Indian Pharmaceuticals
‘Down, but not out’
January 2016
DR HARITH AHAMED [email protected] +91 44 4344 0052
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Page 1
Pharmaceuticals – Initiating Coverage Sector Outlook
NEUTRAL
Index performance
1m 3m 12m
Sensex 0% 0% -5%
BSE HC 4% -5% 16%
Date 4 JAN 2016
Market Data
SENSEX 26161
Nifty 7963
BSETHC 16852
Relative performance
Find Spark Research on Bloomberg (SPAK <go>),
Thomson First Call, Reuters Knowledge and Factset
Initiating Coverage
DR HARITH AHAMED [email protected] +91 44 4344 0052
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Recent USFDA actions on Indian companies for CGMP violations including Warning Letters for Sun, Dr Reddy's
and Cadila have raised concerns on sustainability of growth in the largest market for Indian pharmaceutical
companies. In the last two years, adverse outcomes in FDA audits have led to delays in approvals for key
products, impacting growth for several players. Going forward, we expect companies to step up to the challenge.
Leading players have raised the focus on CGMP practices and are roping in 3rd party consultants to oversee
their quality systems. Companies are investing in new facilities with the objective of diversifying key products
and filings across their manufacturing network. We also see increasing sourcing from 3rd party manufacturers
and CMOs, thereby de-risking key products from outcomes in FDA audits. Post the patent cliff, top Indian
players had acknowledged challenges to sustaining growth and had initiated transformational steps requiring
significant operational and financial resources. Sun’s acquisition of Ranbaxy, initiatives in branded segments,
Lupin’s forays into new segments such as injectables, inhalers and dermatology and Dr Reddy’s investments in
complex generics and biosimilars are examples. In the long-term, we believe the prospects for the sector are
more linked to success or failure in these transformational initiatives.
Initiating coverage on Aurobindo, Dr Reddy’s, Lupin and Sun: Aurobindo’s (BUY) backward-integrated business
model and manufacturing scale are underappreciated strengths and we expect the recent approval momentum in the US
to translate to significant earnings momentum. For Dr Reddy’s (ADD), we believe the risk of Import Alert (IA),
uncertainties around product launches and protracted resolution timelines should weigh on the stock in the near-to-
medium term. We believe Lupin’s (REDUCE) dependence on price increase driven upsides (gFortamet and gGlumetza)
and an unknown pipeline (Gavis) exposes the company to significant execution risks. We are positive on Sun (BUY) on
the back of our expectation for a quick resolution of the Warning Letter (WL) for Halol facility and the company’s initiatives
in US branded segments (ophthalmology and dermatology)
Key industry findings: In recent years, USFDA has stepped up inspections at non-US drug manufacturing facilities. For
instance, in 2015, USFDA inspected 240 drug facilities in India, ~2.5 times the number of facilities inspected in 2010.
Currently, India accounts for 29% and 36% of non-US API and formulations facilities, respectively. We note an increase in
the Indian share of CGMP WLs recently and an increase in the time interval between inspections and issuance of WLs
(as seen in WLs to Sun, Dr Reddy’s and Cadila). We see a rising trend of data integrity issues in WLs in recent years. We
also observed a rising correlation between data integrity issues and IAs. Imposition of IAs after the issuance of WLs was
noticed only in 25% of active IAs. This implies the probability of WLs for Sun, Dr Reddy’s and Cadila converting to IAs is
low. However, we do not rule out the possibility completely, especially in the case of Dr Reddy’s given the data integrity
related observations
Stock calls: ARBP (BUY, TP - Rs. 1056), BIOS (BUY, TP – Rs. 581), CDH (ADD, TP – Rs. 352), DIVI (SELL, TP – Rs.
1031), DRRD (ADD, TP – Rs. 3328), GRAN (ADD, TP – Rs. 157), LPC (REDUCE, TP – Rs. 1763), SUNP (BUY, TP –
Rs. 910), SYNG (ADD, TP – Rs. 438), TRP (BUY, TP – Rs. 1635)
‘Down, but not out’
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Page 2
Pharmaceuticals – Initiating Coverage Sector Outlook
NEUTRAL
Summary of financials
Source: Company data, Spark Capital Research
Financial Summary
CompanyRevenues EBITDA Adj. PAT Adj. EPS
FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E
ARBP 121,205 140,932 165,482 187,464 25,636 32,384 41,017 48,243 16,354 20,673 26,042 30,829 28.0 35.4 44.6 52.8
BIOS 30,898 34,730 39,026 44,834 6,958 8,390 9,539 11,482 4,081 4,589 4,931 5,599 20.4 22.9 24.7 28.0
CDH 86,513 99,522 110,868 129,390 17,557 23,162 24,457 29,401 11,506 14,577 16,389 20,004 11.2 14.2 16.0 19.5
DIVI 31,150 37,184 42,350 49,036 11,653 13,984 15,979 18,511 8,516 10,691 11,842 13,684 32.1 40.3 44.6 51.5
DRRD 148,189 160,649 176,395 199,094 33,469 41,262 42,976 50,321 22,179 25,607 27,157 31,606 129.8 149.8 158.9 184.9
GRAN 12,929 15,421 18,698 22,158 2,086 2,650 3,394 4,263 909 1,191 1,641 2,232 4.5 5.8 7.2 9.8
LPC 127,700 137,059 176,109 205,201 36,196 34,471 49,236 55,705 24,032 22,747 31,872 36,205 53.2 50.4 70.6 80.2
SUNP 274,334 283,270 329,624 375,347 80,636 86,706 114,290 132,754 47,784 53,245 72,220 86,746 19.9 22.1 30.0 36.1
SYNG 8,599 10,775 12,939 15,607 2,811 3,540 4,351 5,361 1,750 2,215 2,776 3,505 8.9 11.1 13.9 17.5
TRP 46,535 71,043 71,343 77,499 10,202 26,007 17,860 19,874 7,509 15,893 11,996 13,831 44.4 93.9 70.9 81.7
P/E EV/EBITDA RoCE CMP
(Rs.)
MCap
(Rs.mn)
Target
Price
(Rs.)
RatingFY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E
ARBP 31.5 24.9 19.8 16.7 21.6 17.1 13.5 11.5 19.9% 20.6% 22.1% 22.4% 881 514,706 1,056 BUY
BIOS 25.4 22.6 21.0 18.5 15.0 12.4 10.9 9.1 10.1% 8.7% 10.7% 11.4% 518 103,620 581 BUY
CDH 29.6 23.4 20.8 17.0 20.3 15.4 14.6 12.1 18.9% 21.0% 21.5% 23.5% 333 340,599 352 ADD
DIVI 36.2 28.9 26.1 22.6 25.6 21.4 18.7 16.1 26.2% 27.7% 25.9% 25.5% 1,163 308,607 1,031 SELL
DRRD 24.0 20.8 19.6 16.8 15.6 12.6 12.1 10.4 15.9% 16.6% 15.5% 16.0% 3,109 530,127 3,328 ADD
GRAN 33.8 25.8 20.8 15.3 17.3 13.6 10.6 8.5 14.4% 15.1% 16.2% 18.3% 151 31,496 157 ADD
LPC 34.7 36.6 26.2 23.0 24.5 25.7 18.0 15.9 28.7% 17.6% 18.7% 19.8% 1,845 831,278 1,763 REDUCE
SUNP 41.1 36.9 27.2 22.6 24.1 22.4 17.0 14.6 20.9% 17.5% 20.4% 21.3% 816 1,962,708 910 BUY
SYNG 47.0 37.7 30.1 23.8 29.1 23.1 18.8 15.3 20.2% 22.1% 24.7% 27.2% 418 83,540 438 ADD
TRP 33.3 15.7 20.9 18.1 25.6 10.1 14.7 13.2 22.4% 30.5% 21.5% 23.3% 1,479 250,251 1,635 BUY
Page 3
Industry Analysis
Page 4
Industry Analysis
Increasing number of inspections per year at non-US drug facilities
Source: FDAzilla, Spark Capital Research; *YTD Dec 18, 2015; **Non-US includes the major
drug importers into the US - UK, Japan, Italy, India, Germany, France, China and Canada
USFDA’s drug inspections in India
Source: FDAzilla, Spark Capital Research; *YTD Dec 18, 2015
Types of FDA inspections at drug facilities
Source: FDAzilla, Spark Capital Research
Rising trend of FDA inspections at non-US drug facilities
According to FDAzilla, there are 3 types of drug facility inspections:
− Pre-Approval Inspections (PAI): The purpose of a PAI is to verify the
raw data included in drug filings and to confirm that the facility is
capable of manufacturing the drug (correct scale qualified equipment,
process validation, etc.)
− Routine GMP inspections: Periodically (every 2-3 years generally) the
FDA performs an unannounced GMP inspection for manufacturers who
import drugs into the US
− ‘For-cause’ inspections: Usually based on a Field Alert Report (FAR),
product recalls or other adverse events. These inspections are usually
focused on the particular event
Inspection of Indian drug facilities – rising trend
Source: FDAzilla, Spark Capital Research
The non-US number of inspections is based on FDAzilla data for the top-8
importers of drugs into the US – UK, Japan, Italy, India, Germany, France,
China and Canada
From 2006 to 2015, the number of inspections per year at US drug
facilities declined 16% while the number of inspections per-year at non-
US facilities increased 220%
As per data from FDAzilla, USFDA inspected 240 drug facilities in India in
2015, ~2.5x the number of facilities inspected in 2010
The increase in the number of inspections per year on Indian drug
facilities is in-line with FDA’s greater focus on facilities across all non-US
locations
2,097 1,976 1,994 2,096 2,365 2,390
2,169 1,857 1,845 1,758
206 289 306 461
402 495 555
512 706 660
500
1,000
1,500
2,000
2,500
3,000
CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15*
US Non-US**
38
7696
134108
149178
163
201
240
CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15*
USFDA inspections on Indian drug facilities
Page 5
Industry Analysis
FDA Form 483 – often the first sign of trouble!
~2/3rd of Indian inspections resulted in Form 483s*
Source: FDAzilla, Spark Capital Research; *data for 2015
FDA Form 483 – often the first sign of trouble!
Source: USFDA, Spark Capital Research
An FDA Form 483 is issued to a firm’s management at the conclusion of
an inspection when an investigator observes any conditions that may
constitute violations of the Food, Drug and Cosmetic (FD&C) Act
At the conclusion of an inspection, the FDA Form 483 is presented and
discussed with the company’s senior management. Companies are
expected to respond to the FDA Form 483 in writing with their corrective
action plan and then implement the corrective action plan
The FDA Form 483 is considered, along with a written report called an
Establishment Inspection Report (EIR), all evidence or documentation
collected on-site, and any responses made by the company, before the
Agency determines further action on the facility
The number of Form 483s issued (for drug facilities) by the FDA has
remained more or less flat over the past several years, in-line with the
flat trend of total drug facility inspections (US + non-US)
Duration of inspection*
Source: FDAzilla, Spark Capital Research; *data for 2015
Top 10 observation types accounted for 36%
Source: USFDA, Spark Capital Research
Number of Form 483s for drug facilities has remained flat*
Source: USFDA, Spark Capital Research; *FY-ending September
Form 483s -issued61%
Form 483s -
not issued39%
<5 days25%
5-10 days70%
>10 days5%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
No. of 483s issued 649 572 498 594 746 758 787 690 645
Total no. of observations 3,503 3,388 2,702 3,326 3,797 4,105 3,828 3,527 2,997
Observations per 483 5.4 5.9 5.4 5.6 5.1 5.4 4.9 5.1 4.6
No. of observation types 221 223 210 227 219 223 235 246 239
Type of Observations FY06 FY10 FY14
Documentation of investigations findings 6.6% 6.6% 7.0%
Quality Control unit’s responsibilities 3.6% 4.3% 4.8%
Laboratory controls 2.4% 2.5% 3.6%
Procedures for sterile drug products 1.1% 1.3% 3.6%
Procedures for product & process control 4.0% 3.8% 3.5%
Inadequate training 3.3% 4.5% 3.2%
Validation of manufacturing performance 3.5% 3.0% 2.5%
Complaint handling procedures 3.1% 2.6% 2.5%
Written stability testing procedure 2.2% 2.3% 2.4%
SOPs for equipment maintenance 1.5% 2.1% 2.4%
Page 6
Industry Analysis
12 12 19 26 2615 17
48
75
23
3021
29 19
FY09 FY10 FY11 FY12 FY13 FY14 FY15
CGMP WLs Other WLs
NAI, 146, 33%
OAI, 37, 8%
VAI, 260, 59%
OAI status, often a precursor for Warning Letters and Import Alerts
OAI status for 8% of inspections in 2010-2014*
Source: USFDA, Spark Capital Research; *of the 443 GMP
inspections on Indian pharmaceutical manufacturing facilities
for which FDA has disclosed the final inspection classification
WLs issued by CDER for non-US facilities*
Source: USFDA, Spark Capital Research; *FY-ending Sep
WLs issued by CDER in FY09-FY14*
Source: USFDA, Spark Capital Research; *FY-ending Sep
OAI status is often precursor for WLs and IAs
Source: USFDA, Spark Capital Research
• Warning Letters for US drug facilities are
issued by FDA’s District Officers while
WLs for non-US drug facilities are issued
by CDER headquarters
• Our focus is on WLs which were issued for
CGMP violations. For instance, of the 44
WLs issued by CDER headquarters (for
non-US facilities) in FY14, 15 were for
CGMP violations
• In the period FY09-FY15, CGMP WLs
accounted for 127 out of the total 372 WLs
issued for non-US drug facilities
• After reviewing a firm’s response to the
Form 483, FDA classifies each inspection
into NAI (No Action Initiated), VAI
(Voluntary Action Initiated) and OAI
(Official Action Initiated)
• OAI status implies that that the facility will
require re-inspection before being
compliant again. OAI status is also a
precursor for further escalation, as seen in
recent WLs to Sun and Dr Reddy’s
• Of the 443 GMP inspections on Indian
pharmaceutical manufacturing facilities in
2010-2014 for which FDA has disclosed
the final inspection classification, 37 (8%)
were classified as OAI
WL + IA, 15, 40%
WL, 14, 38%
IA, 4, 11%
No escalation, 4, 11%
~90% of OAIs escalated
into WLs or IAs
6087
42 56 47 44
52
84
66 3939 50
FY09 FY10 FY11 FY12 FY13 FY14
CDER - District offices (US) CDER - HQ (non-US)
Page 7
Industry Analysis
2 13 3
53
1 2
4
1
7
4
6
5
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16*
Indian CGMP WLs - Formulations facilities
Indian CGMP WLs - API facilities
Breakup of Indian CGMP Warning Letters
Source: USFDA, Spark Capital Research; FY- ending Sep,
*YTD Dec
A WL can cover more than
one facility. For instance,
recent WL to Dr Reddy’s
included 3 facilities
Indian facilities account for 29% of CGMP Warning Letters from FY09
CGMP WLs issued by CDER for non-US facilities
Source: USFDA, Spark Capital Research; FY-ending Sep,
*YTD Dec
And the 2nd highest number of formulations
facilities
Source: USFDA, Spark Capital Research
India has the highest number of FDA approved
API facilities
Source: USFDA, Spark Capital Research
• Of the 131 CGMP WLs issued to non-
US drug facilities from FY09, Indian
facilities accounted for 38 (29%)
• A WL can cover more than one facility.
For instance, the recent WL to Dr
Reddy’s included 3 facilities
• Of the 47 Indian facilities covered by
these 38 WLs, API facilities accounted
for 17 (36%). Increasing incidence of
483s and WLs for API facilities has
delayed approvals of key ANDAs and
missed launch opportunities for Indian
larger players
• As of June 2015, India accounted for
26% and 22% of API and formulations
facilities (29% and 36% excluding US
facilities), respectively
• The increase in the number of
inspections of Indian drug facilities is
in-line with FDA’s greater focus on
drug facilities across non-US locations
• We note an increase in Indian share of
CGMP WLs in recent years
India22926%
China16919%
USA11813%
Other38042%
India14722%
China456%
USA27040%
Other21632%
1 25
2
8 7 94
11 10
1424
18
88
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16*
CGMP WLs - India CGMP WLs - Others
Rising Indian
share of WLs in
recent years
Page 8
Industry Analysis
Indian facilities have accounted for 29% of CGMP Warning Letters from FY09; higher share in recent years
Company Facility Type Last date of inspection Warning LetterData integrity
issues
Cadila HealthcareAhmedabad APIs 06-Dec-14
30-Dec-15No
Moraiya Formulations 05-Sep-14 No
Sun Pharmaceuticals Halol Formulations 19-Sep-14 17-Dec-15 No
Dr. Reddy's Laboratories
Srikakulam APIs 21-Nov-14
05-Nov-15 YesMiryalaguda APIs 31-Jan-15
Duvvada, Visakhapatanam Formulations 06-Mar-15
Sandoz PrivateNavi Mumbai Formulations 29-Aug-14
22-Oct-15 NoNavi Mumbai Formulations 28-Aug-14
Unimark Remedies Ahmedabad APIs 21-Mar-14 28-Sep-15 Yes
Pan Drugs Vadodara APIs 18-Jul-14 02-Sep-15 No
Mylan Laboratories
Bangalore Formulations 13-Feb-15
06-Aug-15 NoBangalore Formulations 03-Oct-14
Bangalore Formulations 08-Aug-14
Sipra Labs Hyderabad APIs 01-Mar-14 23-Jul-15 No
Mahendra Chemicals Ahmedabad Formulations 24-May-14 13-Jul-15 Yes
Cadila Pharmaceuticals Ankleshwar APIs 28-Mar-14 25-Feb-15 Yes
Apotex Research Bangalore Formulations 01-Jul-14 30-Jan-15 Yes
Micro Labs Goa Formulations 13-May-14 09-Jan-15 Yes
Sharp Global Gujranwala Town, New Delhi APIs 10-Mar-14 15-Oct-14 Yes
Marck Biosciences Kheda Formulations 01-Nov-13 08-Jul-14 Yes
Apotex Pharmachem India Bangalore APIs 31-Jan-14 16-Jun-14 Yes
Sun Pharmaceutical Industries Karkhadi Formulations 16-Nov-13 07-May-14 Yes
Smruthi Organics Solapur District, Maharashtra APIs 18-Oct-13 06-Mar-14 Yes
Canton Laboratories Baroda APIs 09-Apr-13 27-Feb-14 Yes
USV Mumbai Formulations 11-Jun-13 06-Feb-14 No
Wockhardt Chikalthana Formulations 30-Jul-13 25-Nov-13 Yes
Agila Specialties Bangalore Formulations 27-Jun-13 09-Sep-13 No
Promed Exports Solan, Himachal Pradesh Formulations 03-Apr-13 09-Aug-13 No
Posh Chemicals Hyderabad APIs 08-Mar-13 02-Aug-13 Yes
CGMP Warning Letters to Indian drug facilities (2009-2015)
Page 9
Industry Analysis
Resolution time <2 years in ~70% of WLs
Source: USFDA, Spark Capital Research
CGMP Warning Letters to Indian drug facilities (2009-2015)
Company Facility Type Last date of inspection Warning LetterData integrity
issues
Aarti DrugsPalghar Formulations 02-Nov-12
30-Jul-13 YesTarapur Formulations 07-Nov-12
Wockhardt Aurangabad Formulations 22-Mar-13 18-Jul-13 Yes
Fresenius Kabi Oncology Nadia, West Bengal APIs 18-Jan-13 01-Jul-13 Yes
Hospira Healthcare India Sriperumbudur Formulations 10-Oct-12 28-May-13 No
RPG Life SciencesThane APIs 31-Jan-13
28-May-13 YesAnkleshwar Formulations 24-Nov-12
Wintac Bangalore Rural Formulations 20-Sep-11 23-Feb-12 No
Xylo Chem Industries Nadiad APIs 16-Jul-11 15-Nov-11 No
Yag Mag Labs Medak District, Telangana APIs 02-Jul-11 12-Sep-11 Yes
Cadila Healthcare Moraiya Formulations 03-Feb-11 21-Jun-11 Yes
Aurobindo PharmaHyderabad (Unit III) Formulations 24-Sep-10
20-May-11 NoHyderabad (Unit VI) Formulations 22-Dec-10
Synbiotics Vadodara APIs 27-Aug-10 16-Dec-10 No
Claris Lifesciences Ahmedabad Formulations 16-Jun-10 01-Nov-10 No
Choksi Laboratory Panchkula, Haryana Formulations 24-Apr-10 30-Sep-10 No
Stericon Pharma Bangalore, Karnataka Formulations 17-Mar-10 23-Aug-10 No
Lupin Mandideep Formulations 12-Nov-08 07-May-09 No
Increasing interval between inspection and WL
Source: USFDA, Spark Capital Research
• The time interval between inspections
and issuance of WLs has increased
substantially, as seen in recent WLs to
Sun, Dr Reddy’s and Cadila (WLs were
issued more than a year after
inspections)
• We looked at resolution timelines for 42
CGMP WLs (for non-US facilities) with
close-out letters. Resolution time was
less than 2 years in ~70% of WLs
0-12 months,
9%
12-18 months,
43%18-24 months,
19%
>24 months,
29%
Increasing interval between inspection and issuance of Warning Letter
Source: USFDA, The Gold Sheet, Spark Capital Research
176142 144 156 165
211
364
CY09 CY10 CY11 CY12 CY13 CY14 CY15
Inspection to WL - No.of days
Resolution
timelines for
CGMP WLs
Page 10
Industry Analysis
Increasing incidence of data integrity issues in
WLs
Source: USFDA, The Gold Sheet, Spark Capital Research;
FY-ending Sep, *YTD Dec
Rising correlation between data integrity issues
and Import Alerts
Source: The Gold Sheet, Spark Capital Research; *YTD Aug
Increasing incidence of data integrity issues in CGMP Warning Letters in recent years
• Of the 131 CGMP WLs issued to non-
US drug facilities from FY09, we
noticed a rising incidence data integrity
issues
• Data integrity issues figured
prominently in 11 WLs (out of the 17
WLs) in FY15
• According to data from The Gold
Sheet, data integrity issues were cited
prominently in 56% of Import Alerts
imposed by the FDA in 2015
1 2 3 26
9 11
1
11 10
1624
20
66
3
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16*
WLs with no data integrity issuesWLs with data integrity issues
Of the 40 active Import Alerts on Indian drug facilities, 21 (52%) do not have corresponding WLs
Company Import Alert date Type of facility Place Warning Letter Warning Letter date
Pan Drugs 08-Dec-15 APIs Vadodara No –
Megafine Pharma 14-Oct-15 APIs Nashik No –
Polydrug Laboratories 11-Sep-15 APIs Mumbai No –
Akorn India 21-Aug-15 Formulations Paonta Sahib No –
Sri Krishna Pharmaceuticals - Unit II 13-Aug-15 Formulations Hyderabad No –
Emcure Pharmaceuticals 13-Jul-15 Formulations Pune No –
Pan Drugs 05-May-15 APIs Vadodara Yes 02-Sep-15
Ipca Laboratories 24-Mar-15 Formulations Pithampur No –
Ipca Laboratories 24-Mar-15 Formulations Silvasa No –
Aarti Drugs 23-Mar-15 APIs Tarapur, Mumbai Yes 30-Jul-13
Aarti Drugs 23-Mar-15 APIs Thane, Mumbai Yes 30-Jul-13
Ipca Laboratories 22-Jan-15 APIs Ratlam No –
Apotex Research 22-Sep-14 APIs Bangalore Yes 30-Jan-15
Micro Labs 19-Sep-14 Formulations Goa Yes 09-Jan-15
Aadivighnesh Chem 05-May-14 APIs Mumbai No –
Canton Laboratories 10-Apr-14 APIs Vadodara Yes 27-Feb-14
Apotex Pharmachem India 01-Apr-14 APIs Bangalore Yes 16-Jun-14
Marck Biosciences 12-Mar-14 Formulations Gujarat Yes 08-Jun-14
Sun Pharmaceutical Industries 12-Mar-14 Formulations Karkhadi Yes 07-May-14
24% 33% 41%56%
76% 67% 59%44%
CY12 CY13 CY14 CY15*
IAs with no data integrity issues
IAs with data integrity issues
Page 11
Industry Analysis
Imposition of Import Alerts after the issuance of Warning Letters was noticed only in 25% of active IAs
Import Alert precedes Warning Letter in ~75% of active IAs
Source: USFDA, Spark Capital Research
• Of the 40 active Import Alerts on Indian drug facilities, 21 (52%)
do not have corresponding WLs
• Imposition of Import Alerts after the issuance of Warning
Letters was noticed only in 25% of active IAs
• This implies the probability of WLs for Sun, Dr Reddy’s and
Cadila converting to IAs is low. However, we do not rule out the
possibility completely, especially in the case of Dr Reddy’s,
given the data integrity-related observations
Probability of WLs for Sun, Dr Reddy’s and Cadila converting to IAs is low
Company Import Alert date Type of facility Place Warning Letter Warning Letter date
Wockhardt 26-Nov-13 Formulations Chikalthana Yes 25-Nov-13
Ranbaxy Laboratories 13-Sep-13 Formulations Mohali No –
Micro Labs 21-Aug-13 Formulations Bangalore No –
Kamud Drugs 10-Jul-13 APIs Sangli, Maharashtra No –
Konduskar Laboratories 10-Jul-13 APIs Talandage, Maharashtra No –
Unique Chemicals 28-Jun-13 APIs Thane, Mumbai No –
Vignesh Life Sciences 28-Jun-13 APIs Hyderabad No –
Vignesh Life Sciences 28-Jun-13 Formulations Bellary, Karnataka No –
Sentiss Pharma 20-Jun-13 Formulations Solan Yes 09-Aug-13
RPG Life Sciences 11-Jun-13 Formulations Ankleshwar Yes 28-May-13
RPG Life Sciences 10-Jun-13 APIs Thane, Mumbai Yes 28-May-13
Smruthi Organics 03-Jun-13 APIs Solapur Yes 06-Mar-14
Wockhardt 22-May-13 Formulations Aurangabad Yes 18-Jul-13
Amsal Chem 11-Apr-13 APIs Ankleshwar No –
Nivedita Chemicals 23-Nov-11 APIs Mumbai No –
Yag Mag Labs 13-Sep-11 APIs Hyderabad Yes 12-Sep-11
Fleming Laboratories 11-Apr-11 APIs Hyderabad No –
Fleming Laboratories 08-Apr-11 APIs Hyderabad No –
Stericon Pharma 13-Jan-11 Formulations Bangalore Yes 23-Aug-10
Ranbaxy Laboratories 10-Sep-09 Formulations Paonta Sahib Yes 16-Sep-08
Ranbaxy Laboratories 10-Sep-09 Formulations Dewas Yes 16-Sep-08
Source: USFDA, Spark Capital Research
IAs without WL, 21, 52%
IAs before WL, 9, 23%
IAs after WL, 10, 25%
Page 12
Industry Analysis
Lupin: Strong record in recent inspections, Mandideep inspection will be key monitorable
FacilityLast
inspection
Type of
facilityComments
Tarapur Aug-15 APIs No observations in the last inspection
Pithampur (Indore) Aug-15APIs and
Formulations
Most oral contraceptive and ophthalmic filings from here. Facility has 3 units. All units inspected in CY15. Only
Unit 2 received Form 483 with observations
Goa Jul-15 FormulationsForm 483 with 9 observations issued post last inspection. Observations unlikely to be major as ANDA approvals
continue from here. Supplies 50+ products including gFortamet, gCelebrex, gTricor, gCymbalta
Chikalthana, Aurangabad Apr-15 Formulations Form 483 with observations issued post recent inspection. 5-6 ANDAs approved from the facility
Nagpur Mar-15 Formulations New facility. Inspected and certified in FY15. No observations in the last inspection
New Jersey, USA Jan-15 FormulationsGavis' facility. No observations in the last inspection. 60+ ANDAs filed. Key marketed products include
gMethergine, gRowasa Enema
Mandideep Oct-11APIs and
FormulationsManufactures all cephalosporin products including Suprax. WL received in May 2009 and closed-out in Jan 2010
Source: Company data, FDAzilla, Spark Capital Research
Aurobindo: Unit VII inspected in Mar 2015 with no Form 483 observations, penem approvals from Bhiwadi will be key monitorable
FacilityLast
inspection
Type of
facilityComments
Unit I NA APIs CVS, CNS, anti-allergics, cephalosporins (non-sterile)
Unit V Sep-11 APIs Penicillins (sterile & non-sterile)
Unit VIII Apr-14 APIs ARV, CVS, CNS (non-sterile)
Unit IX Mar-15 APIs Intermediates facility. Form 483 with observations issued post last inspection
Unit XI Apr-15 APIs Non-antibiotics. No observations in the last inspection
Unit III Jun-15 FormulationsOral solid facility. Form 483 with observations issued post recent inspection. Warning Letter issued in May 2011
and closed out in 2012. 117 ANDAs filed and 112 approved
Unit IV Sep-14 FormulationsInjectables (non-antibiotics) facility. 66 ANDAs filed and 15 approved (as of Sep 2015). New block for lyophilized
vials under construction
Unit VI B Sep-12 Formulations Oral cephalosporins. Warning Letter issued in May 2011 and closed out in 2012. 11 ANDAs filed, all approved
Unit VII Mar-15 FormulationsOral solid facility. Largest formulations facility. No observations in the last inspection. 141 ANDAs filed, 47
approved (as of Sep 2015)
Unit XII Jul-15 FormulationsOral and injectable penicillins facility. Form 483 with observations issued post recent inspection. 19 ANDAs filed,
all approved
Bhiwadi Sep-15 Formulations Penems facility (meropenem and doripenem filed). Form 483 with observations issued post recent inspection
New Jersey, USA Jul-11 Formulations Oral solids including controlled substances. 26 ANDAs filed, 10 approved
Source: Company data, FDAzilla, Spark Capital Research
Overview of FDA approved manufacturing facilities – Aurobindo, Lupin
Page 13
Industry Analysis
Cadila: Moraiya Warning Letter pushes key approvals further out. Site transfers for key products will be key monitorable
FacilityLast
inspection
Type of
facilityComments
Dabhasa Mar-15 API Successful audit in FY15, as per management
Ankleshwar FY15 API Successful audit in FY15, as per management
Ahmedabad Dec-14 API Oncology APIs. No external or captive sales. FDA issued Warning Letter in Dec 2015
Moraiya Sep-14 FormulationsOral solids, injectables, nasal, transdermals. Largest formulations facility and only injectables facility. ~60% of
US sales. FDA issued Warning Letter in Dec 2015
Baddi May-15 FormulationsOral solids. Form 483 with observations issued post last inspection. Per management, observations minor as
approvals continue (Amiloride HCl approved in Aug 2015)
Ahmedabad - Formulations Topicals. Awaiting first inspection
Ahmedabad SEZ Feb-15 Formulations Oral solids including oncology. EIR received in Q2FY16
Ahmedabad SEZ Apr-15 Formulations Cytotoxic injectables (erstwhile BSV JV). Form 483 with observations issued post last inspection
Ahmedabad SEZ FY15 Formulations Cytotoxic injectables (Zydus Hospira JV). Successful audit in FY15, as per management
Ahmedabad SEZ May-15 Formulations Transdermal facility (part of Zydus Technologies). No observations in the last inspection
St. Louis, USA May-15 FormulationsPart of Nesher (acquired in 2011). Form 483 with observations issued post last inspection. Under consent
decree since 2009. Product launches have resumed (morphine sulphate in Q1FY16)
Dr Reddy’s: Updates on Warning Letter resolution/escalation and status of Bachupally facility will be key monitorables
FacilityLast
inspection
Type of
facilityComments
Hyderabad (plant 1) Sep-12 APIs -
Hyderabad (plant 2) Sep-11 APIs -
Hyderabad (plant 3) May-14 APIs -
Hyderabad (plant 4) Apr-15 APIs -
Nalgonda Jan-15 APIs Warning Letter received on Nov 5, 2015
Srikakulam Nov-14 APIs Dr Reddy’s largest API facility. Warning Letter received on Nov 5, 2015
Srikakulam (SEZ) - APIs Awaiting first inspection
Mexico NA APIsAcquired from Roche in 2005. Manufactures naproxen. Received WL (June 2011) and Import Alert (July 2011).
Closed-out in July 2012
Mirfield, UK NA APIs Acquired from Dow Pharma in 2005
Srikakulam Plant-1 (SEZ) FY15 Formulations Oral solid facility. First product approvals by USFDA in FY15. Key products include atorvastatin, clopidogrel
Visakhapatnam Plant-1
(SEZ)Mar-15 Formulations
Oncology facility. Warning Letter received on Nov 5, 2015. 4-5 ANDAs pending approval. Key marketed products
included azacitidine, decitabine, sirolimus
Shreveport (US) NA Formulations Acquired from BASF in 2008
Bristol (US) NA Formulations Acquired from GSK in 2011. Manufactures amoxicillin and related products
Hyderabad Plant-3
(Bachupally)Jul-15 Formulations
Form 483 with observations issued post last inspection. Observations minor and escalation unlikely, as per
management. Largest formulations facility. Key products include gNexium, gDepakote ER, gGeodon, gValcyte,
gToprol XL
Overview of FDA approved manufacturing facilities – Dr Reddy’s, Cadila
Source: Company data, FDAzilla, Spark Capital Research
Page 14
Industry Analysis
Sun: Quick resolution of Halol WL will be key for medium-term performance
FacilityLast
inspection
Type of
facilityComments
Panoli Jul-15 APIs No observations in the last inspection
Ahmednagar Jul-15 APIs Form 483 with observations issued post last inspection
Toansa (Ranbaxy) Jan-14 APIs Import Alert issued and facility brought under consent decree in Jan 2014
Karkhadi Nov-13APIs and
FormulationsCephalosporin facility. FDA imposed Import Alert in Mar 2014 and issued Warning Letter in May 2014
Dewas (Ranbaxy) Feb-08APIs and
Formulations
FDA issued Warning Letter and imposed Import Alert in Sep 2008. Department of Justice filed consent decree of
permanent injunction in Jan 2012
Halol Sep-14 FormulationsWarning Letter issued in Dec 2015. Contributed high single-digit percent of consolidated sales (~$350) in FY15.
All approved injectables including gDoxil manufactured at this facility
Dadra Jan-15 FormulationsForm 483 with observations issued post last inspection. Key marketed products include gNamenda, gSeroquel,
gComtan, gProscar and gMaxalt
Cranbury Aug-15 Formulations No observations in the last inspection. gGleevec (sole FTF launch in Feb 2016) was transferred to this facility
Paonta Sahib (Ranbaxy) Mar-08 FormulationsFDA issued Warning Letter and imposed Import Alert in Sep 2008. Department of Justice filed consent decree of
permanent injunction in Jan 2012
Mohali (Ranbaxy) Dec-12 Formulations FDA imposed Import Alert and brought the facility under consent decree in Sep 2013
New Jersey (Ranbaxy) Mar-14 Formulations Part of Ohm Laboratories (Ranbaxy). Form 483 with observations issued post last inspection
Wilmington May-15 FormulationsPart of Dusa Pharmaceuticals (acquired in Nov 2012). Manufactures Levulan, Dusa’s flagship product for actinic
keratosis (AK). No observations in the last inspection
Billerica NA Formulations Injectables facility, part of Pharmalucence (acquired in July 2014)
Aurora (URL) Feb-13 Formulations Part of URL (acquired from Takeda in Dec 2012). Doxycycline manufactured at this facility
Ontario, Canada (Taro) Feb-14 FormulationsDermatology facility. Key products include clobetasol, nystatin-triamcinolone, ketoconazole, lidocaine, clobetasol
and desoximetasone. Form 483 with observations issued post last inspection
Israel (Taro) NAAPIs and
FormulationsOral solid facility. Key products include warfarin, clomipramine, carbamazepine XR and carbamazepine
Source: Company data, FDAzilla, Spark Capital Research
Torrent: Dahej approval should resolve capacity constraints
FacilityLast
inspection
Type of
facilityComments
Indrad Mar-15APIs and
Formulations
Only approved facility for US. Form 483 with observations issued post last inspection. As per management,
observations minor as approvals continue – gNexium (Oct 2015), gCelebrex (Dec 2015)
Dahej Apr-15APIs and
Formulations
New facility. Form 483 with observations issued post last inspection. Observations minor and EIR expected
shortly, as per management
Source: Company data, FDAzilla, Spark Capital Research
Overview of FDA approved manufacturing facilities – Sun, Torrent
Page 15
Industry Analysis
US formulations – rising contribution to sales and profitability of leading players
Source: Company data, Spark Capital Research
Aurobindo’s and Lupin’s strong recent ANDA approval track record attributable to compliant status of key facilities
Source: Company data, Spark Capital Research; *includes Taro
Recent ANDA approval track record reflects key facilities’ compliance status
1012 13
21
26
51
11
6
1215
6
35
3 2
22
9
3
Aurobindo Cadila Dr Reddy's Lupin Sun* Torrent
FY14 FY15 YTD FY16
27%39%
22% 39%
25%44%
35% 45%
38%50%
5% 18%
FY11 FY15 FY11 FY15 FY11 FY15 FY11 FY15 FY11 FY15 FY11 FY15
ARBP CDH DRRD LPC SUNP TRP
Domestic formulations US formulations API / CRAMS Other segmentsBreakup of sales
No. of ANDAs approved
Page 16
Industry Analysis
Strong pipeline of pending ANDAs
Source: Company data, Spark Capital Research; *includes
Gavis; data as on 30th Sep 2015
Sales per approved ANDA
Source: Company data, Spark Capital Research; *1HFY16
sales annualized / ANDAs approved (as of Mar 2015)
5.56.3
7.6
6.4
4.6
9.6
ARBP CDH DRRD LPC SUNP TRP
Sales per approved ANDA* ($mn)
Investments in new segments driving higher R&D spending
R&D as % of sales – highest for Dr Reddy’s
Source: Company data, Spark Capital Research
Dr Reddy’s has the highest cumulative R&D spending in the last 5 years
Source: Company data, Spark Capital Research
Core margins higher for Dr Reddy’s, LPC, SUNP
Source: Company data, Spark Capital Research
24%27%
34%36% 36%
25%
ARBP CDH DRRD LPC SUNP TRP
% EBITDA margin (ex R&D expense)
11.5
21.1
48.5
35.6
42.0
6.3
ARBP CDH DRRD LPC SUNP TRP
Cumulative R&D expense (FY11-15) (Rs. Bn)
3.2%
5.6%6.8%
8.2%
5.4% 5.8%
2.9%
6.6%
11.8%
8.1%6.7%
3.4%
ARBP CDH DRRD LPC SUNP TRP
R&D as % of sales - FY11 R&D as % of sales - FY15
Torrent benefiting from gAbilify launch
196
168
76
161 154
23
ARBP CDH DRRD LPC* SUNP TRP
ANDAs pending approval
Page 17
Company
Page 18
Aurobindo Pharma CMP
Rs. 881
Target
Rs. 1,056
Rating
BUY
Stock performance
1m 3m 12m
ARBP 9% 15% 56%
Sensex 0% 0% -5%
BSEHC 4% -5% 16%
Financial Summary (Consolidated)
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE ROCE
FY15 121,205 25,636 16,354 28.0 31.5 21.6 36.7% 19.9%
FY16E 140,932 32,384 20,673 35.4 24.9 17.1 34.2% 20.6%
FY17E 165,482 41,017 26,042 44.6 19.8 13.5 32.1% 22.1%
FY18E 187,464 48,243 30,829 52.8 16.7 11.5 28.8% 22.4%
Date 4 Jan 2016
Market Data
SENSEX 26161
Nifty 7963
Bloomberg ARBP IN
Shares o/s 584mn
Market Cap Rs. 515bn
52-wk High-Low Rs. 892-465
3m Avg. Daily Vol Rs. 1,320mn
Index member BSE100
Latest shareholding (%)
Promoters 53.9
Institutions 35.0
Public 11.1
Initiating CoverageOver the past couple of years Aurobindo has scaled up its US business substantially. A large product basket,
strong front-end leadership team, cost efficiencies from backward integration and manufacturing scale are the
company’s key strengths in the US. Aurobindo’s continued focus on profitability in ex US segments, especially
the acquired Actavis portfolio should drive further improvement in margins. Re-initiating coverage with ‘BUY’
Key investment thesis:
Recent approval momentum translates to high growth visibility: YTD FY16, Aurobindo has received significantly
higher number of ANDA approvals compared to peers (refer page 20). The recent approval momentum can be partially
attributed to the compliant status of the company’s key facilities. Post the resolution of CGMP violations at Unit III (WL)
and Unit VI (Import Alert) in 2011, Aurobindo has a strong track record in FDA inspections. Recent approvals for
gAbilify, gBaraclude, gEvista, gDilantin, injectables (eptifibatide, methylprednisolone) and olopatadine provides high
visibility for growth in H2FY16 and FY17. The company’s strong pipeline of 168 pending ANDAs and initiatives in newer
segments such as peptides (2 DMFs filed), penems (2 filings) and injectables (51 pending ANDAs) provide comfort on
long-term growth for the segment
Backward integration, large product basket and manufacturing scale – underappreciated strengths: Unlike
peers, Aurobindo has not allocated significant capital to specialty drugs/ complex generics/ NCEs till date and has
focused on the lower-hanging fruits in the US generics business. Cost efficiencies from backward integration and
manufacturing scale, as visible in the strong margins of its US business, are underappreciated strengths, in our view. As
per management, access to newer technologies, segments and geographies through acquisitions remain an option and
the company’s stronger balance sheet (compared to few years back) should support these initiatives
Ex US segments – focus on profitability: Topline growth across Aurobindo’s ex US businesses (EU formulations,
ARVs and APIs) will be modest as the company focuses on profitability in these segments. Margins at the acquired
Actavis portfolio which accounts for ~20% of the company’s business, should improve as the company shifts
manufacturing of more products to India
Improved balance sheet and return ratios, trading at discount to large cap peers: At CMP of Rs. 881, Aurobindo
trades at 20x and 17x of our FY17E and FY18E earnings, respectively. The company has substantially improved its
balance sheet (net debt/EBITDA of 1.6x) and RoCE (21%, in-line with large cap peers). We expect the discount to large
cap peers to narrow further and value the stock at 20x FY18E of Rs. 52.8, to arrive at a target price of Rs. 1,056. Re-
initiating coverage with a ‘BUY’ rating
Initiating coverage; ‘BUY’
DR HARITH AHAMED [email protected] +91 44 4344 0052
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Page 19
Aurobindo Pharma CMP
Rs. 881
Target
Rs. 1,056
Rating
BUYSegmental sales and EBITDA
Margin improvement across segments
FY14 FY15 FY16E FY17E FY18EFY16E
Jun-15 Sep-15 Dec-15 Mar-16
Breakup of US sales
FTFs 85 55 - - - - - - -
Natrol - 30 102 120 135 24 26 25 27
Base 475 705 883 1,157 1,359
US sales $mn 560 790 985 1,277 1,494 225 227 251 281
Revenue breakup
US 34,028 48,317 63,991 82,074 95,972 14,295 14,775 16,477 18,444
EU – base 6,721 7,336 6,768 7,259 7,985 1,596 1,674 1,731 1,766
EU – Actavis - 24,611 24,922 26,725 29,397 5,821 5,969 6,474 6,659
Total EU 6,721 31,947 31,690 33,984 37,382 7,417 7,643 8,205 8,425
RoW 4,634 5,683 6,407 7,368 8,473 1,706 1,680 1,472 1,549
ARV 8,402 9,639 12,323 13,864 15,597 2,953 2,708 3,672 2,990
API 28,642 27,062 28,144 30,114 32,222 7,230 6,911 6,987 7,016
Gross revenue 82,427 122,648 142,555 167,404 189,645 33,601 33,717 36,812 38,424
Excise duty -1,594 -1,520 -1,662 -1,951 -2,211 -397 -391 -427 -446
Net revenue (ex dossier sales) 80,833 121,128 140,893 165,452 187,434 33,204 33,326 36,385 37,978
EBITDA breakup
FTF 4,562 1,793 - - - - - - -
% margin 89% 75% - - - - - - -
Natrol - 260 918 1,049 1,388 213 236 239 229
% margin - 14% 14% 16% 18% 14% 14% 14% 14%
EU - Actavis - -615 -131 668 1,323 -131 -67 - 67
% margin - -2.5% -0.5% 2.5% 4.5% -2.2% -1.1% 0.0% 1.0%
Base 19,354 27,587 35,624 44,036 51,068 8,119 8,573 9,295 9,636
% margin 25.0% 29.4% 32.1% 33.1% 33.7% 30.9% 32.9% 32.5% 32.0%
Core EBITDA 23,916 29,025 36,411 45,753 53,779 8,202 8,743 9,533 9,932
% margin 29.6% 24.0% 25.8% 27.7% 28.7% 24.7% 26.2% 26.2% 26.2%
Dossier sales 165 77 39 30 30 - 9 15 15
R&D expense -2,753 -3,466 -4,066 -4,766 -5,566 -955 -996 -1,037 -1,077
as % of sales 3.4% 2.9% 2.9% 2.9% 3.0% 2.9% 3.0% 2.8% 2.8%
EBITDA 21,328 25,636 32,384 41,017 48,243 7,247 7,756 8,512 8,870
% margin 26.3% 21.2% 23.0% 24.8% 25.7% 21.8% 23.3% 23.4% 23.3%
Source: Company data, Spark Capital Research
Page 20
Aurobindo Pharma CMP
Rs. 881
Target
Rs. 1,056
Rating
BUY
US sales – quarterly trend
Source: Company data, Spark Capital Research
Recent approval momentum translates to high growth visibility
Source: Company data, Spark Capital Research
Significantly higher number of ANDA approvals vs. peers
Source: Company data, USFDA, Spark Capital Research
Ramp of sales from recent approvals to drive strong growth in the near-term
102 119155 165 166 186
32 2826 26 27
2875
9288
145183 168
FY11 FY12 FY13 FY14 FY15 1HFY16
Final approval Tentative approval Pending approval
35
3 2
22
9
3
ARBP CDH DRRD LPC SUNP TRP
ANDA approvals - YTD FY16
Key recent approvals; growth momentum to pick up from H2FY16
Source: Company data, Spark Capital Research
Active ingredient Brand Approval dateMarket size
($mn)
No. of
players
olopatadine HCl Patanol 18-Dec-15 235 9
methylprednisolone sod
succinateSolu-Medrol 15-Dec-15 102 5
eptifibatide Integrilin 8-Dec-15 137 3
risedronate sodium Actonel 30-Nov-15 113 6
tramadol ER Ultram ER 20-Oct-15 56 8
aripiprazole Abilify 8-Oct-15 7,300 6
telmisartan Micardis 3-Sep-15 92 11
raloxifene HCl Evista 28-Aug-15 404 5
entecavir Baraclude 26-Aug-15 294 5
entacapone Comtan 19-Jun-15 59 5
phenytoin sodium ER Dilantin 10-Jun-15 125 6
cefixime Suprax 14-Apr-15 123 2
118
150
181 187 194 194215
225 227
Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15
US sales ($mn)
Page 21
Aurobindo Pharma CMP
Rs. 881
Target
Rs. 1,056
Rating
BUYCompliant status of key facilities to aid US growth
Ongoing investments to strengthen manufacturing network further
Source: Company data, Spark Capital Research
Facility-wise breakup of ANDAs
Source: Company data, Spark Capital Research; data as on 30th Sep
2015; *includes tentative approvals
Place Comments
Brownfield expansions
Unit IV New dedicated block for lyophilized vials
Auronext Commissioning of penems facility at Bhiwadi
Unit VII New formulations block at Jadcherla SEZ
Unit XI New API block
Aurolife USA Capacity expansions at existing facility in NJ
Greenfield expansions
Naidupet SEZ Unit X. Oral solid formulations facility
Visakhapatanam Formulations facility for European markets
Shamirpet, Hyderabad Eugia (JV with Celon) - Specialty products (hormones and oncology) facility
Hyderabad SEZ New antibiotic injectables unit
USA Automated warehouse and OTC liquids and packaging facility
Facility Dosage Filed Approved* Pending
Unit III Oral 117 112 5
Unit IV Injectable 66 15 51
Unit VI B Oral 11 11 0
Unit VII Oral 141 47 94
Unit XIIOral &
Injectable19 19 0
Aurolife USA Oral 26 10 16
Auronext Injectable 2 0 2
Total 382 214 168
Unit VII inspected in Mar 2015 with no Form 483 observations, penem approvals from Bhiwadi will be key monitorable
FacilityLast
inspection
Type of
facilityComments
Unit I NA APIs CVS, CNS, anti-allergics, cephalosporins (non-sterile)
Unit V Sep-11 APIs Penicillins (sterile & non-sterile)
Unit VIII Apr-14 APIs ARV, CVS, CNS (non-sterile)
Unit IX Mar-15 APIs Intermediates facility. Form 483 with observations issued post last inspection
Unit XI Apr-15 APIs Non-antibiotics. No observations in the last inspection
Unit III Jun-15 FormulationsOral solid facility. Form 483 with observations issued post recent inspection. Warning Letter issued in May 2011
and closed out in 2012. 117 ANDAs filed and 112 approved
Unit IV Sep-14 FormulationsInjectables (non-antibiotics) facility. 66 ANDAs filed and 15 approved (as of Sep 2015). New block for lyophilized
vials under construction
Unit VI B Sep-12 Formulations Oral cephalosporins. Warning Letter issued in May 2011 and closed out in 2012. 11 ANDAs filed, all approved
Unit VII Mar-15 FormulationsOral solid facility. Largest formulations facility. No observations in the last inspection. 141 ANDAs filed, 47
approved (as of Sep 2015)
Unit XII Jul-15 FormulationsOral and injectable penicillins facility. Form 483 with observations issued post recent inspection. 19 ANDAs filed,
all approved
Bhiwadi Sep-15 Formulations Penems facility (meropenem and doripenem filed). Form 483 with observations issued post recent inspection
New Jersey, USA Jul-11 Formulations Oral solids including controlled substances. 26 ANDAs filed, 10 approved
Source: Company data, FDAzilla, Spark Capital Research
Page 22
Aurobindo Pharma CMP
Rs. 881
Target
Rs. 1,056
Rating
BUY
Pipeline visibility lower compared to peers; para III filings could surprise
Source: Company data, Spark Capital Research
27 injectable ANDAs approved till date
Source: Company data, Spark Capital Research
Low borrowing costs benefiting RoE
Source: Company data, Spark Capital Research
Strong cash generation to continue
Source: Company data, Spark Capital Research; *net of interest paid
Injectables, penems and peptides will be key segments in the medium term
Active ingredient Brand Size Comments
esomeprazole Mg Nexium 4,000Sued in Dec 2013. Tentative approval in Dec 2015. Launch likely in
post 30 month expiry in June 2016. 5 player market currently
fondaparinux Arixtra 120 DMF filed in Jan 2014. Dr Reddy’s only generic player
octreotide acetateSandostatin
LAR750 Peptide product. DMF filed in June 2015. Patent expires in Jan 2017
meropenem Merrem 150 Approval expected in FY16. 5-player market currently
imipenem + cilastatin
sodiumPrimaxin 100 Filing in FY16. 4 player market currently
doripenem Doribax 50Sued in Jan 2015. Patent expiry in 2021. Management expects to
settle for early launch
ertapenem Invanz 250 Patent expiry in Nov 2017
linaclotide Linzess 450 Peptide product. DMF filed in Sep 2015. Patent expires in Jan 2024
atomoxetine HCl Strattera 450 Patent expiry in May 2017. 7 players with tentative approval
olmesartan +
amlodipine + HCTZTribenzor 250 Para III filing. Patents expire in Oct 2016
Anaesthetics18%
Anti-nausea
19%
Antibiotics37%
Others26%
Breakup of approved injectable ANDAs
6.5
12.416.5
20.8
27.3
-3.9
-14.5-11.0 -9.5 -10.5
1.6
-2.9
4.5
10.4
15.9
0.0
0.5
1.0
1.5
2.0
(20)
(10)
0
10
20
30
FY14 FY15 FY16E FY17E FY18E
OCF (Rs.bn) Capex (Rs.bn) FCF* (Rs.bn) Net debt/ EBITDA
43%
37%34%
32%29%
22% 20% 21% 22% 22%
0%
10%
20%
30%
40%
50%
FY14 FY15 FY16E FY17E FY18E
RoE (%) RoCE (%)
Page 23
Aurobindo Pharma CMP
Rs. 881
Target
Rs. 1,056
Rating
BUYFinancial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY18E FY14 FY15 FY16E FY17E FY18E
Profit & Loss Growth ratios
Revenue 80,998 121,205 140,932 165,482 187,464 Revenue 38.3% 49.6% 16.3% 17.4% 13.3%
EBITDA 21,328 25,636 32,384 41,017 48,243 EBITDA 139.9% 20.2% 26.3% 26.7% 17.6%
Depreciation (3,125) (3,326) (3,769) (4,477) (5,167) Adjusted PAT 200.9% 18.9% 26.4% 26.0% 18.4%
EBIT 18,203 22,310 28,615 36,541 43,076 Margin ratios
Other Income 232 808 708 720 804 EBITDA 26.3% 21.2% 23.0% 24.8% 25.7%
Interest expense (1,079) (843) (949) (910) (835) Adjusted PAT 16.9% 13.4% 14.6% 15.7% 16.4%
Forex gain / (loss) (2,031) (596) (835) 0 0 Performance ratios
PBT 15,325 21,679 27,539 36,351 43,046 RoE 43.3% 36.7% 34.2% 32.1% 28.8%
PAT (after minority interest) 11,729 15,758 19,838 26,042 30,829 RoCE 21.7% 19.9% 20.6% 22.1% 22.4%
Adjusted PAT (after minority interest) 13,759 16,354 20,673 26,042 30,829 RoA 19.0% 17.2% 17.5% 19.2% 19.8%
Balance Sheet Fixed asset turnover (x) 1.9 2.3 2.2 2.2 2.2
Net Worth 37,758 51,817 69,495 93,025 120,990 Total asset turnover (x) 1.1 1.3 1.2 1.2 1.2
Deferred Tax 2,054 2,058 2,058 2,058 2,058 Financial stability ratios
Total debt 37,949 44,511 43,931 36,790 31,166 Net Debt to Equity (x) 0.9 0.8 0.5 0.3 0.1
Other liabilities and provisions 3,625 10,200 11,048 11,917 12,812 Net Debt to EBITDA (x) 1.5 1.6 1.2 0.7 0.3
Total Networth and liabilities 81,386 108,586 126,532 143,789 167,026 Current ratio (x) 3.4 2.7 2.7 2.7 2.7
Gross Fixed assets 44,927 58,658 69,658 79,158 89,658 Inventory and debtor days 228 217 222 222 222
Net fixed assets 30,314 41,253 48,484 53,507 58,840 Working capital days 166 155 157 157 157
Investments 198 198 198 198 198 Interest cover (x) 16.9 26.5 30.1 40.2 51.6
Cash and bank balances 5,795 4,691 6,040 7,150 15,010 Valuation metrics
Loans & advances and other assets 8,550 11,451 12,023 12,625 13,256 Fully Diluted Shares (mn) 583.2 583.6 584.0 584.0 584.0
Net working capital 36,529 50,994 59,786 70,309 79,721 Market cap (Rs.mn) 514,706
Total assets 81,386 108,586 126,532 143,789 167,026 Adjusted EPS (Rs.) 23.6 28.0 35.4 44.6 52.8
Cash Flows P/E (x) 37.4 31.5 24.9 19.8 16.7
Cash flows from Operations 6,463 12,368 16,467 20,770 27,279 EV (Rs.mn) 552,804
Capex (3,905) (14,543) (11,000) (9,500) (10,500) EV/ EBITDA (x) 25.9 21.6 17.1 13.5 11.5
Cash flows from Investing (4,178) (14,085) (11,000) (9,500) (10,500) BV/ share (Rs.) 64.3 88.4 118.6 159.0 207.0
Cash flows from Financing 1,176 932 (4,118) (10,160) (8,919) Price to BV (x) 13.7 10.0 7.4 5.5 4.3
Page 24
Dr Reddy’s Laboratories CMP
Rs. 3109
Target
Rs. 3328
Rating
ADD
Stock performance
1m 3m 12m
DRRD 0% -25% -3%
Sensex 0% 0% -5%
BSEHC 4% -5% 16%
Financial Summary (Consolidated)
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE ROCE
FY15 148,189 33,469 22,179 129.8 24.0 15.6 21.9% 15.9%
FY16E 160,649 41,262 25,607 149.8 20.8 12.6 21.0% 16.6%
FY17E 176,395 42,976 27,157 158.9 19.6 12.1 18.8% 15.5%
FY18E 199,094 50,321 31,606 184.9 16.8 10.4 18.7% 16.0%
Date 4 Jan 2016
Market Data
SENSEX 26161
Nifty 7963
Bloomberg DRRD IN
Shares o/s 171mn
Market Cap Rs. 530bn
52-wk High-Low Rs. 4,387-2,951
3m Avg. Daily Vol Rs. 2,957mn
Index member BSE SENSEX
Latest shareholding (%)
Promoters 25.5
Institutions 41.9
Public 32.6
Initiating CoverageThe recent Warning Letters for 3 manufacturing facilities of Dr Reddy’s is a major setback to the company’s
prospects in its largest market. Given the serious nature of CGMP violations raised in the WL including data
integrity related observations, escalation into Import Alert cannot be ruled out completely. While we remain
positive on the long-term prospects of the company’s pipeline of complex generics, biosimilars and 505b(2)
products, the risk of Import Alert, uncertainties around product launches and protracted resolution timelines
should weigh on the stock in the near-to-medium term. We re-initiate coverage with an ‘Add’ rating
Key investment thesis:
Resolution of WL likely to be a long-drawn process: FDA’s Warning Letter for Dr Reddy’s in Nov 2015 covers 3
manufacturing facilities – Srikakulam (API), Nalgonda (API) and Vizag (oncology formulations including injectables).
Given the serious nature of CGMP violations raised in the WL including data integrity related observations, escalation
into Import Alert cannot be ruled out completely. We note that Dr Reddy’s responded to the WL on Dec 7, 2015 and
FDA’s decision would also depend on the completeness of the company’s response. As per management, the scope of
remediation activities required for resolution of WL will be significantly greater compared to the company’s original
remediation plan in response to the Form 483. FDA has also asked for implementation of corrective actions across the
company’s manufacturing network and for 3rd party validation of the same. All these imply that WL resolution will take
considerable time
Lack of approval to hurt, site transfers and 3rd party manufacturing to mitigate the impact partially: Given the
importance of Srikakulam facility, Dr Reddy’s is likely to have referenced APIs from the facility for significant number of
pending ANDAs. Though the WL per se does not block approvals from other facilities, FDAs decision on the same in not
clear yet and suspension of approvals from all facilities cannot be ruled out. We note that Dr Reddy’s has initiated site
transfers for few key ANDAs (gNexium approved in Sep 2015, prior to the WL) and has used 3rd party APIs for some of
its filings (gGleevec, gPropofol). Further, some of its key injectables such as gVidaza and gDacogen have approvals
from 3rd party CMO facilities and are hence de-risked from FDA actions on Vizag facility
Valuation and stock view: At CMP of Rs. 3109, Dr Reddy’s trades at 20x and 17x our FY17E and FY18E earnings,
respectively. We remain positive on the company’s pipeline of complex generics, biosimilars and 505b(2) products.
However, the risk of Import Alert, uncertainties around product launches and protracted resolution timelines should
weigh on the stock in the near-term. Re-initiating coverage with a target price of Rs. 3328 (18x FY18E EPS)
Initiating coverage; ‘ADD’
DR HARITH AHAMED [email protected] +91 44 4344 0052
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Page 25
Dr Reddy’s Laboratories CMP
Rs. 3109
Target
Rs. 3328
Rating
ADDSegmental sales and EBITDA
Lack of new launches to impact growth and margins in FY17; gNexium relaunch to provides some respite
FY14 FY15 FY16E FY17E FY18E FY16E
Jun-15 Sep-15 Dec-15 Mar-16
Revenue breakup
US ($mn) 921 1,059 1,188 1,333 1,515 292 286 299 312
US (Rs. Mn) 55,302 64,734 77,098 85,616 97,348 18,515 18,563 19,584 20,436
Europe 6,970 7,181 8,818 9,799 10,975 1,912 2,124 2,213 2,569
India 15,714 17,870 20,562 23,646 27,193 4,756 5,464 4,934 5,408
Russia & CIS 19,819 17,714 15,064 16,482 18,954 3,100 3,944 4,301 3,719
RoW 7,359 13,057 10,822 9,653 10,224 2,676 2,673 2,874 2,599
Global Generics 105,164 120,556 132,363 145,196 164,694 30,959 32,768 33,906 34,730
PSAI 23,974 25,457 24,383 26,821 29,503 5,614 5,918 5,806 7,044
Proprietary Products 1,778 1,013 2,439 2,741 3,062 697 663 539 539
Other 1,255 1,163 1,462 1,638 1,834 306 540 288 328
Net revenues 132,171 148,189 160,647 176,395 199,094 37,576 39,890 40,539 42,642
EBITDA breakup
PSAI 4,847 5,709 5,942 6,670 7,485 1,332 1,526 1,394 1,691
% margin 20.2% 22.4% 24.4% 24.9% 25.4% 23.7% 25.8% 24.0% 24.0%
Global Generics 69,148 78,553 87,754 94,442 108,070 20,917 22,059 22,378 22,401
% margin 65.8% 65.2% 66.3% 65.0% 65.6% 67.6% 67.3% 66.0% 64.5%
Proprietary Products 1,606 812 2,051 2,467 2,756 577 561 456 456
% margin 90.3% 80.2% 84.1% 90.0% 90.0% 82.9% 84.6% 84.6% 84.6%
Other 200 329 813 983 1,101 121 323 173 196
% margin 15.9% 28.3% 55.6% 60.0% 60.0% 39.4% 59.9% 59.9% 59.9%
Gross Profit 75,802 85,403 96,560 104,562 119,411 22,947 24,469 24,400 24,744
% margin 57.4% 57.6% 60.1% 59.3% 60.0% 61.1% 61.3% 60.2% 58.0%
SG&A expenses -39,280 -42,585 -46,559 -52,146 -58,403 -10,973 -11,058 -12,162 -12,366
as % of sales 30% 29% 29% 30% 29% 29% 28% 30% 29%
R&D expenses -12,402 -17,449 -18,426 -20,269 -22,701 -4,387 -4,473 -4,662 -4,904
as % of sales 9% 12% 11% 11% 11% 12% 11% 12% 12%
EBIT 24,119 25,369 31,575 32,148 38,307 7,587 8,938 7,576 7,474
% margin 18.2% 17.1% 19.7% 18.2% 19.2% 20.2% 22.4% 18.7% 17.5%
Depreciation & amortization -7,095 -8,100 -9,687 -10,829 -12,014 -2,268 -2,466 -2,476 -2,476
EBITDA 31,214 33,469 41,262 42,976 50,321 9,855 11,404 10,053 9,951
% margin 23.6% 22.6% 25.7% 24.4% 25.3% 26.2% 28.6% 24.8% 23.3%
Source: Company data, Spark Capital Research
Page 26
Dr Reddy’s Laboratories CMP
Rs. 3109
Target
Rs. 3328
Rating
ADD
Increasing contribution from complex generics
Source: Company data, Spark Capital Research
Strong Rx share in key injectable launches
Source: Company data, Spark Capital Research
5th largest player in the US generic injectables market
Source: Company data, Hikma, Spark Capital Research; *includes Hospira
Strength in OTC and injectables = less impact from channel consolidation
Source: Company data, Spark Capital Research
Active ingredient Brand Rx share
decitabine Dacogen 68%
azacitidine Vidaza 50%
sumatriptan succinate Imitrex STATdose 35%
fondaparinux Arixtra 51%
zoledronic acid Reclast 50%
19.3%
12.9%
8.8%
5.6% 5.0% 4.8%4.0% 3.9% 3.6% 3.5%
Pfizer* APP Sandoz Hikma DrReddy's
Mylan Grifols Baxter SagentWinthrop
US generic injectable market share (by value)
86% 80% 81%66% 61%
14% 20% 19%34% 39%
FY11 FY12 FY13 FY14 FY15
Retail channel Non-retail channels (OTC and health systems)
29% 33% 38%57%
71% 67% 62%43%
FY12 FY13 FY14 FY15
Complex generics Vanilla generics
Complex injectables – key growth driver in recent years
Page 27
Dr Reddy’s Laboratories CMP
Rs. 3109
Target
Rs. 3328
Rating
ADD
Significant step up in R&D spending
Source: Company data, Spark Capital Research
Focus on complex APIs
Source: Company data, Spark Capital Research
Generics account for ~60% of R&D spending
Source: Company data, Spark Capital Research
Complex products account for >50% of pipeline
Source: Company data, Spark Capital Research
Capabilities across complex technologies
Source: Company data, Spark Capital Research
Generic60%Proprietary
products25%
Biologics14%
Others1%
Tech complexity
45%
IP complexity
40%
Others15%
TechnologyCurrent
pipeline
Future
products
Addressable
market ($bn)Key developments
Injectables
Microspheres 2 2 2.5 Leveraging capabilities from Octoplus
Liposomal 2 1 1.0 Two near term filings, one each in FY16 and FY17
Particulate
systems2 2 2.0 Proof-of-concept done through academic partnerships
Ready-to-use 4 Multiple 3.0Four near term filings, 505b(2) approach for several
candidates
Other technologies
Dermatology 7 >5 3.5 Filed three ANDAs in FY15
Transdermal 3 1 1.9 Two patches filed till date. Acquisition of Habitrol
Soft gels 3 3 1.0Commercialized isotretinoin in US - both branded and
generic
Respiratory 3 2 3.0 Launched levalbuterol
Capabilities in complex generics – ahead of peers
APIs under development
76%62% 56%
22%35%
31%
2% 3% 13%
FY11 FY13 FY15
Softgel, topical and resipiratory
Injectable
Oral solid drug
68 pending ANDAs and 3 NDAs
with 51% complex products
3.8 5.1 5.9 7.7 12.4 17.4
5.4%6.8%
6.1% 6.6%
9.4%
11.8%
0%
2%
4%
6%
8%
10%
12%
14%
-
5
10
15
20
FY10 FY11 FY12 FY13 FY14 FY15
R&D spend (Rs. bn) % of sales
Page 28
Dr Reddy’s Laboratories CMP
Rs. 3109
Target
Rs. 3328
Rating
ADDRecent Warning Letter derails US growth
Import Alert usually precedes WL implying low
probability of Import Alert for Dr Reddy’sFacility mapping of top products; major oral solid drugs manufactured at Bachupally
IAs without WL, 21,
52%
IAs before WL, 9, 23%
IAs after WL, 10,
25%
Product Facility
amoxicillin / amox +
clavulanic acidBristol
atorvastatin Ca Srikakulam SEZ Plant-1
azacitidine Vizag SEZ Plant-1
decitabineVizag SEZ Plant-1, 3rd party
(Cipla)
divalproex Na ERBachupally (Hyderabad Plant-
3)
esomeprazole MgBachupally (Hyderabad Plant-
3)
fondaparinux sodium 3rd party (Gland)
isotretinoin 3rd party (Cipla)
Source: Company data, FDAzilla, Spark Capital Research
Product Facility
metoprolol succinate
ERBachupally (Hyderabad Plant-3)
sirolimus Vizag SEZ Plant-1
sumatriptan succinate 3rd party (Gland)
tacrolimus Bachupally (Hyderabad Plant-3)
tizanidine hydrochloride Bachupally (Hyderabad Plant-3)
valganciclovir
hydrochlorideBachupally (Hyderabad Plant-3)
ziprasidone
hydrochlorideBachupally (Hyderabad Plant-3)
zoledronic acid
(gReclast/gZometa)
Vizag SEZ Plant-1, 3rd party
(Gland)
Source: Company data, USFDA, Spark Capital Research Source: USFDA, Spark Capital Research
Updates on Warning Letters resolution/ escalation and status of Bachupally facility will be key monitorables
Facility Last inspection Type of facility Comments
Hyderabad (plant 1) Sep-12 APIs -
Hyderabad (plant 2) Sep-11 APIs -
Hyderabad (plant 3) May-14 APIs -
Hyderabad (plant 4) Apr-15 APIs -
Nalgonda Jan-15 APIs Warning Letter received on Nov 5, 2015
Srikakulam Nov-14 APIs Dr Reddy’s largest API facility. Warning Letter received on Nov 5, 2015
Srikakulam (SEZ) - APIs Awaiting first inspection
Mexico NA APIs Acquired from Roche in 2005. Manufactures naproxen. Received WL (Jun’11) and Import Alert (Jul’11). Closed in Jul’12
Mirfield, UK NA APIs Acquired from Dow Pharma in 2005
Srikakulam Plant1 (SEZ) FY15 Formulations Oral solid facility. First product approvals by USFDA in FY15. Key products include atorvastatin, clopidogrel
Visakhapatnam Plant-
1 (SEZ)Mar-15 Formulations
Oncology facility. Warning Letter received on Nov 5, 2015. 4-5 ANDAs pending approval. Key marketed products included
azacitidine, decitabine, sirolimus
Shreveport (US) NA Formulations Acquired from BASF in 2008
Bristol (US) NA Formulations Acquired from GSK in 2011. Manufactures amoxicillin and related products
Hyderabad Plant-3
(Bachupally)Jul-15 Formulations
Form 483 with observations issued post last inspection. Observations minor and escalation unlikely, as per management.
Largest formulations facility. Key products include gNexium, gDepakote ER, gGeodon, gValcyte, gToprol XL
Data from 40
active Import
Alerts on Indian
drug facilities
Page 29
Dr Reddy’s Laboratories CMP
Rs. 3109
Target
Rs. 3328
Rating
ADDFinancial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY18E FY14 FY15 FY16E FY17E FY18E
Profit & Loss Growth ratios
Revenue 132,170 148,189 160,649 176,395 199,094 Revenue 13.7% 12.1% 8.4% 9.8% 12.9%
EBITDA 31,214 33,469 41,262 42,976 50,321 EBITDA 25.5% 7.2% 23.3% 4.2% 17.1%
Depreciation & amortization (7,095) (8,100) (9,687) (10,829) (12,014) Adjusted PAT 20.3% 5.5% 15.5% 6.1% 16.4%
EBIT 24,119 25,369 31,575 32,148 38,307 Margin ratios
Other Income 3,090 3,691 2,767 3,358 3,654 EBITDA 23.6% 22.6% 25.7% 24.4% 25.3%
Interest expense (1,274) (1,092) (1,948) (979) (701) Adjusted PAT 15.5% 14.6% 15.7% 15.1% 15.6%
Exceptional items / Forex gain / (loss) 497 0 0 0 0 Performance ratios
PBT 26,432 27,968 32,394 34,527 41,260 RoE 26.2% 21.9% 21.0% 18.8% 18.7%
PAT (after minority interest and associates) 21,515 22,179 25,607 27,157 31,606 RoCE 18.0% 15.9% 16.6% 15.5% 16.0%
Adjusted PAT 21,017 22,179 25,607 27,157 31,606 RoA 15.0% 13.4% 13.5% 13.1% 13.8%
Balance Sheet Fixed asset turnover (x) 1.1 1.1 1.1 1.2 1.3
Net Worth 90,801 111,302 132,923 155,696 182,519 Total asset turnover (x) 0.9 0.9 0.8 0.9 0.9
Deferred Tax (3,310) (4,013) (4,013) (4,013) (4,013) Financial stability ratios
Total debt 44,742 43,126 41,704 29,871 32,147 Net Debt to Equity (x) 0.1 0.0 (0.1) (0.2) (0.2)
Other liabilities and provisions 21,433 27,895 29,563 31,625 34,511 Net Debt to EBITDA (x) 0.4 0.1 (0.2) (0.6) (0.9)
Total Networth and liabilities 153,666 178,310 200,177 213,179 245,164 Current ratio (x) 1.8 1.8 3.3 3.2 3.2
Gross Fixed assets 129,731 138,466 149,966 145,692 158,192 Inventory and debtor days 157 163 170 170 170
Net fixed assets 59,121 64,520 66,333 67,504 67,990 Working capital days 128 137 144 144 144
Investments 806 3,850 4,056 4,282 4,530 Interest cover (x) 18.9 23.2 16.2 32.8 54.6
Cash and short-term investments 33,534 39,653 50,872 55,037 75,578 Valuation metrics
Loans & advances and other assets 13,679 14,663 15,650 16,889 18,659 Fully Diluted Shares (mn) 170.7 170.9 170.9 170.9 170.9
Net working capital 46,526 55,624 63,266 69,468 78,407 Market cap (Rs.mn) 530,127
Total assets 153,666 178,310 200,177 213,179 245,164 Adjusted EPS (Rs.) 123.1 129.8 149.8 158.9 184.9
Cash Flows P/E (x) 25.2 24.0 20.8 19.6 16.8
Cash flows from Operations 19,463 25,033 28,353 31,152 33,860 EV (Rs.mn) 520,959
Capex (10,081) (15,327) (11,500) (12,000) (12,500) EV/ EBITDA (x) 16.7 15.6 12.6 12.1 10.4
Cash flows from Investing (16,620) (22,904) (9,778) (9,791) (10,110) BV/ share (Rs.) 531.9 651.1 777.6 910.9 1,067.8
Cash flows from Financing (217) (4,118) (7,356) (17,196) (3,208) Price to BV (x) 5.8 4.8 4.0 3.4 2.9
Page 30
Lupin CMP
Rs. 1845
Target
Rs. 1,763
Rating
REDUCE
Stock performance
1m 3m 12m
LPC 3% -9% 29%
Sensex 0% 0% -5%
BSEHC 4% -5% 16%
Financial Summary (Consolidated)
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE ROCE
FY15 127,700 36,196 24,032 53.2 34.7 24.5 30.4% 28.7%
FY16E 137,059 34,471 22,747 50.4 36.6 25.7 23.2% 17.6%
FY17E 176,109 49,236 31,872 70.6 26.2 18.0 26.4% 18.7%
FY18E 205,201 55,705 36,205 80.2 23.0 15.9 24.1% 19.8%
Date 4 Jan 2016
Market Data
SENSEX 26161
Nifty 7963
Bloomberg LPC IN
Shares o/s 450mn
Market Cap Rs. 831bn
52-wk High-Low Rs. 2,129-1,365
3m Avg. Daily Vol Rs. 1,948mn
Index member BSE SENSEX
Latest shareholding (%)
Promoters 46.6
Institutions 43.4
Public 10.0
Initiating Coverage
Initiating coverage; ‘REDUCE’
DR HARITH AHAMED [email protected] +91 44 4344 0052
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
After a disappointing H1FY16 impacted by price erosions in several key products, we expect Lupin’s
performance to improve in H2FY16 on the back of price increase-driven upsides in gFortamet (Lupin has ~60%
Rx share) and gGlumetza (sole FTF launch in Feb 2016). Gavis which accounts for ~25% of Lupin’s incremental
EBITDA on our estimates in FY16-18 has a largely unknown pipeline, exposing Lupin’s earnings to significant
execution risks. We believe the risk-reward is unfavourable at current valuation of 26x FY17 earnings (which
include one-off FTF profits) and valuations do not reflect the inferior return ratios post Gavis acquisition. Re-
initiating coverage with ‘REDUCE’ rating
Key investment thesis:
Near-term performance largely dependent on price increases: Lupin’s performance in H1FY16 was impacted by
price erosion in key products such as Suprax, gGeodon, gCymbalta and gNiaspan (refer page 32). EBITDA margin in
1HFY16 declined sharply to 23% (vs. 28% in FY15). Recovery in H2FY16 is largely dependent on price increase-driven
upsides in gFortamet (Lupin has ~60% Rx share) and expected sole FTF launch of gGlumetza. While Lupin took ~3x
price increase in gFortamet (which should reflect in US sales and margins from Q3FY16), Valeant increased brand
Glumetza prices by ~10x. We believe Lupin’s growth in FY17-FY18 depends heavily on the sustenance of price
increases in gFortamet and Glumetza, given the company’s initiatives in dermatology, biosimilars, injectables and
inhalers are in early stages and meaningful contributions from these segments are still few years away
Gavis – low pipeline visibility adds significant execution risks to earnings: Lupin has guided for Gavis’ sales to
grow to ~$300mn by FY18 (from ~$96mnn in CY14). Gavis’ pipeline is largely unknown with <10 para IV filings (out of
66 pending ANDAs) and no product with $50mn+ sales potential according to management. We have factored $190mn
and $250mn sales from Gavis in FY17 and FY18, respectively. On our estimates, Gavis contributes 26% of Lupin’s
incremental EBITDA in FY16-18. In our view, the high dependence on a largely unknown pipeline exposes Lupin’s
earnings to significant execution risks. We note that in H1FY16, Gavis received only one ANDA approval
Valuation and stock view: At CMP of Rs. 1845, Lupin trades at 26x and 23x of our FY17E and FY18E earnings,
respectively. We believe the price increase-driven upsides in gFortamet and gGlumetza are unlikely to sustain in the
long term. Further, the impact of the $800mn Gavis acquisition on return ratios is yet to reflect in the stock’s valuations.
We value the Lupin at 22x FY18E EPS of Rs. 80.2, to arrive at a target price of Rs. 1,763. Re-initiating coverage with
‘REDUCE’ rating
Page 31
Lupin CMP
Rs. 1845
Target
Rs. 1,763
Rating
REDUCESegmental sales and EBITDA
EBITDA growth highly leveraged to gFortamet price increase, gGlumetza FTF launch and Gavis
FY14 FY15 FY16E FY17E FY18EFY16E
Jun-15 Sep-15 Dec-15 Mar-16
US sales breakup
FTFs 52 18 47 77 20 - - - 47
gFortamet 75 80 115 150 125 20 20 35 40
Gavis - - 40 190 250 - - - 40
US generics – base 595 713 591 826 1,105 142 139 149 161
US – branded 81 80 48 47 48 18 15 8 8
Total US $mn 803 891 841 1,289 1,548 180 174 192 296
Net sales breakup
US Rs. Mn 48,691 56,576 55,394 82,844 99,433 11,906 11,550 12,560 19,378
EU 3,115 3,279 4,131 4,919 5,903 856 1,158 953 1,164
Japan 12,954 13,239 13,535 14,849 16,334 3,231 3,234 3,648 3,423
Domestic formulations 24,796 29,679 33,775 39,179 45,448 8,851 8,738 8,554 7,633
Emerging markets 10,133 11,283 14,515 17,684 20,469 2,642 3,884 3,728 4,261
API 11,178 11,941 12,670 13,443 14,263 3,257 3,219 2,965 3,229
Net sales 110,867 125,997 134,020 172,918 201,850 30,743 31,783 32,407 39,087
EBITDA breakup
FTFs 2,812 986 2,766 4,445 1,128 - - - 2,766
% margin 90% 90% 90% 90% 90% 90% 90% 90% 90%
gFortamet 2,950 3,174 5,677 7,484 5,835 825 845 1,840 2,168
% margin 65% 65% 76% 78% 73% 65% 65% 80% 83%
Gavis - - 1,469 6,592 8,352 - - - 1,469
% margin - - 56% 54% 52% - - - 56%
Base (ex FTFs, gFortamet, Gavis) 31,214 40,545 35,628 46,032 58,246 9,546 8,118 8,733 9,231
% margin 30% 34% 29% 32% 33% 32% 27% 29% 30%
Core EBITDA 36,976 44,704 45,539 64,554 73,562 10,371 8,963 10,572 15,633
% margin 33.4% 35.5% 34.0% 37.3% 36.4% 33.7% 28.2% 32.6% 40.0%
Other operating income 1,999 1,703 3,039 3,191 3,351 759 1,430 600 250
R&D - Gavis - - -472 -1,831 -1,927 - - - -472
R&D - Lupin -8,948 -10,211 -13,635 -16,677 -19,279 -2,964 -3,671 -3,500 -3,500
Total R&D expense -8,948 -10,211 -14,107 -18,508 -21,207 -2,964 -3,671 -3,500 -3,972
% of sales 8.1% 8.1% 10.5% 10.7% 10.5% 9.6% 11.6% 10.8% 10.2%
EBITDA 30,028 36,196 34,471 49,236 55,705 8,166 6,721 7,672 11,911
% margin 26.6% 28.3% 25.2% 28.0% 27.1% 25.9% 20.2% 23.2% 30.3%
Source: Company data, Spark Capital Research
Page 32
Lupin CMP
Rs. 1845
Target
Rs. 1,763
Rating
REDUCE
EBITDA margin – quarterly trend
Source: Company data, Spark Capital Research
Price erosion in key products impacted Lupin’s growth and margins in H1FY16
Source: Company data, Medicaid, Spark Capital Research
US sales – quarterly trend
Source: Company data, Spark Capital Research
193206
180167
215241
262
202217 211
180 174
Dec-1
2
Ma
r-1
3
Jun
-13
Se
p-1
3
Dec-1
3
Ma
r-1
4
Jun
-14
Se
p-1
4
Dec-1
4
Ma
r-1
5
Jun
-15
Se
p-1
5
US sales ($mn)
24% 25% 24% 25% 26%28%
33%
26% 28%26% 26%
20%
Dec-1
2
Ma
r-1
3
Jun
-13
Se
p-1
3
Dec-1
3
Ma
r-1
4
Jun
-14
Se
p-1
4
Dec-1
4
Ma
r-1
5
Jun
-15
Se
p-1
5
% EBITDA margin
Product Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15
Suprax 1.0x 0.8x
gCelebrex 1.0x 0.9x 0.7x
gCymbalta 1.0x 1.0x 0.5x 0.2x 0.2x 0.2x 0.2x
gTricor 1.0x 0.9x 0.8x 0.6x 0.7x 0.5x 0.5x 0.4x
gTrilipix 1.0x 1.0x 0.9x 0.8x 0.8x 0.8x 0.7x
gCombivir 1.0x 1.0x 1.0x 0.9x 0.9x 0.8x 0.8x 0.5x
gNiaspan 1.0x 1.0x 0.9x 0.8x 0.8x 0.6x
gGeodon 1.0x 1.0x 0.9x 0.9x 0.7x 0.5x 0.5x 0.5x
Price erosion in key products impacted Lupin’s growth and margins in H1FY16
Page 33
Lupin CMP
Rs. 1845
Target
Rs. 1,763
Rating
REDUCE
Growth highly leveraged to gFortamet price increase, gGlumetza FTF launch and Gavis
Source: Company data, Spark Capital Research
Marginal decline in Glumetza volumes post price increase
Source: Bloomberg, Spark Capital Research
High pipeline visibility in the US
Source: Company data, Spark Capital Research
Gavis acquisition strengthens Lupin’s ANDA pipeline
Source: Company data, Spark Capital Research
320260
196 168
96154
76
65
Teva+ Allergan
Mylan Aurobindo Cadila Lupin +Gavis
Sun DrReddy's
ANDAs pending approval
Active ingredient Brand Est. launch date
ethinyl estradiol + norgestimate OrthoTricyclen Lo Jan-16
metformin ER Glumetza Feb-16
esomeprazole Mg Nexium Apr-16
lanthanum carbonate Fosrenol Apr-16
aripiprazole Abilify Jul-16
tolterodine tartrate Detrol LA Oct-16
sevelamer HCl Renagel Oct-16
colesevelam HCl Welchol - Suspension Oct-16
carvedilol phosphate Coreg CR Oct-16
sevelamer carbonate Renvela - Suspension Apr-17
sevelamer carbonate Renvela - Tab Apr-17
colesevelam HCl Welchol - Tab Apr-17
lapatinib ditosylate Tykerb Jul-17
oseltamivir phosphate Tamiflu Sep-17
8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 9%
0%
20%
40%
60%
80%
100%
Dec-1
4
Jan
-15
Fe
b-1
5
Ma
r-1
5
Ap
r-15
Ma
y-1
5
Jun
-15
Jul-
15
Au
g-1
5
Se
p-1
5
Oct-
15
Nov-1
5
Glucophage XR (inc Gx) Fortamet (inc Gx) Glumetza
17.7 18.0
1.50.3
1.51.7
2.3
4.02.8
2.8
19.3
26.2
0
5
10
15
20
25
30
1H
FY
16
FT
Fs
gF
ort
am
et
Gavis
Base
2H
FY
16
E
35.646.0
5.110.4
6.6
5.7
1.87.5
2.81.7
4.4
45.5
64.6
0
10
20
30
40
50
60
70
FY
16E
FT
Fs
gF
ort
am
et
Gavis
Base
FY
17E
Ex Gavis US pipeline – higher visibility vs. peers
Core EBITDA
Page 34
Lupin CMP
Rs. 1845
Target
Rs. 1,763
Rating
REDUCENo adverse outcomes in recent FDA audits
M&As and partnerships – key focus area
Date Target / Partner Geography Type of transaction Rationale
Oct-15 Boehringer Ingelheim India Co-marketing alliance Co-market DPP-4 inhibitor linagliptin and linagliptin + metformin
Jul-15Specialty portfolio from
TemmlerGermany Product portfolio acquisition Strengthened presence in Germany with addition of 13 CNS products
Jul-15 Gavis US Acquisition$800mn transaction. 20+ approved and 66 pending ANDAs. One manufacturing
facility in the US
Jul-15 Biocom Russia Acquisition Entry into Russia
May-15 Medquimica Brazil Acquisition Foray into Brazil
Mar-15 Pharma Dynamics South Africa Acquisition Increased stake from 60% to 100%
Feb-15 Celon Pharma Multiple markets Co-developmentJointly develop gAdvair for USA, Canada, Mexico and other markets. Lupin
responsible for commercialization
Sep-14 Merck Serono Emerging markets Product devpt. & supply Lupin to develop products, provide dossiers and supply finished products
Sep-14 Salix Canada Product licensing Exclusive rights to market certain Salix products in Canada
Apr-14 Yoshindo Japan JV Formed JV YL Biologics for developing biosimilars
Mar-14 Grin S.A De C.V Mexico Acquisition Entry into Mexico
Feb-14 Nanomi Netherlands Acquisition Foray into complex injectables
Sep-13 Dermatologics LLC US Co-marketing alliance Exclusive rights to co-promote Locoid brand in the US
Aug-13 Romark Laboratories US Product licensing Acquired exclusive rights for Alinia oral suspension for US market
Source: Company data, Spark Capital Research
Strong record in recent inspections, Mandideep facility due for inspection
FacilityLast
inspection
Type of
facilityComments
Tarapur Aug-15 APIs No observations in recent inspection
Pithampur, Indore Aug-15APIs and
Formulations
Most oral contraceptive and ophthalmic filings from here. Facility has 3 units. All units inspected in CY15. Only
Unit 2 received Form 483 with observations
Goa Jul-15 FormulationsForm 483 with 9 observations issued post last inspection. Observations unlikely to be major as ANDA approvals
continue from here. Supplies 50+ products including gFortamet, gCelebrex, gTricor, gCymbalta
Chikalthana, Aurangabad Apr-15 Formulations Form 483 with observations issued post recent inspection. 5-6 ANDAs approved from the facility
Nagpur Mar-15 Formulations New facility. Inspected and certified in FY15. No observations in the last inspection
New Jersey, USA Jan-15 FormulationsGavis' facility. No observations in the last inspection. 60+ ANDAs filed. Key marketed products include
gMethergine, gRowasa Enema
Mandideep Oct-11APIs and
FormulationsManufactures all cephalosporin products including Suprax. WL received in May 2009 and closed-out in Jan 2010
Source: Company data, FDAzilla, Spark Capital Research
Page 35
Lupin CMP
Rs. 1845
Target
Rs. 1,763
Rating
REDUCEFinancial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY18E FY14 FY15 FY16E FY17E FY18E
Profit & Loss Growth ratios
Revenue 112,866 127,700 137,059 176,109 205,201 Revenue 17.1% 13.1% 7.3% 28.5% 16.5%
EBITDA 30,028 36,196 34,471 49,236 55,705 EBITDA 32.3% 20.5% -4.8% 42.8% 13.1%
Depreciation (2,610) (4,347) (4,448) (5,768) (6,371) Adjusted PAT 39.7% 30.9% -5.3% 40.1% 13.6%
EBIT 27,418 31,849 30,023 43,468 49,334 Margin ratios
Other Income 1,165 2,398 2,171 1,844 1,546 EBITDA 26.6% 28.3% 25.2% 28.0% 27.1%
Interest expense (267) (98) (405) (921) (455) Adjusted PAT 16.1% 18.5% 16.3% 17.9% 17.5%
PBT 28,317 34,148 31,788 44,391 50,425 Performance ratios
PAT (after minority interest) 18,364 24,032 22,747 31,872 36,205 RoE 30.3% 30.4% 23.2% 26.4% 24.1%
Adj PAT (after minority interest) 18,364 24,032 22,747 31,872 36,205 RoCE 26.9% 28.7% 17.6% 18.7% 19.8%
Balance Sheet RoA 23.6% 24.9% 15.3% 16.4% 17.6%
Net Worth 69,985 88,982 107,464 134,827 166,264 Fixed asset turnover (x) 2.1 2.0 1.2 1.2 1.3
Deferred Tax 1,779 1,182 1,182 1,182 1,182 Total asset turnover (x) 1.4 1.3 0.9 0.9 1.0
Total debt 6,537 5,371 62,625 46,945 23,249 Financial stability ratios
Other liabilities 2,331 8,077 8,481 8,905 9,350 Net Debt to Equity (x) (0.0) 0.0 0.5 0.3 0.1
Provisions 4,779 7,363 7,964 9,306 10,373 Net Debt to EBITDA (x) (0.0) 0.0 1.6 0.7 0.2
Total Networth and liabilities 85,411 110,975 187,716 201,164 210,418 Current ratio (x) 2.4 1.7 1.8 1.9 1.9
Gross Fixed assets 55,880 72,771 147,913 155,413 163,763 Inventory and debtor days 151 149 165 165 165
Net fixed assets 36,597 49,442 120,136 121,868 123,847 Working capital days 99 93 105 105 105
Investments 1,785 16,584 12,584 10,584 8,584 Interest cover (x) 102.9 324.7 74.1 47.2 108.4
Cash and bank balances 7,975 4,814 7,942 10,044 10,549 Valuation metrics
Loans & advances and other assets 9,060 8,095 8,500 8,925 9,371 Fully Diluted Shares (mn) 450.2 451.7 451.7 451.7 451.7
Net working capital 29,994 32,041 38,554 49,744 58,066 Market cap (Rs.mn) 831,278
Total assets 85,411 110,975 187,716 201,164 210,418 Adjusted EPS (Rs.) 40.8 53.2 50.4 70.6 80.2
Cash Flows P/E (x) 45.2 34.7 36.6 26.2 23.0
Cash flows from Operations 20,039 27,331 21,480 28,532 35,605 EV (Rs.mn) 886,355
Capex (5,286) (15,006) (75,143) (7,500) (8,350) EV/ EBITDA (x) 29.5 24.5 25.7 18.0 15.9
Cash flows from Investing (8,585) (10,545) (71,143) (5,500) (6,350) BV/ share (Rs.) 154.0 196.5 237.2 297.6 367.0
Cash flows from Financing (8,571) (1,969) 52,791 (20,930) (28,749) Price to BV (x) 12.0 9.4 7.8 6.2 5.0
Page 36
Sun Pharmaceutical Industries CMP
Rs. 816
Target
Rs. 910
Rating
BUY
Stock performance
1m 3m 12m
SUNP 12% -6% -1%
Sensex 0% 0% -5%
BSEHC 4% -5% 16%
Financial Summary (Consolidated)
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE ROCE
FY15 274,334 80,636 47,784 19.9 41.1 24.1 21.6% 20.9%
FY16E 283,270 86,706 53,245 22.1 36.9 22.4 19.4% 17.5%
FY17E 329,624 114,290 72,220 30.0 27.2 17.0 22.3% 20.4%
FY18E 375,347 132,754 86,746 36.1 22.6 14.6 22.1% 21.3%
Date 4 Jan 2016
Market Data
SENSEX 26161
Nifty 7963
Bloomberg SUNP IN
Shares o/s 2,407mn
Market Cap Rs. 1,963bn
52-wk High-Low Rs. 1,201-704
3m Avg. Daily Vol Rs. 3,403mn
Index member BSE SENSEX
Latest shareholding (%)
Promoters 54.7
Institutions 35.6
Public 9.7
Initiating CoverageSun had a challenging FY15 and 1HFY16 with lack of product approvals, impact of remediation measures on
output (both related to compliance status of Halol facility) and integration expenses related to Ranbaxy
acquisition impacting performance. Considering the significant remediation measures implemented by the
company since receiving the Form 483 in Sep 2014 and the nature of observations in the Warning Letter (no data
integrity issues), we expect Sun’s Halol facility to be back in compliance by 2HFY17. Product approvals and
growth should improve from 2HFY17. In the near-term gGleevec launch will drive growth and margins. We believe
Sun’s initiatives in the US branded segment hold huge potential. Re-initiate coverage with ‘BUY’
Key investment thesis:
Halol Warning Letter, quick resolution likely: Halol facility accounts for 8-9% of Sun’s consolidated sales
(significantly higher share of profits) and is the company’s only facility with injectables manufacturing capabilities. We
note that the recently issued Warning Letter for Halol does not include any data integrity related issues and observations
are mostly related to sterile procedures and adherence to SOPs. We believe the risk of Import Alert is minimal and
expect Sun to resolve the Warning Letter in 9-12 months (by 2HFY17). Near-term performance will benefit from launch
of gGleevec (sole FTF, successfully transferred out of Halol to the company’s Cranbury site) in Feb 2016
Margins have bottomed out: Sun (ex Taro) has witnessed significant margin contraction from FY15, key reasons
being remediation measures at Halol, charges related to Ranbaxy integration and higher R&D spend on account of MK
3222 phase III clinical trials. We expect margins to recover from H2FY16 as production improves at Halol and Ranbaxy
integration progresses towards completion. In the medium-to-long term we expect significant margin improvement from
rationalization of Ranbaxy businesses, resolution of Ranbaxy consent decree and operational synergies from Ranbaxy
Initiatives to establish a US branded business, early days but huge potential: We are positive on Sun’s recent
steps towards establishing branded business in the US focused on dermatology and ophthalmology. We believe in-
licensing of tildrakizumab (novel biologic for plaque psoriasis), launch of Keveyis (Taro’s product for periodic paralysis),
acquisition of InSite Vision and in-licensing of SPARC products (Xelpros, Elepsia) are steps in the right direction
Valuation and stock view: At CMP of Rs. 816, Sun trades at 27x and 23x our FY17E and FY18E earnings,
respectively. We note that valuations off FY18 estimates do not reflect potential earnings upsides from tildrakizumab
(filing in CY17) and synergies from Ranbaxy. Our target price of Rs. 910 is 24x FY18E EPS of Rs. 36.1 plus Rs. 45 per
share for probability-adjusted NPV for tildrakizumab opportunity. Re-initiate coverage with ‘BUY’
Initiating coverage; ‘BUY’
DR HARITH AHAMED [email protected] +91 44 4344 0052
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Page 37
Sun Pharmaceutical Industries CMP
Rs. 816
Target
Rs. 910
Rating
BUYSegmental sales and EBITDA
Sole FTF launch of gGleevec to drive performance in the near-term
FY14 FY15 FY16 FY17E FY18E FY16E
Jun-15 Sep-15 Dec-15 Mar-16
US sales breakup
Taro 669 777 845 917 1,039 194 191 223 238
Sun ex Taro – FTFs 40 - 67 162 - - - - 67
Sun ex Taro – Base 911 1,470 1,241 1,513 1,854 294 319 309 319
US sales ($mn) 1,620 2,247 2,153 2,592 2,893 488 510 532 623
Sales break up
US 97,844 137,196 139,776 166,536 185,883 30,906 33,158 34,851 40,861
India formulations 36,918 67,166 73,680 86,943 102,593 17,837 18,187 19,142 18,514
Other reg markets 8,777 23,320 21,768 24,300 27,402 5,749 4,968 5,736 5,315
Emerging markets 10,308 37,326 35,206 40,083 46,697 8,448 9,089 9,037 8,631
APIs 8,010 9,910 11,534 12,688 13,957 2,714 3,146 2,528 3,146
Other 138 792 756 794 833 214 142 200 200
Gross sales 161,995 275,709 282,720 331,344 377,364 65,868 68,689 71,496 76,667
Excise duty -1,951 -2,844 -2,748 -3,220 -3,667 -610 -656 -715 -767
Net sales 160,044 272,865 279,973 328,124 373,697 65,259 68,033 70,781 75,900
EBITDA breakup
Taro 30,577 37,348 42,543 46,308 52,967 9,693 9,589 11,291 11,970
% margin 66% 71% 70% 72% 73% 71% 70% 71% 71%
FTFs 2,178 - 3,934 9,372 - - - - 3,934
% margin 90% 90% 90% 90% 90% 90% 90% 90% 90%
Sun ex Taro - base 48,248 60,192 57,336 80,970 105,305 11,449 14,174 15,344 16,369
% margin 43% 27% 27% 32% 35% 22% 26% 28% 30%
Core EBITDA 81,003 97,540 103,813 136,650 158,272 21,142 23,762 26,635 32,273
% margin 50.6% 35.7% 37.1% 41.6% 42.4% 32.4% 34.9% 37.6% 42.5%
Other operating income (Sun ex Taro) 760 1,469 3,297 1,500 1,650 2,354 343 300 300
R&D - Taro -3,361 -4,012 -4,775 -5,110 -5,754 -922 -1,217 -1,279 -1,357
R&D - Sun ex Taro -6,501 -14,361 -15,629 -18,750 -21,413 -4,077 -3,552 -4,000 -4,000
Consolidated R&D expense -9,862 -18,373 -20,404 -23,860 -27,167 -4,999 -4,769 -5,279 -5,357
as % of sales 6.2% 6.7% 7.3% 7.3% 7.3% 7.7% 7.0% 7.5% 7.1%
EBITDA - Taro 27,216 33,336 37,768 41,197 47,213 8,771 8,372 10,013 10,613
EBITDA - Sun ex Taro 44,685 47,300 48,938 73,093 85,542 9,726 10,965 11,644 16,603
Consolidated EBITDA 71,901 80,636 86,706 114,290 132,754 18,497 19,337 21,657 27,216
% margin 44.7% 29.4% 30.6% 34.7% 35.4% 27.4% 28.3% 30.5% 35.7%
Source: Company data, Spark Capital Research
Page 38
Sun Pharmaceutical Industries CMP
Rs. 816
Target
Rs. 910
Rating
BUYWe expect Halol Warning Letter resolution by 2HFY17
Resolution time <2 years in ~70% of WLs
Source: Company data, USFDA, FDAzilla, Spark Capital Research
0-12 months
9%
12-18 months
43%
18-24 months
19%
>24 months
29%
• We looked at resolution timelines for 42 CGMP WLs (for non-US facilities)
with close-out letters. Resolution time was less than 2 years in ~70% of WLs
• We note that the recently issued Warning Letter for Halol does not include
any data integrity related issues and observations are mostly related to
sterile procedures and adherence to SOPs. We believe the risk of Import
Alert is minimal and expect Sun to resolve the Warning Letter by 2HFY17
High dependence on Halol, quick resolution of Warning Letter critical for growth revival
FacilityLast
inspection
Type of
facilityComments
Panoli Jul-15 APIs No observations in the last inspection
Ahmednagar Jul-15 APIs Form 483 with observations issued post last inspection
Toansa (Ranbaxy) Jan-14 APIs Import Alert issued and facility brought under consent decree in Jan 2014
Karkhadi Nov-13APIs and
FormulationsCephalosporin facility. FDA imposed Import Alert in Mar 2014 and issued Warning Letter in May 2014
Dewas (Ranbaxy) Feb-08APIs and
Formulations
FDA issued Warning Letter and imposed Import Alert in Sep 2008. Department of Justice filed consent decree of
permanent injunction in Jan 2012
Halol Sep-14 FormulationsWarning Letter issued in Dec 2015. Contributed high single-digit percent of consolidated sales (~$350) in FY15.
All approved injectables including gDoxil manufactured at this facility
Dadra Jan-15 FormulationsForm 483 with observations issued post last inspection. Key marketed products include gNamenda, gSeroquel,
gComtan, gProscar and gMaxalt
Cranbury Aug-15 Formulations No observations in the last inspection. gGleevec (sole FTF launch in Feb 2016) was transferred to this facility
Paonta Sahib (Ranbaxy) Mar-08 FormulationsFDA issued Warning Letter and imposed Import Alert in Sep 2008. Department of Justice filed consent decree of
permanent injunction in Jan 2012
Mohali (Ranbaxy) Dec-12 Formulations FDA imposed Import Alert and brought the facility under consent decree in Sep 2013
New Jersey (Ranbaxy) Mar-14 Formulations Part of Ohm Laboratories (Ranbaxy). Form 483 with observations issued post last inspection
Wilmington May-15 FormulationsPart of Dusa Pharmaceuticals (acquired in Nov 2012). Manufactures Levulan, Dusa’s flagship product for actinic
keratosis (AK). No observations in the last inspection
Billerica NA Formulations Injectables facility, part of Pharmalucence (acquired in July 2014)
Aurora (URL) Feb-13 Formulations Part of URL (acquired from Takeda in Dec 2012). Doxycycline manufactured at this facility
Ontario, Canada (Taro) Feb-14 FormulationsDermatology facility. Key products include clobetasol, nystatin and triamcinolone, ketoconazole, lidocaine,
clobetasol and desoximetasone. Form 483 with observations issued post last inspection
Israel (Taro) NAAPIs and
FormulationsOral solid facility. Key products include warfarin, clomipramine, carbamazepine XR and carbamazepine
Resolution timelines
for CGMP WLs based
on data for 42 CGMP
WLs (for non-US
facilities) with close-
out letters
Page 39
Sun Pharmaceutical Industries CMP
Rs. 816
Target
Rs. 910
Rating
BUYANDA approvals to resume post Halol resolution; gGleevec to drive recovery in FY17
gGleevec to drive recovery in ex Taro US sales in FY17
Source: Company data, Spark Capital Research
Taro – product concentration not significant
Source: Company data, Bloomberg, Spark Capital Research
ANDA approvals to resume post resolution of WL for Halol
Source: Company data, Spark Capital Research; *SPARC products
Margins decline post Ranbaxy acquisition
Source: Company data, Spark Capital Research
Active ingredient Brand Launch
tetrabenazine Xenazine Aug-15
dexmedetomidine Precedex Aug-15
imatinib mesylate Gleevec Feb-16
carvedilol phosphate ER Coreg CR Apr-16
metformin ER Glumetza Oct-16
valganciclovir HCl Valcyte Oct-16
aripiprazole Abilify Oct-16
esomeprazole Mg Nexium Oct-16
ethinly estradiol + norgestimate OrthoTricyclen Lo Oct-16
latanoprost BAK-free Xelpros* Oct-16
levetiracetam ER Elepsia* Oct-16
dexmethylphenidate HCl Focalin XR Jan-17
Product Form Brand InnovatorNo.
playersRx %
Ketoconazole Creams Ketoconazole Teva 3 43%
Clobetasol propionate Creams Cormax Hi Tech 3 27%
Nystatin +
Triamcinolone acetonideCreams - - 3 54%
Clobetasol propionate Ointments Temovate Fougera 5 20%
Desoximetasone Creams Topicort Taro 3 58%
Clomipramine HCL Capsules Anafranil Mallinckrodt 4 28%
Warfarin sodium Tablets Coumadin BMS 10 37%
Carbamazepine XR Tablets Tegretol XR Novartis 2 41%
Carbamazepine Tablets Tegretol Novartis 4 34%
911 1,470 1,241
1,513 1,854 40
67
162
669
777 845
917 1,039
FY14 FY15 FY16E FY17E FY18E
Sun ex Taro - Base ($mn) Sun ex Taro - FTFs ($mn) Taro ($mn)
29.2 29.6 28.9
55.3
64.6
53.8
46.351.6
54.341%
44% 46%
33%
36%
31%
4%
22%26%
0%
10%
20%
30%
40%
50%
-
10
20
30
40
50
60
70
Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15
Net sales - ex Taro (Rs. bn) % Core EBITDA margin (pre R&D)
Page 40
Sun Pharmaceutical Industries CMP
Rs. 816
Target
Rs. 910
Rating
BUY
Historical P/E band
M&A and product licensing activities have picked up in recent years
M&A transactions – last 5 years
Year Deals Geography Rationale
2015 Acquired InSite Vision Inc. US Pipeline of ophthalmic drugs
2015Acquisition of GSK's Opiates
business
Global
marketsVertical integration for controlled-substance drugs
2015Distribution agreement with
AstraZenecaIndia
For brand Axcer (brand of ticagrelor for acute
coronary syndrome
2015 Ranbaxy acquisitionGlobal
markets
Ranbaxy's strong presence in India, US and emerging
markets
2014 In-licensing of MK-3222Global
marketsNovel biologic for plaque psoriasis
2014 Acquired Pharmalucence US Sterile injectable capacity in the US
2013 Formation of Sun-Intrexon JV US JV for ocular therapies
2013Acquired URL’s generic
businessUS Adds 107 products to US portfolio
2012 Acquired DUSA Pharma, Inc. USAccess to branded dermatology product, Levulan, for
treatment of Actinic Keratosis
2011 Formation of Sun-MSD JVEmerging
marketsBranded generics in emerging markets
2010 Acquired Taro Israel Attractive basket of dermatology products
Summary of consolidated financials
FY14 FY15 FY16E FY17E FY18E FY15-18E CAGR
Taro 46,121 52,869 60,378 64,678 72,825 11%
Sun ex Taro 114,683 221,465 222,892 264,945 302,522 11%
Revenue 160,804 274,334 283,270 329,624 375,347 11%
Taro 27,216 33,336 37,768 41,197 47,213 12%
% margin 59.0% 63.1% 62.6% 63.7% 64.8%
Sun ex Taro 44,685 47,300 48,938 73,093 85,542 22%
% margin 39.0% 21.4% 22.0% 27.6% 28.3%
EBITDA 71,901 80,636 86,706 114,290 132,754 18%
% margin 44.7% 29.4% 30.6% 34.7% 35.4%
Taro 22,010 29,762 31,665 33,133 38,277 9%
Sun ex Taro 16,780 25,132 24,478 49,382 60,364 34%
PAT 38,790 54,894 56,143 82,515 98,641 22%
Minority interest (7,375) (9,488) (9,750) (10,295) (11,895) 8%
PAT after minority 31,415 45,406 46,394 72,220 86,746 24%
Source: Company data, Spark Capital Research
Source: Company data, Spark Capital Research Source: Bloomberg, Spark Capital Research
0
200
400
600
800
1,000
1,200
Ap
r-08
Se
p-0
8
Fe
b-0
9
Jul-0
9
Dec-0
9
Ma
y-1
0
Oct-
10
Ma
r-11
Au
g-1
1
Jan
-12
Jun
-12
Nov-1
2
Ap
r-13
Se
p-1
3
Fe
b-1
4
Jul-1
4
Dec-1
4
Ma
y-1
5
Oct-
15
12M fwd P/EC
MP
(Rs.)
32x
12x
16x
20x
24x
28x
Page 41
Sun Pharmaceutical Industries CMP
Rs. 816
Target
Rs. 910
Rating
BUYFinancial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY18E FY14 FY15 FY16E FY17E FY18E
Profit & Loss Growth ratios
Revenue 160,804 274,334 283,270 329,624 375,347 Revenue 42.3% 70.6% 3.3% 16.4% 13.9%
EBITDA 71,901 80,636 86,706 114,290 132,754 EBITDA 46.8% 12.1% 7.5% 31.8% 16.2%
Depreciation (4,092) (12,948) (10,041) (10,574) (11,065) Adjusted PAT 63.6% -15.6% 11.4% 35.6% 20.1%
EBIT 67,808 67,688 76,666 103,716 121,689 Margin ratios
Other Income 3,624 4,521 5,391 3,696 4,031 EBITDA 44.7% 29.4% 30.6% 34.7% 35.4%
Interest expense (442) (5,790) (5,113) (4,431) (2,524) Adjusted PAT 35.2% 17.4% 18.8% 21.9% 23.1%
Exceptional items (25,174) (2,378) (6,852) - - Performance ratios
PBT 45,817 64,041 70,091 102,981 123,196 RoE 33.8% 21.6% 19.4% 22.3% 22.1%
PAT (after minority interest) 31,415 45,406 46,394 72,220 86,746 RoCE 32.3% 20.9% 17.5% 20.4% 21.3%
Adjusted PAT (after minority interest) 56,589 47,784 53,245 72,220 86,746 RoA 24.9% 13.5% 12.0% 15.3% 16.6%
Balance Sheet Fixed asset turnover (x) 1.6 1.6 1.2 1.4 1.5
Net Worth 204,461 284,893 331,620 403,995 491,771 Total asset turnover (x) 0.7 0.8 0.6 0.7 0.7
Deferred Tax (9,110) (17,516) (17,525) (17,524) (17,524) Financial stability ratios
Total debt 25,609 89,939 74,067 44,176 9,138 Net Debt to Equity (x) (0.2) (0.1) (0.2) (0.3) (0.4)
Other liabilities and provisions 47,599 82,924 60,464 62,777 65,372 Net Debt to EBITDA (x) (0.7) (0.2) (0.7) (1.0) (1.4)
Total Networth and liabilities 268,559 440,239 448,626 493,424 548,757 Current ratio (x) 4.0 3.5 3.6 3.5 3.5
Gross Fixed assets 113,267 224,455 235,203 246,589 257,979 Inventory and debtor days 121 147 147 147 147
Net fixed assets 76,588 147,211 148,595 149,406 149,732 Working capital days 91 105 106 105 105
Investments 27,860 27,163 28,850 28,574 28,574 Interest cover (x) 153.4 11.7 15.0 23.4 48.2
Cash 75,902 109,980 133,386 161,719 200,747 Valuation metrics
Loans & advances and other assets 48,257 77,620 56,767 59,399 62,369 Fully Diluted Shares (mn) 2,071 2,406 2,406 2,406 2,406
Net working capital 39,952 78,265 81,028 94,325 107,335 Market cap (Rs.mn) 1,962,708
Total assets 268,559 440,239 448,626 493,424 548,757 Adjusted EPS (Rs.) 27.3 19.9 22.1 30.0 36.1
Cash Flows P/E (x) 29.8 41.1 36.9 27.2 22.6
Cash flows from Operations 39,592 53,219 60,867 79,557 94,162 EV (Rs.mn) 1,941,650
Capex (9,060) (23,659) (11,424) (11,386) (11,390) EV/ EBITDA (x) 27.0 24.1 22.4 17.0 14.6
Cash flows from Investing (23,668) (26,710) (7,786) (7,485) (7,431) BV/ share (Rs.) 89.4 106.6 121.9 147.7 179.3
Cash flows from Financing 5,066 (10,875) (29,675) (43,738) (47,703) Price to BV (x) 9.1 7.7 6.7 5.5 4.5
Page 42
Biocon CMP
Rs. 518
Target
Rs. 581
Rating
BUY
Stock performance
1m 3m 12m
BIOS 13% 17% 23%
Sensex 0% 0% -5%
BSEHC 4% -5% 16%
Financial Summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE ROCE
FY15 30,898 6,958 4,081 20.4 25.4 15.0 13.4% 10.1%
FY16E 34,730 8,390 4,589 22.9 22.6 12.4 13.6% 8.7%
FY17E 39,026 9,539 4,931 24.7 21.0 10.9 12.7% 10.7%
FY18E 44,834 11,482 5,599 28.0 18.5 9.1 13.3% 11.4%
Date 4 Jan 2016
Market Data
SENSEX 26161
Nifty 7963
Bloomberg BIOS IN
Shares o/s 200mn
Market Cap Rs. 104bn
52-wk High-Low Rs. 529-395
3m Avg. Daily Vol Rs. 227mn
Index member BSE200
Latest shareholding (%)
Promoters 61.0
Institutions 19.2
Public 19.8
Company Update
Unique play on biosimilars; maintain ‘BUY’
Recent developments from Biocon’s biosimilar portfolio has been positive with partner Mylan guiding for four
biosimilar filings (insulin glargine, trastuzumab, adalimumab and pegfilgrastim) in US and Europe in 2016.
Updates from ongoing global phase III trials for biosimilars will be key triggers for the stock in 2016. The muted
earnings growth ~11% in FY15-18 is partially on account of higher R&D expenses and higher depreciation post
commissioning of Malaysia facility. Maintain ‘BUY’ rating on the stock
Key investment thesis:
Biosimilars – we remain bullish on the opportunity: Recent developments from Biocon’s biosimilar portfolio has
been positive with four biosimilars (insulin glargine, trastuzumab, adalimumab and pegfilgrastim) making progress in
global phase III trials. Filing for biosimilar pegfilgrastim is planned in H1CY16 while filings for insulin glargine,
trastuzumab and adalimumab are scheduled for H2CY16. Updates from ongoing global phase III trials for these
biosimilars will be key triggers for the stock in 2016. On the regulatory front, more clarity has emerged on several fronts
in recent months. USFDA recently approved the first biosimilar under the 351(k) pathway, Sandoz’s filgrastim product.
The first biosimilar analog insulin, Eli Lilly’s glargine product was recently approved under the 505b(2) pathway. The
opportunity for biosimilars in EMs remains huge with potential for volume expansion post biosimilar launches not
appreciated adequately, in our view
Valuation and stock view: At CMP Biocon trades at 21x and 19x, FY17E and FY18E earnings, respectively. We note
that the muted earnings growth ~11% in FY15-18 is partially on account of higher R&D expenses and higher
depreciation post commissioning of Malaysia facility. We believe Biocon is a unique play on the global biosimilars
opportunity. The company along with Dr Reddy’s is the only Indian player with significant exposure to this huge
opportunity. The potential for volume expansion in biologic drugs post biosimilar launches, especially in EMs, is
significant, in our view
Our SOTP-based target price of Rs. 581 includes: 1) Biocon ex Syngene valued at 16x FY18 earnings of Rs. 15.1
per share 2) 25% holding company discount to Biocon’s 73.5% stake in Syngene (valued at 25x FY18 EPS of Rs. 17.5
per share) 3) Probability adjusted per share NPV of Rs. 98 for the biosimilar portfolio of insulin glargine, trastuzumab,
adalimumab and pegfilgrastim. We believe the risk-reward is attractive given the significant potential of biosimilars
portfolio and maintain ‘BUY’ rating on the stock
Page 43
Biocon CMP
Rs. 518
Target
Rs. 581
Rating
BUY
Core EBITDA (excluding R&D expense and licensing income) CAGR of 19% in FY15-18E
Off-P&L R&D spending to peak in FY16E and decline thereafter
Source: Company data, Spark Capital Research
FY14 FY15 FY16E FY17E FY18E FY15-18E CAGR
Small molecules 14,901 14,992 15,078 16,339 17,746 6%
Biosimilars 2,417 2,646 3,458 4,195 5,159 25%
Total Biopharma 17,318 17,638 18,536 20,534 22,905 9%
Branded formulations 3,914 4,296 4,540 5,221 6,056 12%
Syngene 6,871 8,427 10,568 12,689 15,357 22%
Other / Inter-segment 275 -202 -160 -317 -384 -
Net sales 28,378 30,159 33,484 38,126 43,934 13%
Biopharma – EBITDA 5,371 4,848 5,376 6,077 6,924 13%
% margin 31.0% 27.5% 29.0% 29.6% 30.2%
Branded formulation – EBITDA 235 430 748 1,011 1,347 46%
% margin 6.0% 10.0% 16.5% 19.4% 22.2%
Syngene – EBITDA 2,144 2,811 3,540 4,351 5,361 24%
% margin 31.2% 33.4% 33.5% 34.3% 34.9%
Core EBITDA 7,750 8,088 9,664 11,439 13,632 19%
% margin 27.3% 26.8% 28.9% 30.0% 31.0%
Licensing income 150 433 406 400 400 -3%
R&D expenses -1,229 -1,690 -2,300 -2,550 -2,800 18%
Other operating income 122 126 620 250 250 26%
EBITDA 6,793 6,958 8,390 9,539 11,482 18%
% margin 23.9% 23.1% 25.1% 25.0% 26.1%
FY14 FY15 FY16E FY17E FY18E
R&D spending netted off with deferred revenue 205 295 250 250 250
Capitalized R&D spending 81 611 1,200 1,200 1,200
R&D spending expensed through P&L 1,229 1,690 2,300 2,550 2,800
Gross R&D spend 1,515 2,596 3,750 4,000 4,250
Adj. profit before tax (PBT) 5,377 5,190 6,638 7,165 8,273
R&D understatement as % of PBT 5% 17% 22% 20% 18%
Biocon capitalizes R&D spending on
biosimilar trastuzumab and biosimilar
glargine given proof-of-concept from their
Indian launches
Further, R&D spending on rh insulin is
netted against deferred revenue (received
from the terminated deal with Pfizer)
We expect off-P&L R&D spending to peak
in FY16 and decline thereafter
Segmental sales and EBITDA
Page 44
Biocon CMP
Rs. 518
Target
Rs. 581
Rating
BUY
SOTP-based target price of Rs. 581
Source: Spark Capital Research
Investment phase continues
Source: Company data, Spark Capital Research
CommentsPer share
(Rs.)
Biocon ex SyngeneBiocon ex Syngene valued at 16x FY18
earnings of Rs. 15.1 per share242
Syngene
25% holding company discount to Biocon’s
73.5% stake in Syngene (valued at 25x FY18
EPS of Rs. 17.5 per share)
242
Biosimilar portfolio
Probability adjusted per share NPV of Rs. 98
for the biosimilar portfolio of insulin glargine,
trastuzumab, adalimumab and pegfilgrastim
98
Target price 581
Consolidation of Biocon (ex Syngene) and Syngene financials
Source: Company data, Spark Capital Research; *FY15 and FY16 includes exceptional incomes of Rs. 1,051mn and Rs. 3,070mn respectively
Rs. mn FY14 FY15 FY16E FY17E FY18E
Revenue – Biocon ex Syngene 21,503 22,501 24,115 26,405 29,611
Revenue – Syngene 7,270 8,397 10,615 12,621 15,223
Consolidated revenue 28,773 30,898 34,730 39,026 44,834
EBITDA – Biocon ex Syngene 4,649 4,147 4,850 5,188 6,121
EBITDA – Syngene 2,144 2,811 3,540 4,351 5,361
Consolidated EBITDA 6,793 6,958 8,390 9,539 11,482
PBT – Biocon ex Syngene 3,811 4,206 7,114 3,845 4,019
PBT – Syngene 1,566 2,035 2,594 3,321 4,254
Consolidated PBT 5,377 6,241 9,708 7,165 8,273
PAT – Biocon ex Syngene* 2,960 3,534 5,068 2,890 3,021
PAT – Syngene 1,348 1,750 2,215 2,776 3,505
Consolidated PAT* 4,308 5,284 7,283 5,666 6,526
Minority interest -170 -310 -666 -735 -927
Consolidated PAT after minority interest* 4,137 4,974 6,617 4,931 5,599
Our SOTP based target price of Rs. 581
Area of Investment Comment
Malaysia
Biocon recently commissioned its $200mn (phase I) facility
insulin manufacturing in Malaysia. The total cost including
phase II is estimated at $300mn
Formulations -
Bangalore
Construction of Biocon’s first oral solid dosage facility in
Bangalore. $25mn investment. Estimated completion in
CY17
Insulin facility -
Bangalore
Expansion of drug product facility in Bangalore initiated.
Expected completion in FY18
Monoclonal
antibodies
Expansion of existing mAb capacity in Bangalore, in-line
with launch timelines
Other Recently commissioned new devices facility in Bangalore
Page 45
Biocon CMP
Rs. 518
Target
Rs. 581
Rating
BUYFinancial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY18E FY14 FY15 FY16E FY17E FY18E
Profit & Loss Growth ratios
Revenue 28,773 30,898 34,730 39,026 44,834 Revenue 17.2% 7.4% 12.4% 12.4% 14.9%
EBITDA 6,793 6,958 8,390 9,539 11,482 EBITDA 32.6% 2.4% 20.6% 13.7% 20.4%
Depreciation & amortization (2,036) (2,210) (2,454) (2,660) (3,377) Adjusted PAT 26.0% -1.4% 12.5% 7.5% 13.5%
EBIT 4,756 4,748 5,936 6,879 8,105 Margin ratios
Other Income 637 531 856 567 486 EBITDA 23.6% 22.5% 24.2% 24.4% 25.6%
Interest expense (17) (89) (153) (280) (318) Adjusted PAT 14.1% 13.0% 12.9% 12.5% 12.4%
Exceptional items - 1,051 3,070 - - Performance ratios
PBT 5,377 6,241 9,708 7,165 8,273 RoE 14.7% 13.4% 13.6% 12.7% 13.3%
PAT 4,137 4,974 6,617 4,931 5,599 RoCE 12.4% 10.1% 8.7% 10.7% 11.4%
Adjusted PAT 4,137 4,081 4,589 4,931 5,599 RoA 8.7% 7.2% 7.3% 7.2% 7.7%
Balance Sheet Fixed asset turnover (x) 1.1 1.1 1.1 0.9 0.8
Net Worth 31,090 34,428 42,699 46,786 51,579 Total asset turnover (x) 0.6 0.5 0.5 0.6 0.6
Deferred Tax 450 417 417 417 417 Financial stability ratios
Total debt 8,637 11,172 11,638 10,317 11,488 Net Debt to Equity (x) (0.2) (0.0) (0.0) (0.0) 0.0
Other liabilities and provisions 13,857 13,444 12,188 11,897 11,773 Net Debt to EBITDA (x) (0.9) (0.1) (0.2) (0.0) 0.0
Total Networth and liabilities 54,034 59,461 66,943 69,418 75,257 Current ratio (x) 2.4 2.4 2.1 2.4 2.1
Gross Fixed assets 26,746 29,750 36,051 50,851 58,951 Inventory and debtor days 137 125 146 137 136
Net fixed assets 27,308 33,065 38,561 42,900 46,323 Working capital days 81 95 87 87 86
Long-term investments 645 - - - - Interest cover (x) 278.1 53.3 38.7 24.6 25.5
Cash and short-term investments 15,048 11,678 13,451 10,450 11,486 Valuation metrics
Loans and advances 3,511 4,506 4,877 5,244 5,612 Fully Diluted Shares (mn) 200.0 200.0 200.0 200.0 200.0
Other assets 1,230 2,273 1,962 1,651 1,342 Market cap (Rs.mn) 103,620
Net working capital 6,292 7,939 8,093 9,172 10,494 Adjusted EPS (Rs.) 20.7 20.4 22.9 24.7 28.0
Total assets 54,034 59,461 66,943 69,418 75,257 P/E (x) 25.0 25.4 22.6 21.0 18.5
Cash Flows EV (Rs.mn) 104,416
Cash flows from Operations 5,607 2,107 5,982 7,042 8,562 EV/ EBITDA (x) 15.4 15.0 12.4 10.9 9.1
Cash flows from Investing (9,381) (5,087) (10,209) (6,000) (5,800) BV/ share (Rs.) 134.7 151.3 163.5 200.5 217.2
Cash flows from Financing 4,260 1,862 3,741 (3,043) (727) Price to BV (x) 3.8 3.4 3.2 2.6 2.4
Page 46
Cadila Healthcare CMP
Rs. 333
Target
Rs. 352
Rating
ADD
Stock performance
1m 3m 12m
CDH -17% -20% 3%
Sensex 0% 0% -5%
BSEHC 4% -5% 16%
Financial Summary (Consolidated)
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE ROCE
FY15 86,513 17,557 11,506 11.2 29.6 20.3 29.9% 18.9%
FY16E 99,522 23,162 14,577 14.2 23.4 15.4 30.0% 21.0%
FY17E 110,868 24,457 16,389 16.0 20.8 14.6 26.9% 21.5%
FY18E 129,390 29,401 20,004 19.5 17.0 12.1 26.5% 23.5%
Date 4 Jan 2016
Market Data
SENSEX 26161
Nifty 7963
Bloomberg CDH IN
Shares o/s 1,024mn
Market Cap Rs. 341bn
52-wk High-Low Rs. 454-285
3m Avg. Daily Vol Rs. 819mn
Index member BSE200
Latest shareholding (%)
Promoters 74.8
Institutions 15.1
Public 10.1
Company Update
Warning Letter delays key launches further; maintain ‘ADD’
DR HARITH AHAMED [email protected] +91 44 4344 0052
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
The Warning Letter for Moraiya facility implies further delays to monetization of Cadila’s attractive pipeline in the
US. Approvals for key filings including gToprol XL, gAsacol HD, gPrevacid ODT, gLialda and gNexium, earlier
expected to kick in from early CY16, are now pushed out to CY17. Given no meaningful launches in FY17 except
authorized generic of Asacol HD and expected pricing pressure in HCQS, we believe FY17 will be a challenging
year for the company. The Warning Letters for Moraiya (2nd Warning Letter in ~4 years) and Ahmedabad adds to
the company’s recent execution woes, which include CRLs and approval delays for several complex products.
We lower our FY17 and FY18 earnings estimates by 9% and 5%, respectively. The stock has corrected ~15% since
the Warning Letter on Dec 30th. Maintain ‘ADD’ rating with a target price of Rs. 352 (18x FY18E EPS of Rs. 19.5)
Key investment thesis:
Warning Letter to delay launch of key products in the US further: Driven by authorized generic products (from
Abbvie) and shortage-led price increase in HCQS (following Ipca’s exit) Cadila’s US business (accounting for ~40% of
the company’s topline in FY16E) has grown at a CAGR of 33% in FY13-16E. However, Cadila’s inability to meaningfully
monetize its high potential US pipeline has been a disappointment during this period. Cadila has significantly lagged
peers in timely approvals and launches in the US, impacting monetization of its attractive pipeline. Form 483
observations and suspension of approvals from Moraiya facility following an inspection in Sep 2014 have contributed to
the weak execution. The recent Warning Letter for the facility is likely to delay approvals for key products further. We
expect AG sales to flatten out and HCQS sales to decline as competition reenters
Diversified business model, but too early to attach meaningful value to initiatives in new technologies: With
significant presence in segments such as animal health, wellness and APIs, Cadila is among the most diversified Indian
pharmaceuticals companies. Cadila has made significant investments and progress in biosimilars, inhalers,
transdermals, topicals, vaccines and NCEs (Lipaglyn to commence phase II trials in the US). While acknowledging the
progress made by Cadila in these high-value segments, we believe it is too early to attach meaningful value to these
assets given monetization, especially in regulated markets, is unlikely in the next 2-3 years
Valuation and stock view: Following the Warning Letters for Moraiya and Ahmedabad facilities, we lower our FY17
and FY18 EPS estimates by 9% and 5%, respectively, and lower our target price to Rs. 352 (18x FY18E EPS of Rs.
19.5). Maintain ‘ADD’ rating on the stock
Page 47
Cadila Healthcare CMP
Rs. 333
Target
Rs. 352
Rating
ADD
Warning Letter and approval delays to impact growth and margins in FY17
Segmental sales and EBITDA
Rs. Mn FY13 FY14 FY15 FY16E FY17E FY18EFY15-18E
CAGR
Domestic formulations 23,232 24,645 26,772 29,730 34,189 39,318 14%
US 15,068 21,703 33,932 40,867 44,686 54,288 17%
Europe 3,697 3,900 3,376 3,246 3,386 3,725 3%
Japan 603 542 0 0 0 0
Latin America 2,384 2,438 2,348 2,062 2,227 2,672 4%
Emerging markets 3,134 3,693 4,075 4,953 5,944 7,133 20%
APIs 3,099 3,498 3,723 3,807 3,998 4,198 4%
Animal Health 2,462 2,864 3,217 3,291 3,620 3,982 7%
Alliances 138 418 980 1,829 2,232 2,566 37%
Core sales (ex Wellness & JVs) 53,817 63,701 78,423 89,786 100,282 117,882 14%
Zydus Wellness 4,100 4,296 4,430 4,679 5,147 5,765 9%
JVs 4,932 4,083 3,724 3,965 4,415 4,904 10%
Gross sales 62,849 72,080 86,577 98,430 109,844 128,551 14%
Excise duty -1,296 -1,479 -1,606 -1,802 -2,008 -2,337
Net sales 61,553 70,601 84,971 96,629 107,836 126,213 14%
EBITDA - Wellness 957 886 900 989 1,114 1,277 12%
EBITDA - JVs 2,452 1,695 1,215 1,293 1,487 1,725 12%
EBITDA - ex Wellness & JVs 10,523 12,389 19,509 25,058 26,911 32,687 19%
Core EBITDA 13,931 14,970 21,623 27,340 29,513 35,690 18%
% margin 22.6% 21.2% 25.4% 28.3% 27.4% 28.3%
Other operating income 2,025 1,640 1,542 2,893 3,032 3,177 27%
R&D expenses -4,706 -4,608 -5,608 -7,072 -8,088 -9,466 19%
EBITDA 11,251 12,001 17,557 23,162 24,457 29,401 19%
% margin 17.7% 16.6% 20.3% 23.3% 22.1% 22.7%
Source: Company data, Spark Capital Research
Page 48
Cadila Healthcare CMP
Rs. 333
Target
Rs. 352
Rating
ADDWarning Letter to delay launch of key products in the US further
ANDAs with tentative approvals (TAs), but delayed final approval
Drug Brand Innovator $mn Comments
sirolimus Rapamune Pfizer 208
Cadila launched 0.5mg in Jan 2014. Awaiting approval for higher strengths (tentative
approval in Jan 2014). Dr Reddy’s, only generic in the market for 1mg and 2mg,
received final approval in Oct 2014
amlodipine besylate / benazepril
HClLotrel Novartis 290
Cadila got tentative approval in Mar 2013. 8-9 players in the market including Dr
Reddy's (Apr 2010), Lupin (June 2011) and Aurobindo (Sep 2012)
glipizide extended release Glucotrol XL Pfizer 71Cadila got tentative approval in Sep 2014. 3 generic players – Watson, Mylan and Par
in the market
aripiprazole ODT Abilify Otsuka NA Cadila got tentative approval in July 2012. Alembic, only generic, launched in Apr 2015
desloratadine Clarinex Schering Plough 200 Cadila got tentative approval in May 2011. 9 players in the market
letrozole Femara Novartis 200Cadila got tentative approval in July 2012. More than 10 players in the market. Product
went generic in 2011
Launches delayed by Complete Response Letters (CRLs) and Form 483 observations at Moraiya facility
esomeprazole magnesium delayed
release capsuleNexium AstraZeneca 4,000
Teva, Dr Reddy's, Mylan, Hetero and Torrent have launched. Cadila’s filing from
Moraiya
azelastine nasal spray Astelin Meda 100Astelin – Sun, Apotex, Roxane, Breckenridge in the market. Cadila filed ANDA in Feb
2010. Sued on '194 patent which has since expired
aripiprazole tablet Abilify Otsuka 7,800Teva, Torrent, Alembic, Hetero, Apotex and Aurobindo Pharma have launched.
Cadila’s filing from Moraiya
metoprolol succinate extended
release tabletsToprol XL AstraZeneca 700
Only 4 generic players in the market (Wockhardt, Dr Reddy's, Mylan, Actavis). Cadila’s
ANDA filed from Moraiya
mesalamine 1.2gm delayed
release tabletsLialda Shire 520
Cadila sole FTF. Recently, Watson won patent litigation (‘720 patent expiring June
2020) against Shire in CAFC. In Cadila’s case, Markman ruling completed in July 2015.
Trial date awaited. Cadila received CRL from USFDA in 2014. Mylan, Amneal and
Osmotica are other known players. Management believes other players can enter only
after Cadila’s exclusivity period
lansoprazole delayed release;
orally disintegrating tablets
Prevacid
Solutab/ ODT Takeda 250
Cadila received favorable verdict on ‘994 patent (expiring in Nov 2019) from CAFC.
Cadila got CRL in 2014 to which company has responded. ANDA filed from Moraiya.
Teva and Sandoz (AG) launched in 2010 but withdrew in 2011. Lupin and Mylan are
other known filers
mesalamine 800mg delayed
release tabletsAsacol HD
Warner Chilcott
(Allergan)440
Cadila sole FTF. Litigation settled. Settlement allowed Cadila to launch on Nov 15,
2015 (if own ANDA approved) or on July 1, 2016 (authorized generic). Cadila yet to get
approval. No other known filer
Source: Company data, Bloomberg, Spark Capital Research
Page 49
Cadila Healthcare CMP
Rs. 333
Target
Rs. 352
Rating
ADDSite transfers for key products will be key monitorable
Monetization of transdermal filings key to long-term growth of US business
Drug Brand Innovator $mn Comments
estradiol (once-a-week)
transdermalClimara Bayer 60
Mylan only generic player. Launched in Feb 2000. No unexpired patents. Cadila received
CRL
estradiol (twice-a-week)
transdermalVivelle DOT Novartis 260
Mylan launched in Dec‘14. No other known player. No unexpired patents. Cadila received
CRL
lidocaine transdermal LidodermEndo
Pharmaceuticals1,100 Mylan (Aug 2015) and Actavis (Sep 2013) have launched. No unexpired patents
clonidine transdermal Catapres-TTSBoehringer
Ingelheim180
Actavis (May 2014), Teva (Aug 2010), Mylan (July 2010) and Aveva/Par (Aug 2009) are in the
market. No unexpired patents. Cadila received CRL
fentanyl transdermal Duragesic J&J 7506-player market – Actavis, Par, Mylan, Mallinckrodt, Lavipharm and Aveva. No unexpired
patents
rivastigmine transdermal Exelon Patch Novartis 250
Actavis lost patent litigation against Novartis on ‘023 and ‘031 patents (both expiring Jan
2019). Cadila sued in Aug 2014 on same patents. Mylan, Par, Novan and Alvogen other
known filers
Source: Company data, Spark Capital Research
Source: Company data, FDAzilla, Spark Capital Research
Moraiya Warning Letter pushes key approvals further out. Site transfers for key products will be key monitorable
FacilityLast
inspection
Type of
facilityComments
Dabhasa Mar-15 API Successful audit in FY15, as per management
Ankleshwar FY15 API Successful audit in FY15, as per management
Ahmedabad Dec-14 API Oncology APIs. No external or captive sales. FDA issued Warning Letter in Dec 2015
Moraiya Sep-14 FormulationsOral solids, injectables, nasal, transdermals. Largest formulations facility and only injectables facility. ~60% of
US sales. FDA issued Warning Letter in Dec 2015
Baddi May-15 FormulationsOral solids. Form 483 with observations issued post last inspection. Per management, observations minor as
approvals continue (Amiloride HCl approved in Aug 2015)
Ahmedabad - Formulations Topicals. Awaiting first inspection
Ahmedabad SEZ Feb-15 Formulations Oral solids including oncology. EIR received in Q2FY16
Ahmedabad SEZ Apr-15 Formulations Cytotoxic injectables (erstwhile BSV JV). Form 483 with observations issued post last inspection
Ahmedabad SEZ FY15 Formulations Cytotoxic injectables (Zydus Hospira JV). Successful audit in FY15, as per management
Ahmedabad SEZ May-15 Formulations Transdermal facility (part of Zydus Technologies). No observations in the last inspection
St. Louis, USA May-15 FormulationsPart of Nesher (acquired in 2011). Form 483 with observations issued post last inspection. Under consent
decree since 2009. Product launches have resumed (morphine sulphate in Q1FY16)
Page 50
Cadila Healthcare CMP
Rs. 333
Target
Rs. 352
Rating
ADDFinancial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY18E FY14 FY15 FY16E FY17E FY18E
Profit & Loss Growth ratios
Revenue 72,240 86,513 99,522 110,868 129,390 Revenue 13.6% 19.8% 15.0% 11.4% 16.7%
EBITDA 12,001 17,557 23,162 24,457 29,401 EBITDA 6.7% 46.3% 31.9% 5.6% 20.2%
Depreciation (2,012) (2,873) (2,971) (3,451) (3,870) Adjusted PAT 23.0% 43.2% 26.7% 12.4% 22.1%
EBIT 9,989 14,684 20,191 21,006 25,531 Margin ratios
Interest (1,181) (679) (448) (443) (280) EBITDA 16.6% 20.3% 23.3% 22.1% 22.7%
Other Income 507 554 856 895 937 Adjusted PAT 11.0% 13.2% 14.5% 14.7% 15.3%
Forex gain/(loss)/exceptional items 108 0 (43) 0 0 Performance ratios
PBT 9,422 14,559 20,556 21,458 26,188 RoE 24.8% 29.9% 30.0% 26.9% 26.5%
PAT (after minority interest) 8,036 11,506 14,577 16,389 20,004 RoCE 15.4% 18.9% 21.0% 21.5% 23.5%
Adjusted PAT (after minority interest) 8,036 11,506 14,577 16,389 20,004 RoA 12.1% 15.8% 18.0% 18.7% 20.7%
Balance Sheet Fixed asset turnover (x) 1.4 1.5 1.6 1.6 1.7
Net Worth 35,833 44,205 55,732 68,798 85,212 Total asset turnover (x) 1.1 1.2 1.2 1.2 1.3
Deferred Tax 961 586 586 586 586 Financial stability ratios
Total debt 27,004 26,513 20,851 14,592 7,809 Net Debt to Equity (x) 0.6 0.4 0.2 0.1 (0.0)
Other liabilities and provisions 6,959 8,258 9,009 9,598 10,201 Net Debt to EBITDA (x) 1.8 1.1 0.6 0.3 (0.0)
Total Networth and liabilities 70,757 79,562 86,178 93,574 103,809 Current ratio (x) 2.1 2.1 2.1 2.1 2.2
Gross Fixed assets 55,506 59,364 65,364 72,364 80,864 Inventory and debtor days 129 134 131 131 131
Net fixed assets 40,153 41,501 44,530 48,079 52,709 Working capital days 82 87 84 84 84
Investments 866 1,544 1,544 1,544 1,544 Interest cover (x) 8.5 21.6 45.1 47.4 91.2
Cash and bank balances 5,488 6,699 7,369 8,106 8,916 Valuation metrics
Loans & advances 8,346 9,486 10,399 10,919 11,465 Fully Diluted Shares (mn) 1,024 1,024 1,024 1,024 1,024
Net working capital 15,904 20,332 22,336 24,927 29,174 Market cap (Rs.mn) 340,599
Total assets 70,757 79,562 86,178 93,574 103,809 EPS (Rs.) 7.8 11.2 14.2 16.0 19.5
Cash Flows P/E (x) 42.4 29.6 23.4 20.8 17.0
Cash flows from Operations 8,870 9,936 15,730 17,829 20,073 EV (Rs.mn) 356,111
Capex (4,682) (5,124) (6,000) (7,000) (8,500) EV/ EBITDA (x) 29.7 20.3 15.4 14.6 12.1
Cash flows from Investing (4,222) (4,647) (6,000) (7,000) (8,500) BV/ share (Rs.) 33.6 41.5 52.5 64.9 80.5
Cash flows from Financing (5,287) (3,511) (9,060) (10,092) (10,762) Price to BV (x) 9.9 8.0 6.3 5.1 4.1
Torrent Pharmaceuticals CMP
Rs. 1479
Target
Rs. 1635
Rating
BUY
Page 51
Stock performance
1m 3m 12m
TRP 4% -2% 29%
Sensex 0% 0% -5%
BSEHC 4% -5% 16%
Financial Summary (Consolidated)
Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE ROCE
FY15 46,535 10,202 7,509 44.4 33.3 25.6 34.2% 22.4%
FY16E 71,043 26,007 15,893 93.9 15.7 10.1 49.9% 30.5%
FY17E 71,343 17,860 11,996 70.9 20.9 14.7 27.6% 21.5%
FY18E 77,499 19,874 13,831 81.7 18.1 13.2 25.8% 23.3%
Date 4 Jan 2016
Market Data
SENSEX 26161
Nifty 7963
Bloomberg TRP IN
Shares o/s 169mn
Market Cap Rs. 250bn
52-wk High-Low Rs. 1,720-1,030
3m Avg. Daily Vol Rs. 259mn
Index member BSE200
Latest shareholding (%)
Promoters 71.3
Institutions 18.5
Public 10.3
Company Update
Clinical execution; maintain ‘BUY’
DR HARITH AHAMED [email protected] +91 44 4344 0052
KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037
Strong execution on low-competition opportunities in the US (such as gCymbalta and gAbilify) has been the
highlight of Torrent’s performance in the last two years. In the domestic market, the company’s focus on sales
force productivity and profitability by rationalizing bonus offers to the channel are steps in the right direction.
Despite weak growth in recent quarters on account BRL depreciation, Torrent’s business in Brazil remains
fundamentally strong. Strong free cash generation (>Rs. 30bn in FY16-18, according to our estimates) should
support inorganic growth initiatives, including product acquisitions in the US, as indicated by the management.
Maintain ‘BUY’ rating
Key investment thesis:
Dahej approval along with gNexium and gDetrol LA to support US sales in FY17: Torrent’s execution on low-
competition product opportunities in the US has been near-perfect in recent years. To address its weak US pipeline
(only 19 ANDAs pending approval) the company is adding 550 people (to its existing R&D workforce of 600) and plans
to step up ANDA filings (18-20 per year) from 1HFY17, with focus on oncology, dermatology and ophthalmology.
Torrent’s new facility at Dahej was inspected by FDA in April 2015. Management expects EIR shortly and plans to
commercialize the facility from 4QFY16. This should ease capacity constraints and help improve Rx shares in existing
products. We expect Dahej approval along with gNexium and gDetrol LA to support US sales in FY17, partially offsetting
the expected price erosion in gAbilify
New product launches and improvement in productivity to boost India sales: After successful integration of the
acquired portfolio from Elder, Torrent has started focusing on portfolio expansion and profitability improvement in its
domestic business. Apart from restructuring its field force, the company has rationalized discounts and bonus offers to
the channel and these initiatives are expected to impact margins positively going forward. The company is currently
developing a product basket of 180 products across dermatology (cosmetic products), pain, nutraceuticals and
nephrology segments, which will be launched over the next five years. Following its recent launch of biosimilar rituximab
(licensed from Reliance Life Sciences), Torrent plans to launch biosimilar adalimumab in 4QFY16
Valuation and stock view: At CMP of Rs. 1,479, Torrent trades at 21x and 18x of our FY17E and FY18E earnings,
respectively. Strong free cash generation (>Rs. 30bn in FY16-18 according to our estimates) should support inorganic
growth initiatives, including product acquisitions in the US, as indicated by the management. We value the stock at 20x
FY18E EPS of Rs. 81.7 to arrive at a target price of Rs. 1,635. Maintain ‘BUY’
Torrent Pharmaceuticals CMP
Rs. 1479
Target
Rs. 1635
Rating
BUY
Page 52
Weak ANDA pipeline, filings to pick up from H1FY17
Source: Company data, Spark Capital Research
Drug Brand Innovator $mnPatent
expiryComments
amlodipine; olmesartan
medoxomilAzor Daiichi Sankyo 166 Oct-16
Mylan lost litigation on '599 patent (expiring Oct 2016). Teva and Macleods are other
known players. All (inc. Torrent) have TAs
olmesartan medoxomil Benicar Daiichi Sankyo 350 Oct-16Mylan lost litigation on '599 patent (expiring Oct 2016). Apotex and Teva are other
known players. Torrent has TA
rosuvastatin calcium Crestor AstraZeneca 2,918 Jul-16Actavis settled to launch on May 2, 2016. 9 players with TAs. Torrent has TA for 5mg
tab
sildenafil citrate Viagra Pfizer 1,300 Apr-20Teva and Mylan settled litigations to launch in Dec 2017. Actavis, Apotex, Amneal
Pharmaceutical, Hetero and Invagen are other known players. Torrent has TA
valsartan;
hydrochlorothiazideDiovan HCT Novartis 170 Expired
7 players (Aurobindo, Mylan, Lupin, Watson, Alembic, Apotex and Macleods) already
launched. Torrent has TA, can launch on approval
nebivolol hydrochloride Bystolic Forest Labs 293 Dec-21Multiple players (including Torrent) settled for launch 3 months ahead of patent expiry
(Dec 2021)
rivaroxaban Xarelto J&J 830 Dec-20
Bayer and Janssen sued Aurobindo, Breckenridge, Micro, Mylan, Prinston,
Sigmapharm and Torrent in Oct 2015 on '456 (Feb 2021), '860 (Dec 2020) and '339
(Dec 2020) patents. 30-month stay expires in Apr 2018
roflumilast Daliresp AstraZeneca NA Mar-24
Takeda/AZN sued Mylan, Hetero, Citron, Breckenridge, Prinston, Apotex, Strides,
Cadila, Micro and Torrent in May 2015 on patents ‘206 (Mar 2024), ‘064 (Mar 2024)
and ‘142 (Mar 2024). 30-month stay expires in Nov 2017
fingolimod Gilenya Novartis 2,500 Feb-19‘283 (expiring in 2026) invalidated recently. Apotex and Mylan are other known filers.
Likely launch post expiry of compound patent in Feb 2019
candesartan cilexetil Atacand AstraZeneca 120 Expired Torrent has DMF. Sandoz (May 2013) and Apotex (Jan 2014) in the market
candesartan cilexetil; HCTZ Atacand HCT AstraZeneca 56 ExpiredTorrent has DMF. Apotex (Dec 2012), Dr Reddy’s (Jun 2013), Macleods (Feb 2015)
and Mylan (Dec 2012) in the market
darifenacin hydrobromide Enablex Allergan 170 Aug-16Torrent sued in Dec 2013. Teva, Par (FTFs) settled for Mar 2016 launch. Torrent
likely to launch after FTF exclusivity
lurasidone hydrochloride Latuda Sunovion 1000 Jul-18 Torrent has DMF. Teva, Emcure and Invagen have para IV filings
paliperidone Invega J&J 600 Expired Torrent has DMF. Actavis (Sep 2015) and Mylan (Sep 2015) in the market
quetiapine fumarate XR Seroquel XR AstraZeneca 738 Mar-17Torrent has DMF. Highly competitive (more than 10 para IV filers including Lupin and
Intas)
Torrent Pharmaceuticals CMP
Rs. 1479
Target
Rs. 1635
Rating
BUY
Page 53
Strong growth in FY16 on the back of gAbilify
Dahej approval along with gNexium and gDetrol LA to support US sales in FY17, partially offsetting the expected price erosion in gAbilify
Source: Company data, Spark Capital Research
(Rs. mn) FY14 FY15 FY16E FY17E FY18E FY15-18E CAGR
India 11,610 16,090 18,570 21,634 25,204 16%
Brazil 5,330 6,060 5,180 5,525 6,520 2%
Others 3,050 3,210 3,460 3,875 4,340 10%
Branded 19,990 25,360 27,210 31,034 36,064 12%
US 7,760 8,320 29,894 25,170 24,654 43%
Others 10,160 9,900 9,408 10,467 11,723 6%
Generic 17,920 18,220 39,302 35,637 36,377 26%
Others (including contract manufacturing) 3,937 2,955 4,530 4,672 5,059 19%
Revenues 41,847 46,535 71,043 71,343 77,499 18%
% growth 30% 11% 53% 0% 9%
Impressive track record of monetizing low-competition opportunities
Source: Company data, Spark Capital Research
20 19 18 24 27 28 28 36 40 40 6
41 18
~100 ~70
1Q
FY
14
2Q
FY
14
3Q
FY
14
4Q
FY
14
1Q
FY
15
2Q
FY
15
3Q
FY
15
4Q
FY
15
1Q
FY
16
2Q
FY
16
Base sales ($mn) gCymbalta ($mn) gAbilify ($mn)
• Torrent’s new facility at Dahej was inspected by FDA in April 2015. Management
expects EIR shortly and plans to commercialize the facility from 4QFY16. This
should ease capacity constraints and help improve Rx shares in existing products
• Torrent’s US pipeline appears weak (vs. larger peers) with only 19 ANDAs
pending approval. The company is in the process of adding ~550 people (to its
existing R&D workforce of 600) and plans to step up ANDA filings (18-20 per
year) from FY17 with focus on oncology, dermatology and ophthalmology
• In our view, Torrent’s strong execution capabilities as evident from recent low-
competition launches is a key positive
o gAbilify – Torrent launched gAbilify at-risk in April’15; recorded sales of
~$170mn in 1HFY16
o gNexium – Torrent was the 5th generic company to launch the drug (launched
in Oct 2015)
o gDetrol LA – Torrent is the 3rd generic company to launch the product
(launched 2QFY16). We expect gDetrol LA to be a meaningful contributor in
2HFY16 and FY17
Torrent Pharmaceuticals CMP
Rs. 1479
Target
Rs. 1635
Rating
BUY
Page 54
Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16E FY17E FY18E FY14 FY15 FY16E FY17E FY18E
Profit & Loss Growth ratios
Revenue 41,847 46,535 71,043 71,343 77,499 Revenue 30.3% 11.2% 52.7% 0.4% 8.6%
EBITDA 9,515 10,202 26,007 17,860 19,874 EBITDA 37.5% 7.2% 154.9% -31.3% 11.3%
Depreciation (870) (1,907) (2,450) (2,871) (3,195) Adjusted PAT 41.1% 13.2% 111.6% -24.5% 15.3%
EBIT 8,645 8,294 23,557 14,989 16,679 Margin ratios
Interest expense (590) (1,752) (1,960) (1,847) (1,121) EBITDA 22.7% 21.9% 36.6% 25.0% 25.6%
Other income 380 2,856 2,210 2,238 1,840 Adjusted PAT 15.7% 15.2% 21.7% 16.3% 17.4%
One-off income/(expense) 0 0 530 0 0 Performance ratios
PBT 8,435 9,398 24,337 15,380 17,398 RoE 39.9% 34.2% 49.9% 27.6% 25.8%
PAT after minority interest 6,635 7,509 16,423 11,996 13,831 RoCE 28.1% 22.4% 30.5% 21.5% 23.3%
Adjusted PAT after minority interest 6,635 7,509 15,893 11,996 13,831 RoA 21.2% 15.7% 23.9% 16.5% 18.9%
Balance Sheet Fixed asset turnover (x) 2.4 1.5 1.6 1.5 1.5
Net Worth 19,028 24,910 38,845 48,150 59,087 Total asset turnover (x) 1.3 1.0 1.1 1.0 1.1
Deferred Tax (182) 1,047 1,047 1,047 1,047 Financial stability ratios
Total debt 11,318 27,404 25,737 16,017 5,173 Net Debt to Equity (x) 0.1 0.8 0.3 0.1 (0.1)
Other liabilities and provisions 5,586 6,632 7,103 7,588 8,086 Net Debt to EBITDA (x) 0.2 1.8 0.4 0.2 (0.3)
Total Networth and liabilities 35,750 59,992 72,732 72,802 73,393 Current ratio (x) 2.1 2.9 2.7 2.7 2.6
Gross Fixed assets 19,542 42,054 46,154 50,254 54,354 Inventory and debtor days 190 212 200 200 200
Net fixed assets 14,095 35,110 36,760 37,989 38,894 Working capital days 61 66 70 70 70
LT investments 0 1 0 0 0 Interest cover (x) 14.7 4.7 12.0 8.1 14.9
Cash and ST investments 9,551 8,650 14,323 12,621 10,692 Valuation metrics
Loans & advances and other assets 5,342 7,892 8,287 8,701 9,136 Fully Diluted Shares (mn) 169.2 169.2 169.2 169.2 169.2
Net working capital 6,764 8,340 13,362 13,491 14,671 Market cap (Rs.mn) 250,251
Total assets 35,750 59,992 72,732 72,802 73,393 Adj EPS (Rs.) 39.2 44.4 93.9 70.9 81.7
Cash Flows P/E (x) 37.7 33.3 15.7 20.9 18.1
Cash flows from Operations 5,994 8,102 15,684 16,453 16,827 EV (Rs.mn) 261,669
Capex (4,001) (22,026) (4,100) (4,100) (4,100) EV/ EBITDA (x) 27.5 25.6 10.1 14.7 13.2
Cash flows from Investing (3,558) (21,623) (4,099) (4,100) (4,100) BV/ share (Rs.) 112.4 147.2 229.5 284.5 349.1
Cash flows from Financing 864 12,123 (5,911) (14,055) (14,656) Price to BV (x) 13.2 10.0 6.4 5.2 4.2
Page 55
Pharmaceuticals – Initiating Coverage Sector Outlook
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Absolute
Rating
Interpretation
BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCEStock expected to provide returns of <5% – -10% over a 1-year
horizon
ADDStock expected to provide positive returns of >5% – <15% over a 1-year
horizonSELL Stock expected to fall >10% over a 1-year horizon
Page 56
Pharmaceuticals – Initiating Coverage Sector Outlook
NEUTRALDisclaimer (Cont’d)
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