Wind of Change- US Opportunity Dips;India & EMs Shine_Pharma Thematic

8/3/2019 Wind of Change- US Opportunity Dips;India & EMs Shine_Pharma Thematic

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Institutional Equities

Wind of change-US opportunity dips;India & EMs shine

Pharmaceuticals | Thematic | India Research

October 3, 2011Souvik Chatterjee([email protected])+912222877009

Mitesh Shah([email protected])


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Contents

Executive Summary 3

USgenericattractivenessdippingout 10

48%dropinpatentexpirypost2012-14;isitthebeginningoftheend?

Streetoverestimatingpatentexpiryopportunity 11

USgenericmarkettobecomevolumeplay;marginpressuretoremain 1

Historyrepeats:expectcontributionfromUStoreduce~40%postFY13 13

Scarcityofmajorblockbusterdrugexpirypost2015 14

Emerging markets to drive long term growth 16

Emergingmarketstoleadgenericgrowth 16

India-strongdemandgrowth 18

Japan-landofopportunities 20

China-theMedicineMan 22

Russia-onsolidground 25

LatinAmerica-growingstrong 27

Valuations 29

Key risks 33

Company Section 34

SunPharmaceuticalsLtd.(SUNP) 35

Dr.Reddy'sLaboratoriesLtd.(DRRD) 47

LupinLtd.(LPC) 62

Cadila(CDH) 76

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Wind of change - US opportunity dips; India and EMs shine


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Wind of change - US opportunity dips; India and EMs shineInstitutional Equities

Executive Summary

We expect a significant change in business strategy of large cap Indian generic pharmaceutical companies as

we forecast US attractiveness is likely to get reduced post the patent cliff dips off. The Indian generic drug

makers should now shift focus to the domestic and Pharma-emerging markets which provides exciting

growth opportunities. We believe the next phase of valuation of the Indian pharmaceutical companies will be

driven by the Pharma-emerging markets opportunities, robust product pipeline and strong domestic growth.

We initiate coverage on DRRD IN (Out-performer), LPC IN (Out-performer) and CDH IN (Out-performer); we

upgrade our rating on SUNP IN from Market-performer to Out-performer.

Except ~48% drop in patent expiry post 2014 in the US: The golden era of patent expiry opportunity

(USD71bn) is likely to come to end post 2015, however we expect 2013 to be the beginning of the end on theback of a ~74% drop in patent expiry opportunity. We see a sharp drop of ~85% in the patent expiry

opportunity for the generic players in the US over 2016-20 (USD10.7bn) from USD71bn over 2011-15.

Generic growth to slow down post 2015: Generic market in the US over the past 10 years suggests that as

the level of penetration increased there has been sharp drop in the growth rate for generic pharma market.

The high growth during 2000-05 was mainly attributed to the lower penetration of generics coupled with

expiry of blockbuster drugs during 2002-06. We expect CAGR 7% for generic pharma market in the US as

against 12% in the previous decade.

US becoming a pure volume play: Generic penetration in the US is at its peak (80-85%) and we estimate stiff

erosion of generic drug prices owing to sharp increase in competition thus resulting in lower margins. We

anticipate slower generic prescription sales growth in the US, at CAGR of 9% over 2010-20 vs. 12% over 2000-

09, putting pressure on the margins of the generic drug manufacturers.

Exhibit-1: Global pharmaceutical market CAGR of 7% over 2010-14E

Source: IMS, Industry

781 808875

920990

1,0601,140

0%

1%

2%

3%

4%

5%

6%7%

8%

9%

10%

0

200

400

600

800

1,000

1,200

200820092010E2011E2012E2013E2014E

(%)USDbn

TotalWorldMarket GrowthRate

3


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Pharma-emerging markets to account for ~40% of global healthcare revenue by 2015

Weestimatethepharma-emergingmarketstogrowata15-17%(CAGR)over2010-15andtor250bn. TheAsia-Pacific(APAC)healthcaremarketisprojectedtogrowby~13-15%ov

USD560bncontributing~30-40%oftheglobalhealthcarerevenue.WepreferIndia,China

Brazilasthemajorpharma-emergingmarketsintermsofgrowthopportunities.

INDIA:Theriseinincomelevelcoupledwithriseinchronicailmentsinthetier-II/IIIciti

50%riseinhealthcarespendingby2015.WeforecasttheIndianpharmamarkettomain

annualgrowthtrendof~16%till2015.WeexpectmedicalinfrastructureinIndiatoreg

withoverUSD150-200bnbeinginvestedover2015increatingandupgradingmedicalfacili

JAPAN: Japanhasthelargestpopulationofoldagedpeople(above60yearsage)representing~

populationandby2050theseniorcitizenpopulationwillaccountfor~50%ofthetotal

currentlyspend~7.5%ofitsentireGDPonhealthcarewhichisexpectedtoreach15%bydrivenbybrandeddrugs.GenericdrugsinJapanaccountsforlessthan~10%invaluetermscre

marketforthegenericdrugmanufacturers.WeexpecttheJapanesegenericindustrytoreachUSD

by2015ataCAGR9-12%andtodrivethenextphaseofgrowthfortheIndiangenericmanufactu

CHINA:ChinawithaGDP(nominal)ofUSD~6.5tnandpopulationof1.4bnispoisedt

pharmaceuticalmarketintheworldaftertheUSovertakingJapanandFranceby2015.Generi

thebackboneoftheChinesepharmaceuticalindustry.Genericdrugsaccountto~63%(USD

totalpharmaceuticalmarketandisexpectedtoregisterCAGR15%till2014.

RUSSIA:RussianpharmaceuticalmarketisestimatedataboutUSD8.6bnason2010andisex

reachUSD22bnby2015atCAGR21%.ThecountryhasapercapitapharmaceuticalspendofabouwhichisevenlowerthanthatofRomania(USD200)suggestingtremendousgrowth

pharmaceuticalindustryinRussia.

LATIN AMERICA:TheLatinAmericanpharmaceuticalmarketisamongthefastestgrowingmark

world.Althoughindividualmarketsaregrowingatdifferentrates,theentireLatinAme

toexpandatCAGRof10-12%over2010-15.Oneofthemajordriversofgrowthforthepharmace

isnationalgovernmentssteppedupeffortstoincreaseaccesstohealthcarefortheirrespectiveci

Exhibit-2: Pharma-emerging market to dominate growth

Source: Glenmark, SMC Inst. Research

0%

5%

10%

15%

20%

25%

30%

ChinaRussiaIndiaBrazil JapanUS EUCanada

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Drivers India Japan China Russia LatAM US

GDP Growth (%) (2012) 8.0% 3.0% 9.0% 4.5% 4.0% 2.0%

Healthcare spending as % of GDP 8.0% 8.5% 8.0% 5.5% 7.5% 17.0%

Total Pharma market by 2015 (USD bn) 20 102 80 22 55 480

Generic penetration (Sales) NA 6% NA 40% 80% 20%

Regulatory environment

Semi-regulated

marketwithprice

controlmechanism

Highlyregulated.

GovernmentofChinahas

implementedNEDL

(NationalEssentialDrug

List)andNERDL(National

EssentialReimbursement

DrugList)toregulateand

restructurethelocal

pharmaceuticalindustry

andtocuttherisingdrug

cost.

Highlyregulated. Semiregulated

Highlyregulated.USFDA

thenodalauthorityfor

genericapproval.Hatch-

Waxmanlawprovidesthe

rightof180days

exclusivitytothefirst

genericfiler.

Opportunities

Hugedomestic

demand.Increase

inchronicdisease

andrisinghealh

awarenessto

providesuperior

growth

22%oftotalpopulate

above60yearsputing

pressureon

Government's

healthcarespend.Low

genericpenetration

andGovernmentgenericfavoring

policiestohelp

growth.

Hugedomesticdemand.

Governmentpoliciesto

regulatethepharma

marketandprotectIP

rightswillattractforeign

companiesandprovide

growthopportunity.

Largemarket.Increasein

chronicdiseasesprovides

hugeopportunity.

Largemarket.Increase

inchronicdiseases

providehuge

opportunity.

Nearterm:Patentexpiry

opportunityworth

USD80bnby2015in

Farterm:Largestpharma

market;highyreceptiveto

genericdrugs

Challenges

Pricesensetive

market.

Government

interventioninthe

drugspricing.

Lessgenericawarness.

Moreinclinedtowards

brandeddrugs

Largenumberoflocal

playersalongwithun-

regulatedmarketstructure

providestremendous

competitiontonew

foreignentrants.

Regulationslackclarity

andtransparencyandare

subjecttofrequent

changes

Regulatorydelaysin

approvalsalongwith

Governments

protectismpolicies.

Highcompetitionalong

withcut-throatpricewar.

Morethan90%price

erosionafterpatent

expiry.

Indian presence All LPC,RBXY,DRL,CDHNA DRRD,SUNP,GNP GNP,DRRD,SUNP Almostall

SMC Comment

Riseincomelevel

coupledwithrisein

chronicdiseases

likelytolead50%

riseinhealthcare

spendingbyFY15E.

Weforecastthe

Indianpharma

markettomaintain

itscurrentannualgrowthtrendof

~16%till2015.

ExpectJapantodrive

thenextphaseof

growthforgeneric

manufacturershaving

CAGR9-12%overFY11-

15

Governmentfundingof

USD125bntargeting

substantialimprovementto

thenationshealthcare

infrastructurewilldoublethe

pharmaceuitalmarketsize

by2015.WeforecastCAGR

18-20%overthenext3years

totouchUSD80bnby2015.

Russiaisanimportant

marketwithhugegrowth

potential.Russian

pharmaceuticalmarketis

expectedtoreachUSD22bn

(fromcurrentUSD8.6bn)by

2015atCAGR21%.

LatinAmericanpharma

marketisexpectedto

expandatCAGRof10-

12%over2010-15.One

ofthemajordriversof

growthforthe

pharmaceuticalmarkets

isnationalgovernments

steppedupeffortsto

increaseaccesstohealthcareforits

citizens.

Weviewthisdippingoutof

patentexpiryopportunities

intheUSgenericspaceasa

possiblethreattothe

genericgrowthofIndian

pharmacompanies.

termsofParaIVlaunches.

Exhibit-3: Snapshot of world pharmaceuticals market

Source: Company, SMC Inst. Research

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Dr Reddy's Laboratory Ltd. (DRRD IN) Out-performer TP: INR1,864

Dr.Reddy'sLab(DRRD)isoneofourtoppicksintheIndiangenericpharmaceuticalspace

Indiandomesticgrowth,strongUSbusinessandexcitingproductpipelineincludinganu

opportunitiesintheUS.

WeareimpressedwithDRRD'srobustpipelineofproductsincludingtheFTFopportunityca

WeexpectDRRDtomonetize~USD3bnofrevenueoverFY14throughitsFTFpipelineintheU

gArictra,gGeodon,andgZyprexa.

WeinitiatecoverageonthestockrecommendingOut-performerforecasting36%earningsCAGRoverFY1

13Eonthebackofincreasinggrowthinthedomesticmarket(CAGR15%overFY11-13);expan

pharma-emergingmarketsandnewlaunchesintheUStohelpdriveearnings.

WevalueDRRDat20xFY13EearningsofINR91.8andaddingNPVofINR30pershareforthe

opportunitiestoarriveatourtargetpriceofINR1,865implyingapotentialupsideof2

Sun Pharmaceuticals (SUNP IN) Out-performer TP: INR557

SunPharma(SUNP)isoneofthemostaggressivelarge-capplayersinthepharmaceuticalsp

SUNP,withitsstrongproductpipelinewillbeabletomonetizeonthepatentcliffopportun

domesticbusinessprovidessupporttovolatileinternationaloperations.Weseenewpr

tappingnewmarkets(tierIIandtierIIIcities)thekeytoSUNP sgrowthstrategyinthedo

believeSUNPtohaveamarketableopportunityof~USD10bnoverFY12-13Eandwillbeon

beneficiariesofthePatentcliffopportunity.

WerecommendOut-performer recommendationforecastingearningsCAGRof23%overFY11-13

expectSUNPtomaintainitsleadershipacrosskeysegmentsinthedomesticmarket.Wef

domesticgrowthtocontinue,helpingthebasebusiness(exTaro)togrowby22.5%(CAGR)o

WevalueSUNPat22xFY13EearningsofINR24.8andaddingNPVoflimitedcompetitio

INR12toarriveatourtargetpriceofINR558implyingapotentialupsideof19%fromthe

Particulars FY10 FY11 FY12E FY13E

Revenues(INRmn) 40,075 57,214 88,611 97,398

Revenuegrowth(%) (5.8) 42.8 54.9 9.9

EBITDA(INRmn) 13,632 19,700 27,582 30,962

EPS(INR) 13.0 17.5 27.0 30.5

RoE(%) 18.2 23.0 30.1 26.0

PE(x) 36.0 26.7 17.1 15.1

Financial Summary

Source: SMC Inst. Research


Revenues(INRmn) 70,277 74,693 86,124 97,291

Growth(%) 1.2 6.3 15.3 13.0

EBITDA(INRmn) 2,008 12,629 16,902 22,439

EPS(INR) (6.7) 49.5 69.6 91.8

RoE(%) (2.6) 18.3 20.4 21.2

PE(x) NA 32.3 21.6 16.2

Financial Summary


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Lupin (LPC IN) Out-performer TP: INR 580

Lupin(LPC)oneofthemostaggressiveIndianmid-capplayersintheIndianpharmaceutitransformeditselffrombeingabulkdrugplaytoanintegratedformulationsplayerwitha

portfolioinUSandJapanbackedbyCAGR19%indomesticbusiness.Weexpectthedomesticf

drivefuturegrowthwithaCAGR19%overFY11-14stronglybackedbyKwoya(Japansubsidiary

toregisteraCAGR15%

LPC'sbrandedformulationbusinessintheUS(accountsfor~45%ofitstotalUSrevenues)

contributemoretothegrowthwiththelaunchofnewproducts(AllerNaze)andsomelimi

opportunities.

WerecommendOut-performeronthestockforecastingearningsCAGRof23%overFY11-13E.Wev

at20xFY13EearningsofINR29.2toarriveatourtargetpriceofINR580implyingapotent

fromtheCMP.

Cadila Healthcare (CDH IN) Out-performer TP: INR 912

CadilaHealthcare(CDH)isourpreferredcounteramongtheemergingmid-capintheIndi

spacemainlybecauseofitsstrongmixofdevelopedandpharma-emergingmarket.Weforecast

CAGRat27%overFY11-14andexpectthedomesticbusinessofCDHwilladdtractiontotheo

growthandforecastCAGR17%overFY11-14forthedomesticbusinessledbyitsflagshipformu

withCAGR15%overthestatedperiod.

WeexpectJapantobeoneofthefastestgrowingpharma-emergingmarketsintheworld

Government'sincreasedefforttoreducetherisinghealthcarecost.WebelieveCDH'sJapan

longtermgrowthwithCAGR40%overFY11-14E.

WeinitiatecoverageonthestockrecommendingOut-performerandforecastingearningsCAGRof16%ov

FY11-13E. WevalueCDHat20xFY13EearningsofINR45.6toarriveatourtargetpriceofIN


Revenues(INRmn) 36,868 46,302 55,573 66,280

Growth(%) 25.9 25.6 20.0 19.3

EBITDA(INRmn) 8,086 10,262 11,079 13,331

EPS(INR) 24.6 34.7 37.3 45.6

ROE(%) 35.3 37.4 31.1 30.2

PE(x) 30.8 21.9 20.3 16.6

Financial Summary


Revenues(INRmn) 48,708 58,320 69,586 82,840

Growth(%) 26.0 19.7 19.3 19.0

EBITDA(INRmn) 9,839 11,911 15,439 18,142

EPS(INR) 15.3 19.3 24.7 29.2

RoE(%) 34.1 29.5 29.4 27.2

PE(x) 31.3 24.8 19.4 16.4

Financial Summary



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Parameter

Rating

LPC

Out-performer

CDH

Out-performer

Target price

(Upside %)

INR585 (22%) INR912 (20%)

Recent

developments

1)LaunchofgUltramER(Marketsizeof

USD130mn, OrthoPain),2)Marketingagreement

withSanofiforCNS

productsinPhilippines.

1) USFDA warning letter tothe Mexican unit for

manufacturing violation.2) Zydus Cadila acquires

German company, Bremer

Pharma GmbH. 3) Zydusplans to buy US drug cos

for USD60 mn

Financial

forecasts

EarningsCAGRof23%

overFY11-13

EarningsCAGRof32%over

FY11-13

Share PriceOutperform VsHC Sector (1yr)

36% 1% 21% 31%

Positive

catalysts

1)Robustdomesticsales

growth.2)LaunchofnewOCproductstoprovide

growthtraction.3)Japantoprovidehugeearnings

opportunity.

BayerandZydusCadila

joinhandstosetupanewpharmaceuticalsJoint

VentureinIndia

DRRD

Out-performer

INR1,864 (26%)

1)Pfizer(PFE)andDRRDsettlepatentsuitover

Lipitor.2)ReceivedapprovaltolaunchgLipitor

(Atorvastatin)intheUS.3)

DRRD sAllegrastartsretailinginUS.

EarningsCAGRof36%

overFY11-13

1)LaunchofFondaparinux

intheUSwith180dayexclusivity. 2)Agreement

withFujiFilmstosetfootholdintheJapanesemarket.

SUNP

Out-performer

INR558 (21%)

1)ReceivedtentativeUSFDAapprovalfor

gPlavix, 2)ReceivedUSFDAapprovalfor

gUroxatralER with180

daymarketingexclusivity

EarningsCAGRof32%

overFY11-13

1)Robustdomesticsales

growth.2)StrongproductpipelineintheUSto

capitalizeonthegenericopportunity.36)Taroto

providegrowthtractionintheUS.

Negative

catalysts

1)Slowgrowthandsharepricingpressureinthe

Germanmarket. 2)Recenttepidperformanceinthe

domesticmarket. 3)

USFDAwarninglettertoDRRD'sMexicanplant

Michiganplantuncertaintyprevails.

1)LowerthanexpectsgrowthintheOCbusinessin

theUS.2)LowerthanexpectAllerNazerrealisation.

USFDAwarninglettertotheMexicanunitfor

manufacturingviolation

Source:Industry,Company,SMC Inst. Research

Exhibit-5: Company Snapshot

Exhibit-4: FY11 Geogrophical breakup of Indian companies

Source:Company,SMC Inst. Research

21%

53%

40%

32%35%

23%

38%41%

0%

10%

20%

30%

40%

50%

60%

Dr reddy Cadila Sun Lupin

Domestic US

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Exhibit-6: Global peer comparison

Mkt Cap EV EBITDA (USD mn) EV/EBITDA EPS PE

(USD bn) (USD bn)(USD bn) EBITDA EPS

Company FY 11 FY 12 FY 13 CAGR FY 11 FY 12 FY 13 FY 11 FY 12 FY 13 CAGR FY 11 FY 12 FY 13

Indian front-line generics

Sun* 10.710.0437.8581.6643.721%18x18x 16x 0.4 0.6 0.628%20x19x17x

DrReddy's* 5.2 6.6280.7375.6498.633%21x16x 12x 1.1 1.5 2.036%32x21x16x

Cipla 5.0 5.9300.3340.8403.816%18x15x 13x 0.3 0.3 0.415%23x20x17x

Ranbaxy 4.4 5.9341.2466.4387.37%14x 10x 12x 0.6 0.7 0.68%19x15x16x

LPC* 4.4 4.4264.7343.1403.223%8x 14x 12x 0.4 0.5 0.623%22x19x16x

Median 21% 18x 15x 12x Median 23% 22x 19x 16x

Mean 20% 16x 15x 13x Mean 22% 23x 19x 16x

Mid-cap Indian generics

Cadila* 3.6 3.8228.0245.5294.314%9x 16x 13x 0.9 0.2 0.5(28%) 23x22x18x

Glenmark* 1.8 2.2131.6193.8238.835%16x 12x 10x 0.4 0.4 0.521%26x16x13x

Aurobindo 0.8 1.8209.9205.5244.68%7x 6x 5x 0.4 0.4 0.58%7x 7x 6x

Strides 0.4 1.0 99.4 119.3156.125%8x 7x NA 0.7 1.0 1.232%9x 6x 5x


Mean 20 10x 10x 10x Mean 8% 16x 13x 10x

Indian CRAMS

Divi's 2.0 1.9 97.9 137.8172.733%20x 14x 11x 0.6 0.8 1.030%26x19x15x

Biocon* 1.4 1.5139.9128.2159.67%11x 13x 10x 0.4 0.4 0.513%19x18x15x

Jubilant 0.7 1.2146.7152.8183.312%10x 9x 8x 0.4 0.4 0.510%12x12x9x

Dishman 0.1 0.4 34.6 46.154.826%9x 6x 5x 0.2 0.2 0.314%7x 7x 5x


Mean 19% 12x 10x 9x Mean 16% 16x 14x 11x

US generics

Mylan 8.315.71,686.71,922.42,038.310%8x 7x 7x 2.0 2.3 2.512%10x 8x 8x

Hospira 6.710.51,083.01,161.41,169.24%7x 7x 7x 3.9 4.2 4.710%10x10x9x

Watson 8.810.31,100.61,357.21,470.016%9x 7x 7x 4.4 5.6 6.218%15x12x11x

Impax 1.2 1.1103.5135.0175.030%8x 6x 5x 0.9 1.2 1.529%20x15x12x

Par 1.0 0.9202.6207.6215.83%3x 3x 3x 3.3 3.3 3.64%8x 8x 8x


Mean 13% 7x 6x 6x Mean 15% 13x 11x 9x

GLobal generics

Teva 35.750.05,919.66,974.27,569.013%N/A N/A N/A 5.0 5.8 6.211%8x 7x 6x

Aspen 5.1 6.4500.6624.3694.318%11x 9x 8x 0.7 0.8 1.016%17x14x12x

Richter 2.9 3.7366.2389.8439.09%8x 7x 7x NA NA NANA13x13x12x

Hikma 1.7 2.7171.9223.9247.420%12x 9x 8x 0.5 0.7 0.829%18x13x11x

Stada 1.8 3.6458.2519.2561.411%7x 6x 5x 3.3 3.8 4.314%9x 8x 7x


Mean 14% 9x 8x 7x Mean 17% 13x 11x 10x

Japanese generics

Sawai 1.6 1.5201.7247.0280.618%8x 7x 6x 5.6 7.2 8.523%17x14x12x

Nichi-iko 1.1 1.1165.3192.9213.514%7x 6x 5x 1.5 1.9 2.426%18x14x11x

Towa 0.8 0.8134.9164.0187.218%5x 5x 4x 4.1 4.3 4.43%10x10x10x

Nippon 0.2 0.2 NA NA NA NANANA NA 0.2 0.3 0.4NA22x12x10x


Mean 16% 7x 6x 5x Mean 17% 17x 13x 11x

Japanese Formulation

Takeda 38.127.26,265.46,651.25,410.1-7%4x 4x 5x 4.6 4.8 3.6(12%) 10x10x13x

Astellas 17.315.12,161.72,571.42,651.511%7x 6x 6x 2.2 2.5 2.813%16x15x13x

Daiichi 14.213.22,167.42,064.42,413.66%6x 7x 6x 1.3 1.1 1.44%15x18x15x


Mean 3% 6x 6x 6x Mean 2% 14x 14x 14xSpecialty pharma

Allergan 24.024.91,826.52,060.92,291.012%13x11x 10x 3.6 4.2 4.916%21x18x

Forest 8.9 8.51,565.11,382.7470.0-45%4x 5x 14x 4.4 3.7 1.3(46%) 7x 9x26x

Cephalon 6.3 6.41,161.5778.3682.2-23%6x 8x 9x 8.1 5.1 4.2(28%) 10x16x19x

United 2.5 2.8320.0391.9489.324%7x 5x 4x 5.0 5.6 6.817%9x 8x 6x

King NA 2.1351.2386.0NA NA9x 8x NA 0.7 0.9 NANANANANA

Median (6%) 7x 8x 10x Median (6%) 9x 12x 18x

Mean (8%) 8x 8x 10x Mean (11%) 12x 13x 17x

Big Pharma

Pfizer 142.3178.731,309.731,257.231,409.30%5x 5x 5x 2.3 2.3 2.43%8x 8x 8x

Johnson 174.3173.520,439.322,324.623,671.88%8x 7x 7x 5.0 5.3 5.77%13x12x

Novartis 149.0170.318,250.218,603.718,536.61%9x 9x 9x 5.7 5.8 6.02%10x9x 9

Merck 98.6115.618,764.718,874.717,682.0-3%6x 6x 6x 3.7 3.9 3.92%9x 8x 8x

GlaxoSmithKline 103.764.417,114.017,328.0NA NA0x 0x NA 3.2 3.5 NANA13x12xN

Sanofi 86.862.420,193.018,301.0NA NA0x 0x NA 4.7 4.2 4.5NA7x 8x 7x

Abbott 78.691.311,260.212,053.212,878.37%8x 7x 7x 4.6 5.0 5.37%11x10x10

Novo 57.756.44,385.84,848.55,419.011%13x 11x 10x 5.3 6.0 6.914%19x17x1

AstraZeneca 58.267.614,836.013,030.112,635.4-8%4x 4x 5x 7.3 6.2 6.2(8%) 6x 7x 7xBristol-Myers 50.246.97,232.35,592.75,067.0-16%7x 9x 9x 2.3 2.0 2.0(6%) 13x14x1

Eli 41.743.87,458.76,548.77,014.8-3%6x 6x 6x 4.3 3.7 4.0(3%) 8x10x9x


Mean (0%) 6x 6x 7x Mean 2% 10x 10x 10x

*SMC Inst. Research estimate Source: Bloomberg

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US generic attractiveness dipping out

@Lower patent expiry opportunity to shrink US opportunity by ~48% post FY12

@US generic market turning a volume play with lower margin, penetration levels are above 80%

and negative generic inflation

@Higher para-IV approval and better than expected US generic market growth act as a potential

risk to our estimates

We ring the alarm bell foreseeing the challenges emerging on the Indian pharmaceutical industry post

2015 on the back of sharp drop in patent expiries in the US. The Indian pharmaceutical industry is been

bullish for long on the USD70bn US patent expiry (generic opportunity of ~USD14-20bn) overlookingthe stiff downfall thereafter. We expect the patent expiry opportunity to fall ~48% over 2012-14 and

85% post 2015 (2016-20) creating serious challenge for the Indian generic pharmaceutical industry.

48% drop in patent expiry post 2012-14; is it the beginning of the end?

Thegoldeneraofpatentexpiryopportunity(USD70bn)islikelytocometoendpost2015,

2013tobethebeginningoftheendofthisopportunityonthebackofa~74%dropinpa

opportunityover2012.AspertheMedcoHealthSolutions,Inc.(2009)data,majority

brandeddrugpatentsareset toexpirebetween2011-15Ethusshrinkingthemarketableopport

genericdrugsintheUSfromUSD7-14bnover2011-15toUSD1-2bnover2016-20(assumingprices).Weseeasharpdropof~85%inthepatentexpiryopportunityforthegenericplayersi

2016-20E(USD10.7bn)fromUSD71bnover2011-15E.

Exhibit-7: Sharp drop in the US patent expiry opportunity

Source: Medco, SMC Inst. Research

4.0

6.24.3

9.7

4.0

6.07.0

8.5

13.0

26.5

6.9

13.8

9.7

2.6 3.2 2.51.6

0.8

0

5

10

15

20

25

30

2003 04 05 06 07 2008 09 10 11 12 13 14 2015 16 17 18 19 2020

USDbn

~85% fall in overall patent

expiry opportunity

~55% fall in patent

expiry opportunity

10




11/86


Street over estimating patent expiry opportunity; generic opportunity to increase by

mere USD1.6bn over 2010-15

According to our analysis, we believe the street has been over estimating patent expiry opportunity in the US

over 2010-15. Branded drugs worth USD70bn is likely to face patent expiry over 2010-15 only to add USD1.6-

4bn to the US generic (base) market after ~95-98% price erosion post expiry. We see this opportunity to be

very miniscule (10-20% addition over 2011-15) in order of addition to the USD31bn US generic market.

Exhibit-8: Patent expiry of USD70bn to add only 10-20% generic market in the US

Source: Medco, SMC Inst. Research

We expect slower CAGR of 7% for generic market in the US over FY10-20

Our trend analysis of the generic market in the US over the past 10 years suggests that as the level of

penetration increased there has been sharp drop in the growth rate for generic pharma market. The high

growth during 2000-05 was mainly attributed to the lower penetration of generics coupled with expiry of

blockbuster drugs during 2002-2006. We expect 7% CAGR (2011-20) for generic pharma market in the US as

against 12% in the previous decade.

Exhibit-9: Generic growth to slow over 2010-20

Source: IMS Health Dec 2009, SMC Inst. Research

Total pharma mkt size Generic mkt size

Generic mkt growth (%) (RHS) Pharma mkt growth (%) (RHS)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

50

100

150

200

250

300

350

400

450500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

USDb

n

0

20

40

60

80

100

120

USDBn

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014E

2015E

11




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12

US generic market to become volume play; margin pressure to remain

Generic penetration in the US is at its peak (80-85%) and we estimate stiff erosion of generic drug prices owing

to sharp increase in competition thus resulting in lower margins. We expect the US generic market to become a

volume play from the high margin play for the generic pharma players, (exception being the Para IV

opportunity). We anticipate slower generic prescription sales growth in the US, at CAGR of 7% over 2010-20

vs. 12% over 2000-09, putting pressure on the margins of the generic drug manufacturers.

Exhibit-10: Generic pharma market penetration in the US

Source: SDI, SMC Inst. Research

1%

9%

20%23%

33%

45%

55%

72%78%

85%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Generic drug inflation at the lowest; margins pressure to remain

The generic drug inflation in the US is at the lowest (-1.1% in 2009) since 2004 indicating gradual decline in

the generic drug prices. It is expected that generic drug prices to further decline on the back of large number of

drugs hitting the market post the patent expiry 2013 onwards.

We expect generic pharma market in the US to be more competitive with more players entering the market

resulting in sharp fall in drug prices and thin margins.

Exhibit-11: Generic drug inflation at the lowest

Source: Medco, Caremark, SMC Inst. Research

6.76.3

6.97.4

8.3

9.2

0.5 0.4 0.2 0.1

(0.4) (1.1)

5.24.7 4.9 4.9

5.3 5.5

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

2004 2005 2006 2007 2008 2009

Branded Generic Total

(%)




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13

History repeats: expect contribution from US to reduce ~40% post FY13

We dig in to the history to find a similar situation of high patent expiry in the US. We analyze the performanceof various companies (mainly US based generic companies) over 2004-08 when USD35bn of patent expiry

opportunity went off in the US.

Our analysis showed profitability of these generic companies depicted sharp rise during the high patent expiry

period but contracted severely post that. Revenue growth of Teva, Mylan and Watson (the three companies we

used in our analysis) plunged significantly in 2006-08 on the back shrinking patent opportunity post 2006.

Mylan recorded a revenue de-growth of 11% in 2007 on account of sharp drop in patent expiry and high base

effect of 2006 (refer to Exhibit7). Mylan's high revenue growth of 49% in 2007 was mainly attributed to

Matrix lab acquisition (2007 sales of USD1.6bn), adjusting to the acquisition the growth is only 11%. Similar

trend of decline in revenue and margins has been observed for Teva and Watson over 2007-08.

We expect a similar situation happening for the generic pharma companies (more specifically the Indianpharma companies). We anticipate US revenues to decline by ~40% over 2015-20 mainly because of limited

growth coupled with high base of 2012-15.

Exhibit-12: Revenue and margin contraction of US generic companies post 2006


4%

83%

0%

11%

20% 19% 16% 15%

-10%

10%

30%

50%

70%

90%

0

1,000

2,000

3,000

4,000

5,000

2005 2006 2007 2008

Teva

US Revenue Rev Growth (%) (LHS)

EBITDA Margin (%) (LHS)

USDm

n

0%-2%

-11%

49%

0% 0% 0%0%

-30%

-10%

10%

30%

50%

70%

90%

0

500

1,000

1,500

2,000

2005 2006 2007 2008

Mylan

US Revenue Rev Growth (%) (LHS)


USDmn

-1%

22%

-1%-2%

15%

7%

10%

0%

-10%

10%

30%

50%

70%

90%

0

500

1,000

1,500

2,000

2005 2006 2007 2008

WatsonUS Revenue Rev Growth (%) (LHS)


USDmn




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14

Exhibit-13: Scarcity of blockbuster drug expiry post 2015

Patent Expiry Name of drug US Sales in 2009 (USD mn)

2010 Nov Aricept 1,465

2011 Jun Levaquin 1,633

2011 Oct Zyprexa 1,968

2011 Nov Lipitor 6,054

2012 Mar Lexapr 2,557

2012 Mar Seroquel 2,557

2012 Mar Gabitril 3,483

2012 Jul Tricor 1,350

2012 Jul Singulair 3,466

2012 Aug Actos 2,783

2012 Aug Diovan 1,4702012 Aug Diova 1,376

2012 Oct Viagra 1,001

2012 Nov Lidoderm 1,065

2013 Nov AcipHex 1,160

2013 Dec Cymbalta 2,621

2014 May Celebrex 1,581

2014 Aug ProAir 1,074

2015 Oct Abilify 3,583 Source:Medco,SMC Inst. Research

Patent Expiry Name of drug US Sales in 2009 (USD mn)

2016 Jul Crestor 2,626

2017 Oct Zetia 1,111

2017 Oct Vytorin 1,233

2018 Jul Spiriva 1,436

2018 Oct Nasonex 1,098

2019 Jul Lyrica 1,566

Scarcity of major blockbuster drug expiry post 2015

We see drying up of blockbuster drugs (sales >USD1bn) post 2015. Apart from AstraZeneca's anti cholesteroldrug Crestor (rosuvastatin calcium), patent expiry in Q3FY16, there is no drug with sales more than USD2bn

expiring between 2016-20 vis--vis 10 such blockbuster drug over 2011-15, sharply reducing the

opportunity of generic pharma companies in the US market.




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15

Indian generic drug makers, according to us will emerge as likely winners because of their diverse

geographical presence and strategic alliances. LPC (currently 41% revenue from the US) will compensate the

patent expiry opportunity loss post 2015 in the US through its strong domestic presence (currently 35% of

revenue) and concentrating in Japan and other key markets through its aggressive organic and inorganic

expansion plans. DRRD (currently 35% of revenue from US) is likely to gain for the GSK marketing agreement

in the emerging markets and through its plans to enter in to other key markets including Japan.

SUNP according to us is likely to be runners-up predominantly on account of their US dependency. SUNP is

expected to have ~40% US dependency (including Taro) in FY12E and we expect the US contribution to come

down to 36% by FY14E on the back of strong domestic and emerging market sales.

Our assessment

We believe the loss of patent expiry opportunity in the US will hit the generic pharma industry hard post 2015.

Though there will be a flood of generic products in US market by then, we expect a cut-throat price war

environment to prevail significantly reducing the profit margin. With lower new drug approval trend in the US

we expect pharma companies will have to revisit their growth strategy in the wake of lowering opportunities.

Exhibit-14: Decline in new product approval to reduce generic opportunity in the long run

Source: USFDA, SMC Inst. Research

0

10

20

30

40

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

USFDA New drug approval




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16

Emerging markets to drive long term growth@Emerging markets to generate ~40% of global healthcare revenue by 2015

@Expect domestic market (India) CAGR of ~15/18% over FY10-15 to fuel growth for Indian

pharma companies

@Japan, APAC, CIS and LatAm to fuel future growth for Indian pharma companies

We believe more focus on domestic and emerging markets will help drive growth for the Indian

pharmaceutical companies over medium to long term. Japan being the second biggest pharma market

(~USD80bn) after the USA, has


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17

Exhibit-16: Bifurcation of pharma emerging countries

Tiers Countries 2009 GDP based on Incremental PharmaPPP valuation (tn USD) Market Growth from

2009-13 (bn USD)

Tier1 China 9 40

Tier2 Brazil 2-4 5-15

Russia

India

Tier3 Venezuela Thailand


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18

India- strong demand growth

The rise in income level coupled with rise in chronic diseases in the tier-II/III cities is likely to lead 50% rise in

healthcare spending by FY15E. We forecast the Indian pharma market to maintain its current annual growth

trend of ~16% till 2015. We expect medical infrastructure in India to register huge changes with over USD150-

200bn being invested over 2015 in creating and upgrading medical facilities.

Exhibit-17: Indian pharma market likely to triple by 2015

Source: McKinsey, SMC Inst. research

6.3

11.8

20.9

27.3

35.2

0

10

20

30

40

50

CAGR 10% (Bear

case)

CAGR 16% (Base

case)

CAGR 20% (Bull

case)

2005 2009 2015E

USD

bn

Rapid growth in chronic disease to fuel growth of domestic pharma market

As a result of rapid urbanization, the Indian tier-II/III cities have witnessed a sharp rise in chronic/lifestyle ailments like

obesity, diabetes, cardio vascular ailments and oncology. The healthcare spend on these lifestyle-related diseases is

expected at 50% CAGR by 2015. This would eventually result in huge healthcare opportunity in the tier-II/III cities across

India.

Exhibit-18: Rapid rise in several chronic diseases to prevail

Source:WHO,Industry,SMCInst.rese

1.9 2.63.6

5.12.0 3.0

4.56.8

8.9

14.2

22.8

36.5

0

5

10

15

20

25

30

3540

2008 2009 2012E 2015E

INRbn

Cardic Diabetic Oncology




19/86

Healthcare spends to increase growth

With rise in chronic diseases, the per capita healthcare expenditure as a percentage of per capita income in

tier-II/III cities is likely to increase from 7% in 2008 to 14% by 2020. However, per capita healthcare spending

as a percentage of per capita income in India is much lower at 7% vs. 10% of the world average). Rise in chronic

diseases and healthcare spending in tier-II/III cities coupled with the metro/tier I cities, Indian healthcare

market is expected at 50% CAGR by 2015E. Penetration of health insurance would also boost healthcare

spending. Currently, health insurance accounts for less than 8% of the overall health expense which is likely to

increase to 15% by 2015.


19

Down penetration of health insurance to offer additional opportunities

Healthinsurancehasbecomeoneofthefastestgrowingsegmentsinthenon-lifeinsuranc

higherinsurancepenetrationwouldresultinhigherpropensitytowardshealthcarespent.I

years,healthinsurancepremiumhasgrownten-foldfromINR7bnin2001-02toINR66

introductionofcashlesshealthcarefacilitybyhealthinsuranceprovidershashelpedincre

towardshospitalization.

Source:IRDA,E&Y,SMCInst.resea

20%22%25%26%26%

30%32%

44%

20%

30%

40%

50%

60%

70%

0

1,000

2,000

3,000

4,000

5,000

6,000

20042005200620072008200920102015

Healthinsurancepremium(INRmn) Growth(%)(LHS) %ofTierII/IIIcities(LH

Exhibit-21: Increase in health insurence to help domestic pharma growth

Source:IRDA,E&Y,Industry,SMCInst.Source:IRDA,E&Y,Industry,SMCInst.

Exhibit-19: Per capita income in India is much lower

at 7% vs. 10% of the world

10%

12%

14%

16%

17%

0%

5%

10%

15%

20%

0%

5%

10%

15%

20%

25%

2008 2010E 2012E 2015E 2020EAllIndiaEM(exIndia) USA WorldAverage

7

1618

25

13

India2008India2020EChina2020EOECD2020EEM(exInd

andChina)

2020E

Exhibit-20: Percentage of average household

spending on healthcare

Source:IRDA,E&Y,Industry,SMCInst.research



INRmn


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20

Japan- Kikai no tochi (Land of opportunities)

Japan is the second largest pharma market in the world after the US with market size of ~USD80bn. Mostly

driven by formulation drugs, generics in Japan accounts for less than ~10% in value terms. We expect Japan to

drive the next phase of growth for the Indian generic manufacturers (previously it was US led). We expect the

Japanese generic industry to reach USD10-15bn by 2015 at a CAGR 9-12%.

Generic, the only option for ageing Japan

Japan has the largest population of old aged people (above 60 years age) representing ~22% of total

population. As per the Japanese government estimates, by 2050 the senior citizen population will account for

~50% of the total population. Japan currently spend ~7.5% of its entire GDP on healthcare and is expected to

reach 15% by 2020 thus putting tremendous pressure on the public healthcare cost. To get relieved of this

burden, Japan's government is promoting the use of generic drugs and has set a target of 30% market share ofgenerics in prescription by 2012 from current ~18-20%.

Exhibit-22: Healthcare cost as percent of GDP (2009)

Source: OECD, Mckinsey, SMC Inst. Research

16.0

11.210.5

8.7 8.5 8.5

7.5 6.55.9

7.0

0

4

8

12

16

20

USA

France

Germany

UK

Australia

Norway

Japan

Korea

Mexico

India

%o

fGDP

4.7%

6.6%

10.1% 10.6%

13.8%

0%

4%

8%

12%

16%

0

300

600

900

1,200

1990 2005 2020E 2025E 2035E

Medical expense (USD bn) Medical expenditure as % of GDP (LHS)

Exhibit-23:Japan's healthcare cost to rise three fold

Source: OECD, Mckinsey, SMC Inst. Research

Low generic penetration to provide greater opportunity

Japan has one of the world's lowest consumption rates for generic drugs. Japanese generic drugs contribute

only 18-20% of prescription sales and ~6% in value terms. Although, Japanese pharmaceutical market

contributed ~10% of global sales at ~USD900bn, generics had sales of USD5-7bn or accounted for 6-8% of the

Japanese pharmaceutical market. We see high demand growth for generics drugs in Japan backed by

government's initiative to increase generic acceptability in order to reduce public healthcare cost.



(USDbn)


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21

Exhibit-24:Japan has one of the lowest generic

penetrations among the developed countries

Source: OECD, Japan Ministry of health, SMC Inst. Research

Exhibit-25:Japan's healthcare cost to rise three fold

28%23% 20%

16% 14%

6%

15%

71%75%

89%

52%

41%

20%

60%

-10%

10%

30%

50%

70%

90%

UK Germany USA France Spain Japan Global

Value (sales) Volume (prescription)

0%

5%

10%

15%

20%

25%

Value Volume

In 2003, Japan announced incentive for sellinggeneric products to doctors and pharmacists

Japan's healthcare expenses to reach JPY 95tn by 2035 having deficit of 47%

According to McKinsey report, Japan's healthcare budget is expected to increase from 6.7% in 2005 to 13.5%

of the GDP by 2035. We expect Japan's healthcare spend to rise at CAGR 3.6% to JPY 63tn by 2020 and JPY

95tn by 2035 while the conventional sources of funds (copayments, insurance premiums, and government

subsidies) are expected to generate revenues of JPY 43tn by 2020 and JPY 50tn by 2035. Hence, in our view,

the snowballing gap between the healthcare expenses and the NHI (National Healthcare Insurance) revenues

reinforce the need to stress on the generic drugs in order to reduce the deficit.

Exhibit-26:Japan's health care deficit to

reach 47% by FY35break-up

Source: McKensey, SMC Inst. Research

Fig27: Japan's health insurance industry

27%

32%

47%

0%

10%

20%

30%

40%

50%

0

20

40

60

80

100

120

140

160

2005 2020 2035

JPYtn

Expenditure Revenue Deficit (%)

National healthinsurance, 40%

Society health

insurance (Union

managed), 24%

Government

(managed health

insurance), 28%

Other mutual benefit

insurance, 8%

Source: OECD, Japan Ministry of health, SMC Inst. Research

Source: McKensey, SMC Inst. Research




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22

China- Yo rn (The Medicine Man)

China with a GDP (nominal) of USD ~6.5tn and population of 1.4bn is poised to be the second largest

pharmaceutical market the world after the US overtaking Japan and France by 2015. An incremental

government funding of USD 125bn targeting substantial improvement to the nation's healthcare

infrastructure will according to us double the size of China's pharmaceutical market by 2015. We forecast

China pharmaceutical market CAGR 18-20% to touch USD 80bn by 2015. We believe China to be the next

industry leader in the medium to long term as US attractiveness reduces post the sharp fall of the patent cliff

post 2015.

Exhibit-28: Scarcity of blockbuster drug expiry post 2015

2003 2008 2013 2020

United States United States United States United States

Japan Japan Japan China

Germany France China Japan

France Germany Germany Brazil

Italy China France Germany

United Kingdom Italy Italy France

Spain Spain Spain Russia

Canada United Kingdom Brazil Italy

Brazil Canada Canada India

China Brazil United Kingdom South Korea

Mexico Russia Russia United Kingdom

Australia Mexico India Canada

India India Venezuela Spain

Netherlands Australia South Korea Venezuela

South Korea Turkey Mexico Mexico

Belgium South Korea Australia Australia

Poland Greece Greece Greece

Portugal Netherlands Turkey Turkey

Greece Belgium Poland Poland

Switzerland Poland Belgium Belgium

Source:Mckinsey,SMCInst.Researc




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23

We believe Indian generic players have a better opportunity in China than their MNC counterparts because of

low cost model and proven expertise in the US and other pharma-emerging markets.

Current situation

Chinese healthcare system is marked by: 1) growing demand of superior drugs and 2) wide disparities

between the urban and rural healthcare system.

To regulate and restructure the local pharmaceutical industry and to cut the rising drug cost, Government of

China (GoC) has implemented NEDL (National Essential Drug List) and NERDL (National Essential

Reimbursement Drug List). Currently the medicines listed under NEDL and also those drugs having monopoly

in the market are subject to price control by the Government.

Source: BMI, SMC Inst. Research

Exhibit-30: China Pharmaceutical industry break-up

Generics,

22%

Patented

Drugs,14%OTC, 64%

USD34bn

0

20

40

60

80

100

120

2005200620072008200920102011201220132014

Branded Generic OTCSource:Industry,SMCInst.Resear

Exhibit-29: Generic drugs account to ~63% of the total Chinese pharmaceutical market

Generic advantage

Generic drugs are the back bone of the Chinese pharmaceutical industry. Generic drugs account to ~63% (USD29bn) of the total pharmaceutical market and rising at a CAGR of 13% over 2014.



(%)


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24

Exhibit-31: Overview of drug distribution in China

Now is the time to act for Indian pharma players

We believe investment in to the Chinese pharmaceutical sector is the need of the hour for the global generic

drug makers (including Indian majors). Chinese pharmaceutical industry witnessed a sea change in the recent

past post the government regulations. Most of the global majors have already made a footing in to the Chinese

market mainly with their off-patent drugs. We believe now is the time for the Indian generic players to tap in to

this opportunity in to one of the fastest growing pharma market in the world. According to us Indian

companies should penetrate the Chinese market through JV with the local players instead of going solo as it

former strategy will increase marketing strength and will help reduce cost drastically.

Pharmaceutical

companiesWholesalers

Hospitals 80% Pharmacies 20%

Patient

Exhibit-32: Global majors in China

1Q 2011 Sales Growth (%) Market

(USD mn) share (%)

Pfizer 835 31 8.32

AstraZaneca 749 32 7.47

Bayer 663 20 6.61

Sanofi 620 31 5.59

Roche 531 31 5.29

Merck 443 15 4.42

Novartis 440 25 4.39

GSK 378 30 3.77

Novo Nordisk 359 30 3.58

J&J 288 30 2.87

Exhibit-33: Sample M&A transections in China in 2010

Buyer SellerDeal size(USD mn)

GSK Nanjin MeiruiPharmaceuticalcompany

70

Sanofi Minsheng Pharma NA

Nycomed Guangdong TianpuPharma

214

Sanofi BMP 520

Shanghai

Pharma

China HealthSystem Ltd.

339

Shanghai

Pharma

Xinya pharma 217

Source:BMI,Deloitte,SMCInst.R

Source: KPMG, BMI, SMC Inst. ResearchSource:KPMG,BMI,SMCInst.Research




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25

Russia- na tverdoi pochve (on solid ground)

Russia, according to us is an important market for global pharmaceutical players with huge growth potential.

Russian pharmaceutical market is estimated at about USD9bn as 2010 and is expected to reach USD22bn by

2015 at CAGR15%. The country has a per capita pharmaceutical spend of about USD130 which is even lower

than that of Romania (USD200) suggesting tremendous growth potential of pharmaceutical industry in

Russia.

Current environmentImportantdevelopmentindrugregulationcameintoeffectin2009withtheacceptanceoDrugList(EDL),consistingofdrugsrecommendedbyWHOandanassessmentsystembasedond

andexclusioncriteria.From2010,drugregistrationandpricedeclarationarerequiredf

includedontheEDL.

Currentlybrandedproductsoccupytwo-thirdsofthepharmaceuticalmarket.Toimprove

production, thegovernmenthasdefinedalistofstrategically-importantmedications

manufacturedinRussia,includingexpensivedrugsfortreatmentofoncologyandcardiovasc

Thegovernmenthassetagoalfordomesticallymanufacturedpharmaceuticalstoreacha50%of

by2020(currentlyaround20%).Thiswillbestimulatedthroughgovernmentpurchasing

Exhibit-34: Russian pharma market to grow 15% over 2010-12

Source: IQS, SMC Inst. Research

16%18%

31%29%

14%16%

21%

0%

5%

10%

15%

20%

25%

30%

35%

0

10

20

30

40

200620072008200920102011E2012E

PharmaMarketSize(USDbn) Growth(%)

Exhibit-35: Ratio of Original & Generic in real term is 1:2; while opposite in value term (2:1)

Source: Pharma Expert, SMC Inst. Research

8773 65

1327 35

0

20

40

60

80

100

120

HospitalmarketBeneficiarydrugcoverageOut-of-pockmarket

(%)

Inrealterm

Generics Originaldrugs

43

2236

57

7864

Hospitalmarket Beneficiarydrug

coverage

Out-of-pockmarket

Invalueterm

Generics Originaldrugs



(INR

bn)


26/86


26

State-owned segment

ThissegmentincludessalesofmedicinesthroughpharmaciesundertheFRPprogram,aswell

variouspreventionandtreatmentfacilitiesandclinicalchains.Thesegmentaccountsformarketvalue.

State-owned

sector, 70%

Commercial

sector, 30%

Source: Industry, SMC Inst. Research

Market segmentationRussian pharmaceutical market has come out of the domination of the state owned companies and

pharmacies. Currently private sector accounts for nearly 70% of the market value.

Commercial segmentThis segment includes retail drug sales and 'Para-Pharmaceuticals' (health and beauty products and other

non-medicinal products) but excludes medical drug sales under the Federal Reimbursement program (FRP).

The segment forms about 70 % of the market by value.

TOP5 ATC groups of generics (in value terms) TOP5 ATC groups of generics (in Real terms)

Cardiovascular system 20.73 Cardiovascular system 20.86

General anti-infectives systemic 15.88 General anti-infectives systemic 19.00

Alimentary tract and metabolism 15.31 Alimentary tract and metabolism 12.14

Musculo-skeletal system 11.25 Musculo-skeletal system 12.03

Respiratory system 10.71 Respiratory system 11.99

Total (%) 73.88 Total (%) 76.02

Source: Pharma Expert, SMC Inst. Research

Exhibit-36: Russian pharma market segment

Exhibit-37: Top 5 therapeutic segment contribution (in percentage)




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27

Latin America - creciendo fuerte (growing strong)

The Latin American pharmaceutical market is among the fastest growing across the world. The top eight

pharmaceutical markets in Latin American were worth more than USD30 bn in 2009. Although individual

markets are growing at different rates, the entire Latin American market is expected to expand at CAGR of 10-

12% over 2010-15. One of the major drivers of growth for the pharmaceutical markets is national

governments stepped up efforts to increase access to healthcare for its citizens. The Latin American markets,

which are already growing at double-digit rates, will receive a huge boost from the increasing use of generic

pharmaceuticals.

Exhibit-38: Latin America pharma market growth

Source: BMI, SMC Inst. Research

12.9%

9.5%

4.6% 4.3%7.2%

9.2%

27.6%

13.7%

9.7%

7.4%8.8%

7.4%8.8%

26.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Argentina Brazil Chile Columbia Mexico Peru Venezuela

CAGR 2003-07 CAGR 2007-12

Brazil

Brazil being one of the largest emerging into a world power and is already the largest market in Latin America,

representing 38% of the market compared with 21% for Mexico, 16% for Venezuela, and 9% for Argentina.

Brazil's healthcare spending represents almost 8% of GDP and of its population of nearly 200 million people

(20% have private insurance) make use of both private and public-health services with demand for

pharmaceutical products is growing 10% per year.

Brazilian, 88%

Swiss, 5.1%

Indian, 3.6%

German, 1.8%US, 1.1%

Canadian, 0.3%

Exhibit-39: Indian generic players command ~4% market share in Brazil

Source:Industry,SMCInst.Resear




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28

Brazil, according to Osec, a Swiss Bank, houses are 270 private and 20 state-owned pharmaceutical

laboratories in business. This growing local business has been driven by the government's industrial policy,

enhanced regulations, and the introduction of generics. The government supports investments throughspecial credits and encourages innovation through subsidies and strong IP protection. A number of global

pharmaceutical companies are using Brazil as a production platform, and there are small, but growing R&D

opportunities in the country.

Mexico

Mexico is the second-largest pharmaceutical market in Latin America after Brazil. Mexico after signing the

North American Free Trade (NAFTA) has opened the door to trade with large pharmaceutical markets.

Enforcement of patent protection laws has also increased foreign investment. It also enables foreign

manufacturers to register their patents with the Mexican regulatory authorities and manufacture their

products in Mexico.

Branded products are purchased primarily by population with higher income, while generics are bought by

population with lower income. Expiry of patents of blockbuster products is also expected to spark an increase

in the growth of generics. Mexico is one of the most attractive destinations for foreign manufacturers,

however, the research and development sector has not matured and so the majority of foreign investment in

Mexico is targeted at its manufacturing industry.

Argentina

Argentina's pharmaceutical market is dominated by local players accounting for ~60% of the market value.

Despite the increasing inflation and manufacturing costs, the pharmaceutical industry has managed to keep

the price of its drugs low. The Government in order to increase affordability and to maintain growth gave

discount of approximately 30% was given on 600 drugs. Demand continues to rise significantly in Argentina'spharmaceutical market propelled by the efforts of the government and its commitment to increasing access to

healthcare.




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29

ValuationsWe expect a re-look in the valuation multiple on the back of changing industry fundamentalsDomestic and emerging market growth would help Indian pharma companies command

premium over its global peers

We Initiate Out-performer on DRRD, LPC, CDH and recommend Out-performer on SUNP.

SoTP methodology

Indian generic pharma companies have always traded at a premium to its global peers on the back of strong

growth and high revenue visibility both in the domestic market and also in the regulated market.

We value the Indian generic players on SOTP basis to assess the various parts of the business. We value the

base business on earnings multiple to capture the relative growth and the product pipeline on NPV based onthe opportunity. We assign premium multiple to the Indian players vis--vis the global players.

-10%

0%

10%

20%

30%

40%

50%

60%

BSETHCIndex DRRDINEquityCDHINEquityLPCINEquity SUNPINEquity

Sep-10Oct-10

Nov-10

Dec-10

Sep-11

Aug-11

Jul-11

Jun-11

May-11

Apr-11

Mar-11

Feb-11

Jan-11

Exhibit-40: BSE HC vs SUNP, DRRD, LPC and CDH (price performance)

Source:Bloomberg,SMCInst.Researc

Source:Bloomberg,SMCInst.Resear

Exhibit-42: DRRD 1-year fwd P/E

15x

20x

25x

30x

-1500

-1000

-500

0

500

1000

1500

2000

2500

3000

Dec-05

INR

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

PE band chart of all the above companies

10x

15x

20x

25x

Exhibit-41: SUNP 1-year fwd P/E

0

100

200

300

400

500

600

INR

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Source:Bloomberg,SMCInst.Research




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30

Exhibit-43: LPC 1-year fwd P/E

Source:Bloomberg,SMCInst.Resear

Exhibit-44: CDH 1-year fwd P/E

10x

15x

20x

25x

0

200

400

600

800

1000

1200INR

Apr-06

Oct-06

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Apr-07

Oct-07

12x

15x

20x

25x

0

100

200

300

400

500

600

700INR

Apr-06

O

ct-06

Apr-08

O

ct-08

Apr-09

O

ct-09

Apr-10

O

ct-10

A

pr-11

Apr-07

O

ct-07

Source:Bloomberg,SMCInst.Research




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31

DRRD Out-performer TP: INR 1864

Target price calculation FY12 FY13

BasebizEPS 69.6 91.8

TargetBasebizP/E(x) 20

TargetPrice(basebusiness) 1,835

Limited competition opportunities (NPV) 29

Total Target Price (INR) 1,864

LPC Out-performer TP: INR 585



TargetBasebizP/E(x) 20Total Target Price (INR) 585

CDH Out-performer TP: INR 912


Base biz EPS 37.2 45.6


Total Target Price (INR) 912

SUNP Out-performer TP: INR 558




TargetPrice(basebusiness) 546

Limitedcompetitionopportunities(NPV) 12

Total Target Price (INR) 558Source: SMC Inst Research

Source: SMC Inst Research






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32

Exhibit-45: Peer Comparison table

Mcap Mcap Revenue EBITDA EPS PECompany USD bn INR bn INR bn Margin (%) FY11 FY12E FY13E FY11 FY12E FY13E

Sun* 10.63504.0957.21 34.47 17.525.7 28.720.4 18.6 16.

Drreddy* 5.29250.5474.11 20.84 49.569.6 91.832.3 21.3 16

Cipla 4.84229.5261.30 22.18 12.314.3 17.020.0 16.8 14.7

Ranbaxy 4.31204.2089.61 20.92 35.633.0 29.714.7 16.3 11

Lupin* 4.54215.2157.07 21.14 19.324.7 29.221.8 17.9 16.

Cadila* 3.59170.1744.65 19.89 34.737.3 45.622.8 22.1 18.

Divi's 2.0697.7713.07 38.12 32.437.5 46.919.7 15.7 13.5

Glenmark* 1.8788.4129.49 20.08 16.819.7 24.526.4 16.3 13

Biocon* 1.4166.6523.01 24.60 18.419.4 23.419.5 18.5 15.

Piramal 1.2760.3625.10 4.76 573.719.3 21.318.7 17.0 12.

Aurobindo 0.8037.9843.81 22.05 19.618.6 22.97.0 5.7 5.0

Ipca 0.7535.4618.83 20.20 21.022.7 27.912.4 10.1 9.1

Jubilant 0.7334.5134.33 16.43 14.417.6 22.812.3 9.5 7.2

Strides 0.3717.4916.96 19.26 26.144.1 56.26.8 5.3 NA

Orchid 0.3014.2016.84 20.49 22.220.8 28.49.7 7.1 6.2

Dishman 0.115.12 9.91 16.7 9.9 9.1 11.87.0 5.4 4.3

*SMC Inst Research Estimates Source: Bloomberg




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33

Key risk to our call

Business risk

Failure of research and development efforts may restrict introduction of new products

Futureresultsofoperationsdependontheabilitytosuccessfullycommercializeproductsinglob

othersegments.FailureinR&Dprocesscouldadverselyaffecttheabilitytocontinuedevelopi

successfulproductsandoverallprofitability.

Increase in competition, and higher than expected fall in prices of generic products

Anyincreaseincompetitioninthelaunchedproductcategorywillresultincutthroatpricewar

marketsharethusadverselyeffectingthemarginandprofitabilityofthecompany.Ourrecommen

adverselyeffectedduetomorethanexpectdropinpricesofdrug(bothbrandedandgeneric)thusnega

impactingourrevenueandearningsestimates.

Regulatory risk

Delay in regulatory approvals and timely launch of products is a key risk to our call

Thesubmissionofanapplicationtoaregulatoryauthoritydoesnotguaranteethatalicensetoma

willbegrantedparticularlyinrespecttotheFTFfilled(having180daysexclusivity)withthe

WaxmanActof1984.Eachauthoritymayimposeitsownrequirementsand/ordelayorrefusetogran

evenwhenaproducthasalreadybeenapprovedinanothercountry.Thetimetakentoobtainapproval

countrybutgenerallytakesfromsixmonthstoseveralyearsfromthedateofapplication.Thisregi

increasesthecosttousofdevelopingnewproductsandincreasestheriskthatwewillnotbeabletosuc

suchnewproducts.

Theregulatoryrequirementsandthepoliciesandopinionsofregulatorsmayattimesbeunclear,

arbitraryduetoabsenceofadequateprecedentsorforotherreasons.Asaresult,thereisincreasedri

compliancewithsuchregulations,whichcouldleadtogovernment-enforcedshutdownsandoth

asthewithholdingordelayofregulatoryapprovalsfornewproducts.

Market risk

Demand slowdown in key markets adversely impact our recommendation

WehaveestimatedPharma-emergingmarketstooutperformthedevelopmarketintermofgrowthont

fadingpatentopportunityintheUSpost2015andstrongregulatoryandpricingenvironmentinot

markets.SlowdownindemandinthekeymarketsparticularlyintheUSandIndiaandthepharma-em

holdsadownsiderisktoourestimateandtoourrecommendation.




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34

Company Section




35/86

SUN PHARMACEUTICALS INDUSTRIES LTD.


Out-performer Shining bright upon the cloudy sky

Shareholding pattern (%)

Promoter group 63.7

FII 18.4

DII 7.2

Others 10.7

Stock price performance

Return (%)1 Mth 6 Mths 1Yr

Absolute (5) 5 15

Relative (5) 18 32

Analyst

Souvik Chatterjee

+91 22 [email protected]

Mitesh Shah

[email protected]

Stock details

Bloomberg code SUNP IN

Shares O/S (mn) 1,030

M Cap (INR mn) 479,988

M Cap (USD mn) 9,711

52 week H/L (INR) 540 / 390

Avg. 6M daily vol 1,038,859

Current Price:

1year Target:

Expected Return:

INR 462

INR 558

+21%

October 03, 2011

India | Pharmaceutical

Company Review

35

Stock chart

Sun Pharma (SUNP) according to us is one of the most aggressive large-cap players in theIndian pharmaceutical space. We believe SUNP, with its strong product pipeline will be ableto monetize on the patent cliff opportunity in the US.

We recommend on SUNP as OUT-PERFORMER, forecasting an earning CAGR of 25%.

Domestic business to drive growth at CAGR 17% over FY11-14SUNP's chronic domestic portfolio in our view would be a key growth driver. The company has beenable to maintain its leadership position in the key therapeutic segments of neurology, cardiology,

ophthalmology, orthopedics and psychiatrists with strong brand recall among doctors. We expect thedomestic segment CAGR of 17% FY11-14 on the back of aggressive product launches in key segmentsand increasing penetration through existing products.

Strong growth across key markets, headwinds in the US to remainSUNP has formidable presence in key global markets like the US and Europe. We expect a CAGR of 52%in the semi-regulated markets for SUNP. We however, expect tepid performance from Sun Pharma (exTaro) and Caraco in the US for FY12 on account of limited near-term Para IV opportunities (Effexor XRlaunch in Q4 FY11 expected to be competitive and no clarity on the generic Gemzar and Taxoterelaunch). Moreover, the USFDA's warning to SUNP Michigan plant will add to the slow US growth.

Taro integration, a long term growth driver for SunWe see Taro as a long-term growth driver for SUNP mainly in the US. Taro compliments SUNPs

portfolio through its presence in key dermatology products (~57% of revenue) and steroids. We expectsignificant growth from Taro in the next 6-8 quarters on account of improvements in execution. Weestimate Taro to provide an incremental revenue growth of CAGR of 12.6% over FY10-13E for SUNP.

Recommend Out-performer; TP INR570At CMP of INR462 SUNP trades at 15.1x FY13E earnings. We recommend Out-performerrecommendation forecasting earnings CAGR of 32% over FY11-13. We expect SUNP to maintainits leadership across key segments in the domestic market. We forecast strong domestic growthto continue, helping the base business (ex Taro) grow by 22.5% (CAGR) over FY10-13E.We value SUNP at 22x FY13 earnings of INR24.8 and adding NPV of limited competitionopportunities of INR 12 to arrive at our target price of INR558 implying a potential upside of21% from the CMP.

Key risk to our recommendation1) Lower than expected growth in the domestic business 2) Delay in regulatory approvals in term ofnew launches and resolution of legal issues, and 3) Lower than expected growth in the key Pharma-emerging markets.

Summary financials

Particulars (INR mn) FY10 FY11 FY12E FY13E CAGR (%) (FY 10-13E)

NetSales(INRmn) 40,075 57,214 88,611 97,398 34.4

EBITDA(INRmn) 13,632 19,700 27,582 30,962 31.4

EPS(INR) 13.0 17.5 27.0 30.5 32.8

EV/EBITDA(x) 25.7 17.8 17.0 14.4 NM

ROE(%) 18.2 23.0 30.1 26.0 NM

PE(x) 36.0 26.7 17.1 15.1 NM

BVpershare 75.6 77.0 102.0 133.1 NM

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Sep-10 Dec-10 Mar-11 Jun-11 Sep-11

SUNP IN Equity NIFTY Index

SUNPIN=462Nifty=5,015


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36

Financial statements

Profit and loss statements


Incomefromoperations 40,075 57,214 88,611 97,398

Totaloperatingexpenses (26,442) (37,514) (61,029) (66,436)

EBITDA 13,632 19,700 27,582 30,962

Depreciation&Amortization (1,533) (2,041) (2,858) (2,919)

EBIT 12,099 17,659 24,724 28,043

Otherincome 2,048 2,699 4,974 5,599

Profitbeforetax&extraordinary 14,147 20,358 29,698 33,641

Extraordinaryincome 199 - - -

Profitbeforetax 14,347 20,358 29,698 33,641

Provisionfortax (679) (1,284) (1,782) (2,018)

Netprofit 13,469 19,074 27,916 31,623

MinorityInterest 41 (913) - -

Reported PAT 13,510 18,161 27,916 31,623

Adjusted Profit 13,311 18,161 27,916 31,623


Balance sheets


Shareholder'sequity 78,289 79,755 105,643 137,843

Minorityinterests 1,932 8,472 8,472 8,472

Long-termdebt 459 2,049 2,049 2,049

Provisions 3,484 5,030 3,366 3,382

Short-termdebt 1,252 2,207 2,207 2,207

Currentliabilities 4,095 9,203 8,982 9,783

Totalliabilities&equity 89,512 106,715 130,718 163,736Netintangibleassets 5,747 10,600 10,092 9,584

Netfixedassets 15,090 25,060 27,209 28,298

Investments 30,664 22,310 22,310 22,310

Inventories 10,739 14,794 19,641 26,871

Sundrydebtors 11,748 11,716 13,114 14,415

Loans&advances 8,488 11,281 12,973 14,919

Othercurrentassets 74 445 490 514

Cash&cashequivalents 6,073 6,858 21,772 44,313

Currentassets 37,121 45,094 67,989 101,031Deferredtaxasset,net 890 3,653 3,118 2,513

Totalassets 89,512 106,715 130,718 163,736

Cash Flow


PAT 13,510 18,161 27,916 31,623

Depreciaiton 1,533 2,041 2,858 2,919

Changeinworkingcapital (4,675) 5,482 (9,867) (9

Othernon-cashadjustments (3,392) (3,986) (851) 1

Operating cashflow 7,614 23,894 21,837 28,464

Capitalexpenditure (2,752) (4,170) (4,500) (3,

Changeininvestments (11,584) (1,460) - -

Otherinvestingcashflow 1,447 (15,855) - -

Investing cashflow (12,889) (21,485) (4,500) (3,500)

Free cashflow to firm 4,862 19,724 17,337 24,964

Changeinborrowings 306 (3,787) - -

Dividendpaid (3,321) (3,314) (2,423) (2,4

Otherfinancingcashflow (442) (647) - -

Financing cashflow (3,457) (7,747) (2,423) (2,423)

Net cash generated during year (8,733) (5,338) 14,914 22,541

Cash at beginning of year 14,634 12,196 6,858 21,772

Cash at end of year 5,901 6,858 21,772 44,313


Key ratio


EPS(INR) 13.017.527.030.5

BVpershare(INR) 75.677.0102.0133.1

ROE(%) 18.223.030.126.0

Growth (%)

Revenues (5.8) 42.854.9 9.9

EBITDA (14.4) 46.451.810.3

Netprofit (26.9) 44.540.012.3

EPS (30.5) 46.040.013.4

Margins (%)

EBITDA 34.034.431.131.8

EBIT 30.230.927.928.8

Netprofit 35.335.633.534.5

Valuation ratios

Year ending 31 March FY10 FY11 FY12E FY13E

P/E(x) 36.026.717.115.1

Price/BV(x) 6.2 6.1 4.6 3.5

Marketcap/sales(x) 12.1 8.5 5.5 5.0

EV/sales (x) 8.7 6.1 5.3 4.6

EV/EBITDA(x) 25.717.817.014.

Mcap/Sales(x) 12.1 8.5 5.5 5.0

EarningsYiels(%) 2.8 3.7 5.7 6.5

Source: Company, SMC Inst. Research Source: Company, SMC Inst. Research




37/86

Domestic business holds the key to success

The domestic business comprises high-margin (above 30%), high-growth chronic therapeutic areas, such as

neuro-psychiatry, cardiovascular, diabetes and gastroenterology. SUNP commands dominance with strong

brand recall amongst doctors in these therapeutic areas. During FY0511, SUNP's domestic formulation

business registered 22% CAGR (consistently growing above the industry average) and contributed 45% to the

total turnover in FY10. Strong domestic business provides support to volatile international operations.

We see new product launch and tapping new markets (tier II & tier III cities & towns) the key to SUNP's growth

strategy in the domestic market. SUNPs aggressive strategy with 4,000 strong field force and lower attrition

provides a leading edge in the acute therapeutic segment.


37

Exhibit-46: Domestic business to grow at 17-18% over the next 3 years


-10

-5

0

5

10

15

20

25

30

35

40

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

FY10 FY11 FY12E FY13E FY14E

INRMN

(%)

Domestic leader in chronic therapy; top 10 brands contribute ~20% of revenue

SUNP is the market leader in key chronic therapy in India commanding a 4.4% market share. SUNP derives ~70%

of its revenue from lifestyle therapeutic segments including CNS, CVS, GI and anti-diabetes. It is the market leader

in two of the fastest growing therapy segments, CNS and CVS. The top 10 brands of SUNP contribute to nearly 20%

of its domestic revenue. Seven of its brands feature among the top 300 brands of the industry. Most of the top

brands have one of the highest recall values among physicians in the respective sector.

Exhibit-47: WACC Calculation

Brand Name Therapy area

Pantocid Proton pump inhibitor

Glucored Group Oral anti diabetic

Susten Women's healthcare

Aztor CVS, cholesterol reducing agent

Pantocid-D Proton pump inhibitor

Gemer Oral anti diabetic

Strocit CNS, stroke

Repace Group CVS, Hypertension

Encorate chrono CNS, epilepsy

Clopilet CVS, anti clotting agent


Neuro-Psychiatry, 28%

Cardiology, 19%

Gastroenterology,

11%

Diabetology, 14%

Gynecology &Urology, 7%

Antiasthamatic &Antiallergic, 4%

Musculo-Skeletal &Pain, 5%

Opthamology, 5%

Others, 8%

Exhibit-48: India Branded Generics





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38

Emerging market to add growth traction

SUNP's ex-US markets consist more than c1500 product registrations and c900 strong product pipeline

across 40 countries in the world. Currently, non-US base business contributes ~62% to overall sales. We

believe that while growth in the US will continue to ride on the back of new launches and increasing

penetration through existing products, Pharma-emerging markets share as a proportion of total sales will

improve on the back of diminishing US opportunity post 2015. Ex-US markets consist of 40 markets with more

than 1500 product registrations and above 900 are in the pipeline. We expect the high growth in the emerging

market coupled with the aggressive growth strategy and efficient management team of SUNP will add growth

traction to the overall financials of the company.




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39

Strong Para IV pipeline to help accelerate growth

We expect SUNP's strong product pipeline with more than 369 cumulative filings (including Caraco and Taro)

would provide accelerated growth in the next 2-3 years on the back of the large amount of patent expiries in

the US. We believe SUNP to have a marketable opportunity of ~USD10bn over FY12-13E and will be one of the

key beneficiaries of the Patent cliff opportunity.

Exhibit-49: SUNP's robust product pipeline provides USD10bn opportunities by 2013

API / Generic name Innovator Brand Name Therapy Brand Patent Sales (USD

Docetaxel Sanofi-Aventis Taxotere Oncology Sep-10 3,033

Entacapone/Levodopa/Carbidopa Orion Stalevo CNS, Parkinson's Oct-10 233

Entacapone Orion Comtan CNS Oct-10 94

Gemcitabine Hcl Eli Lilly Gemzar Oncology Nov-10 1,363Alfuzosin Hcl Aventis Uroxatral Urology Jan-11 487

Azelastine Hcl, Opthalmic Drops Meda pharma Optivar Antihistamine May-11 41

Azelastine Hcl, Nasal metered spray Meda Pharma Astelin Antihistamine May-11 177

Acetaminophen; Tramadol Hydrochloride J&J Ultracet Pain management Aug-11 -

Tiagabine Hydrochloride Cephalon Gabitril CNS, Anticonvulsant Sep-11 56

Risedronate Sodium Aventis Actonel Women's Healthcare Nov-11 -

Eszopiclone Sepracor Lunesta CNS Jan-12 761

Escitalopram Oxalate Forest Lexapro CNS Mar-12 2,300

Amifostine Astra Zeneca Ethyol Oncology Jul-12 43

Rivastigmine Tartrate Novartis Exelon CNS Aug-12 945

Levocetirizine DiHcl Aventis Xyzal Respiratory Sep-12 253Source:Company,SMCInst.Research

expiry mn)

Taro, a long term growth driver; effective integration holds the key

Taro compliments SUNP's product portfolio through its presence in key dermatology products (~60% of

revenue) and steroids. Taro has over 153 ANDAs and 30 active DMFs filed with the USFDA and manufacturing

sites in Israel and Canada. Taro in our view, would also give SUNP access to Europe with more than 100 filings

in the EU. With Caraco still shackled with regulatory issues, Taro's manufacturing facilities would provide

necessary support to SUNPs US manufacturing strategy. We expect revenue CAGR of 18% over FY11-14E

from Taro on account of improvements in execution.

Exhibit-50: Financial performance of Taro


- 10%

0%

10%

20%

30%

40%

50%

0

100

200

300

400

500

600

700

CY05 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E

USDMn

NET SALES EBITDA Margin




40/86


40

Increase in product portfolio to add strength to US revenues

SUNP has the largest ANDA filings (369) by any Indian player in the US post the Taro acquisition. Taro

integration strengthens the US formulation business particularly in the field of dermatology and steroids. In

our view SUNP through its proven management skills will be able to increase Taro's efficiency.

We forecast a CAGR of 26% in SUNP's US business over FY10-13E on account of upsides from exclusivity

products and constant new launches and helping SUNP to become the numero uno among the Indian generic

players in the US. We expect significant growth from Taro in the next 6-8 quarters on account of improvements

in execution. We estimate Taro to provide CAGR of 12.6% incremental revenue growth over FY10-13E for

SUNP.

Exhibit-51: Cumulative ANDA approvals

Products filled Product approvalsFY06 59 20

FY07 96 29

FY08 142 53

FY09 177 69

FY10 207 84

FY11 (Incl Taro) 377 225


Exhibit-52: Comparing SUNP with other peers


224 215173 158

127 106

153

0

50

100

150

200

250

300

350

400

Sun Ranbaxy Aurobindo

Pharm

Dr Reddy Lupin Cadila

Taro

Taxotere case partially favourable; limited upside remaining

US district court has invalidated patents of Sanofi's Taxotere (docetaxel), favouring SUNP and other three

generic manufactures (Hospira, Apotex and Sandoz), limiting the exclusive marketing opportunity for SUNP.

Now with the USFDA approval we expect Hospira (having FTF status) to launch generic Taxotere (docitaxcel)

post expiry of branded drug by H1FY12. SUNP's launch (~6 months after Hospira's launch) of generic Taxotere

may be further delayed by 12-15months in the event of a possible Preliminary Injunction (PI) granted to

Sanofi by a higher US court.

In case of a launch, we expect SUNP to garner incremental EPS of 9.5% in FY12E and 6.1% in FY13E (assuming

60% price erosion and 10% market share in FY12E and 80% price erosion and 20% market share in FY13E).




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41

Particulars FY12E FY13E

Taxotere market size in US (USD Mn.) 2,800 2800

Price erosion 60% 80%

Sun's market share 10% 20%

Sun's market opportunity (USD Mn) 112 112

Profitability 40% 30%

Earnings (USD Mn) 44.8 33.6

Earning in INRMn (USD/INR 45) 2016 1512

No. of shares 1036 1036

Earning impact (INR) 1.9 1.5


Caraco merger to help resolve USFDA issues

We expect the proposed merger of SUNP and Caraco would help in resolution of the USFDA issues in terms of

quality at the Caraco's Detroit plant. SUNP in previous instance has helped to reinstate Caraco sales following

the product seizure from Caraco's Detroit facility in 2008, through site transfer and product acquisition.

Caraco, had earlier stated that

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