.7    9.9       18.6   6.0    36.2    28.7     2.7     12.5
  1,6,12 Rel. Perf. (%)            3/19/18   03/11A    22,265    2,702   31.9    0.8       18.4   4.9    29.2    24.1     2.3     12.4
  M.Cap. (INR b)                      54.6   03/12E    25,596    3,392   40.1    25.6      14.7   3.8    29.3    24.9     1.9      9.6
  M.Cap. (USD b)                       1.2   03/13E    29,817    4,029   47.6    18.8      12.4   3.1    27.7    25.1     1.6      8.0
  Background




                        Though ranked 17th in terms of total revenue in the domestic formulations segment, Torrent derives its
                        strength from being the leader in some of the most lucrative and fastest growing chronic therapy segments.
                        It has consistently maintained its leadership in these therapeutic classes, with strong brands and new
                        product launches.



August 2011                                                                                                                              62
                                                                                                                         Torrent Pharma




    Chairman Profile
  Chairman




                      Torrent Pharma was set-up by Late U N Mehta. Mr Mehta started his career as a clerk with the government.
                      Later, he took a job as a medical representative for Sandoz. Post which he started his own business in
                      pharmaceutical and eventually established the company. Currently, his son Mr. Sudhir Mehta and
                      Mr. Sameer Mehta handle the operations of the company.


       C: CAGR and scale-up                               6/10         I: Improvement in productivity                           3/10

             Torrent Pharma has significantly outperformed the              Torrent Pharma ranks very low compared to its
             industry with revenue CAGR of 19% over FY05-11.                larger peers when it comes to field force
             The company has scaled up the business rapidly                 productivity.
             albeit on a low base and growth has been achieved
                                                                            However the company has managed to improve
             largely because of a favorable therapeutic mix,
                                                                            the productivity over the last 6 years. Revenue per
             improvement in brand equity and increase in field
                                                                            MR improved from Rs1.5m in 2004 to Rs2.2m in
             force productivity.
                                                                            2010
             We expect Torrent Pharma to post 16% CAGR
             over FY11-13, outperforming the industry, led by a
             strong presence in fast growing chronic therapeutic
             areas like CVS, CNS and anti-diabetes and
             improvement in brand equity.


       N: Non-domestic business                           6/10         E: Earnings growth                                       8/10
             We are positive about Torrent Pharma's non-                    We expect overall top-line CAGR of 16% over FY11-
             domestic business given it's has strong presence               13 leading to EPS CAGR of 22.1%.
             in Latin America and expanding its reach in various
                                                                            Earnings growth will be driven by the domestic
             regulated and emerging markets.
                                                                            formulation business and increase in profitability
             We expect the international business to post                   of international operations.
             15.7% CAGR over FY11-13 mainly led by the US
             and Latin American markets.
             The company has tie-up with 3 global innovators
             for supplying various products. We expect these
             supplies to grow at 16.5% CAGR over FY11-13.
             Option values include upsides from NCE business.


       S: Stock Attractiveness                                                                                                 14/20
             A focused and cautious approach to international        Stock performance (1 year)
             expansion along with a highly profitable domestic                    Torrent Pharma            Sensex - Rebased
             business has ensured good return ratios, RoIC is         700
             estimated at 40% over the next two years.                650

             Torrent Pharma is valued at 14.7x FY12E and 12.4x        600

             FY13E consolidated earnings.                             550
                                                                      500
             Reiterate Buy with a target price of INR762 (16x          Aug-10       Nov-10         Feb-11       May-11         Aug-11
             FY13E EPS).



August 2011                                                                                                                             63
                                                                                                                            Torrent Pharma



India formulations                             All's in place
snapshot                                       Strong profitable growth, robust balance sheet, attractive valuation
Domestic formulations -
major      contributor      to
                                               Torrent derives its strength from its strong positioning in some of the most lucrative and
revenue, profits
                                               fastest growing chronic therapy segments. It has consistently maintained its leadership in
The domestic formulations
business contributes ~40% to                   these therapeutic classes, with strong brands and new product launches. Torrent has 6
Torrent Pharma's revenue. The                  brands in the industry's top 300 brands, and has 37 brands in leadership positions in their
segment is the most profitable                 respective molecule segments. The company has a field force of 3,600 medical
for Torrent and contributes                    representatives (MRs). Domestic business has grown at a CAGR of 19% over the last 6 years
~70% to consolidated EBITDA.                   through FY11. Torrent derived 40% of its revenue from the domestic formulations business
                                               in FY11, down from 85% in FY04 due to relatively higher growth in its international business.
Revenue/PBT Contribution

         Torrent Pharma
 Non-DF EBITDA      DF EBITDA                  1. Mix:                                                                                 6/10
      30%              70%
                                               Lifestyle segments like CVS, CNS, anti-diabetes dominate sales
                                               Torrent Pharma derives 59% of its revenue from chronic therapeutic segments, which
                                               dominate the company's revenue mix. The top five therapeutic segments including CNS,
                                               CVS, GI, AI and anti-diabetes contribute ~91% to Torrent's domestic formulations revenue.
The leading player in the                      Torrent is among the market leader in two of the fastest growing therapeutic segments,
chronic            therapeutic                 CNS and CVS. Torrent's sizable presence in the chronic therapy segments makes it an
segment
                                               attractive play in the domestic formulations business.
Torrent Pharma has grown its
market share over the years due
to a significant presence in fast              Therapeutic break-up (FY05)                      Therapeutic break-up (FY11)
growing chronic therapeutic
                                                                                                     Cardiac               Anti-diabetic
areas. It is among the largest                              Anti-      others                        CNS                   Anti-infectives
companies in the chronic
                                                  Pain    diabetic       2%                          Pain                  GI
                                                  6%                                                 others      5%
segments. The company's                                     3%                     Cardiac
market share has gone up from                                                       36%
                                                 Anti-                                                                             33%
1.9% in 2006 to 2% in 2010. The                 infec-                                              19%
company posted 19% CAGR                          tives
over the past five years against                 14%
14% CAGR for the industry.
                                                                                                   4%

Market share has increased                        CNS
                                                  17%                            GI                                                  5%
marginally                                                                                            13%
                                                                                22%                                        21%
                 Mkt Share (%)
                 Grow th (%)                                                                                   Source: Company/Industry/MOSL
 2.1                                      25
 2.1                                      20
 2.0                                      15
                                               2. Equity with doctors:                                                                 7/10
 2.0                                      10
 1.9                                      5    Strong brand equity among specialists, among leaders in the CVS and CNS
 1.9                                      0    Torrent has been a dominant player in two of the industry's fastest growing therapeutic
       2006
              2007
                     2008
                            2009
                                   2010




                                               segments i.e CNS and CVS. Torrent ranks No2 in the CVS and No.3 in CNS segments
                                               with a value market share of 6.8% and 8.6% respectively.




August 2011                                                                                                                                  64
                                                                                                                                  Torrent Pharma



Market share in key therapies (%)                                        Growth comparison (%) (2010)

                                                      8.6                              Avg Gr - Company            Avg Gr - Industry
                                                                                                                                         18.7
                                                                                       17.9                                       18.0
                                                                                16.8                           17.1
           6.8
                                                                                                       15.1



                              3.6




           CVS                GI                      CNS                         CVS                         GI                       CNS

* Average growth over 2009-2010                                                                                             Source: Industry/MOSL


                                    In terms of prescriptions Torrent Pharma has been one of the leading players in two of the
                                    industry's fastest growing therapeutic segments viz. CNS and CVS. Torrent Pharma ranks
                                    No3 in the CNS and No. 7 in CVS segments with a prescription market share of 8.1% and
                                    4.6% respectively. It ranks sixth in the GI segment. Over the last 4 years, the company
                                    has either maintained or improved its ranking in almost all the therapeutic areas it operates
                                    in.

                                    Torrent's Prescription ranking has improved across therapy segments
                                                               Jan-07             Jan-08             Jan-09              Jan-10              Oct-10
                                    CVS                              8                  8                6                     5               7
                                    CNS                              2                  2                2                     3               3
                                    Anti Diabetics                  17                 10               13                    13              14
                                    Anti infectives                 14                 14               14                    15              14
                                    GI                               7                  6                5                     6               6
                                                                                                                            Source: Industry/MOSL



                                    Top 10 brands contribute 30% of the revenues
                                    Torrent Pharma's top 10 brands contribute ~30% to total revenue, which shows low brand
                                    concentration compared with other leading companies. Four brands of the company feature
                                    among the top 300 brands of the industry. Torrent Pharma's No1 brand, Dilzem, (Diltiazem,
                                    CVS) ranks 102nd in the industry and it posted revenue CAGR of 13% over the past four
                                    years. Seven of its top 10 brands have grown at double digit CAGR over past 4 years.

Top 10 brands of the company
Brand                  Drug                                 Product                    Product           Sales              YoY Gr.           CAGR
                                                            Category                    Launch         (INRm)                  (%)              (%)
Dilzem                 Diltiazem                            CVS                               1987        475                   5.7             13.0
Nikoran                Nicorandil                           CVS                               1997        410                  17.6             19.2
Alprax                 Alprazolam                           CNS                               1988        396                   0.0              5.4
Nebicard               Nebivolol                            CVS                               2003        252                  14.5             19.8
Topcef                 Cefixime                             Anti-infective                    1994        235                  18.7             16.0
Domstal                Domperidone                          Gastro-intestinal                 1988        229                   5.5           5.4
Droxyl                 Cefadroxil                           Anti-infective                    1989        213                   3.3           3.5
Azulix-mf              Glimepiride+Metformin                Diabetes                          2002        197                 27.5           33.2
Deplatt-a              Aspirin + Clopidogrel                CVS                               2002        191                 11.8           24.3
Lamitor                Lamotrigine                          CNS                               1998        170                 17.0           18.5
CAGR through 2006-10                                                                                                        Source: Industry/MOSL

August 2011                                                                                                                                       65
                                                                                                                                   Torrent Pharma



                                       3. Distribution and reach:                                                                           6/10
                                   Torrent Pharma derives 73% of its revenue from metros and class-I towns, compared
                                   with 63% of the industry average, suggesting a focus on these geographies. In the past
                                   four years, revenue CAGR for all geographies has been lower than that of the industry
                                   average except for Metros. The contribution of rural areas to revenue has fallen over the
                                   past five years from 18.2% in 2006 to 12.8% in 2010.



Geographical distribution of revenues - Torrent Pharma (%)                   Geographical distribution of revenues - Industry (%)

      Metros     Class I Tow ns          Class II to VI           Rural            Metros      Class I Tow ns        Class II to VI       Rural

     18.2       17.6            16.9             13.8             12.8
                                                                                 20.6         20.9           20.0           18.1          17.3
                                                 14.2             14.2
     15.7       15.6            15.8
                                                                                 19.2         19.0           19.5           19.4          19.6
                                                 27.8             28.5
     30.6       28.7            29.9
                                                                                 32.6         31.3           31.6           32.5          32.0


                38.1            37.4             44.3             44.5
     35.5
                                                                                 27.6         28.9           28.9           30.0          31.0


    CY06        CY07            CY08             CY09            CY10            CY06         CY07           CY08          CY09          CY10


Geography-wise growth rates - Torrent Pharma (%)                             Geography-wise growth rates - Industry (%)

       Metros     Class I Tow ns               Class II to VI        Rural         Metros       Class I Tow ns          Class II to VI          Rural

                                                                                                                                            26.2
                                               41.1
                                                                                                                                             23.5
       26.6                                                                        17.6              17.5           17.7                    20.7
                                                                                                      15.6
                                                                19.0            14.0                                  16.4                 17.5
     16.8              12.7                                        16.4                              14.7
                                        10.7                                    11.1                                 13.0
  14.1                                                           16.0                   7.9
                          9.7                                      7.9                               9.5
     10.6                 6.3                  6.7
                 3.8                    -3.0                                                                               2.5

     CY07          CY08                 CY09                CY10                   CY07              CY08           CY09                 CY10


                                                                                                                            Source: Industry/MOSL



                                       4. Introduction:                                                                                     5/10
                                   Torrent Pharma's pace of new product launches has been moderate
                                   compared with its peers in the industry. There has been significant
                                   improvement in revenue per new product launched
                                   Torrent's new product launch rate has been moderate compared to its peers in the industry.
                                   It has launched 38 new products annually (including line extensions) over the last 4 years.
                                   The revenue growth is driven by both existing products as well as new launches. The
                                   average revenue per new launch has risen substantially in the past four years from Rs32.7m
                                   in 2006 to Rs118m in 2010, suggesting better penetration of launched brands.



August 2011                                                                                                                                        66
                                                                                                                             Torrent Pharma



Torrent Pharma's - new launches                                     Torrent Pharma's growth compositions (%)

                  No. Of launches in last 2 yrs                                        New Launches               Existing Brands
                  Avg sales per launch (INR m)
      126
                                    137.2
                                                       118.3
                                                                                                                 10.1
                   73                                                      9.8
                                                                                                                                    9.9
                                    43                39                                         1.3
                   57.1                                                                                           9.1
                                                                           8.1                   6.9
      32.7                                                                                                                          5.9


     CY07         CY08             CY09               CY10                 CY07                  CY08            CY09               CY10

                                                                                                                         Source: Industry/MOSL


                                5. CAGR and scale-up:                                                                                     6/10
                               We expect 16% CAGR from Torrent Pharma's domestic formulations business led by a
                               strong presence in the fastest growing chronic therapeutic segments. We believe the
                               company will continue to outperform the industry and its peers over the foreseeable future.
                               Historically the company has outperformed industry in this segment with FY05-11 revenue
                               CAGR of 19% versus that of 14% for the industry during the same period. We believe
                               that, Torrent is likely to strengthen its presence in key therapeutic areas, improving its
                               ranking in the industry.
                               Torrent Pharma: Domestic formulations revenue ramp-up

                                                                    Revenues (INR m)               Grow th (%)
                                                                                                                                      11,285

                                                                   38.8                                                     9,563
                                                        35.0                                                     8,389
                                                                                                        7,254
                                                                            5,813         6,240
                                                                   5,444
                                                           3,921                                                                          18.0
                                                                                                        16.3     15.6        14.0
                                   2,848      2,904
                                                                                 6.8       7.3

                                            2.0

                                   FY04       FY05         FY06    FY07     FY08          FY09          FY10     FY11       FY12E     FY13E

                                                                                                                        Source: Company/MOSL


                                6. Improved MR productivity:                                                                              3/10
                               Torrent's topline growth is driven by both addition to the MR strength and
                               improvement in the MR productivity. However MR productivity is low
                               compared to large peers
                               Torrent Pharma has done a good job over the past six years with a improvement in workforce
                               productivity. Over FY04-10, Torrent Pharma's domestic formulations business revenue
                               posted 19.3% CAGR and its sales force expanded by just 10.7% CAGR, implying
                               significant productivity improvement of the workforce. In 2004, Torrent derived revenue
                               of Rs1.5m per MR, which rose to Rs2.3m in 2010. However the MR productivity is still
                               very low compared to large peers.
August 2011                                                                                                                                      67
                                                                                                            Torrent Pharma



Torrent: Salesforce productivity

              No. of MRs     Revenue per MR (INR m)                                Sales force addition CAGR (%)
                                             2.3                                   Productivity Improvement CAGR (%)


               1.5
                                                                          10.7

                                          3,600
                                                                                                          11.5
              1,959
                                                                          7.8
                                                                                                           1.9
              2004                        2010                           Torrent                         Industry

                                                                                              Source: Company/Industry/MOSL



                                   7. Non-domestic business snapshot:                                                  6/10
                               Positives
                                Strong presence in emerging markets like Brazil and RoW markets. Increasing presence
                                  in other emerging markets
                                Increasing presence in US market with healthy product pipeline
                                Strong chemistry skills and backward integrated low-cost operations.
                                Improving profitability of international subsidiaries.


                               Risks & concerns
                                Delay in getting regulatory approvals for the products
                                Worsening of pricing environment in key markets like Germany and US.
                                Rupee appreciation vs US$ may have negative impact on earnings.
                                Continued losses at Russian subsidiaries will impact overall profits.


                               Key news flows/triggers
                                Ramp up in US revenue in FY12-13
                                Begining of supplies to AstraZeneca
                                Improvement in profitability of international business


                               Impact assessment
                                Expect the international business to post 15% CAGR over FY11-13 led mainly by US
                                 and CRAMS supplies to AstraZeneca
                                We expect the international business to record 16% CAGR over FY11-13 excluding
                                 low-competition and Para-IV products in the US.
                                Option values include upsides from future inorganic initiatives.




August 2011                                                                                                               68
                                                                                                                                               Torrent Pharma



Sales mix (INR m)                                                                               EBITDA Contribution
                        FY09      FY10       FY11   FY12E     FY13E    FY11-13
                                                                      CAGR (%)                                             Torrent Pharma
Domestic formulation 6,240      7,254       8,389    9,563    11,285      16.0                        Non-DF                                                   DF
  YoY Growth (%)           7.3   16.3        15.6     14.0       18.0                                 EBITDA                                                 EBITDA
International formulation7,970 9,157       10,702   12,421    14,331      15.7                         30%                                                    70%
  YoY Growth (%)         37.8    14.9        16.9     16.1       15.4
Latin America           2,566   3,006       3,519    4,223     4,983      19.0
Russia/CIS                658     391         583      525        577     -0.5
Europe (ex-Germany)     1,011   1,163       1,245    1,469     1,704      17.0
Germany (Heumann)       2,573   2,547       2,986    3,135     3,292       5.0
RoW                       885   1,141       1,276    1,429     1,643      13.5
US                        278     909       1,093    1,640     2,131      39.6
CRAMS                   1,601   1,849       2,096    2,431     2,845      16.5
  YoY Growth (%)           7.4   15.5        13.4     16.0       17.0
Others                      53     69          33       36         40     10.0
  YoY Growth (%)         64.8    29.7       -52.8     10.0       10.0
Net Sales              15,864  18,329      21,220   24,451    28,500      15.9
  YoY Growth (%)         20.9    15.5        15.8     15.2       16.6
Other operating income    441     710       1,045    1,145     1,317      12.2
  YoY Growth (%)           3.7   61.0        47.1       9.6      15.0
Income from op.        16,306  19,040      22,265   25,596    29,817      15.7
  YoY Growth (%)         20.4    16.8        16.9     15.0       16.5
                                                          Source: Company/MOSL



                                  8-9. Earnings growth and stock attractiveness:                                                                                 22/30
                                  Over the past five years Torrent posted earnings CAGR of 34% and CAGR of capital
                                  employed in the business was 17%. Torrent consistently improved its profitability, with
                                  RoCE increasing from 14.5% in FY05 to 24.1% in FY11. Torrent is likely to post earnings
                                  of 22% CAGR over FY11-13, in line with strong operating performance. It is likely to
                                  sustain high return ratios despite large capex and growing cash on its books. We believe
                                  current valuations do not reflect the improvement in business profitability, turnaround of
                                  international operations and Torrent's strong positioning in the domestic formulations segment.
                                  Torrent should trade at a premium to most mid-cap pharmaceutical companies, and its
                                  valuation gap vis-à-vis frontline pharmaceutical companies should fall, going forward. The
                                  stock trades at 14.7x FY12E and 12.4x FY13E earnings. We believe Torrent's superior
                                  financial performance will drive re-rating. Maintain Buy with a target price of INR762
                                  (16x FY13E EPS), an upside of 26%.

Torrent Pharma RoE & RoCE                                          Torrent Pharma one year forward P/E

                    RoE (%)              RoCE (%)                  24                     P/E (x)               Avg(x)               Peak(x)            Min(x)
    42.0

                 36.2                                                                                             21.4
                                                                   18
                                                                                                                                                                  13.4
                               29.2                                                                               11.9
                                            29.3
                                                       27.7        12
     28.1       28.7

                               24.1         24.9       25.1         6

                                                                                                                    3.9
                                                                    0
                                                                        Mar-05


                                                                                 Dec-05




                                                                                                       May-07


                                                                                                                  Jan-08




                                                                                                                                      Jul-09


                                                                                                                                               Mar-10


                                                                                                                                                        Dec-10
                                                                                                                            Oct-08
                                                                                             Aug-06




                                                                                                                                                                   Aug-11




    FY09        FY10           FY11        FY12E      FY13E


August 2011                                                                                                                                                                 69
                                                                                                               Torrent Pharma



Financials and valuations: Torrent Pharma


Income Statement                                 (INR Million)   Ratios
Y/E March                    2010     2011    2012E     2013E    Y/E March                    2010     2011    2012E     2013E
Net Revenues               19,040   22,265   25,596    29,817    Basic (INR)
Change (%)                   16.8     16.9      15.0      16.5   EPS (INR)                     31.7    31.9     40.1      47.6
Total Expenditure          14,944   18,173   20,445    23,748    Cash EPS                      35.1    39.3     51.6      61.1
% of Sales                   78.5     81.6      79.9      79.6   BV/Share                      98.2   120.8    153.1     191.2
EBITDA                      4,096    4,092     5,151     6,069   DPS                            7.0     9.3      8.1       9.5
Margin (%)                   18.5     14.4      16.4      16.7   Payout (%)                    25.6    29.1     20.0      20.0
Depreciation                  661      626       952    1,137
                                                                 Valuation (x)
EBIT                        3,435    3,466     4,199     4,932
                                                                 P/E                                    18.4     14.7     12.4
Int. and Finance Charges      251      121       172       172
                                                                 Cash P/E                               15.0     11.4      9.6
Other Income - Rec.           127       81       109       153
                                                                 P/BV                                    4.9      3.8      3.1
PBT before EO Expense 3,312          3,427     4,137     4,913
                                                                 EV/Sales                                2.3      1.9      1.6
Extra Ordinary Exp./(Inc.)    368        0       -21         0
                                                                 EV/EBITDA                              12.4      9.6      8.0
PBT after EO Expense        2,944    3,427     4,158    4,913
                                                                 Dividend Yield (%)                      1.6      1.4      1.6
Current Tax                   705      720       745       884
Deferred Tax                  -74        5         0         0   Return Ratios (%)
Tax                           632      725       745       884   EBITDA Margins (%)           18.5      14.4     16.4     16.7
Tax Rate (%)                 19.1     21.2      18.0      18.0   Net Profit Margins (%)       14.1      12.1     13.3     13.5
Reported PAT                2,312    2,702     3,413     4,029   RoE                          36.2      29.2     29.3     27.7
Adj PAT                     2,680    2,702     3,392     4,029   RoCE                         28.7      24.1     24.9     25.1

                                                                 Working Capital Ratios
Balance Sheet                                    (INR Million)
                                                                 Asset Turnover (x)             1.4      1.4      1.3       1.3
Y/E March                   2010      2011    2012E     2013E
                                                                 Fixed Asset Turnover (x)       3.6      3.6      3.3       3.3
Equity Share Capital         423       423       423       423
                                                                 Debtor (Days)                   56       55       57       59
Total Reserves             7,887     9,801   12,531    15,755
Net Worth                  8,310    10,224   12,955    16,178    Leverage Ratio (x)
Deferred liabilities         499       480       480       480   Current Ratio                 2.1       1.7      1.8      1.9
Total Loans                5,224     5,721     5,721     5,721   Interest Cover Ratio         13.7      28.7     24.5     28.7
Capital Employed          14,033    16,441   19,155    22,378    Debt/Equity                   0.6       0.6      0.4      0.4


Gross Block                8,129    10,385   12,685    14,885    Cash Flow Statement                              (INR Million)
Less: Accum. Deprn.        2,718     3,343    4,295     5,432    Y/E March                   2010      2011    2012E     2013E
Net Fixed Assets           5,411     7,041    8,390     9,452    Oper. P/L before Tax         4,096   4,092    5,151     6,069
Capital WIP                1,098     1,500    1,200     1,500    Interest/Dividends Recd.       127      81      109       153
Investments                1,412     1,460    1,460     1,460    Direct Taxes Paid             -717    -744     -745      -884
                                                                 (Inc)/Dec in WC                349     577     -598      -611
Curr. Assets              11,607    15,346   17,990    21,490    CF from Operations           3,856   4,005    3,917     4,726
Inventory                  3,236     5,048    5,794     6,676
Account Receivables        2,982     3,404    4,090     4,927    EO Expense / (Income)        368         0      -21         0
Cash and Bank Balance      3,883     4,788    5,856     7,105    CF from Oper. incl EO Exp. 3,488     4,005    3,938     4,726
Loans & Advances           1,506     2,106    2,250     2,782
Curr. Liability & Prov.    5,496     8,907    9,884    11,524    (inc)/dec in FA             -1,487   -2,657   -2,000   -2,500
Account Payables           4,216     7,479    7,839     9,140    (Pur)/Sale of Investments      -17      -48        0        0
Provisions                 1,280     1,427    2,045     2,384    CF from Investments         -1,504   -2,705   -2,000   -2,500
Net Current Assets         6,111     6,440    8,106     9,966
Appl. of Funds            14,033    16,441   19,155    22,378    (Inc)/Dec in Debt             398      513      -16         0
E: MOSt Estimates                                                Interest Paid                -251     -121     -172      -172
                                                                 Dividend Paid                -592     -787     -683      -806
                                                                 Others                         44       -1        0         0
                                                                 CF from Fin. Activity        -401     -395     -870      -977


                                                                 Inc/Dec of Cash             1,583      905    1,068     1,249
                                                                 Add: Beginning Balance      2,300    3,883    4,788     5,856
                                                                 Closing Balance             3,883    4,788    5,856     7,105


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                                                                                                Domestic Formulations | New Peaks




                                                                                                           MEDICINES
     MEDICINES                    CAPSULE                                                                   Score       64/100
                                                       GSK Pharma
     Of patent and parent                                                                 CMP: INR2,155                  GLXO IN
                                                                                          TP: INR2,330                        Buy
         M: Mix                                                4/10       E: Equity with doctors                              9/10

               GSK derives majority of its revenue from the acute              Enjoys strong brand equity in its some of the largest
               therapeutic segments and has very little presence               therapeutic segments in the industry. It ranks no.1
               in the chronic segments.                                        in dermatology segment, no.3 in Pain management
                                                                               and Vitamins segments and no5 in AI and
               GSK derives 95% of its revenues from acute
                                                                               respiratory segments.
               therapeutic segments with dominant presence in
               Anti-infcetives, dermatology, pain management and               Based on prescription ranking, GSK Pharma is the
               Vitamins.                                                       market leader in Dermatology, vitamins and pain
                                                                               managements segment while ranks no.4 in
               It also enjoys leadership position in the
                                                                               respiratory segment.
               Dermatology segment.




         D: Distribution & reach                               7/10       I: Introductions                                    3/10

               Derives 60% of the revenues from Metro and Tier I               GSK is among the laggards when it comes to
               cities.                                                         launch of new products.
               Contribution of Tier II and rural area to total                 GSK has launched very few new products over the
               revenues has remained stagnant over the last 5                  last 4 years compared to its peers. It has launched
               years.                                                          5 new products (including line extensions) annually
                                                                               over the last 4 years.
               It has field force of 3000MRs which is on a lower
               side compared to other Indian companies of similar              Ramp-up in domestic formulations revenues is
               size.                                                           driven largely by existing products.




  Stock info                                Financial & valuation summary
  Equity Shares (m)                  84.7   Year     Net Sales PAT    EPS       EPS       P/E   P/BV   RoE     RoCE     EV/    EV/
                                            End       (INR m) (INR m) (INR)    Gr. (%)    (x)    (x)   (%)      (%)    Sales EBITDA
  52-Week Range (INR)         2,475/1,850
                                            12/09A    18,708    5,049   59.6   12.6        -      -    28.7     43.0     -       -
  1,6,12 Rel. Perf. (%)            5/7/22
                                            12/10A    21,116    5,814   68.6   15.2      31.4    9.5   30.1     44.8    7.6    21.9
  M.Cap. (INR b)                   182.5    12/11E    23,740    6,567   77.5   12.9      27.8    8.7   31.3     46.3    6.8    20.2
  M.Cap. (USD b)                      4.0   12/12E    26,921    7,586   89.6   15.5      24.1    8.0   33.4     49.5    5.9    17.2
  Background




                        GSK Pharma is the 4th largest formulations company in India, with a strong presence in segments like
                        dermatology, respiratory and vaccines. Its parent has one of the richest product and R&D pipelines among
                        Pharma companies worldwide. The company is in the process of expanding its presence in the life-style
                        segment led by new launches from the parent's portfolio, launch of branded generics and in-licensing.



August 2011                                                                                                                            72
                                                                                                                       GSK Pharma




   CEO Profile


                 GSK Pharma is a 50% subsidiary of GSK Plc (UK) and is being currently managed by Dr. Hasit Joshipura
  CEO




                 (MD). Maintaining a leading presence in India and sustaining one of the highest profitability and return
                 ratios in the industry despite miniscule presence in the high-growth life-style segments is the key
                 achievement.


    C: CAGR and scale-up                               6/10       I: Improvement in productivity                              9/10

        GSK has significantly underperformed the industry                GSK enjoys one of the highest MR productivity in
        with revenue CAGR of 8.1% over CY04-10 versus                    the industry with annual revenue per MR at
        industry revenue CAGR of 14.8% over the same                     INR7.7m.
        period. The company has gradually lost its market
                                                                         MR growth was at 5.9% compared to revenue
        share and slipped through the ranking.
                                                                         growth of 8.1% for CY04-10
        We expect it to grow at 13-14% CAGR over CY10-                   The company has reported an improvement in
        12 which is slightly lower than the industry average,            workforce productivity over CY04-10. At this level
        mainly due to high base and intensifying                         the productivity is amongst the best in the industry.
        competition in acute segment.




    N: Non-domestic business                            NA        E: Earnings growth                                         6/10

        NA                                                               Expect overall topline CAGR of 13% for CY10-12
                                                                         leading to EPS CAGR of 14.2%
                                                                  "      EPS growth is higher than topline growth mainly
                                                                         due to expanding EBITDA margins.




    S: Stock Attractiveness                                                                                                  14/20

        One of the most conservative managements                Stock performance (1 year)
        amongst Indian pharmaceutical companies                                   GSK Pharma            Sens ex - Rebas ed
                                                                 2,600
        Return ratios are amongst the best in the industry
                                                                 2,350
        with ROCE in excess of 40% and RoEs in excess
                                                                 2,100
        of 30%. GSK is currently valued at 27.8x CY11E
                                                                 1,850
        and 24.1x CY12E
                                                                 1,600
        Maintain Buy with TP of INR 2,330 (26x CY12E                Aug-10         Nov-10      Feb-11        May -11         Aug-11
        EPS)



August 2011                                                                                                                           73
                                                                                                                                GSK Pharma



India formulations                   Of patent and parent
snapshot                             Solid play on new patent regime
Second largest Pharma MNC in
                                     GSK Pharma is among the best performing MNCs in the domestic formulation space with its
India. Before Abbott took over
                                     strong parentage and brand equity among doctors. It leads the industry in profitability despite
Piramal Healthcare's domestic
                                     its meager presence in highly profitable chronic segments. GSK's MR productivity is the best
formulation business, GSK
was the largest pharma MNC           among the leading companies. We believe GSK's growth trajectory will increase from CY13
in India. We believe GSK is one      as it gets meaningful revenue from new launches.
of the best plays on the IPR
regime in India with aggressive
plans to launch new products         1. Mix:                                                                                        4/10
in the high-growth lifestyle
segments. These launches are         Acute segments account for most of GSK's sales
expected to bring long-term
                                     The top seven therapeutic segments, AI, Dermatology, Pain Management, Vitamins,
benefits.
                                     Respiratory, Hormones and GI, contribute ~86% to GSK's domestic formulations revenue.
EBITDA Contribution                  GSK derives 95% of its revenue from acute therapeutic segments. Over the past 10 years
                                     the contribution of Dermatology and Pain Management rose from lower single digits to
                                     double digits while that of Vitamins and Respiratory segments fell from 50% to 18.4%.



                                     GSK Pharma: Therapeutic mix
        DF EBITDA 100%

                                                           CY 2000                                              CY 2004
Among the leading players
                                                  Others               AI      Dermatol                Others                     Dermatol
in the industry                                                                                                            AI
                                                   15%                21%      ogy/Ster                 15%                       ogy/Ster
GSK has maintained                                                                            GI                          25%
                                      GI                                         oids                                               oids
leadership in the industry                                                                   6%
                                      7%                                         2%                                                 18%
though its ranking has slipped
from No1 to No4 over the past
few years. However, GSK                                                           Pain
has maintained its strong                                                         5%       Res pirat
position despite few new              Res pirat                                              ory             VMN        Pain
                                                                        VMN
launches. Its market share fell         ory                                                 10%
                                                                        26%                                  15%        11%
from 5.23% in 2006 to 4.26%
                                       24%
in 2010 due to low growth
stemming from very few new                                                          March 2011
launches and stiffer
                                                              Gynaec 3%        CVS 3%
competition. GSK's business                                                                      Others 6%
posted CAGR of 8.1% over                                                                                           AI 21%
the past six years against             Anti-Parasitic 3%
14% CAGR for industry.
                                           GI 7%

Market share and growth
                                           Hormones 8%
              Mkt Share (%)
              Grow th (%)
                              19.2
                      4.3




                                            Respiratory 9%
  5.2

        4.9

                4.5




                                                                                                                    Dermatology 19%
                              4.3




  6.8                                                                VMN 10%               Pain 11%
        2.9     3.6    9.3
                                                                                                          Source: Company/Industry/MOSL

 2006 2007 2008 2009 2010




August 2011                                                                                                                              74
                                                                                                                                GSK Pharma



                                     2. Equity with doctors:                                                                             9/10
                                     GSK leads the industry in AI, Dermatology, Pain Management
                                     GSK ranks first in the Dermatology space in India with market share of 20% and ranks
                                     third in the Pain Management and Vitamins segments with market share of 6.4% and
                                     7.3% respectively. It ranks fifth in two of the industry's largest therapeutic segments, AI
                                     and Respiratory, with market share of 6% and 5.1% respectively. However over the past
                                     two years, the company lagged the industry growth rate in almost all therapeutic segments
                                     due to very few new launches.

GSK Pharma: Market share in key therapies (%)                         GSK Pharma: Growth composition (%) (2010)

                                                                                     Avg Gr - Company       Av g Gr - Industry
                                                          20.3
                                                                                                                                         18.4
                                                                       16.0                              16.7                     17.4
                                                                                             16.2                        16.4
                                                                              14.6
                                                                                                     13.9

                                                                                                                   9.8
                                              7.3                                      7.1
      6                        6.4
                  5.1




      AI      Respiratory Pain/Analgesic      VMN      Dermatology         AI        Res piratory Pain/Analgesic    VMN          Dermatology


* Average growth over 2009-2010                                                                                     Source: Industry/MOSL


                                     GSK has strong brand equity among physicians, which is visible from its market share and
                                     prescriptions rankings. GSK ranks first in the Dermatology, Vitamins and Pain Management
                                     segments with prescription market share of 10.4%, 8.7% and 7% respectively. GSK ranks
                                     fourth in the Respiratory segment and sixth in the Gynecology segment.

                                     Prescription ranking of GSK
                                                            Jan-07        Jan-08               Jan-09           Jan-10              Oct-10
                                     Derma                        1              1                   1               1                 1
                                     Vit                          1              1                   1               1                 1
                                     Pain Mgmt                    1              1                   2               2                 1
                                     Respiratory                  3              3                   3               3                 4
                                     Gynaec                       1              4                   6               6                 6
                                     Anti-infectives              9              9                   9              10                10
                                     GI                          10              9                  13              15                15
                                     CVS                         16             18                  18              19                20
                                                                                                                    Source: Industry/MOSL



                                     Top 10 brands contribute 45% to GSK revenue
                                     GSK's top 10 brands contribute ~45% to its total revenue. The brand concentration is
                                     among the highest in the industry. It shows GSK's brand building ability and its strong
                                     brand recall among physicians. GSK's top 10 brands feature among the industry's top 100
                                     brands. Its No1 brand, Augmentin (Amoxycillin, AI), ranks fifth in the industry and posted
                                     18% growth over the past four years. Eight of the 10 brands posted double-digit CAGR
                                     over the past four years.


August 2011                                                                                                                                     75
                                                                                                                                      GSK Pharma



                                         Top 10 brands
                                         Brand             Drug                 Product Launch Sales (INR m)             YoY Gr (%)      CAGR (%)
                                         Zinetac        Ranitidine                    1986                  1,032                12.5         12.6
                                         Augmentin      Amoxy. & Clav.                1994                  1,704                27.7         18.0
                                         Ceftum         Cefuroxime                    1991                   798                 23.8         14.0
                                         Calpol         Paracetamol                   1995                  1,101                16.6         15.5
                                         Phexin         Cephalexin                    1989                   813                 10.2          6.4
                                         Eltroxin       Levothyroxine                 2000                   638                 19.2         17.0
                                         Betnovate-c    Betameth.+Chinoform.          1996                   633                 31.7         13.7
                                         Betnovate-n    Betameth.+Neom.               1996                   631                 29.3         10.9
                                         Neosporin      Antibio. Comb.                1996                   630                 18.8         15.5
                                         Betnesol       Betamethasone injectables     1971                   822                 11.3          7.2
                                         CAGR through 2006-10                                                                 Source: Industry/MOSL



                                         3. Distribution and reach:                                                                            7/10
                                         GSK derives 60% of its revenue from metros and Class-I towns compared with an industry
                                         average of 63%. Over the past four years revenue CAGR for all geographies has lagged
                                         the industry average. However, GSK's CY10 growth in all geographies was in higher
                                         double digits.

GSK: Geographical distribution of revenues (%)                            Geographical distribution of revenues: Industry (%)

     METROS        CLASS I TOWNS           CLASS II TO VI     RURAL           METROS         CLASS I TOWNS            CLASS II TO VI      RURAL

     21.9          22.9            22.4             20.7          19.7         20.6          20.9              20.0           18.1        17.3

                                                    20.4          20.1         19.2          19.0              19.5           19.4        19.6
     19.0          19.4            20.6

     31.7          30.7                             32.3          32.0         32.6          31.3              31.6           32.5        32.0
                                   31.4


     27.4          27.0            25.6             26.6          28.2         27.6          28.9              28.9           30.0        31.0


    CY06           CY07            CY08            CY09       CY10            CY06           CY07              CY08          CY09        CY10

GSK: Geography-wise growth rates (%)                                      Industry: Geography-wise growth rates (%)

          METROS                       CLASS I TOWNS                                   METROS                         CLASS I TOWNS
          CLASS II TO VI               RURAL                       26.7                CLASS II TO VI                 RURAL                26.2
                                                                                                                                          23.5
                                                                   17.7                                                                    20.7
                                                                                                    17.5              17.7
                                                                   17.7      17.6
                                                                                                       15. 6                               17.5
                                            13.3                                                                       16.4
                                                                   13.3      14.0
                            9.7              12.7                                                    14.7
                                                                             11.1                                     13.0
    7.5                     6.0                                                                     9.5
                                             8.3                              7. 9
    5.2
    1.3                                                                                                                      2.5
                           1.6                     0.8
     -0.5
      CY07                 CY08 -1.8        CY09             CY10              CY07             CY08                  CY09              CY10


                                                                                                                              Source: Industry/MOSL




August 2011                                                                                                                                       76
                                                                                                                GSK Pharma



                               4. Introductions:                                                                            3/10
                              Existing products lead revenue growth over the past four years
                              Over the past four years, GSK launched very few new products-22 new products including
                              line extensions-compared with its peers. The average revenue per new launch has improved
                              marginaly from been virtually stagnant from INR71m in CY07 to INR81m in CY10. Top-
                              line growth over the past four years has been almost entirely driven by existing products,
                              which reflects GSK's ability to leverage existing brands.


GSK Pharma: New launches                                     GSK Pharma: Growth composition (%)

                 No. Of launches in last 2 yrs                            New Launches           Ex is ting Brands
                 Av g s ales per launc h (INR m)
                                   124.5


                81.6                                 81.3
     71.4
                                                                                                                     17.4

                                                                                                 7.4

       13         15               23              36               2.2            2.8
                                                                    0.7            0.8           1.9                 1.8
     CY07        CY08             CY09             CY10            CY07           CY08          CY09                 CY10

                                                                                                       Source: Industry/MOSL




                               5. CAGR and scale up:                                                                        6/10
                              We expect 13-14% CAGR for GSK's domestic formulations business over the next few
                              years. GSK's top-line growth will be led by a focus on priority products, which will sustain
                              double-digit growth. This will be driven by expanding therapeutic and geographic coverage
                              and with incremental contribution from new launches. We believe the growth trajectory
                              will improve in the long term as new launches contribute meaningfully to the top-line.


                               6. Improvement in MR productivity:                                                           9/10
                              GSK's sales force productivity increases
                              GSK's revenue posted CAGR of 8.7% over CY04-10 and its sales force posted CAGR of
                              5.9% over CY04-10, implying improvement in salesforce productivity. In 2004, GSK derived
                              INR6.5m revenue per MR, which rose to INR7.7m in CY10. GSK's current MR productivity
                              is arguably one of the best in the industry.




August 2011                                                                                                                   77
                                                                                                                                                                       GSK Pharma



GSK Pharma: Salesforce productivity

               No. of MRs            Revenue per MR (INR m)                                            Sales forc e addition CAGR (%)
                                                                                                       Produc tivity Improv ement CAGR (%)
                                                      7.7




                                                                                                                                                            11.5
              6.5

                                                                                               5.9

              1,775                               2,500                                                                                                     1.9
                                                                                               1.5
              2004                                2010                                        GSK                                                    Indus try


                                                                                                                                     Source: Company/Industry/MOSL



                                      8-9. Earnings growth and stock attractiveness:                                                                                          20/30
                                     We believe GSK is one of the best plays on the IPR regime in India with aggressive plans
                                     to launch new products in the high growth lifestyle segments. These launches are expected
                                     to bring it long-term benefits. We believe GSK is likely to sustain double-digit topline
                                     growth over the next few years. We believe this growth trajectory will improve after
                                     CY13, as new launches contribute meaningfully to the top-line. Given the high profitability
                                     of operations, we expect this growth to lead to sustainable double-digit earnings growth
                                     and RoE of ~30%. This growth is likely to be funded through miniscule capex and negative
                                     net working capital. GSK deserves premium valuations due to strong parentage (giving
                                     access to a large product pipeline), brand-building ability and likely positioning in the post
                                     patent era. GSK is one of the very few companies with the ability to drive reasonable
                                     growth without major capital requirement, leading to high RoCE of over 45%. We expect
                                     GSK to record CY11E EPS of INR77.5 (up 12.9%) and CY12E EPS of INR89.6 (up
                                     15.5%). The stock is valued at 27.8x CY11E and 24.1x CY12E earnings. Maintain Buy
                                     with a target price of INR2,330 (26x CY11E).

GSK RoE & RoCE (%)                                                    GSK one year forward P/E

                             RoE           RoCE                                              P/E (x )               Av g(x )                 Peak(x)                    Min(x)
                                                                      34
                                                            49.5
                                   44.8        46.3
     44.0            43.0                                                                                                    30.2
                                                                      28
                                                              33.4                                                           23.1                                               24.6
     29.1             28.7         30.1        31.3                   22

                                                                      16                                                     14.8

                                                                      10
                                                                                    Mar-07




                                                                                                          F eb-08




                                                                                                                               F eb-09




                                                                                                                                                  F eb-10




                                                                                                                                                                          F eb-11
                                                                           Aug-06




                                                                                              Aug-07




                                                                                                                    Aug-08




                                                                                                                                         Aug-09




                                                                                                                                                              Aug-10




                                                                                                                                                                                    Aug-11




       2008           2009          2010          2011E       2012E




August 2011                                                                                                                                                                              78
                                                                                                                     GSK Pharma



Financials and valuations: GSK Pharma

Income Statement                                  (INR Million)   Ratios
Y/E December                2009      2010     2011E     2012E    Y/E December                 2009     2010     2011E      2012E
Net Sales                  18,708   21,116    23,740    26,921    Basic (INR)
   Change (%)                12.7     12.9      12.4      13.4    EPS                           59.6     68.6      77.5      89.6
Materials Consumed          6,922    7,770     8,784     9,961    Cash EPS                      61.5     70.7      79.9      92.3
Personnel Expenses          2,094    2,409     2,842     3,212    BV/Share                     207.7    228.0     247.7     267.9
Other Expenses              3,146    3,560     4,163     4,525    DPS                           30.0     40.0      50.0      60.0
Total Expenditure          12,162   13,739    15,789    17,698    Payout (%)                    58.9     66.5      73.5      76.4
EBITDA                      6,546    7,378     7,951     9,223
                                                                  Valuation
   Change (%)                13.3     12.7        7.8     16.0
                                                                  P/E                                    31.4      27.8      24.1
   Margin (%)                35.0     34.9      33.5      34.3
                                                                  Cash P/E                               30.5      27.0      23.4
Depreciation                  164      176       202       231
                                                                  P/BV                                    9.5       8.7       8.0
Int. and Finance Charges        4        6          0        0
                                                                  EV/Sales                                7.6       6.8       5.9
Other Income - Rec.         1,206    1,477     1,969     2,234
                                                                  EV/EBITDA                              21.9      20.2      17.2
PBT & EO Expense            7,585    8,673     9,718    11,226
                                                                  Dividend Yield (%)                      1.9       2.3       2.8
Tax                         2,536    2,859     3,152     3,641
   Tax Rate (%)              33.4     33.0      32.4      32.4
                                                                  Return Ratios (%)
Adj PAT                     5,049    5,814     6,567     7,586
                                                                  RoE                           28.7     30.1      31.3      33.4
EO Expense (net of tax)       -74      177     1,859         0
                                                                  RoCE                          43.0     44.8      46.3      49.5
Reported PAT                5,123    5,637     4,708     7,586
   Change (%)                12.6     15.2      12.9      15.5
                                                                  Working Capital Ratios
   Margin (%)                27.4     26.7      19.8      28.2
                                                                  Fixed Asset Turnover (x)      20.4     20.9      18.4      17.1
                                                                  Debtor (Days)                   10        8        10        10
                                                                  Inventory (Days)                49       49        49        49
Balance Sheet                                     (INR Million)   Working Capital (Days)         -50      -60       -47       -45
Y/E December                2009     2010      2011E     2012E
Equity Share Capital          847      847       847       847    Leverage Ratio
Reserves                   16,728   18,445    20,115    21,826    Debt/Equity                    0.0      0.0       0.0        0.0
Capital Reserve                17       17        17        17
Net Worth                  17,591   19,308    20,979    22,689    Cash Flow Statement                                (INR Million)
Loans                          54       52         0         0    Y/E December                  2009     2010     2011E    2012E
Capital Employed           17,646   19,360    20,979    22,689    Oper. Profit/(Loss) bef. Tax 6,546    7,378     7,951     9,223
                                                                  Interest/Dividends Recd.     1,206    1,477     1,969     2,234
Gross Block                 2,892    3,184     3,784     4,184    Direct Taxes Paid           -2,687   -2,976    -3,152    -3,641
Less: Accum. Deprn.         1,964    2,095     2,297     2,528    (Inc)/Dec in WC              1,153       -3    -1,392      -720
Net Fixed Assets              928    1,089     1,487     1,656    CF from Operations           6,218    5,876     5,376     7,096
Capital WIP                   214       87       214       214
Investments                 1,909    1,604    20,566    22,194    EO expense                     -74      177     1,859         0
                                                                  CF frm Op. incl EO exp.      6,292    5,699     3,518     7,096
Curr . Assets              21,144   24,483     6,932     7,834    (inc)/dec in FA               -184     -166      -726      -400
Inventory                   2,530    2,815     3,157     3,580    (Pur)/Sale of Investments    5,535      216   -17,204    -1,729
Account Receivables           537      470       665       727    CF from investments          5,350       50   -17,931    -2,129
Cash and Bank Balance      16,726   19,481     1,187     1,346
Others                      1,351    1,717     1,923     2,181    Change in Net Worth              0        0        53        21
Curr. Liability & Prov.     6,996    8,468     8,784     9,772    Inc/(Dec) in Debt               -2       -3       -52         0
Account Payables            3,167    3,567     4,036     4,523    Interest Paid                   -4       -6         0         0
Provisions                  3,830    4,900     4,748     5,250    Dividend Paid               -3,976   -2,985    -3,863    -4,829
Net Current Assets         14,148   16,016    -1,852    -1,938    CF from Fin. Activity       -3,982   -2,994    -3,862    -4,808

Deferred Tax Assets          447       564       564       564    Inc/Dec of Cash           7,660      2,755    -18,274       159
                                                                  Add: Beginning Balance    9,065    16,726      19,481     1,187
Appl. of Funds           17,646      19,360   20,979    22,689    Closing Balance          16,726    19,481       1,187     1,346
E: MOSL Estimates; ^Standalone results                            E: MOSL Estimates ^ - Standalone results




August 2011                                                                                                                     79
                                                                                                   Domestic Formulations | New Peaks




                                                                                                             MEDICINES
    MEDICINES                     CAPSULE                                                                     Score       77/100
                                                        Sun Pharma
                                                                                            CMP: INR464                     SUNP IN
     The Sun shines bright !                                                                TP: INR524                   Neutral
        M: Mix                                               7/10            E: Equity with doctors                             9/10

               Sun is the best play on the high-growth life-style                 Sun pharma enjoys strong brand equity in CNS,
               segments of CNS, CVS and Diabetes. It derives 61%                  Gynaecology, CVS and Anti-diabetic segments.
               of its revenues from lifestyle chronic segments
                                                                                  In CNS and Gynaecology segments, Sun Pharma
               Sun is one of the very few companies which has                     ranks No.1 with prescription market share of 12%
               focussed on the life-style from its inception.                     and 4.2% respectively while in CVS and Anti-
                                                                                  diabetics segment it ranks no 2 with prescription
                                                                                  market share of 6.8% and 7.8% respectively.
                                                                                  Further, it has either maintained or improved its
                                                                                  prescription ranking in the therapeutic areas where
                                                                                  it is present.




        D: Distribution & reach                              8/10            I: Introductions                                   6/10

               Derives 73% of the revenues from Metro and Tier                    Sun Pharma's new product launch rate has been
               I cities.                                                          moderate compared to its peers in the industry. It
                                                                                  has launched 31 new products annually (including
               The contribution of rural areas to revenues has
                                                                                  line extensions) over the last 4 years.
               come down over the last 5 years.
                                                                                  The revenue growth is driven by both existing
               Further, in last 4 year, revenue CAGR for all
                                                                                  products as well as new launches.
               geographies has been in-line or better than industry
               average
               It has field force strength of 2,600




  Stock info                                Financial & valuation summary
  Equity Shares (m)               1,035.6   Year      Net Sales PAT     EPS        EPS      P/E    P/BV   RoE    RoCE     EV/    EV/
                                            End        (INR m) (INR m) (INR)      Gr. (%)   (x)     (x)   (%)     (%)    Sales EBITDA
  52-Week Range (INR)             538/341
                                            03/11A     52,066    14,041   13.6     47.8     34.2    5.1   16.2    22.9    7.7    22.4
  1,6,12 Rel. Perf. (%)           2/22/41
                                            03/11A*    57,214    18,161   17.5     34.4     26.5
  M.Cap. (INR b)                    480.5   03/12E     65,601    17,952   17.3     27.9     26.8    4.4   17.7    20.5    6.6    20.8
  M.Cap. (USD b)                     10.4    03/13E     75,976 21,626 20.9         20.5     22.2    3.9   18.5    22.2    5.5    16.7
                                            * Including Para-IV/one-off upsides
  Background




                        Sun Pharma is one of the largest Indian companies in the domestic formulation space with significant
                        presence and leadership in fast growing chronic therapeutic areas like CVS, Diabetes, CNS etc. It offers
                        the best play on fast growing and most lucrative lifestyle therapeutic segments in India. Over the past
                        decade it has also expanded its presence to US and 40 other markets. Key markets include India and US.



August 2011                                                                                                                             80
                                                                                                                 Sun Pharma




   CEO Profile


                 Dilip S. Shanghvi is a graduate in commerce from Kolkata University. He founded Sun Pharma in 1982
  CEO




                 and has extensive experience in the pharmaceutical industry. Focused approach to business and sustaining
                 superior profitability and growth on higher base are his key achievements.



    C: CAGR and scale-up                            9/10          I: Improvement in productivity                       9/10

        Sun Pharma has significantly outperformed the                  Sun ranks the best in the industry in terms of MR
        industry with revenue CAGR of 23% over FY05-11.                productivity. Revenue per MR has improved
        The company has scaled up the business rapidly                 significantly from INR3.2m in 2004 to INR7.8m in
        albeit on a low base. The growth is achieved largely           2010.
        because of favorable therapeutic mix, improvement
                                                                       The current field force productivity is one of the
        in brand equity and increase in field force
                                                                       best in the industry.
        productivity.
        We expect it to grow domestic formulations at
        18.5% CAGR over FY11-13 outperforming the
        industry led by strong presence in fast growing
        chronic therapeutic areas like CVS, CNS and Anti-
        diabetics, and improvement in brand equity.


    N: Non-domestic business                        7/10          E: Earnings growth                                   9/10
        Remain positive on Sun's US business given its                 Expect overall topline CAGR of 15.2% for FY11-13
        strong chemistry skills, strong generic pipeline and           leading to EPS CAGR of 24%
        monetization of some of the niche, low-competition
                                                                       Earnings growth will be driven by the Taro
        opportunities
                                                                       acquisition, sustained momentum in the India
        Expect international business to record 15.2% CAGR             formulations business and gradual improvement in
        for FY11-13 mainly led by the Taro acquisition. Core           Caraco
        international business (excluding one-offs in US)
        to record 34% CAGR
        Option values includes upsides from one-off
        opportunities in US.




    S: Stock Attractiveness                                                                                       13/20
        Focused and cautious approach to international          Stock performance (1 year)
        expansion coupled with highly profitable domestic                     Sun Pharma            Sensex - Rebased
        business has ensured good return ratios which,           540
        partly muted due to significant cash of USD1b.           480

        Sun is currently valued at 26.8x FY12E and 22.2x         420

        FY13E consolidated earnings                              360
                                                                 300
        We maintain Neutral with TP of INR524 (25x FY13E          Aug-10       Nov-10      Feb-11       May-11         Aug-11
        EPS) excluding Para-IV upsides



August 2011                                                                                                                     81
                                                                                                                       Sun Pharma



India formulations                      The Sun shines bright !
snapshot                                But dazzling valuation merits caution
Domestic formulations -
                                        Sun Pharma is one of the largest Indian companies in the domestic formulations space with
major contributor to
                                        a significant presence and leadership in fast growing chronic therapeutic areas like CVS,
revenue, profits
The domestic formulations               diabetes and CNS. Over the years, Sun Pharma out-performed industry growth and increased
business contributes 42% to             its market share and brand equity in its major segments. Sun Pharma is arguably the best
Sun Pharma's revenue, a                 company in the industry in terms of improvement in workforce productivity and the best play
contribution that is the highest        on fast growing and the lucrative lifestyle therapeutic segments.
among leading Indian generic
companies. The segment is the
most profitable for Sun Pharma          1. Mix:                                                                              7/10
and contributed almost 72% to
EBITDA in FY11.                         Lifestyle segments like CVS, CNS, anti-diabetes dominate sales
EBITDA Contribution
                                        Sun Pharma derives 61% of its revenue from lifestyle therapeutic segments, which dominate
                                        the company's revenue mix. The top four therapeutic segments including CNS, CVS, GI
           Sun Pharm a
                                        and anti-diabetes contribute ~70% to Sun Pharma's domestic formulations revenue. It is
         Non-DF EBITDA 28%              the market leader in two of the fastest growing therapy segments, CNS and CVS. Sun
                                        Pharma's sizable presence on the chronic therapy segments makes it the most attractive
                                        play in the domestic formulations business.

           DF EBITDA 72%                CNS, CVS, Diabetes dominates the therapy mix

                                                                  FY01                                     FY11
The largest player in the                                                                        Respirat Others
                                                       Others                  CNS                                          CNS
chronic therapeutic                                                                     Ophthalm ory 4%    8%
                                                        23%                    32%                                          27%
segment                                                                                 ology 5%
Sun Pharma is one of the                 Respirat
                                           ory                                          Pain 6%
largest players in the industry
and has grown its market                   6%
                                                                                        Gynaec
share over the years due to                                                              7%
significant presence in fast
growing chronic therapeutic              Pain       Gynaeco
                                                             GI          CVS             Diabetes                            CVS
areas. Sun Pharma is the                 10%          logy
                                                            6%           21%               10%                               21%
largest company in the chronic                         2%                                              GI 12%
segments, in which it
commands 3.66% market                                                                                  Source: Company/Industry/MOSL
share, which grew from
3.21% in 2006. The company
posted 23.2% CAGR over the              2. Equity with doctors:                                                              9/10
past six years against 14%
CAGR for the industry.                  Strong brand equity among specialists, leader in the CVS, CNS, GI and
                                        anti-diabetes segments
Sun Pharma
                                        Sun Pharma has been a dominant player in three of the industry's fastest growing therapeutic
                 Mkt Share (%)
                 Grow th (%)
                                        segments, CNS, CVS and anti-diabetes. Sun Pharma ranks No1 in the CNS and CVS
                                 23.9   segments with a value market share of 20.7% and 7.1% respectively. It ranks fourth in
 17.5              17.5 18.2            the anti-diabetes segment with market share of 7.8% and sixth in the GI and gynecology
          13.7
                                        segments with market share of 4.7% and 5.5% respectively. Except in the anti-diabetes
                                        segment, in all other segments the average growth rate over the past two years has been
  3.21




                          3.58

                                 3.66




                                        higher than the industry's.
           3.3

                    3.4




 2006 2007 2008 2009 2010



August 2011                                                                                                                        82
                                                                                                                                     Sun Pharma



Market share in key therapies (%)                                          Growth comparison (%) (2010)

                                               20.7                                          Avg Gr - Company       Avg Gr - Industry




     7.1                                                   7.8                               25.8
                               5.5                                           20.7                        20.2                            21.2
                  4.7                                                                                                    18.8


                                                                                 17.9            17.1           18.1         18.7             23.3

     CVS          GI      Gynaecology          CNS    Anti Diabetic            CVS              GI      Gynaecology        CNS          Anti Diabetic

* Average growth over 2009-2010                                                                                            Source: Industry/MOSL


                                     Sun Pharma has strong brand equity in the CNS, gynaecology, CVS and anti-diabetes
                                     segments, in terms of the number of prescriptions written in the segments. In the CNS and
                                     gynaecology segments, Sun Pharma ranks No1 with a prescription market share of 12%
                                     and 4.2 respectively while in the CVS and anti-diabetes segments it ranks second and its
                                     prescription market share is 6.8% and 7.8% respectively. Over the past few years Sun
                                     Pharma has either maintained or improved its prescription ranking in the therapeutic areas
                                     in which it is present.
                                     Sun Pharma's prescription ranking
                                                              Jan-07             Jan-08              Jan-09             Jan-10               Oct-10
                                     CNS                               1                 1                1                  1                1
                                     Gynaec                            5                 2                2                  1                1
                                     CVS                               2                 2                2                  2                2
                                     Anti-diabetic                     2                 2                2                  2                2
                                     GI                               15                14               15                 12               12
                                     Respiratory                      23                25               23                 22               22
                                                                                                                           Source: Industry/MOSL


                                     Top 10 brands contribute 20% of the revenues
                                     Sun Pharma's top 10 brands contribute ~20% to total revenue, which shows low brand
                                     concentration compared with other leading companies. Seven of its brands feature among
                                     the top 300 brands of the industry. Sun Pharma's No1 brand, Pantocid, (Pantoprazole, GI)
                                     ranks 87th in the industry and has posted revenue CAGR of 19% over the past four years.
                                     This is the only company among the companies covered in this report to post double-digit
                                     revenue CAGR in all its top 10 brands.
Top 10 brands of the company
Brand                   Drug                                 Product                    Product           Sales            YoY Gr.              CAGR
                                                             Category                    Launch         (INR m)               (%)                 (%)
Pantocid                Pantoprazole Solids                  Gastro-intestinal                1999            479            20.2           19.5
Glucored                Glibenclamide + Metformin            Anti-diabetics                   2000            457            11.2            11.3
Susten                  Progesterone                         Gynaecology                      2000            430            16.9           14.3
Aztor                   Atorvastatin                         CVS                              2000            400            11.6           24.1
Pantocid-D              Pantopr.+ Domperidone                Gastro-intestinal                2003            355            22.4           28.2
Gemer                   Glimepiride+Metformin                Anti-diabetics                   2002            287            20.3           32.6
Strocit                 Citocholine                          -                                2004            253              2.7          17.7
Repace                  Losartan                             CVS                              1998            243              8.9          12.3
Encorate Chrono         Sodium Valproate                     CNS                              1999            234            10.3           13.9
Clopilet                Clopidogrel                          CVS                              2001            230            17.7           25.0
                                                                                                                           Source: Industry/MOSL
August 2011                                                                                                                                          83
                                                                                                                                Sun Pharma



                                            3. Distribution and reach:                                                                  8/10
                                        Sun Pharma derives 73% of its revenue from metros and class-I towns, compared with
                                        63% of the industry average, suggesting a focus on these geographies. In the past four
                                        years, revenue CAGR for all geographies has been in line/better than the than that of the
                                        industry average. The contribution of rural areas to revenue has fallen over the past five
                                        years.



Geographical distribution of revenues - Sun Pharma (%)                           Geographical distribution of revenues - Industry (%)

      Metros        Class I Tow ns            Class II TO VI       Rural

     14.6          14.1              13.6            12.2          11.0

     14.3          14.5              14.2            15.2          16.3


     34.0          32.6              34.1            32.8          33.2



     37.1          38.8              38.2            39.9          39.5



    CY06           CY07          CY08                CY09          CY10


Geography-wise growth rates - Sun Pharma (%)                                     Geography-wise growth rates - Industry (%)

          Metros      Class I Tow ns             Class II To VI          Rural
                                                                   32.9

                                              26.4
                                                                     25.8
                              22.7                   23.4            22.6
   19.0
                          14.9
   14.9                       15.7
                                                     13.6
    9.2                   13.1
          9.5                                                      12.2
                                               6.2

      CY07                CY08                CY09                CY10

                                                                                                                        Source: Industry/MOSL




                                            4. Introductions:                                                                           6/10
                                        Sun Pharma's new product launches have been moderate compared with
                                        its peers in the industry. There has been significant improvement in revenue
                                        per new product launched
                                        Sun Pharma's new launch rate has been moderate compared with its peers in the industry.
                                        It launched 31 new products each year (including line extensions) over the past four
                                        years. The average revenue per new launch has risen substantially in the past four years
                                        from INR112m in 2006 to INR163m in 2010, suggesting better penetration of launched
                                        brands. Revenue growth was driven by existing products and new launches.



August 2011                                                                                                                                84
                                                                                                                                 Sun Pharma



Sun Pharma's - new launches                                                Sun Pharma's growth compositions (%) (2010)

                    No. Of launches in last 2 yrs                                       New Launc hes             Ex is ting Brands
                    Av g s ales per launc h (INR m)       163.2


     112.3
                     103.5
                                      95.8                                                                                            15.6
                                                                                                                 6.9
                                                                                1.5             8.4


                                                                                12.2                             11.3
                                                                                                9.1                                   8.3
       86             64               64                 60

      CY07           CY08             CY09               CY10                   CY07           CY08              CY09                 CY10


* Average growth over 2009-2010                                                                                         Source: Industry/MOSL



                                   5. CAGR and scale up:                                                                                     9/10
                                  We expect 18.5% CAGR from Sun Pharma's domestic formulations business led by a
                                  strong presence in the fastest growing chronic therapeutic segments. We believe that the
                                  company will continue to outperform the industry and its peers over the foreseeable future
                                  despite a sizable revenue base. We believe that, Sun is likely to strengthen its presence in
                                  key therapeutic areas, improving its ranking in the industry.

                                  Sun Pharma: Domestic formulations revenue ramp-up

                                                                    Revenue (INR m)                     Grow th (%)

                                                                                                                                      31,132
                                                                                32.7                     30.1
                                                                                                                        26,383
                                                       23.1       25.0
                                       17.7                                    19,597      18,301                                       18.0
                                                                  14,762                                                 10.9
                                                      11,810                                            23,801
                                       6,800
                                                                                             -6.6



                                       FY05           FY07        FY08          FY09        FY10        FY11            FY12E         FY13E


                                                                                                                     Source: Company/MOSL



                                  6. Improvement in MR productivity:                                                                         9/10
                                  Unlike other leading companies covered in this report, Sun Pharma's top-
                                  line growth was driven by a significant improvement in MR productivity.
                                  The company leads the pack in productivity improvement
                                  Sun Pharma has done a stellar job over the past six years with a significant improvement
                                  in workforce productivity. Over FY04-10, Sun Pharma's domestic formulations revenues
                                  posted 23.3% CAGR and its sales force expanded by just 6.3% CAGR, implying significant
                                  productivity improvement of the workforce. In 2004, Sun Pharma derived revenue of
                                  INR3.2m per MR, which rose to INR7.8m in 2010. The productivity was among the best
                                  in the industry.


August 2011                                                                                                                                    85
                                                                                                                 Sun Pharma



Sun Pharma: Sales force productivity

                                                                             Sales force addition CAGR (%)
              No. of MRs       Revenue per MR (INR m)
                                                                             Productivity Improvement CAGR (%)

                                         7.8
                                                                            6.3




              3.2                                                          16.0
                                                                                                          11.5


              1,799                     2,600                                                             1.9

              2004                      2010                            Sun Pharma                      Industry


                                                                                             Source: Company/Industry/MOSL


                              7. Non-domestic business:                                                              7/10

                              Positives
                               Strong presence in the US through its own supplies, Taro and Caraco.
                               Strong chemistry skills and backward integrated low-cost operations.
                               Pragmatic mix of low-competition, Para-IV and normal products for the US market.
                               Targets niche opportunities in the US market.
                               One of the most profitable domestic business with strong presence in high growth
                                 segments

                              Risks & concerns
                               Slow progress in resolving cGMP issues at Caraco
                               Potential damages for "at-risk" launch of generic Protonix in the US.
                               Integration of Taro and sustaining the improvement in its profitability will be a key
                                 challenge.
                               Gradual ramp-up in emerging market portfolio.
                               Astute tax planning results in very low taxes - tax can increase significantly if tax laws
                                 are changed.

                              Key news flows/triggers
                                Update on generic Eloxatin.
                               Launch of generic Prandin in US under exclusivity.
                               US Federal Circuit Court ruling on Protonix patent litigation.
                               Ramp-up in generic Effexor XR sales.
                               Steps to sustain profitability of Taro and to improve its R&D productivity.

                              Impact assessment
                               Positive on Sun Pharma's US business given its strong chemistry skills, generic pipeline
                                and monetization of some niche, low-competition opportunities.
                               Expect the international business to post 15.2% CAGR over FY11-13 led mainly by
                                the Taro acquisition. Core international business (excluding one-offs in the US) will
                                post 34% CAGR over FY11-13.
                               Option values include upsides from future inorganic initiatives - the company has cash
                                of ~USD1b.

August 2011                                                                                                              86
                                                                                                                Sun Pharma



Sales mix (INR m)                                                               EBITDA Contribution
                        FY09      FY10     FY11    FY12E    FY13E     FY11-13
                                                                     CAGR (%)                    Sun Pharm a
Domestic Sales                                                                                     Non-DF
     Formulations      19,597    18,301   23,801   26,383   31,132       14.4                      EBITDA
    API                 1,042     1,021    1,130    1,186    1,234        4.5                       28%
     Others                 11       11       17       17       17       14.4
Total Domestic Sales 20,650      19,334   24,948   27,586   32,383       13.9
% of total sales         47.2      47.4     43.0     41.4     41.9
International sales
     Formulations      19,256    16,892   28,982   34,607   39,922      17.4
        Taro                 0        0    9,962   17,357   19,008                                DF EBITDA
         Caraco-Generics15,409 11,076     13,042    4,882    6,072     -31.8                         72%
        Branded         3,847     5,816    5,978   12,368   14,842      57.6
    API                 3,804     4,470    4,083    4,409    4,850       2.8
     Others                41        66       54       60        66     11.0
Total International sales 23,101 21,428   33,119   39,076   44,839      16.4
% of total sales         52.8      52.6     57.0     58.6      58.1
Gross Sales            43,751    40,761   58,066   66,662   77,221      15.3
Less: Indirect Taxes    1,917     1,728      852    1,061    1,245
Net Sales              41,833    39,033   57,214   65,601   75,976      15.2
                                                        Source: Company/MOSL




                                  8-9. Earnings growth and stock attractiveness:                                    21/30
                                 We expect overall top-line CAGR of 15% over FY11-13, leading to EPS CAGR of 24%.
                                 Earnings growth will be driven by the Taro acquisition, sustained momentum in the India
                                 formulations business and gradual improvement in Caraco.

                                 Sun Pharma has been one of the most consistent performers among Indian pharmaceutical
                                 companies over the past decade. Its profitability is one of the highest among its peers. It
                                 has been able to achieve this despite being a late entrant in the domestic formulations and
                                 the US generic markets, compared with peers like Ranbaxy, Dr Reddy's Labs and Cipla.


                                 Key USPs of the company include:
                                 1. Ability to scale up its operations in India and the US without sacrificing profitability,
                                    i.e., ability to strike an optimum balance between growth and profitability.
                                 2. Has established a very strong and profitable domestic formulations business which,
                                    given its predictable nature, offers a strong foundation to scale-up its international
                                    initiatives.
                                 3. A focused approach by the management - Unlike some of its peers it has not spread
                                    itself very thin by expanding across the globe. Its key markets continue to be India and
                                    the US with expanding presence in some of the emerging markets. It has been able to
                                    avoid the temptation to expand in regulated European markets wherein most of its
                                    peers have got adversely impacted over the past few years due to regulatory changes.




August 2011                                                                                                               87
                                                                                                                                                     Sun Pharma



                            An expanding generic portfolio coupled with sustained double-digit growth in high-margin
                            life-style segments in India is likely to bring in long-term benefits for Sun Pharma. Its
                            ability to sustain superior margins even on a high base is a clear positive.


                            Key drivers for future include:
                            1. Ramp-up in US business and resolution of Caraco's cGMP issues
                            2. Monetization of the Para-IV pipeline in the US
                            3. Taro integration with potential for improvement in its profitability
                            4. Launch of controlled substances in the US.

                            While we are positive about SUNP's business outlook, rich valuations have tempered our
                            bullishness. We maintain Neutral with a target price of INR524 (25x FY13E EPS).
                            Inorganic initiatives (Sun has cash of ~USD1b) are a key risk to our rating. However, we
                            believe that given the recent acquisition of Taro, Sun is unlikely to make a large
                            acquisition.

Sun Pharma RoE & RoCE (%)                                   Sun Pharma one year forward PE

                                                                                   P/E (x)             Avg(x)                Peak(x)                  Min(x)
                                                            34


                                                            27                                         29.6
                                                                                                                                                                 25.0
                                                            20
                                                                                                                20.2
                                                            13
                                                                                                                11.9
                                                             6
                                                                          Mar-07




                                                                                              Feb-08




                                                                                                                 Feb-09




                                                                                                                                   Feb-10




                                                                                                                                                        Feb-11
                                                                 Aug-06




                                                                                     Aug-07




                                                                                                       Aug-08




                                                                                                                          Aug-09




                                                                                                                                            Aug-10




                                                                                                                                                                  Aug-11
                            Sun Pharma non-domestic business: key trends, triggers & risk
                            Building a strong and focused US business
                            Sun has been able to establish itself as a key Indian player in the US generics market
                            through a combination of:
                            1. Strong chemistry skills which has enabled it to develop a strong generic pipeline for
                                the US market.
                            2. Good product selection in building presence in the US market - Rather than
                                targeting all the large products, Sun has focused on building a pragmatic mix of niche,
                                low-competition products along with other normal products.
                            3. Identifying key opportunities - This capability is clearly visible in the Taro acquisition
                                wherein, despite a 3-year delay, Sun has been able to acquire the company and
                                consequently a profitable portfolio of dermatology and paediatric products.

                            Over the past few years, Sun has been able to build a very strong pipeline of generic
                            products for the US market. It currently has 149 ANDAs pending US FDA approval - one
                            of the strongest pipelines amongst Indian companies.

August 2011                                                                                                                                                           88
                                                                                                                         Sun Pharma



              Key Indian companies - ANDA pipeline
                                                    Filed        Approved            Pending Approval
                                                                             383



                                                                                   232
                 215                                    204
                                   180
                       138                                    138                        151                            152
                                         104                                                        109                            101
                             77                76                    66                                   69
                                                                                                               40             51



                 Aurobindo         Dr. Reddy's              Ranbaxy                Sun               Glenmark                Lupin

                                                                                                               Source: Company/MOSL


              Taro acquisition - fills a key gap and complements Sun's US presence
              About 90% of Taro's sales come from the US markets. It has expertise in the dermatology
              and paediatric segments and has about 170 scientists involved in product development.
              One of the key attractions is Taro's capabilities of developing and manufacturing of
              ointments, creams, lotions in the semi-solids category. The acquisition fills-in a key gap in
              Sun's US portfolio and complements its existing presence in this important market.

              Taro enjoys relatively high profitability compared to peers
              Given its strengths in the low-competition therapeutic segment, Taro has traditionally enjoyed
              relatively higher profitability in the US generics market. We believe that this is sustainable
              and in fact, under the control of a capable management like Sun, the profitability is likely to
              improve in the future, albeit gradually.
              TARO - Key financials
              (USD M)                          CY08         CY09          CY10      2QCY10          2QCY11          1HCY10     1HCY11
              Sales                             337           359           393                98       112            187      219
              Growth (%)                                       6.6           9.4                       14.2                    17.4
              EBITDA                             55            67             85            19           34            39        68
              EBITDA Margins (%)               16.4          18.8           21.7          19.9         30.6          20.8      30.8
              PBT                                56            51             71            20           38            31        71
              Tax                                12          (70)             18             4            2             6         8
              PAT                                44           121             52            17           36            25        62
              Growth (%)                                    173.2         (56.8)                      119.6                   147.9
                                                                                                               Source: Company/MOSL


              Taro - Good acquisition at reasonable valuations
              Unlike some of its other Indian peers, Sun has been extremely cautious in paying for
              inorganic growth. The Taro acquisition is a case in point. It has paid ~USD280m for a
              66% economic interest in Taro valuing the company at 1x EV/Sales and 4.6x EV/EBITDA
              which, we believe is a reasonable valuation compared to some of the other acquisitions
              made by a few Indian players.




August 2011                                                                                                                              89
                                                                                                        Sun Pharma



              Caraco - US FDA resolution is likely to be long-drawn
              While there is no fresh update on the US FDA resolution at Caraco, the company has, in
              the past, indicated that the process will be very gradual. We estimate part-recovery in
              Caraco's core US revenue from FY13, based on the assumption that the US FDA issues
              will get resolved in FY12. The ongoing US FDA issues have adversely impacted Caraco's
              core revenue (excluding distributed products revenue) for the past two years.
              Caraco - revenue trend (USD m)
                                       Caraco Revenue - Total         Caraco Revenue - Mf gd Products

                                 350            337
                                                                                  288
                                                                234

                                       125                                                               138
                  117 112                             112                                    108
                                                                                                                65
                                                                                                   45
                                                                      22                23


                   FY07           FY08            FY09          FY10              FY11E       FY12E       FY13E

              Note: Caraco's FY11 financials not given separately; hence, our estimates       Source: Company / MOSL


              Guidance - topline growth of 28-30% for FY12
              Sun Pharma management has guided 28-30% topline growth for FY12. The strong growth
              will be partly driven by full-year consolidation of Taro financials as compared to a little
              over two quarters for FY11. Sun had recorded significant one-off upsides, which we
              estimate at INR8.4b for FY11 (the company has not disclosed these numbers separately)
              and at INR5b for FY12. The guidance includes one-offs for both these years. Based on
              these upsides for one-offs, the implied growth guidance for core revenue (ex-Taro) is 18-
              19% for FY12. The company intends to file ~25 ANDAs for FY12, R&D expenses are
              estimated at 6% of sales, and capex is estimated at INR4.5b.

              One-offs to continue in FY12 as well albeit with lower magnitude
              We believe SUNP will try to capitalize on some of the Para-IV/low-competition opportunities
              in the US in FY12. This will be in line with its past trend of exploiting a few such opportunities
              every year. However, we also believe that one-off upsides are likely to decline YoY in
              FY12 due to the absence of large opportunities like generic Eloxatin which was a key
              contributor in FY11.

              FTF/low-competition Upsides in US (INR m)
                                                                           FY11                         FY12E
              Eloxatin                                                 4,530                                 -
              Exelon                                                   1,076                             1,404
              Keppra Inj                                                 704                               918
              Effexor-XR                                               1,342                                 -
              Protonix                                                   760                                 -
              Taxotere                                                     -                             1,181
              Prandin                                                      -                             1,553
              Total one-off revenues                                   8,412                             5,056
              Total one-off PAT                                        4,119                             2,378
                                                                                              Source: Company / MOSL



August 2011                                                                                                          90
                                                                                                                               Sun Pharma



Financials and valuations: Sun Pharma


Consolidated Income Statement                          (INR Million)     Ratios
Y/E March                    2010        2011      2012E       2013E     Y/E March                      2010       2011    2012E      2013E
Net Sales                  41,028      57,214     65,601      75,976     Basic (INR)
Change (%)                    -1.9       39.5        14.7         15.8   EPS                             13.0      17.5      19.6      20.9
Total Expenditure          27,394      37,543     44,811      51,008     Fully Diluted EPS               13.0      13.6      17.3      20.9
% of Sales                    66.8       65.6        68.3         67.1   Cash EPS                        14.5      19.5      22.3      23.8
EBITDA                     13,633      19,672     20,791      24,968     BV/Share                        75.6      91.6     104.7     120.4
Margin (%)                    33.2       34.4        31.7         32.9   DPS                              2.8       3.5       3.6       4.5
Depreciation                1,533       2,041       2,716      3,031     Payout (%)                      24.7      22.2      21.2      22.2
EBIT                       12,100      17,631     18,075      21,938
Int. and Finance Charges         62       149           56          60   Valuation (x)
Other Income - Rec.         2,111       2,876       3,351       4,333    P/E                             35.6      34.2      26.8      22.2
PBT                        14,149      20,358     21,370      26,211     Cash P/E                        31.9      23.8      20.9      19.5
Tax                            679      1,284       1,069       1,835    P/BV                             6.1       5.1       4.4       3.9
Tax Rate (%)                    4.8        6.3         5.0         7.0   EV/Sales                        10.9       7.7       6.6       5.5
Profit After Tax           13,471      19,074     20,302      24,376     EV/EBITDA                       32.7      22.4      20.8      16.7
   Change (%)                -28.3       41.6          6.4        20.1   Dividend Yield (%)               0.6       0.8       0.8       1.0
   Margin (%)                    33         33          31          32
Less: Mionrity Interest        -40        913        2350        2750    Return Ratios (%)
Net Profit                 13,511      18,161     20,330      21,626     RoE                             12.8      16.2      17.7      18.5
Adj. PAT                    9,501      14,041     17,952      21,626     RoCE                            18.7      22.9      20.5      22.2


Consolidated Balance Sheet                            (INR Million)      Working Capital Ratios
Y/E March                    2010        2011      2012E       2013E     Fixed Asset Turnover (x)         2.7       2.7        2.4       2.6
Equity Share Capital        1,036       1,036       1,036      1,036     Debtor (Days)                   105         75         75       75
Total Reserves             77,254      93,798    107,441     123,661     Inventory (Days)                  96       94         93        90
Net Worth                  78,289      94,833    108,477     124,696     Working Capital T/O (Days)      263       293        319       360


Minority Interest           1,932       8,472     10,822      13,571     Leverage Ratio
Deferred Liabilities         -890       -3652      -3652       -3652     Debt/Equity (x)                  0.0       0.0       0.0        0.0
Secured Loan                1,003           0          0           0
Unsecured Laon                708       4,256      1,500       1,500     Cash Flow Statement                                   (INR Million)
Total Loans                 1,711       4,256      1,500       1,500     Y/E March                      2010      2011      2012E     2013E
Capital Employed           81,042     103,908    117,146     136,115     Oper. Profit/(Loss) bef. Tax 13,633    19,672     20,791    24,968
                                                                         Interest/Dividends Recd.      2,111     2,876       3,351     4,333
Gross Block                23,340      36,545     41,045      45,545     Direct Taxes Paid              -890    -4,046     -1,069    -1,835
Less: Accum. Deprn.         8,013      10,053     12,769      15,799     (Inc)/Dec in WC              -4,675      -533     -5,097    -2,637
Net Fixed Assets           15,328      26,492     28,276      29,746     CF from Operations           10,179    17,968     17,977    24,830
Capital WIP                 1,448       1,448      1,448       1,448
Goodwill                    4,060       7,720      7,720       7,720     (inc)/dec in FA               -2,920   -16,864    -4,500    -4,500
Investments                30,664      22,310     22,310      22,310     (Pur)/Sale of Investments    -12,069     8,354         0         0
                                                                         CF from investments          -14,989    -8,510    -4,500    -4,500
Curr. Assets               37,121      60,172     71,981      93,114
Inventory                  10,739      14,794     16,728      18,734     Change in networth            -2,348     8,251         0         0
Account Receivables        11,748      11,716     13,480      15,612     (Inc)/Dec in Debt                -78     2,545    -2,756         0
Cash and Bank Balance       6,072      21,936     28,293      43,157     Interest Paid                    -62      -149       -56       -60
L & A and Others            8,562      11,726     13,480      15,612     Dividend Paid                 -3,321    -4,241    -4,308    -5,407
Curr. Liability & Prov.     7,579      14,234     14,589      18,221     CF from Fin. Activity         -5,809     6,406    -7,121    -5,467
Account Payables            4,095       9,203      9,212      10,980
Provisions                  3,484       5,030      5,377       7,241     Inc/Dec of Cash             -10,618 15,864         6,357    14,864
Net Current Assets         29,542      45,939     57,392      74,892     Add: Beginning Balance       16,690     6,072     21,936    28,293
Appl. of Funds             81,042     103,908    117,146     136,116     Closing Balance               6,072 21,936        28,293    43,157
E: MOSL Estimates                                                        Note: Cashflows do not tally due to acquisition




August 2011                                                                                                                               91
                                                                                                   Domestic Formulations | New Peaks




                                                                                                             MEDICINES
    MEDICINES                       CAPSULE                                                                   Score       60/100
                                                         Cadila Healthcare
                                                                                            CMP: INR824                         CDH IN
     Guts and glory!                                                                        TP: INR907                   Neutral
         M: Mix                                                  6/10        E: Equity with doctors                              7/10

               Cadila's relatively small presence in the fast growing             Enjoys good brand equity in a couple of therapeutic
               segments of Diabetes, CNS & CVS (contributes                       segments.
               ~24% to sales) will make it difficult for the company              Cadila is among the top three players in two of the
               to outpace the market growth.                                      largest therapeutic segments, CVS and GI. The
               The CVS and GI segments' contribution to revenue                   company ranks first in the fast growing gynecology
               has risen over the past 10 years from 24% to 37%                   segment.
               while that of respiratory and anti-infectives has fallen           Cadila has a good prescription market share in the
               from 32% to 21%.                                                   GI, respiratory and CVS segments.




        D: Distribution & reach                                7/10          I: Introductions                                   5/10

               Cadila derives 65% of its revenue from metro and                   Cadila has few new introductions compared with
               tier-I cities and is expanding its presence in tier-II             its peers and this is one reason why it has not
               to tier-VI towns.                                                  been able to outperform the market in the past.

               The company's growth rate in all geographies has                   Revenue growth has been driven largely by its
               accelerated from CY09.                                             existing products over the past four years.

               It employs one of the larger field forces in the
               industry with MR strength of 4,000.




  Stock info                                  Financial & valuation summary
                                              Year     Net Sales PAT     EPS   EPS          P/E    P/BV   RoE    RoCE     EV/    EV/
  Equity Shares (m)                   204.7
                                              End       (INR M) (INR M) (INR) GR. (%)       (X)     (X)   (%)     (%)    sales EBITDA
  52-Week Range (INR)              984/599
                                              03/10A    36,868     5,011   24.5   55.2      33.7   10.4   35.4    26.4    4.8     22.1
  1,6,12 Rel. Perf. (%)             5/18/44   03/11A    46,302     6,334   30.9   26.4      26.6   7.8    37.5    30.5    3.8     17.2
  M.Cap. (INR b)                      168.7   03/12E    51,717     5,801   28.3    -8.4     29.1   6.2    27.3    25.4    3.4     17.2
  M.Cap. (USD b)                        3.7   03/13E    59,983     8,419   41.1   45.1      20.0   5.0    27.6    27.2    2.9     14.0
  Background




                         Cadila is amongst one of the largest domestic pharma companies in India with a strong focus on the
                         global generics opportunity. The company is gradually building its presence in the regulated generic
                         markets beginning with the US and France. It also plans to tap some unique opportunities through its JVs
                         with Nycomed, Hospira. Bayer and Bharat Serums.



August 2011                                                                                                                              92
                                                                                                                                   Cadila




    Chairman Profile
  Chairman




                      Cadila is one of the most consistent performers amongst the Indian pharmaceutical companies. It is
                      promoted by Mr. Pankaj Patel. Sustaining strong growth and return ratios coupled with a very conservative,
                      low-risk management style is his key achievement.



       C: CAGR and scale-up                                6/10         I: Improvement in productivity                           5/10

             Cadila's domestic formulations business posted                    Cadila's is MR productivity has declined at 2%
             revenue CAGR of 12.4% over FY05-11, which is                      CAGR over 2004-10.
             slightly below market growth during the same
                                                                               MR growth was 11.3% and revenue growth was
             period.
                                                                               9.2%, indicating a fall in sales force productivity.
             We expect Cadila to post revenue CAGR of 13-                      Revenue per MR declined from INR4.1m in 2004 to
             14% over FY11-13, which is slightly below                         INR3.6m in 2010, which however, is in line with the
             compared to 15-16% CAGR for the industry.                         industry average.
             Rapid scale-up in revenue would be difficult given
             Cadila's high base and small presence in fast-
             growing chronic segments.




       N: Non-domestic business                            6/10         E: Earnings growth                                       6/10

             We are positive on Cadila's international business,               Cadila is one of the most consistently performing
             given its strong chemistry skills and pragmatic mix               Indian pharmaceutical companies.
             of its geographic presence and partnerships.                      We expect overall top-line CAGR of 14% over FY11-
             A cautious approach to establishing international                 13 leading to EPS CAGR of 15%.
             presence has ensured sustained higher return
                                                                               Earnings growth will be led by traction in the
             ratios for investors.
                                                                               international business and steady growth in the
             Cadila has a good track record of forging                         domestic portfolio.
             partnerships with global players.

             We expect Cadila's international business to post
             revenue CAGR of 16% over FY11-13, led by 18%
             CAGR for formulation exports.


       S: Stock Attractiveness                                                                                                  12/20

             We expect RoE of 25-30% over the next two years,         Stock performance (1 year)
             driven by a cautious approach towards international                       Cadila Health        Sensex - Rebas ed
             expansion and a profitable domestic business.             1,000
                                                                         850
             Cadila is valued at 29.1x FY12E and 20.0x FY13E
                                                                         700
             consolidated earnings.
                                                                         550
             Reiterate Neutral with a target price of INR907(22x         400
             FY13E EPS plus INR3 upside from Taxotere).                   Aug-10        Nov-10         Feb-11    May -11        Aug-11




August 2011                                                                                                                              93
                                                                                                                                          Cadila



India formulations                   Guts and glory!
snapshot                             Strong in GI, CVS; maintains market share amidst rising competition
Domestic           formulations
                                     Cadila is among the leading companies in the domestic formulations business and has
contribute most to revenue
                                     maintained its market share over the years despite growing competition. Some of Cadila's
The domestic formulations
                                     brands lead in their segments and the company has strong brand equity in therapeutic
business is a major contributor
to Cadila's revenue and              segments like CVS and GI. Besides, Cadila is the largest player in the gynecology segment.
EBITDA. In FY11 the segment          The company has been expanding its presence in all geographies, which is visible from its
contributed 40% to Cadila's          growth in 2009 and 2010. We believe Cadila is likely to post a top-line of 13-14% CAGR over
revenue and we estimate              FY11-13, which is slightly below compared to the industry growth.
EBITDA contribution was
~45%, since it is one of
Cadila's most profitable
                                     1. Mix:                                                                                              6/10
businesses. We believe
despite strong contribution to
                                     CVS, GI, gynecology dominate sales
profitability, capital employed in
the business is proportionately      The top 3 therapeutic segments, CVS, GI and gynecology, contribute about half of Cadila's
lower.                               domestic formulations revenue. Other large segments, such as respiratory and anti-infective,
                                     contribute 11% and 10% respectively to total revenue. Over the past 10 years, the
EBITDA Contribution
                                     contribution of CVS and GI segments to revenue rose from 24% to 37% while that of
                                     respiratory and anti-infective segments fell from over 32% in FY01 to less than 21% in
  Non-DF             DF EBITDA
                        45%
                                     FY10.
EBITDA 55%

                                     CVS, GI and Gynaecology dominates the therapy mix

                                      CNS        Others       FY01     CVS                               Others         FY05
                                                  13%                                            CNS                                      CVS
                                       2%                              13%        GI                      20%
                                                                                                 2%                                       22%
                                                                                 11%
Among the leading players             VMN
in the industry                        9%
Cadila leads in the highly
competitive domestic
formulations market and is
among the top five companies
in the industry with market                                                                                                                GI
                                        Pain                                   Gynae             Pain
share of 3.7%. Cadila's market                                       Respira                                      Respira       Gynae     16%
                                        Mgmt      AI                           cology            Mgmt
share rose to 3.74% in 2010                                           tory                               AI        tory         cology
                                         9%      16%                            12%               9%
                                                                      15%                               11%        10%           10%
from 3.46% in 2006. Cadila's
domestic formulations
business grew at 12.4%               CVS, GI and Gynaecology dominates the therapy mix
CAGR over the last 6 years
                                                                                          FY11            CVS
versus 14% CAGR for
industry.                                      Anti-Malaria     CNS Others                                21%
                                                   0%            3% 16%
Cadila has maintained it
market share over the                              VMN
years despite growing                               2%
competition                                                                                                              GI
                                                 Dermatology                                                            17%
         Mkt Share (%)                               3%
         Gr. (%)
                             24.2
                                                   Pain Mgmt
 13.6 16.9            14.8                                    AI
                                                                               Res pira                 Gy naec ology
               8.6                                    7%
                                                             10%
                                                                                tory                        10%
  3.5

         3.7

               3.6

                       3.7

                              3.7




                                                                                11%

 2006 2007 2008 2009 2010
                                                                                                                            Source: Industry/MOSL

August 2011                                                                                                                                   94
                                                                                                                                                                                   Cadila



                                       2. Equity with doctors:                                                                                                                    7/10
                                       Good brand equity; among leaders in CVS, GI, gynecology segments
                                       Cadila has been a dominant player in two of the largest therapeutic segments of the
                                       industry, CVS and GI. Cadila ranks first in the gynecology segment with value market
                                       share of 10.4%. It ranks second in the GI segment with value market share of 6.5% and
                                       it ranks third in the fast growing and second largest, CVS segment with value market
                                       share of 6.5%. Cadila has either grown in line with or above the industry average in its top
                                       4-5 therapeutic segments. In the pain management and dermatology segments, Cadila's
                                       has outperformed the respective segment growth.

Value market share in key therapies (%) (2010)                                               Value growth comparison (%) (2010)

                                                          10.4                                                Av g Gr - Company          Av g Gr - Industry                     66.2


    6.5       6.5
                        5.4
                                         4.0                             3.7                                                             24.8
                                                                                              15.8 17.9       18.9 17.1 18.4                                                              18.4
                                                                                                                             16.2                  16.7 16.7 18.1

                                                                                                                 GI




                                                                                                                                                                                   Dermatology
                                                                                                  CVS
               GI




                                                                                                                                                                  Gynaecology
                                                                         Dermatology




                                                                                                                                            Pain/Analgesic
                                                                                                                           Respiratory
     CVS




                         Respiratory



                                         Pain/Analgesic



                                                           Gynaecology




* Average growth over 2009-2010                                                                                                                               Source: Industry/MOSL




                                       In terms of the number of prescriptions written, Cadila ranks second in the GI segment
                                       with a prescription market share of 4.5%. It ranks third in the respiratory segment with
                                       market share of 4.9% and seventh in the CVS segment with a prescription market share
                                       of 4.5%. Cadila has improved its ranking in the gynecology and respiratory segments and
                                       its ranking in CVS deteriorated a bit.

                                       Cadila's prescription ranking
                                                                         Jan-07                  Jan-08                Jan-09                           Jan-10                   Oct-10
                                       GI                                              1.0              2.0                2.0                                2.0              2.0
                                       Gynaec                                          3.0              3.0                1.0                                2.0              2.0
                                       Respiratory                                     2.0              2.0                1.0                                2.0              2.0
                                       CVS                                             3.0              3.0                5.0                                7.0              6.0
                                       Pain Mgmt                                         -                -               24.0                               24.0             20.0
                                                                                                                                                              Source: Industry/MOSL



                                       Top 10 brands contribute 30% of revenue
                                       Cadila's top 10 brands contribute ~30% to total revenue, indicating lower brand
                                       concentration. Its No1 brand, Aten (Atnolol, CVS), ranks thirty-seventh in the industry
                                       and it reported 12.5% CAGR over the past four years. Six of the top 10 brands posted
                                       CAGR in double digits over the past four years.

August 2011                                                                                                                                                                                      95
                                                                                                                                                     Cadila



                                          Cadila's top 10 brands
                                          Brand                  Drug                  Product Launch Sales (INR m)              YoY Gr (%)        CAGR (%)
                                          Aten           Atenolol                             1993                    865               19.2         12.5
                                          Atorva         Atorvastatin                         2000                    585               16.2         19.5
                                          Ocid           Omeprazole                           1991                    517                6.6         10.2
                                          Falcigo        Artesunate                           1996                    484               10.7         30.6
                                          Deriphyllin    Etophylline+Theophylline             1981                    637                8.4           2.9
                                          Primolut-n     Norethisterone                       1969                    432                5.3           4.1
                                          Amlodac        Amlodipine                           1995                    379               16.1           8.4
                                          Dulcolax       Bisacodyl                            1983                    352               18.7          11.5
                                          Mifegest       Mifepriston                          2002                    346               -5.7           1.6
                                          Pantodac       Pantoprazole                         1999                    456               13.0          11.3
                                          CAGR through 2006-10                                                                       Source: Industry/MOSL



                                              3. Distribution and reach:                                                                             7/10
                                          Cadila derives 65% of its revenue from metros and class-I towns compared with 63% of
                                          the industry average. In the past four years, revenue CAGR for all geographies except
                                          metros were in line or marginally better than that of the industry average.


Cadila: Geographical distribution of revenues (%)                                 Industry: Geographical distribution of revenues (%)


    METROS         CLASS I TOWNS                CLASS II TO VI          RURA L        METROS         CLASS I TOWNS           CLASS II TO VI        RURAL

     18.3          18.5                18.1              16.5           15.9          20.6           20.9             20.0           18.1          17.3

     18.7          18.5                18.9              18.8           19.1          19.2           19.0             19.5           19.4          19.6


     32.5          30.5                31.3              32.4           32.4                                                         32.5          32.0
                                                                                      32.6           31.3             31.6


     30.5          32.4                31.8              32.2           32.7          27.6           28.9             28.9           30.0          31.0


    CY 06          CY07                CY08             CY09           CY10           CY06       CY07                 CY08           CY09          CY10

Cadila: geography-wise growth rates (%)                                           Industry: geography-wise growth rates (%)

          Metros     Clas s I Tow ns                 Class II to VI       Rural         Metros         Class I Tow ns           Clas s II to VI       Rural
                                                                        25.9                                                                        26.2
   24.4                                                                  25.9
                                                                                                                                                    23.5
                                                                         24.0
  18.2                                         19.0                                                                                                 20.7
                                                                         19.3                               17.5             17.7
                                                                                     17.6                      15.6                                 17.5
   15.6                                       16.3
                      11.3                                                           14.0                                     16.4
                                                                                                             14.7
   10.0                                              14.5                            11.1                                     13.0
                          10.8
                                 6.5                                                                        9.5
                                                                                      7.9
                     5.8                              5.0
                                                                                                                                    2.5

      CY07            CY08                      CY09                  CY10             CY07                 CY08             CY09                 CY10


                                                                                                                                     Source: Industry/MOSL




August 2011                                                                                                                                                96
                                                                                                                                                      Cadila



                                  4. Introductions:                                                                                                  5/10
                                 Cadila's growth over the past four years has been led by existing products
                                 and new launches
                                 Over the past four years Cadila launched 49 new products (including line extensions)
                                 annually which is in line with its peers. Average revenue per new launches has grown
                                 from INR42m in CY07 to INR94m in CY10. Cadila's revenue growth is driven by existing
                                 products and new launches.

Cadila - new launches                                                         Cadila growth compositions (%)

                   No. Of launc hes in last 2 y rs                                            New Launches                   Existing Brands
                   Avg s ales per launch (INR m)           94.4

                   75.6              74.4

                                                                                                                                               16.5
      41.7
                                                                                   13.0                                      8.5
                                                                                                             2.9

                                                                                                             5.7             6.2               7.7
       90           84               101                   113                      4.0

     CY07          CY08              CY09                CY10                      CY07                  CY08                CY09              CY10


                                                                                                                                    Source: Industry/MOSL



                                  5. CAGR and scale up:                                                                                              6/10
                                 We expect 13-14% CAGR for Cadila's domestic formulations business led by existing
                                 products, increasing geographical penetration and incremental contribution from new
                                 launches. This is below our estimated forecast of 15-16% CAGR for the industry. Out-
                                 performance of the industry seems difficult due to a lower prescription share in high-
                                 growth lifestyle segments and the anti-infective segment. It's absence in fast growing
                                 lifestyle segments except CVS, will make it difficult for it to outpace industry growth. Its
                                 focus on improving workforce productivity needs to be enhanced for it to grow its business
                                 more profitably.

                                 Cadila - domestic formulations performance

                                                                  DF Revenues (INR m)                                 YoY Grow th (%)
                                                                                                                   18.6
                                     15.4
                                                                                                                                                14.7
                                                                                                                                    12.8
                                                                                                  12.2
                                                                    10.9
                                                                                    9.6
                                                     8.3
                                                      10,603




                                                                     11,763




                                                                                     12,889




                                                                                                    14,458




                                                                                                                    17,146




                                                                                                                                     19,347




                                                                                                                                                 22,197
                                        9,793




                                      FY06           FY07          FY08            FY09            FY10            FY11            FY12E       FY13E

                                                                                                                                   Source: Company/MOSL




August 2011                                                                                                                                               97
                                                                                                                      Cadila



                                 6. Improvement in MR productivity:                                                   5/10
                                Cadila's top-line growth is driven by sales force additions; fares poorly
                                when compared with the industry productivity
                                Cadila's domestic formulations business revenue posted 9.2% CAGR over FY04-10 and
                                its sales force posted 11.3% CAGR, implying negative productivity of the workforce. In
                                2004, Cadila derived sales of INR4.1m per MR, which fell to INR3.6m in FY10. Cadila's
                                performance was below average, compared with the average of performances covered
                                in the report.


Cadila - Sales force productivity (2004-10)

              No. of MRs       Rev enue per MR (INR m)                      Sales forc e addition CAGR (%)
                                                                            Productivity Improv ement CAGR (%)
              4.1


                                                                                                           11.5
                                              4,000                         11.3

                                                3.6                                                         1.9
               2,100                                                        -1.9


               2004                           2010                         Cadila                         Indus try

                                                                                               Source: Industry/Company/MOSL




                                 7. Non-domestic business — Snapshot:                                                 6/10
                                Non-domestic business: Snapshot
                                Positives
                                 Expanding presence in emerging and regulated markets through a mix of its own
                                   presence and front-end acquisitions.
                                 Strong chemistry skills and fully backward integrated low-cost operations help in making
                                   the US business viable despite being a late entrant.
                                 Low-risk strategy to access international markets through its own presence and
                                   partnerships.
                                 Supplies of injectables to Hospira to ramp-up in the next 1-2 years while the Abbott
                                   tie-up for emerging markets is likely to contribute from FY13 onwards.

                                Risks and concerns
                                 Needs to build a differentiated portfolio in the US to access low-competition
                                   opportunities. The company has initiated steps in this directions.
                                 NCE research yet to deliver desired returns for investors.
                                 Slow progress in accessing the Japanese generic opportunity.


                                News flow/triggers
                                 Ramp-up in supplies to Hospira and Abbott.
                                 Signing of supply agreements with MNCs.

August 2011                                                                                                              98
                                                                                                                               Cadila



                                     Impact assessment
                                      We are positive on Cadila's international business given its strong chemistry skills and
                                       pragmatic mix of own presence and partnerships.
                                      Cautious approach to establishing an international presence has ensured sustained
                                       higher return ratios for investors.
                                      Has a good track record of forging partnerships with global players.
                                      Expect 16% CAGR for the international business over FY11-13 led by 18.3% CAGR
                                       for formulation exports.

Sales mix (INR M)                                                                          EBITDA Contribution
                           FY09      FY10        FY11     FY12E      FY13E    FY11-13
                                                                             CAGR (%)
Domestic Sales
                                                                                            Non-DF                            DF
Formulations           12,889    14,458     17,146      19,347      22,197         13.8                                     EBITDA
                                                                                            EBITDA
APIs                      426        318        352         317        348          -0.5                                     45%
                                                                                             55%
Consumer & Others       3,120     3,948       4,827      5,458       6,372         14.9
Gross Domestic sales16,435       18,724     22,325      25,121      28,917         13.8
% to sales               56.3       51.8       49.4        49.5       48.6
Export Formulations     9,676    14,018     19,214      22,170      26,838         18.2
Export APIs             3,060     3,400       3,672      3,472       3,712           0.5
Total Exports          12,736    17,418     22,886      25,642      30,550         15.5
% to sales               43.7       48.2       50.6        50.5       51.4
Gross Sales            29,172    36,142      45,211     50,763      59,467         14.7
Note:Estimates exclude Nesher acquisition pending availability of more details from                              Source: Company/MOSL
Cadila management.



                                     8-9. Earnings growth and stock attractiveness:                                           18/30
                                     Cadila's growth will be led by increased traction in its international businesses, ramp-up in
                                     supplies to Hospira and sustained double-digit growth in domestic formulations and consumer
                                     businesses. We estimate 15% revenue and EPS CAGR for FY11-13 for core operations
                                     excluding one-offs and RoE of 27-28% over the next two years. Sustaining double-digit
                                     growth without diluting return ratios has been the company's USP and has led to a significant
                                     re-rating of the stock.

                                     We believe that this track record would be subjected to many challenges, as Cadila tries to
                                     aggressively scale-up to achieve its revenue target of USD3b by FY16. This target implies
                                     a topline CAGR of 25% for FY11-16, which we believe is very aggressive. The company
                                     will have to invest significant resources to achieve this target, which can raise its risk
                                     profile.

                                     Given the disappointing core performance for the last two quarters and likely impact of
                                     the Nesher acquisition, the strong earnings upgrade cycle of the past two years could
                                     break. Cadila trades at 29.1x FY12E and 20.0x FY13E consolidated EPS. We believe that
                                     valuations are rich and leave little scope for further re-rating. We maintain Neutral. Our
                                     target price is INR907 (22x FY13E EPS + INR3/share DCF value of earnings from
                                     Taxotere).




August 2011                                                                                                                          99
                                                                                                                                                                         Cadila



Cadila RoE & RoCE (%)                                             Cadila one year forward P/E

                           RoE             RoCE                                          P/E (x)               Avg(x)                  Peak(x )               Min(x )
                                                                  35
                                  37.5
                        35.4
                                                                  28                                                    30.2

                                                                  22                                                                                                     24.6
    26.7      26.9                30.5        27.3     27.6                                                             15.8
                                                                  15
                         26.4                          27.2
                                             25.4                  9
    23.1      23.6
                                                                                                                        6.5
                                                                   2




                                                                                Mar-07




                                                                                                     F eb-08




                                                                                                                        F eb-09




                                                                                                                                           F eb-10




                                                                                                                                                               F eb-11
                                                                       Aug-06




                                                                                            Aug-07




                                                                                                               Aug-08




                                                                                                                                  Aug-09




                                                                                                                                                     Aug-10




                                                                                                                                                                          Aug-11
     2008      2009      2010       2011      2012E     2013E




                                 Annexure: Cadila non-domestic business
                                 New launches to drive growth in the US
                                 Cadila has a pipeline of 65 ANDAs pending approval and has received 65ANDA approvals
                                 so far (including tentative approvals). The company filed 24 ANDAs in FY11 and launched
                                 11 products in the US. It expects to file 15-20 ANDAs with the US FDA every year and
                                 get about 8-10 approvals a year. Cadila's US business is witnessing increased traction due
                                 to the absence of some of the competitors (due to US FDA issues) and new product
                                 launches. The company is also improving its market share in already launched products.
                                 We expect Cadila to post sales of INR11.9b in FY12 against INR9.7b in FY11. We expect
                                 this business to grow by 20% CAGR over FY11-13. Cadila has also commenced development
                                 and filing of potential low-competition products with delivery advantages (trans-dermal
                                 patches and respiratory products) and is focusing on developing a pipeline of such niche
                                 products (likely to be commercialized after FY12).


                                 Nesher acquisition - long-term positive, but may pressurize P&L in short
                                 term
                                 Cadila recently entered into an agreement to acquire certain assets and liabilities of Nesher
                                 Pharma in the US (a subsidiary of KV Pharma) for ~USD60m. It has acquired Nesher's
                                 existing and future product pipeline, its manufacturing facility and R&D lab. Cadila will
                                 also take over certain liabilities. The transaction is likely to close by August/September
                                 2011 and Cadila will be consolidating Nesher's financials with effect from August/
                                 September.

                                 With this acquisition, Cadila gets access to Nesher's controlled substances pipeline (besides
                                 other products) as well as access to its manufacturing facility for these controlled substances.
                                 Nesher's ANDA pipeline includes 8 filings and another 5 products under development,
                                 which address a potential on-patent market of USD2.1b. We note that given the possibility
                                 of controlled substances being abused as drugs, the US government has put stringent rules
                                 in place for monitoring the manufacturing and sale of such products. This includes a pre-
                                 requirement of a local manufacturing facility with DEA license to manufacture and supply
                                 such products in the US. Through the Nesher acquisition, Cadila gets access to a DEA-
                                 licensed facility.


August 2011                                                                                                                                                                  100
                                                                                                         Cadila



              Given the entry barriers, we believe that the controlled substances market will be a low-
              competition market for generics players. Currently, Nesher is making net losses, which
              may pressurize Cadila's P&L till it is able to turn around Nesher's operations. Cadila
              management has guided that Nesher is likely to contribute ~USD15m in revenue for
              FY12. It expects Nesher to report a minor net loss for FY12 and a positive bottomline for
              FY13. We are awaiting further clarity from Cadila on the plans for achieving this turnaround.
              We also note that Cadila management has a track record of being conservative in its
              inorganic initiatives and has not made any acquisitions in the past which have diluted the
              return ratios for investors.

              Hospira supplies to ramp up in FY12 led by Taxotere, new launches
              Cadila's supplies to Hospira commenced in FY10, recording INR839m in revenues for
              supplies to Europe. It posted FY11 revenue of INR2.15b led by the launch of exclusivity
              product generic Taxotere in the US. We expect a ramp-up in this business in FY11 led by
              commercialization of more products and revenue from limited competition product Taxotere
              for some more time. We expect FY12 revenue of INR803m to Cadila from Taxotere.
              However we have not included it in our FY12 estimates. We are valuing the upside based
              on the DCF method (INR3/share) since this is a limited period opportunity.

              French operations to record 14% CAGR
              While Cadila's French operations are completely aligned to a low-cost generic market, we
              expect only 14% CAGR for this business over FY11-13 driven mainly by the slow market
              growth.

              Emerging market revenue to grow by double-digits
              Among emerging markets, Cadila is present mainly in Latin America. We expect Cadila's
              emerging market revenue to record 17% CAGR over FY11-13 driven by new launches
              and favorable demographics.

              Abbott tie-up: Supplies to start from FY13
              In FY10, Cadila entered into a supply agreement with Abbott to supply 24 branded generic
              products to meet Abbott's requirements in 15 emerging markets (names not disclosed).
              The agreement also includes an option for 40 additional products to be included over the
              term of the collaboration.

              Cadila will make the products at its facilities in India. The products selected fall in categories
              of pain, cancer, CVS, neurology and respiratory illnesses. Product names have not been
              disclosed.

              The supplies will enable Cadila to capture a part of the upsides in some emerging markets
              where it does not have a presence. We believe this is a long-term positive for Cadila, given
              the possibility that such arrangements tend to include a larger product basket over time.
              We expect the supplies to start from FY13.




August 2011                                                                                                 101
                                                                                                                             Cadila



Financials and valuations : Cadila


Income Statement                                 (INR Million)   Ratios
Y/E March                   2010     2011    2012E    2013E      Y/E March                       2010     2011    2012E     2013E
Net Sales                  36,868   46,302   51,717   59,983     Basic (INR)
Change (%)                   25.9     25.6     11.7     16.0     EPS                              24.5     30.9     28.3      41.1
Total Expenditure          28,863   36,040   41,427   47,500     Cash EPS                         30.8     40.9     40.2      49.8
EBITDA                      8,006   10,262   10,291   12,483     BV/Share                         79.0    106.1    132.7     165.4
Margin (%)                   21.7     22.2     19.9     20.8     DPS                               5.0      6.3      6.3       8.7
Depreciation                1,339    1,269    1,569    1,779     Payout (%)                       23.7     20.8     21.6      23.8
EBIT                        6,667    8,993    8,721   10,704
Int. and Finance Charges      821      699      731      650     Valuation (x)
Other Income - Rec.           159      131      207      272     P/E                              33.7     26.6     29.1      20.0
PBT before EO Expense 6,004          8,425    8,197   10,326     Cash P/E                         26.7     20.1     20.5      16.5
Extra Ordinary Exp./(Inc.)     46        0        0        0     P/BV                             10.4      7.8      6.2       5.0
PBT after EO Expense        5,958    8,425    8,197   10,326     EV/Sales                          4.8      3.8      3.4       2.9
Current Tax                   741    1,064    1,230    1,549     EV/EBITDA                        22.1     17.2     17.2      14.0
Tax                           741    1,064    1,230    1,549     Dividend Yield (%)                0.6      0.8      0.8       1.1
   Tax Rate (%)              12.4     12.6     15.0     15.0
Reported PAT                5,217    7,361    6,968    8,777     Return Ratios (%)
Less: Mionrity Interest       247      251      301      358     RoE                              35.4     37.5     27.3      27.6
Net Profit                  4,970    7,110    6,667    8,419     RoCE                             26.4     30.5     25.4      27.2
PAT Adj for EO Items        5,011    6,334    5,801    8,419
                                                                 Working Capital Ratios
                                                                 Fixed Asset Turnover (x)     2.3           2.6       2.6      2.7
                                                                 Debtor (Days)                 46           60        66        74
                                                                 Inventory (Days)              74           64        71        79
Balance Sheet                                    (INR Million)
                                                                 Working Cap. Turnover (Days) 65            68        76        85
Y/E March                  2010       2011   2012E    2013E
Equity Share Capital         682     1,024    1,024    1,024
                                                                 Leverage Ratio (x)
Total Reserves            15,501    20,691   26,154   32,841
                                                                 Current Ratio                   2.0        2.0       1.9      2.0
Net Worth                 16,183    21,715   27,178   33,865
                                                                 Debt/Equity                     0.5        0.4       0.3      0.2
Minority Interest            392       669        0        0
                                                                 * Ratios adjusted for bonus issue
Deferred liabilities        1141      1127     1127     1127
Total Loans               10,905    10,973   10,442    9,286
                                                                 Cash Flow Statement                                   (INR Million)
Capital Employed          28,621    34,484   38,748   44,290
                                                                 Y/E March                      2010       2011    2012E    2013E
                                                                 Oper. Profit/(Loss) bef. Tax   8,006    10,262   10,291    12,483
Gross Block               25,578    28,320   33,320   36,320
                                                                 Interest/Dividends Recd.         159       131       207      272
Less: Accum. Deprn.        8,734     9,994   11,563   13,342
                                                                 Direct Taxes Paid               -741    -1,064   -1,230    -1,549
Net Fixed Assets          16,844    18,326   21,757   22,978
                                                                 (Inc)/Dec in WC                 -402    -2,108    -2,011   -3,206
Capital WIP                2,482     4,310    4,310    4,310
                                                                 CF from Operations             7,022     7,222     7,257    8,000
Investments                  207       207      207      207

                                                                 CF from Oper. incl EO Exp.      6,976    7,222    7,257     8,000
Curr . Assets             17,749    22,829   26,084   33,719
                                                                 (inc)/dec in FA                -3,478   -4,579   -5,000    -3,000
Inventory                  7,504     8,119   10,025   12,924
                                                                 (Pur)/Sale of Investments          42        0        0         0
Account Receivables        4,668     7,652    9,524   12,337
                                                                 CF from Investments            -3,436   -4,579   -5,000    -3,000
Cash and Bank Balance      2,507     2,952    1,773    2,877
Loans & Advances           3,070     4,106    4,762    5,581
                                                                 Change in Networth                289     -301        0         0
Curr. Liability & Prov.    8,661    11,188   13,611   16,937
                                                                 Inc/(Dec) in Debt              -1,605      345   -1,200    -1,156
Account Payables           6,710     8,955   10,777   13,218
                                                                 Interest Paid                    -821     -699     -731      -650
Provisions                 1,951     2,233    2,834    3,719
                                                                 Dividend Paid                  -1,237   -1,529   -1,505    -2,090
Net Current Assets         9,088    11,641   12,473   16,782
                                                                 Others                           -175      -14
Appl. of Funds            28,621    34,484   38,746   44,290
                                                                 CF from Fin. Activity          -3,550   -2,198   -3,436    -3,896
E: MOSL Estimates

                                                                 Inc/Dec of Cash                   -10      445   -1,179     1,105
                                                                 Add: Beginning Balance         2,517     2,507    2,952     1,773
                                                                 Closing Balance                2,507     2,952    1,773     2,878


August 2011                                                                                                                     102
                              Domestic Formulations | New Peaks




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August 2011                                                103
                                                                                                  Domestic Formulations | New Peaks




                                                                                                            MEDICINES
    MEDICINES                     CAPSULE                                                                    Score       49/100
                                                             Ranbaxy
     Sayonara, unless ...                                                                  CMP: INR468
                                                                                           TP: INR412
                                                                                                                           RBXY IN
                                                                                                                               Sell
        M: Mix                                                  6/10        E: Equity with doctors                             5/10

               Ranbaxy operates mainly in acute therapeutic                      Ranbaxy enjoys low brand equity with doctors
               segments, deriving 76% of its revenue from the                    except in the AI and dermatology segments. Some
               segment. It is yet to strengthen its presence in the              of its brands like Storvas have good brand equity in
               chronic segment.                                                  the CVS segment.
               Ranbaxy is a dominant player in large therapy                     Ranbaxy is ranked at No3 position in the AI
               segments like AI, CVS and pain management. The                    segment with a prescription market share of 7.8%
               segments, along with the sex stimulant segment,                   and it ranks No4 in the dermatology segment with
               contribute ~68% to Ranbaxy's domestic                             a prescription market share of 5.4%.
               formulations revenue.
                                                                                 Over the past five years, Ranbaxy's brand equity
                                                                                 has taken a beating in almost all therapy areas.




        D: Distribution & reach                                 7/10        I: Introductions                                   5/10

               Ranbaxy derives 66% of its revenues from metros                   Ranbaxy has been aggressive in launching new
               and tier-I cities.                                                products over the past four years compared with
                                                                                 its peers. It launched 65 products (including line
               Distribution reach in metros has increased over
                                                                                 extensions) a year over the past four years.
               time but the contribution of rural geographies to
               revenue has fallen over the past four years.                      Revenue growth has been driven by existing
                                                                                 products and new launches.
               Ranbaxy's field force has been recently expanded
               by 50% to 4,500 MRs.




  Stock info                                 Financial & valuation summary
  Equity Shares (m)                 420.4    Year     Net Sales PAT     EPS       EPS       P/E   P/BV   RoE     RoCE    EV/    EV/
                                             End       (INR m) (INR m) (INR )    Gr. (%)    (x)    (x)   (%)      (%)   Sales EBITDA
  52-Week Range (INR)             625/414
                                             12/09A    75,970    1,911    4.5    -38.2       -      -    4.4      9.8     -       -
  1,6,12 Rel. Perf. (%)              0/6/6
                                             12/10A    89,608    10,855   25.8   467.1     15.2    2.9   19.4    15.9    2.3    11.1
  M.Cap. (INR b)                    196.8    12/11E    85,242    4,991    11.9   -54.0     33.0    2.7   11.4    10.7    2.4    23.0
  M.Cap. (USD b)                      4.3    12/12E    93,005    7,052    16.7    41.3     23.3    2.4   10.4    11.1    2.2    18.5
  Background




                        Ranbaxy is a leading global generic company with global revenues of over USD1.9b. The company has
                        established a direct presence across the world in key markets like US, UK, Germany, France, Brazil and
                        other emerging markets. Around 40% of its revenues come from the developed markets of the US and
                        Europe while emerging markets contribute about 50-55% of revenues.



August 2011                                                                                                                            104
                                                                                                                           Ranbaxy




   CEO Profile


                  Ranbaxy is currently a 64% subsidiary of Daiichi Sankyo (Japan). It is being currently managed by a team
  CEO




                  of professionals headed by Mr. Arun Sawhney (MD). Establishing a global generics business and a
                  leading position in India, coupled with one of the strongest pipeline of First-to-File opportunities in the US
                  is the key achievement of the company.


    C: CAGR and scale-up                                6/10          I: Improvement in productivity                       3/10

        Ranbaxy posted revenue CAGR of 10.2% in the                       Ranbaxy's domestic formulation revenue posted
        domestic formulations market over CY04-10,                        10.2% CAGR and its sales force posted 15%
        underperforming market's growth.                                  CAGR over 2004-10 implying negative MR
                                                                          productivity.
        We expect CAGR of 14% for Ranbaxy's domestic
        formulations business led by its recent field-force               The current productivity of INR3.6m per MR is in
        expansion and rapid new launches. This slightly                   line with the industry average.
        lower than our forecast CAGR of 15-16% for the
        industry.
        Ranbaxy is likely to maintain its leading position
        in the sector given its strong position and market
        share in some of the largest therapeutic segments.



    N: Non-domestic business                            5/10          E: Earnings growth                                   3/10
        We are neutral on Ranbaxy's international                         We expect overall core top-line CAGR of 14.4%
        business despite its strong presence in the US                    over CY10-12, leading to EPS CAGR of 53%, albeit
        and in emerging markets due to ongoing US FDA                     on a very low base.
        issues and moderate profitability of its international
                                                                          Cost reductions leading to improved profitability and
        operations.
                                                                          gradual recovery in the US business will be key
        We expect the international business to post 13%                  growth drivers.
        CAGR over CY10-12 excluding low-competition and
        Para-IV products in the US.
        Option values (Para-IV products) will make a one-
        time contribution to PAT of INR38.2b over CY11-
        14, leading to DCF value of INR77/share.



    S: Stock Attractiveness                                                                                                9/20
        Aggressive international expansion, high cost              Stock performance (1 year)
        acquisitions and on-going US FDA issues have
                                                                                Ranbaxy Labs           Sensex - Rebased
        adversely impacted overall return ratios. While we          640
        expect some improvement in return ratios by CY12,           580
        they will still remain sub-optimal.
                                                                    520
        Ranbaxy is valued at 33.0x CY11E and 23.3x                  460
        CY12E consolidated earnings. Reiterate Sell with            400
        a target price of INR412 (20x CY12E EPS)                     Aug-10        Nov-10       Feb-11      May-11        Aug-11
        excluding Para-IV upsides.


August 2011                                                                                                                        105
                                                                                                                                  Ranbaxy



India formulations                       Sayonara, unless ...
snapshot                                 Key challenges are resolved at the earliest
Domestic formulations -
                                         Ranbaxy is the second largest Indian company by revenue in the domestic formulations
significant PAT contribution
                                         space after Cipla and ranks third in the overall ranking. Ranbaxy's strength lies in its strength
The domestic formulations
                                         in the acute therapeutic segments. However, it has underperformed the market over the
business is a leading
contributor to Ranbaxy's                 past four years and has been losing market share.
revenue and contributes ~98%
to its EBITDA excluding one off
upsides. Ranbaxy has been                1. Mix:                                                                                      6/10
posting large losses in its core
US business because of                   AI, CVS, pain management dominate sales
ongoing US FDA issues.
                                         The top four therapeutic segments including AI, CVS, pain management and sex stimulants
EBITDA Contribution
                                         contribute ~68% to Ranbaxy's domestic formulations revenue. Ranbaxy is among the
                                         market leaders in three of the largest therapy segments, AI, CVS and pain management.
         Non-DF EBITDA, 2%
                                         Ranbaxy derives ~76% of its revenue from acute therapies. Ranbaxy's dependence on
                                         the AI segment has fallen over the past 10 years while the contribution of CVS, pain and
                                         GI improved over the years.

           DF EBITDA, 98%                Ranbaxy: Therapeutic mix

                                                            CY 2000                                            March 2011
The second largest Indian                        Vitamins                                         Respirat    Diabetes Others
                                                            Others
player in the industry                    Respira 14%        7%
                                                                                                  ory 4%         2%     7%
Ranbaxy has consistently                   tory                                    AI
                                                                                                                                  AI 35%
                                            2%                                    51%        CNS 4%
ranked among the top three
players in the industry due to                                                               GI 7%
                                          CNS
its strong presence in two of
                                          5%
the largest therapeutic                                                                      Derma
                                         Derma
segments in the industry.                                                                     8%
                                          3%
Ranbaxy holds 4.69% market                   GI                                                Sex
share, which has fallen from                 4% Pain          CVS                                                               CVS
                                                                                             stimulants      Pain
5.1% in 2006. The company                       8%            6%                                                                13%
                                                                                                9%           11%
grew its business at 10.2%
CAGR over the past six years                                                                                 Source: Company/Industry/MOSL
while the industry posted 14%
CAGR. This under
performances can be
                                         2. Equity with doctors:                                                                      5/10
attributed to the fact that
Ranbaxy derives most of its
                                         Good brand equity in AI, CVS, pain management, dermatology segments
revenue from highly
competitive acute therapeutic            Ranbaxy has been a dominant player in three of the largest therapeutic segments of the
segment.                                 industry, AI, CVS and pain management. Ranbaxy ranks first in AI, with market share of
                                         10.8%, it ranks sixth in the CVS segment with market share of 5.8%, second in the pain
Ranbaxy is among top three
                                         management segment with market share of 7% and third in the dermatology segment with
players in the industry
                  Mkt Share (%)
                                         market share of 8.9%. However Ranbaxy's growth has been sluggish compared with the
                  Grow th (%)            segments' growth over the past two years.
 21.4
                    17.0
                                  14.6
           7.8             7.1
  5.09

           5.02




                           4.97

                                  4.69
                    5.2




 2006 2007 2008 2009 2010



August 2011                                                                                                                             106
                                                                                                                                                                                Ranbaxy



Market share in key therapies (%)                                                      Growth comparison (%) (2010)

    10.8                                                                                                  Avg Gr - Company             Avg Gr - Industry
                                                      8.9                                                                           20.0
                                                                                                               17.9                                                    18.4           18.7
                                      7                                                                                      17.1                 16.7
              5.8                                                                             14.6      13.8          12.8
                                                                            3.8         9.0                                                                  10.9
                         3.6                                                                                                                                                    7.6




                                                                                                                                                                                  CNS
                                                                                                                         GI




                                                                                                                                                                  Dermatology
                                                                                                           CVS
                                                                                              AI




                                                                                                                                        Pain/Analgesic
                                                                            CNS
                         GI




                                                      Dermatology
               CVS
     AI




                                     Pain/Analgesic




* Average growth over 2009-2010                                                                                                                             Source: Industry/MOSL


                                  In terms of the number of prescriptions written, Ranbaxy's brand equity with physicians is
                                  high only in the AI and dermatology segments. Ranbaxy is ranked third in the AI segment
                                  with a prescription market share of 7.8% and it ranks fourth in the dermatology segment
                                  with a prescription market share of 5.4%. Over the past five years, Ranbaxy's brand
                                  equity has taken a beating in almost all therapy areas.
                                  Ranbaxy's prescription ranking
                                                                           Jan-07         Jan-08                      Jan-09                             Jan-10                  Oct-10
                                  Anti-infectives                                  2                2                     3                                   2                3
                                  Derma                                            3                3                     3                                   4                4
                                  GI                                              12               13                     9                                  14               14
                                  CNS                                             11               11                    11                                  14               14
                                  Pain Mgmt                                       12               13                    13                                  13               14
                                  CVS                                             13               15                    13                                  17               15
                                  Anti-diabetic                                   10               12                    11                                  15               16
                                  Respiratory                                     15               12                    17                                  18               19
                                                                                                                                                            Source: Industry/MOSL


                                  Top 10 brands contribute 40% of the revenues
                                  Ranbaxy's top 10 brands contribute ~40% to its revenue and they feature among the
                                  industry's top 300 brands. Its No1 brand Revital (Vitamins) ranks sixth in the industry and
                                  it posted revenue CAGR of 30% over 2006-10. Most of Ranbaxy's top 10 brands recorded
                                  double-digit CAGR over the past four years.
                                  Ranbaxy's top 10 brands
                                  Brand                             Drug                       Product Launch           Sales (INR m)                      YoY Gr (%)           CAGR (%)
                                  Revital                           Ginseng products                    1989                   1,607                           29.4         30.4
                                  Mox            Amoxycillin                                            1997                   1,346                           14.6         15.3
                                  Storvas        Atorvastatin                                           1999                    996                            13.4         22.3
                                  Volini         Nsaids                                                 1994                    924                            36.0         33.2
                                  Cifran         Ciprofloxacin injectables                              1989                    863                            -1.6          2.4
                                  Sporidex       Cephalexin                                             1980                    904                             5.0          5.1
                                  Zanocin        Ofloxacin                                              1990                    660                             4.1          9.0
                                  Cepodem        Cefpodoxime                                            1999                    646                           17.4          20.9
                                  Rosuvas        Rosuvastatin                                           2003                    346                            57.4         56.1
                                  Fortwin        Injectables                                            1975                    341                           26.0          26.2
                                  CAGR through 2006-10                                                                                                      Source: Industry/MOSL




August 2011                                                                                                                                                                             107
                                                                                                                                           Ranbaxy



                                      3. Distribution & reach:                                                                                 7/10
                                   Ranbaxy derives 66% of its revenue from the metros and class-I towns, compared with
                                   63% of the industry average. Over the past four years, revenue CAGR for all geographies
                                   has been below the industry average. The contribution of metros to revenue has risen
                                   over the past five years, in line with the industry trend.

Ranbaxy: Geographical distribution of revenues (%)                          Geographical distribution of revenues: Industry (%)

      Metros     Class I Tow ns         Class II to VI       Rural              Metros         Class I Tow ns          Class II to VI       Rural

    19.6        19.6           18.6            16.3          16.0               20.6           20.9             20.0           18.1        17.3

    17.9        17.1           17.7            17.7          17.7                                               19.5           19.4        19.6
                                                                                19.2           19.0

    31.6        30.9           30.0            30.4          30.3                                                              32.5        32.0
                                                                                32.6           31.3             31.6


    30.9        32.3           33.7            35.6          36.1               27.6           28.9             28.9           30.0        31.0


    CY06        CY07           CY08           CY09           CY10               CY06          CY07            CY08            CY09        CY10


Ranbaxy: Geography-wise growth rates (%)                                    Geography-wise growth rates

                                                                                            Metros                      Class I Tow ns
       Metros     Class I Tow ns           Class II to VI           Rural
                                                                                            Class II to VI              Rural               26.2
                  21.5 21.8                                                                                                                 23.5
                                                                                                      17.5                                  20.7
                    13.6                 13.4                     16.0                                                 17.7
     12.7                                                                      17.6                      15.6                               17.5
                                                                  14.2
    8.0                                  8.2                      14.2         14.0                                     16.4
                       10.7                                       12.4                                 14.7
    5.5                                                                        11.1                                    13.0
                                         7.1
     3.1                                                                                              9.5
                                                                                7.9
                                              -6.0                                                                           2.5

     CY07              CY08             CY09                CY10                 CY07                 CY08             CY09              CY10

                                                                                                                               Source: Industry/MOSL


                                      4. Introductions:                                                                                        5/10
                                   Ranbaxy has been one of the most aggressive players in the industry in
                                   launching new products
                                   Ranbaxy has aggressively launched new products over the past four years. It launched 65
                                   new products (including line extensions) annually over the past four years. However, the
                                   average revenue per new launch has declined from INR94m in CY07 to INR60m in
                                   CY10. Revenue growth is driven by existing products and new launches.
Ranbaxy: New launches (INR m)                                               Ranbaxy: Growth composition (%)

                   No. Of launches in last 2yrs
                   Avg sales per launch (INR m)                                          New Launches                  Existing Brands
       94.0             92.4
                                        73.1
                                                            60.5                                      10.6
                                                                                                                                         9.6
                                                                                  0.8
                                                                                                                       2.4
                                                                                  7.0                 6.4
      104              104              114                 154                                                        4.8               5.0

     CY07              CY08             CY09                CY10                 CY07              CY08                CY09              CY10

                                                                                                                               Source: Industry/MOSL
August 2011                                                                                                                                        108
                                                                                                Ranbaxy



              5. CAGR amd scale-up:                                                               5/10
              We expect Ranbaxy's domestic formulations revenue to post 14% CAGR over CY10-12,
              led by a large field force and rapid new launches. This is lower than our forecast of 15-
              16% CAGR for the industry. Ranbaxy is likely to maintain its leading position in the sector
              given its strong position and market share in some of the largest therapeutic segments.
              Though Ranbaxy employs one of the largest field forces in the industry the company's
              focus on improving productivity of the salesforce needs to be enhanced for it to grow the
              business more profitably.

              Ranbaxy: Domestic formulations revenue ramp-up




                                                                                   Source: Company/MOSL


              6. Improvement in MR productivity:                                                  3/10
              Top-line growth driven by sale force additions; MR productivity declines
              Ranbaxy's domestic formulations revenue posted 10.2% CAGR over FY04-10 and its
              sales force posted 15% CAGR, implying negative productivity of the salesforce. In CY04
              Ranbaxy derived INR4.6m revenue per MR, which fell to INR3.6m in CY10. This is
              partially attributed to recent additions to the sale force.

              Sales force productivity

                     No. of MR     Revenue per MR (INR m)
                         4.6                4,500

                                              3.6


                       1,950




                       2004                 2010

                                                                            Source: Company/Industry/MOSL




August 2011                                                                                          109
                                                                                                                            Ranbaxy



                                    7. Non-domestic business snapshot                                                         5/10

                                    Positives
                                     Strong presence in the US and emerging markets.
                                     Strong chemistry skills and backward integrated low-cost operations.
                                     Para-IV pipeline in the US market is strongest among peers.
                                     Strong parentage (Daiichi, Sankyo, Japan).


                                    Risks & concerns
                                     Resolution of US FDA issues imperative to monetize large Para-IV opportunities in
                                       the US. This can result in a large one-time penalty payment.
                                     Needs to reduce fixed costs.
                                     Yet to initiate steps to exploit the bio-similars space.
                                     Acquisitions have not delivered desired results, impacting return ratios.


                                    Key news flows/triggers
                                      US FDA resolution for Paonta and Dewas facility.
                                     Launch of generic Lipitor with 180-day exclusivity in November 2011.
                                     Further visibility on exploiting synergies with Daiichi.


                                    Impact assessment
                                     We are neutral on Ranbaxy's international business despite its strong presence in the
                                      US and emerging markets, due to ongoing US FDA issues and high fixed cost in some
                                      of the European markets
                                     We expect the international business to record 14.5% CAGR over CY10-12 excluding
                                      low-competition and Para-IV products in the US.
                                     Option values (Para-IV products) to contribute INR38.2b in one-time PAT over CY11-
                                      14 with DCF value of INR77/share.
Sales mix (INR m)                                                                         EBITDA Contribution
                          2008       2009      2010      2011E      2012E CY10-12
                                                                         CAGR (%)                       Non-DF
                                                                                                        EBITDA
Dosage Form
                                                                                                          2%
India                      368          359      387       438       519          15.9
   Growth (%)              8.9          -2.5      7.7      13.2      18.6
Europe, CIS and Africa     571         480       527        621       697         15.0
   Growth (%)              -1.9     -15.9         9.8      17.8       12.2
Japan,Asia Pacific         100         100         93       102       133         19.4
& Middle East
   Growth (%)              -9.1         0.0      -7.0      10.0       29.7
Latin America                74          71        83         80       102        10.9                                      DF
   Growth (%)             15.6         -4.1     16.9        -3.6      27.7                                                EBITDA
USA                        448         397       660        467       473         -15.4                                    98%
   Growth (%)               6.9      -11.4      66.2     -29.3         1.2
Total dosage             1,561      1,407      1,750     1,708      1,924           4.9                          Source: Company/MOSL
   Growth (%)               3.2        -9.9     24.4        -2.4      12.6
API                         117         112       114       143       143          11.8
   Growth (%)                12          -5         2         25         0
Allied business               4           0         0          0         0            -
   Growth (%)                 0       -100        -99        -99       -99
Total sales              1,682      1,519      1,864     1,851      2,066          5.3
Note - Estimates exclude Para-IV/low-competition opportunities in US except for   CY11

August 2011                                                                                                                        110
                                                                                                                                                                Ranbaxy



                                     8. Earnings growth and stock attractiveness:                                                                                   6/30
                                 We expect overall top-line CAGR of 14.4% over CY10-12, leading to EPS CAGR of
                                 53%, albeit on a very low base. Cost cuts, leading to improved profitability and gradual
                                 recovery in the US business, will be key growth drivers.

                                 The key near term determinant for Ranbaxy's valuations will be the expected resolution of
                                 the US FDA and DoJ issues. Ranbaxy management has been trying to resolve these
                                 issues. However, time-lines for such a solution are not known.

                                 Valuations imply market attaching sustainable P/E multiples to Para-IV
                                 upsides
                                  Current valuations implies that market is attaching sustainable P/E multiples
                                    to Para-IV upsides: Given the potential recurrence of Para-IV upsides every year
                                    for the CY11-12 period, Para-IV upsides are attracting P/E based valuations. We
                                    believe that these are one-off upsides and hence continue to value them on DCF
                                    basis. Our current DCF value of all potential Para-IV upsides is INR77/sh.
                                  US FDA resolution imperative: Since sustaining current valuations is dependent on
                                    upsides from Lipitor & Nexium, it is imperative for RBXY to resolve outstanding US
                                    FDA issues and salvage the upsides from these two opportunities which account for
                                    80% of overall Para-IV upsides.
                                  Valuations discount best-case scenario: Ranbaxy is currently valued at 33.0x
                                    CY11E and 23.3x CY12E core EPS. Our estimates exclude MTM forex gains and
                                    one-off upsides from Para-IV opportunities. Our current DCF value of all potential
                                    Para-IV upsides is INR77/sh. We believe that current valuations are discounting the
                                    best-case scenario for both the core business as well as for the Para-IV upsides. We
                                    maintain Sell with target price of INR412 (20x CY12E EPS + FTF DCF value of
                                    INR77/sh).



Ranbaxy RoE & RoCE (%)                                         Ranbaxy one year forward P/E

                        RoE             RoCE                    120                     P/E (x)             Avg(x)                   Peak(x)               Min(x)
                                                                                                                94.6
                              19.4
                                                                 90


                              15.9                               60
                9.8                        11.4      10.4
     9.8                                                                                                                    37.7
                                          10.7      11.1         30
   7.2                                                                                                                                                              30.7
                4.4
                                                                                                            14.3
                                                                  0
                                                                               Mar-07




                                                                                                   Feb-08




                                                                                                                       Feb-09




                                                                                                                                         Feb-10




                                                                                                                                                           Feb-11
                                                                      Aug-06




                                                                                          Aug-07




                                                                                                            Aug-08




                                                                                                                                Aug-09




                                                                                                                                                  Aug-10




                                                                                                                                                                     Aug-11




         2008    2009          2010        2011      2012E




August 2011                                                                                                                                                               111
                                                                                                                                  Ranbaxy



                                   Ranbaxy non-domestic business: key trends, triggers & risk
                                   Getting the US business on track is key: Over the past 3-4 years, Ranbaxy has been
                                   facing cGMP issues, which have gradually aggravated. The problems started with a warning
                                   letter for the Paonta facility and gradually aggravated into an import alert for the Paonta
                                   and Dewas facilities and culminated in the Application of Integrity Policy (AIP) being
                                   invoked for the Paonta facility.

                                   The US FDA's steps resulted in the stopping of exports of US formulations from both the
                                   facilities. Ranbaxy's US facility is the only facility that supplies products in the US, pending
                                   the resolution of the US FDA issues at its India facilities. We believe getting the US
                                   business back on track through the clearance of the Paonta and Dewas facilities is crucial
                                   for the Ranbaxy management in the near-term.

                                   Resolution of US FDA issues imperative: We believe it is imperative for Ranbaxy to
                                   resolve its long-pending US FDA cGMP problems, without which the significantly large
                                   upsides for its US business are at a risk. The management has been attempting to resolve
                                   the issues and is trying to obtain a comprehensive solution with the US FDA and the DoJ
                                   for all outstanding issues. While the time-lines for such a resolution are not predictable, we
                                   note that, given past precedence, Ranbaxy may be required to pay a one-time penalty for
                                   the resolution.

                                   Risks to Para-IV opportunities: Given the seriousness of the US FDA issues, we
                                   believe there are risks to high value FTF opportunities like generic Lipitor and Nexium
                                   (cumulative one-time PAT of INR38.2b over CY11-14). Ranbaxy must demonstrate that
                                   these high-value Para-IV opportunities are not at risk.

Para-IV upsides: Ranbaxy: One-time PAT from Para-IV upsides (INR m)
Brand      Innovator    Launch         CY09            CY10         CY11E        CY12E      CY13E      CY14E          Total   % of total
               Sales
             (USD m)
Valtrex      1500      25-Nov-09       2,724           5,893            -             -           -         -        8,616           18
Flomax       1452         Mar-10           -           1,561            -             -           -         -        1,561            3
Aricept      1900      30-Nov-10           -             393        1,993             -           -         -        2,386            5
Lipitor     5000          Nov-11           -               -        2,250         6,750           -         -        9,000           18
Caduet        304         Nov-11           -               -          247           740           -         -          986            2
Diovan      1300          Sep-12           -               -            -         2,683      1,342          -        4,025            8
Valcyte       300         Mar-13           -               -            -             -      2,007          -        2,007            4
Nexium       2800         May-14           -               -            -             -           -    20,168       20,168           41
Total      17,956                      2,724           7,846        4,489        10,173      3,348     20,168       48,749          100
One-Time EPS                             6.5            18.7         10.7          24.2         8.0      48.0

Ranbaxy - Para-IV Upsides in US (INR M)                                     Ranbaxy - Core & Para-IV Profits (INR M)

                                                           20,168                          Core PAT             Para-IV PAT



                                                                                                                                20,168
                                   10,173
               7,846
                                                                                                      10,173
                         4,489                                                                                      3,348
   2,724                                       3,348                           7,846       4,489
                                                                                                      7,052         8,437       9,702
                                                                               3,008       4,991

   CY09        CY10      CY11E     CY12E       CY13E       CY14E                CY10      CY11E       CY12E        CY13E        CY14E


August 2011                                                                                                                              112
                                                                                                Ranbaxy



              Key FTF upsides: Nexium at risk
              Nexium account for a major portion of Ranbaxy's FTF upsides. We believe there are
              potential risks to the monetization of these opportunities due to ongoing US FDA issues.

              Settlements for Nexium raise uncertainty
              AstraZeneca entered into an out-of-court settlement with Teva and recently with Dr
              Reddy's Labs for the potential launch of their respective generic versions in May 2014.
              This raises uncertainty over Ranbaxy's FTF status and an out-of-court settlement with
              AstraZeneca since Ranbaxy's 180-day exclusivity on Nexium is likely to commence from
              May 2014.

              Teva and Dr Reddy's indicated that if Ranbaxy got final US FDA approval, they would
              launch their generic versions after the expiry of Ranbaxy's exclusivity. However, the
              matching launch time-lines for the three settlements (May 2014) and the fact that Ranbaxy
              is yet to receive even tentative approval, raises uncertainty over upsides for Ranbaxy. The
              table highlights the upsides for Ranbaxy in both cases:

              NEXIUM UPSIDE (USD m) - Sensitivity Analysis
                                                             Only Ranbaxy          Ranbaxy along with
                                                               on market                DRL and Teva
              Innovator Sales (USD mn)                              2,800                       2,800
              Sales period (mths)                                       6                            6
              Price discount (%)                                       30                          70
              Potential Mkt for generics                              980                         420
              No. of players in mkt                                     2                            4
              Ranbaxy Mkt Share (%)                                    70                          30
              Ranbaxy Sales (USD mn)                                  686                         126
              Assumed exchange rate (INR/USD)                          42                          42
              Ranbaxy Sales (INR mn)                               28,812                       5,292
              PAT Margin (%)                                           70                          40
              PAT (INR mn)                                         20,168                       2,117
              WACC (%)                                                 14                          14
              PV Factor                                                 1                          0.6
              PV of cash flow                                      11,941                       1,253
              NPV (INR/share)                                        28.4                          3.0
                                                                                   Source: Company/MOSL




August 2011                                                                                          113
                                                                                                  Ranbaxy



              Long-term plan to exploit synergies with Daiichi
              Ranbaxy formulated a three-year plan (2010-12) to exploit synergies with Daiichi. This
              plan straddles multiple areas in which the partners can leverage each other's strengths.
              The areas include:
              1. Accessing the Japanese generic market through Daiichi;
              2. Leveraging Ranbaxy's distribution network to launch Daiichi's products, with the key
                  target markets including India, Africa, Latin America and parts of Europe.
              3. Synergies for NCE research: Daiichi has bought Ranbaxy's NCE operations.
              4. Accessing Ranbaxy's low-cost manufacturing facilities in India as a sourcing base for
                  Daiichi.


              Accessing the Japanese generic market
              The USD70b Japanese pharmaceutical market (with 5% generic penetration at ~USD3.5b)
              is undergoing a change with the government planning to reduce health care costs by
              encouraging generics. The Japanese government aims to double the generic penetration
              over the next five years.

              Ranbaxy plans to become a strong player in this market by accessing Daiichi's presence
              and brand-equity in this market as well as its own product pipeline. We do not expect
              major upsides from this initiative in the short- to medium term as Ranbaxy will have to file
              products with the Japanese authorities and get them approved, which will be time-
              consuming.


              Leveraging Ranbaxy's distribution network to launch Daiichi products
              Key target markets include India, Africa, Latin America and parts of Europe, in which
              Ranbaxy's front-end presence will be leveraged to distribute Daiichi's products (can also
              include patented products). A beginning has been made with Ranbaxy starting marketing
              of a few products in India, Mexico and Romania. We believe this could result in incremental
              upsides to Ranbaxy in the medium term.


              Cost savings for NCE research division
              In July 2010, Ranbaxy transferred its NCE research operations to Daiichi along with all its
              NCE assets and ~150 employees. In return, it received some upfront consideration (not
              quantified) from Daiichi. The transfer of NCE research to Daiichi will result in cost savings
              for Ranbaxy besides the upfront cash inflow. We estimate Ranbaxy spends ~20% of its
              annual R&D expenditure on NCE research, which has now been transferred to Daiichi,
              leading to cost savings. Our estimates take into account the savings in R&D cost due to
              the sale of NCE research operation to Daiichi.

              Shifting manufacturing to Ranbaxy's Indian facilities
              Ranbaxy can supply some products to Daiichi (especially APIs) from its Indian facilities,
              resulting in upsides for both partners. However, this may be a time-consuming exercise as
              it will require changing Daiichi's filings for these products.




August 2011                                                                                            114
                                                                                                                            Ranbaxy



Financials and valuations: Ranbaxy


Income Statement                                   (INR Million)   Ratios
Y/E December                2009      2010     2011E     2012E     Y/E December                  2009     2010     2011E     2012E
Net Sales                 73,294    85,355    83,111     90,736    Basic (INR)
Change (%)                    1.5     16.5        -2.6       9.2   EPS (Fully diluted)*           4.5      25.8      11.9      16.7
Other Operating Income     2,676     4,253      2,132     2,268    Cash EPS                      10.9      38.9      24.2      26.0
Total Expenditure         68,846    70,955    76,209     81,969    BV/Share                     103.1     132.9     145.7     160.7
EBITDA                     7,124    18,652      9,033    11,035    DPS                            0.0       2.0       4.7       3.2
Change (%)                 -15.1     161.8      -51.6      22.2    Payout (%)                     0.0       6.5      30.0      20.0
Margin (%)                    9.4     20.8       10.6       11.9
Depreciation               2,676     5,533      3,210     3,894    Valuation (x)
EBIT                       4,448    13,120      5,823     7,141    P/E (Fully diluted)                     15.2      33.0      23.3
Int. and Forex loss         -783      -793      1,063       204    PEG (x)                                  0.0      -0.9      23.9
Other Income - Rec.        2,935     2,795      3,290     1,862    Cash P/E                                10.0      16.1      15.0
PBT pre EO Expense         8,166    16,708      8,050     8,800    P/BV                                     2.9       2.7       2.4
Change (%)                -459.2     104.6      -51.8        9.3   EV/Sales                                 2.3       2.4       2.2
Extra Ordinary Expense    -1,931    -4,293    -1,138       -700    EV/EBITDA                               11.1      23.0      18.5
PBT after EO Exp.         10,098    21,001      9,188     9,500    Dividend Yield (%)                       0.5       1.2       0.8
Tax                        6,991     5,849      1,516     1,615
Tax Rate (%)                 69.2      27.8      16.5      17.0    Return Ratios (%)
Reported PAT               3,107    15,152      7,672     7,885    RoE                             4.4     19.4      11.4      10.4
Minority Interest            142       185          80         0   RoCE                            9.8     15.9      10.7      11.1
Adj PAT after Min. Int.    1,911    10,855      6,984     7,052
Change (%)                 -38.2     467.9      -35.7        1.0   Working Capital Ratios
Margin (%)                    2.6      12.7        8.4       7.8   Fixed Asset Turnover (x)        1.6      1.9       1.8       2.1
Adj PAT excl one-offs       -812     3,008      4,991     7,052    Debtor (Days)                    92       69        70        70
                                                                   Inventory (Days)                92       94        95        95
Balance Sheet                                      (INR Million)   Working Capital (Days)          33       55        73        83
Y/E December                2009      2010     2011E     2012E
Equity Share Capital       2,102     2,105      2,105     2,105    Leverage Ratio (x)
Fully Diluted Eq Cap       2,102     2,105      2,105     2,105    Current Ratio                   1.5      2.1       1.8       1.8
Reserves                  41,261    53,871    59,241     65,549    Debt/Equity                     0.8      0.8       0.4       0.2
Revaluation Reserves          71        71         71        71
Net Worth                 43,434    56,047    61,417     67,725    Cash Flow Statement                                (INR Million)
Minority Interest            533       647        567       567    Y/E December                   2009     2010    2011E     2012E
Loans                     36,295    43,348    23,328     13,328    Op.Profit/(Loss) bef. Tax     7,124   18,652     9,033    11,035
Deferred liabilities       -4746      -227       -227      -227    Interest/Dividends Recd.      2,935    2,795     3,290     1,862
Capital Employed          75,517    99,815    85,085     81,393    Direct Taxes Paid               493   -1,331    -1,516    -1,615
Gross Block               62,786    67,050    69,550     72,050    (Inc)/Dec in WC             -11,296   -6,332    -3,706    -4,144
Less: Accum. Deprn.       17,880    21,571    24,781     28,675    CF from Operations             -743   13,785     7,101     7,138
Net Fixed Assets          44,905    45,479    44,769     43,375
                                                                   CF frm Op.incl EO Exp.        -743    13,785     7,101     7,138
Capital WIP                6,231     3,818      6,231     6,231
                                                                   (Inc)/Dec in FA             -4,205    -3,694    -4,913    -2,500
Investments                5,407     4,985      4,985     4,985
                                                                   (Pur)/Sale of Investments       24       423         0         0
Goodwill/Intangibles      21,446    19,009    19,009     19,009
                                                                   CF from Investments         -4,181    -3,271    -4,913    -2,500
Curr. Assets              60,086    86,932    64,226     61,286
Inventory                 18,407    21,926    21,632     23,616
                                                                   Change in networth            -704     2,736     1,138       700
Account Receivables       18,399    16,052    15,971     17,436
                                                                   Inc/(Dec) in Debt           -6,695     7,167   -20,100   -10,000
Cash and Bank Balance     12,416    32,644    12,506      6,063
                                                                   Interest Paid                  783       793    -1,063      -204
Others                    10,863    16,309    14,117     14,170
                                                                   Dividend Paid                    0      -982    -2,302    -1,577
Curr. Liability & Prov.   41,112    41,398    35,125     34,483
                                                                   CF from Fin. Activity       -6,616     9,714   -22,327   -11,081
Account Payables          32,511    31,865    30,774     29,750
Provisions                 8,602     9,534      4,350     4,733
                                                                   Inc/Dec of Cash             -11,540   20,228   -20,139    -6,442
Net Current Assets        18,974    45,534    29,101     26,803
                                                                   Add: Beginning Balance       23,956   12,416    32,644    12,506
Appl. of Funds            75,517    99,815    85,085     81,393
                                                                   Closing Balance              12,416   32,644    12,506     6,063
E: MOSL Estimates




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                                                                                                      Domestic Formulations | New Peaks




                                                                                                               MEDICINES
    MEDICINES                      CAPSULE                                                                      Score        52/100
                                                          Dr Reddy's
                                                                                              CMP: INR1,446                   DRRD IN
     The homecoming                                                                           TP: INR1,670                  Neutral
        M: Mix                                                4/10            E: Equity with doctors                               6/10

               Dr Reddy's Laboratories (DRL) derives 72% revenue                 DRL has good brand equity in the GI and pain
               from the acute therapy segment and has small                      management segments but is not a market leader
               presence in chronic therapy segments through the                  in these therapeutic segments.
               CVS segment.
                                                                                 DRL ranks third in the GI and pain management
               GI, CVS, pain management and AI contribute ~64%                   segments with a prescription market share of 4.4%
               to DRL's domestic formulation revenue.                            and 4.1% respectively. In other major segments
                                                                                 its brand equity is not very strong. DRL has not
                                                                                 been able to improve its brand equity in most after
                                                                                 therapeutic areas in which it is present.




        D: Distribution & reach                              6/10             I: Introductions                                     4/10

               DRL derives 68% of its revenue from metros and                    DRL launched fewer new products over the past
               tier-I cities.                                                    four years than its peers. It launched 22 new
                                                                                 products (including line extensions) annually over
               The company's distribution in metros has increased
                                                                                 the past four years.
               significantly over time and the contribution of other
               geographies to revenue has fallen over the past                   Over the past two years DRL's revenue growth has
               four years.                                                       been driven largely by old products rather than new
                                                                                 launches.
               DRL has a large field force with 3,165 MRs which
               helps it to tap both the urban and semi-urban
               market.




  Stock info                                 Financial & valuation summary
                                             Year Net Sales    PAT     EPS     EPS     P/E    Adj P/E P/BV    RoE    RoCE    EV/    EV/
  Equity Shares (m)                  168.4
                                             End    (INR M) (INR M) (INR) GR. (%) (X)          (X)      (X)   (%)    (%)    Sales EBITDA
  52-Week Range (INR)          1,855/1,320
                                             03/10A 68,179     334     2.0            729.7   716.2     5.7   2.5    2.6     3.5    17.4
  1,6,12 Rel. Perf. (%)             5/4/20
                                             03/11A 74,693    11,099   65.6           22.0     21.6     5.3   24.1   16.7    3.5    16.7
  M.Cap. (INR b)                     243.5   03/12E 81,754    11,615   68.6     7.8   21.1     20.7     4.7   22.5   15.4    3.2    17.1
  M.Cap. (USD b)                       5.3   03/13E 90,323    13,725 81.1      18.2   17.8     17.5     4.2   23.5   17.0    2.9    14.4
  Background




                        Dr. Reddy's is a vertically integrated company with presence across the pharmaceutical value chain through
                        its core businesses of Global Generics, Pharmaceutical Services & Active Ingredients (PSAI), and Proprietary
                        Products. The company is currently developing bio-generics and NCEs. Key focus markets include India,
                        US, Europe and Russia.



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                                                                                                                           Dr Reddy's




    Chairman Profile
  Chairman




                      Dr. Reddy's Labs was promoted by Dr. Anji Reddy, a first generation entrepreneur. The day-to-day operations
                      of the company are currently managed by Mr. G.V. Prasad (Vice Chairman & CEO) and Mr. Satish Reddy
                      (MD & COO). Building a strong business in US and Russia coupled with global scale in the API business
                      are the key achievements of the company.


       C: CAGR and scale-up                                6/10         I: Improvement in productivity                       2/10

             DRL outperformed the industry with revenue CAGR                   DRL posted negative MR productivity over 2004-
             of 18% over FY05-11. The company scaled up its                    10. The number of MRs grew 16% against revenue
             business rapidly albeit on a low base.                            growth of 13.6%, indicating a fall in sales force
                                                                               productivity.
             We expect DRL to post revenue CAGR of 15%
             over FY11-13, in line with the industry, given its                Revenue per MR declined from INR3.6m in 2004 to
             small base, recent additions to field force and                   INR3.2m in 2010. At this level, productivity is the
             considering the management's increased focus on                   lowest among peers.
             the business.




       N: Non-domestic business                            7/10         E: Earnings growth                                   5/10
             We are positive on DRL's international business                   We expect DRL to post top-line of 15% CAGR over
             given its strong US and emerging markets portfolio,               FY11-13, leading to EPS CAGR of 11%, excluding
             backed by a strong API portfolio.                                 Para-IV upsides.
             We expect non domestic business to record 15.2%                   DRL's core earnings growth will be driven by
             CAGR over FY11-13, excluding low-competition and                  sustained double-digit growth in the branded
             Para-IV products in the US.                                       formulations business but will be partly tempered
                                                                               down by higher taxes.
             Option values (low-competition and Para-IV
             products in US) will contribute INR12.9b to sales
             and INR5.4b to PAT in FY12.




       S: Stock Attractiveness                                                                                              12/20
             Return ratios are muted due to a high cost German        Stock performance (1 year)
             acquisition, which is not yielding desired returns.                 Dr Reddy’ s Labs       Sensex - Rebased

             DRL is valued at 20.7x FY12E and 17.5x FY13E              2,000
                                                                       1,750
             consolidated earnings.
                                                                       1,500
             We had placed our recommendation "Under                   1,250
             Review" for a potential downgrade (from Buy earlier)      1,000
             some time back. We now rate the stock Neutral                Aug-10        Nov-10      Feb-11    May-11       Aug-11
             with TP of INR1,670.



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                                                                                                                                                 Dr Reddy's



India formulations                            The homecoming
snapshot                                      Balancing focus between overseas and domestic markets
Domestic formulations:
Revenue contribution                          Despite being one of the largest Indian generic companies, Dr Reddy's Laboratories (DRL)
marginal, sizable                             has been lagging its peers in the domestic formulations business. DRL, ranked a distant
contribution to profits                       thirteenth in the industry with 2.17% market share, has strong brand equity in the
The domestic formulations                     gastrointestinal and pain management segments. DRL lagged the industry average growth
business contributes just                     rate over the past four years in all geographies except metros. However, of late, it has been
~15% to DRL's revenue but is                  expanding in the domestic market, which is visible from its growth up-tick in 2009 and 2010.
one of its most profitable
businesses. We estimate
contribution of 23% to EBITDA.
                                              1. Mix:                                                                                                 4/10
EBITDA Contribution
                                              Acute therapeutic segments dominate sales
         Non-DF             DF EBITDA
         EBITDA                23%
                                              The top four therapeutic segments, GI, CVS, pain management and AI contribute ~63%
          77%                                 to DRL's domestic formulations revenue. Overall, the acute therapeutic segments contribute
                                              ~72% to sales. Over the past 10 years, the GI and respiratory segments increased their
                                              contribution from 19% in FY01 to 29% in FY11 while contributions from pain management
                                              and anti-infective segments fell from more than 32% in FY01 to 20.6% in FY11.

Among laggards in the                         Dr. Reddy's: Therapeutic breakup
segment compared with
peers                                                                   FY01
                                                               Derma           Respi                                                FY05
DRL ranks thirteenth in the                     Diabetes                                                                   Derma           Respira
                                                               tology          ratory
industry and has a market                          5%                                                                      tology           tory
                                                                 3%             1% VMN                      Diabetes                                 VMN
share of 2.17%. Over the past                   AI                                                                           5%              4%
                                                                                      9% Others                7%                                     6%
five years DRL's market share                  15%                                        13%
dropped from 2.31% in 2006 to                                                                              AI
                                                                                                                                                      Others
2.17% in 2010. DRL's focus on                                                                              8%
                                                                                                                                                       9%
growing the international
generic business had resulted                                                                            Pain                                          GI
in low focus on the domestic                                                                GI           17%                                          22%
formulations business in the                    Pain                                       18%
                                                                         CVS                                                 CVS
past which has impacted                         17%
                                                                         19%                                                 22%
overall business growth. DRL
posted revenue CAGR of 18%
over the past six years,                                                                          FY11
against the industry's 14%
                                                                               VMN 5%              Others 10%
CAGR.                                                                                                                         GI 23%
                                                         Stomatologicals 5%
DRL market                  share      and
growth                                                 Respiratory 5%
                  Mkt Share (%)
                  Grow th (%)                   Dermatology 6%
 18.6                                 20.6

          14.7
                   10.5                                    Diabetes 6%                                                          CVS 19%
                              8.0

                                                                                                                Pain 13%
  2.31




                                                                                AI 8%
           2.4

                    2.3

                               2.2

                                       2.2




                                                                                                                           Source: Company/Industry/MOSL
  2006

           2007

                     2008

                               2009

                                       2010




August 2011                                                                                                                                                118
                                                                                                                                Dr Reddy's



                                  2. Equity with doctors:                                                                           6/10
                                  Good brand equity in GI, pain management segments
                                  DRL is not a market leader in any therapeutic segment. It ranks third in the GI segment
                                  with market share of 5.6%, eighth in the pain management segment with market share of
                                  4% and tenth in the dermatology segment with market share of 3%. A major drawback in
                                  DRLs portfolio is that it is not among the top 10 players in any major chronic therapeutic
                                  segment. Over the past two years, DRL's growth in key segments like the GI and pain
                                  management segments has been lower than that of industry.


Market share in key therapies (%) (2010)                           Growth comparison (%) (2010)

         5.6                                                                         Avg Gr - Company      Avg Gr - Industry

                                                                                                                         23.0
                              4
                                                                                                                                 18.4
                                                                                    17.1                16.7
                                                    3                   15.5




                                                                                                 4.4



          GI            Pain/Analgesic          Dermatology                    GI              Pain/Analgesic            Dermatology

* Average growth over 2009-2010                                                                                   Source: Industry/MOSL



                                  DRL does not have high brand equity except in the GI and pain management segments in
                                  terms of the number of prescriptions written. DRL ranks at third position in the GI and
                                  pain management segments with prescription market shares of 4.4% and 4.1% respectively.
                                  In other major segments the brand equity is not very strong. DRL has not improved its
                                  brand equity in most therapeutic areas in which it is present.
                                  DRL's prescription ranking
                                                              Jan-07       Jan-08             Jan-09            Jan-10           Oct-10
                                  Pain Mgmt                       3                  3             3                3               3
                                  GI                              5                  3             4                4               3
                                  Respiratory                    10                  9            10               11              10
                                  Vit                             9                  8            11               14              11
                                  CVS                            10                 11            12               12              13
                                  Anti-diabetic                  11                 13            15               14              13
                                  Anti-infectives                17                 15            16               16              16
                                  Derma                          23                 19            22               19              21
                                                                                                                  Source: Industry/MOSL


                                  Higher brand concentration
                                  DRL's top 10 brands contribute ~37% to its total revenue and seven of its top 10 brands
                                  feature among the industry's top 300 brands. Its No1 brand Omez (Omeprazole in the GI
                                  segment) ranks twenty-seventh in the industry and has been posting revenue CAGR of
                                  17% over the past two years. Six out of the top 10 brands reported double-digit revenue
                                  CAGR over the past two years.

August 2011                                                                                                                             119
                                                                                                                                              Dr Reddy's



                                         DRL's top 10 brands
                                         Brand                Drug                 Product Launch           Sales (INR m)      YoY Gr (%)      CAGR (%)
                                         Omez           Omeprazole                          1992                  1,065            14.8       17.2
                                         Nise           Nimesulide                          1996                   700              1.4        7.6
                                         Stamlo         Amlodipine                          1994                   507              7.2        9.6
                                         Reditux        Rituximab                                                  405             74.6       42.7
                                         Omez-D         Omeprazole & Domperidone            2005                   377             21.6       34.0
                                         Stamlo Beta    Atenelol & Amlodipine               1996                   328              0.6        4.4
                                         Razo           Rabeprazole                         2002                   285             15.4       15.4
                                         Atocor         Atorvastatin                        2000                   278              1.5        1.7
                                         Mintop         Minoxidil                           1989                   209              6.6       10.2
                                         Razo-D         Rabeprazole & Domperidone           2005                   200             19.0       20.4
                                         CAGR through 2009-2011                                                                Source: Company/MOSL




                                           3. Distribution and reach:                                                                             6/10
                                         DRL derives 68% of its revenue from metros and class-I towns, against an industry
                                         average of 63%. Over the past four years revenue CAGR for all geographies have been
                                         either in line or below the industry average.

DRL: Geographical distribution of revenues (%)                                Industry: Geographical distribution of revenues (%)

     Metros          Class I Tow ns          Class II to VI        Rural           Metros           Class I Tow ns          Class II to VI       Rural

     20.5            20.9           20.8            17.9           16.0           20.6             20.9             20.0           18.1         17.3

                                                    16.1           15.6                                                            19.4         19.6
     17.1            16.5           16.3                                          19.2             19.0             19.5

                                                    32.1           30.6
     31.9            31.5           32.4                                          32.6             31.3             31.6           32.5         32.0


     30.5            31.1           30.5            33.9           37.8                                                                         31.0
                                                                                  27.6             28.9             28.9           30.0


    CY06             CY07           CY08            CY09           CY10           CY06             CY07             CY08          CY09         CY10


DRL: Geography-wise growth rates (%)                                          Industry: Geography-wise growth rates (%)

       Metros          Class I Tow ns            Class II to VI       Rural         Metros           Class I Tow ns          Class II to VI       Rural
                                                                     34.3                                                                        26.2
                                                                                                                                                 23.5
                                                                                                                                                 20.7
       17.2                                 20.1                                                          17.5             17.7
              17.2                                                   17.2        17.6                        15.6                                17.5
                            13.6
   13.2                                                              15.1        14.0                                      16.4
                                             6.8                                                           14.7
    10.5               9.8                                           7.7         11.1                                      13.0
                                   8.3
                             9.4              6.7                                                         9.5
                                                                                  7.9
                                                                                                                                  2.5
                                            -7.0
     CY07                   CY08            CY09                  CY10             CY07                CY08                CY09               CY10

                                                                                                                                   Source: Industry/MOSL




August 2011                                                                                                                                             120
                                                                                                                                   Dr Reddy's



                                  4. Introductions:                                                                                       4/10
                                 DRL's growth over the past four years has been led by existing products
                                 as It launched fewer new products compared with the industry
                                 Over the past four years DRL launched 22 new products (including line extensions),
                                 annually which is less than its peers. The average revenue per new launch has fallen over
                                 the past four years, indicating a sharp decline in value derived out of new launches. Over
                                 the past two years, DRL's revenue growth has been largely driven by existing products
                                 rather than new launches.

DRL: New launches                                                         DRL: Growth composition (%)

                    No. Of launches in last 2 yrs                                     New Launches               Existing Brands
                    Avg sales per launch (INR m)
      138.8          142.2



                                                                                7.0                                                18.5

                                                                                                  5.2

                                       19.4             28.3                                                     6.6
                                                                                7.7
                                                                                                  5.3
       34             26               54                  63                                                    1.4                2.1

                                                                               CY07           CY08               CY09              CY10
      CY07           CY08             CY09             CY10

                                                                                                                        Source: Industry/MOSL




                                  5. CAGR and scale-up:                                                                                   6/10
                                 DRL is aggressively targeting strong growth in the domestic formulations business and
                                 expects double-digit growth, led by new launches and strengthening of its field force (600
                                 MRs added over the past few quarters to total ~3,000). We expect DRL's domestic
                                 formulations business to post revenue CAGR of 15% over FY11-13. We expect DRL to
                                 report in line industry growth over the next two years, considering the management's
                                 increased thrust on the business and relatively low base.

                                 Dometic formulation revenues

                                                                DF Revenue (INR m)           YoY Grow th (%)

                                       26.7         26.0

                                                                                           19.8
                                                                   15.7                                  15.1                       16.0
                                                                                                                       13.0

                                                                               5.2

                                      5,526         6,964        8,060        8,478       10,158        11,690      13,210         15,323

                                      FY06          FY07         FY08         FY09         FY10         FY11        FY12E          FY13E


                                                                                                                       Source: Company/MOSL




August 2011                                                                                                                                 121
                                                                                                                    Dr Reddy's



                               6. Improvement in MR productivity:                                                       2/10
                               DRL's sales force productivity fairs poorly compared with the industry
                               DRL's domestic formulations business posted revenue of 13.6% CAGR over FY04-10
                               and its sales force grew 16% CAGR, implying negative productivity of the salesforce. In
                               2004, DRL derived INR3.6m revenue per MR, which fell to INR3.2m in FY10. Compared
                               with the companies covered in this report, DRL's performance was below average.


DRL: Sales force productivity (2004-10)

              No. of MRs      Revenue per MR (INR m)                         Sales force addition CAGR (%)
                                                                             Productivity Improvement CAGR (%)
              3.6


                                          3,165
                                                                            16.0                           11.5


                                             3.2                                                           1.9
               1,300                                                        -2.1


               2004                       2010                              DRL                          Industry


                                                                                              Source: Company/Industry/MOSL


                               7. Non-domestic business snapshot:                                                       7/10
                               Positives
                                DRL has a strong presence in the US and emerging markets.
                                It has strong chemistry skills and fully backward integrated, low-cost operations.
                                It has a pragmatic mix of low-competition, Para-IV and normal products for the US
                                  market.
                                It is one of the few Indian players to target the bio-similar opportunity.
                                It is among the top three global API players.


                               Risks and concerns
                                 Further write-offs for DRL's German operations cannot be ruled out. They are related
                                  to potential price erosions in the tender market.
                                DRL has yet to tie up with a global player to capitalize on the bio-similar opportunity in
                                  regulated markets.
                                DRL's CRAMS business may not scale-up due to a conflict of interest with a strong
                                  generic business.
                                DRL's past acquisitions have not delivered the desired results, which has impacted
                                  return ratios.

                               News flow/triggers
                                Launch of generic Zyprexa in US with 180 days exclusivity expected in October 2011
                                US FDA approval for generic Arixtra in the US expected in FY12.
                                Ramp-up in supplies to GSK for emerging markets expected in FY13.
                                Further visibility on DRL's achieving US$2.7b revenue by FY13.

August 2011                                                                                                               122
                                                                                                                                                                                        Dr Reddy's



                                           Impact assessment
                                            We are positive on DRL's international business given its strong US and emerging
                                             markets portfolio backed by a strong API portfolio.
                                            We expect the non-domestic business to record 15.2% CAGR over FY11-13 excluding
                                             low-competition and Para-IV products in the US.
                                            Option values (low-competition and Para-IV products) will contribute INR12.9b to
                                             DRL's sales and INR5.4b to PAT in FY12.

Sales mix (INR m)                                                                                                      EBITDA Contribution
                             FY09           FY10       FY11       FY12E      FY13E     FY10-13
                                                                                      CAGR (%)
                                                                                                                                                                                           DF
PSAI                        18,758         20,404     19,648    20,655       22,427                 6.8
                                                                                                                                                                                         EBITDA
  India                      2,383          2,646      2,619     2,750        2,887                 5.0                                                                                   23%
   International        16,375     17,758     17,029    17,905      19,540                          7.1
Branded Formulations 18,060 22,145            25,913    29,708      34,627                         15.6
  India                  8,478     10,158     11,690    13,210      15,323                         14.5
   International         9,582     11,987     14,223    16,499      19,303                         16.5
Generics                31,730     26,460     27,427    29,220      30,638                          5.7
   US                   19,844     16,817     18,996    20,532      21,354                          6.0                  Non-DF
  EU                    11,886      9,643      8,431     8,688        9,284                         4.9                  EBITDA
Others                     893      1,268      1,705     2,171        2,631                        24.2                   77%
Total                   69,441     70,277     74,693    81,754      90,323                         10.0
Note - Estimates exclude Para-IV/low-competition opportunities in the US                                                                                             Source: Company/MoSL




                                            8-9. Earnings growth and stock attractiveness:                                                                                                   17/30
                                           Traction in the branded formulations and US businesses will be key growth drivers for
                                           DRL over the next two years. We estimate core EPS of INR68.6 in FY12 and INR81.1
                                           in FY13, adjusting for the interest cost of the bonus debentures and factoring-in the impact
                                           of likely withdrawal of DEPB scheme. Our core estimates exclude upsides from patent
                                           challenges/low-competition opportunities in the US. The stock trades at 20.7x FY12E and
                                           17.5x FY13E core earnings. While current valuations are supported by large potential
                                           one-time opportunities in the US, they do not fully discount the slowdown in DRL's core
                                           business. We had placed our recommendation "Under Review" for a potential downgrade
                                           (from Buy earlier) some time back. We now rate the stock Neutral with TP of INR1,670
                                           (20x FY13E core EPS + INR47/sh of DCF value).

Dr Reddy's RoE & RoCE (%)                                                        Dr Reddy's one year forward PE

           RoE          RoCE                                                                                 P/E (x)                 Avg(x)                        Peak(x)              Min(x)
                                             24.1                                 84
                                                         22.5        23.5
                                                                                                                                                         77.2
                                                                                  64
     9.9                                      16.7       15.4         17.0
                                                                                                                                   Negative
                                                                                  44
                             2.5                                                                                                   Earnings
   4.0
                 -2.9                2.6                                                                                             Cycle                     25.4
                                                                                  24
                                                                                                                                              16.4                                                19.7
                                                                                      4
                    -12.3
                                                                                                    Mar-07




                                                                                                                          Feb-08




                                                                                                                                                Feb-09




                                                                                                                                                                      Feb-10




                                                                                                                                                                                         Feb-11
                                                                                          Aug-06




                                                                                                              Aug-07




                                                                                                                                     Aug-08




                                                                                                                                                          Aug-09




                                                                                                                                                                               Aug-10




                                                                                                                                                                                                   Aug-11




         2008     2009         2010            2011       2012E      2013E




August 2011                                                                                                                                                                                          123
                                                                                               Dr Reddy's



              DRL non-domestic business: key trends, triggers & risk
              Revenue target of USD2.7b by FY13 implies 27% CAGR
              DRL aims at a top-line of USD3b by FY13 implying 27% revenue CAGR over FY11-13.
              We believe this is a slightly aggressive target given that most of its businesses are growing
              at much lower than 27% CAGR.

              Hence, we estimate DRL's core revenue will grow at 15% CAGR to USD2.1b. One-off
              and low-competition opportunities in the US are likely to contribute ~USD286m in FY12
              and ~USD173m for FY13. We expect revenues of USD2.2b in FY13 including the upside
              from low competition opportunities. We believe that without some inorganic initiative, it
              will be difficult for DRL to achieve USD2.7b in revenue by FY13.

              Strong positioning in emerging markets led by a focused approach
              We expect DRL's formulation exports to emerging markets to record 18% CAGR over
              FY11-13 led by a ramp-up in its Russian operations and the start of supplies to other
              emerging markets under the GSK supply agreement.

              The main target markets for the company's emerging market initiative include Russia and
              the CIS region, Venezuela and Brazil.

              Russia, CIS key markets
              With 76 percentage contribution to DRL's emerging market exports, Russia and the CIS
              region is a key market for the company. To sustain double-digit growth in this region, DRL
              has begun to focus on the Russian OTC market (with the addition of more products and
              expansion of the field force) and has in-licensing arrangements to expand its product
              portfolio in the region.

              US business to ramp-up significantly over the next two years
              DRL's revenue target of US$1b in the US implies 55% CAGR over FY11-13, led mainly
              by its FTF pipeline of 12 products and contribution from other low-competition opportunities.
              Such opportunities are likely to contribute ~INR12.9b and ~INR7.6b in sales and INR5.4b
              and INR2.3b to PAT in FY12 and FY13 respectively. We have excluded such opportunities
              from our core estimates and forecast that DRL will post core US revenue of 27.5%
              CAGR over FY11-13.

              Low-competition/patent challenge opportunities in the US gain momentum
              DRL management has guided for launch of at least one patent challenge/low-competition
              product in the US every year over the next few years. DRL has a pipeline of 11 FTFs. A
              combination of scale-up in existing patent challenge/low-competition products and new
              opportunities will help the company to achieve its revenue guidance of USD1b by FY13 in
              the US.




August 2011                                                                                            124
                                                                                               Dr Reddy's



              DRL US portfolio - one-time pat contribution (INR m)
              Product                Launch Status                                 FY12E            FY13E
              Generic Arixtra        Launched in Jul-2011                            310             1,122
              Generic Accolate       Launched                                        366               358
              Generic Zyprexa        Likely launch on 23-Oct-2011                  3,503                 -
              Generic Prevacid       Launched on 15-Oct-2010                       1,063                 -
              Generic Exelon         Expected in August 2012                           -                60
              Generic Clarinex       Expected in January 2012                        101               124
              Generic Geodon         Expected in Mar 2012                             79               385
              Generic Lipitor        Expected in May 2012                                              229
              Total                                                                5,421             2,277


              DRL US portfolio - one-time revenue contribution (INR m)
              Product                Launch Status                                 FY12E            FY13E
              Generic Arixtra        Launched in Jul-2011                          1,721             4,488
              Generic Accolate       Launched                                        731               715
              Generic Zyprexa        Likely launch on 23-Oct-2011                  7,005                 -
              Generic Prevacid       Launched on 15-Oct-2010                       3,038                 -
              Generic Exelon         Expected in August 2012                           -               172
              Generic Clarinex       Expected in january 2012                        169               206
              Generic Geodon         Expected in Mar 2012                            225             1,100
              Generic Lipitor        Expected in June 2012                                             917
              Total                                                               12,889             7,598
                                                                                     Source: Company/MOSL




              Import alert for Mexico facility to temper core performance
              DRL's Mexico facility recently received a warning letter and subsequently an import alert
              from the US FDA. This is the fallout of the US FDA inspection done in November 2010
              wherein it issued 12 observations. Of these, DRL was able to resolve 8. However, the US
              FDA has issued a warning letter for the remaining four deviations.

              The warning letter has identified the following cGMP lapses at this facility: non-validation
              of analytical methods to test APIs, incomplete cleaning validation for some manufacturing
              equipment, out-of-specification investigations data did not include analysis of all available
              data, and lack of responsibility of the quality unit to ensure API manufactured were in
              compliance with GMP.

              This facility generates annual revenue of ~USD65m, of which ~USD30m is from Naproxen,
              which is not included in the import alert. DRL can continue to supply this product to its
              customers. Supply of remaining products (contributing ~USD35m in revenue) will have to
              be suspended till the import alert is resolved. These are low-margin products for DRL,
              with gross margins of 25-30%, implying EBITDA hit of USD8m-10m on annual basis.
              Our estimates factor in the impact of this development for DRL.

              Germany: Cost structure aligned for a pure generic model
              Over the past three years, DRL has significantly altered its German operations through
              cost cutting to align it with the low-margin pure generic market. While the high cost
              acquisition of Betapharm seems to have been mistimed, we believe that, contrary to past
              trend, the German operations will not be a drag on the company's PAT in the coming
              years.

August 2011                                                                                            125
                                                                                                                             Dr Reddy's



Financials and valuations : Dr Reddy's


Income Statement                                      (INR Million)   Ratios
Y/E March                    2010       2011      2012E      2013E    Y/E March                     2010       2011     2012E        2013E
Net Sales                  70,277     74,693     81,754     90,323    Basic (INR)
  Change (%)                   1.2        6.3         9.5      10.5   EPS                             6.3      65.6      68.6          81.1
Other Income                  617      1,115         493        549   Cash EPS                       81.9      89.9      95.6         109.7
Total Expenditure          56,075     59,073     66,384     72,259    BV/Share                      254.2     271.8     304.7         345.9
EBITDA                     14,202     15,620     15,370     18,065    DPS                             0.8       8.2       8.6          10.1
  Margin (%)                  20.2      20.9        18.8       20.0   Payout (%)                     28.2      29.2      29.2          29.2
Deprec. & Amortization     12,763      4,107       4,555      4,845
EBIT                        1,439     11,513     10,814     13,220    Valuation (x)
Net Interest Exp                75       132         806        712   P/E                                      22.0       21.1         17.8
Forex (Gains)/Losses           -72        57        -158          0   Cash P/E                                 16.1       15.1         13.2
PBT & EO Expense            2,053     12,439     10,659     13,057    P/BV                                      5.3        4.7          4.2
Change (%)                 -151.4      505.9       -14.3       22.5   EV/Sales                                  3.5        3.2          2.9
PBT after EO Expense        2,053     12,439     10,659     13,057    EV/EBITDA                                16.7       17.1         14.4
Tax                           985      1,403       1,706      2,089   Dividend Yield (%)                        0.6        0.6          0.7
  Tax Rate (%)                48.0       11.3       16.0       16.0
Reported PAT                1,068     11,036       8,953    10,968    Return Ratios (%)
Adjusted Net Profit         1,068     11,099     11,615     13,725    RoE                             2.5      24.1       22.5         23.5
  Change (%)               -120.7      939.2          4.6      18.2   RoCE                            2.6      16.7       15.4         17.0
  Margin (%)                   1.5      14.9        14.2       15.2
                                                                      Working Capital Ratios
Balance Sheet                                        (INR Million)    Fixed Asset Turnover (x)        3.2       2.8        2.4          2.2
Y/E March                    2010       2011     2012E      2013E     Debtor (Days)                    62        86         66           62
Equity Share Capital *        844        846        846        846    Inventory (Days)                69        78         69           66
Reserves                   42,071     45,144     50,712     57,679    Working Capital (Days)          62        90         75           71
Net Worth                  42,915     45,990     51,558     58,525
Loans                      14,695     23,572     23,572     23,572    Leverage Ratio
Deferred Liabilities/Tax    1,438         87         87         87    Current Ratio (x)               1.9       2.0        2.1          2.2
Capital Employed           59,048     69,649     75,217     82,184    Debt/Equity (x)                 0.3       0.5        0.5          0.4


Net Fixed Assets           22,769     29,955     38,755     43,155    Cash Flow Statement                                  (INR Million)
Investments                 3,843        309     -1,191     -1,191    Y/E March                    2010       2011      2012E         2013E
Goodwill/Intangible Assets 13,973     15,246     15,246     15,246    Op. Profit/(Loss) before Tax 14,202   15,620     15,370        18,065
                                                                      Interest/Dividends Recd.        614      926       -155          -163
Curr. Assets               38,463     47,560     42,028     45,748    Direct Taxes Paid              -985   -1,403     -1,706        -2,089
Inventory                  13,371     16,059     15,533     16,258    (Inc)/Dec in WC               3,629   -6,531      1,650          -853
Account Receivables        11,960     17,615     14,716     15,355    CF from Operations           17,460    8,612     15,159        14,959
Cash and Bank Balance       6,584      5,729      5,647      7,361
Others                      6,548      8,157      6,132      6,774    CF from Oper. incl EO Exp.17,460        8,612    15,159        14,959
                                                                      (inc)/dec in FA           -6,182      -12,566   -13,355        -9,245
Curr. Liability & Prov.   20,000     23,421       19,621    20,774    (Pur)/Sale of Investments -3,113        3,534     1,500             0
Account Payables            9,322      8,480       8,993      9,936   CF from Investments       -9,295       -9,032   -11,855        -9,245
Other Current Liabilities 10,678     14,941       10,628    10,839
Net Current Assets        18,463     24,139       22,407    24,974    Change in networth              103    -4,726         0             0
Appl. of Funds            59,048     69,649       75,217    82,184    (Inc)/Dec in Debt            -5,006     8,877         0             0
* IFRS reporting from FY09 onwards. Financials prior to FY09 are as   Other Items                  -1,973         0         0             0
per US GAAP                                     E: MOSL Estimates     Dividend Paid                  -301    -3,235    -3,386        -4,001
                                                                      CF from Fin. Activity        -7,177       916    -3,386        -4,001


                                                                      Inc/Dec of Cash                  988      496         -82       1,713
                                                                      Add: Beginning Balance         5,596    6,584       5,729       5,647
                                                                      Closing Balance                6,584    7,080       5,647       7,360
                                                                      Note: Reported cashflow differs due to acquisitions & change   to IFRS
                                                                      reporting from FY09 onwards


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                                                                                                           MEDICINES
    MEDICINES                      CAPSULE                                                                  Score       49/100
                                                    Glenmark Pharma
     Needs to improve returns ratios                                                      CMP: INR318
                                                                                          TP: INR310                   Neutral
                                                                                                                              GNP IN



        M: Mix                                                  2/10       E: Equity with doctors                              3/10

               Acute therapeutic segments such as dermatology,                  Glenmark lags other leading companies when it
               AI and respiratory segments dominate the sales                   comes to brand equity among doctors.
               mix, contributing 76% of the company's revenue.
                                                                                The only therapeutic segment in which Glenmark
               Glenmark has been trying to expand its presence
                                                                                has made its mark is dermatology, in which it ranks
               in chronic therapy segments.
                                                                                second in the industry, with market share of 11.5%.
               Over the past 10 years, Glenmark has tried to
                                                                                However, Glenmark has gradually improved its
               diversify its therapeutic mix as the contribution to
                                                                                prescription ranking in the gynecology and CVS
               revenue from the respiratory, gastro and
                                                                                segments over the past four years.
               dermatology segments has fallen significantly.




        D: Distribution & reach                                 5/10       I: Introductions                                    6/10

               Glenmark has better distribution in metros and tier-             Glenmark has launched fewer new products
               I cities as it derives 70% of the revenue from such              compared with some of its peers.
               areas, which is above average compared with the
                                                                                It launched 26 new products annually over the past
               industry.
                                                                                four years.
               Distribution in metros has increased significantly
                                                                                Glenmark's revenue growth is led by both existing
               over time while the contribution of other geographies
                                                                                products new launches over the past four years.
               to revenue has fallen.
               Glenmark has a field force of 2,078 MRs.




  Stock info                                 Financial & valuation summary
                                             Year     Net Sales PAT     EPS      EPS      P/E    P/BV   RoE    RoCE     EV/    EV/
  Equity Shares (m)                  269.8
                                             End       (INR m) (INR m) (INR)    Gr. (%)   (x)     (x)   (%)     (%)    Sales EBITDA
  52-Week Range (INR)             390/242
                                             03/10A    24,616    3,310   11.6   174.9     27.3   3.6    14.1    12.7    4.2     17.3
  1,6,12 Rel. Perf. (%)           10/22/20   03/11A    29,491    3,548   12.5    7.2      25.5   4.2    17.4    13.4    3.6     17.7
  M.Cap. (INR b)                      85.8   03/12E    37,007    4,584   16.1    29.2     19.7   3.2    17.0    15.3    2.8     10.4
  M.Cap. (USD b)                       1.9   03/13E    40,693    5,612   19.7    22.4     16.1   2.6    17.1    16.3    2.5      11.1
  Background




                        Glenmark is one of the second tier integrated pharmaceutical companies which has differentiated itself
                        through its success in NCE research. The company has pipeline of 5 Novel drugs in different phases of
                        clinical studies. It is also one of the leading Indian generic companies in US with focus on niche generics
                        segments. Glenmark has reasonable presence in semi-regulated markets.



August 2011                                                                                                                             128
                                                                                                         Glenmark Pharma




   CEO Profile


                 Glenmark was founded by Mr. Gracias Saldanha (Founder & Chairman Emeritus) and is being currently
  CEO




                 managed by Mr. Glenn Saldanha (CMD). Developing a strong NCE pipeline coupled with expanding
                 presence in the US and emerging markets are the key achievements. It is the most successful NCE
                 research company from India till date.


    C: CAGR and scale-up                             6/10       I: Improvement in productivity                       5/10

        Glenmark has outperformed the average industry               Glenmark has shown marginal increase in MR
        growth with revenue CAGR of 18.6% over FY05-                 productivity over the past six years.
        11. The company scaled up its business rapidly
                                                                     Glenmark's MR growth was 14.2% compared with
        albeit on a very low base.
                                                                     revenue growth of 17.3%, indicating improved
        We expect Glenmark to post revenue CAGR of                   productivity.
        17% over FY11-13, outperforming the industry, given
                                                                     Revenue per MR improved from INR3.1m in 2004
        its low base and aggressive focus on driving growth
                                                                     to INR3.6m in 2010. At this level productivity is in
        in this business.
                                                                     line with average.




    N: Non-domestic business                         3/10       E: Earnings growth                                   7/10
        We are neutral on Glenmark's international                   We expect topline of 18.3% CAGR over FY11-13
        business despite its ramp-up in emerging markets             leading to EPS CAGR of 25.8%.
        due to the low return ratios in these markets.
                                                                     Reduction in interest costs in the long-term will
        We expect international formulation business to              partly drive earnings growth.
        record 17% CAGR over FY11-13.
        Option values include potential NCE out-licensing
        and the launch of Crofelemer in some emerging
        markets.




    S: Stock Attractiveness                                                                                      10/20
        Return ratios have been muted due to the working-     Stock performance (1 year)
        capital intensive nature of Glenmark's operations.                 Glenmark Pharma        Sensex - Rebased

        Glenmark is valued at 19.7x FY12E and 16.1x            400
        FY13E consolidated earnings.                           350
                                                               300
        Maintain Neutral with a target price of INR310 (15x
                                                               250
        FY13E EPS plus DCF value of Crofelmer and Para
        IV products).                                          200
                                                                Aug-10       Nov-10      Feb-11      May-11       Aug-11




August 2011                                                                                                                129
                                                                                                                         Glenmark Pharma



India formulations                  Needs to improve return ratios
snapshot                            Ranks 25th in the domestic market
Domestic          formulations
                                    Glenmark is a niche player in the domestic formulations segment with strong presence in a
contribute ~30% to revenue
                                    few niche therapeutic areas like dermatology. It ranks twenty-fifth in the industry with market
The domestic formulations
                                    share of 1.53%. The company has been gradually increasing its presence in chronic therapy
business, which contributed
30% to Glenmark's revenue in        areas. Glenmark is among the few companies to have improved the productivity of its
FY11 and an estimated 27% to        workforce over the years.
EBITDA, is a leading
contributor to Glenmark's top-
line and profitability.             1. Mix:                                                                                             2/10
Interestingly, unlike other
leading generic companies,          Acute therapeutic segments account for 76% of revenue; dermatology, CVS,
Glenmark's profitability from       AI, respiratory segments dominate sales
the domestic formulations
business is lower than from its
                                    Acute therapeutic segments, in which Glenmark has 76% market share, dominate
regulated market generics           Glenmark's sales mix. The top four therapeutic segments, including dermatology, CVS, AI
business.                           and respiratory segments, account for about 76% of Glenmark's domestic formulation
                                    revenue. Its top therapy segment, dermatology, contributes 29% to total revenue. Over
EBITDA Contribution
                                    the past 10 years, the contribution of CVS and AI segments increased while that of
     Non-DF                         respiratory, gastro and dermatology segments fell. Glenmark has been trying to expand its
                       DF EBITDA
   EBITDA 73%
                          27%       presence in chronic segments.

                                    Acute segments contributes 76% to the revenue

                                                                                              Gynaeco
                                             GI         Others FY01         Derma                                 FY05
                                            10%                             tology              logy        GI
                                                         7%
                                                                             37%                 5%                                 Dermatol
                                                                                                           7%        Others
                                     Gynae                                                                                            ogy
Glenmark ranks twenty-                                                                                                3%
                                     cology                                                                                          33%
fifth in the domestic                                                                        Pain
                                      9%
                                                                                             13%
formulations segment
Glenmark ranks twenty-fifth in
                                     Pain
the domestic formulations            4%
market and has a market share
                                                                               CVS
of 1.53%. However, over the                            Respira                                         Respirat                          CVS
                                     Diabetes                          AI      0%           Diabetes                           AI
past five years, the company                            tory                                             ory                             5%
                                        0%                            11%                      8%                             11%
improved its market share from                          22%                                             15%
1.26% in 2006 to 1.53%
currently. Over the past six                                                         FY11
years, Glenmark's revenue
                                                                               Others 6%
posted 19% CAGR and the                                             GI 3%
                                                      Gynaec 5%
industry posted 14% CAGR.
                                                                                                                   Dermatology 28%
                                            Pain 6%
Glenmark has improved
market share over the last
5 years                                      Diabetes 6%

               Mkt Share (%)
               Grow th (%)   25.9
 21.8    20.1 18.5      17                        AI 14%

                                                                                                                  CVS 17%
                                                             Respiratory 15%
  1.26

         1.3

                 1.4

                        1.5

                              1.5




                                                                                                           Source: Company/Industry/MOSL
 2006 2007 2008 2009 2010




August 2011                                                                                                                                130
                                                                                           Glenmark Pharma



              2. Equity with doctors:                                                                     3/10
              Glenmark lags in terms of brand equity except in dermatology
              Glenmark lags leading companies covered in this report in terms of brand equity. The only
              therapeutic segment in which Glenmark made its mark is dermatology, in which it ranks
              second in the industry with market share of 11.5%. In the respiratory segment, Glenmark
              ranks ninth with market share of 2.8%.
              Market share in key therapies (%)                  Growth comparison (%) (2010)

                                                                      Avg Gr - Company    Avg Gr - Industry
                                                11.5
                                                                                             25.4


                                                                       18.3                        18.4
                                                                              16.2



                          2.8




                     Respiratory          Dermatology                 Respiratory             Dermatology

              * Average growth over 2009-2010                                            Source: Industry/MOSL

              Glenmark has maintained its strong brand equity in the dermatology segment over the
              years with prescription ranking of No2 and 8% of the prescription market share. It has
              improved its prescription ranking in the gynecology and CVS segments over the past four
              years.

              Glenmark's prescription ranking
                                        Jan-07          Jan-08        Jan-09         Jan-10          Oct-10
              Derma                             2            2                2           2                 2
              Anti-diabetic                      9          9              9             10               10
              Gynaec                            16         12              9              11               8
              Respiratory                       11         11             14             13               13
              CVS                                -         24             21             20               17
              Anti-infectives                    -         23             23             20               23
                                                                                         Source: Industry/MOSL




August 2011                                                                                                     131
                                                                                                                            Glenmark Pharma



                                      3. Distribution and reach:                                                                     5/10
                                   Glenmark derives 70% of its revenue from metros and class-I towns against the industry
                                   average of 63%. Over the past four years revenue CAGR for all geographies except rural
                                   areas has been better than that of the industry average.


Glenmark: Geographical distribution of revenues (%)                    Geographical distribution of revenues: Industry (%)

     Metros     Class I Tow ns          Class II to VI      Rural           Metros      Class I Tow ns          Class II to VI      Rural

    19.3        20.3           18.3            15.5         14.3                                        20.0           18.1        17.3
                                                                            20.6       20.9
                                               15.4         15.6
    18.3        17.2           16.0                                                                                    19.4        19.6
                                                                            19.2       19.0             19.5
                                               25.5         26.7
                               25.7
    30.2        28.3                                                                                                   32.5        32.0
                                                                            32.6       31.3             31.6


                               40.0            43.6         43.5
    32.2        34.2                                                                   28.9             28.9           30.0        31.0
                                                                            27.6


    CY06        CY07           CY08            CY09        CY10            CY06        CY07             CY08          CY09         CY10


Glenmark: Geography-wise growth rates (%)                              Industry: Geography-wise growth rates (%)

       Metros     Class I Tow ns          Class II to VI       Rural         Metros      Class I Tow ns          Class II to VI       Rural
                                                                                                                                    26.2
                                                                                                                                    23.5
                       38.4                                  31.5
    27.7                                27.5                                                                                        20.7
                                                              27.1                            17.5             17.7
                                                                          17.6                                                      17.5
   26.4                                                                                          15.6
                                                              25.7                                             16.4
                                        16.3                              14.0
    12.5                                                     15.8                              14.7
                       7.5                                                11.1                                 13.0
    12.5                                 12.7                                                 9.5
                  7.1                                                      7.9
                        10.5
                                                                                                                      2.5
                                        -1.1
     CY07              CY08             CY09               CY10             CY07           CY08                CY09               CY10

                                                                                                                       Source: Industry/MOSL




                                      4. Introductions:                                                                              6/10
                                   Glenmark's revenue growth from new launches has been gradually
                                   declining over the past few years
                                   Glenmark's revenue growth was led mainly by new launches in CY07, CY08 and CY09
                                   but in CY10 the contribution of existing brands to revenue growth was higher than that of
                                   new launches. Glenmark launched 26 new products annually on average over the past
                                   four years. Average revenue per new launch has risen over the past four years from
                                   INR66m to INR90m.




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                                                                                                                                 Glenmark Pharma



Glenmark: New launches                                                     Glenmark: Growth composition (%)

                  No. Of launches in last 2 yrs                                          New Launches                   Existing Brands
                  Avg sales per launch (INR m)

                   98.3            96.7                    90.3

       65.7                                                                                                                               17.2
                                                                                 8.7                   5.6
                                                                                                                        7.5


                                                                                11.4                   12.9
                                                                                                                        9.5               8.7
       57          52              46                      53

      CY07        CY08            CY09                CY10                      CY07               CY08                 CY09              CY10


                                                                                                                               Source: Industry/MOSL



                              5. CAGR and scale up:                                                                                              8/10
                             Glenmark posted domestic formulation revenue CAGR of 19% over FY05-11, much faster
                             than the industry average. We believe the company can sustain its out-performance of the
                             industry by changing its therapeutic mix in favor of chronic therapeutics segments and
                             consistent improvement in workforce productivity. We expect Glenmark's domestic
                             formulations business to post 17% CAGR over FY11-13 against the industry's 15-16%
                             CAGR.

                             Glenmark: domestic formulations performance

                                                                      DF revenue (INR m)                 Grow th (%)

                                                                  27.1


                                                                                 16.8          18.1                            18.0
                                                                                                                                           16.0
                                                                                                               12.2
                                                  9.0

                                                                                                                                            11,562
                                    3,937




                                                   4,290




                                                                   5,454




                                                                                 6,372




                                                                                               7,529




                                                                                                                8,447




                                                                                                                                9,967




                                  FY06            FY07            FY08          FY09          FY10            FY11            FY12E       FY13E

                                                                                                                              Source: Company/MOSL



                              6. Improvement in MR productivity:                                                                                 5/10
                             Glenmark's above-average MR productivity leads growth
                             Glenmark's revenue from the domestic formulations business grew at 17.3% CAGR over
                             FY04-10 and its sales force strength increased by 14.2% CAGR, implying improvement
                             in salesforce productivity. Glenmark's MR productivity improvement is visible from the
                             fact that, in 2004, Glenmark derived sales of INR3.1m per MR, which went up to INR3.6m
                             in FY10.




August 2011                                                                                                                                          133
                                                                                                       Glenmark Pharma



Glenmark: Salesforce productivity

              No. of MRs          Revenue per MR (INR m)                   Sales force addition CAGR (%)
                                                                           Productivity Improvement CAGR (%)
                                           3.6



                                                                         14.2
                 3.1                                                                                   11.5


                936                       2,078                          2.7                            1.9

                2004                      2010                         Glenmark                       Industry


                                                                                           Source: Company/Industry/MOSL




                              7. Non-domestic business snapshot:                                                 3/10
                              Positives
                               Trying to build a differentiated portfolio in the US by targeting niche segments of
                                 dermatology, oral contraceptive and controlled substances.
                               One of the most successful NCE players from India despite setbacks on some NCEs.
                                 Glenmark has generated upfront and milestone income of USD187m from NCEs so
                                 far.
                               Glenmark is gradually ramping up its presence in emerging markets.


                              Risks and concerns
                               Working capital intensive operations, especially in emerging markets
                               NCE out-licensing has become difficult and time-consuming, which may lead to higher
                                 R&D expenses in coming years.

                              Key news flows/triggers
                                Stoppage of Oxycodone supplies by other generic players in the US will make Glenmark
                                 the sole player.
                               Launch of Calcipotriene ointment in the US makes Glenmark the sole supplier.
                               Launch of generic Malarone in the US under agreement with GSK.
                               Signing of NCE out-licensing deals with MNCs.


                              Impact assessment
                               We are neutral on Glenmark's international business given the working capital
                                intensiveness of its emerging market business.
                               We expect the international formlation business to record 17% CAGR for FY11-13.
                               Option values include potential NCE out-licensing and the launch of Crofelemer in
                                some emerging markets.




August 2011                                                                                                         134
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Sales mix (INR m)                                                                                           EBITDA Contribution
                           FY09      FY10        FY11   FY12E      FY13E FY11-13E
                                                                        CAGR (%)                                                                                                DF
                                                                                                                                                                              EBITDA
Formulations           19,188       21,989   25,259     30,821     35,907                19.2
                                                                                                                                                                               27%
  Branded              11,303       14,116   15,963     19,163     22,188                17.9
    India               6,372        7,529    8,447      9,967     11,562                17.0
     Europe-branded       996        1,363    1,528      1,669      1,795                 8.4
     Latam-branded      1,580        1,361    1,919      2,478      2,908                23.1
    Semi-regulated mkts 2,355        3,864    4,070      5,048      5,923                20.6
   Generics             7,885        7,873    9,296     11,658     13,719                21.5                    Non-DF
     Latin America        400          343      401        478        561                18.3                    EBITDA
     North America      7,338        7,230    8,352     10,370     12,168                20.7                     73%
    Europe                147          299      544        810        990                35.0
API                     1,972        2,627    3,337      3,610      4,026                 9.8                                                            Source: Company/MoSL
NCE Income                  0            0      895      2,475        660
Gross Sales            21,160       24,616   29,491     36,906     40,592                17.3




                                     8-9. Earnings growth and stock attractiveness:                                                                                              17/30
                                     Sustaining growth in existing businesses and funding of NCE research expenses has resulted
                                     in high leverage for Glenmark. Debt has particularly increased after the credit crisis of
                                     FY09 and has not reduced significantly since. We believe the key determinant for Glenmark's
                                     valuations will be its ability to de-leverage without sacrificing growth traction. High debt
                                     and high working capital are our key concerns for Glenmark.

                                     Expect 26% EPS CAGR over FY11-13: We expect Glenmark to record 18.3% top-
                                     line CAGR over FY11-13 led by 17.1% CAGR in the generic business and 18% CAGR in
                                     branded generic business. EPS CAGR is estimated at 26% over FY11-13. Glenmark has
                                     differentiated itself among Indian pharmaceutical companies through its success in NCE
                                     research (resulting in licensing income of USD187m so far). Given this success, Glenmark
                                     has been aggressive in adding new NCEs to its pipeline, which will put pressure on its
                                     operations in the short to medium term as it will have to fund R&D expenses for these
                                     NCEs on its own until they are out-licensed. High interest costs and likely absence of
                                     strong forex gains will temper down the strong operational performance for FY12. Low
                                     return ratios is our main concern. The stock is valued at 19.7x FY12E and 16.1x FY13E
                                     earnings. Maintain Neutral with a target price of INR310 (15x FY13E EPS+ DCF value
                                     of INR14 for Para-IV pipeline and crofelemer).
Glenmark Pharma RoE & RoCE (%)                                         Glenmark Pharma one year forward PE

                            RoE           RoCE                                                      P/E (x)                Avg(x)                Peak(x)                    Min(x)
                                                                       160
                                  17.4       17.0          17.1
                                                                       120                                                      137.7
                  14.1                                    16.3
                                             15.3
                  12.7            13.4                                  80
     8.0
                                                                                                                                     37.4
                                                                        40
     7.0                                                                                                                                                                               18.4

                                                                            0                                               13.1
                                                                                           Mar-07




                                                                                                                  Feb-08




                                                                                                                                       Feb-09




                                                                                                                                                          Feb-10




                                                                                                                                                                              Feb-11
                                                                                Aug-06




                                                                                                        Aug-07




                                                                                                                            Aug-08




                                                                                                                                                Aug-09




                                                                                                                                                                   Aug-10




                                                                                                                                                                                        Aug-11




      2009          2010           2011       2012E        2013E



August 2011                                                                                                                                                                              135
                                                                                                                              Glenmark Pharma



                                       Glenmark non-domestic business: key trends, triggers & risk
                                       Trying to build a differentiated portfolio in the US
                                       Glenmark is focusing on filing products in the niche segments of dermatology, controlled
                                       substances and hormones for the US market. This coupled with a few FTF filings are
                                       expected to be key growth drivers for the US business. However, we are cautious about
                                       these product categories given the complexities of manufacturing and the stretched US
                                       FDA approval time-lines for ANDA approvals. We estimate Glenmark's US portfolio (ex-
                                       upsides from one-off FTF opportunities) to post revenue of 21% CAGR over FY11-13.

                                       ANDAs filed/marketed (includes partner filings)
                                                              As of 31 March 2009             As of 31 March 2010        As of 31 March 2011
                                       Dermatology                                 18                           20                        21
                                       Controlled substance                         6                            9                         3
                                       Modified release                             2                            6                         9
                                       Hormones                                     7                           15                        15
                                       Para-IV FTF                                  9                            9                        13
                                       Normal generics                             45                           46                        48
                                       Total                                       87                          105                       109
                                                                                                                         Source: Company/MOSL


                                       Para-IV pipeline not significant
                                       Unlike some of its peers, Glenmark has not focused on developing a strong patent challenge
                                       pipeline for the US. It has a pipeline of six Para-IV products (of which five are FTFs)
                                       targeting an innovator market size of USD2.3b.

Glenmark: Para IV pipeline
Product           Indication      Brand      Innovator    Market     Status
                                                            Size
                                                         (USD m)
Ezetimibe         Cholesterol     Zetia      Schering         1500   Has tentative approval with FTF. Sued on 22-Mar-07. 30-month
                                             (Merck)                 stay period expired in Oct-2010. Court case started in May-10. Signed
                                                                     licensing & cost-sharing deal with Par Pharma on 04-May-10 for small
                                                                     upfront payment. Par to share risks/costs of litigation as well as profits.
                                                                     Settled out-of-court with innovator. Launch scheduled on 12-Dec-2016
Tradolapril +     Anti-           Tarka      Abbott/            58   Glenmark is FTF and was sued on 07-Dec-07. 30-month stay expired in
Verapamil         hypertensive               Sanofi                  May-2010. Received final approval on 10-May-2010. Innovator's summary
                                                                     motion rejected. Glenmark launched "at-risk" in Jun-10; Federal Jury ruled
                                                                     against Glenmark in Jan-2011 and awarded Abbott USD16m in damages
                                                                     post which Glenmark has stopped further sales. District Court Judge's ruling
                                                                     will determine the final outcome with losing party having right to appeal to
                                                                     the Federal Circuit Court
Fluticasone       Dermatology     Cutivate Nycomed              48   Glenmark seems the FTF. Sued on 12-Dec-08. Received final approval
lotion 0.005%                                                        on 02-May-2011. Settled out-of-court with Nycomed for potential launch
                                                                     in Mar-2012. Glenmark will pay mid-teens royalty to Nycomed. Only one
                                                                     other generic filing till date
Atovaquone        Anti-malarial   Malarone GSK                  58   Glenmark has FTF. GSK sued Glenmark on 17-Aug-09. Settled out-of-court
Proguanil HCl                                                        on 12-Apr-10. Launch scheduled in Sep-2011 with 180-day exclusivity. No
250mg/100mg tablets                                                  AzG. Glenmark seems to be the only filer till and date
Oxycodone                         NA         Pre-1938           13   Not an FTF product. Glenmark's partner Lehigh Valley Tech (LVT)
Hydrochloride                                product                 has filed NDA with US FDA since it is a pre-1938 product. NDA
Capsules &                                                           approval awaited. If successfully approved all other generic players
Liquid Solution                                                      will have to file ANDAs referencing Glenmark's product & hence
                                                                     could give Glenmark ~18 months of indirect exclusivity. Product has
                                                                     to be manufactured in the US as it is a controlled substance

August 2011                                                                                                                                   136
                                                                                                                            Glenmark Pharma



Glenmark: Para IV pipeline
Product          Indication      Brand      Innovator      Market   Status
                                                             Size
                                                          (USD m)
Calcipotriene    Dermatology     Dovonex Leo Pharma            93   Leo Pharma discontinued marketing in 2007 when annual revenues were
ointment                                                            USD93m as it planned to shift prescriptions to a combination but has not
                                                                    been successful. Glenmark currently is the only approved product on the
                                                                    market. It has tied up with Taro exclusively for branding & promoting the
                                                                    product. Current revenue run-rate will be much lower than USD93m (likely to
                                                                    be USD25m for FY11) as the product has not been promoted for the past 3
                                                                    years. Glenmark to receive small milestone income prior to launch & then
                                                                    royalty on Taro's sales. Royalty will be minimum 30%
Eszopiclone      Insomnia        Lunesta Sunovion             787   Settled with Sepracor on 9th Aug 2010. As per settlement Glenmark
tablets                                                             can launch after 30-Nov-2013, which is 2.5months prior to the expiry of '673
                                                                    patent, or after 30-May-2014 if Sepracor obtains pediatric exclusivity. Other
                                                                    Para IV filers are Teva, DRL, Cobalt, Orchid, Lupin, Roxane, Wockhardt and
                                                                    Sun. Settled with Lupin, Wockhardt, Cobalt and Teva. Received tentative
                                                                    approval on 22- Dec-10
Hydrocortisone   Eczema        Locoid       Astellas           38   Glenmark has FTF. Sued on 04-Nov-10. The 30-month stay expires in May-
Butyrate         (Dermatology) Lipo-        /Triax                  2013. Patent expires on 03-Jun-2014. Settled out-of-court on 25-May-2011
                               cream                                with launch scheduled in 3QFY12. There will be no AzG, but Glenmark will
                                                                    have to pay royalty to the innovator. Royalty amount/ percentage not disclosed
Rosuvastatin     Cholesterol     Crestor    AstraZeneca      3600   Glenmark not sued till date. The '314 patent expiring in 2016 has been upheld
Calcium                                                             by court. Astra sued 8 generic players in Apr-10 for the '152 patent expiring
                                                                    on 02-apr-2018 and '618 patent expiring on 17-Dec- 2021. Glenmark's 30-
                                                                    month stay expires in Nov-2012. Patent litigation is on. No timelines known
Atomoxetine      Attention-      Strattera Eli Lilly          530   9 generic players have FTF status alongwith Glenmark. Many generic filings
HCl              Deficit/                                           with Para-IV status - Teva, Sandoz, Actavis, Mylan, Glenmark, Cadila, Apotex,
                 Hyperactivity                                      Aurobindo, Synthon. DRL has tentative approval
                 (ADHD)
Fluocinonide     Dermatology     Vanos      Medicis            30   Perriogo seems to be the FTF. Other generic players with Para-IV filings
                                                                    include Glenmark, Taro & Nycomed. Perrigo has settled with launch scheduled
                                                                    in Dec-2013. Glenmark & Taro have also settled with launch scheduled in
                                                                    Dec-2013. Glenmark's 30-month stay expires in Nov-2011
                                                                                                                        Source: Company/MOSL



                                    Tarka has witnessed negative news flow
                                    On 15 January 2011, a US jury ruled against Glenmark on one of the contentions of the
                                    patent litigation for generic Tarka (a USD58m brand) at a US District Court (lower court).
                                    The federal jury rejected Glenmark's challenge to the validity of a Sanofi patent that
                                    expires in February 2015. Glenmark had argued that the patent covered an invention that
                                    was protected by an expired patent.

                                    Abbott markets the drug in the US and sought USD25m as compensation from Glenmark
                                    and the US jury awarded damages of USD16m. The District Court judge will now have to
                                    either accept or reject the jury ruling on this aspect of invalidation and give a ruling on
                                    other aspects of the case. The final outcome of the case will depend on what the judge
                                    rules on all the aspects of the case (the ruling is expected in next few weeks).




August 2011                                                                                                                                  137
                                                                                         Glenmark Pharma



              Glenmark undertook an "at-risk" launch of generic Tarka in the US in June 2010. Glenmark
              generates US$5m in revenue per quarter from generic Tarka with about 55% PAT margins
              resulting in USD2.75m PAT per quarter. For FY11, we estimated one-time PAT of USD8m
              from this opportunity for Glenmark. The jury ruling implies potential damages of USD16m
              which Glenmark will have to pay Abbott if it loses the case. Glenmark has temporarily
              halted sales of generic Tarka until the District Court judge gives a ruling.

              Identifying niche opportunities in the US
              Besides Para-IV filings, identifying niche, low-competition opportunities in the US is a key
              focus area of Glenmark's US strategy. It has met with some success in this strategy with
              Oxycodone and Calcipotriene.

              (A) Oxycodone
              Glenmark's US partner, Lehigh Valley Technologies (LVT), received NDA approval for
              Oxycodone 5mg capsule and 100mg/5mL oral solution in June 2010. LVT will make the
              product and while Glenmark will have exclusive distribution rights for these dosages in the
              US (market size of USD13m/year).

              Background to the NDA filing
              Since Oxycodone is a pre-1938 product all generic players launched their generic versions
              in the US without US FDA approvals. The US FDA has been gradually trying to get the
              products approved. As part of this process, LVT filed an NDA for the 5mg capsules and
              100mg/5mL oral solution with the US FDA, which has been approved.

              As per US FDA guidelines, a successful NDA approval will force the remaining generic
              companies to withdraw from the market and re-file their products with reference to LVT's
              approved NDA. The US FDA will issue a warning letter to the remaining generic players
              to withdraw their versions from the market after it is convinced that it will not lead to drug
              shortages and that Glenmark/LVT will be able to meet the demand.

              US FDA approval time-lines for ANDAs is approximately for 18-24 months. This will
              result in Glenmark/LVT being the only approved Oxycodone player in the market for the
              next 24 months.

              Sole player - may be able to raise prices
              Being the sole player in the market, Glenmark/LVT will enjoy indirect exclusivity for the
              dosages until other generic players receive new approvals. This product will qualify as a
              niche (high margin) opportunity targeted by Glenmark in the US market. Absence of other
              generic players (for ~24 months) will give it an opportunity to raise prices of Oxycodone,
              enhancing the size of the opportunity to US$25m-30m over the next 12 months.

              (B) Calcipotriene
              Glenmark is the only US FDA approved player in the Calcipotriene ointment market. Leo
              Pharma discontinued marketing in 2007 when annual revenue was USD93m as it planned
              to shift prescriptions to a combination of Calcipotriene & Betamethasone but has not been
              successful.

              Glenmark is the only approved product on the market. It has tied up with Taro exclusively
              to brand and promote the product. Current revenue run-rate will be lower than US$93m
              (likely to be USD25m) as the product has not been promoted over the past three years.

August 2011                                                                                             138
                                                                                                                  Glenmark Pharma



                               We expect Glenmark/Taro to launch this product in FY12. It will receive a small milestone
                               income prior to launch and then royalty on Taro's sales. While Glenmark has not disclosed
                               financial details of its tie-up with Taro, we believe the royalty will be fairly remunerative.

                               Most successful NCE company from India so far
                               Glenmark has been one of the most successful NCE companies from India, generating
                               ~USD202m in upfront and licensing income over the past decade. This is despite its being
                               a relatively late entrant in this segment compared with the likes of Ranbaxy and Dr Reddy's.



Glenmark - NCE Pipeline Snapshot
Molecule          Indication              Clinical Trials        Out-licensing            Licensing Income (USD m)
                                                                  Partner              Upfront        Mile- Total Estimated
                                                                                                  s t o n e s Deal Value
Melogliptin       Diabetes - DPP IV       Phase-IIb completed    Initially Merck KgA        31              - Partner returned
(GRC 8200)        Inhibitor                                      but molecule returned                        molecule
                                                                 to Glenmark
Revamilast        Rheumatoid Arthritis,   Initiated Phase-II      -                          -              - -
(GRC 4039)        Asthma                  trials in UK, Poland,
                                          India, Czech
                                          Republic and Philippines
                                           in Aug-2011
Tedalinab         Neuropathic pain,       Phase-I completed.     -                            -           -   -
(GRC 10693)       Osteoarthritis and      To initiate Phase-II
                  Inflammatory pain.      in FY12
                  Initially targeted for
                  Neuropathic pain
GRC 15300         Osteoarthritis,         Phase I completed      Sanofi                     20      -   325
                  Neuropathic pain        in UK
GBR 500           Crohn's disease &       Phase I completed      Sanofi                     50      -   613
                  Multiple Sclerosis      in US
GBR 600           Acute Stroke/           To initiate Phase-I                                 -           -
                  Coronary Syndrome,      in UK
                  Thrombosis
                  Cardiovascular Disorders
GRC 17536         Osteoarthritis,         Phase I in             -                            -           -
                  Neuropathic pain &      Netherlands
                  Respiratory disorders
Oglemilast        Asthma, COPD            Partner stopped        Forest/Teijin              16           25   Clinical development
                                          clinical development                                                stopped
                                          post Phase-IIb
GRC 6211          Osteoarthritis,         Partner stopped        Eli Lilly                  45                Clinical development
                  Neuropathic pain,       clinical development                                                stopped
                  Dental pain,            post Phase-IIb
                  Incontinence
Crofelemer        Adult acute             Completed Phase III    In-licensed from           15                Glenmark holds rights
                  infectious diarrhoea,   in US and Phase IIb    Napo Pharma                                  only for 140 RoW
                  HIV-related diarrhoea   in India                                                            markets and not for
                                                                                                              regulated markets
Total                                                                                      177           25
                                                                                                              Source: Company/MOSL




August 2011                                                                                                                          139
                                                                                                        Glenmark Pharma



                               Out-licensing of NCEs imperative to control R&D costs
                               Glenmark has a pipeline of Eight NCEs undergoing clinical development. Since NCE
                               research has been a differentiating factor for Glenmark compared with its peers, and
                               since it is the most successful NCE research company from India so far, the company has
                               been prompted to aggressively add new NCEs to its pipeline. As these NCEs progress in
                               clinical trials, they will put pressure on Glenmark's P&L in the short to medium term as it
                               will have to fund R&D expenses for these NCEs on its own. Hence, we believe, out-
                               licensing of some of these NCEs is imperative to control the expected increase in R&D
                               costs.

                               Crofelemer: Not a big opportunity
                               Glenmark has in-licensed this NCE from Napo and holds distribution and marketing rights
                               for 140 emerging markets. It does not hold rights for the product in regulated markets. A
                               launch across 140 emerging markets will be phased.

                               Glenmark has, in the past, indicated peak revenue of USD80m from this product (across
                               unregulated markets that Glenmark will target). Revenue ramp-up will be phased from
                               FY13/14 and is likely to take a few years.

                               We believe the profitability of this product for Glenmark will not be very high due to:
                               1. Relatively low profitability (compared with other NCEs) given the difficulty in
                                  manufacturing such products and lower flexibility in pricing the product since it is
                                  related to HIV.
                               2. Payment of single-digit royalty on sales by Glenmark to Napo.
                               3. We do not expect a big upside for Glenmark from this opportunity. We estimate the
                                  DCF value of this opportunity at INR9/share for Glenmark.
Glenmark - Crofelemer DCF Valuation
(USD m)                              FY11 FY12    FY13   FY14   FY15   FY16   FY17   FY18   FY19    FY20    FY21        FY22
Total Market Size                        0    0     15     75    150    255    380    380    380      80      80          80
Regulated Markets                                    0     50    100    175    300    300    300       0       0           0
Semi-regulated Markets (SRM)                        15     25     50     80     80     80     80      80      80          80
Glenmark - Upside from SRM
Revenues                                            15     25     50     80     80     80     80      80       80         80
EBITDA Margin (%)                                   30     30     30     30     30     30     30      30       30         30
EBITDA                                               5      8     15     24     24     24     24      24       24         24
Royalty to Napo at 8% of
revenues (assumed)                                   1      2      4      6      6      6      6       6        6          6
PAT                                                  3      6     11     18     18     18     18      18       18         18
Glenmark - Upside from Regulated Markets
Salix/Napo's revenues                                     50    100    175    300    300     300        Patent Expiry
Cost of API (%)                                           10     10      10     10    10      10
Glenmark's revenue from API supplies                 5    10     18     30     30     30
PAT margin (%)                                            15     15     15     15     15     15
PAT from API supplies                                     0.8      2      3      5      5      5
Total upside for Glenmark                            3      6     13    20     22     22     22       18      18         18
WACC (%)                                           14     14     14     14     14     14     14       14      14         14
Year                                     0    1      2      3      4      5      6      7      8        9      10         11
PV of cash inflow                        0    0      3      4      7     11    10       9      8        5       5          4
Exchange Rate (INR/USD)               45.0 44.5   43.0   42.0   40.7   39.5   38.3   37.2   36.1     35.0    33.9       32.9
PV (INR m)                               0    0   109    177    302    415    386    328    279      189     161        137
Total PV (INR m)                     2,484
Total PV per share (INR)                 9
                                                                                                    Source: Company/MOSL

August 2011                                                                                                               140
                                                                                              Glenmark Pharma



              Strong growth in emerging markets but working capital intensive
              Glenmark's revenue in emerging markets have grown 4x over FY05-11, albeit on a low
              base. These include markets like Latin America, Australasia, Africa, Russia and the CIS
              and parts of eastern and central Europe. Barring a slowdown in FY09, due to the credit
              crisis, the portfolio has been growing steadily over the years.

              However, we believe this growth traction has been partly achieved by expanding working
              capital in the business leading to increased borrowings. We believe Glenmark must strike
              an optimum balance between growth and working capital in these markets. We expect
              this portfolio to record 19% revenue CAGR over FY11-13, partly impacted by a potential
              rupee appreciation against the US dollar.

              High debt, working capital key concerns
              High net debt of over INR18b and net working capital of ~INR18b are key concern
              areas. While Glenmark is attempting to reduce its working capital requirements, we believe
              it may not be easy for it to reduce it significantly without sacrificing growth, resulting in
              slower progress on this front.

              Sales ramp-up v/s net working capital (INR b)

                                          Revenue (Ex-NCE income)          Non Cash WC               40.0
                                                                                           34.5

                                                                                 28.6
                                                                    24.6
                                                         20.9                                           21.1
                                                                                              18.8
                                                                       18.0         16.4
                                              17.4           15.5
                             10.8                11.7
                 6.8                7.6
                       4.6


                  FY06        FY07             FY08       FY09       FY10         FY11     FY12E      FY13E

                                                                                           Source: Company/MOSL




August 2011                                                                                                   141
                                                                                                                          Glenmark Pharma



Financials and valuations: Glenmark Pharma


Income Statement                                        (INR Million)    Ratios
Y/E March                      2010       2011     2012E       2013E     Y/E March                      2010      2011         2012E    2013E
Net Sales                   24,616     29,491     37,007      40,693     Basic (INR)
   Change (%)                  18.0        19.8      25.5        10.0    EPS (Fully diluted)*            11.6      12.5         16.1     19.7
Materials Consumed            8,061      9,918    11,396      13,211     Cash EPS                        15.9      15.8         19.9     23.9
Personnel Expenses            3,425      5,103      5,613       6,455    BV/Share                        87.6      75.4         99.7    121.4
R&D Expenses                  1,200      1,386      1,899       2,442    DPS                              2.0       3.7          3.7      5.0
Other Expenses                5,966      7,161      8,288       9,608    Payout (%)                       3.8       5.2          3.5      5.1
Total Expenditure           18,653     23,568     27,196      31,716
EBITDA                        5,963      5,923      9,811       8,977    Valuation (x)
   Change (%)                  76.4        -0.7      65.7         -8.5   P/E (Fully diluted)                       25.5         19.7     16.1
   Margin (%)                   24.2       20.1      26.5        22.1    PEG (x)                                    3.5          0.7      0.7
Adjusted EBITDA               5,963      5,028      7,336       8,317    Cash P/E                                  20.1         15.9     13.3
   Margin (%)                   24.2       17.6      21.2        20.8    P/BV                                       4.2          3.2      2.6
Depreciation                  1,206        947      1,086       1,186    EV/Sales                                   3.6          2.8      2.5
EBIT                          4,757      4,976      8,725       7,791    EV/EBITDA                                 17.7         10.4     11.1
Interest                      1,640      1,566      1,482       1,276    Dividend Yield (%)                         1.2          1.2      1.6
OI & forex gains/losses         722      1,405        562         646
PBT before EO Expense 3,839              4,816      7,805       7,162    Return Ratios (%)
   Change (%)                  42.8        25.4      62.1         -8.2   RoE                             14.1      17.4         17.0     17.1
PBT after EO Exp.             3,839      4,816      7,805       7,162    RoCE                            12.7      13.4         15.3     16.3
Tax                             529        237        994         976
   Tax Rate (%)                 13.8        4.9      12.7        13.6    Working Capital Ratios
Reported PAT                  3,310      4,578      6,812       6,186    Fixed Asset Turnover (x)         1.5       1.5          1.7       1.8
Adj PAT**                     3,310      3,548      4,584       5,612    Debtor (Days)                   160       140          126       125
   Change (%)                 194.3         7.2      29.2        22.4    Inventory (Days)                105       100          103       103
   Margin (%)                   13.4       12.4      13.3        14.0    Working Capital (Days)          266       203          185       189
** - Excl NCE upsides & incl adjustment for R&D exp capitalization
                                                                         Leverage Ratio (x)
Balance Sheet                                           (INR Million)    Current Ratio                    4.7       3.4          3.0       3.0
Y/E March                     2010        2011      2012E      2013E     Debt/Equity                      0.8       1.0          0.7       0.5
Equity Share Capital           269         270         270        270
Fully Diluted Eq Cap           284         284         284        284    Cash Flow Statement                                     (INR Million)
Reserves                    23,282      20,102     26,678     32,549     Y/E March                    2010         2011     2012E       2013E
Net Worth                   23,551      20,372     26,948     32,819     Op. Profit/(Loss) before Tax 5,963       5,923     9,811       8,977
Minority Interest              130         267         267        267    Interest/Dividends Recd.        722      1,405       562         646
Loans                       18,693      21,258     18,258     15,758     Direct Taxes Paid              -388     -2,029      -994        -976
Deferred liabilities           710       -1081      -1081      -1081     (Inc)/Dec in WC              -2,441      1,530    -2,368      -2,275
Capital Employed            43,085      40,816     44,391     47,763     CF from Operations            3,857      6,829     7,012       6,373
Gross Block                 21,586      25,899     28,399     30,899
Less: Accum. Deprn.          3,929       4,876       5,962      7,148    CF frm Op.incl EO Exp.        3,857      6,829     7,012       6,373
Net Fixed Assets            17,656      21,023     22,437     23,751     (Inc)/Dec in FA              -3,970        810    -2,500      -2,500
Capital WIP                  6,224       1,100       1,100      1,100    CF from Investments          -3,970        682    -2,500      -2,500
Investments                    181         309         309        309
Intangibles (net)            7,259      10,329       9,606      8,934    Change in Networth            4,386     -7,521         0           0
Curr. Assets                24,210      25,988     30,608     33,643     Inc/(Dec) in Debt            -2,151      2,701    -3,000      -2,500
Inventory                    7,085       8,070     10,407     11,483     Interest Paid                -1,640     -1,566    -1,482      -1,276
Account Receivables         10,783      11,308     12,772     13,936     Dividend Paid                  -126       -236      -236        -315
Cash and Bank Balance        1,069       1,959       1,752      1,535    CF from Fin. Activity           468     -6,621    -4,718      -4,090
Others                       5,273       4,651       5,676      6,689
Curr. Liability & Prov.      5,186       7,605     10,063     11,041     Inc/Dec of Cash                  354      890          -207      -217
Account Payables             4,987       7,560       9,663    10,591     Add: Beginning Balance           715    1,069         1,959     1,752
Provisions                     200          44         400        450    Closing Balance                1,069    1,959         1,752     1,535
Net Current Assets          19,023      18,384     20,545     22,602     Note: Reported cashflow differs due to acquisitions   & change to IFRS
Appl. of Funds              43,085      40,816     44,391     47,763     reporting from FY09 onwards
E: MOSL Estimates

August 2011                                                                                                                                142
                          Domestic Formulations | New Peaks



              N O T E S




August 2011                                             143
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