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Indian Pharmaceutical Sector

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ICRA LIMITED Summary After a brief period of sluggishness, the growth momentum in the domestic formulations market appears to be back on track Structural demand drivers including a) rising household income levels, b) increasing prevalence of lifestyle related diseases, c) improving healthcare infrastructure/delivery systems and 4) rising penetration in smaller towns and rural areas continue to support long-term growth However, competitive pressures in the domestic market are likely to sustain as MNCs become aggressive and domestic companies leverage on their expanded field force; potential regulatory interventions could hurt pricing A large number of patent expirations continue to offer strong growth prospects for generic players in the developed markets; In the recent quarters, a peer set of seven leading generic players have reported a fairly strong revenue growth in the US driven by steadily expanding product portfolio and exclusivities While patent expires are expected to peak out in 2012, we believe that the growth momentum would sustain as most of Indian companies have a fairly well spread out product pipeline till 2014. While some companies have a healthy pipeline of FTF opportunities, others are likely to benefit from the launch of niche, limited competition products The quality of the filings by major Indian companies has also significantly improved over the years with complex molecules, non-orals (i.e. inhalers, injectables, oral contraceptive, ophthalmic etc.) and Para IV/FTFs forming increasing share of their pipeline Globally, generics players however continue to face competitive environment with increasingly crowded space for filing ANDAs and Para IV challenges and aggressive product life cycle management strategies by large innovator companies Price erosion, especially through regulatory interventions, remains a foremost challenge in the European markets; presence in limited competition product segments and over-the-counter (OTCs) segment offers some protection to margins. Most developed markets continue to move away from branded generics to commoditized un-branded generics and lower margin tender based business; amongst new frontiers Japanese generic market offers large potential, though there are significant challenges Patent expirations, weak pipeline quality and increasing focus by Governments to reduce healthcare costs continue to exert pressure on innovator companies which supports outsourcing to low-cost nations Despite challenges, leading Indian players continue to exhibit strong profitability indicators (excluding one-time instances like exclusivity-related aberrations or impact of foreign exchange fluctuations) and credit metrics. These strengths are also reflected in their strong credit profile Our outlook on the Indian pharmaceutical companies remains favourable as we believe companies will continue to benefit from recovery in the domestic market, strong growth potential in generics developed markets and potential outsourcing opportunities Overall, investments including capital expenditure are likely to remain buoyant over the medium term. Balance sheets of major pharmaceutical companies remain strong providing adequate room for fund raising INDIAN PHARMACEUTICAL SECTOR Growth drivers strengthen in the near term; Patent expiries in the U.S. & Europe and domestic market are key Industry Update March 2012 ICRA RATING FEATURE Corporate Ratings Anjan Ghosh +91 22 3047 0006 [email protected] Subrata Ray +91 22 3047 0027 [email protected] Shamsher Dewan +91 124 4545 328 [email protected] Kinjal Shah +91 22 3047 0054 [email protected] Khushboo Shahani +91 22 3048 1070 [email protected]
Transcript
Page 1: Indian Pharmaceutical Sector

ICRA LIMITED

Summary

After a brief period of sluggishness, the growth momentum in the domestic formulations market appears to be back on track

Structural demand drivers including – a) rising household income levels, b) increasing prevalence of lifestyle related diseases, c)

improving healthcare infrastructure/delivery systems and 4) rising penetration in smaller towns and rural areas continue to support

long-term growth

However, competitive pressures in the domestic market are likely to sustain as MNCs become aggressive and domestic companies

leverage on their expanded field force; potential regulatory interventions could hurt pricing

A large number of patent expirations continue to offer strong growth prospects for generic players in the developed markets; In the

recent quarters, a peer set of seven leading generic players have reported a fairly strong revenue growth in the US driven by steadily

expanding product portfolio and exclusivities

While patent expires are expected to peak out in 2012, we believe that the growth momentum would sustain as most of Indian

companies have a fairly well spread out product pipeline till 2014. While some companies have a healthy pipeline of FTF opportunities,

others are likely to benefit from the launch of niche, limited competition products

The quality of the filings by major Indian companies has also significantly improved over the years with complex molecules, non-orals

(i.e. inhalers, injectables, oral contraceptive, ophthalmic etc.) and Para IV/FTFs forming increasing share of their pipeline

Globally, generics players however continue to face competitive environment with increasingly crowded space for filing ANDAs and

Para IV challenges and aggressive product life cycle management strategies by large innovator companies

Price erosion, especially through regulatory interventions, remains a foremost challenge in the European markets; presence in limited

competition product segments and over-the-counter (OTCs) segment offers some protection to margins. Most developed markets

continue to move away from branded generics to commoditized un-branded generics and lower margin tender based business;

amongst new frontiers Japanese generic market offers large potential, though there are significant challenges

Patent expirations, weak pipeline quality and increasing focus by Governments to reduce healthcare costs continue to exert pressure

on innovator companies which supports outsourcing to low-cost nations

Despite challenges, leading Indian players continue to exhibit strong profitability indicators (excluding one-time instances like

exclusivity-related aberrations or impact of foreign exchange fluctuations) and credit metrics. These strengths are also reflected in

their strong credit profile

Our outlook on the Indian pharmaceutical companies remains favourable as we believe companies will continue to benefit from

recovery in the domestic market, strong growth potential in generics developed markets and potential outsourcing opportunities

Overall, investments including capital expenditure are likely to remain buoyant over the medium term. Balance sheets of major

pharmaceutical companies remain strong providing adequate room for fund raising

INDIAN PHARMACEUTICAL SECTOR Growth drivers strengthen in the near term; Patent expiries in the U.S. & Europe and domestic market are key

Industry Update March 2012

ICRA RATING FEATURE

Corporate Ratings Anjan Ghosh

+91 22 3047 0006

ag hos h@ icr a i n di a .co m

Subrata Ray

+91 22 3047 0027

su b rat a@ icra i nd ia . com

Shamsher Dewan

+91 124 4545 328

sh am sh er d @ic ra i n d ia .com

Kinja l Shah

+91 22 3047 0054

k i n ja l . sh ah @ic ra i nd ia .co m

Khushboo Shahan i

+91 22 3048 1070

kh u sh boo. Sha ha ni @ic ra i n di a .com

Page 2: Indian Pharmaceutical Sector

ICRA LIMITED

17.4%20.8%

13.9% 16.6%

9.7%9.1%

13.1%

0%

5%

10%

15%

20%

25%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Domestic Formulations Sales (Rs. Crore) Change (%) YoY

Domestic Formulations Business: Growth momentum improves; therapy-mix influences growth rates among companies

Exhibit 1: Trend in Domestic Formulations Revenues* & Growth

Source: Company Data; ICRA Estimates; *Peer set includes 10 companies

Exhibit 2: Key Management takeaways from earning calls

Company Comments on Domestic Formulations

Ranbaxy Industry wide slowdown in the anti-infective segment continued to

impact growth in the domestic market; however some recovery in

growth is visible;

consumer healthcare business continues to do well

Lupin Domestic formulations business grew by 192% during Q3 FY12

driven by growth across therapeutic segments

Sun Pharma Driven by higher share of chronics in India, business continued to

grow steadily with a growth of 14% in Q3 FY12

Dr. Reddy’s There are initial signs of recovery; secondary sales trends have been

encouraging

Source: Company Earnings Call; ICRA

Structural demand drivers to support growth despite short-term headwinds After a period of sustained growth, the domestic formulations market began to decelerate since

the beginning of Q3 FY11 largely prompted by intense competition, especially in the acute

segments. The growth rates slipped quite sharply in H1FY12 on back of high base effect of the

previous year and spill over of pricing pressure even to the chronic segments to some extent. The

competitive pressure in the domestic formulations market has been rising steadily for some time

now. While on one hand, this has been prompted by significant increase in investments by

domestic players in marketing efforts through expansion in field force, on the other, MNC have

also renewed their focus on India. Some of the smaller players have also contributed to the

competitive intensity by offering huge discounts/incentives to the distribution network and

doctors. However, while competitive pressures are unlikely to abate, the growth momentum

appears to be back on track with last few months reporting a fairly strong growth across therapy

segments. We believe, that the structural demand drivers would continue to support growth in

the long-run despite short-term headwinds.

The Domestic formulations market, valued at ~Rs. 48,200 crore has grown steadily at CAGR of 14-

15% over the past five years. The strong growth has been driven by a confluence of factors

including – a) rising household income levels leading to higher expenditure on healthcare, b)

increasing prevalence of lifestyle related diseases, c) improving healthcare infrastructure/delivery

systems and 4) rising penetration in smaller towns and rural areas. As a result, majority of the

growth in the Indian market has been driven by expansion in volumes and new product

introductions as against prices increases.

Despite increasing consolidation, the market continues to remain highly fragmented with top ten

pharmaceutical companies accounting for only ~35-40% of the market. Leading players continue

to maintain their market share owing to their strong distribution reach, strong field force and

slew of product launches.

Lifestyle related disorders to propel faster growth in chronic segments The acute therapy segments dominate the market with a share of 73% of the total market.

However, with changing demographics and lifestyle patterns, the chronic segments such as

cardiovascular, anti-diabetic, neurology, psychiatry have been growing at a faster pace and the

market is gradually shifting towards chronics. In 2010-11, while the market grew by 15%, chronics

grew by 18%. As per IMS health estimates, the chronic therapies are likely to comprise more than

50% of the market by 2020 with cardiovascular (second largest segment after anti-infective) and

anti-diabetic will take lead while segments like anti-cancer will also add to the momentum.

Page 3: Indian Pharmaceutical Sector

ICRA LIMITED

4.0%8.3%

11.9%

24.3%

17.5%

13.0%9.8%

18.0% 15.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

2006 2007 2008 2009 2010

MNC Pharma Revenues Change (%) YoY Domestic Market Growth (%)

26.4%

29.4% 29.1%

25.1% 25.9%

40.9%39.8%

38.8% 39.6%

32.0%

20.0%

24.0%

28.0%

32.0%

36.0%

40.0%

44.0%

2006 2007 2008 2009 2010

PBDIT Margins (%) RoCE (%)

Domestic Formulations Business: MNCs are becoming aggressive; competitive pressures are likely to sustain

Exhibit 3: Trend in Revenues growth of MNCs in the Indian market

Source: Capitaline; ICRA Estimates Exhibit 4: Trend in profitability indicators of listed MNCs in India

Source: Capitaline; ICRA Estimates

Increasing investments by MNCs reflect at their renewed interest in the Indian market The MNC pharma companies which have so far lagged the domestic market growth are now

becoming increasingly aggressive in the Indian market as part of their focus on emerging

markets. In the past, most of MNCs players had maintained a subdued profile in India owing to

limitation on launch of patented products, limited marketing and distribution bandwidth and

relatively small scale offered by the Indian market. However, with the implementation of the

product patent regime and strong growth prospects, the landscape for MNCs pharmaceutical

companies is gradually changing. Series of major acquisitions, steady growth in new product

introductions (especially in the branded segment with steep pricing difference to global prices)

and expansion in field force clearly indicates at their renewed interest in the Indian market.

Apart from acquisitions, which have so far been their preferred route for consolidating position in

India, companies have also been targeting growth opportunities through in-licensing deals with

domestic generic players both for domestic as well other emerging markets. Such alliances

primarily aim at leveraging on the lower R&D cost (i.e. product/market authorizations) and

manufacturing capabilities of the local generic companies on one hand and the extensive

marketing & distribution footprint of MNCs in other markets on the other. With increasing focus

of MNC Pharma on emerging markets and limited growth opportunities in developed markets

owing to large patent expiries and sluggish replacement of patented products, such alliance are

likely to gain prominence given the strong capabilities exhibited by Indian players.

Overall, we believe that competitive pressures are here to stay as a) MNCs become aggressive in

India, b) domestic players leverage on their expanded field force and c) potential regulatory

interventions could hurt pricing. Additionally, with the introduction of product patent regime, the

basket of products available for introduction is also gradually declining. Given this scenario,

companies are countering these challenges by expanding into other therapeutic areas,

developing combination and controlled release products and even looking at in-licensing/co-

marketing opportunities with foreign players. We believe, companies with relatively diversified

therapeutic exposure, strong positioning in chronic segments (which are likely to grow faster),

wide spread distribution reach and strong R&D capabilities would continue to exhibit a stable

operating performance albeit industry-wide challenges would continue to remain imperative.

Page 4: Indian Pharmaceutical Sector

ICRA LIMITED

22

5

13

5

13

3

10

3

48

65

69

15

2

63

10

38

23

65

26

7

54

38

77

14

0%

20%

40%

60%

80%

100%

Sun Pharma*

Ranbaxy Aurobindo Dr. Reddy's Lupin Cadila Glenmark

Approved Pending (Non Para IV) Para IV

31.3% 19.1% 17.5%

14.6%

4.8% 29.4%

90.3%

0%

20%

40%

60%

80%

100%

-

1,000

2,000

3,000

4,000

5,000

6,000

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q2 FY13

US Formulations Sales (Rs. Crore) Change (%) YoY

US Generics: Large patent expiries + focus on limited competition products to drive growth

Exhibit 5: Trend in US Formulation for Indian Companies*

Source: Company Reports; ICRA Estimates; * peer set includes seven companies Exhibit 6: Market Position in the US gradually improving

Company Comments

Lupin 5th

largest generic company in the US in terms of prescriptions

14 products are market leader and 27 (among top 3) out of 30

Dr. Reddy’s 25 products rank among top 3 in terms of markets

Developed a meaningful OTC business with revenues of $60 million

Sun Pharma Sun has one of highest ANDA filings among Indian generic majors

Source: Company Reports; ICRA Estimates; * Includes filings from Taro

Generics to propel growth in the US market over the medium term With a market size of US$ 320 billion, the United States remains the largest pharmaceutical

market, globally. Given the sizeable generic substitution (~75% in volume terms), It is also the

largest generics market and considered to be one of the most matured of all the markets. The

price erosion post patent expiration is also amongst the highest in the US, reflecting the extent of

competitive pressures. With ~$100 billion worth patent expiries over the next 5 years, generic

business enjoys strong growth prospects. Besides patent expirations, healthcare reforms

initiated by the US Government, aimed at reducing healthcare spending and covering a larger

proportion of population under public healthcare are also likely to provide impetus to growth in

the generics market.

Indian generics to benefit from the ongoing wave of patent expiries Riding on back of the generic opportunity, Indian companies have capitalized on the growth

prospects to emerge as formidable players in the US generics markets. Most of the leading

players have significantly expanded their ANDA filings in line with the patent expiration cycle.

The quality of the filings by top Indian companies has also significantly improved over the years

with complex molecules, non-standard categories (i.e. inhalers, injectables, oral contraceptive,

ophthalmic etc.) and Para IV/FTFs forming increasing share of their pipeline. Given the sheer size,

the US generics market has become a significant contributor to the revenues of most leading

Indian companies and a significant component of their earnings profile. Some of the companies

have also captured significant market share across product segments. For instance, while Lupin

has emerged as the 5th

largest generic company in terms of prescriptions, Dr. Reddy’s has 25

products among the top three in terms of market share.

In the recent quarters, our peer set of seven leading generic players have reported a fairly strong

revenue growth in the US driven by steadily expanding product portfolio and exclusivities on

certain molecules. While the growth has been strong, it has also been volatile largely due to the

impact of one-time exclusivities for some of the companies and also price erosion in certain

cases. In particular, for Ranbaxy, the trend has been quite volatile due to exclusivity for

Valacylovir (in CY10) and Donepezil (in CY11) which also reflected in lower growth in Q1 FY12 as a

whole for the peer group. In Q2 FY12, growth momentum picked up across almost all companies

(despite no major Para IV/FTFs) and also benefitted from the consolidation of Taro with Sun

Pharma. In the near term, we expect the revenue growth to sustain as exclusivities on Lipitor

(Ranbaxy) and Zyprexa (DRL) play out.

[Indian companies]

Details of Para IV opportunities for Sun Pharma and Cadila are not available

Exhibit 7: Details of ANDA filings by leading Indian Companies

Page 5: Indian Pharmaceutical Sector

ICRA LIMITED

35

9

20 22

8

-

5

10

15

20

25

30

35

40

2012e 2013e 2014e 2015e 2016e

In U

S$ B

illio

n

US Generics: Aggressive product life cycle strategies + price erosions remain challenging

Exhibit 8: Expected Market Size of Branded Product Expiries in US by Year

Source: Industry Estimates

Exhibit 9: Major Product Launches Expected in 2012

Brand Generic Name Sales ($ Billion) Exp. Launch 180 day

Plavix Clopidogrel ~ 6.7 May No

Seroquel Quetiapine ~ 4.5 March No

Singulair Montelukast ~ 4.5 July No

Actos Pioglitazone ~ 3.6 August No

Lexapro Ecitalopram Oxalate ~ 2.9 March Yes

Diovan* Valsartan ~ 3.5 September Yes

Geodon Ziprasidone ~ 1.3 November Yes

Tricor Fenofibrate ~ 1.3 July Yes

Provigil Modafinil ~ 1.1 April Yes

Source: Industry Estimates, ICRA Research; * Diovan + Diovan HCT

Exhibit 10: Major Product Launches Expected in 2013

Brand Generic Name Indication

Cymbalta Duloxetine Anti-Depressant

Concerta Methylphenidate Anti-Depressant

Niaspan Niacin Vitamin Deficiency

Aciphex Rabeprazole Gastro Intestinal

Zometa Zoledronic Acid Osteoporosis

Source: Industry Estimates, ICRA Research

With some of the major blockbuster drugs losing patent protection, the generics market is likely

to maintain a strong growth momentum in the near term. Some of the largest branded products

are expected to lose patent protection in 2012 with a market size of approximately $35 billion. In

the US market, notable upcoming patent expirations include Lexapro and Seroquel in March

2012, Plavix in May, Singulair and Actos in August and Diovan in September. While some of these

products are expected to face multiple generic competition thereby leading to severe price

erosion, we believe that the sheer size of these products still creates growth opportunity for

most of the players. As a result we remain positive on the fundamental conditions in the global

generic drug sector, reflecting not only the genericization of blockbuster branded products, but

also global cost containment efforts that favor generic drugs. Additionally, the full year impact of

brands (i.e. Lipitor, Plavix, Zyprexa and Levaquin) which have recently gone off-patent would also

continue to drive revenue growth in 2012.

While patent expires are expected to peak out in 2012, we believe that the growth momentum

would continue as most of Indian companies have a fairly well spread out product pipeline till

2014. Among Indian companies, while some companies (i.e. Ranbaxy, Dr. Reddy’s) have a healthy

pipeline of FTF opportunities, others like Lupin, Glenmark are likely to benefit from the launch of

oral contraceptives, beginning H2 FY13. As discussed earlier, the quality of pipeline of top Indian

companies is gradually strengthening, comprising of higher Para IV filings, specialty products and

niche complex chemistry molecules. Most of these segments, especially injectables, inhalers,

ophthalmic, oral contraceptives and controlled releases products are set to lose patent expiries

beyond 2012. Being characterized by complex manufacturing techniques, entailing greater

investments in R&D and manufacturing, these segments have higher entry barriers and thereby

potential for limited competition and higher profitability. For segments such as biosimilars where

roadmap for generic approval is yet to be established in the US may also require marketing

efforts as efficacy profile of two ‘copycats’ of biologics could be different.

Some of the other trends being witnessed in the industry include aggressive product life cycle

management by large innovator companies to protect their earnings in view of patent expirations

and slowing new product introductions. Life cycle management includes patent extensions,

switching to OTC category, product substitution and launch of authorized generics (which can

significantly erode attractiveness of the Para IV exclusivities). All these have significantly

increased the costs and capped potential upsides from patent challenges for generic companies.

In the last two years, there has been greater emphasis on patent settlements by Indian generics,

which however significantly reduces launch uncertainties and litigation costs and hence is a

positive from credit standpoint.

Page 6: Indian Pharmaceutical Sector

ICRA LIMITED

US Generics: Continued

Europe: Regulatory reforms + price erosion remains a key concern; generic substitution to gain momentum

Exhibit 11: Generic Penetration across European markets (volume terms)

0%

10%

20%

30%

40%

50%

60%

70%

U.K Germany Netherlands France Spain Italy

Source: IMS Health, ICRA Research

The current wave of patent expirations has also triggered consolidation in the industry as innovator companies look for growth opportunities by diversifying their business profile,

entering into newer therapeutic/product segments or even markets. Apart from M&As, many of the innovator companies are also reconfiguring their R&D operations either by

reducing R&D spending or exiting segments where prospects for NCEs look dismal. Outsourcing or partnering with smaller companies for early stage development is another

trend that is gaining momentum. In the generics space too, consolidation has been a prominent phenomenon. The top four generic players now account for over 60% of the

market compared to ~30-35% a decade ago.

Comparatively, while Indian players have significantly ramped up their product portfolio and made a mark in the US generics space, they remain small in comparison to the

generic majors such as Teva, Mylan and Sandoz. The sheer scale of these entities gives an edge in generics business. While scale is the foremost factor, channel servicing and

product pipeline are equally important, especially in developed markets such as US which are dominated by large distributors/retailers that enjoy tremendous bargaining power.

Strong management focus on legal and R&D skills is also necessary to ensure emphasis on product development of FTF/exclusive products also add to business strengths. In

recent periods regulatory compliance for developed markets has also been a cause of concern for a number of companies. While most Indian manufacturers have been able to

resolve 483s/regulatory concerns flagged by international regulatory agencies, our discussion with industry indicates that there is likely to be some increase in compliance cost

over the near term to meet tightening quality norms in these markets.

Unlike the U.S, the European generics market is quite diverse. Regulations, reimbursement policies

(and consequently prices), competitive landscape and generic penetration varies across markets.

While some of the European markets, such as the U.K, Germany and Netherland are characterized

by relatively high generic penetration (~50%+), other key markets like France, Italy and Spain have

low generic usage at around 25%. Apart from generic penetration, the reimbursement policies

and consequently pricing also differ across markets. While in some markets, reimbursements are

based on reference pricing mechanism, in other markets, generics are priced to a discount to the

innovator’s brand. For instance, in the U.K, the pricing is set by a scheme based on the pharmacy

purchase profit.

In Europe, most Governments have implemented austerity measures aimed at reducing healthcare

spending as they seek to repair their fiscal benefits. Some of markets have shifted away from

branded generics to unbranded generics or tender market; in the process, the pricing power of

generics companies is getting rapidly eroded. In addition, the rising bargaining power of large

distributors, retailers and insurance companies are potential dampener to pricing power of generic

companies.

Page 7: Indian Pharmaceutical Sector

ICRA LIMITED

Europe: Continued

Exhibit 12: Snapshot of measures announced by European Governments

Country Government Initiatives to reduce healthcare cost

U.K. Continued use of risk-sharing schemes (effective drug discounting) for

expensive drugs; generic substitution by pharmacists is among the

highest in the UK

Germany Has moved from being a branded generics market to a tender driven

one; healthcare reforms has put the negotiating power firmly in the

hands of the country’s healthcare funds

France 2011 budget incorporated reduction in healthcare bill besides tax

breaks for companies that market high-selling orphan drugs

More importantly, the Government has also proposed changes in

reimbursement levels for drugs that only have moderate effect

Spain Announced similar price cuts/rebates in line with other European

nations; in August 2011, passed a bill for promoting generics

Italy Price cuts to the extent of 12.5% on generics and introduction of

tendering system from 2011 onwards

Source: Industry Estimates, ICRA

Exhibit 13: Exposure of Indian Generic majors in Europe (% cons revenue)

Company Contribution Comments

Wockhardt 37% Has among the highest exposure to Europe

Dr. Reddy’s 21% Acquisition of Betapharm (Germany) and

subsequent transformation of the industry to

tender driven impacted company’s performance in

Europe

Ranbaxy 15% Leading generic company in Romania

Cipla 14% Targeting the inhalers segment in Europe

Cadila 6% Low exposure; mainly present in France & Spain

Intas Pharma Targeting multiple markets in Europe to insulate

from single market linked adversities

Source: Industry Estimates, ICRA

At the same time government legislation and insurance companies are increasingly incentivizing

pharmacists and patients to substitute branded medicine with cheaper generic alternatives,

which remains a key growth driver. Overall in volume terms, in comparison to North America

(generic penetration in volume terms ~75-80%) generic penetration in Europe is generally lower,

with significant potential in growth in a number of countries.

In Germany, after the series of healthcare reforms, the market has transformed into tender-

driven model from a branded generics market. Healthcare funds are increasingly playing an

important role in determining the products being sold in the market, following the reforms

implemented in 2009. It is estimated that nearly one-fourth of the German generics market has

migrated to a tender-driven one, resulting in significant pricing pressure. Price cuts (in generics)

have been common across nations ranging between 5-25% depending on product segments and

markets. All these measures are expected to support the growth in generics driven by increasing

substitution levels and patent expirations.

In comparison to the US generics, the dependence of top Indian companies in the Europe as a

whole has been relatively lower. Among leading players, Wockhardt has the highest exposure to

Europe with over 37% contribution to revenues. Among the other players, Dr. Reddy’s (owing to

its acquisition of Betapharm in Germany), Ranbaxy, Cipla and Intas Pharma have considerable

presence in the European markets. Although most of the players have presence across nations,

many of them have established prominent position in certain key markets through steady

expansion in product portfolio and supply relationship with the distribution channels. Most of

the companies also acquired local companies during the initial phase with the intent of gaining

front-end marketing capabilities (i.e. market authorizations, distribution relationships) and even

manufacturing in certain cases.

The performance of Indian players in the European markets has been relatively lackluster largely

emanating from unanticipated changes in market structure and pricing pressures. Nonetheless,

the European markets remain an important part of Indian companies’ long-term growth

strategy. Companies have been ramping up their presence across markets by steadily enhancing

product portfolio, investing in developing marketing and distribution strengths.

Page 8: Indian Pharmaceutical Sector

ICRA LIMITED

Emerging Markets in centre of attraction; Indian companies prefering tie-ups

The emerging markets represent the fastest growing segment of the Global pharmaceutical industry. As per industry estimates, the total spending on healthcare in these markets

is likely to grow from US$151 billion to $285-315 billion by 2015 with most markets expected to grow at double digit. Apart from the developed markets, the Indian Pharma

companies have also been eyeing growth opportunities in some of the other fast-growing emerging markets. Among them, in Russia, South Africa and some of the countries in

Latin America (Brazil, Mexico) and South-East Asia, Indian companies have strengthened considerable presence. These emerging markets with some of them being branded

generics offer strong growth prospects for Indian players given the high out of pocket expenditure on healthcare in these markets (unlike developed markets) and relatively

easier regulatory pathways. During the initial phase, most of the Indian players preferred acquisitions/in-organic investments to enter into these markets are now enhancing

their presence through ramp up in product portfolio and therapy segments. In addition to direct presence, Indian companies have also been partnering with MNCs in emerging

markets. Such alliances benefit from the R&D and manufacturing capabilities of the Indian partners and the extensive marketing & distribution footprint of the MNCs in those

markets. For instance, GSK has a tie-up with Dr. Reddy’s whereas Pfizer has tied-up with a number of Indian companies to launch a range of branded generics in emerging

markets (besides generics in US)

Exhibit 14: Snapshot of key of emerging markets

Markets Growth Prospects Challenges Positioning of Indian Players

Russia Market Growth – ~13-14% over medium

term

Growth Drivers

- Per capita spending on healthcare is higher

than other emerging markets but remains

low

- Transition to the OTC segment offers

strong growth prospects

- The Government is playing an increasing active role in regulating

market access as well as controlling prices of essential drugs

through reference pricing mechanism

- The market is gradually transforming from a high out-of-pocket

driven market to a western European model of centralized

reimbursements

- In the long run, the Government also aims to encourage local

manufacturing by offering incentives to promote R&D

Key Indian Players - Ranbaxy, Dr. Reddy’s, Lupin and

Glenmark

For instance, Dr. Reddy’s is ranked 15th

in Russia and is the

third most important market after US and India with 17%

contribution to turnover

Brazil Market Growth

Largest pharmaceutical market in Latin

America, growing at a CAGR of ~15%

Growth Drivers

- Low per capita spending on healthcare

- Govt. interference is much lower; out-of-

pocket spending is significant

- Despite being a branded generics, it has been a difficult market

to penetrate given the strong dominance of local players which

control over 60-70% of the market

Key Indian Players – Ranbaxy, Torrent Pharma

Torrent is one of the leading Indian player in the Brazilian

market with a share of 6.8% in the representative market

Ranbaxy is also ranked 9th

(M.S. 2.8%) in generics

Participation in Govt. tenders also is significant among Indian

players

South

Africa

Market Growth

- Relatively small market but growing at fast

pace; in FY11 market grew by 8%

Growth Drivers

- Implementation of NHI to encourage the

penetration of generics

- Prices increases are generally restricted and controlled by the

Government

- Industry works on a ‘Single Exit Price’ mechanism for essential

drugs which essentially means that companies are mandated to

sell their products at same price to all customers

Key Indian Players – Cipla, Ranbaxy, Lupin

Cipla through its partner Medpro has major presence in

South Africa among Indian players.

Lupin acquired Pharma Dynamics (ranked 19th

& 6th

in

generics); currently is working on moving manufacturing to

India & augmenting product portfolio

Source: Industry Data, ICRA Research

Page 9: Indian Pharmaceutical Sector

ICRA LIMITED

Evolving generics opportunity in Japan + biosimilars also offers long-strong growth prospects but with challenges across the value chain

Japanese market offers new growth avenue for Indian generic players Amongst the key markets outside the United States and Europe, the Japanese market offers potential to drive significant growth in the medium term. With healthcare reforms

aimed to reduce healthcare budgets and generic friendly policies being adopted by the Japanese Government, the pharmaceutical market is gradually opening up to generics.

The current generic penetration in Japan, estimated at ~23%, is low and the Government has targeted ~30% penetration by 2012. As a result, despite being the second largest

pharmaceutical market in the world, the Japanese market ranks only as the sixth largest generic market. Apart from the wide ranging government’s pro-generic reforms, major

patent expiries in 2012 are also likely to propel generic penetration in Japan.

The Japanese generic market however is a challenging one on many fronts e.g., the reimbursement structure (as margins for pharmacies are linked to reimbursement prices,

higher generic substitution would therefore mean lower margins for pharmacies), consumer mindset (strong preference towards brands, as a result, generic penetration is likely

to be gradual) and absence of exclusivity mechanism (unlike US, in Japan, the regulatory mechanism does not provide an exclusivity period for generic FTF applicants, leaving

little incentive for generic players to adopt that route). The approval process for generics is also quite stringent and time consuming. Given the market specific challenges,

majority of the generics sold in Japan are manufactured by local players. Thus, local experience through joint venture or partnerships is critical for success in product selection,

manufacturing and distribution. Among Indian companies, Lupin, Ranbaxy, Torrent Pharma and Cadila Healthcare are among the front runners in this market. While Ranbaxy (by

virtue of its Japanese parent, Daiichi Sankyo) is exploring a hybrid model for the Japanese market, Lupin has recently strengthened its presence by acquiring another company

(I’rom Pharmaceuticals) in the injectables segment.

Biosimilars offers strong long-term potential… In addition to the impending patent expiries, globally, the generic companies are also eyeing generics in the biologics space as a long-term growth avenue. Biologics are basically

used to substitute disease induced deficiencies of endogenous factors such as erythropoietin or GCSF and are also used to treat diseases such as cancer, arthritis and certain rare

genetic disorders. As per the industry estimates, the biopharmaceuticals market touched nearly US$ 100 billion in 2010 and it is estimated that almost 85% of the existing

biologics would face generic competition over the next ten years. The global biosimilars market is expected to grow from US$ 243 million in 2010 to US$ 3.7 billion by 2015. The

rapid growth in biosimilars is expected to be driven by patent expiries for more than 30 biologic medicines, with sales of $51 billion in the next five years.

…but with challenges across the development cycle and approval pathway However, there are certain challenges in developing biosimilars in comparison to generics for ‘small molecules’. Unlike chemical (non-biological) compounds, which are

produced synthetically, biopharmaceutical production involves the use of living organisms and due to their heavy molecular weight, complex molecular structure and extremely

intricate manufacturing process, biologics are difficult to replicate. As a result, it is difficult to compare and determine equivalence of biosimilars, which impedes the regulatory

pathway for their approval. Additionally, due to higher regulatory barriers, the R&D investments for developing such products remain significant and so does the capex in

manufacturing facilities after commercialization. Even within biosimilars, products can have varying efficacy profiles, resulting in differentiated products among companies. As a

result of this peculiarity, companies need to market the biosimilars products through dedicated field force. Thus, marketing efforts are also critical in case of biosimilars.

Among markets, the European regulatory agency (EMEA) has announced the guidelines for approval for biosimilars and has already approved a number of biosimilars.

Comparatively, in the US, the market for biosimilars remains limited as of now as the FDA is still in the process of developing the regulatory pathway for biosimilars. The market

is dominated by sales of Erythropoietin, Filgrastim and growth hormones. The key generic players marketing biosimilars are Sandoz, Teva, Hospira and Stada besides others.

Some of the Indian companies have also started launching biosimilars in emerging markets including in India. Dr. Reddy’s, Biocon and Lupin have so far been at the forefront as

far as investments and R&D pipeline is concerned. In our view, given the complexities and high costs involved, Indian players will need to collaborate with technical partners to

aid in the development cycle as well as the marketing stage. Such partnerships are already visible in this segment. While Teva runs a JV with Lonza (provides technical inputs in

biologics APIs), Biocon has entered into various co-development alliances with global pharmaceutical majors and research companies with presence in monoclonal anti-bodies

and insulin.

Page 10: Indian Pharmaceutical Sector

ICRA LIMITED

M&A: Acquisitions are giving way to partnerships with focus on specific markets or therapy segments

In the past, acquisitions have played a vital role for Indian companies in establishing their presence in international markets. Most of the acquisitions have either been in the

generic segment or in the contract research & manufacturing segment. Only a handful of acquisitions have been in the $200 million plus range, with a majority being small-sized

acquisitions in value terms. Investments in generic space have been aimed at gaining presence in newer markets, access to technologies or even acquiring marketing and

distribution front-end. In the CRAMS space, access to new clients and technologies has been key rationale for acquisitions. The initial phase of investments was largely in

regulated markets (European Union and North America) however, with higher growth prospects in emerging markets, the focus has also widened to semi-regulated markets in

Africa, Latin America, and South-East Asia. These markets offer potential for profitable growth with relatively easier regulatory pathways. Except for certain transactions, most of

the acquisitions have been relatively small sized.

In the recent period, the pace at which Indian companies have acquired international assets have slowed down considerably as preference towards forming JVs/alliances with

focus on specific markets or therapy segments is gaining importance. The performance of past acquisitions has generally been mixed. Unanticipated changes in market dynamics,

inability to move sourcing to low-cost locations and contract cancellation have been some of the factors adversely affecting performance. The transformation of the German

pharmaceutical market from being a branded generic to a tender drive one for instance eroded value for some acquisitions and continues to remain a difficult investment to

manage. Certain companies have also faced challenges in securing new contracts, particularly in the CRAMS space. As a result, companies have become more prudent in their

investment decisions than earlier. Among key acquisitions in the recent period, Dr. Reddy’s acquired GSK’s penicillin manufacturing facility in U.S., allowing it to enter the U.S.

penicillin-containing anti-bacterial market with brands such as Augmentin and Amoxil. More recently, Cadila Healthcare acquired Biochem to strengthen its presence in the anti-

biotic segment in the Indian market. During the year, Lupin also continued with its strategy to augment its presence in the Japanese market; having acquired I’rom

Pharmaceuticals in November 2011.

Exhibit 17: List of acquisitions by Indian companies in 2011-12 (indicative)

Company Acquisition Market Month Consideration Rationale

Zydus Cadila Biochem India

(Branded)

December

2011

Not disclosed Strengthens Cadila’s presence in domestic formulations market especially in the anti-biotic segment

Lupin Limited I’rom Pharmaceuticals Japan November

2011

Not disclosed Strengthens Lupin’s presence in the Japanese generics market with diversification into the specialty

injectables segment

Zydus Cadila Bremer Pharma Mainly Europe July 2011 Not disclosed Expands presence in the animal healthcare business

Zydus Cadila Nesher Pharma United States

(Generics)

June 2011 Not disclosed Allows presence in the controlled-release drugs segment in the US with product portfolio and

manufacturing capabilities; step to strengthen presence in the US generics market

Dr. Reddy’s GSK’s Penicillin

manufacturing facility

United States

(Generics)

March

2011

$ 20 million Allows the company to enter the US penicillin-containing anti-bacterial market segment with brands

such as Augmentin and Amoxil and diversify its generics portfolio in the US

Source: Company Releases, ICRA

With patent expirations at its peak and weak pipeline quality, there is a continuous pressure on innovator companies to explore other avenues including generic business

especially in emerging markets. Globally, many of the large innovator companies already have their generic arms which are aggressively pursuing opportunities across markets. In

recent period, most of the innovator companies have entered into alliances with generic companies from India. In most cases, these alliances are designed to leverage on the

R&D and low-cost manufacturing capabilities of Indian partners and marketing and distribution capabilities of the MNCs. There is also an increasing trend among MNCs in

partnering in the domestic market where marketing and distribution footprint of Indian companies and product portfolio of MNCs is being leveraged upon.

Page 11: Indian Pharmaceutical Sector

ICRA LIMITED

Conclusion

Our outlook on the Indian Pharmaceutical Industry remains favourable, reflecting our view that earnings growth will continue, benefitting from healthy growth in the domestic

formulations business and steady growth expected in the U.S/Europe generics space on back of patent expiries. In the U.S, companies with a robust and selective product

pipeline, presence in niche/complex segments and diversified therapies would continue to exhibit a relatively strong earnings profile. There would also be significant one-time

upsides for companies, stemming largely from Para IV/FTF opportunities in US. In the European markets, while companies may face pressure on profitability, volume growth

would continue as healthcare reforms initiated by Governments would push growth in generics. Emerging markets, with growing spend on healthcare and strong branded

generic market offers profitable growth opportunities for generic business. Besides emerging markets, the gradually evolving generics opportunity in Japan, the second-largest

market in the world (after United States) also offers generic players the opportunity to pursue long-term investments. On the CRAMS front, Indian players are focusing on

providing services across the value chain spanning from development stage to commercial scale production. Relatively lower exposure to small biotech companies has been a risk

mitigant during the downturn for these entities. With several drugs going off-patent and big pharma increasing exposure to cost efficient sourcing locations, opportunities

remain favourable for CRAMS players to provide developmental services and subsequently graduate to commercial scale production.

Key challenges facing the industry are potential implementation of the new pricing policy in India, increasing competitive pressure in the chronic segments, aggressive approach

such as authorized generics by innovators in the US and healthcare reforms in European markets are some of the factors that could impede profitability for pharma companies.

ICRA currently has ~80 entities with long-term ratings (excluding ‘SO’ ratings) in the pharmaceutical sector. About 10% of these entities are rated in the ‘AA’ category - these

entities have strong and profitable domestic branded formulations business, which has been a stable source of cash flows over the years. Around 41% of the entities are rated in

the non-investment graded. Most of these entities are relatively small entities, often in API business and suffer from high product or client concentration.

Exhibit 18: List of JV/Alliances among Indian players (indicative)

JV/Alliances Market Rationale

Sun Pharma – Merck Emerging Markets JV would develop, manufacture and market branded generics across emerging markets;

Sun Pharma’s contribution: Leveraging on SPARC’s R&D pipeline and manufacturing capabilities

Merck’s contribution: Market presence and regulatory competence across emerging markets

Dr. Reddy’s – GSK Emerging Markets Based on similar structure; DRL would manufacture products; while GSK would distribute in Latin America, Africa, Middle East and Asia

Cadila Healthcare – Bayer India Primarily a co-marketing arrangement with focus on certain therapy segment

With product patent regime, Indian players are collaborating with MNCs by in-licensing patented products in India

Cadila Healthcare – Abbott Emerging Markets Cadila Healthcare would license 24 branded generics to Abbott for 15 emerging markets; collaboration includes pain management,

oncology, CVS, neurological and respiratory diseases

Lupin – Eli Lilly India Primarily a co-marketing arrangement with focus on insulin segment

Aimed at leveraging on Lupin’s marketing & distribution footprint in India and Eli Lilly’s product portfolio in the insulin segment

Biocon – Bristol Myers Squibb N.A Partnership in the research space with focus on discovery & development of NCEs

Working on early stage of the development cycle

Source: Company Releases, ICRA

Page 12: Indian Pharmaceutical Sector

ICRA LIMITED

Company Section

Page 13: Indian Pharmaceutical Sector

ICRA LIMITED

44% 51% 54% 56%

51% 44% 40% 43%

4% 5% 6% 2%

0%

20%

40%

60%

80%

100%

FY09 FY10 FY11 9m FY12

Formulations APIs Dossier Income

AUROBINDO PHARMA LIMITED

Exhibit: Trend in APL’s Revenue Mix (FY09-9m FY12)

Source: Company Data, ICRA Estimates

ICRA Ratings

Shareholding Pattern (%)

Promoters 54.7%

FIIs 13.7%

DIIs 16.3%

Others 15.3%

Price Performance (%)

3M 12M

APL 26.9% -37.8%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code ARBP

Market Capitalisation Rs. 3,451 Crore

Valuations

FY12e FY13e

Price/Earnings 11.9X 7.9X

Price/Sales 0.8X 0.7X

Source: Bloomberg

Not Rated by ICRA

Sequential recovery in business; resolution on US FDA issues holds key for further improvement

Revenue Growth – APL performance in Q3 FY12 improved on a sequential

basis as reflected by a 19.5% growth in operating income on QoQ basis and a

healthy 420 bps improvement in operating margins. The growth on

sequential basis was primarily driven by scale up in company’s formulations

(ex-US) and ARVs business. Some of the issues that impacted the business

during the last quarter namely logistics (due to Telengana agitation) and

persistent power cuts also were resolved to a large extent thereby leading to

some recovery in the business. On a YoY basis, the company’s formulations

business (56% of turnover) witnessed a growth of 14.7% driven largely by

European and RoW markets even as US business remained flat. Growth was

primarily led by entry into newer markets in Europe and product launches in

emerging markets especially GCCs. In the US, the FDA overhang continued to

the impact business which coupled with slowdown in orders from Pfizer led

to flattish sales during the quarter. In comparison to formulations, the

company’s API business posted a slightly higher growth of 20.3% on back of

strong growth in the non-anti-biotic API segments.

Profitability – The company’s OPBDIT margins at 14.9% dropped sharply on

YoY basis but improved on sequential basis. Some of the reasons that have

impacted APL’s profitability during the year include (i) adverse product mix

(ii) lower licensing income, (iii) overheads on account related to

manufacturing units that are under import alert and (iv) and increase in

employee expenses etc. These factors along with a large MTM loss on forex

liabilities resulted in a loss of Rs. 31 crore in Q3 FY12 at PBT level. While API’s

performance has been impacted during the current year on various front, the

management however remains confident of a recovery led by launch of

certain high value products (under Pfizer deal), ramp-up in injectables

portfolio and OTCs in the US over the medium term. Any positive

announcement on US FDA issues and ramp-up in supply contracts (with Pfizer

& AZ) could remain key developments to watch out for in the near term.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 1,192.2 1,284.5 1,075.3

Growth (%) - YoY 7.7% 19.5%

OPBDIT 319.5 191.2 114.6

Less: Depreciation 43.4 55.2 46.2

Less: Interest Charges 11.5 27.4 20.7

Other Income 5.9 4.9 6.0

Exceptional Gain/Loss 4.1 (144.5) (185.4)

PBT 267.0 (31.0) (131.7)

Less: Tax 78.3 (2.4) (51.6)

PAT (Concern Share) 188.6 (28.5) (80.2)

OPBDIT/OI (%) 26.8% 14.9% 10.7%

PAT/OI (%) 15.8% -2.2% -7.5%

Source: Company Data, ICRA Estimates

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12

Operating Income 924.8 922.3 1,112.6 1,192.2 1,154.4 1,076.9 1,075.3

Growth (%) - YoY 1.8% 8.2% 26.1% 30.3% 24.8% 16.8% -3.4%

OPBDIT 171.5 171.7 254.2 319.5 211.7 163.9 114.6

PAT 121.9 51.6 198.3 188.6 125.0 (122.8) (80.2)

OPBDIT/OI (%) 18.5% 18.6% 22.8% 26.8% 18.3% 15.2% 10.7%

PAT/OI (%) 13.2% 5.6% 17.8% 15.8% 10.8% -11.4% -7.5%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

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Page 14: Indian Pharmaceutical Sector

ICRA LIMITED

AUROBINDO PHARMA LIMITED: Business Overview (Page 2 of 2)

APL’s Sales Mix

Formulations (54%)

Dossier Income (6%)

APIs (40%)

US (27%)

EU & RoW (12%)

ARVs (15%)

SSPs (13%)

Cephs (19%)

ARVs & etc (9%)

Aurobindo Pharma Limited (APL) is a leading formulations and API player with presence across

developed and emerging markets. Over the last five years, it has transformed its business model

from being a pure API player to a company with diversified product mix (increasing share of

formulations) and geographic mix (higher proportion of sales from developed markets). In FY11,

formulations accounted for 54% of company’s turnover (up from 39% in FY08), while the share of

low-margin APIs have declined to 40% (from 61% in FY08). Driven by aggressive product filings

across markets, APL has also been able to generate a sizeable income through out-licensing of

dossiers. It has managed to rapidly grow its business in the US generics space through a

confluence of aggressive product filings, large manufacturing capabilities and a supply contract

with Pfizer. APL is one of the leading ANDA filers from India (209 as on FY11) and among the

largest suppliers for ARVs drugs to the WHO.

Scale-up in US generics space has transformed APL’s business profile: Despite being a late entrant, APL has been able to register an impressive scale up in the US generics

space through aggressive product filings (up from 82 in FY07 to 209 in FY11), contract manufacturing tie-ups with Pfizer (extensive tie-up, covers over 100 products) and

large manufacturing capabilities. With considerable experience in APIs, the company has also maintained a competitive edge through backward integrated operations

besides establishing relationship with leading distribution companies in the US. While we expect, the US business to remain the key growth driver for the company,

benefitting from the impending patent expiries in the US and strong product line-up, the recent import alert and a warning letter for two of its manufacturing units have

obstructed the scale-up to an extent.

Inorganic investments + supply contracts to drive growth in EU: At present, APL generates about 6-7% of its turnover from EU markets. In line with other generic players,

APL has also forayed into these markets through acquisitions. It has so far acquired companies in the UK, Netherlands and Italy. All the acquisitions have been with the

intent to get ready access in these markets through a portfolio of market authorizations and distribution network. As on March 2011, the company had filed around xx

product dossiers and received xx approvals. In addition, the company’s tie-up with Pfizer also covers the EU markets in an extensive way, which coupled with company’s

large product filings and strategy to enter into new markets is likely to help the company scale up business in Europe.

Emerging markets also hold strong growth potential: Similar to the US and EU markets, ROW markets are emerging as promising growth driver for the company driven by

aggressive product filings (across product segments and markets), supply tie-ups with Pfizer and Astra Zeneca (focuses primarily on emerging markets) and relatively better

product positioning (higher share of branded generics). Till FY11, the company has filed over xx market authorizations across markets with focus on South Africa, Brazil and

Australia and Canada in particular.

One of the leading players in APIs and ARV Drugs: Besides formulations (54% of revenues), APL also generates a considerable share of its turnover from API. It is one of the

leading players in APIs with strong presence in some of the mature Pen-G based anti-biotic such as Cephalosporin and Semi-Synthetic Penicillin (SSPs). However, with

increasing focus on formulations and focus on only high-end anti-biotic, the share of revenues from APIs is likely to come down further going forward. Moreover, the recent

move to reduce stake in an intermediates facility (in China) reflects its gradual shift away from APIs. APL also has significant presence in the Anti-Retroviral (ARV) drugs

through participation in various tender programmes of international procuring agencies. Over the last four years (i.e. FY08-11), the ARV business has grown at a CAGR of

20% driven by steadily increasing demand and company’s increasing participation (through tenders). However, with PEPFAR budgets being flat for almost last four years, the

share of revenues from ARV business is likely to come down, considering the expectation of higher growth in the other segments.

Page 15: Indian Pharmaceutical Sector

ICRA LIMITED

CADILA HEALTHCARE LIMITED

Exhibit: Break-up of Cadila Healthcare’s FY11 Revenues

ICRA Ratings

Shareholding Pattern (%)

Promoters 74.8%

FIIs 5.2%

DIIs 12.3%

Others 7.7%

Price Performance (%)

3M 12M

CHL 1.1% -8.3%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code CDH

Market Cap. Rs. 14,513 Crore

Valuations

FY12e FY13e

Price/Earnings 20.8x 16.8x

Price/Sales 2.8x 2.4x

Source: Bloomberg

Not Rated by ICRA

Acquisitions drive growth however margins decline on consolidation of lower-profitability businesses

Revenue Growth – Cadila’s Q3 FY12 net sales at Rs. 1,352.5 crore grew by

19.2% on YoY basis driven by acquisitions and strong growth in the domestic

formulations business (up 17.7%). Adjusted for acquisition (Nesher, Bremer

& Biochem), sales growth would have been lower at 13.6%. Among markets,

Cadila’s reported a growth of 45.1% in the US, however after adjusting for

the impact of Nesher, it stood at 27.1%. In constant currency terms, growth

rates were much lower largely due to lack of product introductions. Cadila’s

didn’t receive US FDA approvals during the quarter being impacted by the

warning letter at its Ahmedabad facility. Growth rates were also sluggish in

other key market – Europe (up 1% YoY), Brazil (4.9%) and other emerging

markets (up 2.8%). The company’s wellness business also had a challenging

quarter with 12.0% drop in revenues primarily coming in from steep

competition in the skin care segment. The management indicated that

competition from some of the MNCs and domestic have increased in the

recent period and renewed marketing efforts should help in reviving the

demand going forward.

Profitability – Despite rupee depreciation, Cadila’s operating margins at

18.9% in Q3 FY12 came under pressure on both YoY as well as QoQ basis

largely due to the consolidation of some of the lower margin business, drop

in highly profitable wellness business and impact of certain one-offs. The

company also reported a forex loss of Rs. 34.2 crore which pulled down the

net profit to Rs. 149.2 crore, a drop of 7.9% on YoY basis. In the near term,

growth prospects remain weak due to under performance in the US and

European markets. While warning letter related issues continue to impede

growth in the US, challenging environment in Europe is likely to derail

growth momentum to an extent. The management however reiterated that

the worst is behind in terms of operating profitability and going forward

improvement would be driven by inherent synergies between Cadila’s

domestic formulations business with recently acquired Biochem.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 1,166.8 1,383.2 1,236.4

Growth (%) 18.5% 11.9%

OPBDIT 256.2 261.6 237.1

Less: Depreciation 33.4 46.5 37.5

Less: Net Interest 19.4 59.4 76.9

Other Income 2.9 18.2 11.0

Exceptional Gain/Loss - - -

PBT 206.4 173.9 133.7

Less: Tax 36.8 17.4 23.5

PAT (Concern Share) 162.0 149.2 102.7

OPBDIT/OI (%) 22.0% 18.9% 19.2%

PAT/OI (%) 13.9% 10.8% 8.3%

Source: Company Data, ICRA Estimates

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY11 Q2 FY12

Operating Income 846.6 1,133.8 1,116.7 1,166.8 1,212.9 1,245.7 1,236.4

Growth (%) – YoY 17.0% 25.5% 18.1% 17.7% 43.3% 9.9% 10.7%

OPBDIT 189.4 297.4 244.9 256.2 227.8 302.4 237.1

PAT 118.8 199.2 170.8 162.0 179.0 229.8 102.7

OPBIT/OI (%) 22.4% 26.2% 21.9% 22.0% 18.8% 24.3% 19.2%

PAT/OI (%) 14.0% 17.6% 15.3% 13.9% 14.8% 18.4% 8.3%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

Source: Company Data

India Formulations

38%

Export Formulations

43%

APIs9%

India Consumer Business

7%

Other3%

Cadila's Sales Break-up (FY11)

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Page 16: Indian Pharmaceutical Sector

ICRA LIMITED

CADILA HEALTHCARE LIMITED: Business Overview (Page 2 of 2)

wT

Key Highlights from Q3 FY12 Conference Call Cadila’s domestic formulation business grew by 17.7% during Q3 FY12 driven by steady growth across key therapy segments and the impact of Biochem’s acquisition.

Adjusted for the acquisition, growth would have been around 15%; during the quarter, the company launched 15 new products in India, of which seven were launched

for the first time; management indicated that growth will continue to be around 15-16% in the near term

The rationale behind Biochem’s acquisition was to strengthen company’s presence in the acute segments as Cadila’s major presence has been in the fast-growing

chronic segments; the acquisition augments Cadila’s field force by 950 MRs, adds a manufacturing facility and would boost revenues by Rs.260 crore annually

Without disclosing the details, management indicated that while the margins are lower in Biochem, expected synergies between the two entities would drive

improvement through cost savings

Growth in the US business ex. Nesher was 27% and much lower in constant currency terms due to lack of new product introductions; US FDA inspection in relation to

the warning letter is expected in the next month and should result in favourable resolution soon; management guided for the launch of six extended release products

from Nesher’s portfolio of eight over the next 2-3 years

It was a challenging quarter for wellness owing to steep competition from MNCs and other domestic FMCG players in the skincare segment; management has renewed

its marketing efforts to growth the brand franchise; product extensions in Sugarfree and Nutralite are also being planned

During the quarter, the company adopted AS-30 to account for foreign exchange fluctuation; as a result, out of the total loss of Rs. 65.0 crore on forex, Rs. 34.2 crore

was routed through the P&L (clubbed under other expenditure and interest expenses) while balance was accounting in the hedge reserves

Business Overview

Cadila Healthcare (Cadila) is one of the top-five leading formulations company in India with strong focus on the fast-growing chronic therapy segments. Apart from domestic

formulations, Cadila Healthcare has established itself as an emerging generics player in some of key markets like the United States, the EU and Latin American countries. Clutch

of well-thought acquisitions, steady product introductions and therapy expansion, and maintaining service levels have been key factors that have helped the company become

strong player in the generic space. Over the years, the company has also entered into certain strategic JVs and alliances having clear focus on leveraging either its manufacturing

capabilities or partnering to gain technical expertise in certain product/therapy segments.

With a contribution of 36% to revenues, domestic formulation is the largest segment for the company followed by United States, Emerging markets and Europe. In India, Cadila

has approximately 3.7-4.0% market share with strong position in the CVS, Gastrointestinal, Gynaecology and Anti-Respiratory segments. In addition to scale-up in base business,

the company has entered into a JV with Bayer for co-marketing products in India and more recently acquired Biochem to strengthen its acute segment portfolio. In the US,

Cadila’s initial foray and ramp-up was largely driven by highly commoditized oral solids which the company is now augmenting with limited competition segments such as

transdermals, injectables etc. The recent acquisition of Nesher Pharma has helped the company gain presence in the controlled release substance portfolio. Among other

markets, Cadila has created considerable presence in the Brazilian market and is also increasing its focus on the Japanese generics segment. Additionally, the company has also

established certain JVs/alliances with leading players with a specific strategic intent either leveraging on the capabilities in certain therapy areas or markets:

Tie-Ups Area Comments

Zydus Nycomed Healthcare APIs JV with Nycomed for manufacturing starting material for Pantoprazole; supports Nycomed’s branded generics portfolio

Turnover – Rs. 111.2 crore (FY11)

Zydus Hospira Oncology Oncology 50:50 JV with Hospira Inc.; Turnover – Rs. 430.4 crore (FY11)

Zydus BSV Pharma Oncology 50:50 JV with Bharat Serums; it owns rights to a novel and patented oncology product; also provided contract manufacturing services

Deal with Abbott Labs. Emerging Markets Signed a deal with Abbott to manufacture 24 of its branded generics for certain emerging markets; the alliance aims to leverage on

Abbott’s strong marketing & distribution footprint in those markets and Cadila’s manufacturing capabilities

Source: Company Data, ICRA

Page 17: Indian Pharmaceutical Sector

ICRA LIMITED

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Domestic Revenues Exports Revenues

Growth (%) - Domestic Growth (%) - Exports

CIPLA LIMITED

Exhibit: Trend in Cipla’s Domestic & Export Revenues (FY07-11)

ICRA Ratings

Shareholding Pattern (%)

Promoters 36.8%

FIIs 13.1%

DIIs 20.4%

Others 29.7%

Price Performance (%)

3M 12M

CIPLA -6.5% 2.5%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code CIPLA

Market Cap. Rs. 24,714 Crore

Valuations

FY12e FY13e

Price/Earnings 22.0x 18.3x

Price/Sales 3.6x 3.1x

Source: Bloomberg

Not Rated by ICRA

Product and market rationalizations efforts impede exports growth; focus clearly shifting on profitable segments

Revenue Growth – Cipla’s Q3 FY12 revenues at Rs. 1,758.0 crore grew by

12.9% on YoY basis driven by strong growth in the domestic formulations

business (up 18.4% YoY) and relatively muted performance in exports

which grew by a modest 10.7% during the quarter. The healthy growth in

domestic business was aided by a strong 36% growth in the generic

business and 14-15% growth in the branded business benefiting from

strong revenues in the anti-asthma segment. In the exports segment,

Cipla’s revenues at Rs. 865.8 crore grew by only 10.7% (as declined

sequentially) as the company continued with its product and market

rationalization measures resulting increasing focus on higher profitable

products/segments. Overall, the management remains confident of

achieving higher than industry growth of 15-16% in the domestic business

driven by steady product introductions and strong field force even as

exports growth is likely to remain in 10% level on YoY basis

Profitability – On the profitability front, Cipla’s OPBDIT margins at 22.3%

during the quarter improved by almost 200 bps on YoY basis primarily

aided by improvement in gross margin as a result of product and market

rationalizations efforts being pursued by the company. While Cipla’s gross

margins improved by almost 400 bps during the quarter, due to annual

increments and increased manpower count, the favourable impact on

OPBDIT was partially negative by higher employee expenses. The growth

in net profit at 16.0% was however marginally lower than the rise in

operating profit due to higher tax rate which increased during the quarter

following expiry of tax benefits at EOUs.

Cipla incurred a capex of Rs. 130 crore during the quarter with full year

guidance maintained at Rs. 500-600 crore; impact of forex was marginal at

Rs. 4.5 crore (booked in other income).

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 1,557.1 1,758.0 1,778.0

Growth (%) 12.9% -1.1%

OPBDIT 318.2 391.5 437.6

Less: Depreciation 65.3 75.7 65.6

Less: Interest Charges 2.9 3.2 2.4

Other Income 25.7 30.2 24.3

Exceptional Gain/Loss - - -

PBT 275.7 342.6 393.9

Less: Tax 43.0 72.7 85.0

PAT (Concern Share) 232.7 269.9 309.0

OPBDIT/OI (%) 20.4% 22.3% 24.6%

PAT/OI (%) 14.9% 15.4% 17.4%

Source: Company Data, ICRA Estimates

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12

Operating Income 1,374.7 1,479.8 1,634.4 1,557.1 1,669.2 1,591.4 1,778.0

Growth (%) - YoY 0.9% 7.7% 12.0% 8.0% 21.4% 7.5% 8.8%

OPBDIT 258.0 337.9 366.6 318.2 302.1 369.5 437.6

PAT 275.5 257.4 263.0 232.7 214.0 253.3 309.0

OPBDIT/OI (%) 18.8% 22.8% 22.4% 20.4% 18.1% 23.2% 24.6%

PAT/OI (%) 20.0% 17.4% 16.1% 14.9% 12.8% 15.9% 17.4%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

Source: Company Data

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Page 18: Indian Pharmaceutical Sector

ICRA LIMITED

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51.8% 52.6% 55.3% 54.1% 54.8%

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Domestic Revenues Exports Revenues

CIPLA LIMITED: Business Overview (Page 2 of 2)

Exhibit: Share of Cipla’s Domestic & Exports Revenues (FY07-11)

Exhibit: Trend in Cipla’s Domestic & Export Revenue Growth – Quarterly

Key Highlights from Q3 FY12 Conference Call Cipla’s revenues from domestic market grew by 18.4% during the quarter aided by a strong 36% growth in the generic business and a fairly stable 14-15% growth in

branded business; management guided of 15-16% growth in the domestic market riding on back of steady product introductions, strong franchisee in key therapeutic

segments and a well entrenched field force

Performance of the exports business was muted with 10.7% growth on YoY and a decline of ~5% on sequential basis; management attributed the impact of slowdown

to company’s cautious strategy of gradually rationalizing its product and market mix and increased focus on higher profitable segments; company is targeting to

achieve 10% growth in exports formulations over the next one year

Within exports, revenues from API segment grew by 18.1% led by strong ARV sales during the quarter

Gross margins improved by 400 bps due to better product mix and some impact of lower input costs; the company believes that its efforts of shifting its business model

towards higher profitable segments to should continue to support improvement in margins however there could be an impact of this on revenues in the near term

The company has filed for11 inhalers in the European markets, of which four have been approved and the remaining are at various stages of approval; the company has

also entered the US market, however details of regulatory filings were not disclosed

JVs in the biosimilars space are progressing in line with expectations with clinical trials having started in India; commercial launch is still 2-3 years away

On the forex front, the company had $200 million of forward contracts outstanding as on December end which adequately covers the current debtors

Company Profile Cipla Limited (Cipla) is one of the leading pharmaceutical company in the domestic

formulations segment with a market share of ~5%. In addition to its strong presence in the

Indian market, the company generates nearly 55% of its turnover from exports to various

emerging and regulated markets. In the domestic formulations market, Cipla has particularly

stronger presence in anti-infective and respiratory segment. Within respiratory, it commands

over 75% share of inhalers in India. Over the past three years (FY09-11), the growth in Cipla’s

domestic formulations at 12.0% has been below the industry average largely due to its higher

presence in some of the mature products as well as pure generic segments and comparatively

lower presence in fast-growing chronics like CVS and Anti-Diabetic.

In the exports market, Cipla operates through partnerships based business model, wherein it

develops and manufactures the products and receives licensing income and manufacturing

revenues. The company’s exports turnover has grown at a CAGR (%) of 17% over the past five

years. The African region is major market for the company followed by US and Europe. To

strengthen its presence in the exports market, Cipla is targeting the inhalers segment in

Europe with a basket of 11 products. Given the high entry barriers (due to relatively longer

approval time frames), the inhalers segment faces relatively limited competition compared to

pure vanilla generics and offer lucrative opportunity for Cipla to ramp up its presence in the

European markets. With recently expanded capacities (at Indore SEZ), growing approvals in

the inhalers in Europe and other non-US markets, the company is likely to register strong

growth in overseas markets going forward.

Page 19: Indian Pharmaceutical Sector

ICRA LIMITED

DISHMAN PHARMACEUTICALS & CHEMICALS LIMITED

ICRA Ratings

Shareholding Pattern (%)

Promoters 61.4%

FIIs 3.3%

DIIs 7.4%

Others 28.0%

Price Performance (%)

3M 12M

DISHMAN -34.0% -47.5%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code DISH

Market Cap. Rs. 407 Crore

Valuations

FY12e FY13e

Price/Earnings 8.3x 5.3x

Price/Sales 0.4x 0.3x

Source: Bloomberg

Not Rated by ICRA

Growth driven by Marketable Molecules segment; CRAMS expected to revive with impending commercial supplies

Revenue Growth – Dishman’s operating income grew by 11.9% on a YoY

basis in Q3 FY12 to Rs. 266.2 crore, facilitated by a favourable currency

movement. While the Marketable Molecule business reported a YoY

growth of 30.9%, the CRAMS business has reported a YoY growth of 6.9%

contributed by 28.7% growth in Carbogen Amcis, while Indian CRAMS

business has reported a de-growth. However, facilitated by several new

contracts, which include supply of an oncology drug to Astellas for an order

value of Euro 18 million per annum starting from January 2013; sale of 150

tonnes of Eprosartan Mesylate to Abbott Laboratories in FY13 (followed by

sales of 200 tonnes each in FY14 and FY15); commercial supplies of an anti-

tuberculosis drug to Johnson & Johnson with expected sales of Euro 5-6

million in FY13; US$ 6 million contract from Novartis; etc., Dishman

management is hopeful of achieving 20% growth in FY13.

Profitability – Non-recurring research income and higher contribution from

sale of high margin Benzethonium drug have resulted in a 987 bps

improvement in OPBDITA margin to 23.1% in Q3 FY12. This also includes a

forex gain of Rs. 8.1 crore (Rs. 5.7 crore forex gain in Q3 FY11) on account

of reversals. With commencement of Vitamin D3 supplies which is in short

supply worldwide, OPBDITA margins are expected to further witness an

improvement.

Developments – All three units at Bavla plant – Vitamin D3 (Unit 13),

Oncology (Unit 9) and Disinfectant (Unit 10) – have commenced production

in Q3 FY12, and expected to start contributing significantly from FY13

onwards. On account of the increase in operating costs in Shanghai due to

which China has no longer remained a core business area for the company,

Dishman is in the process of selling its China factory.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 237.9 266.2 269.7

Growth (%) - YoY 11.9% 15.7%

OPBDIT 31.5 61.5 28.8

Less: Depreciation 17.1 19.1 20.7

Less: Interest Charges 13.3 16.4 15.0

Other Income - - -

Exceptional Gain/Loss - - -

PBT 1.0 26.0 (7.0)

Less: Tax (0.7) 9.3 (0.7)

PAT (Concern Share) 1.7 16.7 (6.3)

OPBDIT/OI (%) 13.2% 23.1% 10.7%

PAT/OI (%) 0.7% 6.3% (2.3%)

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12

Operating Income 251.2 212.3 233.1 237.9 347.8 242.8 269.7

Growth (%) - YoY -15.5% -12.7% 4.4% 5.5% 38.5% 14.4% 15.7%

OPBDIT 51.9 54.9 57.2 31.5 57.5 49.3 28.8

PAT 19.9 27.1 29.5 1.7 23.0 15.1 -6.3

OPBDIT/OI (%) 20.7% 25.8% 24.5% 13.2% 16.5% 20.3% 10.7%

PAT/OI (%) 7.9% 12.8% 12.7% 0.7% 6.6% 6.2% -2.3%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

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Page 20: Indian Pharmaceutical Sector

ICRA LIMITED

DISHMAN PHARMACEUTICALS & CHEMICALS LIMITED: Business Overview (Page 2 of 2)

Key Highlights from Q3 FY12 Conference Call In Q3 FY12, of the total sales of Rs. 265.5 crore, the CRAMS segment has reported sales of Rs. 169.1 crore while the Marketable Molecules segment has reported sales of

Rs. 96.4 crore. Within CRAMS, Indian business has constituted Rs. 58.5 crore, Carbogen Amcis Rs. 102.3 crore and Carbogen UK Rs. 8.3 crore. In the Marketable Molecules business, Vitamin D business contributed Rs. 50.9 crore, and quats and other India-based products contributed Rs. 45.4 crore

While India CRAMS business was impacted in Q3 FY12, management expects Q4 FY12 to report a robust growth on the back of a pipeline of few good projects In the current quarter, Carbogen Amcis has turned around and with continued good performance in Q4 FY12, it is expected to be net positive in FY12; expected EBITDA of

Euro 15 million in FY13

Dishman Netherlands has been approved by the USFDA without any 483s. So with both EU and USFDA approvals, they can sell their Vitamin D product including Vitamin D analogues all over the world; Dishman Netherlands is expected to achieve a turnover of US$ 50 million in the next two-three years, with EBITDA improving significantly driven by Vitamin D3 supplies

Overall, Dishman is expected to report a PAT of Rs. 45-50 crore in FY12; Dishman’s RoCE and other ratios are expected to improve with the increased contribution of the three new units at the Bavla plant

If Dishman management receives the asking price for the China facility, it will exit the investment and use the funds to reduce its debt; however, it is not going to make a desperate sale of the facility

For 9m FY12, Dishman’s top five customers have accounted for 37.5% of total sales as against 35.1% in 9m FY11

Dishman’s net debt for FY13 is expected to be around Rs. 850 crore

Company Profile CRAMS: CRAMS, constituting 66% of FY11 sales, is the largest business segment for Dishman, catering to the requirements of multinational pharmaceutical companies

internationally, where the company develops intermediates/ APIs based on customers’ requirements. Dishnman’s wholly-owned subsidiary – Carbogen Amcis – located in

Switzerland, spearheads the R&D and supplies API to support clinical trial requirements. Some of Dishman’s key contracts include among others,

Supply of Eprosartan Mesylate to Abbot Laboratories in FY13 – a contract worth Euro 100 million over three years

Supply of an oncology drug to Astellas from January 2013 – a contract worth Euro 18 million per year

Supply of an anti-tuberculosis drug to Johnson & Johnson which has already commenced and expected to result in annual sales of Euro 5-6 million

Contract with Novartis for US$ 6 million

Other segment: Other segment includes bulk drugs, intermediates, quats, specialty chemicals and outsourced/ trade goods, which accounted for 34% of Dishman’s FY11 sales

Dishman Specialty Chemicals: Supplies intermediates, fine chemicals and products for the pharmaceutical, cosmetic and related industries. Dishman is a leading

manufacturer of Phase Transfer catalysts.

Dishman Vitamins and Chemicals: Supplies Vitamin D2, Vitamin D3 and Vitamin D analogues, cholesterol and laolin related products for pharmaceutical, cosmetic and

related markets.

Dishman Disinfectants: Supplies antiseptic and disinfectant formulations.

With strong R&D experience and effective relationship developed with MNC customers, Dishman has emerged as a premier contract manufacturing organization (CMO). The

CMO business model was envisaged in the year 1997 and there under set-up a modern production facility at Bavla, near Ahmedabad, which is now a 100% EOU facility. At

present, the company has eight multi-purpose production units at Bavla. The company also has manufacturing and R&D facilities in Switzerland, UK and Netherlands. The

company has also set up a Greenfield manufacturing facility at Shanghai Chemical Industrial Park, Shanghai.

Page 21: Indian Pharmaceutical Sector

ICRA LIMITED

DIVI’S LABORATORIES LIMITED

ICRA Ratings

Shareholding Pattern (%)

Promoters 52.2%

FIIs 10.2%

DIIs 17.3%

Others 20.4%

Price Performance (%)

3M 12M

DIVI’s 1.5% 19.5%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code DIVI

Market Cap. Rs. 9,825 Crore

Valuations

FY12e FY13e

Price/Earnings 20.0x 16.0x

Price/Sales 6.0x 4.9x

Source: Bloomberg

Not Rated by ICRA

Revenue momentum continues; to be further boosted by the commissioning of the new facility Revenue Growth – Divi’s operating income grew by 32.5% on a YoY basis

in Q3 FY12 to Rs. 417.4 crore driven by higher volumes for major generic

APIs such as Naproxen, Dextromethorphan, Levetiracetam, Nabumetone

and Carbidopa/ Levodopastrong. While favourable currency movement

accounted for 13% of the overall growth, the company witnessed a QoQ

de-growth in the sales of Carotenoids to Rs. 20 crore from Rs. 23 crore in

Q2 FY12. The capacity utilization at the DSN SEZ facility in Vizag has

remained flat QoQ and is expected to scale up from Q1 FY13 onwards.

Thus, the management has lowered its sales growth guidance for FY12

to 20% from 25% earlier.

Profitability – Divis’s OPBDITA margin at 36.2% for Q3 FY12 reported a

YoY decline of 300 bps despite the Rupee depreciation on the back of

increased fuel and staff cost as also higher overheads due to the

commissioning of the DSN SEZ unit at Vizag. The favourable currency

movement resulted in a forex gain of ~Rs. 16.0 crore for the quarter,

which was however off-set by the higher effective tax rate, moderating

the YoY growth in PAT to 21% (Rs. 122.6 crore). Divi’s effective tax rate

has risen to 23.6% in Q3 FY12 (against 12.8% in Q3 FY11) mainly due to

the end of the tax holiday on its 100% EOU at Choutuppal and its existing

SEZ at Visakhapatnam being eligible only for 50% tax exemption.

However, the new DSN SEZ Unit is eligible for exemption of 100% of

export profits for five years from April 2011 as it has commenced

operations in Q1 FY12, which will again reduce the effective tax rate for

the company once production ramps up from the facility.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 315.0 417.4 366.1

Growth (%) - YoY 32.5% 42.5%

OPBDIT 123.5 151.1 138.2

Less: Depreciation 13.5 16.2 15.2

Less: Interest Charges 0.6 0.2 0.6

Other Income 7.1 25.7 10.8

Exceptional Gain/Loss - - -

PBT 116.5 160.4 133.2

Less: Tax 14.9 37.9 27.1

PAT (Concern Share) 101.6 122.6 106.1

OPBDIT/OI (%) 39.2% 36.2% 37.8%

PAT/OI (%) 32.2% 29.4% 29.0%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12

Operating Income 312.1 269.4 256.9 315.0 482.5 364.8 366.1

Growth (%) - YoY -4.8% 27.0% 13.4% 60.8% 54.6% 35.4% 42.5%

OPBDIT 151.8 102.5 88.3 123.5 194.4 134.0 138.2

PAT 130.0 86.3 73.0 101.6 174.8 102.6 106.1

OPBDIT/OI (%) 48.6% 38.1% 34.4% 39.2% 40.3% 36.7% 37.8%

PAT/OI (%) 41.7% 32.0% 28.4% 32.2% 36.2% 28.1% 29.0%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

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Page 22: Indian Pharmaceutical Sector

ICRA LIMITED

DIVI’S LABORATORIES LIMITED: Business Overview (Page 2 of 2)

Key Highlights from Q3 FY12 Conference Call During the quarter, the business mix between large volume APIs and custom synthesis has remained largely the same at 50:50

Strong revenue growth during the quarter was supported by higher volumes for major generic APIs such as Naproxen, Dextromethorphan, and Levodopa, etc. However, the Carotenoids business witnessed QoQ de-growth on the back of slower than expected off-take.

Despite the Rupee depreciation, this quarter saw the EBDITA margins contracting by 300bps YoY on the back of higher other expenses and high base of Q3 FY11.

The new DSN SEZ, which qualifies for 100% tax exemption, is currently ramping up production; and during the quarter, two more production blocks were commissioned at the site. The USFDA inspection for this plant is likely to be in mid FY13.

In this quarter, Divi’s effective tax rate has risen to ~24% (against ~13% in Q3 FY11), mainly due to the end of the tax holiday on its 100% EOU at Choutuppal and its Vishakhapatnam SEZ being eligible only for 50% tax exemption.

Company Profile

Divi’s is engaged in the manufacturing of generic APIs, custom synthesis of active ingredients for innovator companies and other specialty chemicals like peptides and

nutraceuticals. The company operates predominantly in the export markets with over 75% of sales to the regulated markets in Europe and USA. As at the end of FY11, Divi’s

has a total of 41 DMFs filed with USFDA and CoS with EDQM for 12 products. It has also filed several dossiers for 28 products with other countries. The company has so far

filed 18 patents in India and 12 patents in the USA for generic products. During FY11, Divi’s has added 21 products to its product portfolio of which 8 are generic APIs and

intermediates and 13 are custom synthesis APIs and intermediates.

Generic APIs: Divi’s concentrates on a few niche APIs, which normally fetch better margins and where competition is low. The key generic APIs of the company are Naproxen

(anti-inflammatory), Dextromethorphan Hydrobromide (anti-cough), Levodopa (CNS) and Phenylephrine (anti-cough). The company enjoys more than 70% market share

across the globe in APIs like Naproxen and Dextromethorphan Hydrobromide. Divi’s is one of the world’s leading suppliers of Naproxen which is used in the treatment of

arthritis, spondylitis and other inflammatory conditions. Around 20% of Divi’s total revenues in FY11 were contributed by Naproxen. Besides Naproxen, the company has also

received approvals from USFDA and EDQM for Naproxen Sodium and its intermediate (DL Naproxen). Recently, Divi’s has started focusing on nutraceuticals, future generics

and specialty chemicals like Carotenoids. In FY11, around 5% of Divi’s total revenues (~Rs. 62 crore) came from Carotenoids. Carotenoids are coloring agents which are

extracted from plants and other natural sources. They are an important source of vitamin, which acts as a preventive agent against cancer and heart diseases. Divi’s has

developed various types of Carotenoids like Astaxanthin, Beta carotene, Canathaxanthin, Apocarotenal, Lutein, Lycopene and Vitamin D3 which are widely used in the Food &

Beverage industry.

Custom Synthesis APIs: Custom synthesis involves development of a non-infringing process and supply of API and intermediates to innovator pharma companies for

supporting their drug discovery process. Due to its strong R&D capabilities and proven track record, Divi’s is one of the leading custom synthesis players in India with a large

number of leading MNC pharma companies as its clients. In custom synthesis, Divi’s follows a service-based fee model and has a presence across all stages of pre-clinical and

clinical trials. Divi’s owns four R&D centres, two pilot plants, and three large scale manufacturing facilities, with approval from various regulatory bodies. Having an India

centric asset base and strong-flexible infrastructure capabilities allows Divi’s to be a low-cost manufacturer.

Page 23: Indian Pharmaceutical Sector

ICRA LIMITED

North America

31%

Europe21%

India19%

Russia & CIS15%

ROW14%

Dr. REDDY’S LABORATORIES LIMITED

Exhibit: Trend in Dr. Reddy’s Revenues (FY11)

Source: Company Data

Source: Company Data

ICRA Ratings

Shareholding Pattern (%)

Promoters 25.6%

FIIs 27.2%

DIIs 13.8%

Others 33.5%

Price Performance (%)

3M 12M

Dr. REDDY’s 5.9% 6.2%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code DRRD

Market Cap. Rs. 28,739 Crore

Valuations

FY12e FY13e

Price/Earnings 20.3x 18.0x

Price/Sales 3.1x 2.7x

Source: Bloomberg

Long Term [ICRA]AA+

Short Term [ICRA]A1+

Outlook Stable

U.S. continues to be the growth driver; exclusivity on Olanzapine supports margin expansion and jump in profits

Revenue Growth – DRL’s Q3 FY12 revenues at Rs. 2,769.2 crore grew by a

strong 46% on YoY largely led by strong growth in the US market which

benefited from the exclusivity on Olanzapine and steady growth in the

some of the recently launched products and anti-infective portfolio. DRL

has been able to garner around 50% market share in Olanzapine with 40-

45% price erosion. Among other key markets, DRL reported a growth of

11% in India formulations, though lower than the industry average but

reflected an improving trend on QoQ basis. The growth in European

markets (at 14%) largely benefitted from rupee depreciation as growth in

constant currency terms was flat at 2% YoY. In DRL’s other key market –

Russia, revenue growth (in constant currency terms) was flat at inventory

correction measures and delayed onset of winter impacted orders. Going

forward, with series of limited competition launches in the US market,

growth momentum is expected supported by pick-up in India business

Profitability – DRL’s OPBDIT margins at 33.3% in Q3 FY12 benefitted

substantially from the launch of highly profitable Olanzapine which

contributed nearly $99 million in sales (out of the $235 million in the US).

Excluding the impact of Olanzapine, company’s adjusted gross margins

were flat on QoQ basis. Despite higher tax provisioning (largely due to

higher tax outgo on Olanzapine), net profit rose by 88% to Rs. 513 crore

during the quarter. DRL reported forex gains of Rs. 28.5 million in Q3 on

restatement of receivables. MTM losses in the balance sheet stood at $85

million as on December 2011 but came down to $30 million by January-

end following rupee appreciation.

During the quarter, the company filed 3 ANDAs taking the pending

approvals to 79 including 40 on Para IV and 10 FTFs

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 1,898.5 2,769.2 2,267.8

Growth (%) 45.9% 22.1%

OPBDIT 404.6 920.8 520.1

Less: Depreciation 75.8 89.9 87.9

Less: Net Interest 5.0 (17.4) 5.0

Other Income 19.8 16.5 21.5

Exceptional Gain/Loss - - -

PBT 288.4 772.1 369.5

Less: Tax 15.2 261.7 63.0

PAT (Concern Share) 273.1 513.0 307.8

OPBDIT/OI (%) 21.3% 33.3% 22.9%

PAT/OI (%) 14.4% 18.5% 13.6%

Source: Company Data, ICRA Estimates

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY11 Q2 FY12

Operating Income 1,642.4 1,683.1 1,870.4 1,898.5 2,017.3 1,978.3 2,267.8

Growth (%) – YoY -17.3% -7.5% 1.8% 9.8% 22.8% 17.5% 21.2%

OPBIT* 187.6 243.9 300.8 273.6 333.3 260.2 352.9

PAT 166.7 209.6 286.8 273.1 334.5 262.7 307.8

OPBIT/OI (%) 11.4% 14.5% 16.1% 14.4% 16.5% 13.2% 15.6%

PAT/OI (%) 10.1% 12.5% 15.3% 14.4% 16.6% 13.3% 13.6%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore; Data based on IFRS Reporting; * after depreciation

Source: Company Data

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Page 24: Indian Pharmaceutical Sector

ICRA LIMITED

Dr. REDDY’S LABORATORIES LIMITED: Business Overview (Page 2 of 2)

Key Highlights from Q3 FY12 Conference Call Apart from the exclusivity on Olanzapine, growth in the US market in Q3 also benefitted by market share traction in Lansoprazole, Omeprazole Mg. OTC, and other

recently launched products; ramp up in anti-infective portfolio also aided to the overall growth; with a series of limited competition product launches lined up over the

medium term, US market is expected to remain the key growth driver for DRL

The company also aims to scale up the OTC portfolio in the US from $100 million (in 9m FY12) to an annualized run rate of $200 million by FY13 end

In India, DRL’s formulations business grew by 11% on YoY basis; while growth rates remain below industry average, management believes realignment in marketing

strategies, sales force expansion have started showing results and should add to the momentum going forward; biosimilars continues to do well in India with 25%

growth; during the quarter, the company launched six products in India

During Q3 FY12, growth in Russia (in local currency terms) was flat at 1% impacted by inventory correction due to light liquidity condition and delayed onset of winters;

management however stated that the situation has improved since the beginning of Q4 with strong order book; Besides strengthening its product portfolio, DRL aims

to ramp-up its OTC portfolio in Russia and investing heavily on the marketing & distribution front

DRL’s PSAI division reported a 12% growth in revenues to Rs. 556.3 crore largely driven by pharmaceutical services business and benefit of rupee depreciation;

management has indicated of higher growth prospects in this segment led by patent expirations and resultant pick up in API business

Company’s tie-up with GSK, JV with Fujifilm in Japan and biosimilars foray in other emerging markets are progressing in line with plans; however meaningful scale up in

these are is still some time away

Business Overview

DRL, amongst the largest Indian pharmaceutical company, is an integrated player with presence across research, manufacturing and marketing of formulations and APIs. The

company’s business mix is broadly divided into three segments – Global Generics (comprising of formulations – 71% of turnover in FY11), Pharmaceutical Services and APIs

(26%) and Proprietary Products Business (negligible contribution at present). The global generics vertical focuses on marketing and distribution of branded generics (in India,

Russia, CIS and emerging markets) and generics (in US and Europe). Among Indian generics majors, DRL is one of the most formidable players in the U.S. generic space even as

its performance and market position in India lags that of its peers.

The global generics vertical has been the largest contributor to DRL’s revenues but the growth rate has exhibited significant volatility largely on account of inorganic growth

initiatives as well as one-offs (exclusivities/FTFs/authorized generic) in the U.S. North America remains the largest market for DRL’s global generics vertical, where the company

also has a strong products pipeline (with 79 pending approvals with 40 Para IVs and 10 FTFs on Dec. 2011). The company has worked on a strategy to achieve critical mass in its

base business and build a portfolio of one-off exclusivity backed and limited competition opportunities. With slew of big-ticket launches in the past few quarters, the benefits of

company’s strategy have started off paying off. This is likely to continue given the lineup of limited competition product over the medium term in the U.S.

Apart from U.S., DRL has major presence in India, Russia & CIS and Europe which contributed 22%, 20% and 16% to company’s generic business in FY11. In comparison to its

peers, DRL has underperformed the domestic market growth over the past few years due to relatively lower focus on fast-growing chronics, supply chain issues and recently the

field force restructuring. The company also has relatively higher concentration on top-10 products. Apart from India, Russia and other CIS countries have emerged as one of the

top 4 regions for the company over the past few years. Among other Indian generic companies, DRL is the positioned as the strongest player in the Russian market. Despite the

challenging environment, prompted largely by steady price erosive moves, the company has been able to successfully grow its presence in the Russian market. DRL’s growth

strategy for the market involves gradually expanding the proportion of OTC business to 40-45% over the medium term (from 25% in FY11), introduce a basket of bio-similar and

in-licensed products and also potentially pursue in-organic investments with focus on product/brand acquisition. Along with scale-up of the existing business segments, DRL is

also working on multiple growth segments namely, biosimilars (already doing well India, planning for global launches), proprietary products in the US and emerging markets

(through tie-up with GSK). All these initiatives are likely to provide long-term growth avenues for the company.

Page 25: Indian Pharmaceutical Sector

ICRA LIMITED

GLENMARK PHARMA LIMITED

ICRA Ratings

Shareholding Pattern (%)

Promoters 48.3%

FIIs 34.2%

DIIs 5.1%

Others 12.4%

Price Performance (%)

3M 12M

Glenmark Pharma -0.9% 8.7%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code GNP

Market Cap. Rs. 7,910 Crore

Valuations

FY12e FY13e

Price/Earnings 15.2x 14.0x

Price/Sales 2.1x 1.9x

Source: Bloomberg

Not Rated by ICRA

Impressive growth in the U.S. and RoW markets drives top line; but forex losses hurt margins

Revenue Growth – Glenmark’s Q3FY12 revenues grew by an impressive

37.7% driven by strong growth in the U.S. generics segment (up 37.7%) as

well key markets across Asia Pacific, Latin America and Africa. The growth

in the domestic formulations segment was however muted as the company

pursued inventory de-stocking measures to improve its working capital

cycles. Among other market, the company also reported strong growth in

Europe despite price cuts in some of the European markets. The company’s

generic business also witnessed a healthy growth of 45% largely led by

strong 37.7% growth (in $ terms) in the US generics space, benefitting from

launch of new products (especially OCs) and market share gains in the

existing products. The management believes that steady market share gain

coupled with new product launches will keep accelerate the growth

momentum in the US market going forward.

Profitability – Despite strong growth and benefit of depreciating INR,

Glenmark’s operating margins fell sharply (down 790 bps) in Q3 FY12 led by

a confluence of factors with forex losses (on liabilities) being the prominent

one. Apart from forex losses, lower growth in the higher margin domestic

formulations business, higher API prices and increased R&D spending also

added to the pressure on operating profits. As a result of lower margins

and other income, Glenmark’s profit after tax (PAT) declined by 46.7% to

Rs. 46.1 crore as compared to Rs. 86.5 crore in Q3 FY11.

Developments – Glenmark’s key NCE molecule – Revamilast (GRC 4039)

got approval for conducting Phase IIb trials for indications in Asthma and

Rheumatoid Arthritis and management expects to initiate phase III trials by

end of FY13. In the US, the company filed two ANDAs and received

approval for Montelukast Sodium (expected to be launched by August

2012).

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 749.1 1,031.3 1,055.7

Growth (%) – YoY 37.7% 45.8%

OPBDIT 133.9 102.9 225.6

Less: Depreciation 24.6 23.1 24.7

Less: Interest Charges 39.6 35.7 29.1

Other Income 24.1 10.5 (8.1)

Exceptional Gain/Loss (131.7)

PBT 93.8 54.5 32.1

Less: Tax 7.3 8.4 (23.8)

PAT (Concern Share) 86.5 46.1 55.9

OPBDIT/OI (%) 17.9% 10.0% 21.4%

PAT/OI (%) 11.5% 4.5% 5.3%

Source: Company Data, ICRA Estimates

Q2 FY10 Q3 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q1 FY12 Q2 FY12

Operating Income 602.5 648.3 684.8 724.1 758.5 868.8 1,055.7

Growth (%) - YoY 11.3% 24.8% 20.1% 17.0% 26.8% 45.8%

OPBDIT 168.5 170.3 232.3 141.3 174.1 296.9 225.6

PAT 80.9 94.1 170.5 86.2 109.6 210.1 55.9

OPBDIT/OI (%) 28.0% 26.3% 33.9% 19.5% 23.0% 34.2% 21.4%

PAT/OI (%) 13.4% 14.5% 24.9% 11.9% 14.4% 24.2% 5.3%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore * Also includes Oncology business (1.4%)

GPL’s Sales Mix

Specialty Business

(57%)

Out licensing Income

Generics Business*

(43%)

India (28.6%)

LATAM (6.5%)

ROW (22.0%)

US (28.3%)

Europe (1.8%)

APIs (11.3%)

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Page 26: Indian Pharmaceutical Sector

ICRA LIMITED

GLENMARK PHARMA LIMITED: Business Overview (Page 2 of 2)

Specialty Business: Glenmark’s specialty business (comprising largely of branded generic formulations) contributes 57% to company’s overall revenues and has grown at

11.4% over the past four years. The business is predominantly spread across emerging markets such as India, Latin America, East Europe and other semi-regulated markets.

Among these, India is the key market for the company where it is focused on specialty segments such as dermatology, CVS, respiratory, hormones and gynecology. Glenmark

is particularly a strong player in dermatology segment with a market share of about 8.3%. In terms of therapy mix, nearly 80% of its business comes from acute segments. As

has been the trend in the industry, Glenmark has also been steadily ramping up its field force (2,455 as on FY11) and focusing on niche segments in the domestic formulations

segment. Besides India, Glenmark generates nearly 50% of its specialty business from other semi-regulated markets in CIS, Latin America, Africa and Asia Pacific with Russia

and Brazil being the other two most important markets. In the past, the company witnessed pressures on working capital intensity (mainly due to high receivables) in some of

these markets and a result rationalize its distribution network. Following the rationalization efforts, sales growth was back on track in FY11 with most of the markets reporting

healthy growth.

Generics Business: Glenmark’s generics business accounts for 43% of company’s overall turnover and is largely dominated by presence in the US generics space. Over the

past the four years, the company’s generics business has grown at a CAGR of 17% between FY08-11 and the US generics business, which contributes nearly 66% has been the

key growth driver. In the US, the company is largely focused on niche segments like dermatology, controlled substances, oncology and modified release products. As on FY11,

the company had a portfolio of 67 ANDA filings with 41 pending approval including 14 on Para IV. During FY11, the company received approval for 22 ANDA applications

(mostly in the oral contraceptive space), highest among Indian pharma companies during the year. In FY11, Glenmark settled four Para IV filings, which considerably adds to

the visibility to US business in the medium to long term. The key drugs for which it has settled include Atovaquone, Ezetimibe, Eszopiclone and Lunesta. Besides US generics,

the company also has presence in Europe, oncology facility in Latin America and API sales (from India), which form part of its generics business. Its presence in Europe is fairly

limited at present, while it is looking at expanding its oncology and API business in regulated markets.

Details of Glenmark’s Key FTF opportunities

Product Brand Name Plaintiff Therapy Indication Status & Expected Launch Approval Status Sales (CY 2010)

Ezetimibe Tablets Zetia Merck CVS Settled, Expected Launch – Dec. 2016 Tentative Approval -

Fluticasone Lotion Cultivate Nycomed Dermal Settled, Expected Launch – Dec. 2013 Final US$ 48 million

Hydrocortisone Butyrate Cream Locoid Lipocream Triax and Astellas Dermal Settled, Expected Launch – Mar. 2012 Awaited US$ 38 million

NCE Pipeline: Apart from generics and branded formulations, Glenmark also has an active research portfolio of NCE & NBE. Among Indian pharma companies, Glenmark is

the only to have established a credible track record of being able to regularly monetize its NCE research pipeline. Over the years, the company has been regularly monetizing

its NCE pipeline by out-licensing of molecules at different stages of development to large pharmaceutical companies. While it has suffered some setbacks in the past, it has

recently out licensed one of its molecules i.e. GRC 15300 to Sanofi for an upfront payment of $20 million. Since FY07, Glenmark has generated cumulative revenues of Rs. 493

crore through out-licensing deals.

Details of Glenmark’s key NCE molecules

Compound Primary Indication Status

Crofelemer Acute Infectious Diarrhea Completed Phase III trials for HIV diarrhea in US and Phase II for acute diarrhea in adults in India

GRC 4039 Asthma Completed Phase I trials; Initiated Phase II in some countries

GBR 500 Crohn’s Disease Phase I completed in US; Initiating Phase II for Chorn’s Disease; Out-licensed to Sanofi in FY11

GRC 15300 Neuropathic Pain Phase I is ongoing in the UK; already out-licensed to Sanofi in FY11 for $ 20 million upfront

Source: Company Releases

Page 27: Indian Pharmaceutical Sector

ICRA LIMITED

HIKAL LIMITED

ICRA Ratings

Shareholding Pattern (%)

Promoters 68.8%

FIIs 0.2%

DIIs 6.5%

Others 24.5%

Price Performance (%) 3M 12M

Hikal 15.2% -2.9%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement

Bloomberg Code HKCI

Market Cap. Rs. 452 Crore

Valuations

FY12e FY13e

Price/Earnings N.A. N.A.

Price/Sales N.A. N.A.

Source: Bloomberg

Long Term [ICRA]BB+

Short Term [ICRA]A4+

Outlook Stable

Hikal posts 152% jump in Q3; net profit at Rs 13.0 crore

Revenue Growth – Driven by the robust growth in the pharmaceutical

segment; Hikal’s revenues in Q3FY12 stood at Rs. 185.5 crore; higher by 84.0%

on YOY basis and 28.3% on QoQ basis. In this quarter, over 70% of the sales of

Hikal were from the API and CRAMs business which reported a YoY growth of

91.9% and QoQ growth of 49.9%. The revenues from the pharmaceutical

business stood at Rs.130.4 crore. While on the other hand, the crop protection

business which contributes around ~30% of the total revenues of Hikal; also

saw a growth of 67.8% on YoY with revenues around Rs. 55.0 crores in this

quarter.

Profitability – This quarter saw Hikal’s EBIDTA margin at 24.3%, lower by 122

bps on YoY basis; mainly due to increase in raw material costs and other

overhead expenses. In Q3 FY12, the EBIDTA margin for the pharma division

were around 27.9% which was much lower when compared to 30.9% for the

corresponding quarter previous year. While on the other hand, the EBIDTA

margin from the crop protection business grew by 476 bps YoY basis to 8.9%.

During the quarter, the interest and depreciation cost was around Rs.11.7

crores and Rs.10.8 crore respectively. Due to currency fluctuations in this

quarter, Hikal has booked a forex loss of Rs.11.11 crores. The company’s PAT in

Q3FY12 was Rs.13.0 crore, indicating a 14% growth on QoQ basis and 152%

growth on YoY basis. However, the impact of this robust growth in sales was

somewhat subdued by the large forex losses seen in this quarter , as the net

margins for Hikal in Q3FY12 stood at 7.0%; higher by 190 bps on YoY basis but

lower by 90 bps on QoQ basis.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 100.8 185.5 144.6

Growth (%)-YoY 84.0% -1.6%

OPBDIT 25.8 45.1 37.1

Less: Depreciation 9.4 10.8 10.7

Less: Interest Charges 11.6 11.7 12.2

Other Income 0.8 1.1 1.0

Exceptional Gain/Loss -0.4 -11.1 -2.2

PBT 5.1 12.7 13.0

Less: Tax 0.0 -0.4 1.5

PAT (Concern Share) 5.2 13.0 11.4

OPBDIT/OI (%) 25.6% 24.3% 25.6%

PAT/OI (%) 5.1% 7.0% 7.9%

Source: Company Data, ICRA Estimates

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12

Operating Income 163.8 133.2 108.0 100.8 151.5 142.8 144.6

Growth (%) - YoY 10.9% 4.7% -13.7% -15.9% -7.5% 7.2% 33.9%

OPBDIT 44.4 32.0 32.6 25.8 35.0 33.1 37.1

PAT 20.0 14.7 10.3 5.2 14.1 14.5 11.4

OPBDIT/OI (%) 27.1% 24.0% 30.2% 25.6% 23.1% 23.2% 25.6%

PAT/OI (%) 12.2% 11.1% 9.5% 5.1% 9.3% 10.2% 7.9%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

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Page 28: Indian Pharmaceutical Sector

ICRA LIMITED

HIKAL LIMITED: Business Overview (Page 2 of 2)

Hikal Limited is engaged in R&D, manufacturing and marketing of fine chemicals for companies in Pharmaceuticals, Biotech, Agrochemicals and Specialty Chemicals Industries.

It has two main business segments – Pharmaceuticals and Agrochemicals, with nearly 64.9% of the total revenues in FY11 coming from the manufacturing of APIs and

intermediates for various domestic and global pharmaceutical companies and the remaining ~35.1% revenues contributed by sale of chemicals for crop protection. The

company is the largest supplier for the Gabapentin molecule (API used in CNS therapeutic drugs) and sole supplier for Thiabendazole and Fenamidone (both for crop

protection) in the world. Hikal’s main focus has been the regulated markets; with bulk of its sales being to countries like US and UK.

API: Hikal’s Pharma business has high concentration from Gabapentin sales which contributes ~80% of the total pharma revenues. Hikal has been one of the early entrants

and hence is a leading supplier of Gabapentin API globally. The global market of Gabapentin is estimated at 1800-2000 MT, with Hikal supplying close to 60%of the demand.

Also Gabapentin is one of the molecules which have grown in demand (volume) after going off patent in 2002. And it is projected to grow at 7% annually in terms of volumes.

The company supplies to MNCs like Pfizer, Apotex, Cleo Singapore, Medichem, Alpharma, Sandoz etc. and has a strong relationship with these companies.

In FY11, the revenues from pharmaceuticals export showed a de-growth of 35% as one of the large customers of Hikal, Apotex had stopped production due to USFDA issues.

However, the company was able to develop new clientele such as Glenmark and TEVA Canada to compensate for this loss. Hikal has also started supplying validation batch

quantities for Venlafexine API which is expected to be commercially produced from FY13 onwards. Currently, the company has filed one new US DMF and has received

approvals for two existing products from the European regulatory authorities (EDQM).

CRAMS: Acoris Research (Acoris) is a 100% subsidiary of Hikal and is established as a CRO to provide contract research to innovator companies pertaining to chemistry skills

primarily chemical synthesis for NCE prior to pre clinical stage and developing process for scaling up. Various services offered by Acoris includes Route Scouting, Contract

Research, Process Development, Scale up, Analytical Method Development and cGMP (kilo) Manufacturing. It provides customized services, from Full Time Equivalent (FTE) to

Fee for Service (FfS) contracts. Under FTE model entire lab is given on rent for few days to few weeks. The risk of successfully synthesizing chemical lies with the innovator or

innovator already has the processes and wants to evaluate the same. In FfS, the innovator company gives a molecule and asks Acoris to develop a process for same. Higher

fees are paid under fee for service model as Acoris develops the process. In FY11, Acoris had a turnover of Rs. 9.5 crore with accumulated losses of Rs. 20 crore. The addition

of Acoris has increased the Hikal group’s visibility as it has been successful in penetrating the Japanese markets as well as the European and US markets.

Crop Protection: Hikal contract manufactures active ingredients for agrochemical industry including herbicide, insecticide and fungicides. The company is an exclusive global

supplier for Thiabendazole to Syngenta and multiple products to Bayer. Hikal is also started producing Fenamidone for BASF from FY09 onwards and revenues from this

ingredient are expected to grow further. Hikal has also supplied validation batch quantity to BASF for Initium which will be commercially produced from FY13 onwards. Hikal’s

62% of the revenues from crop protection business comes from its top two molecules- Thiabendazole and Fenamidone and their buyers. However, the molecules are

proprietary to respective clients and Hikal enjoys exclusive supplier status for them. In FY11, nearly ~84% of the revenues for crop protection business came from exports;

however due to the cutbacks on production schedules and inventory rationalizing done by its MNC clients, Hikal’s revenues from the crop protection business were lower by

~8% when compared to the previous year.

Page 29: Indian Pharmaceutical Sector

ICRA LIMITED

INDOCO REMEDIES LIMITED

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

ICRA Ratings

Shareholding Pattern (%)

Promoters 61.1%

FIIs 2.8%

DIIs 14.1%

Others 22.1%

Price Performance (%)

3M 12M

IRL -3.5% -5.7%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code INDR

Market Cap. Rs. 485 Crore

Valuations

FY12e FY13e

Price/Earnings 9.3x 7.6x

Price/Sales 0.9x 0.7x

Source: Bloomberg

Long Term [ICRA]A+

Short Term [ICRA]A1+

Outlook Stable

Recovery in domestic formulations boost revenues; however margins remain muted in Q3 Revenue Growth - In Q3FY12, IRL’s operating income grew by 23.6% on a YoY basis to Rs. 141.5 crore. Due to healthy growth in therapeutic segments like respiratory (23.6%) and gastro-intestinal (23.1%); the domestic formulations business witnessed a better traction as revenues grew by 14.8% YoY basis to Rs. 84.9 crore. In the export formulation business, IRL’s revenues grew by 35.5% to Rs.45.5 crore driven by growth in regulated markets (up by 38.7% to Rs. 37.0 crore). IRL has started commercial supplies of anti-diabetic products for the Eastern Europe market and is also participating in a new German tender for 7 products, which is expected to be announced in Q1FY13. In the emerging markets division, the revenues grew by 23.1% YoY to Rs. 8.5 crore on the back of supplies to Ghana and new launches in other regions. As for the API business, the domestic sales were up by 34% YoY to Rs. 5.2 crore; owing to new product launch in the ophthalmic segment. During the quarter, API export sales more than doubled (up by 107%) to Rs. 5.7 crore due to new customer additions in Europe for anti-glaucoma segment and sale of an API intermediate in Japan. Profitability - Despite recovery in the high margin domestic formulations business and favourable currency, EBITDA margins in this quarter declined by 110 bps YoY to 11.4% on the back of forex losses and high marketing expenses and employee costs. With the commission of the Goa III facility; both interest and depreciation increased sharply, which led to net profit declining by 6.2% YoY to Rs. 8.3 crore. Developments- In this quarter, IRL has signed an alliance with Austria’s DSM Pharmaceuticals to market eight of its existing APIs to new geographies, for which the commercial supplies are expected to start in Q1FY13. Till date, the company has submitted 5 US ANDA; bringing total ANDA count to 13 (of which 7 are under the Watson Deal).

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 115.5 142.6 147.4

Growth(%) - YoY 23.5% 8.9%

OPBDIT 14.5 16.3 20.7

Less: Depreciation 3.4 5.3 4.7

Less: Interest Charges 0.6 1.8 1.4

Other Income 0.0 0.0 0.1

Exceptional Gain/Loss 0.0 0.0 0.0

PBT 10.5 9.2 14.6

Less: Tax 1.7 0.9 0.8

PAT (Concern Share) 8.8 8.3 13.8

OPBDIT/OI (%) 12.5% 11.4% 14.0%

PAT/OI (%) 7.6% 5.8% 9.4%

Source: Company Data, ICRA Estimates

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12

Operating Income 110.5 112.9 135.4 115.5 122.8 127.1 147.4

Growth (%) - YoY 27.8% 12.2% 41.0% 20.4% 11.3% 12.7% 8.9%

OPBDIT 12.6 19.1 20.8 14.5 18.0 18.6 20.7

PAT 8.2 14.8 15.3 8.8 12.2 11.7 13.8

OPBDIT/OI (%) 11.4% 16.9% 15.4% 12.5% 14.6% 14.6% 14.0%

PAT/OI (%) 7.5% 13.1% 11.3% 7.6% 9.9% 9.2% 9.4%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

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Page 30: Indian Pharmaceutical Sector

ICRA LIMITED

INDOCO REMEDIES LIMITED: Business Overview (Page 2 of 2)

Indoco Remedies Limited (IRL) is a mid-sized pharmaceutical company engaged in the manufacturing and marketing of branded Formulations, APIs and Contract Research and

Manufacturing (CRAMS); with a strong presence in the domestic markets. The domestic formulations and the API business contribute ~68% of the total revenues and the rest

32% of the revenues coming from the international business. In the domestic business, IRL has a prominent presence in the anti-infective, respiratory, gastro-intestinal and

dental segments with its products among top 1-2 brands in respective categories. IRL has also tied up with Watson for 19 generic sterile products for the US markets which

has a market size of $800-850mn and with Aspen for over 30 products across 30 geographies, primarily regulated markets. As for the exports formulations business, regulated

markets like UK, Germany and South Africa are the top contributors for IRL.

Domestic Formulations: In the domestic formulations business, IRL has an established market position in the branded generics market with leading acute therapy brands like

Cyclopam, Sensodent and Febrex Plus having a substantial market share in their respective categories. The contribution of its top 10 brands accounts for ~ 55% of the

domestic formulation revenues but at the same time none of the single therapeutic area contributes more than 20% of the revenues; thus making the portfolio broad based

and diversified. Except for Vepan none of the top brands are under DPCO; though having a large acute therapy portfolio; IRL faces significant competitive and pricing pressures

especially in its anti-infective and respiratory segments. IRL’s focus is on driving growth through territorial expansion by strengthening its field force (currently 1900) and by

building brand presence in chronic therapeutic areas such as Diabetes and Cardiovascular which are slated to grow fast due to changing socio-demographic scenario.

Regulated Markets: IRL’s export business is targeted towards regulated markets where company supplies on trade basis or tender basis (Contract Manufacturing). The growth

has been largely from regulated markets which contribute ~ 90.3% of the revenues; The UK markets contribute more than 48.2% of the total regulated markets contributions

and Germany more than 14%. Among the larger tender contracts, the company had won supply contracts in a tender by Germany’s largest health insurer, Allgemeine

Ortskrankenkassen (AOK) for Metformin thereby leading to cumulative revenues of Rs. 32 crores spread over FY10 and FY11. IRL has also entered into a deal with Watson

Pharmaceuticals Inc. (3rd

largest generic company in USA) to develop and manufacture ten sterile ophthalmic products on a cost plus profit sharing basis. The current market

size of these products is US$ 1.5 billion. The first commercialization is expected in FY14; with expected revenues of Rs. 30-35 crore per year.

Semi-Regulated Markets: The Company intends to pre-dominantly use trade channel business to supply to less regulated markets of Africa, CIS and South East Asian countries

where credit risks are a challenge. In the semi-regulated markets, IRL has recently signed a long-term deal with South-African drug maker Aspen Pharma for developing and

out-licensing six ophthalmic products for sale in over 30 emerging markets. These products are in initial stages of development and IRL will earn milestone payments as well as

sale proceeds from supplying the drugs to Aspen. As a result of above deals, IRL growth rate from export business is expected gain momentum from FY13 onwards. The above

deals are expected to generate EBIDTA margins in the range of 18% and will be primarily for South African and Latin American countries.

API: Revenues from API constitute a very small portion (~6% in FY11) of IRL’s total revenues; also this business has lower margins compared to other business segments as it is

mainly affected by the raw material prices. IRL has two API manufacturing facilities which it primarily uses it for captive consumption. The company plans to add another API

block at Patalganga at a total capex of Rs. 55 crores over the next two years. A large part of the API production will be used for backward integration for contract

manufacturing deals in order to drive cost benefit and for filing new DMFs and ANDAs. The company has already filed eleven DMFs in US, for the European markets, the

company has six CoS approved.

Page 31: Indian Pharmaceutical Sector

ICRA LIMITED

IPCA LABORATORIES LIMITED

ICRA Ratings

Shareholding Pattern (%)

Promoters 46.1%

FIIs 8.7%

DIIs 22.8%

Others 22.5%

Price Performance (%)

3M 12M

IPCA 28.5% 21.3%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code IPCA

Market Cap. Rs. 4,210 Crore

Valuations

FY12e FY13e

Price/Earnings 14.0x 11.8x

Price/Sales 1.8x 1.6x

Source: Bloomberg

Not Rated by ICRA

Export formulations drive revenue growth and operating margin; net margin remains flat on account of forex losses

Revenue Growth – IPCA’s operating income grew by 31.8% on a YoY basis in Q3 FY12 to Rs. 614.8 crore driven by export formulations (73% YoY growth) despite growth moderation in domestic formulations. The muted growth of ~6% in domestic formulations (over Q3 FY11) was pressurised by weak anti-malarial sales, though cardiovascular and pain management segments have started to show improvements. IPCA’s API sales growth of ~5% also appears to be muted despite substantial increase in production as a major part of API sales is utilized for captive consumption. Nonetheless, the management remains confident of clocking at least 20% revenue growth in FY12 as the benefits of internal restructuring exercise begin to demonstrate results. However, IPCA’s export formulation growth would be largely dependent on the impending approval of its Indore SEZ by the USFDA.

Profitability – IPCA’s OPBDITA margin improved 509 bps YoY to 24.6% led by favourable currency realization, lower material cost (by 2.9%), and an increase in other operating income to Rs. 13.1 crore from Rs. 3.0 crore in Q3 FY11 on account of some dossier sales income and Rs. 7 crore provision made in respect of the focus market scheme announced by the Government (even though the scheme is effective from April 2012; since the announcement was made in the quarter, IPCA has recorded the same). Despite strong 66% growth at the OPBDITA level, net profit remained almost flat at Rs. 63.9 crore on account of forex losses of Rs. 39.9 crore largely due to translation of ECBs. Excluding forex loss in Q3 FY12 and forex gains in Q3 FY11 (Rs. 11.2 crore), the like-to-like net profit witnessed a significant YoY growth of 96.8%.

Developments – IPCA’s Indore facility has been inspected by the USFDA in January 2012 and the management expects to receive the approval within two months. The company has filed for 13 ANDAs from this plant and expects approval for 6 ANDAs along with the USFDA approval.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 466.4 614.8 623.5

Growth (%) - YoY 31.8% 20.3%

OPBDIT 91.0 151.3 158.0

Less: Depreciation 14.2 18.1 17.6

Less: Interest Charges 7.3 10.8 11.8

Other Income 2.1 3.9 2.6

Exceptional Gain/Loss - - -

PBT 82.8 86.4 104.2

Less: Tax 18.8 22.5 26.2

PAT (Concern Share) 64.0 63.9 78.0

OPBDIT/OI (%) 19.5% 24.6% 25.3%

PAT/OI (%) 13.7% 10.4% 12.5%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12

Operating Income 367.8 418.0 518.3 466.4 478.5 529.9 623.5

Growth (%) - YoY 15.8% 16.4% 20.5% 17.9% 30.1% 26.8% 20.3%

OPBDIT 67.6 71.2 118.0 91.0 98.3 95.2 158.0

PAT 37.3 38.8 94.0 64.0 58.6 61.7 78.0

OPBDIT/OI (%) 18.4% 17.0% 22.8% 19.5% 20.5% 18.0% 25.3%

PAT/OI (%) 10.1% 9.3% 18.1% 13.7% 12.2% 11.6% 12.5%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

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Page 32: Indian Pharmaceutical Sector

ICRA LIMITED

IPCA LABORATORIES LIMITED: Business Overview (Page 2 of 2)

IPCA is a fully integrated pharmaceuticals company producing branded and generic formulations, APIs and Intermediates, and one of the leaders in anti-malarial and

Rheumatoid Arthritis in the Indian market; and the company has been expanding its therapeutic coverage, especially in the fast growing life style related segments. The

products of the company are currently exported to over 110 countries across the globe.

Domestic Formulations: IPCA has been one of the fastest growing companies in the domestic formulations market with presence across therapeutic categories of CVS and

anti-diabetics, NSAID, anti-malarials and anti-bacterials, among others. The company’s formulations business in India now comprises 12 marketing divisions focusing on key

therapeutic segments, including two new divisions – IPCA Pain Management and IPCA Dynamix which started operations from April 2011. During FY11, IPCA introduced 25

new products in the domestic market in new therapeutic segments of urology and nephrology.

APIs & Intermediates: IPCA has been exporting APIs/ Intermediates to 95 countries across the globe through its Ratlam API manufacturing facility which has been approved by

regulatory agencies of US, Canada, Japan, Australia, UK and several other European countries. Most of the international customers of IPCA are end user formulations

manufacturers including several MNCs. The company commercialized 17 new APIs during FY11, and has also stepped up its DMF registration activities with 60 DMFs currently

filed with USFDA.

Americas: IPCA mainly exports its APIs to USA, Canada and South American countries; and formulations to USA, Panama, West Indies and few South American countries in this

sub-continent. 25 ANDA applications in respect of generic formulations developed by the company are filed with USFDA, of which 12 ANDA applications are granted till date.

The company is working on another list of formulations for development and filing of ANDAs. Most of these formulations are from its own APIs for which the company has

filed/ is in the process of filing DMFs. The company has currently signed agreements with three marketing partners for sale/ distribution of generic formulations on a profit

sharing arrangement in the US market. The formulations manufacturing facility of the company at Indore SEZ, which is commercially ready since December 2008, and got

inspected by the USFDA in January 2012, is awaiting USFDA approval, post which, the company will be in a position to substantially scale up its US generic business. The

company has also started marketing its branded formulations in Venezuela, Columbia and Peru in the Latin American market with a few product registrations.

Europe: The company has developed and submitted 54 generic formulation dossiers for registration in Europe, out of which 42 dossiers are already registered.

CIS: Most of the business from CIS is from branded formulations sales in Russia, Ukraine and Belarus, which are marketed by its own field force.

Asia: The company exports formulations as well as APIs to several Asian countries like Nepal, Srilanka, Myanmar, Philippines and Vietnam, where it markets its branded

formulations through dedicated field force. The field force and product range of the company in Asian market is also being expanded.

Africa: The WHO pre-qualification of anti-malarial formulation of Artemether and Lumefantrine has helped the company in expanding its anti-malarial formulations business

in the African market. The company exports branded and generic formulations as well as APIs to 20 African countries. The company markets branded formulations in countries

like Uganda, Ghana, Ivory Coast, Burkina Faso, Zimbabwe, Sudan, Tanzania, Kenya, Ethiopia and Nigeria through dedicated field force.

Page 33: Indian Pharmaceutical Sector

ICRA LIMITED

JUBILANT LIFE SCIENCES LIMITED

ICRA Ratings

Shareholding Pattern (%)

Promoters 49.0%

FIIs 28.4%

DIIs 1.4%

Others 21.2%

Price Performance (%)

3M 12M

JLSL 8.8% 15.4%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code JOL

Market Cap. Rs. 2,948 crore

Valuations

FY12e FY13e

Price/Earnings 9.9x 7.1x

Price/Sales 0.7x 0.6x

Source: Bloomberg

Not Rated by ICRA

Generics business drives revenue growth; services business drives operating margin

Revenue Growth – Jubilant’s operating income grew by 25.3% on a YoY basis

in Q3 FY12 to Rs. 1,088.5 crore on account of strong growth in the Generics

business (YoY growth of 79%) driven by favourable pricing in Dosage Forms.

Life Science Product revenues (constituting 80% of total sales) witnessed a

YoY growth of 24% backed by both volume growth and strong price increase,

while Life Science Services business (constituting 20% of total sales)

witnessed a YoY growth of 32%. Going forward, the management expects the

growth momentum to continue backed by increased capacity utilization, new

product launches and expansion in high growth geographies.

Profitability – In Q3 FY12, the company’s OPBDITA was Rs. 208.4 crore, up

57.7% YoY with margin at 19.1% compared to 15.2% in Q3 FY11 on account

of a nine fold increase in margins of the Services business (margin of 10.9% in

Q3 FY12 due to increased capacity utilization and low base) and increase in

profitability of the Products business by 80 bps to 23.6%. However, the

company has reported a net loss of Rs. 78.4 crore in Q3 FY12 due to an

exceptional loss of Rs. 155.5 crore (exceptional loss of Rs. 2.3 crore in Q3

FY11) towards MTM in respect of currency and interest rate swap and

amortization of foreign currency monetary item translation difference.

Adjusting for the same, the like-to-like net profit has witnessed a YoY growth

of 66.1%. Going forward, product business profitability is expected to be

backed by improved capacity utilization, increased vertical integration and

favourable prices of certain key products; while services business profitability

would be backed by higher margin product mix and cost optimization.

Developments – Commissioning of Symtet plant is expected by March 2012.

The management has guided for a total capex of Rs. 500 crore in FY12, of

which Rs. 377 crore has already been spent till Q3 FY12.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 869.0 1,088.5 1,050.1

Growth (%) - YoY 25.3% 22.1%

OPBDIT 132.2 208.4 238.1

Less: Depreciation 49.3 53.9 50.8

Less: Interest Charges 28.6 56.6 49.7

Other Income 1.7 3.5 3.4

Exceptional Gain/Loss (2.3) (155.5) (42.6)

PBT 53.7 (54.1) 98.4

Less: Tax 10.4 8.9 9.3

PAT (Concern Share) 44.1 (78.4) 79.4

OPBDIT/OI (%) 15.2% 19.1% 22.7%

PAT/OI (%) 5.1% (7.2%) 7.6%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12

Operating Income 993.4 818.6 860.3 869.0 894.4 948.5 1,050.1

Growth (%) - YoY 17.9% 9.3% 22.9% -10.1% -10.0% 15.9% 22.1%

OPBDIT 223.0 141.5 148.2 132.2 132.3 186.2 238.1

PAT 137.2 50.4 73.5 44.1 61.7 77.1 79.4

OPBDIT/OI (%) 22.4% 17.3% 17.2% 15.2% 14.8% 19.6% 22.7%

PAT/OI (%) 13.8% 6.2% 8.5% 5.1% 6.9% 8.1% 7.6%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore; Note: During FY11, the Agri and Performance Polymers business was demerged from the company.

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Page 34: Indian Pharmaceutical Sector

ICRA LIMITED

JUBILANT LIFE SCIENCES LIMITED: Business Overview (Page 2 of 2)

Over the years, Jubilant has transcended from a Chemicals company to a diversified Specialty Chemicals & Pharma company to an Integrated Pharma and Life Sciences

company. The company operates in two primary business segments – 1. Life Science Products comprising Life Science Ingredients (consisting of APIs, Nutrition Ingredients,

Proprietary Products & Exclusive Synthesis business (PPES) and Life Science Chemicals) and Generics (comprising Solid Dosage Forms, Radiopharmaceutical Products and

Allergenic Extracts) and 2. Life Science Services comprising Contract Manufacturing (CMO) and Drug Discovery & Development Solutions (DDDS), with Life Science Products

being the major contributor to revenues. The company has presence in around 75 countries.

APIs: Jubilant’s APIs are primarily sold to manufacturers of formulations of generic drugs, with focus on therapeutic areas of CNS, CVS, Anti-infective, Anti-ulcerants,

Analgesics, Anti-osteoporotics, Muscle relaxants and Urinary-antispasmodics. The company is ranked No. 1 globally in five API products – Valsartan, Carbamazepine,

Oxcarbazepine, Lamotrigine & Pinaverium Bromide, and No. 2 in two products – Citalopram and Risperidone. As on date, the company has filed 54 DMFs in the US, 27 in

Canada, 29 in Europe and 6 in Japan. Commercialisation of the new sartans production block is expected to be a key driver for future growth, in addition to new product

launches.

Nutrition Ingredients: Jubilant is Globally No. 3 in Niacin and Niacinamide (Vitamin B3) in the Human Nutrition Ingredients category and the largest producer of Choline

Chloride (Vitamin B4) in India in the Animal Nutrition category. The company’s backward integration into Beta Picoline is a positive, enabling synergy benefits.

PPES: Jubilant’s key proprietary products include Pyridine, Picolines, Piperidines, Cyanopyridine, Aminopyridines, Chloro & Bromopyridines, and is globally the No. 1 in

Pyridines, Beta Picolines and 14 other Pyridine derivatives. The Exclusive Synthesis business mainly works with innovator companies from early stage of development to offer

intermediates and APIs for NCEs taking it through various stages up to launch and commercial scale.

Life Science Chemicals: Jubilant’s range of manufactured and traded products includes Acetic Acid, Acetic Anhydride, Ethyl Acetate, Carbon Dioxide, Ethylene Oxide mixtures,

Mono Chloro Acetic Acid and Vinyl Acetate Monomer, with volume growth driven by the buoyancy in pharma and agrochemical industries.

Solid Dosage Forms: This business derives benefit from backward integration with the API business and is supported by in-house R&D facility for formulation development.

Jubilant has 11 commercialised products in the US and 8 in Europe. The company has over 40 launches planned in focused therapeutic areas across geographies, 40% of which

are in regulated markets. Over a span of 3 years, the company has plans of over 70 new launches across US, Europe and Emerging Markets.

Radiopharmaceutical Products: Jubilant operates in the highly regulated markets, manufacturing and marketing Diagnostic Imaging and Therapeutic, Radiopharmaceutical

Products like I-131 (used in the treatment of Thyroid Cancer), Sestamibi (a diagnostic cardiac imaging agent used in Myocardial Perfusion Imaging), etc. sold as kits through

radiopharmacies and large hospitals.

Allergenic Extracts: Jubilant, the leading No. 2 Allergy Therapy company in the US, manufactures a wide range of USFDA approved human allergen extracts used for

immunotherapy across various allergen categories like Pollen, Mites, Environmentals, Venom, Mold and Food. Jubilant also enjoys a leading market share position in four

therapeutic and imaging nuclear medicine products in North America, supported by its experience of over 85 years in the business.

CMO: Jubilant provides CMO of Sterile (such as Vial and Ampoule Liquid Fills, Freeze-dried Injectables, Biologics, Suspensions and Water for Injection diluents) and Non-sterile

(includes Antibiotic Ointments, Dermatological Cream and Liquids, Capsules, Tablets and Powder Blends) products and related services and enjoys a large presence in the

Page 35: Indian Pharmaceutical Sector

ICRA LIMITED

North American market. This segment, which had witnessed changes in consumer demand and delays in their submission approvals, as also slowdown in commercialization of

products of key customers, is expected to resume normalized operations with more focus on business development by the company.

DDDS: Jubilant has been undertaking drug discovery in Structural Biology, Insilico Technologies and Medicinal Chemistry. Its drug development activities pertain to clinical

research from Phase I to Phase IV including clinical trials and data management in Oncology, CVS, CNS, Dermatology, Respiratory and Allergy Immunotherapy. The company

has been running 17 integrated research programmes in collaboration with 7 global clients.

Page 36: Indian Pharmaceutical Sector

ICRA LIMITED

US Formulations

35%

India Formulations

27%Europe4%

RoW Markets

16%

Other Segments

3%APIs15%

Lupin Sales Break-up (FY11)

LUPIN LIMITED

ICRA Ratings

Shareholding Pattern (%)

Promoters 46.9%

FIIs 26.2%

DIIs 17.2%

Others 9.6%

Price Performance (%)

3M 12M

Lupin 17.2% 27.1%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code LPC

Market Cap. Rs. 22,420 Crore

Valuations

FY12e FY13e

Price/Earnings 23.2x 18.6x

Price/Sales 3.3x 2.7x

Source: Bloomberg

Long Term [ICRA]AA+

Short Term [ICRA]A1+

Outlook Stable

Growth momentum continues in key market; EBITDA margins improve but higher tax outgo impacts net profits

Revenue Growth – Lupin’s operating income at Rs. 1,818.9 crore in Q3

FY12 reported a strong growth of 20.4% on a YoY basis driven by steady

growth momentum across geographies with India formulations and US

branded business reporting stronger growth. During the quarter, the

company’s US business grew by 12% (in US$ terms) driven by strong

growth in company’s branded business which grew by 18% riding on back

of strong uptake in Suprax franchises and in some recovery in Anthrax

sales. The company’s US generics business however reported muted 9%

growth (in $ terms) despite new product introductions. The management

however remains upbeat about the growth prospects in the US generics

going forward given the series of product launches expected especially

with some of them being on limited competition and in the OCs segment.

The domestic formulations business was best among the pack, reporting a

30% growth on back of recovery in Anti-infective and continued growth in

CVS, diabetic and gynecology therapies. The tie-up with Eli Lilly also

boosted the growth in the domestic market contributing Rs. 27-30 crore

(or 7% to growth) during the quarter. In Japan, the company’s revenues

grew by 22% (in yen terms) aided by the consolidation of I’rom revenues

for a month. Management indicated that the growth on an organic basis

has been somewhat muted in Japan owing to increased competition from

MNCs players but believes that measures being implemented by the

Government would continue to support demand for generics.

Profitability – In terms of profitability, despite forex loss (Rs. 32 crore),

Lupin’s EBITDA margins at 20.5% improved by 85 bps on YoY basis driven

primarily by improvement in gross margins on account of better product

mix However, due to increased depreciation (due to Indore SEZ) and

higher tax outgo (due to discontinuation of EOU benefits at Goa and

Mandideep), the company net profit at Rs. 235.1 crore grew by only 4.9%

over the same quarter in the previous year.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 1,510.2 1,818.9 1,772.4

Growth (%) - YoY 20.4% 23.6%

OPBDIT 297.3 373.5 404.0

Less: Depreciation 41.3 57.6 52.2

Less: Interest Charges 7.8 8.6 6.6

Other Income 3.4 3.3 1.6

Exceptional Gain/Loss - -

PBT 251.6 310.6 346.8

Less: Tax 23.7 70.1 75.1

PAT (Concern Share) 224.0 235.1 266.9

OPBDIT/OI (%) 19.7% 20.5% 22.8%

PAT/OI (%) 14.8% 12.9% 15.1%

Source: Company Data, ICRA Estimates

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12

Operating Income 1,328.2 1,334.3 1,434.0 1,510.2 1,533.6 1,567.7 1,772.4

Growth (%) - YoY 24.3% 21.2% 22.9% 18.9% 17.0% 17.5% 23.6%

OPBDIT 292.4 284.4 298.6 297.3 310.8 294.4 404.0

PAT 220.7 196.3 215.0 224.0 227.2 210.1 266.9

OPBDIT/OI (%) 22.0% 21.3% 20.8% 19.7% 20.0% 18.8% 22.8%

PAT/OI (%) 16.6% 14.7% 15.0% 14.8% 14.6% 13.4% 15.1%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

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Page 37: Indian Pharmaceutical Sector

ICRA LIMITED

LUPIN LIMITED: Business Overview (Page 2 of 2)

Lupin Limited is one the fastest growing generic formulations company with major presence in India, United States, Japan and some of the other emerging generic markets

such as South Africa, Australia and Philippines. Over the years, the company has transformed its business model from predominantly being an API player with strong presence

in the Anti-Infective and Anti-TB segment to a company with strong formulations business with presence diversified across therapy segments and major markets. Driven by

steady growth in ANDA approvals and in-organics investments in the branded formulations segment, United States has emerged as the main market for the company,

contributing 35% to total sales followed by India at 27% and Japan at 11%. Apart from formulations, the company is also actively engaged in developing a portfolio of biologics

and has been investing in New Chemical Entity (NCE) research as well.

Domestic Formulations: Lupin is among the stronger players in the domestic branded formulations segment with strong market position in some of the fast-growing chronic

therapy segment. It is ranked as the 7th

largest domestic formulation company and has consistently outperformed the industry growth backed by steady product introductions

and increasing focus on fast-growing therapy segments. While it continues to maintain leadership in the Anti-TB segment, over the years, it has also emerged as one of the

leading players among chronic therapies such as CVS, CNS, Anti-Asthma and Anti-Diabetic. Lupin’s growth strategy for the domestic market involves strengthening presence in

some of the recently entered therapy segment, expanding product portfolio through in-licensing route as well as stepping up focus on tier II/III cities.

U.S. Formulations: Lupin has emerged as the 5th

largest generic company in the U.S. market (in terms of prescriptions). The company’s strengths in product development,

backward integrations into APIs and conscious focus on servicing the market through a wide spread distribution network has helped it successfully grow its generic business in

the U.S. market. It enjoys strong market share for most the products in its portfolio and a pipeline of limited competition difficult-to-develop molecules in the oral

contraceptive space, is likely to support growth for the company in the near term. In addition to generics, Lupin is the only domestic company to have presence in branded

segment, which it has built through acquisitions over a period of time. While it has faced competitive pressures in case of Antara in the recent period and also delays in the

launch of Allernaze (due to operational issues), its experience in the pediatric segment through the success of Suprax has supported management’s confidence in build ing a

meaningful business stream going forward.

Japan and other emerging markets: Apart from U.S. and India, Japan has emerged as third most important market for Lupin since 2007 post its acquisition of Kyowa

Pharmaceuticals. By virtue of being an early entrant, Lupin is well positioned to benefit from the evolving generics opportunity in the Japanese market. The Government’s

initiatives to promote generic penetration through pro-generic reforms and achieve 30% penetration levels in the medium term augur favorable prospects for the company.

With its strong capabilities in development and manufacturing in India, Lupin aims to backward integrate its Japanese operations and enhance profitability metrics in the

medium term. Apart from Japan, the company has also made investments in some of the other emerging generic markets. Most of Lupin’s acquisitions (apart from Kyowa) have

been relatively small in size, targeting market access through distribution network. Overall, the company has maintained a track record of steady profitability with strong credit

metrics over the years despite sizeable investments in R&D and manufacturing capabilities.

Europe: Lupin is currently a small player in the European markets with its presence limited to U.K., France and Germany. At present, Europe accounts for less than 4% of

company’s turnover. Going forward, the company aims to replicate its success story of the U.S. market by leveraging its strengths in product development, manufacturing and

distribution expertise. Its strategy for various markets with Europe has different, while it has adopted direct-to-market business model in the U.K, it acquired a generic

marketing and distribution company in Germany and followed a partnership model in France. While the European markets would offer strong growth prospects for Lupin aided

by increasing generic opportunities, we expect company’s focus to remain concentrated on the U.S. market in the medium term.

Page 38: Indian Pharmaceutical Sector

ICRA LIMITED

Formulations51%

APIs24%

Pharmacy Stores

25%

Natco Pharma's Revenue Break-up (FY11)

NATCO PHARMA LIMITED

ICRA Ratings

Shareholding Pattern (%)

Promoters 57.0%

FIIs 5.9%

DIIs 11.8%

Others 25.2%

Price Performance (%)

3M 12M

Natco Pharma 29.3% 26.6%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code NTCPH

Market Cap. Rs. 997 Crore

Valuations

FY12e FY13e

Price/Earnings N.A. N.A.

Price/Sales N.A. N.A.

Source: Bloomberg

Long Term [ICRA]A+

Short Term [ICRA]A1+

Outlook Stable

Success in niche Para IV/FTF opportunities in the US Generics space holds long-term growth potential

Revenue Growth – Natco Pharma’s Q3 FY12 operating income at Rs. 145.4

crore grew by a strong 22.9% on YoY basis driven by strong growth in both

formulations as well as bulk drugs business. Natco Pharma largely operates

in the domestic formulations business and has leading presence in the

oncology segment. Besides formulations, the company also has presence in

the API (largely exports driven) segment to generic players. Through a

focused product portfolio comprising of niche Para IV & FTF opportunities,

the company is also targeting the US generics space through tie-ups with

leading generic major. While in the near term, we expect, the company’s

dominant presence in the domestic oncology segment to drive growth, the

company’s ongoing investments to supports its US generics foray is likely

drive growth in the medium term. Over the past few quarters, the growth

momentum in the domestic market has been slowing down largely on

account of increasing competitive intensity in the oncology space, which

has prompted sharp price erosion for the main molecules of the company.

The API business, however, continues to report healthy growth riding on

back of product portfolio expansion.

Profitability – In terms of profitability indicators, NPL’s operating margins

continue to remain stable (despite pricing pressures in the formulations

business) and comparable with some of leading branded generics

companies in the domestic formulations segment. The company’s

backward integration into APIs and relatively high profitability in the

oncology segment continues to support high margins. However, NPL’s RoCE

(%) at 17% (in 2010-11) is comparatively lower to domestic formulations

peers due to investments in a group company and R&D/product filings,

which are yet to yield returns.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 118.3 145.4 133.0

Growth (%) 22.9% 4.4%

OPBDIT 24.3 31.2 30.1

Less: Depreciation 3.3 4.1 4.0

Less: Interest Charges 3.7 5.8 6.1

Other Income 0.3 0.4 1.6

Exceptional Gain/Loss - - -

PBT 17.6 21.6 21.5

Less: Tax 4.8 5.0 5.8

PAT (Concern Share) 13.7 17.0 15.9

OPBDIT/OI (%) 20.5% 21.4% 22.6%

PAT/OI (%) 11.6% 11.7% 12.0%

Source: Company Data, ICRA Estimates

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12

Operating Income 128.4 122.4 127.4 118.3 115.3 123.0 133.0

Growth (%) - YoY -4.6% 8.2% 8.1% 1.1% -9.5% 0.8% 4.4%

OPBDIT 24.0 21.1 27.2 24.3 22.2 26.1 30.1

PAT 15.0 10.6 14.8 13.7 14.4 14.0 15.9

OPBDIT/OI (%) 18.7% 17.2% 21.4% 20.5% 19.3% 21.2% 22.6%

PAT/OI (%) 11.7% 8.7% 11.6% 11.6% 12.5% 11.4% 12.0%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

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Page 39: Indian Pharmaceutical Sector

ICRA LIMITED

NATCO PHARMA LIMITED: Business Overview (Page 2 of 2)

Hyderabad based, Natco Pharma Limited (NPL) is a medium-sized pharmaceutical company with leading presence in the oncology segment of the domestic branded

formulations market. NPL’s business is divided in three broad segments viz. Formulations (51% of revenues), APIs (24%) and Pharmacy business (25%). The formulations

business is dominated by its strong presence in the oncology segment, while the API business is mainly export oriented with supplies to leading generic players in regulated

markets. Supported by early presence, steady product introductions and focus on direct therapy areas, NPL has emerged as a leading player in the oncology segment in India

among domestic companies. Besides its core focus on oncology, NPL has also been investing in developing a product portfolio for the US Generics market with focus on

complex, difficult-to-develop molecules.

Leading player in the domestic oncology segment - NPL is predominantly positioned as a domestic formulations company with leading presence in the fast-growing oncology

segment. The domestic formulations business in India is dominated by branded formulations (59%) and oncology segment accounts for nearly (90%) of the total branded

business. Barring subdued performance in 2010-11 on account of pricing pressure, the company’s domestic formulations business has grown at a CAGR of 15% over the last

three years on the back of niche launches in the oncology segment. Its strengths in identifying and developing niche and difficult-to-manufacture molecules besides early

entrant in the business have helped it in maintaining a dominant presence in the oncology space. In terms of positioning, the company has strong presence in targeted

therapies with particular focus on leukaemia (i.e. blood cancers), lung cancer and multiple myeloma where its brands enjoy leading market share. The competitive landscape in

the oncology segment has been intensifying as MNC pharmaceutical companies have become increased their focus in the Indian market and a number of domestic players

backed by strengths in R&D and manufacturing have also widened their product offerings in the oncology segment. As a result, the segment has become extremely price

competitive, leading to severe price erosion. While we see competition rising in the domestic oncology space with more Indian players and innovators aggressively targeting

the market, we expect the company to maintain its strong presence.

Implementing a differentiated approach for regulated markets – NPL has adopted a differentiated approach to scale up its business in regulated markets. Unlike other generic

players, which typically focus on filing a basket of ANDAs across therapy segments and establish a marketing presence in regulated markets, the company is focusing on

developing niche, difficult to manufacture molecules and has tied up with leading generic players. It is pursuing a de-risked business model wherein it develops and files the

ANDAs and enters into tie-up with bigger and more established generic players, which manage the regulatory/litigation risk and would eventually market the products in the

US. The company has so far filed 21 ANDAs including five on Para IVs basis, of which four are FTFs. It has partnered with leading companies for al l the ANDAs where it has

challenged the innovators. All these tie-ups are currently in the investment phase and could provide significant growth potential in the long-run. However, the potential upside

on these challenges remains exposed to uncertainties related to litigation outcomes, approval timelines and market dynamics (i.e. price erosion, market share etc.)

Focus has shifted away from US Pharmacy business - NPL had identified US pharmacy business as a strategy to build its understanding of the US generics markets. However,

given the operational issues, NPL sold two of its stores and operates only a single store which is owned through a subsidiary in the U.S. In 2010-11, the company generated

revenues of Rs. 111 crore from pharmacy business and incurred a loss of Rs. 1.8 crore as compared to revenues and loss of Rs. 149 crore and Rs.0.02 crore in FY10, respectively.

The company has shifted focus away from the US pharmacy business and does not expect any further investments.

Apart from ANDA programs, NPL’s R&D activities are also focused on developing New Chemical Entities (NCE). At present, the company has two molecules under development.

Both the molecules are being targeted at multiple oncological indications and are initial stages of development. Given the fact that, drug discovery process entails significant

investments in later stages and is also characterised by low success rate, the company plans to out-license the molecules once they generate proof-of-concept data after

completion of Phase II trials.

Page 40: Indian Pharmaceutical Sector

ICRA LIMITED

ORCHID CHEMICALS & PHARMACEUTICALS LIMITED

ICRA Ratings

Shareholding Pattern (%)

Promoters 32.4%

FIIs 11.4%

DIIs 4.5%

Others 51.7%

Price Performance (%) 3M 12M

Orchid 11.6 % -37.6%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement

Bloomberg Code OCP

Market Cap. Rs. 1,260 Crore

Valuations

FY12e FY13e

Price/Earnings 8.0x 6.5x

Price/Sales 0.6x 0.5x

Source: Bloomberg

Not Rated by ICRA

Orchid Chemicals posts consolidated loss of Rs 11.1 crore in Q3; one time forex loss impacts performance Revenue Growth – In Q3FY12, on a consolidated basis, Orchid’s revenues

stood at Rs. 496.9 crore, up by 3.8% on YoY basis and 18.4% on QoQ basis. In

this quarter, Orchid’s revenues continued to witness a healthy growth

mainly driven by the long term supply contracts with MNC clients which

contribute nearly ~40% of the company’s top line. As such, the API business

which contributes over ~70% of the revenues of the company; grew by 7.1%

YoY to Rs.353.3 crore. As for the formulations business, Orchid maintained its

growth momentum aided by key launches in the oral formulations segment;

with the revenues for the formulations business higher by 26.3% at Rs.114.0

crore.

Profitability – During the quarter, Orchid’s EBIDTA on a consolidated basis

was Rs.129.0 crore as against Rs.131.3 crore for the corresponding quarter in

previous year. While the EBIDTA margin was 26.0% as against 27.4% in

Q3FY11. In Q3FY12, the company made a one-time foreign exchange loss of

Rs. 49.0 crore after raising external commercial borrowings of $100 million to

repay foreign currency convertible bonds maturing in February. Higher

interest charges due to the hardening of interest rates coupled with the

exchange loss on outstanding foreign currency loans have impacted the

bottom line of the company. At a consolidated level, the company made a

net loss of Rs.11.1 crore as against a net profit of Rs. 56.6 crore in Q3FY11.

Developments-. Recently in Feb’12, Orchid received USFDA approval for its

ANDA for Levofloxacin tablets (bacterial infections). Also Orchid has

successfully completed in Europe a Phase I trial of its orally administered

PDE4 (phosphodiesterase 4 inhibitor) molecule OCID 2987 positioned for the

treatment of inflammatory disorders.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 478.6 496.9 419.5

Growth (%) - YoY 3.8% 9.9%

OPBDIT 131.3 129.0 105.9

Less: Depreciation 32.2 38.3 36.0

Less: Interest Charges 27.1 49.6 40.1

Other Income 3.0 0.0 0.0

Exceptional Gain/Loss 3.7 -49.1 -86.4

PBT 78.6 -7.9 -56.6

Less: Tax 19.0 3.2 0.0

PAT (Concern Share) 59.6 -11.1 23.4

OPBDIT/OI (%) 27.4% 26.0% 25.2%

PAT/OI (%) 12.4% -2.2% 5.6%

Source: Company Data, ICRA Estimates

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12

Operating Income 327.2 330.9 381.8 478.6 540.0 383.6 419.5

Growth (%) - YoY -16.6% 7.2% 21.4% 32.8% 65.0% 15.9% 9.9%

OPBDIT 223.2 83.8 73.5 131.3 133.2 87.0 105.9

PAT -103.6 21.6 24.0 56.6 63.7 15.5 -56.6

OPBDIT/OI (%) 68.2% 25.3% 19.2% 27.4% 24.7% 22.7% 25.2%

PAT/OI (%) -31.7% 6.5% 6.3% 12.4% 11.8% 4.1% 5.6%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

0100200300400500600700800900

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Page 41: Indian Pharmaceutical Sector

ICRA LIMITED

ORCHID CHEMICALS & PHARMACEUTICALS LIMITED: Business Overview (Page 2 of 2)

Orchid Chemicals & Pharmaceuticals Limited established in 1992 is a vertically integrated pharmaceutical company with presence in bulk drugs manufacturing, formulations,

CRAMS and NDDS. The company is mainly engaged in the manufacturing of APIs and formulations across therapies like as anti-infective, anti-inflammation, cardio vascular,

Nutraceuticals and oral and sterile products for the developed markets of US, Japan and Europe. With exports spanning over 75 countries, nearly 90% of Orchid’s revenues

coming from the overseas markets; as such the contribution from the domestic branded drugs division is relatively small. The company is the largest manufacturer-exporter of

cephalosporin molecule in India and is ranked among the top 5 producers of cephalosporin in the world. It is also among the very few players in the world supplying certain

group of antibiotics like Penicillin and cephalosporin to the regulated markets like Europe and USA.

APIs: Orchid has three API manufacturing sites, two in India (Chennai and Aurangabad) and one in China (joint venture); with the API business contributing ~ 75% of the

revenues in FY11. Cephalosporin contributes nearly one third of the company’s Rs.1, 659 crore total revenue in FY11; thus Orchid is the largest manufacturer-exporter of

cephalosporin molecule in India and is ranked among the top 5 producers of cephalosporin in the world. After the divestment of the injectable business; the company’s

operations are more focused on API business (for niche molecules like cephalosporin, carbapenem and several other non-antibiotics) and oral formulation business of

cephalosporin and non-antibiotics. Hospira contributes around 22% of total sales in FY11, with the majority accruing through limited competition for products such as penems.

Orchid negotiated a 10 year exclusive agreement with Hospira for exclusive supply of Carbapenem API (Meropenem) and other APIs to the company under a ‘cost plus’

arrangement. Orchid has also entered into a 5 year contract with a large Japanese Pharma company to supply Cephalosporin API. The company has various supply agreements

with players in the regulated as well as non-regulated markets which are expected boost the company’s overall growth.

Formulations: In FY’10 Orchid exited its sterile injectable formulation business by transferring it to one of its marketing partners, Hospira Inc. for ~Rs. 1900 crore (US$ 400

million). In order to reduce its debt, Orchid sold its US-FDA approved low cost manufacturing unit which was used to make difficult to replicate niche betalactum injectables.

Currently, Orchid largely depends on its non-antibiotic segment for its formulations presence; with share of formulations business in its total sales being ~ 25% in FY11. Orchid

plans to increase the share of its formulations business by either buying businesses or in-licensing brands in therapies outside antibiotics. It recently acquired Karalex Pharma,

a US-based generic marketing and sales services company; which has been growing at 20% annually. Currently, the company has its presence across therapies like cardio, anti-

diabetic, neuropsychiatry and critical care and for many of these products, Orchid possesses marketing alliances in the US and Europe with prominent players such as Actavis,

North Star and Alvogen. Going forward, In FY12, Orchid plans to incur Rs 200 crore capex for developing niche therapeutic formulations and for which it also plans to set up a

new manufacturing facility at Vishakhapatnam.

Orchid has a strong product pipeline with 43 ANDA filings for the US markets, which include eight PARA IV FTF filings. The break-up of total ANDAs filed is 13 in the

cephalosporin space and 30 in the Non- penicillin, Non-Cephalosporin (NPNC) space. In the EU region, the cumulative count of Marketing Authorizations (MAs) filed stood at

25. The break-up of the total MA filings is 13 in the cephalosporin space and 12 in the NPNC space.

NDDS & NCE: Orchid conducts new drug discovery research at its own centre in Chennai. The Chennai centre is focused on anti-infective, anti-inflammatory and anti-cancer

drugs. All these molecules are in the pre-clinical stage and some of these are expected to enter Phase I soon. Orchid undertakes NCE development through its US JV with Bexel

Pharmaceuticals. The JV is focused on the development of anti- diabetes and anti-obesity molecules. The anti – diabetes molecule BLX-1002 has completed phase II clinical

trials while the remaining drugs are still in preclinical stage.

Page 42: Indian Pharmaceutical Sector

ICRA LIMITED

India20%

Europe14%

CIS5%

Asia Pacific4%

Africa9%

Latin America3%

USA34%

Others11%

RANBAXY LABORATORIES LIMITED

Exhibit: Break-up of Ranbaxy’s CY 11 Revenues

ICRA Ratings

Shareholding Pattern (%)

Promoters 63.7%

FIIs 8.5%

DIIs 11.5%

Others 16.4%

Price Performance (%)

3M 12M

RANBAXY 4.8% -9.1%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code RBXY

Market Cap. Rs. 17,957 Crore

Valuations

CY12e CY13e

Price/Earnings 13.0x 14.9x

Price/Sales 1.6x 1.6x

Source: Bloomberg

Short Term Rating [ICRA]A1+

Lipitor exclusivity drives growth and profitability improvement; $500 million provisioning + forex results in losses

Revenue Growth – Ranbaxy’s Q4 CY11 revenues at Rs. 3,792.3 crore grew by

78% on YoY basis led primarily by sales of Lipitor in the US. Apart from US,

which benefitted from the launch of Lipitor and Caduet, company’s India

formulations business and Africa were the only other two markets which

witnessed growth during the quarter. While the growth in the domestic

market at 8.9% (in CY11) was lower than the industry average owing largely

to higher exposure on the anti-infective segment, the management expects

the market to recover going forward. All other markets either witnessed a

decline or flattish sales (in $ terms) during the quarter. Overall, the growth

is likely to be driven by the US market (led by Lipitor) in the near term as

growth prospects remain relatively subdued in other key markets.

Profitability – Ranbaxy’s Q4 CY11 operating margins at 22.7% were

significantly better on YoY and QoQ basis largely driven by higher proportion

of sales from exclusivity on Lipitor. Given the exclusivity is likely to continue

in Q1 CY12 and part of the next quarter, the company’s margins in the near

term are likely to remain higher than base business margins. For the longer

run, management remains confident on improving its margins profile and

bringing it line with its peers in the next 3-4 years time frame though we

believe that stringent norms of the consent decree, forfeiture of exclusivities

on three FTFs and higher regulatory cost could impede the margin

improvement.

Developments – During the quarter, Ranbaxy entered into a consent decree

with the US FDA (also approved by the District Court) which requires the

company to strengthen procedures for ensuring data integrity in its

applications. The consent decree also requires the company forfeit three of

its FTFs and also pay a hefty fine. As a result, the company provided $500

million towards the same, which coupled with heavy forex losses resulted in

a loss of Rs. 2,982.8 crore at net level.

Q4 CY10 Q4 CY11 Q3 CY11

Operating Income 2,128.8 3,792.3 2,095.5

Growth (%) 78.1% 8.7%

OPBDIT 230.2 860.0 174.1

Less: Depreciation 103.0 168.1 78.8

Less: Interest Charges 14.5 30.4 15.3

Other Income 77.0 163.2 102.0

Exceptional Gain/Loss (211.5) (3,485.9) (362.4)

PBT (4.8) (2,903.4) (431.3)

Less: Tax 88.0 74.7 25.6

PAT (Concern Share) (97.5) (2,982.8) (464.6)

OPBDIT/OI (%) 10.8% 22.7% 8.3%

PAT/OI (%) -4.4% -78.5% -21.8%

Source: Company Data, ICRA Estimates

Q1 CY10 Q2 CY10 Q3 CY10 Q4 CY10* Q1 CY11 Q2 CY11 Q3 CY11

Operating Income 2,761.5 2,150.5 1,934.7 2108.6 2,180.9 2,093.1 2,095.5

Growth (%) - YoY 75.4% 14.4% 2.6% -6.5% -21.0% -2.3% 8.7%

OPBDIT 983.9 416.8 138.6 231.7 403.2 181.7 174.1

PAT 960.6 325.7 307.9 (100.0) 304.4 243.2 (464.6)

OPBDIT/OI (%) 35.6% 19.5% 7.2% 11.0% 18.5% 8.7% 8.3%

PAT/OI (%) 34.9% 15.5% 16.2% -4.4% 14.0% 11.7% -21.8%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore; * Derived from full year financials

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Page 43: Indian Pharmaceutical Sector

ICRA LIMITED

RANBAXY LABORATORIES LIMITED: Business Overview (Page 2 of 2)

Ranbaxy is a leading Indian pharmaceutical company, with a strong international business complementing its leading presence in India. It is one of the leading Indian

companies in the US (with presence supported by a combination of plain vanilla generics and a strong patent challenge pipeline) besides having leading presence in emerging

markets such as Africa and Latin America. The company’s sales mix can be broadly divided into developed markets and emerging markets with latter accounting for 50% of

the turnover in CY11. Ranbaxy is also one of most integrated companies with backward integration into APIs. Among developed markets, United States with revenues of $720

million (or 34% of turnover in CY11) is largest market for the company followed by Europe (at 14%). Among emerging markets, Ranbaxy is among the leading players in the

Indian market with market share in access of ~4.5% and meaningful presence in markets such as Russia, South Africa, Nigeria (in Africa), Brazil & Mexico (in Latin America)

and Romania (in Europe). Among Indian pharmaceutical companies, Ranbaxy is also one of the most diversified companies from geographic standpoint.

US Generics business predominantly influenced by FTF opportunities: After a major upheaval in its U.S. business due to import ban by US FDA and imposition of AIP, the

company’s operations started turning around from Q4 CY09 on back successful monetization of its FTF products, improvement in base business and site transfer for most of

its U.S. operations. Ranbaxy’s revenues started growing with the 180 day exclusive launch of generic Valtrex (Valacyclovir) in November 2009, which continued to favorably

support growth till Q1CY10. In addition to Valacyclovir, the company successfully monetized its other FTFs including the one on Lipitor (in November 2011). Apart from

exclusivity opportunities, the company’s base business have also turned around with market share being maintained on most of the recent launched. Among Indian peers,

Ranbaxy continues to have a healthy pipeline of products, with the cumulative ANDA filings at 205, of which 135 have been approved and 70 pending approval. The recent

consent decree and its restrictions have however resulted in a hefty fine of $500 million, forfeiture of three FTFs and increased adherence on data integrity standards which

are likely impact growth rates and delay the process of transferring manufacturing to India to some extent.

Focused marketing initiatives started showing results but competition intensifies: Among emerging markets, India remains one of the largest and important markets for

Ranbaxy with a turnover of Rs. 1,915.3 crore in CY 2011. With a market share of ~4.5%, Ranbaxy is positioned as the fourth-largest company in the domestic formulation

segment after Abbott India (which after the acquisition of Piramal Healthcare’s formulation business became the largest player), Cipla and Glaxo SmithKline. In India,

Ranbaxy’s business primarily comprises of two business segment – (a) branded generics and (b) – OTC products. In CY 2011, revenues from branded generics stood at $345

million, while OTC business accounted for $67 million. Despite its prominent position in domestic market, Ranbaxy’s formulations business underperformed the industry

growth as well as some its peers. Slower growth in this period is mainly attributed to higher proportion of revenue coming from therapeutic segments such anti-infective,

gastrointestinal, which have been growing at lower than chronic/lifestyle related segments. However recognizing the strong growth prospects of the domestic market, the

company initiated and implemented a project “Viaraat” to strengthen its leadership position in domestic market by increasing field force, expanding presence in tier-2 cities

and reshaping its product strategies. The project has started showing results as evidenced with improvement in growth rates. In terms of market positioning, Ranbaxy

continues to be among the top 3-4 players with leadership position in the anti-biotic segment (market share 9.1%) and strong presence in several other segments such as CVS

(rank 5th), Analgesics (rank 3rd) and Vitamins (rank 5th).

Ranbaxy is well established & diversified presence across other markets: After United States and India, Europe is the third largest market in terms of revenues for Ranbaxy

with 14.0% contribution in CY11. The company generated revenues of $297 million from European markets in CY11, achieving a 11% growth over the previous year. In terms

of diversity, although the company has well established presence across 20+ countries in Europe but it generates majority of its business from U.K., Germany, Romania and

France. Ranbaxy is also well diversified across other emerging markets with strong presence in South Africa, Nigeria, Brazil & Mexico and Romania.

Synergies with Daiichi could generate long-term growth: Post acquisition by Daiichi Sankyo and management change, both Ranbaxy and Daiichi Sankyo are working on a

long-term hybrid business model to explore synergies between the two companies across areas of their expertise right from R&D, manufacturing capabilities and marketing &

distribution network. To begin with, Daiichi Sankyo has started out licensing select branded products from its portfolio to Ranbaxy for launch in markets where Ranbaxy has

strong distribution presence.

Page 44: Indian Pharmaceutical Sector

ICRA LIMITED

India Branded Generics

41%

US Generics39%

International Generics

11%APIs9%

SUN PHARMACEUTICAL INDUSTRIES LIMITED

Exhibit: Trend in Sun Pharma’s (FY11)

Source: Company Data

ICRA Ratings

Shareholding Pattern (%)

Promoters 63.7%

FIIs 19.3%

DIIs 6.3%

Others 10.7%

Price Performance (%)

3M 12M

SUN PHARMA 14.1% 37.0%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code SUNP

Market Cap. Rs. 60,126 Crore

Valuations

FY12e FY13e

Price/Earnings 26.2x 22.8x

Price/Sales 7.9x 6.7x

Source: Bloomberg

Not Rated by ICRA

Taro’s strong operating performance and favourable forex augment profitability

Revenue Growth – Sun Pharma’s Q3 FY12 revenues at Rs. 2,145.1 crore

grew by a strong 37.4% driven by Taro’s strong operating performance and

steady growth across key markets including India and RoW. The company’s

US business which accounts for over 48% of the consolidated turnover was

the leading growth driver, reporting an increase of 47.0% (in $ terms). The

growth was primarily driven by Taro which benefited from increased

selling prices on select products even as overall volumes remained flat.

Taro reported revenues of $148 million, reflecting a growth of 44.0% on

YoY basis. Apart from US, the growth in the India market at 17% (excluding

the discontinuation of third party manufacturing) continued to remain

steady aided by company’s pole position in many of the fast-growing

chronic therapies. With the highest number of ANDA applications pending

approval, potential Para IVs and niche opportunities, Sun Pharma is well

placed to witness steady growth in the medium. Additionally, its strong

position in the domestic market and focus on emerging markets are also

likely to add to the growth momentum.

Profitability – The company’s OPBDIT margins at 44.9% in Q3 FY12

improved sharply on both sequentially and on YoY basis largely driven by

higher margins in Taro (50.3% in Q3 FY12) and inventory translation gains.

With $62 million in net profits, Taro was the principal contributor to the

91% growth in Sun Pharma’s net profit of Rs. 668.3 crore. With sharp

improvement in profitability largely coming in from price increases in

select products in the US and favourable currency movement, the impact

of this may not be sustainable going forward and earnings may return to

base level going forward barring the impact of one-off gains on

exclusivities.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 1,561.7 2,145.1 1,894.6

Growth (%) 37.4% 13.2%

OPBDIT 440.5 963.8 784.0

Less: Depreciation 80.5 77.4 66.8

Less: Net Interest (32.2) (59.1) (41.7)

Other Income 25.8 (86.3) 76.5

Exceptional Gain/Loss - - -

PBT 418.1 859.1 835.5

Less: Tax 54.5 63.4 128.1

PAT (Concern Share) 350.2 668.3 597.7

OPBDIT/OI (%) 28.2% 44.9% 41.4%

PAT/OI (%) 22.4% 31.2% 31.5%

Source: Company Data, ICRA Estimates

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY11 Q2 FY12

Operating Income 1,080.1 1,365.1 1,370.1 1,561.7 1,463.3 1,635.7 1,894.6

Growth (%) – YoY -4.8% 77.7% 15.6% 56.8% 35.5% 19.8% 38.3%

OPBDIT 418.5 616.0 467.0 440.5 443.6 547.4 784.0

PAT 394.5 564.3 503.7 350.2 442.8 501.0 597.7

OPBIT/OI (%) 38.7% 45.1% 34.1% 28.2% 30.3% 33.5% 41.4%

PAT/OI (%) 36.5% 41.3% 36.8% 22.4% 30.3% 30.6% 31.5%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore;

Source: Company Data

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Page 45: Indian Pharmaceutical Sector

ICRA LIMITED

SUN PHARMACEUTICAL INDUSTRIES LIMITED: Business Overview (Page 2 of 2)

Key Highlights from Q3 FY12 Conference Call Sun Pharma’s domestic formulations business grew by 14.0% in Q3 FY12 driven by steady growth in key therapeutic segment; adjusted for the discontinuation of the

contract manufacturing business, growth rate stands at ~17% in Q3; during the quarter, the company launched six new products and ended the CY with 4.5% market

share (as per AIOCD)

Strong performance during the quarter was supported by Taro’s continued strong numbers; with net sales of $148 million and net profit of $62 million, Taro

contributed substantially to company’s overall performance; as per the management, the performance was driven principally by increased selling prices on select

products in the US market even as the overall volumes were flat; during the quarter, the company filed only one ANDA and received approvals for three products;

cumulative ANDA list stands at 389 products (including Taro’s) with 241 approved and 148 awaiting approvals

The company’s formulations business in ROW markets grew by 44% (and 33% in constant currency terms) during the quarter; management remains upbeat on growth

prospects in emerging markets

R&D expenditure in 9m FY12 at Rs. 310 crore (5.5% of sales) was marginally below company’s guidance; capex for FY12 was expected to be around Rs. 400 crore

The company booked a net forex loss of Rs. 86 crore (clubbed under other income)

The company reiterated its plans of strengthening its presence in the US generics and other attractive emerging markets through in-organic opportunities; with $1

billion in revenues, it is comfortably positioned to fund acquisitions however they are no set financial parameters being pursued in this regard

Business Overview

Sun Pharma (Sun) is a leading Indian pharmaceutical company engaged in developing, manufacturing and marketing formulations and APIs. Its business is broadly categorized in

four segments – India Branded Generics, US Formulations, International Generics and APIs. The company has strong branded generics business in India, which accounts for 41%

of the consolidated turnover. In the domestic market, Sun has market leadership in as much as seven therapy segment largely in the fast-growing chronic segments. As on

December 2011, the company held a market share of 4.5% (as per AIOCD data) in the Indian formulations market. Over the past five years, the company’s revenues growth at a

CAGR of 19.1% ahead of the underlying market growth. Higher than industry average growth has been aided by company’s strong focus on fast-growing chronic therapeutic

segments, its focused field force catering to specialist doctors and other initiatives such as in licensing of branded products. To pursue growth opportunities in the anti-diabetic

segment, the company has recently entered into a JV with Merck to co-market Merck’s diabetes drugs – sitagliptin and sitagliptin plus metformin.

Apart from India, U.S. is the second most important market for Sun, contributing 39% to revenues. Driven by acquisitions, ramp-up in ANDAs pipeline and Para IV opportunities,

U.S. has been key growth driver for the company with 44% CAGR growth in revenues. In Sept. 2010, Sun acquired Taro Pharmaceuticals, an Israeli based generic pharmaceutical

company with the objective to strengthen presence in the US generics space. The acquisition of both Caraco and Taro has allowed the company to diversified its presence across

therapy areas and emerge as a strong player in the U.S. market. As on December 2011, the company had 389 ANDA filings with 148 pending approval.

Apart from India and US, Sun is looking to enhance its presence in other markets especially Europe, Latin America, Russia and CIS. At present, these markets, collectively account

for 11% of company’s turnover and have grown at a CAGR of 34.1% over the past five years (FY06-11). Going forward, the company aims to strengthen its presence in these

markets through focus on chronic segments and differentiated (i.e. non-orals, controlled released substances etc.) products. In line with recent trends, Sun has also entered into

a JV with Merck to market branded generics in emerging markets. Sun is expected to develop and manufacturing, while Merck would leverage on its regulatory and marketing

expertise. Despite volatility in earnings, Sun maintains one of the strongest margins profile and robust balance sheet among Indian peers. With sizeable cash reserves, company

is well positioned to pursue in-organic investments and support its R&D pipeline to target the emerging complex generics opportunities in developed markets. Delay in

resolution at Caraco and a potential damages pertaining to the ongoing litigation over Protonix are key sensitivities to company’s earnings profile over the medium, which is

characterized by strong US generics pipeline and strengthening position in the US as well other emerging markets by virtue of its acquisition of Taro Pharma and JV with Merck.

Page 46: Indian Pharmaceutical Sector

ICRA LIMITED

TORRENT PHARMACEUTICALS LIMITED

ICRA Ratings

Shareholding Pattern (%)

Promoters 71.5%

FIIs 5.3%

DIIs 11.8%

Others 11.3%

Price Performance (%)

3M 12M

Torrent 7.9% 18.2%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement Bloomberg Code TRP

Market Cap. Rs. 5,110 Crore

Valuations

FY12e FY13e

Price/Earnings 14.8x 12.6x

Price/Sales 1.9x 1.7x

Source: Bloomberg

Long Term [ICRA]AA

Short Term [ICRA]A1+

Outlook Positive

Revenue growth driven by international operations; revival of domestic business remains key

Revenue Growth – TPL’s operating income grew by 20.6% on a YoY basis in

Q3 FY12 to Rs. 696.6 crore driven primarily by robust growth of 33% from

international operations, partially aided by favourable currency movement.

The sales growth was, however, moderated by the subdued performance

(8% YoY growth) of the domestic formulations business primarily due to

relatively low performance in the acute therapy segment on account of

increasing competitive pressures. Nonetheless, the management has guided

to a sharp recovery in domestic revenues in the coming quarters led by

improved product focus through 15% expansion in field force to 3,000

medical representatives. US and Brazil markets are the key contributors to

the growth in international business. While US operations witnessed a

revenue growth of 67% YoY (50% in constant currency terms) led by the

launch of Donepezil ODT, the 27% YoY (19% in constant currency terms)

growth in Brazilian operations was facilitated by increased contribution from

new product launches. TPL plans to launch three-four new products in Brazil

in the coming two quarters, which should further enhance its growth.

Profitability – TPL’s EBITDA margin at 17.4% in Q3 FY12 witnessed a decline

of 247 bps on YoY basis led by forex loss of Rs. 18 crore compared to a forex

gain of Rs. 7 crore in Q3 FY11. The lower DEPB benefits further impacted the

OPBDITA margin to the extent of 1%. However, the same was moderated to

a certain extent by reduced interest expenses on account of replacement of

high-cost rupee loans as well as higher returns on surplus funds.

Developments – TPL has filed three ANDAs in US taking the cumulative

count to 65, of which 34 have been approved till date. The company has also

announced a capex plan of Rs. 200-250 crore for FY13 for API and

formulation capacity expansion at Dahej SEZ.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 577.5 696.6 683.3

Growth (%) - YoY 20.6% 17.5%

OPBDIT 115.0 121.5 140.7

Less: Depreciation 16.1 19.7 20.1

Less: Interest Charges 3.5 0.2 2.9

Other Income 1.8 2.3 4.3

Exceptional Gain/Loss - - -

PBT 97.2 104.0 121.9

Less: Tax 20.3 20.1 21.2

PAT (Concern Share) 76.9 83.2 100.0

OPBDIT/OI (%) 19.9% 17.4% 20.6%

PAT/OI (%) 13.3% 11.9% 14.6%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12

Operating Income 475.3 541.0 581.5 577.5 536.4 647.5 683.3

Growth (%) - YoY 17.4% 12.5% 21.2% 20.3% 10.8% 19.7% 17.5%

OPBDIT 96.9 112.1 117.5 115.0 64.6 153.1 140.7

PAT 59.1 74.2 76.2 76.9 42.8 102.5 100.0

OPBDIT/OI (%) 20.4% 20.7% 20.2% 19.9% 12.3% 23.6% 20.6%

PAT/OI (%) 12.4% 13.7% 13.1% 13.3% 8.1% 15.8% 14.6%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

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Page 47: Indian Pharmaceutical Sector

ICRA LIMITED

TORRENT PHARMACEUTICALS LIMITED: Business Overview (Page 2 of 2)

With presence across Indian formulations (comprising branded formulations sold in the Indian market), international formulations (comprising sales outside India of branded

and unbranded generic formulations) and contract manufacturing, Torrent Pharmaceuticals Limited (TPL) is one of the leading pharmaceutical companies having presence in

Indian and global markets. The company’s current international operations are focused on five thrust areas – Brazil & Latin America, Europe, Russia & CIS countries, North

America and Rest of World (ROW) comprising less regulated markets of Africa and Asia. TPL is currently working on several in-house NCE projects within the areas of diabetes

and its related complications, metabolic and CVS disorders, ischemic diseases and neuropathic pain. The company has cumulatively filed 445 patents for NCEs in all major

markets worldwide, of which 207 patents have been granted so far.

Domestic Formulations: Ranked 18th

by turnover in the domestic formulations market, TPL is a strong player in the domestic market with strong presence in the fast growing

lifestyle related therapeutic segments of CVS and CNS, having 6 brands in the top 300 brands and 36 brands in leadership positions in their respective molecule segments. The

company is ranked No. 2 in the CVS segment and No. 3 in Neuro-psychiatry therapies with a market share of 6.2% and 7.6%, respectively, in FY11. Cardiology continues to

remain the main therapeutic segment for the company, followed by neuro-psychiatry and gastroenterology segments. However, revenue growth for the company, which was

mainly driven by the anti-infective and gastro segments in the past, has been impacted in 9m FY12 owing to increased competitive pressures. Going forward, the company’s

increased marketing efforts, entry into tier II to VI cities and foray into new therapeutic areas of Gynaecology are expected to drive growth. The company also has plans to enter

the infertility market in the future.

Brazilian Branded Formulations: Brazil is the largest contributor to TPL’s revenues from international markets. TPL has a basket of 27 products comprising 11 products in the

CVS segment, 11 products in the CNS segment and 5 products in the Oral Anti Diabetic segment. TPL is one of the leading Indian branded generic players in the Brazilian market

enjoying a market share of 6.8% in the covered market. The company has 31 products under approval and 6 products are expected to be approved during the current fiscal.

Going forward, the company plans launching new products in the CNS and CVS segments to augment growth. With the company already having invested to develop the required

infrastructure including product development, increase in sales is expected to result in higher operating profitability for the Brazilian operations. The company is looking to

launch 3-4 new products in the next two quarters and a total of 35-40 new products by FY15.

U.S. Formulations: TPL forayed into the US market in FY04 through incorporation of a wholly-owned subsidiary and is one of the late entrants in the US generics market.

However, it is currently the largest supplier of Citalopram (anti-depressant) and the second largest supplier of Zolpidem (anti-convulsant) in the US market. The company has 34

ANDA approvals and its pipeline consists of 31 pending approvals. With the company having started realizing the benefits of its investments in the US market, the US business is

expected to contribute to the growth of TPL’s international business in a significant way, with breakeven expected by FY13.

Germany Formulations: Sales have been driven by continuing traction in the non-tender sales as also recent wins in the tender business. TPL’s German subsidiary (Heumann

operations) was successful in obtaining tender awards announced by various health insurance funds during FY11, which constituted 56% of total sales. 15 new products are

proposed to be launched during the current fiscal, thereby successfully servicing the increased demand from the tender business.

Contract Manufacturing: A major portion of TPL’s contract manufacturing operations is derived from manufacture of human insulin for Novo Nordisk, Denmark, for their India

market needs. The company has entered into product out-licensing and supply contracts with three global pharma players, one of them being AstraZenca, which is expected to

start contributing materially from H2 FY13 onwards.

Page 48: Indian Pharmaceutical Sector

ICRA LIMITED

UNICHEM LABORATORIES LIMITED

ICRA Ratings

Shareholding Pattern (%)

Promoters 49.2%

FIIs 4.9%

DIIs 9.5%

Others 36.3%

Price Performance (%) 3M 12M

Unichem 30.0% -23.0%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement

Bloomberg Code UL

Market Cap. Rs. 1,221 Crore

Valuations

FY12e FY13e

Price/Earnings 15.3x 10.8x

Price/Sales 1.4x 1.2x

Source: Bloomberg

Short Term [ICRA]A1+

Margin pressure to continue in the domestic formulations business; net profit declines

Revenue Growth – In Q3 FY12, Unichem’s revenues grew by 12.7% YoY to

Rs.222.6 crore mainly driven by the export formulations business which

witnessed a robust growth of 83.8% aided by the commencement of CRAMS

contract with a U.S. MNC for 3 products and strong demand for APIs.

However, the domestic formulations business; which is the main business

segment; continued to be under pressure as revenues declined by 6.1% on

YoY basis led by restructuring in the distribution channel and growth erosion

in top brands. Among the top 10 brands of the company, 6 brands reported a

negative YoY growth. The ongoing shift in the inventory rationalization

efforts at the distributor level would continue to drag the sales for next 2-3

quarters before the business stabilizes. On a consolidated basis, the major

subsidiary of Unichem, Niche Generics U.K continued to report losses at PAT

level and the breakeven is still some time away.

Profitability –Unichem’s EBITDA margins continued to be under pressure as

it fell by 344 bps YoY basis to 16.5% due to decline in sales from high margin

domestic formulations business, increase in overhead costs and

commissioning of new manufacturing facilities at Sikkim and Baddi.

However, on QoQ basis, EBIDTA margins expanded by 120 bps on the back of

depreciation of rupee vis-a vis other currencies. The net profit for Q3 FY12

stood at Rs.24.5 crore lower by 4% compared to corresponding quarter

previous year.

Developments – The Company has signed a contract with a US customer to

supply formulations from the Ghaziabad plant. This may generate revenue of

Rs.100 crore in FY13. Company has also filed 2 ANDA in US in Q3 FY12, taking

the cumulative filings to 23 ANDA with 11 approvals. The company is

planning a capex spend of Rs. 40 crore in Q4FY12 and Rs. 100 crore in FY13.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 197.1 222.6 198.8

Growth (%)-YoY 12.9% -1.6%

OPBDIT 39.4 36.8 30.5

Less: Depreciation 6.9 6.7 6.9

Less: Interest Charges 0.2 0.4 0.2

Other Income 1.3 2.1 26.0

Exceptional Gain/Loss 0.0 0.0 0.0

PBT 33.6 31.8 26.0

Less: Tax 8.0 7.3 6.9

PAT (Concern Share) 25.6 24.5 19.1

OPBDIT/OI (%) 20.0% 16.5% 15.3%

PAT/OI (%) 13.0% 11.0% 9.6%

Source: Company Data, ICRA Estimates

Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12

Operating Income 173.8 187.5 202.0 197.1 178.1 188.7 198.8

Growth (%) - YoY 18.8% 10.7% 15.7% 14.1% 2.4% 0.7% -1.6%

OPBDIT 41.5 48.2 49.6 39.4 23.6 26.9 30.5

PAT 33.9 33.3 34.7 25.6 14.8 15.6 19.1

OPBDIT/OI (%) 23.9% 25.7% 24.5% 20.0% 13.3% 14.3% 15.3%

PAT/OI (%) 19.5% 17.8% 17.2% 13.0% 8.3% 8.3% 9.6%

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

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Page 49: Indian Pharmaceutical Sector

ICRA LIMITED

UNICHEM LABORATORIES LIMITED: Business Overview (Page 2 of 2)

Unichem Laboratories Limited (Unichem) is an integrated pharmaceutical company with presence across research, manufacturing and marketing of formulations and APIs. The

company’s business mix can be broadly divided into two segments – formulations (accounts for 90.5% of Unichem’s revenues in FY 2011) and APIs (9.5%). Unichem is

positioned as a domestic formulations company with focus towards high margin lifestyle related therapeutic segments. The company is also present in the bulk drug business

largely meant for exports, though the scale of operations in bulk drugs presently remains relatively small. Unichem has presence in over 20 countries across the five continents

with four wholly owned subsidiaries in UK, USA, Brazil & South Africa. Apart from this, the Company has a network of distribution and marketing alliances in the CIS, Nepal,

South-East Asian region, Europe and Latin America.

Domestic Formulations: Unichem’s product portfolio is dominated by its flagship brand groups namely Ampoxin (anti-infective), Losar (CVS), Telsar (CVS) and Trika (CNS).

Presently five Unichem brands feature among the top 300 Indian pharmaceutical brands and out of which three brands are in the top 100 namely Ampoxin (Rank 60th),

Losar‐H (Rank 72nd) and Losar (Rank 81st). A majority of Unichem’s domestic formulation revenues are derived from chronic therapies namely CVS and CNS which together

accounted for ~59% of overall revenues. These segments also offer higher pricing flexibility given the limited competition as compared to more mature segments such as

antibiotics and anti-TB. Cardiology continues to be the thrust segment for the Company and has contributed ~46% of the domestic formulations sales. However, going forward

Unichem could be impacted by the price controls with major molecules in the CVS segment falling under NPPP 2011. At present, nearly 20% of Unichem’s domestic portfolio

(in value terms) falls under the purview of DPCO. As such, the new avenues for growth identified by Unichem are in the segments of hospital products, women health,

ophthalmology and nutritionals.

In the last 2 years, Unichem undertook a series of restructuring measures which included sales force realignment and strengthening of its second tier power brands like

TELSAR and OLSAR to reduce its dependence on its flagship brands. It is also in the midst of shifting in its distribution channel to lower its dependence on distributors and is

attempting to route sales primarily through C&F agents, in line with the practices followed by its peers. Currently, the company has field force strength of ~1800 personnel

and faces issues of higher attrition rate (~30%) than industry standards and subdued sales force productivity. All these factors combined have impacted Unichem’s domestic

formulations sales in the recent months.

Export Formulations: Unichem’s international presence is primarily targeted towards regulated markets namely US and Europe. The company had entered the European

markets through the acquisition of Niche Generics Limited (NGL) in 2002. However, in recent times, a number of European governments have proposed or implemented

austerity measures aimed at reducing healthcare spending, including cost-controls for various drugs, as they seek to repair their fiscal deficits. These measures have severely

restricted the pricing power of pharmaceutical companies in Europe. Unichem has been a relatively late entrant into the US generic market and has till date filed 17 ANDAs of

which 10 have been approved. The company has so far launched five of the approved products in the US. Unlike some of the larger domestic peers; the company has been

fairly conservative in terms of ANDA filings and mainly focuses on targeting Para III filings (wherein the patent has already expired) thereby limiting any chances of litigation

from the innovator company. The company currently has formulation plants in Goa, Baddi, Ghaziabad and Sikkim of which the Goa and the Ghaziabad plants are USFDA

approved.

APIs: Unichem’s API manufacturing facilities are located at Roha and Pithampur with most of the supplies being used for captive consumption; as such the third party API sales

contributed only 9% of total sales in FY11. The company is now looking to further increase its API presence in the regulated markets through supply of niche APIs to global

generic players and expanding its presence in contract manufacturing for APIs and intermediates. Currently, the company predominantly supplies APIs for lifestyle, anti

asthmatic and anti ulcerative segments.

Page 50: Indian Pharmaceutical Sector

ICRA LIMITED

ICRA Limited An Associate of Moody's Investors Service

CORPORATE OFFICE

Building No. 8, 2nd

Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002

Tel: +91 124 4545300; Fax: +91 124 4545350

Email: [email protected], Website: www.icra.in

REGISTERED OFFICE

1105, Kailash Building, 11th

Floor; 26 Kasturba Gandhi Marg; New Delhi 110001

Tel: +91 11 23357940-50; Fax: +91 11 23357014

Branches: Mumbai: Tel.: + (91 22) 24331046/53/62/74/86/87, Fax: + (91 22) 2433 1390 Chennai: Tel + (91 44) 2434 0043/9659/8080, 2433 0724/ 3293/3294,

Fax + (91 44) 2434 3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049

Fax + (91 80) 559 4065 Ahmedabad: Tel + (91 79) 2658 4924/5049/2008, Fax + (91 79) 2658 4924 Hyderabad: Tel +(91 40) 2373 5061/7251, Fax + (91 40) 2373

5152 Pune: Tel + (91 20) 2552 0194/95/96, Fax + (91 20) 553 9231

© Copyright, 2011 ICRA Limited. All Rights Reserved.

Contents may be used freely with due acknowledgement to ICRA.

All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the

information herein is true, such information is provided 'as is' without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied,

as to the accuracy, timeliness or completeness of any such information. All information contained herein must be construed solely as statements of opinion, and ICRA shall not

be liable for any losses incurred by users from any use of this publication or its contents.


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