Indian Pharmaceutical Sector

INDIAN PHARMACEUTICAL SECTOR
Growth drivers strengthen in the near term; Patent expiries in the U.S. & Europe and domestic market are key
ICRA RATING FEATURE Industry Update March 2012
Summary
After a brief period of sluggishness, the growth momentum in the domestic formulations market appears to be back on track Structural demand drivers including a) rising household income levels, b) increasing prevalence of lifestyle related diseases, c) improving healthcare infrastructure/delivery systems and 4) rising penetration in smaller towns and rural areas continue to support long-term growth However, competitive pressures in the domestic market are likely to sustain as MNCs become aggressive and domestic companies leverage on their expanded field force; potential regulatory interventions could hurt pricing A large number of patent expirations continue to offer strong growth prospects for generic players in the developed markets; In the recent quarters, a peer set of seven leading generic players have reported a fairly strong revenue growth in the US driven by steadily expanding product portfolio and exclusivities While patent expires are expected to peak out in 2012, we believe that the growth momentum would sustain as most of Indian companies have a fairly well spread out product pipeline till 2014. While some companies have a healthy pipeline of FTF opportunities, others are likely to benefit from the launch of niche, limited competition products The quality of the filings by major Indian companies has also significantly improved over the years with complex molecules, non-orals (i.e. inhalers, injectables, oral contraceptive, ophthalmic etc.) and Para IV/FTFs forming increasing share of their pipeline Globally, generics players however continue to face competitive environment with increasingly crowded space for filing ANDAs and Para IV challenges and aggressive product life cycle management strategies by large innovator companies Price erosion, especially through regulatory interventions, remains a foremost challenge in the European markets; presence in limited competition product segments and over-the-counter (OTCs) segment offers some protection to margins. Most developed markets continue to move away from branded generics to commoditized un-branded generics and lower margin tender based business; amongst new frontiers Japanese generic market offers large potential, though there are significant challenges Patent expirations, weak pipeline quality and increasing focus by Governments to reduce healthcare costs continue to exert pressure on innovator companies which supports outsourcing to low-cost nations Despite challenges, leading Indian players continue to exhibit strong profitability indicators (excluding one-time instances like exclusivity-related aberrations or impact of foreign exchange fluctuations) and credit metrics. These strengths are also reflected in their strong credit profile Our outlook on the Indian pharmaceutical companies remains favourable as we believe companies will continue to benefit from recovery in the domestic market, strong growth potential in generics developed markets and potential outsourcing opportunities Overall, investments including capital expenditure are likely to remain buoyant over the medium term. Balance sheets of major pharmaceutical companies remain strong providing adequate room for fund raising
Corporate Ratings
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ICRA LIMITED
Domestic Formulations Business: Growth momentum improves; therapy-mix influences growth rates among companies
Exhibit 1: Trend in Domestic Formulations Revenues* & Growth
4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 20.8% 9.7% 13.9% 16.6% 9.1% 13.1% 25% 20% 15% 10%
Structural demand drivers to support growth despite short-term headwinds

After a period of sustained growth, the domestic formulations market began to decelerate since the beginning of Q3 FY11 largely prompted by intense competition, especially in the acute segments. The growth rates slipped quite sharply in H1FY12 on back of high base effect of the previous year and spill over of pricing pressure even to the chronic segments to some extent. The competitive pressure in the domestic formulations market has been rising steadily for some time now. While on one hand, this has been prompted by significant increase in investments by domestic players in marketing efforts through expansion in field force, on the other, MNC have also renewed their focus on India. Some of the smaller players have also contributed to the competitive intensity by offering huge discounts/incentives to the distribution network and doctors. However, while competitive pressures are unlikely to abate, the growth momentum appears to be back on track with last few months reporting a fairly strong growth across therapy segments. We believe, that the structural demand drivers would continue to support growth in the long-run despite short-term headwinds. The Domestic formulations market, valued at ~Rs. 48,200 crore has grown steadily at CAGR of 1415% over the past five years. The strong growth has been driven by a confluence of factors including a) rising household income levels leading to higher expenditure on healthcare, b) increasing prevalence of lifestyle related diseases, c) improving healthcare infrastructure/delivery systems and 4) rising penetration in smaller towns and rural areas. As a result, majority of the growth in the Indian market has been driven by expansion in volumes and new product introductions as against prices increases.
17.4%
5% 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 FY10 FY10 FY10 FY10 FY11 FY11 FY11 FY11 FY12 FY12 FY12 Domestic Formulations Sales (Rs. Crore) Change (%) YoY
Source: Company Data; ICRA Estimates; *Peer set includes 10 companies
Exhibit 2: Key Management takeaways from earning calls

Company Ranbaxy Comments on Domestic Formulations
Despite increasing consolidation, the market continues to remain highly fragmented with top ten Industry wide slowdown in the anti-infective segment continued to pharmaceutical companies accounting for only ~35-40% of the market. Leading players continue impact growth in the domestic market; however some recovery in to maintain their market share owing to their strong distribution reach, strong field force and slew of product launches. growth is visible;
consumer healthcare business continues to do well Lupin Domestic formulations business grew by 192% during Q3 FY12 driven by growth across therapeutic segments Sun Pharma Driven by higher share of chronics in India, business continued to grow steadily with a growth of 14% in Q3 FY12 Dr. Reddys There are initial signs of recovery; secondary sales trends have been encouraging Source: Company Earnings Call; ICRA
Lifestyle related disorders to propel faster growth in chronic segments

The acute therapy segments dominate the market with a share of 73% of the total market. However, with changing demographics and lifestyle patterns, the chronic segments such as cardiovascular, anti-diabetic, neurology, psychiatry have been growing at a faster pace and the market is gradually shifting towards chronics. In 2010-11, while the market grew by 15%, chronics grew by 18%. As per IMS health estimates, the chronic therapies are likely to comprise more than 50% of the market by 2020 with cardiovascular (second largest segment after anti-infective) and anti-diabetic will take lead while segments like anti-cancer will also add to the momentum.
ICRA LIMITED
Domestic Formulations Business: MNCs are becoming aggressive; competitive pressures are likely to sustain
Exhibit 3: Trend in Revenues growth of MNCs in the Indian market
7,000.0
6,000.0
Increasing investments by MNCs reflect at their renewed interest in the Indian market
30.0% 25.0%
24.3% 17.5% 13.0% 4.0%

9.8% 8.3% 11.9%
5,000.0 4,000.0
3,000.0
18.0%
15.0%
20.0%
15.0%
10.0% 5.0%
2,000.0
1,000.0
2006 2007 2008

Change (%) YoY
0.0% 2009 2010
The MNC pharma companies which have so far lagged the domestic market growth are now becoming increasingly aggressive in the Indian market as part of their focus on emerging markets. In the past, most of MNCs players had maintained a subdued profile in India owing to limitation on launch of patented products, limited marketing and distribution bandwidth and relatively small scale offered by the Indian market. However, with the implementation of the product patent regime and strong growth prospects, the landscape for MNCs pharmaceutical companies is gradually changing. Series of major acquisitions, steady growth in new product introductions (especially in the branded segment with steep pricing difference to global prices) and expansion in field force clearly indicates at their renewed interest in the Indian market. Apart from acquisitions, which have so far been their preferred route for consolidating position in India, companies have also been targeting growth opportunities through in-licensing deals with domestic generic players both for domestic as well other emerging markets. Such alliances primarily aim at leveraging on the lower R&D cost (i.e. product/market authorizations) and manufacturing capabilities of the local generic companies on one hand and the extensive marketing & distribution footprint of MNCs in other markets on the other. With increasing focus of MNC Pharma on emerging markets and limited growth opportunities in developed markets owing to large patent expiries and sluggish replacement of patented products, such alliance are likely to gain prominence given the strong capabilities exhibited by Indian players. Overall, we believe that competitive pressures are here to stay as a) MNCs become aggressive in India, b) domestic players leverage on their expanded field force and c) potential regulatory interventions could hurt pricing. Additionally, with the introduction of product patent regime, the basket of products available for introduction is also gradually declining. Given this scenario, companies are countering these challenges by expanding into other therapeutic areas, developing combination and controlled release products and even looking at in-licensing/comarketing opportunities with foreign players. We believe, companies with relatively diversified therapeutic exposure, strong positioning in chronic segments (which are likely to grow faster), wide spread distribution reach and strong R&D capabilities would continue to exhibit a stable operating performance albeit industry-wide challenges would continue to remain imperative.
MNC Pharma Revenues
Domestic Market Growth (%)
Source: Capitaline; ICRA Estimates
Exhibit 4: Trend in profitability indicators of listed MNCs in India

44.0% 40.0% 36.0%
32.0% 28.0% 24.0% 20.0% 2006 2007 PBDIT Margins (%) 2008 2009 RoCE (%) 2010 29.4%
40.9%
39.8%
38.8%
39.6%
32.0%
29.1%
25.1%
26.4%
25.9%
Source: Capitaline; ICRA Estimates
ICRA LIMITED
US Generics: Large patent expiries + focus on limited competition products to drive growth
Exhibit 5: Trend in US Formulation for Indian Companies*
6,000 5,000
4,000 90.3% 100%
Generics to propel growth in the US market over the medium term

80%
14.6% 31.3% 19.1% 17.5% 4.8% 29.4%
3,000 2,000 1,000

-
60%
40%
20%
0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q2 FY10 FY10 FY10 FY10 FY11 FY11 FY11 FY11 FY12 FY12 FY13 US Formulations Sales (Rs. Crore) Change (%) YoY
With a market size of US$ 320 billion, the United States remains the largest pharmaceutical market, globally. Given the sizeable generic substitution (~75% in volume terms), It is also the largest generics market and considered to be one of the most matured of all the markets. The price erosion post patent expiration is also amongst the highest in the US, reflecting the extent of competitive pressures. With ~$100 billion worth patent expiries over the next 5 years, generic business enjoys strong growth prospects. Besides patent expirations, healthcare reforms initiated by the US Government, aimed at reducing healthcare spending and covering a larger proportion of population under public healthcare are also likely to provide impetus to growth in the generics market.
Indian generics to benefit from the ongoing wave of patent expiries

Riding on back of the generic opportunity, Indian companies have capitalized on the growth prospects to emerge as formidable players in the US generics markets. Most of the leading players have significantly expanded their ANDA filings in line with the patent expiration cycle. The quality of the filings by top Indian companies has also significantly improved over the years with complex molecules, non-standard categories (i.e. inhalers, injectables, oral contraceptive, ophthalmic etc.) and Para IV/FTFs forming increasing share of their pipeline. Given the sheer size, the US generics market has become a significant contributor to the revenues of most leading Indian companies and a significant component of their earnings profile. Some of the companies have also captured significant market share across product segments. For instance, while Lupin th has emerged as the 5 largest generic company in terms of prescriptions, Dr. Reddys has 25 products among the top three in terms of market share. In the recent quarters, our peer set of seven leading generic players have reported a fairly strong revenue growth in the US driven by steadily expanding product portfolio and exclusivities on certain molecules. While the growth has been strong, it has also been volatile largely due to the impact of one-time exclusivities for some of the companies and also price erosion in certain cases. In particular, for Ranbaxy, the trend has been quite volatile due to exclusivity for Valacylovir (in CY10) and Donepezil (in CY11) which also reflected in lower growth in Q1 FY12 as a whole for the peer group. In Q2 FY12, growth momentum picked up across almost all companies (despite no major Para IV/FTFs) and also benefitted from the consolidation of Taro with Sun Pharma. In the near term, we expect the revenue growth to sustain as exclusivities on Lipitor (Ranbaxy) and Zyprexa (DRL) play out.
Source: Company Reports; ICRA Estimates; * peer set includes seven companies
Exhibit 6: Market Position in the US gradually improving

Company Lupin Dr. Reddys Sun Pharma Comments 5 largest generic company in the US in terms of prescriptions 14 products are market leader and 27 (among top 3) out of 30 25 products rank among top 3 in terms of markets Developed a meaningful OTC business with revenues of $60 million Sun has one of highest ANDA filings among Indian generic majors
th
Exhibit 7: Details of ANDA filings by leading Indian Companies

10 54 26 14
Glenmark 100%
152
60%
225 135 133
40%
38
23
77
65
80%
63
38
103
0% Sun Ranbaxy Aurobindo Dr. Reddy's Lupin Pharma* Approved Pending (Non Para IV) Cadila
48
20%
65
Para IV
Source: Company Reports; ICRA Estimates; * Includes filings from Taro Details of Para IV opportunities for Sun Pharma and Cadila are not available
ICRA LIMITED
69
[Indian companies]
US Generics: Aggressive product life cycle strategies + price erosions remain challenging
Exhibit 8: Expected Market Size of Branded Product Expiries in US by Year
40 35
35
In US$ Billion
30
25 20 22
20 15
10
5 2012e 2013e 2014e 2015e 2016e
With some of the major blockbuster drugs losing patent protection, the generics market is likely to maintain a strong growth momentum in the near term. Some of the largest branded products are expected to lose patent protection in 2012 with a market size of approximately $35 billion. In the US market, notable upcoming patent expirations include Lexapro and Seroquel in March 2012, Plavix in May, Singulair and Actos in August and Diovan in September. While some of these products are expected to face multiple generic competition thereby leading to severe price erosion, we believe that the sheer size of these products still creates growth opportunity for most of the players. As a result we remain positive on the fundamental conditions in the global generic drug sector, reflecting not only the genericization of blockbuster branded products, but also global cost containment efforts that favor generic drugs. Additionally, the full year impact of brands (i.e. Lipitor, Plavix, Zyprexa and Levaquin) which have recently gone off-patent would also continue to drive revenue growth in 2012. While patent expires are expected to peak out in 2012, we believe that the growth momentum would continue as most of Indian companies have a fairly well spread out product pipeline till 2014. Among Indian companies, while some companies (i.e. Ranbaxy, Dr. Reddys) have a healthy pipeline of FTF opportunities, others like Lupin, Glenmark are likely to benefit from the launch of oral contraceptives, beginning H2 FY13. As discussed earlier, the quality of pipeline of top Indian companies is gradually strengthening, comprising of higher Para IV filings, specialty products and niche complex chemistry molecules. Most of these segments, especially injectables, inhalers, ophthalmic, oral contraceptives and controlled releases products are set to lose patent expiries beyond 2012. Being characterized by complex manufacturing techniques, entailing greater investments in R&D and manufacturing, these segments have higher entry barriers and thereby potential for limited competition and higher profitability. For segments such as biosimilars where roadmap for generic approval is yet to be established in the US may also require marketing efforts as efficacy profile of two copycats of biologics could be different. Some of the other trends being witnessed in the industry include aggressive product life cycle management by large innovator companies to protect their earnings in view of patent expirations and slowing new product introductions. Life cycle management includes patent extensions, switching to OTC category, product substitution and launch of authorized generics (which can significantly erode attractiveness of the Para IV exclusivities). All these have significantly increased the costs and capped potential upsides from patent challenges for generic companies. In the last two years, there has been greater emphasis on patent settlements by Indian generics, which however significantly reduces launch uncertainties and litigation costs and hence is a positive from credit standpoint.
Source: Industry Estimates
Exhibit 9: Major Product Launches Expected in 2012

Brand Generic Name Sales ($ Billion) Exp. Launch 180 day No No No No Yes Yes Yes Yes Yes Plavix Clopidogrel ~ 6.7 May Seroquel Quetiapine ~ 4.5 March Singulair Montelukast ~ 4.5 July Actos Pioglitazone ~ 3.6 August Lexapro Ecitalopram Oxalate ~ 2.9 March Diovan* Valsartan ~ 3.5 September Geodon Ziprasidone ~ 1.3 November Tricor Fenofibrate ~ 1.3 July Provigil Modafinil ~ 1.1 April Source: Industry Estimates, ICRA Research; * Diovan + Diovan HCT
Exhibit 10: Major Product Launches Expected in 2013

Brand Generic Name Indication Cymbalta Duloxetine Anti-Depressant Concerta Methylphenidate Anti-Depressant Niaspan Niacin Vitamin Deficiency Aciphex Rabeprazole Gastro Intestinal Zometa Zoledronic Acid Osteoporosis Source: Industry Estimates, ICRA Research
ICRA LIMITED
US Generics: Continued
The current wave of patent expirations has also triggered consolidation in the industry as innovator companies look for growth opportunities by diversifying their business profile, entering into newer therapeutic/product segments or even markets. Apart from M&As, many of the innovator companies are also reconfiguring their R&D operations either by reducing R&D spending or exiting segments where prospects for NCEs look dismal. Outsourcing or partnering with smaller companies for early stage development is another trend that is gaining momentum. In the generics space too, consolidation has been a prominent phenomenon. The top four generic players now account for over 60% of the market compared to ~30-35% a decade ago. Comparatively, while Indian players have significantly ramped up their product portfolio and made a mark in the US generics space, they remain small in comparison to the generic majors such as Teva, Mylan and Sandoz. The sheer scale of these entities gives an edge in generics business. While scale is the foremost factor, channel servicing and product pipeline are equally important, especially in developed markets such as US which are dominated by large distributors/retailers that enjoy tremendous bargaining power. Strong management focus on legal and R&D skills is also necessary to ensure emphasis on product development of FTF/exclusive products also add to business strengths. In recent periods regulatory compliance for developed markets has also been a cause of concern for a number of companies. While most Indian manufacturers have been able to resolve 483s/regulatory concerns flagged by international regulatory agencies, our discussion with industry indicates that there is likely to be some increase in compliance cost over the near term to meet tightening quality norms in these markets.
Europe: Regulatory reforms + price erosion remains a key concern; generic substitution to gain momentum
Unlike the U.S, the European generics market is quite diverse. Regulations, reimbursement policies (and consequently prices), competitive landscape and generic penetration varies across markets. While some of the European markets, such as the U.K, Germany and Netherland are characterized by relatively high generic penetration (~50%+), other key markets like France, Italy and Spain have low generic usage at around 25%. Apart from generic penetration, the reimbursement policies and consequently pricing also differ across markets. While in some markets, reimbursements are based on reference pricing mechanism, in other markets, generics are priced to a discount to the innovators brand. For instance, in the U.K, the pricing is set by a scheme based on the pharmacy purchase profit. In Europe, most Governments have implemented austerity measures aimed at reducing healthcare spending as they seek to repair their fiscal benefits. Some of markets have shifted away from branded generics to unbranded generics or tender market; in the process, the pricing power of generics companies is getting rapidly eroded. In addition, the rising bargaining power of large distributors, retailers and insurance companies are potential dampener to pricing power of generic companies.
Exhibit 11: Generic Penetration across European markets (volume terms)

70%
60% 50%
40% 30%
20% 10%
0% U.K Germany Netherlands France Spain Italy
Source: IMS Health, ICRA Research
ICRA LIMITED
Europe: Continued
Exhibit 12: Snapshot of measures announced by European Governments
Country U.K. Government Initiatives to reduce healthcare cost Continued use of risk-sharing schemes (effective drug discounting) for expensive drugs; generic substitution by pharmacists is among the highest in the UK Germany Has moved from being a branded generics market to a tender driven one; healthcare reforms has put the negotiating power firmly in the hands of the countrys healthcare funds France 2011 budget incorporated reduction in healthcare bill besides tax breaks for companies that market high-selling orphan drugs More importantly, the Government has also proposed changes in reimbursement levels for drugs that only have moderate effect Spain Announced similar price cuts/rebates in line with other European nations; in August 2011, passed a bill for promoting generics Italy Price cuts to the extent of 12.5% on generics and introduction of tendering system from 2011 onwards Source: Industry Estimates, ICRA
At the same time government legislation and insurance companies are increasingly incentivizing pharmacists and patients to substitute branded medicine with cheaper generic alternatives, which remains a key growth driver. Overall in volume terms, in comparison to North America (generic penetration in volume terms ~75-80%) generic penetration in Europe is generally lower, with significant potential in growth in a number of countries. In Germany, after the series of healthcare reforms, the market has transformed into tenderdriven model from a branded generics market. Healthcare funds are increasingly playing an important role in determining the products being sold in the market, following the reforms implemented in 2009. It is estimated that nearly one-fourth of the German generics market has migrated to a tender-driven one, resulting in significant pricing pressure. Price cuts (in generics) have been common across nations ranging between 5-25% depending on product segments and markets. All these measures are expected to support the growth in generics driven by increasing substitution levels and patent expirations. In comparison to the US generics, the dependence of top Indian companies in the Europe as a whole has been relatively lower. Among leading players, Wockhardt has the highest exposure to Europe with over 37% contribution to revenues. Among the other players, Dr. Reddys (owing to its acquisition of Betapharm in Germany), Ranbaxy, Cipla and Intas Pharma have considerable presence in the European markets. Although most of the players have presence across nations, many of them have established prominent position in certain key markets through steady expansion in product portfolio and supply relationship with the distribution channels. Most of the companies also acquired local companies during the initial phase with the intent of gaining front-end marketing capabilities (i.e. market authorizations, distribution relationships) and even manufacturing in certain cases. The performance of Indian players in the European markets has been relatively lackluster largely emanating from unanticipated changes in market structure and pricing pressures. Nonetheless, the European markets remain an important part of Indian companies long-term growth strategy. Companies have been ramping up their presence across markets by steadily enhancing product portfolio, investing in developing marketing and distribution strengths.
Exhibit 13: Exposure of Indian Generic majors in Europe (% cons revenue)

Company Wockhardt Dr. Reddys Contribution 37% 21% Comments Has among the highest exposure to Europe Acquisition of Betapharm (Germany) and subsequent transformation of the industry to tender driven impacted companys performance in Europe Leading generic company in Romania Targeting the inhalers segment in Europe Low exposure; mainly present in France & Spain Targeting multiple markets in Europe to insulate from single market linked adversities
Ranbaxy Cipla Cadila Intas Pharma
15% 14% 6%
Source: Industry Estimates, ICRA
ICRA LIMITED
Emerging Markets in centre of attraction; Indian companies prefering tie-ups

The emerging markets represent the fastest growing segment of the Global pharmaceutical industry. As per industry estimates, the total spending on healthcare in these markets is likely to grow from US$151 billion to $285-315 billion by 2015 with most markets expected to grow at double digit. Apart from the developed markets, the Indian Pharma companies have also been eyeing growth opportunities in some of the other fast-growing emerging markets. Among them, in Russia, South Africa and some of the countries in Latin America (Brazil, Mexico) and South-East Asia, Indian companies have strengthened considerable presence. These emerging markets with some of them being branded generics offer strong growth prospects for Indian players given the high out of pocket expenditure on healthcare in these markets (unlike developed markets) and relatively easier regulatory pathways. During the initial phase, most of the Indian players preferred acquisitions/in-organic investments to enter into these markets are now enhancing their presence through ramp up in product portfolio and therapy segments. In addition to direct presence, Indian companies have also been partnering with MNCs in emerging markets. Such alliances benefit from the R&D and manufacturing capabilities of the Indian partners and the extensive marketing & distribution footprint of the MNCs in those markets. For instance, GSK has a tie-up with Dr. Reddys whereas Pfizer has tied-up with a number of Indian companies to launch a range of branded generics in emerging markets (besides generics in US)
Exhibit 14: Snapshot of key of emerging markets Markets Growth Prospects Russia Market Growth ~13-14% over medium term -
Challenges The Government is playing an increasing active role in regulating market access as well as controlling prices of essential drugs through reference pricing mechanism The market is gradually transforming from a high out-of-pocket driven market to a western European model of centralized reimbursements In the long run, the Government also aims to encourage local manufacturing by offering incentives to promote R&D Despite being a branded generics, it has been a difficult market to penetrate given the strong dominance of local players which control over 60-70% of the market
Positioning of Indian Players Key Indian Players - Ranbaxy, Dr. Reddys, Lupin and Glenmark th For instance, Dr. Reddys is ranked 15 in Russia and is the third most important market after US and India with 17% contribution to turnover
Growth Drivers - Per capita spending on healthcare is higher than other emerging markets but remains low - Transition to the OTC segment offers strong growth prospects Brazil Market Growth Largest pharmaceutical market in Latin America, growing at a CAGR of ~15% Growth Drivers - Low per capita spending on healthcare - Govt. interference is much lower; out-ofpocket spending is significant South Market Growth Africa - Relatively small market but growing at fast pace; in FY11 market grew by 8% Growth Drivers - Implementation of NHI to encourage the penetration of generics Source: Industry Data, ICRA Research
Key Indian Players Ranbaxy, Torrent Pharma Torrent is one of the leading Indian player in the Brazilian market with a share of 6.8% in the representative market th Ranbaxy is also ranked 9 (M.S. 2.8%) in generics Participation in Govt. tenders also is significant among Indian players Key Indian Players Cipla, Ranbaxy, Lupin Cipla through its partner Medpro has major presence in South Africa among Indian players. th th Lupin acquired Pharma Dynamics (ranked 19 & 6 in generics); currently is working on moving manufacturing to India & augmenting product portfolio
Prices increases are generally restricted and controlled by the Government Industry works on a Single Exit Price mechanism for essential drugs which essentially means that companies are mandated to sell their products at same price to all customers
ICRA LIMITED
Evolving generics opportunity in Japan + biosimilars also offers long-strong growth prospects but with challenges across the value chain
Japanese market offers new growth avenue for Indian generic players
Amongst the key markets outside the United States and Europe, the Japanese market offers potential to drive significant growth in the medium term. With healthcare reforms aimed to reduce healthcare budgets and generic friendly policies being adopted by the Japanese Government, the pharmaceutical market is gradually opening up to generics. The current generic penetration in Japan, estimated at ~23%, is low and the Government has targeted ~30% penetration by 2012. As a result, despite being the second largest pharmaceutical market in the world, the Japanese market ranks only as the sixth largest generic market. Apart from the wide ranging governments pro-generic reforms, major patent expiries in 2012 are also likely to propel generic penetration in Japan. The Japanese generic market however is a challenging one on many fronts e.g., the reimbursement structure (as margins for pharmacies are linked to reimbursement prices, higher generic substitution would therefore mean lower margins for pharmacies), consumer mindset (strong preference towards brands, as a result, generic penetration is likely to be gradual) and absence of exclusivity mechanism (unlike US, in Japan, the regulatory mechanism does not provide an exclusivity period for generic FTF applicants, leaving little incentive for generic players to adopt that route). The approval process for generics is also quite stringent and time consuming. Given the market specific challenges, majority of the generics sold in Japan are manufactured by local players. Thus, local experience through joint venture or partnerships is critical for success in product selection, manufacturing and distribution. Among Indian companies, Lupin, Ranbaxy, Torrent Pharma and Cadila Healthcare are among the front runners in this market. While Ranbaxy (by virtue of its Japanese parent, Daiichi Sankyo) is exploring a hybrid model for the Japanese market, Lupin has recently strengthened its presence by acquiring another company (Irom Pharmaceuticals) in the injectables segment.
Biosimilars offers strong long-term potential

In addition to the impending patent expiries, globally, the generic companies are also eyeing generics in the biologics space as a long-term growth avenue. Biologics are basically used to substitute disease induced deficiencies of endogenous factors such as erythropoietin or GCSF and are also used to treat diseases such as cancer, arthritis and certain rare genetic disorders. As per the industry estimates, the biopharmaceuticals market touched nearly US$ 100 billion in 2010 and it is estimated that almost 85% of the existing biologics would face generic competition over the next ten years. The global biosimilars market is expected to grow from US$ 243 million in 2010 to US$ 3.7 billion by 2015. The rapid growth in biosimilars is expected to be driven by patent expiries for more than 30 biologic medicines, with sales of $51 billion in the next five years.
but with challenges across the development cycle and approval pathway
However, there are certain challenges in developing biosimilars in comparison to generics for small molecules. Unlike chemical (non-biological) compounds, which are produced synthetically, biopharmaceutical production involves the use of living organisms and due to their heavy molecular weight, complex molecular structure and extremely intricate manufacturing process, biologics are difficult to replicate. As a result, it is difficult to compare and determine equivalence of biosimilars, which impedes the regulatory pathway for their approval. Additionally, due to higher regulatory barriers, the R&D investments for developing such products remain significant and so does the capex in manufacturing facilities after commercialization. Even within biosimilars, products can have varying efficacy profiles, resulting in differentiated products among companies. As a result of this peculiarity, companies need to market the biosimilars products through dedicated field force. Thus, marketing efforts are also critical in case of biosimilars. Among markets, the European regulatory agency (EMEA) has announced the guidelines for approval for biosimilars and has already approved a number of biosimilars. Comparatively, in the US, the market for biosimilars remains limited as of now as the FDA is still in the process of developing the regulatory pathway for biosimilars. The market is dominated by sales of Erythropoietin, Filgrastim and growth hormones. The key generic players marketing biosimilars are Sandoz, Teva, Hospira and Stada besides others. Some of the Indian companies have also started launching biosimilars in emerging markets including in India. Dr. Reddys, Biocon and Lupin have so far been at the forefront as far as investments and R&D pipeline is concerned. In our view, given the complexities and high costs involved, Indian players will need to collaborate with technical partners to aid in the development cycle as well as the marketing stage. Such partnerships are already visible in this segment. While Teva runs a JV with Lonza (provides technical inputs in biologics APIs), Biocon has entered into various co-development alliances with global pharmaceutical majors and research companies with presence in monoclonal anti-bodies and insulin. ICRA LIMITED
M&A: Acquisitions are giving way to partnerships with focus on specific markets or therapy segments
In the past, acquisitions have played a vital role for Indian companies in establishing their presence in international markets. Most of the acquisitions have either been in the generic segment or in the contract research & manufacturing segment. Only a handful of acquisitions have been in the $200 million plus range, with a majority being small-sized acquisitions in value terms. Investments in generic space have been aimed at gaining presence in newer markets, access to technologies or even acquiring marketing and distribution front-end. In the CRAMS space, access to new clients and technologies has been key rationale for acquisitions. The initial phase of investments was largely in regulated markets (European Union and North America) however, with higher growth prospects in emerging markets, the focus has also widened to semi-regulated markets in Africa, Latin America, and South-East Asia. These markets offer potential for profitable growth with relatively easier regulatory pathways. Except for certain transactions, most of the acquisitions have been relatively small sized. In the recent period, the pace at which Indian companies have acquired international assets have slowed down considerably as preference towards forming JVs/alliances with focus on specific markets or therapy segments is gaining importance. The performance of past acquisitions has generally been mixed. Unanticipated changes in market dynamics, inability to move sourcing to low-cost locations and contract cancellation have been some of the factors adversely affecting performance. The transformation of the German pharmaceutical market from being a branded generic to a tender drive one for instance eroded value for some acquisitions and continues to remain a difficult investment to manage. Certain companies have also faced challenges in securing new contracts, particularly in the CRAMS space. As a result, companies have become more prudent in their investment decisions than earlier. Among key acquisitions in the recent period, Dr. Reddys acquired GSKs penicillin manufacturing facility in U.S., allowing it to enter the U.S. penicillin-containing anti-bacterial market with brands such as Augmentin and Amoxil. More recently, Cadila Healthcare acquired Biochem to strengthen its presence in the antibiotic segment in the Indian market. During the year, Lupin also continued with its strategy to augment its presence in the Japanese market; having acquired Irom Pharmaceuticals in November 2011. Exhibit 17: List of acquisitions by Indian companies in 2011-12 (indicative)
Company Zydus Cadila Lupin Limited Zydus Cadila Zydus Cadila Dr. Reddys Acquisition Biochem Irom Pharmaceuticals Bremer Pharma Nesher Pharma Market India (Branded) Japan Mainly Europe United States (Generics) United States (Generics) Month December 2011 November 2011 July 2011 June 2011 March 2011 Consideration Not disclosed Not disclosed Not disclosed Not disclosed $ 20 million Rationale Strengthens Cadilas presence in domestic formulations market especially in the anti-biotic segment Strengthens Lupins presence in the Japanese generics market with diversification into the specialty injectables segment Expands presence in the animal healthcare business Allows presence in the controlled-release drugs segment in the US with product portfolio and manufacturing capabilities; step to strengthen presence in the US generics market Allows the company to enter the US penicillin-containing anti-bacterial market segment with brands such as Augmentin and Amoxil and diversify its generics portfolio in the US
GSKs Penicillin manufacturing facility Source: Company Releases, ICRA
With patent expirations at its peak and weak pipeline quality, there is a continuous pressure on innovator companies to explore other avenues including generic business especially in emerging markets. Globally, many of the large innovator companies already have their generic arms which are aggressively pursuing opportunities across markets. In recent period, most of the innovator companies have entered into alliances with generic companies from India. In most cases, these alliances are designed to leverage on the R&D and low-cost manufacturing capabilities of Indian partners and marketing and distribution capabilities of the MNCs. There is also an increasing trend among MNCs in partnering in the domestic market where marketing and distribution footprint of Indian companies and product portfolio of MNCs is being leveraged upon.
ICRA LIMITED
Exhibit 18: List of JV/Alliances among Indian players (indicative)

JV/Alliances Sun Pharma Merck Market Emerging Markets Rationale JV would develop, manufacture and market branded generics across emerging markets; Sun Pharmas contribution: Leveraging on SPARCs R&D pipeline and manufacturing capabilities Mercks contribution: Market presence and regulatory competence across emerging markets Based on similar structure; DRL would manufacture products; while GSK would distribute in Latin America, Africa, Middle East and Asia Primarily a co-marketing arrangement with focus on certain therapy segment With product patent regime, Indian players are collaborating with MNCs by in-licensing patented products in India Cadila Healthcare would license 24 branded generics to Abbott for 15 emerging markets; collaboration includes pain management, oncology, CVS, neurological and respiratory diseases Primarily a co-marketing arrangement with focus on insulin segment Aimed at leveraging on Lupins marketing & distribution footprint in India and Eli Lillys product portfolio in the insulin segment Partnership in the research space with focus on discovery & development of NCEs Working on early stage of the development cycle
Dr. Reddys GSK Cadila Healthcare Bayer Cadila Healthcare Abbott Lupin Eli Lilly Biocon Bristol Myers Squibb Source: Company Releases, ICRA
Emerging Markets India Emerging Markets India N.A
Conclusion
Our outlook on the Indian Pharmaceutical Industry remains favourable, reflecting our view that earnings growth will continue, benefitting from healthy growth in the domestic formulations business and steady growth expected in the U.S/Europe generics space on back of patent expiries. In the U.S, companies with a robust and selective product pipeline, presence in niche/complex segments and diversified therapies would continue to exhibit a relatively strong earnings profile. There would also be significant one-time upsides for companies, stemming largely from Para IV/FTF opportunities in US. In the European markets, while companies may face pressure on profitability, volume growth would continue as healthcare reforms initiated by Governments would push growth in generics. Emerging markets, with growing spend on healthcare and strong branded generic market offers profitable growth opportunities for generic business. Besides emerging markets, the gradually evolving generics opportunity in Japan, the second-largest market in the world (after United States) also offers generic players the opportunity to pursue long-term investments. On the CRAMS front, Indian players are focusing on providing services across the value chain spanning from development stage to commercial scale production. Relatively lower exposure to small biotech companies has been a risk mitigant during the downturn for these entities. With several drugs going off-patent and big pharma increasing exposure to cost efficient sourcing locations, opportunities remain favourable for CRAMS players to provide developmental services and subsequently graduate to commercial scale production. Key challenges facing the industry are potential implementation of the new pricing policy in India, increasing competitive pressure in the chronic segments, aggressive approach such as authorized generics by innovators in the US and healthcare reforms in European markets are some of the factors that could impede profitability for pharma companies. ICRA currently has ~80 entities with long-term ratings (excluding SO ratings) in the pharmaceutical sector. About 10% of these entities are rated in the AA category - these entities have strong and profitable domestic branded formulations business, which has been a stable source of cash flows over the years. Around 41% of the entities are rated in the non-investment graded. Most of these entities are relatively small entities, often in API business and suffer from high product or client concentration.
ICRA LIMITED
Company Section
ICRA LIMITED
AUROBINDO PHARMA LIMITED Sequential recovery in business; resolution on US FDA issues holds key for further improvement
Q3 FY11 Operating Income Growth (%) - YoY OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) 1,192.2 319.5 43.4 11.5 5.9 4.1 267.0 78.3 188.6 Q3 FY12 1,284.5 7.7% 191.2 55.2 27.4 4.9 (144.5) (31.0) (2.4) (28.5) 14.9% -2.2% Q2 FY12 1,075.3 19.5% 114.6 46.2 20.7 6.0 (185.4) (131.7) (51.6) (80.2) 10.7% -7.5%
ICRA Ratings
Not Rated by ICRA
26.8% OPBDIT/OI (%) 15.8% PAT/OI (%) Source: Company Data, ICRA Estimates
Revenue Growth APL performance in Q3 FY12 improved on a sequential basis as reflected by a 19.5% growth in operating income on QoQ basis and a healthy 420 bps improvement in operating margins. The growth on sequential basis was primarily driven by scale up in companys formulations (ex-US) and ARVs business. Some of the issues that impacted the business during the last quarter namely logistics (due to Telengana agitation) and persistent power cuts also were resolved to a large extent thereby leading to some recovery in the business. On a YoY basis, the companys formulations business (56% of turnover) witnessed a growth of 14.7% driven largely by European and RoW markets even as US business remained flat. Growth was primarily led by entry into newer markets in Europe and product launches in emerging markets especially GCCs. In the US, the FDA overhang continued to the impact business which coupled with slowdown in orders from Pfizer led to flattish sales during the quarter. In comparison to formulations, the companys API business posted a slightly higher growth of 20.3% on back of strong growth in the non-anti-biotic API segments.
Shareholding Pattern (%)

Promoters FIIs DIIs Others 54.7% 13.7% 16.3% 15.3%
Price Performance (%)

3M 26.9% 6.7% 13.1% 12M -37.8% 10.9% -1.8%
Exhibit: Trend in APLs Revenue Mix (FY09-9m FY12)

100% 80% 51%
4%
5% 44%
6% 40%
2% 43%
60%
40%
Nov-11
Dec-11
Jun-11
Feb-11
Apr-11
Sep-11
Oct-11
Jul-11
Mar-11
Feb-12
0% FY09 Formulations FY10

APIs
FY11
9m FY12 Dossier Income
Source: Company Data, ICRA Estimates Q4 FY10 Q1 FY11 Operating Income 924.8 922.3 Growth (%) - YoY 1.8% 8.2% OPBDIT 171.5 171.7 PAT 121.9 51.6 OPBDIT/OI (%) 18.5% 18.6% PAT/OI (%) 13.2% 5.6% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
Q2 FY11 1,112.6 26.1% 254.2 198.3 22.8% 17.8%
Q3 FY11 1,192.2 30.3% 319.5 188.6 26.8% 15.8%
Q4 FY11 1,154.4 24.8% 211.7 125.0 18.3% 10.8%
Q1 FY12 1,076.9 16.8% 163.9 (122.8) 15.2% -11.4%
Q2 FY12 1,075.3 -3.4% 114.6 (80.2) 10.7% -7.5%
Bloomberg Code ARBP Market Capitalisation Rs. 3,451 Crore Valuations

Price/Earnings Price/Sales Source: Bloomberg FY12e 11.9X 0.8X FY13e 7.9X 0.7X
ICRA LIMITED
May-11
Mar-12
Aug-11
Jan-12
20%
44%
51%
54%
56%
Profitability The companys OPBDIT margins at 14.9% dropped sharply on YoY basis but improved on sequential basis. Some of the reasons that have impacted APLs profitability during the year include (i) adverse product mix Stock Movement (ii) lower licensing income, (iii) overheads on account related to 250.0 manufacturing units that are under import alert and (iv) and increase in 200.0 employee expenses etc. These factors along with a large MTM loss on forex 150.0 100.0 liabilities resulted in a loss of Rs. 31 crore in Q3 FY12 at PBT level. While APIs 50.0 performance has been impacted during the current year on various front, the management however remains confident of a recovery led by launch of Volumes Aurobindo's Stock Price certain high value products (under Pfizer deal), ramp-up in injectables portfolio and OTCs in the US over the medium term. Any positive announcement on US FDA issues and ramp-up in supply contracts (with Pfizer & AZ) could remain key developments to watch out for in the near term.
APL CNX Pharma CNX Nifty
800 600 400 200 0
AUROBINDO PHARMA LIMITED: Business Overview (Page 2 of 2)

US (27%) Formulations (54%) EU & RoW (12%) ARVs (15%) APLs Sales Mix Dossier Income (6%) SSPs (13%) APIs (40%) Cephs (19%) ARVs & etc (9%)
Aurobindo Pharma Limited (APL) is a leading formulations and API player with presence across developed and emerging markets. Over the last five years, it has transformed its business model from being a pure API player to a company with diversified product mix (increasing share of formulations) and geographic mix (higher proportion of sales from developed markets). In FY11, formulations accounted for 54% of companys turnover (up from 39% in FY08), while the share of low-margin APIs have declined to 40% (from 61% in FY08). Driven by aggressive product filings across markets, APL has also been able to generate a sizeable income through out-licensing of dossiers. It has managed to rapidly grow its business in the US generics space through a confluence of aggressive product filings, large manufacturing capabilities and a supply contract with Pfizer. APL is one of the leading ANDA filers from India (209 as on FY11) and among the largest suppliers for ARVs drugs to the WHO.
Scale-up in US generics space has transformed APLs business profile: Despite being a late entrant, APL has been able to register an impressive scale up in the US generics space through aggressive product filings (up from 82 in FY07 to 209 in FY11), contract manufacturing tie-ups with Pfizer (extensive tie-up, covers over 100 products) and large manufacturing capabilities. With considerable experience in APIs, the company has also maintained a competitive edge through backward integrated operations besides establishing relationship with leading distribution companies in the US. While we expect, the US business to remain the key growth driver for the company, benefitting from the impending patent expiries in the US and strong product line-up, the recent import alert and a warning letter for two of its manufacturing units have obstructed the scale-up to an extent. Inorganic investments + supply contracts to drive growth in EU: At present, APL generates about 6-7% of its turnover from EU markets. In line with other generic players, APL has also forayed into these markets through acquisitions. It has so far acquired companies in the UK, Netherlands and Italy. All the acquisitions have been with the intent to get ready access in these markets through a portfolio of market authorizations and distribution network. As on March 2011, the company had filed around xx product dossiers and received xx approvals. In addition, the companys tie-up with Pfizer also covers the EU markets in an extensive way, which coupled with companys large product filings and strategy to enter into new markets is likely to help the company scale up business in Europe. Emerging markets also hold strong growth potential: Similar to the US and EU markets, ROW markets are emerging as promising growth driver for the company driven by aggressive product filings (across product segments and markets), supply tie-ups with Pfizer and Astra Zeneca (focuses primarily on emerging markets) and relatively better product positioning (higher share of branded generics). Till FY11, the company has filed over xx market authorizations across markets with focus on South Africa, Brazil and Australia and Canada in particular. One of the leading players in APIs and ARV Drugs: Besides formulations (54% of revenues), APL also generates a considerable share of its turnover from API. It is one of the leading players in APIs with strong presence in some of the mature Pen-G based anti-biotic such as Cephalosporin and Semi-Synthetic Penicillin (SSPs). However, with increasing focus on formulations and focus on only high-end anti-biotic, the share of revenues from APIs is likely to come down further going forward. Moreover, the recent move to reduce stake in an intermediates facility (in China) reflects its gradual shift away from APIs. APL also has significant presence in the Anti-Retroviral (ARV) drugs through participation in various tender programmes of international procuring agencies. Over the last four years (i.e. FY08-11), the ARV business has grown at a CAGR of 20% driven by steadily increasing demand and companys increasing participation (through tenders). However, with PEPFAR budgets being flat for almost last four years, the share of revenues from ARV business is likely to come down, considering the expectation of higher growth in the other segments.
ICRA LIMITED
CADILA HEALTHCARE LIMITED Acquisitions drive growth however margins decline on consolidation of lower-profitability businesses
Q3 FY11 Operating Income Growth (%) OPBDIT Less: Depreciation Less: Net Interest Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) 1,166.8 256.2 33.4 19.4 2.9 206.4 36.8 162.0 Q3 FY12 1,383.2 18.5% 261.6 46.5 59.4 18.2 173.9 17.4 149.2 18.9% 10.8% Q2 FY12 1,236.4 11.9% 237.1 37.5 76.9 11.0 133.7 23.5 102.7 19.2% 8.3%
ICRA Ratings
OPBDIT/OI (%) 22.0% PAT/OI (%) 13.9% Source: Company Data, ICRA Estimates
Revenue Growth Cadilas Q3 FY12 net sales at Rs. 1,352.5 crore grew by Not Rated by ICRA 19.2% on YoY basis driven by acquisitions and strong growth in the domestic formulations business (up 17.7%). Adjusted for acquisition (Nesher, Bremer & Biochem), sales growth would have been lower at 13.6%. Among markets, Cadilas reported a growth of 45.1% in the US, however after adjusting for Shareholding Pattern (%) the impact of Nesher, it stood at 27.1%. In constant currency terms, growth rates were much lower largely due to lack of product introductions. Cadilas 74.8% didnt receive US FDA approvals during the quarter being impacted by the Promoters FIIs 5.2% warning letter at its Ahmedabad facility. Growth rates were also sluggish in DIIs 12.3% other key market Europe (up 1% YoY), Brazil (4.9%) and other emerging 7.7% markets (up 2.8%). The companys wellness business also had a challenging Others quarter with 12.0% drop in revenues primarily coming in from steep competition in the skin care segment. The management indicated that Price Performance (%) competition from some of the MNCs and domestic have increased in the 3M 12M recent period and renewed marketing efforts should help in reviving the CHL 1.1% -8.3% demand going forward.
CNX Pharma CNX Nifty 6.7% 13.1%
Exhibit: Break-up of Cadila Healthcares FY11 Revenues

Cadila's Sales Break-up (FY11) Other India 3% Consumer Business APIs 7% 9%
India Formulations 38%

Export Formulations 43%
Q4 FY10
Q1 FY11
Operating Income 846.6 1,133.8 Growth (%) YoY 17.0% 25.5% OPBDIT 189.4 297.4 PAT 118.8 199.2 OPBIT/OI (%) 22.4% 26.2% PAT/OI (%) 14.0% 17.6% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
Profitability Despite rupee depreciation, Cadilas operating margins at 18.9% in Q3 FY12 came under pressure on both YoY as well as QoQ basis largely due to the consolidation of some of the lower margin business, drop Stock Movement in highly profitable wellness business and impact of certain one-offs. The 1100 900 company also reported a forex loss of Rs. 34.2 crore which pulled down the 700 net profit to Rs. 149.2 crore, a drop of 7.9% on YoY basis. In the near term, 500 growth prospects remain weak due to under performance in the US and 300 European markets. While warning letter related issues continue to impede 100 growth in the US, challenging environment in Europe is likely to derail Volume CHL's Stock Price growth momentum to an extent. The management however reiterated that the worst is behind in terms of operating profitability and going forward improvement would be driven by inherent synergies between Cadilas domestic formulations business with recently acquired Biochem. Bloomberg Code CDH Market Cap. Rs. 14,513 Crore Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY11 Q2 FY12 Valuations 1,116.7 1,166.8 1,212.9 1,245.7 1,236.4
Nov-11 Dec-11 Jun-11 Feb-11 Apr-11 Sep-11 Oct-11 Jul-11 Mar-11 Feb-12
10.9% -1.8%
50 40 30 20 10 0
18.1% 244.9 170.8 21.9% 15.3%
17.7% 256.2 162.0 22.0% 13.9%
43.3% 227.8 179.0 18.8% 14.8%
9.9% 302.4 229.8 24.3% 18.4%
10.7% 237.1 102.7 19.2% 8.3%
FY12e Price/Earnings 20.8x Price/Sales 2.8x Source: Bloomberg
May-11
FY13e 16.8x 2.4x
ICRA LIMITED
Mar-12
Aug-11
Jan-12
CADILA HEALTHCARE LIMITED: Business Overview (Page 2 of 2)

Key Highlights from Q3 FY12 Conference Call
Cadilas domestic formulation business grew by 17.7% during Q3 FY12 driven by steady growth across key therapy segments and the impact of Biochems acquisition. Adjusted for the acquisition, growth would have been around 15%; during the quarter, the company launched 15 new products in India, of which seven were launched for the first time; management indicated that growth will continue to be around 15-16% in the near term The rationale behind Biochems acquisition was to strengthen companys presence in the acute segments as Cadilas major presence has been in the fast-growing chronic segments; the acquisition augments Cadilas field force by 950 MRs, adds a manufacturing facility and would boost revenues by Rs.260 crore annually Without disclosing the details, management indicated that while the margins are lower in Biochem, expected synergies between the two entities would drive improvement through cost savings Growth in the US business ex. Nesher was 27% and much lower in constant currency terms due to lack of new product introductions; US FDA inspection in relation to the warning letter is expected in the next month and should result in favourable resolution soon; management guided for the launch of six extended release products from Neshers portfolio of eight over the next 2-3 years It was a challenging quarter for wellness owing to steep competition from MNCs and other domestic FMCG players in the skincare segment; management has renewed its marketing efforts to growth the brand franchise; product extensions in Sugarfree and Nutralite are also being planned During the quarter, the company adopted AS-30 to account for foreign exchange fluctuation; as a result, out of the total loss of Rs. 65.0 crore on forex, Rs. 34.2 crore was routed through the P&L (clubbed under other expenditure and interest expenses) while balance was accounting in the hedge reserves
Business Overview Cadila Healthcare (Cadila) is one of the top-five leading formulations company in India with strong focus on the fast-growing chronic therapy segments. Apart from domestic formulations, Cadila Healthcare has established itself as an emerging generics player in some of key markets like the United States, the EU and Latin American countries. Clutch of well-thought acquisitions, steady product introductions and therapy expansion, and maintaining service levels have been key factors that have helped the company become strong player in the generic space. Over the years, the company has also entered into certain strategic JVs and alliances having clear focus on leveraging either its manufacturing capabilities or partnering to gain technical expertise in certain product/therapy segments. wT With a contribution of 36% to revenues, domestic formulation is the largest segment for the company followed by United States, Emerging markets and Europe. In India, Cadila has approximately 3.7-4.0% market share with strong position in the CVS, Gastrointestinal, Gynaecology and Anti-Respiratory segments. In addition to scale-up in base business, the company has entered into a JV with Bayer for co-marketing products in India and more recently acquired Biochem to strengthen its acute segment portfolio. In the US, Cadilas initial foray and ramp-up was largely driven by highly commoditized oral solids which the company is now augmenting with limited competition segments such as transdermals, injectables etc. The recent acquisition of Nesher Pharma has helped the company gain presence in the controlled release substance portfolio. Among other markets, Cadila has created considerable presence in the Brazilian market and is also increasing its focus on the Japanese generics segment. Additionally, the company has also established certain JVs/alliances with leading players with a specific strategic intent either leveraging on the capabilities in certain therapy areas or markets:
Tie-Ups Zydus Nycomed Healthcare Zydus Hospira Oncology Zydus BSV Pharma Deal with Abbott Labs. Source: Company Data, ICRA Area APIs Oncology Oncology Emerging Markets Comments JV with Nycomed for manufacturing starting material for Pantoprazole; supports Nycomeds branded generics portfolio Turnover Rs. 111.2 crore (FY11) 50:50 JV with Hospira Inc.; Turnover Rs. 430.4 crore (FY11) 50:50 JV with Bharat Serums; it owns rights to a novel and patented oncology product; also provided contract manufacturing services Signed a deal with Abbott to manufacture 24 of its branded generics for certain emerging markets; the alliance aims to leverage on Abbotts strong marketing & distribution footprint in those markets and Cadilas manufacturing capabilities
ICRA LIMITED
CIPLA LIMITED Product and market rationalizations efforts impede exports growth; focus clearly shifting on profitable segments
Q3 FY11 Operating Income Growth (%) OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) 1,557.1 318.2 65.3 2.9 25.7 275.7 43.0 232.7 Q3 FY12 1,758.0 12.9% 391.5 75.7 3.2 30.2 342.6 72.7 269.9 22.3% 15.4% Q2 FY12 1,778.0 -1.1% 437.6 65.6 2.4 24.3 393.9 85.0 309.0 24.6% 17.4%
ICRA Ratings
Not Rated by ICRA
Revenue Growth Ciplas Q3 FY12 revenues at Rs. 1,758.0 crore grew by 12.9% on YoY basis driven by strong growth in the domestic formulations business (up 18.4% YoY) and relatively muted performance in exports which grew by a modest 10.7% during the quarter. The healthy growth in domestic business was aided by a strong 36% growth in the generic business and 14-15% growth in the branded business benefiting from strong revenues in the anti-asthma segment. In the exports segment, Ciplas revenues at Rs. 865.8 crore grew by only 10.7% (as declined sequentially) as the company continued with its product and market rationalization measures resulting increasing focus on higher profitable products/segments. Overall, the management remains confident of achieving higher than industry growth of 15-16% in the domestic business driven by steady product introductions and strong field force even as exports growth is likely to remain in 10% level on YoY basis Profitability On the profitability front, Ciplas OPBDIT margins at 22.3% during the quarter improved by almost 200 bps on YoY basis primarily aided by improvement in gross margin as a result of product and market rationalizations efforts being pursued by the company. While Ciplas gross margins improved by almost 400 bps during the quarter, due to annual increments and increased manpower count, the favourable impact on OPBDIT was partially negative by higher employee expenses. The growth in net profit at 16.0% was however marginally lower than the rise in operating profit due to higher tax rate which increased during the quarter following expiry of tax benefits at EOUs. Cipla incurred a capex of Rs. 130 crore during the quarter with full year guidance maintained at Rs. 500-600 crore; impact of forex was marginal at Rs. 4.5 crore (booked in other income).
Q2 FY11 1,634.4 12.0% 366.6 263.0 22.4% 16.1% Q3 FY11 1,557.1 8.0% 318.2 232.7 20.4% 14.9% Q4 FY11 1,669.2 21.4% 302.1 214.0 18.1% 12.8% Q1 FY12 1,591.4 7.5% 369.5 253.3 23.2% 15.9% Q2 FY12 1,778.0 8.8% 437.6 309.0 24.6% 17.4%


3M -6.5% 6.7% 13.1% 12M 2.5% 10.9% -1.8%
Exhibit: Trend in Ciplas Domestic & Export Revenues (FY07-11)

4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 2006-07 2007-08 2008-09 2009-10 2010-11 Domestic Revenues Growth (%) - Domestic Exports Revenues Growth (%) - Exports
35.0%
30.0%
CIPLA CNX Pharma CNX Nifty
Stock Movement
400 350 300 250 200 500 400 300 200 100 0
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Nov-11
Dec-11
Jun-11
Feb-11
Apr-11
Sep-11
Oct-11
Jul-11
Mar-11
Feb-12
Volume
May-11
Cipla's Stock Price
Source: Company Data Q4 FY10 Q1 FY11
Operating Income 1,374.7 1,479.8 Growth (%) - YoY 0.9% 7.7% OPBDIT 258.0 337.9 PAT 275.5 257.4 OPBDIT/OI (%) 18.8% 22.8% PAT/OI (%) 20.0% 17.4% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
Bloomberg Code CIPLA Market Cap. Rs. 24,714 Crore Valuations

FY12e Price/Earnings 22.0x Price/Sales 3.6x Source: Bloomberg FY13e 18.3x 3.1x
ICRA LIMITED
Mar-12
Aug-11
Jan-12
CIPLA LIMITED: Business Overview (Page 2 of 2)

Ciplas revenues from domestic market grew by 18.4% during the quarter aided by a strong 36% growth in the generic business and a fairly stable 14-15% growth in branded business; management guided of 15-16% growth in the domestic market riding on back of steady product introductions, strong franchisee in key therapeutic segments and a well entrenched field force Performance of the exports business was muted with 10.7% growth on YoY and a decline of ~5% on sequential basis; management attributed the impact of slowdown to companys cautious strategy of gradually rationalizing its product and market mix and increased focus on higher profitable segments; company is targeting to achieve 10% growth in exports formulations over the next one year Within exports, revenues from API segment grew by 18.1% led by strong ARV sales during the quarter Gross margins improved by 400 bps due to better product mix and some impact of lower input costs; the company believes that its efforts of shifting its business model towards higher profitable segments to should continue to support improvement in margins however there could be an impact of this on revenues in the near term The company has filed for11 inhalers in the European markets, of which four have been approved and the remaining are at various stages of approval; the company has also entered the US market, however details of regulatory filings were not disclosed JVs in the biosimilars space are progressing in line with expectations with clinical trials having started in India; commercial launch is still 2-3 years away On the forex front, the company had $200 million of forward contracts outstanding as on December end which adequately covers the current debtors
Exhibit: Share of Ciplas Domestic & Exports Revenues (FY07-11)

100% 80% 60% 40% 20% 0% 2006-07 2007-08 Exports Revenues 2008-09 2009-10 2010-11 Domestic Revenues 48.2% 47.4% 44.7% 45.9% 45.2% 51.8% 52.6% 55.3% 54.1% 54.8%
Company Profile
Cipla Limited (Cipla) is one of the leading pharmaceutical company in the domestic formulations segment with a market share of ~5%. In addition to its strong presence in the Indian market, the company generates nearly 55% of its turnover from exports to various emerging and regulated markets. In the domestic formulations market, Cipla has particularly stronger presence in anti-infective and respiratory segment. Within respiratory, it commands over 75% share of inhalers in India. Over the past three years (FY09-11), the growth in Ciplas domestic formulations at 12.0% has been below the industry average largely due to its higher presence in some of the mature products as well as pure generic segments and comparatively lower presence in fast-growing chronics like CVS and Anti-Diabetic. In the exports market, Cipla operates through partnerships based business model, wherein it develops and manufactures the products and receives licensing income and manufacturing revenues. The companys exports turnover has grown at a CAGR (%) of 17% over the past five years. The African region is major market for the company followed by US and Europe. To strengthen its presence in the exports market, Cipla is targeting the inhalers segment in Europe with a basket of 11 products. Given the high entry barriers (due to relatively longer approval time frames), the inhalers segment faces relatively limited competition compared to pure vanilla generics and offer lucrative opportunity for Cipla to ramp up its presence in the European markets. With recently expanded capacities (at Indore SEZ), growing approvals in the inhalers in Europe and other non-US markets, the company is likely to register strong growth in overseas markets going forward.
Exhibit: Trend in Ciplas Domestic & Export Revenue Growth Quarterly

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Q1 FY10 Q2 Q3 Q4 Q1 FY10 FY10 FY10 FY11 Domestic Revenues Q2 FY11 Q3 FY11 Q4 Q1 Q2 FY11 FY12 FY12 Exports Revenues Q3 FY12
ICRA LIMITED
DISHMAN PHARMACEUTICALS & CHEMICALS LIMITED Growth driven by Marketable Molecules segment; CRAMS expected to revive with impending commercial supplies
Q3 FY11 Operating Income Growth (%) - YoY OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) 237.9 31.5 17.1 13.3 1.0 (0.7) 1.7 Q3 FY12 266.2 11.9% 61.5 19.1 16.4 26.0 9.3 16.7 Q2 FY12 269.7 15.7% 28.8 20.7 15.0 (7.0) (0.7) (6.3) 10.7% (2.3%)
ICRA Ratings
Not Rated by ICRA
OPBDIT/OI (%) 13.2% 23.1% PAT/OI (%) 0.7% 6.3% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
Revenue Growth Dishmans operating income grew by 11.9% on a YoY basis in Q3 FY12 to Rs. 266.2 crore, facilitated by a favourable currency movement. While the Marketable Molecule business reported a YoY growth of 30.9%, the CRAMS business has reported a YoY growth of 6.9% contributed by 28.7% growth in Carbogen Amcis, while Indian CRAMS business has reported a de-growth. However, facilitated by several new contracts, which include supply of an oncology drug to Astellas for an order value of Euro 18 million per annum starting from January 2013; sale of 150 tonnes of Eprosartan Mesylate to Abbott Laboratories in FY13 (followed by sales of 200 tonnes each in FY14 and FY15); commercial supplies of an antituberculosis drug to Johnson & Johnson with expected sales of Euro 5-6 million in FY13; US$ 6 million contract from Novartis; etc., Dishman management is hopeful of achieving 20% growth in FY13. Profitability Non-recurring research income and higher contribution from sale of high margin Benzethonium drug have resulted in a 987 bps improvement in OPBDITA margin to 23.1% in Q3 FY12. This also includes a forex gain of Rs. 8.1 crore (Rs. 5.7 crore forex gain in Q3 FY11) on account of reversals. With commencement of Vitamin D3 supplies which is in short supply worldwide, OPBDITA margins are expected to further witness an improvement. Developments All three units at Bavla plant Vitamin D3 (Unit 13), Oncology (Unit 9) and Disinfectant (Unit 10) have commenced production in Q3 FY12, and expected to start contributing significantly from FY13 onwards. On account of the increase in operating costs in Shanghai due to which China has no longer remained a core business area for the company, Dishman is in the process of selling its China factory.


3M -34.0% 6.7% 13.1% 12M -47.5% 10.9% -1.8%
DISHMAN CNX Pharma CNX Nifty
Stock Movement
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Nov-11 Dec-11 Jun-11 Feb-11 Apr-11 Sep-11 Oct-11 Jul-11 Mar-11 Feb-12 May-11 Mar-12 Aug-11 Jan-12
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Dishman's Stock Price
Q4 FY10
Q1 FY11
Q2 FY11 233.1 4.4% 57.2 29.5 24.5% 12.7%
Q3 FY11 237.9 5.5% 31.5 1.7 13.2% 0.7%
Q4 FY11 347.8 38.5% 57.5 23.0 16.5% 6.6%
Q1 FY12 242.8 14.4% 49.3 15.1 20.3% 6.2%
Q2 FY12 269.7 15.7% 28.8 -6.3 10.7% -2.3%
Operating Income 251.2 212.3 Growth (%) - YoY -15.5% -12.7% OPBDIT 51.9 54.9 PAT 19.9 27.1 OPBDIT/OI (%) 20.7% 25.8% PAT/OI (%) 7.9% 12.8% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
Bloomberg Code DISH Market Cap. Rs. 407 Crore Valuations

Price/Earnings Price/Sales Source: Bloomberg FY12e 8.3x 0.4x FY13e 5.3x 0.3x
ICRA LIMITED
DISHMAN PHARMACEUTICALS & CHEMICALS LIMITED: Business Overview (Page 2 of 2)

In Q3 FY12, of the total sales of Rs. 265.5 crore, the CRAMS segment has reported sales of Rs. 169.1 crore while the Marketable Molecules segment has reported sales of Rs. 96.4 crore. Within CRAMS, Indian business has constituted Rs. 58.5 crore, Carbogen Amcis Rs. 102.3 crore and Carbogen UK Rs. 8.3 crore. In the Marketable Molecules business, Vitamin D business contributed Rs. 50.9 crore, and quats and other India-based products contributed Rs. 45.4 crore While India CRAMS business was impacted in Q3 FY12, management expects Q4 FY12 to report a robust growth on the back of a pipeline of few good projects In the current quarter, Carbogen Amcis has turned around and with continued good performance in Q4 FY12, it is expected to be net positive in FY12; expected EBITDA of Euro 15 million in FY13 Dishman Netherlands has been approved by the USFDA without any 483s. So with both EU and USFDA approvals, they can sell their Vitamin D product including Vitamin D analogues all over the world; Dishman Netherlands is expected to achieve a turnover of US$ 50 million in the next two-three years, with EBITDA improving significantly driven by Vitamin D3 supplies Overall, Dishman is expected to report a PAT of Rs. 45-50 crore in FY12; Dishmans RoCE and other ratios are expected to improve with the increased contribution of the three new units at the Bavla plant If Dishman management receives the asking price for the China facility, it will exit the investment and use the funds to reduce its debt; however, it is not going to make a desperate sale of the facility For 9m FY12, Dishmans top five customers have accounted for 37.5% of total sales as against 35.1% in 9m FY11 Dishmans net debt for FY13 is expected to be around Rs. 850 crore
Company Profile
CRAMS: CRAMS, constituting 66% of FY11 sales, is the largest business segment for Dishman, catering to the requirements of multinational pharmaceutical companies internationally, where the company develops intermediates/ APIs based on customers requirements. Dishnmans wholly-owned subsidiary Carbogen Amcis located in Switzerland, spearheads the R&D and supplies API to support clinical trial requirements. Some of Dishmans key contracts include among others, Supply of Eprosartan Mesylate to Abbot Laboratories in FY13 a contract worth Euro 100 million over three years Supply of an oncology drug to Astellas from January 2013 a contract worth Euro 18 million per year Supply of an anti-tuberculosis drug to Johnson & Johnson which has already commenced and expected to result in annual sales of Euro 5-6 million Contract with Novartis for US$ 6 million Other segment: Other segment includes bulk drugs, intermediates, quats, specialty chemicals and outsourced/ trade goods, which accounted for 34% of Dishmans FY11 sales Dishman Specialty Chemicals: Supplies intermediates, fine chemicals and products for the pharmaceutical, cosmetic and related industries. Dishman is a leading manufacturer of Phase Transfer catalysts. Dishman Vitamins and Chemicals: Supplies Vitamin D2, Vitamin D3 and Vitamin D analogues, cholesterol and laolin related products for pharmaceutical, cosmetic and related markets. Dishman Disinfectants: Supplies antiseptic and disinfectant formulations. With strong R&D experience and effective relationship developed with MNC customers, Dishman has emerged as a premier contract manufacturing organization (CMO). The CMO business model was envisaged in the year 1997 and there under set-up a modern production facility at Bavla, near Ahmedabad, which is now a 100% EOU facility. At present, the company has eight multi-purpose production units at Bavla. The company also has manufacturing and R&D facilities in Switzerland, UK and Netherlands. The company has also set up a Greenfield manufacturing facility at Shanghai Chemical Industrial Park, Shanghai.
ICRA LIMITED
DIVIS LABORATORIES LIMITED Revenue momentum continues; to be further boosted by the commissioning of the new facility
Q3 FY11 Operating Income Growth (%) - YoY OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) 315.0 123.5 13.5 0.6 7.1 116.5 14.9 101.6 Q3 FY12 417.4 32.5% 151.1 16.2 0.2 25.7 160.4 37.9 122.6 Q2 FY12 366.1 42.5% 138.2 15.2 0.6 10.8 133.2 27.1 106.1 37.8% 29.0%
ICRA Ratings
Not Rated by ICRA
Revenue Growth Divis operating income grew by 32.5% on a YoY basis in Q3 FY12 to Rs. 417.4 crore driven by higher volumes for major generic APIs such as Naproxen, Dextromethorphan, Levetiracetam, Nabumetone and Carbidopa/ Levodopastrong. While favourable currency movement accounted for 13% of the overall growth, the company witnessed a QoQ de-growth in the sales of Carotenoids to Rs. 20 crore from Rs. 23 crore in Q2 FY12. The capacity utilization at the DSN SEZ facility in Vizag has remained flat QoQ and is expected to scale up from Q1 FY13 onwards. Thus, the management has lowered its sales growth guidance for FY12 to 20% from 25% earlier. Profitability Diviss OPBDITA margin at 36.2% for Q3 FY12 reported a YoY decline of 300 bps despite the Rupee depreciation on the back of increased fuel and staff cost as also higher overheads due to the commissioning of the DSN SEZ unit at Vizag. The favourable currency movement resulted in a forex gain of ~Rs. 16.0 crore for the quarter, which was however off-set by the higher effective tax rate, moderating the YoY growth in PAT to 21% (Rs. 122.6 crore). Divis effective tax rate has risen to 23.6% in Q3 FY12 (against 12.8% in Q3 FY11) mainly due to the end of the tax holiday on its 100% EOU at Choutuppal and its existing SEZ at Visakhapatnam being eligible only for 50% tax exemption. However, the new DSN SEZ Unit is eligible for exemption of 100% of export profits for five years from April 2011 as it has commenced operations in Q1 FY12, which will again reduce the effective tax rate for the company once production ramps up from the facility.


3M 1.5% 6.7% 13.1% 12M 19.5% 10.9% -1.8%
DIVIs CNX Pharma CNX Nifty
Stock Movement
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DIVI's Stock Price
Q4 FY10 Q1 FY11 Operating Income 312.1 269.4 Growth (%) - YoY -4.8% 27.0% OPBDIT 151.8 102.5 PAT 130.0 86.3 OPBDIT/OI (%) 48.6% 38.1% PAT/OI (%) 41.7% 32.0% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
Q2 FY11 256.9 13.4% 88.3 73.0 34.4% 28.4%
Q3 FY11 315.0 60.8% 123.5 101.6 39.2% 32.2%
Q4 FY11 482.5 54.6% 194.4 174.8 40.3% 36.2%
Q1 FY12 364.8 35.4% 134.0 102.6 36.7% 28.1%
Q2 FY12 366.1 42.5% 138.2 106.1 37.8% 29.0%
Bloomberg Code DIVI Market Cap. Rs. 9,825 Crore Valuations

ICRA LIMITED
DIVIS LABORATORIES LIMITED: Business Overview (Page 2 of 2)

During the quarter, the business mix between large volume APIs and custom synthesis has remained largely the same at 50:50 Strong revenue growth during the quarter was supported by higher volumes for major generic APIs such as Naproxen, Dextromethorphan, and Levodopa, etc. However, the Carotenoids business witnessed QoQ de-growth on the back of slower than expected off-take. Despite the Rupee depreciation, this quarter saw the EBDITA margins contracting by 300bps YoY on the back of higher other expenses and high base of Q3 FY11. The new DSN SEZ, which qualifies for 100% tax exemption, is currently ramping up production; and during the quarter, two more production blocks were commissioned at the site. The USFDA inspection for this plant is likely to be in mid FY13. In this quarter, Divis effective tax rate has risen to ~24% (against ~13% in Q3 FY11), mainly due to the end of the tax holiday on its 100% EOU at Choutuppal and its Vishakhapatnam SEZ being eligible only for 50% tax exemption.
Company Profile
Divis is engaged in the manufacturing of generic APIs, custom synthesis of active ingredients for innovator companies and other specialty chemicals like peptides and nutraceuticals. The company operates predominantly in the export markets with over 75% of sales to the regulated markets in Europe and USA. As at the end of FY11, Divis has a total of 41 DMFs filed with USFDA and CoS with EDQM for 12 products. It has also filed several dossiers for 28 products with other countries. The company has so far filed 18 patents in India and 12 patents in the USA for generic products. During FY11, Divis has added 21 products to its product portfolio of which 8 are generic APIs and intermediates and 13 are custom synthesis APIs and intermediates. Generic APIs: Divis concentrates on a few niche APIs, which normally fetch better margins and where competition is low. The key generic APIs of the company are Naproxen (anti-inflammatory), Dextromethorphan Hydrobromide (anti-cough), Levodopa (CNS) and Phenylephrine (anti-cough). The company enjoys more than 70% market share across the globe in APIs like Naproxen and Dextromethorphan Hydrobromide. Divis is one of the worlds leading suppliers of Naproxen which is used in the treatment of arthritis, spondylitis and other inflammatory conditions. Around 20% of Divis total revenues in FY11 were contributed by Naproxen. Besides Naproxen, the company has also received approvals from USFDA and EDQM for Naproxen Sodium and its intermediate (DL Naproxen). Recently, Divis has started focusing on nutraceuticals, future generics and specialty chemicals like Carotenoids. In FY11, around 5% of Divis total revenues (~Rs. 62 crore) came from Carotenoids. Carotenoids are coloring agents which are extracted from plants and other natural sources. They are an important source of vitamin, which acts as a preventive agent against cancer and heart diseases. Divis has developed various types of Carotenoids like Astaxanthin, Beta carotene, Canathaxanthin, Apocarotenal, Lutein, Lycopene and Vitamin D3 which are widely used in the Food & Beverage industry. Custom Synthesis APIs: Custom synthesis involves development of a non-infringing process and supply of API and intermediates to innovator pharma companies for supporting their drug discovery process. Due to its strong R&D capabilities and proven track record, Divis is one of the leading custom synthesis players in India with a large number of leading MNC pharma companies as its clients. In custom synthesis, Divis follows a service-based fee model and has a presence across all stages of pre-clinical and clinical trials. Divis owns four R&D centres, two pilot plants, and three large scale manufacturing facilities, with approval from various regulatory bodies. Having an India centric asset base and strong-flexible infrastructure capabilities allows Divis to be a low-cost manufacturer.
ICRA LIMITED
Dr. REDDYS LABORATORIES LIMITED U.S. continues to be the growth driver; exclusivity on Olanzapine supports margin expansion and jump in profits
Q3 FY11 Operating Income Growth (%) OPBDIT Less: Depreciation Less: Net Interest Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) 1,898.5 404.6 75.8 5.0 19.8 288.4 15.2 273.1 Q3 FY12 2,769.2 45.9% 920.8 89.9 (17.4) 16.5 772.1 261.7 513.0 33.3% 18.5% Q2 FY12 2,267.8 22.1% 520.1 87.9 5.0 21.5 369.5 63.0 307.8 22.9% 13.6%
ICRA Ratings
Long Term Short Term Outlook [ICRA]AA+ [ICRA]A1+ Stable
Revenue Growth DRLs Q3 FY12 revenues at Rs. 2,769.2 crore grew by a strong 46% on YoY largely led by strong growth in the US market which benefited from the exclusivity on Olanzapine and steady growth in the some of the recently launched products and anti-infective portfolio. DRL has been able to garner around 50% market share in Olanzapine with 4045% price erosion. Among other key markets, DRL reported a growth of 11% in India formulations, though lower than the industry average but reflected an improving trend on QoQ basis. The growth in European markets (at 14%) largely benefitted from rupee depreciation as growth in constant currency terms was flat at 2% YoY. In DRLs other key market Russia, revenue growth (in constant currency terms) was flat at inventory correction measures and delayed onset of winter impacted orders. Going forward, with series of limited competition launches in the US market, growth momentum is expected supported by pick-up in India business Profitability DRLs OPBDIT margins at 33.3% in Q3 FY12 benefitted substantially from the launch of highly profitable Olanzapine which contributed nearly $99 million in sales (out of the $235 million in the US). Excluding the impact of Olanzapine, companys adjusted gross margins were flat on QoQ basis. Despite higher tax provisioning (largely due to higher tax outgo on Olanzapine), net profit rose by 88% to Rs. 513 crore during the quarter. DRL reported forex gains of Rs. 28.5 million in Q3 on restatement of receivables. MTM losses in the balance sheet stood at $85 million as on December 2011 but came down to $30 million by Januaryend following rupee appreciation. During the quarter, the company filed 3 ANDAs taking the pending approvals to 79 including 40 on Para IV and 10 FTFs


3M 5.9% 6.7% 13.1% 12M 6.2% 10.9% -1.8%
Exhibit: Trend in Dr. Reddys Revenues (FY11)
Dr. REDDYs CNX Pharma CNX Nifty
Stock Movement
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ROW 14% Russia & CIS 15%
North America 31%
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DRL's Stock Price
Source: Company Data Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Operating Income 1,642.4 1,683.1 1,870.4 1,898.5 2,017.3 Growth (%) YoY -17.3% -7.5% 1.8% 9.8% 22.8% OPBIT* 187.6 243.9 300.8 273.6 333.3 PAT 166.7 209.6 286.8 273.1 334.5 OPBIT/OI (%) 11.4% 14.5% 16.1% 14.4% 16.5% PAT/OI (%) 10.1% 12.5% 15.3% 14.4% 16.6% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore; Data based on IFRS Reporting; * after depreciation Q1 FY11 1,978.3 17.5% 260.2 262.7 13.2% 13.3% Q2 FY12 2,267.8 21.2% 352.9 307.8 15.6% 13.6%
Bloomberg Code DRRD Market Cap. Rs. 28,739 Crore Valuations

ICRA LIMITED
Mar-12
Aug-11
Jan-12
India 19%
Europe 21%
Dr. REDDYS LABORATORIES LIMITED: Business Overview (Page 2 of 2)

Apart from the exclusivity on Olanzapine, growth in the US market in Q3 also benefitted by market share traction in Lansoprazole, Omeprazole Mg. OTC, and other recently launched products; ramp up in anti-infective portfolio also aided to the overall growth; with a series of limited competition product launches lined up over the medium term, US market is expected to remain the key growth driver for DRL The company also aims to scale up the OTC portfolio in the US from $100 million (in 9m FY12) to an annualized run rate of $200 million by FY13 end In India, DRLs formulations business grew by 11% on YoY basis; while growth rates remain below industry average, management believes realignment in marketing strategies, sales force expansion have started showing results and should add to the momentum going forward; biosimilars continues to do well in India with 25% growth; during the quarter, the company launched six products in India During Q3 FY12, growth in Russia (in local currency terms) was flat at 1% impacted by inventory correction due to light liquidity condition and delayed onset of winters; management however stated that the situation has improved since the beginning of Q4 with strong order book; Besides strengthening its product portfolio, DRL aims to ramp-up its OTC portfolio in Russia and investing heavily on the marketing & distribution front DRLs PSAI division reported a 12% growth in revenues to Rs. 556.3 crore largely driven by pharmaceutical services business and benefit of rupee depreciation; management has indicated of higher growth prospects in this segment led by patent expirations and resultant pick up in API business Companys tie-up with GSK, JV with Fujifilm in Japan and biosimilars foray in other emerging markets are progressing in line with plans; however meaningful scale up in these are is still some time away
Business Overview
DRL, amongst the largest Indian pharmaceutical company, is an integrated player with presence across research, manufacturing and marketing of formulations and APIs. The companys business mix is broadly divided into three segments Global Generics (comprising of formulations 71% of turnover in FY11), Pharmaceutical Services and APIs (26%) and Proprietary Products Business (negligible contribution at present). The global generics vertical focuses on marketing and distribution of branded generics (in India, Russia, CIS and emerging markets) and generics (in US and Europe). Among Indian generics majors, DRL is one of the most formidable players in the U.S. generic space even as its performance and market position in India lags that of its peers. The global generics vertical has been the largest contributor to DRLs revenues but the growth rate has exhibited significant volatility largely on account of inorganic growth initiatives as well as one-offs (exclusivities/FTFs/authorized generic) in the U.S. North America remains the largest market for DRLs global generics vertical, where the company also has a strong products pipeline (with 79 pending approvals with 40 Para IVs and 10 FTFs on Dec. 2011). The company has worked on a strategy to achieve critical mass in its base business and build a portfolio of one-off exclusivity backed and limited competition opportunities. With slew of big-ticket launches in the past few quarters, the benefits of companys strategy have started off paying off. This is likely to continue given the lineup of limited competition product over the medium term in the U.S. Apart from U.S., DRL has major presence in India, Russia & CIS and Europe which contributed 22%, 20% and 16% to companys generic business in FY11. In comparison to its peers, DRL has underperformed the domestic market growth over the past few years due to relatively lower focus on fast-growing chronics, supply chain issues and recently the field force restructuring. The company also has relatively higher concentration on top-10 products. Apart from India, Russia and other CIS countries have emerged as one of the top 4 regions for the company over the past few years. Among other Indian generic companies, DRL is the positioned as the strongest player in the Russian market. Despite the challenging environment, prompted largely by steady price erosive moves, the company has been able to successfully grow its presence in the Russian market. DRLs growth strategy for the market involves gradually expanding the proportion of OTC business to 40-45% over the medium term (from 25% in FY11), introduce a basket of bio-similar and in-licensed products and also potentially pursue in-organic investments with focus on product/brand acquisition. Along with scale-up of the existing business segments, DRL is also working on multiple growth segments namely, biosimilars (already doing well India, planning for global launches), proprietary products in the US and emerging markets (through tie-up with GSK). All these initiatives are likely to provide long-term growth avenues for the company. ICRA LIMITED
GLENMARK PHARMA LIMITED Impressive growth in the U.S. and RoW markets drives top line; but forex losses hurt margins
Q3 FY11 Operating Income Growth (%) YoY OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) 749.1 133.9 24.6 39.6 24.1 93.8 7.3 86.5 Q3 FY12 1,031.3 37.7% 102.9 23.1 35.7 10.5 54.5 8.4 46.1 10.0% 4.5% Q2 FY12 1,055.7 45.8% 225.6 24.7 29.1 (8.1) (131.7) 32.1 (23.8) 55.9 21.4% 5.3%
ICRA Ratings
Not Rated by ICRA
Revenue Growth Glenmarks Q3FY12 revenues grew by an impressive 37.7% driven by strong growth in the U.S. generics segment (up 37.7%) as well key markets across Asia Pacific, Latin America and Africa. The growth in the domestic formulations segment was however muted as the company pursued inventory de-stocking measures to improve its working capital cycles. Among other market, the company also reported strong growth in Europe despite price cuts in some of the European markets. The companys generic business also witnessed a healthy growth of 45% largely led by strong 37.7% growth (in $ terms) in the US generics space, benefitting from launch of new products (especially OCs) and market share gains in the existing products. The management believes that steady market share gain coupled with new product launches will keep accelerate the growth momentum in the US market going forward. Profitability Despite strong growth and benefit of depreciating INR, Glenmarks operating margins fell sharply (down 790 bps) in Q3 FY12 led by a confluence of factors with forex losses (on liabilities) being the prominent one. Apart from forex losses, lower growth in the higher margin domestic formulations business, higher API prices and increased R&D spending also added to the pressure on operating profits. As a result of lower margins and other income, Glenmarks profit after tax (PAT) declined by 46.7% to Rs. 46.1 crore as compared to Rs. 86.5 crore in Q3 FY11. Developments Glenmarks key NCE molecule Revamilast (GRC 4039) got approval for conducting Phase IIb trials for indications in Asthma and Rheumatoid Arthritis and management expects to initiate phase III trials by end of FY13. In the US, the company filed two ANDAs and received approval for Montelukast Sodium (expected to be launched by August 2012).
Q3 FY11 758.5 17.0% 174.1 109.6 23.0% 14.4% Q1 FY12 868.8 26.8% 296.9 210.1 34.2% 24.2% Q2 FY12 1,055.7 45.8% 225.6 55.9 21.4% 5.3%


3M -0.9% 6.7% 13.1% 12M 8.7% 10.9% -1.8%
India (28.6%) Specialty Business (57%) LATAM (6.5%) ROW (22.0%) GPLs Sales Mix Out licensing Income US (28.3%) Generics Business* (43%) Europe (1.8%) APIs (11.3%)
Glenmark Pharma CNX Pharma CNX Nifty
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Glenmark's Stock Price
Q3 FY10 Q1 FY11 Q2 FY11 Operating Income 648.3 684.8 724.1 Growth (%) - YoY 11.3% 24.8% 20.1% OPBDIT 168.5 170.3 232.3 141.3 PAT 80.9 94.1 170.5 86.2 OPBDIT/OI (%) 28.0% 26.3% 33.9% 19.5% PAT/OI (%) 13.4% 14.5% 24.9% 11.9% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore * Also includes Oncology business (1.4%)
Q2 FY10 602.5
Bloomberg Code GNP Market Cap. Rs. 7,910 Crore Valuations

ICRA LIMITED
Mar-12
Aug-11
Jan-12
GLENMARK PHARMA LIMITED: Business Overview (Page 2 of 2)

Specialty Business: Glenmarks specialty business (comprising largely of branded generic formulations) contributes 57% to companys overall revenues and has grown at
11.4% over the past four years. The business is predominantly spread across emerging markets such as India, Latin America, East Europe and other semi-regulated markets. Among these, India is the key market for the company where it is focused on specialty segments such as dermatology, CVS, respiratory, hormones and gynecology. Glenmark is particularly a strong player in dermatology segment with a market share of about 8.3%. In terms of therapy mix, nearly 80% of its business comes from acute segments. As has been the trend in the industry, Glenmark has also been steadily ramping up its field force (2,455 as on FY11) and focusing on niche segments in the domestic formulations segment. Besides India, Glenmark generates nearly 50% of its specialty business from other semi-regulated markets in CIS, Latin America, Africa and Asia Pacific with Russia and Brazil being the other two most important markets. In the past, the company witnessed pressures on working capital intensity (mainly due to high receivables) in some of these markets and a result rationalize its distribution network. Following the rationalization efforts, sales growth was back on track in FY11 with most of the markets reporting healthy growth.
Generics Business: Glenmarks generics business accounts for 43% of companys overall turnover and is largely dominated by presence in the US generics space. Over the
past the four years, the companys generics business has grown at a CAGR of 17% between FY08-11 and the US generics business, which contributes nearly 66% has been the key growth driver. In the US, the company is largely focused on niche segments like dermatology, controlled substances, oncology and modified release products. As on FY11, the company had a portfolio of 67 ANDA filings with 41 pending approval including 14 on Para IV. During FY11, the company received approval for 22 ANDA applications (mostly in the oral contraceptive space), highest among Indian pharma companies during the year. In FY11, Glenmark settled four Para IV filings, which considerably adds to the visibility to US business in the medium to long term. The key drugs for which it has settled include Atovaquone, Ezetimibe, Eszopiclone and Lunesta. Besides US generics, the company also has presence in Europe, oncology facility in Latin America and API sales (from India), which form part of its generics business. Its presence in Europe is fairly limited at present, while it is looking at expanding its oncology and API business in regulated markets.
Details of Glenmarks Key FTF opportunities Product Brand Name Ezetimibe Tablets Fluticasone Lotion Hydrocortisone Butyrate Cream Zetia Cultivate Locoid Lipocream
Plaintiff Merck Nycomed Triax and Astellas
Therapy Indication CVS Dermal Dermal
Status & Expected Launch Settled, Expected Launch Dec. 2016 Settled, Expected Launch Dec. 2013 Settled, Expected Launch Mar. 2012
Approval Status Tentative Approval Final Awaited
Sales (CY 2010) US$ 48 million US$ 38 million
NCE Pipeline: Apart from generics and branded formulations, Glenmark also has an active research portfolio of NCE & NBE. Among Indian pharma companies, Glenmark is
the only to have established a credible track record of being able to regularly monetize its NCE research pipeline. Over the years, the company has been regularly monetizing its NCE pipeline by out-licensing of molecules at different stages of development to large pharmaceutical companies. While it has suffered some setbacks in the past, it has recently out licensed one of its molecules i.e. GRC 15300 to Sanofi for an upfront payment of $20 million. Since FY07, Glenmark has generated cumulative revenues of Rs. 493 crore through out-licensing deals.
Details of Glenmarks key NCE molecules Compound Primary Indication Crofelemer Acute Infectious Diarrhea GRC 4039 Asthma GBR 500 Crohns Disease GRC 15300 Neuropathic Pain Source: Company Releases
Status Completed Phase III trials for HIV diarrhea in US and Phase II for acute diarrhea in adults in India Completed Phase I trials; Initiated Phase II in some countries Phase I completed in US; Initiating Phase II for Chorns Disease; Out-licensed to Sanofi in FY11 Phase I is ongoing in the UK; already out-licensed to Sanofi in FY11 for $ 20 million upfront
ICRA LIMITED
HIKAL LIMITED Hikal posts 152% jump in Q3; net profit at Rs 13.0 crore
Q3 FY11 Operating Income Growth (%)-YoY OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) 100.8 25.8 9.4 11.6 0.8 -0.4 5.1 0.0 5.2 Q3 FY12 185.5 84.0% 45.1 10.8 11.7 1.1 -11.1 12.7 -0.4 13.0 24.3% 7.0% Q2 FY12 144.6 -1.6% 37.1 10.7 12.2 1.0 -2.2 13.0 1.5 11.4
ICRA Ratings
Revenue Growth Driven by the robust growth in the pharmaceutical segment; Hikals revenues in Q3FY12 stood at Rs. 185.5 crore; higher by 84.0% on YOY basis and 28.3% on QoQ basis. In this quarter, over 70% of the sales of Hikal were from the API and CRAMs business which reported a YoY growth of 91.9% and QoQ growth of 49.9%. The revenues from the pharmaceutical business stood at Rs.130.4 crore. While on the other hand, the crop protection business which contributes around ~30% of the total revenues of Hikal; also saw a growth of 67.8% on YoY with revenues around Rs. 55.0 crores in this quarter.
Long Term Short Term Outlook [ICRA]BB+ [ICRA]A4+ Stable

Profitability This quarter saw Hikals EBIDTA margin at 24.3%, lower by 122 bps on YoY basis; mainly due to increase in raw material costs and other overhead expenses. In Q3 FY12, the EBIDTA margin for the pharma division 25.6% were around 27.9% which was much lower when compared to 30.9% for the 7.9% corresponding quarter previous year. While on the other hand, the EBIDTA margin from the crop protection business grew by 476 bps YoY basis to 8.9%.

3M 15.2% 6.7% 13.1% 12M -2.9% 10.9% -1.8%
Hikal CNX Pharma CNX Nifty
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Hikal's Stock Price
Q4 FY10 Operating Income Growth (%) - YoY OPBDIT PAT OPBDIT/OI (%) PAT/OI (%) 163.8 10.9% 44.4 20.0 27.1% 12.2%
Q1 FY11 133.2 4.7% 32.0 14.7 24.0% 11.1%
Q2 FY11 108.0 -13.7% 32.6 10.3 30.2% 9.5%
Q3 FY11 100.8 -15.9% 25.8 5.2 25.6% 5.1%
Q4 FY11 151.5 -7.5% 35.0 14.1 23.1% 9.3%
Q1 FY12 142.8 7.2% 33.1 14.5 23.2% 10.2%
Q2 FY12 144.6 33.9% 37.1 11.4 25.6% 7.9%
Bloomberg Code HKCI Market Cap. Rs. 452 Crore Valuations

Price/Earnings Price/Sales Source: Bloomberg FY12e N.A. N.A. FY13e N.A. N.A.
Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
ICRA LIMITED
Mar-12
Aug-11
Jan-12
During the quarter, the interest and depreciation cost was around Rs.11.7 Stock Movement crores and Rs.10.8 crore respectively. Due to currency fluctuations in this 350 quarter, Hikal has booked a forex loss of Rs.11.11 crores. The companys PAT in 300 Q3FY12 was Rs.13.0 crore, indicating a 14% growth on QoQ basis and 152% 250 growth on YoY basis. However, the impact of this robust growth in sales was 200 150 somewhat subdued by the large forex losses seen in this quarter , as the net 100 margins for Hikal in Q3FY12 stood at 7.0%; higher by 190 bps on YoY basis but 50 0 lower by 90 bps on QoQ basis.
2.5 2 1.5 1 0.5

0
HIKAL LIMITED: Business Overview (Page 2 of 2)

Hikal Limited is engaged in R&D, manufacturing and marketing of fine chemicals for companies in Pharmaceuticals, Biotech, Agrochemicals and Specialty Chemicals Industries. It has two main business segments Pharmaceuticals and Agrochemicals, with nearly 64.9% of the total revenues in FY11 coming from the manufacturing of APIs and intermediates for various domestic and global pharmaceutical companies and the remaining ~35.1% revenues contributed by sale of chemicals for crop protection. The company is the largest supplier for the Gabapentin molecule (API used in CNS therapeutic drugs) and sole supplier for Thiabendazole and Fenamidone (both for crop protection) in the world. Hikals main focus has been the regulated markets; with bulk of its sales being to countries like US and UK. API: Hikals Pharma business has high concentration from Gabapentin sales which contributes ~80% of the total pharma revenues. Hikal has been one of the early entrants and hence is a leading supplier of Gabapentin API globally. The global market of Gabapentin is estimated at 1800-2000 MT, with Hikal supplying close to 60%of the demand. Also Gabapentin is one of the molecules which have grown in demand (volume) after going off patent in 2002. And it is projected to grow at 7% annually in terms of volumes. The company supplies to MNCs like Pfizer, Apotex, Cleo Singapore, Medichem, Alpharma, Sandoz etc. and has a strong relationship with these companies. In FY11, the revenues from pharmaceuticals export showed a de-growth of 35% as one of the large customers of Hikal, Apotex had stopped production due to USFDA issues. However, the company was able to develop new clientele such as Glenmark and TEVA Canada to compensate for this loss. Hikal has also started supplying validation batch quantities for Venlafexine API which is expected to be commercially produced from FY13 onwards. Currently, the company has filed one new US DMF and has received approvals for two existing products from the European regulatory authorities (EDQM). CRAMS: Acoris Research (Acoris) is a 100% subsidiary of Hikal and is established as a CRO to provide contract research to innovator companies pertaining to chemistry skills primarily chemical synthesis for NCE prior to pre clinical stage and developing process for scaling up. Various services offered by Acoris includes Route Scouting, Contract Research, Process Development, Scale up, Analytical Method Development and cGMP (kilo) Manufacturing. It provides customized services, from Full Time Equivalent (FTE) to Fee for Service (FfS) contracts. Under FTE model entire lab is given on rent for few days to few weeks. The risk of successfully synthesizing chemical lies with the innovator or innovator already has the processes and wants to evaluate the same. In FfS, the innovator company gives a molecule and asks Acoris to develop a process for same. Higher fees are paid under fee for service model as Acoris develops the process. In FY11, Acoris had a turnover of Rs. 9.5 crore with accumulated losses of Rs. 20 crore. The addition of Acoris has increased the Hikal groups visibility as it has been successful in penetrating the Japanese markets as well as the European and US markets. Crop Protection: Hikal contract manufactures active ingredients for agrochemical industry including herbicide, insecticide and fungicides. The company is an exclusive global supplier for Thiabendazole to Syngenta and multiple products to Bayer. Hikal is also started producing Fenamidone for BASF from FY09 onwards and revenues from this ingredient are expected to grow further. Hikal has also supplied validation batch quantity to BASF for Initium which will be commercially produced from FY13 onwards. Hikals 62% of the revenues from crop protection business comes from its top two molecules- Thiabendazole and Fenamidone and their buyers. However, the molecules are proprietary to respective clients and Hikal enjoys exclusive supplier status for them. In FY11, nearly ~84% of the revenues for crop protection business came from exports; however due to the cutbacks on production schedules and inventory rationalizing done by its MNC clients, Hikals revenues from the crop protection business were lower by ~8% when compared to the previous year.
ICRA LIMITED
INDOCO REMEDIES LIMITED Recovery in domestic formulations boost revenues; however margins remain muted in Q3
Q3 FY11 Operating Income Growth(%) - YoY OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) OPBDIT/OI (%) PAT/OI (%) Source: Company Data, ICRA Estimates 14.5 3.4 0.6 0.0 0.0 10.5 1.7 8.8 12.5% 7.6% 115.5 Q3 FY12 142.6 23.5% 16.3 5.3 1.8 0.0 0.0 9.2 0.9 8.3 11.4% 5.8% Q2 FY12 147.4 8.9% 20.7 4.7 1.4 0.1 0.0 14.6 0.8 13.8 14.0% 9.4%
ICRA Ratings
Long Term Short Term Outlook [ICRA]A+ [ICRA]A1+ Stable
Revenue Growth - In Q3FY12, IRLs operating income grew by 23.6% on a YoY basis to Rs. 141.5 crore. Due to healthy growth in therapeutic segments like respiratory (23.6%) and gastro-intestinal (23.1%); the domestic formulations business witnessed a better traction as revenues grew by 14.8% YoY basis to Rs. 84.9 crore. In the export formulation business, IRLs revenues grew by 35.5% to Rs.45.5 crore driven by growth in regulated markets (up by 38.7% to Rs. 37.0 crore). IRL has started commercial supplies of anti-diabetic products for the Eastern Europe market and is also participating in a new German tender for 7 products, which is expected to be announced in Q1FY13. In the emerging markets division, the revenues grew by 23.1% YoY to Rs. 8.5 crore on the back of supplies to Ghana and new launches in other regions. As for the API business, the domestic sales were up by 34% YoY to Rs. 5.2 crore; owing to new product launch in the ophthalmic segment. During the quarter, API export sales more than doubled (up by 107%) to Rs. 5.7 crore due to new customer additions in Europe for anti-glaucoma segment and sale of an API intermediate in Japan. Profitability - Despite recovery in the high margin domestic formulations business and favourable currency, EBITDA margins in this quarter declined by 110 bps YoY to 11.4% on the back of forex losses and high marketing expenses and employee costs. With the commission of the Goa III facility; both interest and depreciation increased sharply, which led to net profit declining by 6.2% YoY to Rs. 8.3 crore. Developments- In this quarter, IRL has signed an alliance with Austrias DSM Pharmaceuticals to market eight of its existing APIs to new geographies, for which the commercial supplies are expected to start in Q1FY13. Till date, the company has submitted 5 US ANDA; bringing total ANDA count to 13 (of which 7 are under the Watson Deal).


3M -3.5% 6.7% 13.1% 12M -5.7% 10.9% -1.8%
IRL CNX Pharma CNX Nifty
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Q4 FY10 Operating Income 110.5 Growth (%) - YoY 27.8% OPBDIT 12.6 PAT 8.2 OPBDIT/OI (%) 11.4% PAT/OI (%) 7.5% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
Q1 FY11 112.9 12.2% 19.1 14.8 16.9% 13.1%
Q2 FY11 135.4 41.0% 20.8 15.3 15.4% 11.3%
Q3 FY11 115.5 20.4% 14.5 8.8 12.5% 7.6%
Q4 FY11 122.8 11.3% 18.0 12.2 14.6% 9.9%
Q1 FY12 127.1 12.7% 18.6 11.7 14.6% 9.2%
Q2 FY12 147.4 8.9% 20.7 13.8 14.0% 9.4%
Bloomberg Code INDR Market Cap. Rs. 485 Crore Valuations

ICRA LIMITED
INDOCO REMEDIES LIMITED: Business Overview (Page 2 of 2)

Indoco Remedies Limited (IRL) is a mid-sized pharmaceutical company engaged in the manufacturing and marketing of branded Formulations, APIs and Contract Research and Manufacturing (CRAMS); with a strong presence in the domestic markets. The domestic formulations and the API business contribute ~68% of the total revenues and the rest 32% of the revenues coming from the international business. In the domestic business, IRL has a prominent presence in the anti-infective, respiratory, gastro-intestinal and dental segments with its products among top 1-2 brands in respective categories. IRL has also tied up with Watson for 19 generic sterile products for the US markets which has a market size of $800-850mn and with Aspen for over 30 products across 30 geographies, primarily regulated markets. As for the exports formulations business, regulated markets like UK, Germany and South Africa are the top contributors for IRL. Domestic Formulations: In the domestic formulations business, IRL has an established market position in the branded generics market with leading acute therapy brands like Cyclopam, Sensodent and Febrex Plus having a substantial market share in their respective categories. The contribution of its top 10 brands accounts for ~ 55% of the domestic formulation revenues but at the same time none of the single therapeutic area contributes more than 20% of the revenues; thus making the portfolio broad based and diversified. Except for Vepan none of the top brands are under DPCO; though having a large acute therapy portfolio; IRL faces significant competitive and pricing pressures especially in its anti-infective and respiratory segments. IRLs focus is on driving growth through territorial expansion by strengthening its field force (currently 1900) and by building brand presence in chronic therapeutic areas such as Diabetes and Cardiovascular which are slated to grow fast due to changing socio-demographic scenario. Regulated Markets: IRLs export business is targeted towards regulated markets where company supplies on trade basis or tender basis (Contract Manufacturing). The growth has been largely from regulated markets which contribute ~ 90.3% of the revenues; The UK markets contribute more than 48.2% of the total regulated markets contributions and Germany more than 14%. Among the larger tender contracts, the company had won supply contracts in a tender by Germanys largest health insurer, Allgemeine Ortskrankenkassen (AOK) for Metformin thereby leading to cumulative revenues of Rs. 32 crores spread over FY10 and FY11. IRL has also entered into a deal with Watson rd Pharmaceuticals Inc. (3 largest generic company in USA) to develop and manufacture ten sterile ophthalmic products on a cost plus profit sharing basis. The current market size of these products is US$ 1.5 billion. The first commercialization is expected in FY14; with expected revenues of Rs. 30-35 crore per year. Semi-Regulated Markets: The Company intends to pre-dominantly use trade channel business to supply to less regulated markets of Africa, CIS and South East Asian countries where credit risks are a challenge. In the semi-regulated markets, IRL has recently signed a long-term deal with South-African drug maker Aspen Pharma for developing and out-licensing six ophthalmic products for sale in over 30 emerging markets. These products are in initial stages of development and IRL will earn milestone payments as well as sale proceeds from supplying the drugs to Aspen. As a result of above deals, IRL growth rate from export business is expected gain momentum from FY13 onwards. The above deals are expected to generate EBIDTA margins in the range of 18% and will be primarily for South African and Latin American countries. API: Revenues from API constitute a very small portion (~6% in FY11) of IRLs total revenues; also this business has lower margins compared to other business segments as it is mainly affected by the raw material prices. IRL has two API manufacturing facilities which it primarily uses it for captive consumption. The company plans to add another API block at Patalganga at a total capex of Rs. 55 crores over the next two years. A large part of the API production will be used for backward integration for contract manufacturing deals in order to drive cost benefit and for filing new DMFs and ANDAs. The company has already filed eleven DMFs in US, for the European markets, the company has six CoS approved.
ICRA LIMITED
IPCA LABORATORIES LIMITED Export formulations drive revenue growth and operating margin; net margin remains flat on account of forex losses
ICRA Ratings
Not Rated by ICRA
Revenue Growth IPCAs operating income grew by 31.8% on a YoY basis in Q3 FY12 to Rs. 614.8 crore driven by export formulations (73% YoY growth) despite growth moderation in domestic formulations. The muted growth of ~6% in domestic formulations (over Q3 FY11) was pressurised by weak anti-malarial sales, though cardiovascular and pain management segments have started to show improvements. IPCAs API sales growth of ~5% also appears to be muted despite substantial increase in production as a major part of API sales is utilized for captive consumption. Nonetheless, the management remains confident of clocking at least 20% revenue growth in FY12 as the benefits of internal restructuring exercise begin to demonstrate results. However, IPCAs export formulation growth would be largely dependent on the impending approval of its Indore SEZ by the USFDA. Profitability IPCAs OPBDITA margin improved 509 bps YoY to 24.6% led by favourable currency realization, lower material cost (by 2.9%), and an increase in other operating income to Rs. 13.1 crore from Rs. 3.0 crore in Q3 FY11 on account of some dossier sales income and Rs. 7 crore provision made in respect of the focus market scheme announced by the Government (even though the scheme is effective from April 2012; since the announcement was made in the quarter, IPCA has recorded the same). Despite strong 66% growth at the OPBDITA level, net profit remained almost flat at Rs. 63.9 crore on account of forex losses of Rs. 39.9 crore largely due to translation of ECBs. Excluding forex loss in Q3 FY12 and forex gains in Q3 FY11 (Rs. 11.2 crore), the like-to-like net profit witnessed a significant YoY growth of 96.8%. Developments IPCAs Indore facility has been inspected by the USFDA in January 2012 and the management expects to receive the approval within two months. The company has filed for 13 ANDAs from this plant and expects approval for 6 ANDAs along with the USFDA approval.


3M 28.5% 6.7% 13.1% 12M 21.3% 10.9% -1.8%
IPCA CNX Pharma CNX Nifty
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Q4 FY10 Q1 FY11 Operating Income 367.8 418.0 Growth (%) - YoY 15.8% 16.4% OPBDIT 67.6 71.2 PAT 37.3 38.8 OPBDIT/OI (%) 18.4% 17.0% PAT/OI (%) 10.1% 9.3% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
Q2 FY11 518.3 20.5% 118.0 94.0 22.8% 18.1%
Q3 FY11 466.4 17.9% 91.0 64.0 19.5% 13.7%
Q4 FY11 478.5 30.1% 98.3 58.6 20.5% 12.2%
Q1 FY12 529.9 26.8% 95.2 61.7 18.0% 11.6%
Q2 FY12 623.5 20.3% 158.0 78.0 25.3% 12.5%
Bloomberg Code IPCA Market Cap. Rs. 4,210 Crore Valuations

ICRA LIMITED
IPCA LABORATORIES LIMITED: Business Overview (Page 2 of 2)

IPCA is a fully integrated pharmaceuticals company producing branded and generic formulations, APIs and Intermediates, and one of the leaders in anti-malarial and Rheumatoid Arthritis in the Indian market; and the company has been expanding its therapeutic coverage, especially in the fast growing life style related segments. The products of the company are currently exported to over 110 countries across the globe. Domestic Formulations: IPCA has been one of the fastest growing companies in the domestic formulations market with presence across therapeutic categories of CVS and anti-diabetics, NSAID, anti-malarials and anti-bacterials, among others. The companys formulations business in India now comprises 12 marketing divisions focusing on key therapeutic segments, including two new divisions IPCA Pain Management and IPCA Dynamix which started operations from April 2011. During FY11, IPCA introduced 25 new products in the domestic market in new therapeutic segments of urology and nephrology. APIs & Intermediates: IPCA has been exporting APIs/ Intermediates to 95 countries across the globe through its Ratlam API manufacturing facility which has been approved by regulatory agencies of US, Canada, Japan, Australia, UK and several other European countries. Most of the international customers of IPCA are end user formulations manufacturers including several MNCs. The company commercialized 17 new APIs during FY11, and has also stepped up its DMF registration activities with 60 DMFs currently filed with USFDA. Americas: IPCA mainly exports its APIs to USA, Canada and South American countries; and formulations to USA, Panama, West Indies and few South American countries in this sub-continent. 25 ANDA applications in respect of generic formulations developed by the company are filed with USFDA, of which 12 ANDA applications are granted till date. The company is working on another list of formulations for development and filing of ANDAs. Most of these formulations are from its own APIs for which the company has filed/ is in the process of filing DMFs. The company has currently signed agreements with three marketing partners for sale/ distribution of generic formulations on a profit sharing arrangement in the US market. The formulations manufacturing facility of the company at Indore SEZ, which is commercially ready since December 2008, and got inspected by the USFDA in January 2012, is awaiting USFDA approval, post which, the company will be in a position to substantially scale up its US generic business. The company has also started marketing its branded formulations in Venezuela, Columbia and Peru in the Latin American market with a few product registrations. Europe: The company has developed and submitted 54 generic formulation dossiers for registration in Europe, out of which 42 dossiers are already registered. CIS: Most of the business from CIS is from branded formulations sales in Russia, Ukraine and Belarus, which are marketed by its own field force. Asia: The company exports formulations as well as APIs to several Asian countries like Nepal, Srilanka, Myanmar, Philippines and Vietnam, where it markets its branded formulations through dedicated field force. The field force and product range of the company in Asian market is also being expanded. Africa: The WHO pre-qualification of anti-malarial formulation of Artemether and Lumefantrine has helped the company in expanding its anti-malarial formulations business in the African market. The company exports branded and generic formulations as well as APIs to 20 African countries. The company markets branded formulations in countries like Uganda, Ghana, Ivory Coast, Burkina Faso, Zimbabwe, Sudan, Tanzania, Kenya, Ethiopia and Nigeria through dedicated field force.
ICRA LIMITED
JUBILANT LIFE SCIENCES LIMITED Generics business drives revenue growth; services business drives operating margin
Q3 FY11 Operating Income Growth (%) - YoY OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) 869.0 132.2 49.3 28.6 1.7 (2.3) 53.7 10.4 44.1 Q3 FY12 1,088.5 25.3% 208.4 53.9 56.6 3.5 (155.5) (54.1) 8.9 (78.4) Q2 FY12 1,050.1 22.1% 238.1 50.8 49.7 3.4 (42.6) 98.4 9.3 79.4 22.7% 7.6%
ICRA Ratings
Revenue Growth Jubilants operating income grew by 25.3% on a YoY basis Not Rated by ICRA in Q3 FY12 to Rs. 1,088.5 crore on account of strong growth in the Generics business (YoY growth of 79%) driven by favourable pricing in Dosage Forms. Life Science Product revenues (constituting 80% of total sales) witnessed a YoY growth of 24% backed by both volume growth and strong price increase, while Life Science Services business (constituting 20% of total sales) Shareholding Pattern (%) witnessed a YoY growth of 32%. Going forward, the management expects the 49.0% growth momentum to continue backed by increased capacity utilization, new Promoters FIIs 28.4% product launches and expansion in high growth geographies. Profitability In Q3 FY12, the companys OPBDITA was Rs. 208.4 crore, up 57.7% YoY with margin at 19.1% compared to 15.2% in Q3 FY11 on account of a nine fold increase in margins of the Services business (margin of 10.9% in Q3 FY12 due to increased capacity utilization and low base) and increase in profitability of the Products business by 80 bps to 23.6%. However, the company has reported a net loss of Rs. 78.4 crore in Q3 FY12 due to an exceptional loss of Rs. 155.5 crore (exceptional loss of Rs. 2.3 crore in Q3 FY11) towards MTM in respect of currency and interest rate swap and amortization of foreign currency monetary item translation difference. Adjusting for the same, the like-to-like net profit has witnessed a YoY growth of 66.1%. Going forward, product business profitability is expected to be backed by improved capacity utilization, increased vertical integration and favourable prices of certain key products; while services business profitability would be backed by higher margin product mix and cost optimization. Developments Commissioning of Symtet plant is expected by March 2012. The management has guided for a total capex of Rs. 500 crore in FY12, of which Rs. 377 crore has already been spent till Q3 FY12.
DIIs Others 1.4% 21.2%

3M 8.8% 6.7% 13.1% 12M 15.4% 10.9% -1.8%
OPBDIT/OI (%) 15.2% 19.1% PAT/OI (%) 5.1% (7.2%) Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
JLSL CNX Pharma CNX Nifty
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Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Operating Income 993.4 818.6 860.3 869.0 894.4 948.5 1,050.1 Growth (%) - YoY 17.9% 9.3% 22.9% -10.1% -10.0% 15.9% 22.1% OPBDIT 223.0 141.5 148.2 132.2 132.3 186.2 238.1 PAT 137.2 50.4 73.5 44.1 61.7 77.1 79.4 OPBDIT/OI (%) 22.4% 17.3% 17.2% 15.2% 14.8% 19.6% 22.7% PAT/OI (%) 13.8% 6.2% 8.5% 5.1% 6.9% 8.1% 7.6% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore; Note: During FY11, the Agri and Performance Polymers business was demerged from the company.
Bloomberg Code JOL Market Cap. Rs. 2,948 crore Valuations

ICRA LIMITED
JUBILANT LIFE SCIENCES LIMITED: Business Overview (Page 2 of 2)

Over the years, Jubilant has transcended from a Chemicals company to a diversified Specialty Chemicals & Pharma company to an Integrated Pharma and Life Sciences company. The company operates in two primary business segments 1. Life Science Products comprising Life Science Ingredients (consisting of APIs, Nutrition Ingredients, Proprietary Products & Exclusive Synthesis business (PPES) and Life Science Chemicals) and Generics (comprising Solid Dosage Forms, Radiopharmaceutical Products and Allergenic Extracts) and 2. Life Science Services comprising Contract Manufacturing (CMO) and Drug Discovery & Development Solutions (DDDS), with Life Science Products being the major contributor to revenues. The company has presence in around 75 countries. APIs: Jubilants APIs are primarily sold to manufacturers of formulations of generic drugs, with focus on therapeutic areas of CNS, CVS, Anti-infective, Anti-ulcerants, Analgesics, Anti-osteoporotics, Muscle relaxants and Urinary-antispasmodics. The company is ranked No. 1 globally in five API products Valsartan, Carbamazepine, Oxcarbazepine, Lamotrigine & Pinaverium Bromide, and No. 2 in two products Citalopram and Risperidone. As on date, the company has filed 54 DMFs in the US, 27 in Canada, 29 in Europe and 6 in Japan. Commercialisation of the new sartans production block is expected to be a key driver for future growth, in addition to new product launches. Nutrition Ingredients: Jubilant is Globally No. 3 in Niacin and Niacinamide (Vitamin B3) in the Human Nutrition Ingredients category and the largest producer of Choline Chloride (Vitamin B4) in India in the Animal Nutrition category. The companys backward integration into Beta Picoline is a positive, enabling synergy benefits. PPES: Jubilants key proprietary products include Pyridine, Picolines, Piperidines, Cyanopyridine, Aminopyridines, Chloro & Bromopyridines, and is globally the No. 1 in Pyridines, Beta Picolines and 14 other Pyridine derivatives. The Exclusive Synthesis business mainly works with innovator companies from early stage of development to offer intermediates and APIs for NCEs taking it through various stages up to launch and commercial scale. Life Science Chemicals: Jubilants range of manufactured and traded products includes Acetic Acid, Acetic Anhydride, Ethyl Acetate, Carbon Dioxide, Ethylene Oxide mixtures, Mono Chloro Acetic Acid and Vinyl Acetate Monomer, with volume growth driven by the buoyancy in pharma and agrochemical industries. Solid Dosage Forms: This business derives benefit from backward integration with the API business and is supported by in-house R&D facility for formulation development. Jubilant has 11 commercialised products in the US and 8 in Europe. The company has over 40 launches planned in focused therapeutic areas across geographies, 40% of which are in regulated markets. Over a span of 3 years, the company has plans of over 70 new launches across US, Europe and Emerging Markets. Radiopharmaceutical Products: Jubilant operates in the highly regulated markets, manufacturing and marketing Diagnostic Imaging and Therapeutic, Radiopharmaceutical Products like I-131 (used in the treatment of Thyroid Cancer), Sestamibi (a diagnostic cardiac imaging agent used in Myocardial Perfusion Imaging), etc. sold as kits through radiopharmacies and large hospitals. Allergenic Extracts: Jubilant, the leading No. 2 Allergy Therapy company in the US, manufactures a wide range of USFDA approved human allergen extracts used for immunotherapy across various allergen categories like Pollen, Mites, Environmentals, Venom, Mold and Food. Jubilant also enjoys a leading market share position in four therapeutic and imaging nuclear medicine products in North America, supported by its experience of over 85 years in the business. CMO: Jubilant provides CMO of Sterile (such as Vial and Ampoule Liquid Fills, Freeze-dried Injectables, Biologics, Suspensions and Water for Injection diluents) and Non-sterile (includes Antibiotic Ointments, Dermatological Cream and Liquids, Capsules, Tablets and Powder Blends) products and related services and enjoys a large presence in the
ICRA LIMITED
North American market. This segment, which had witnessed changes in consumer demand and delays in their submission approvals, as also slowdown in commercialization of products of key customers, is expected to resume normalized operations with more focus on business development by the company. DDDS: Jubilant has been undertaking drug discovery in Structural Biology, Insilico Technologies and Medicinal Chemistry. Its drug development activities pertain to clinical research from Phase I to Phase IV including clinical trials and data management in Oncology, CVS, CNS, Dermatology, Respiratory and Allergy Immunotherapy. The company has been running 17 integrated research programmes in collaboration with 7 global clients.
ICRA LIMITED
LUPIN LIMITED Growth momentum continues in key market; EBITDA margins improve but higher tax outgo impacts net profits
Q3 FY11 Operating Income Growth (%) - YoY OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) 1,510.2 297.3 41.3 7.8 3.4 251.6 23.7 224.0 Q3 FY12 1,818.9 20.4% 373.5 57.6 8.6 3.3 310.6 70.1 235.1 20.5% 12.9% Q2 FY12 1,772.4 23.6% 404.0 52.2 6.6 1.6 346.8 75.1 266.9 22.8% 15.1%
ICRA Ratings
Long Term Short Term Outlook [ICRA]AA+ [ICRA]A1+ Stable
Lupin Sales Break-up (FY11)

Other Segments 3%
APIs 15% RoW Markets 16% US Formulations 35%
Revenue Growth Lupins operating income at Rs. 1,818.9 crore in Q3 FY12 reported a strong growth of 20.4% on a YoY basis driven by steady growth momentum across geographies with India formulations and US branded business reporting stronger growth. During the quarter, the companys US business grew by 12% (in US$ terms) driven by strong growth in companys branded business which grew by 18% riding on back of strong uptake in Suprax franchises and in some recovery in Anthrax sales. The companys US generics business however reported muted 9% growth (in $ terms) despite new product introductions. The management however remains upbeat about the growth prospects in the US generics going forward given the series of product launches expected especially with some of them being on limited competition and in the OCs segment. The domestic formulations business was best among the pack, reporting a 30% growth on back of recovery in Anti-infective and continued growth in CVS, diabetic and gynecology therapies. The tie-up with Eli Lilly also boosted the growth in the domestic market contributing Rs. 27-30 crore (or 7% to growth) during the quarter. In Japan, the companys revenues grew by 22% (in yen terms) aided by the consolidation of Irom revenues for a month. Management indicated that the growth on an organic basis has been somewhat muted in Japan owing to increased competition from MNCs players but believes that measures being implemented by the Government would continue to support demand for generics. Profitability In terms of profitability, despite forex loss (Rs. 32 crore), Lupins EBITDA margins at 20.5% improved by 85 bps on YoY basis driven primarily by improvement in gross margins on account of better product mix However, due to increased depreciation (due to Indore SEZ) and higher tax outgo (due to discontinuation of EOU benefits at Goa and Mandideep), the company net profit at Rs. 235.1 crore grew by only 4.9% over the same quarter in the previous year.


3M 17.2% 6.7% 13.1% 12M 27.1% 10.9% -1.8%
Lupin CNX Pharma CNX Nifty
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550.0 500.0 450.0 400.0 350.0 300.0
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Europe 4%
India Formulations 27%
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Lupin's Stock Price
Q4 FY10 Q1 FY11 Operating Income 1,328.2 1,334.3 Growth (%) - YoY 24.3% 21.2% OPBDIT 292.4 284.4 PAT 220.7 196.3 OPBDIT/OI (%) 22.0% 21.3% PAT/OI (%) 16.6% 14.7% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
Q2 FY11 1,434.0 22.9% 298.6 215.0 20.8% 15.0%
Q3 FY11 1,510.2 18.9% 297.3 224.0 19.7% 14.8%
Q4 FY11 1,533.6 17.0% 310.8 227.2 20.0% 14.6%
Q1 FY12 1,567.7 17.5% 294.4 210.1 18.8% 13.4%
Q2 FY12 1,772.4 23.6% 404.0 266.9 22.8% 15.1%
Bloomberg Code LPC Market Cap. Rs. 22,420 Crore Valuations

ICRA LIMITED
LUPIN LIMITED: Business Overview (Page 2 of 2)

Lupin Limited is one the fastest growing generic formulations company with major presence in India, United States, Japan and some of the other emerging generic markets such as South Africa, Australia and Philippines. Over the years, the company has transformed its business model from predominantly being an API player with strong presence in the Anti-Infective and Anti-TB segment to a company with strong formulations business with presence diversified across therapy segments and major markets. Driven by steady growth in ANDA approvals and in-organics investments in the branded formulations segment, United States has emerged as the main market for the company, contributing 35% to total sales followed by India at 27% and Japan at 11%. Apart from formulations, the company is also actively engaged in developing a portfolio of biologics and has been investing in New Chemical Entity (NCE) research as well. Domestic Formulations: Lupin is among the stronger players in the domestic branded formulations segment with strong market position in some of the fast-growing chronic th therapy segment. It is ranked as the 7 largest domestic formulation company and has consistently outperformed the industry growth backed by steady product introductions and increasing focus on fast-growing therapy segments. While it continues to maintain leadership in the Anti-TB segment, over the years, it has also emerged as one of the leading players among chronic therapies such as CVS, CNS, Anti-Asthma and Anti-Diabetic. Lupins growth strategy for the domestic market involves strengthening presence in some of the recently entered therapy segment, expanding product portfolio through in-licensing route as well as stepping up focus on tier II/III cities. U.S. Formulations: Lupin has emerged as the 5 largest generic company in the U.S. market (in terms of prescriptions). The companys strengths in product development, backward integrations into APIs and conscious focus on servicing the market through a wide spread distribution network has helped it successfully grow its generic business in the U.S. market. It enjoys strong market share for most the products in its portfolio and a pipeline of limited competition difficult-to-develop molecules in the oral contraceptive space, is likely to support growth for the company in the near term. In addition to generics, Lupin is the only domestic company to have presence in branded segment, which it has built through acquisitions over a period of time. While it has faced competitive pressures in case of Antara in the recent period and also delays in the launch of Allernaze (due to operational issues), its experience in the pediatric segment through the success of Suprax has supported managements confidence in building a meaningful business stream going forward. Japan and other emerging markets: Apart from U.S. and India, Japan has emerged as third most important market for Lupin since 2007 post its acquisition of Kyowa Pharmaceuticals. By virtue of being an early entrant, Lupin is well positioned to benefit from the evolving generics opportunity in the Japanese market. The Governments initiatives to promote generic penetration through pro-generic reforms and achieve 30% penetration levels in the medium term augur favorable prospects for the company. With its strong capabilities in development and manufacturing in India, Lupin aims to backward integrate its Japanese operations and enhance profitability metrics in the medium term. Apart from Japan, the company has also made investments in some of the other emerging generic markets. Most of Lupins acquisitions (apart from Kyowa) have been relatively small in size, targeting market access through distribution network. Overall, the company has maintained a track record of steady profitability with strong credit metrics over the years despite sizeable investments in R&D and manufacturing capabilities. Europe: Lupin is currently a small player in the European markets with its presence limited to U.K., France and Germany. At present, Europe accounts for less than 4% of companys turnover. Going forward, the company aims to replicate its success story of the U.S. market by leveraging its strengths in product development, manufacturing and distribution expertise. Its strategy for various markets with Europe has different, while it has adopted direct-to-market business model in the U.K, it acquired a generic marketing and distribution company in Germany and followed a partnership model in France. While the European markets would offer strong growth prospects for Lupin aided by increasing generic opportunities, we expect companys focus to remain concentrated on the U.S. market in the medium term.
th
ICRA LIMITED
NATCO PHARMA LIMITED Success in niche Para IV/FTF opportunities in the US Generics space holds long-term growth potential
Q3 FY11 Operating Income Growth (%) OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) 118.3 24.3 3.3 3.7 0.3 17.6 4.8 13.7 Q3 FY12 145.4 22.9% 31.2 4.1 5.8 0.4 21.6 5.0 17.0 21.4% 11.7% Q2 FY12 133.0 4.4% 30.1 4.0 6.1 1.6 21.5 5.8 15.9 22.6% 12.0%
ICRA Ratings
Long Term Short Term Outlook [ICRA]A+ [ICRA]A1+ Stable
Natco Pharma's Revenue Break-up (FY11)
Revenue Growth Natco Pharmas Q3 FY12 operating income at Rs. 145.4 crore grew by a strong 22.9% on YoY basis driven by strong growth in both formulations as well as bulk drugs business. Natco Pharma largely operates in the domestic formulations business and has leading presence in the oncology segment. Besides formulations, the company also has presence in the API (largely exports driven) segment to generic players. Through a focused product portfolio comprising of niche Para IV & FTF opportunities, the company is also targeting the US generics space through tie-ups with leading generic major. While in the near term, we expect, the companys dominant presence in the domestic oncology segment to drive growth, the companys ongoing investments to supports its US generics foray is likely drive growth in the medium term. Over the past few quarters, the growth momentum in the domestic market has been slowing down largely on account of increasing competitive intensity in the oncology space, which has prompted sharp price erosion for the main molecules of the company. The API business, however, continues to report healthy growth riding on back of product portfolio expansion. Profitability In terms of profitability indicators, NPLs operating margins continue to remain stable (despite pricing pressures in the formulations business) and comparable with some of leading branded generics companies in the domestic formulations segment. The companys backward integration into APIs and relatively high profitability in the oncology segment continues to support high margins. However, NPLs RoCE (%) at 17% (in 2010-11) is comparatively lower to domestic formulations peers due to investments in a group company and R&D/product filings, which are yet to yield returns.


3M 29.3% 6.7% 13.1% 12M 26.6% 10.9% -1.8%
Natco Pharma CNX Pharma CNX Nifty
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Pharmacy Stores 25%

APIs 24%
Formulations 51%
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Natco's Stock Price
Q4 FY10 Q1 FY11 Operating Income 128.4 122.4 Growth (%) - YoY -4.6% 8.2% OPBDIT 24.0 21.1 PAT 15.0 10.6 OPBDIT/OI (%) 18.7% 17.2% PAT/OI (%) 11.7% 8.7% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
Q2 FY11 127.4 8.1% 27.2 14.8 21.4% 11.6%
Q3 FY11 118.3 1.1% 24.3 13.7 20.5% 11.6%
Q4 FY11 115.3 -9.5% 22.2 14.4 19.3% 12.5%
Q1 FY12 123.0 0.8% 26.1 14.0 21.2% 11.4%
Q2 FY12 133.0 4.4% 30.1 15.9 22.6% 12.0%
Bloomberg Code NTCPH Market Cap. Rs. 997 Crore Valuations

FY12e Price/Earnings N.A. Price/Sales N.A. Source: Bloomberg FY13e N.A. N.A.
ICRA LIMITED
Mar-12
Aug-11
Jan-12
NATCO PHARMA LIMITED: Business Overview (Page 2 of 2)

Hyderabad based, Natco Pharma Limited (NPL) is a medium-sized pharmaceutical company with leading presence in the oncology segment of the domestic branded formulations market. NPLs business is divided in three broad segments viz. Formulations (51% of revenues), APIs (24%) and Pharmacy business (25%). The formulations business is dominated by its strong presence in the oncology segment, while the API business is mainly export oriented with supplies to leading generic players in regulated markets. Supported by early presence, steady product introductions and focus on direct therapy areas, NPL has emerged as a leading player in the oncology segment in India among domestic companies. Besides its core focus on oncology, NPL has also been investing in developing a product portfolio for the US Generics market with focus on complex, difficult-to-develop molecules. Leading player in the domestic oncology segment - NPL is predominantly positioned as a domestic formulations company with leading presence in the fast-growing oncology segment. The domestic formulations business in India is dominated by branded formulations (59%) and oncology segment accounts for nearly (90%) of the total branded business. Barring subdued performance in 2010-11 on account of pricing pressure, the companys domestic formulations business has grown at a CAGR of 15% over the last three years on the back of niche launches in the oncology segment. Its strengths in identifying and developing niche and difficult-to-manufacture molecules besides early entrant in the business have helped it in maintaining a dominant presence in the oncology space. In terms of positioning, the company has strong presence in targeted therapies with particular focus on leukaemia (i.e. blood cancers), lung cancer and multiple myeloma where its brands enjoy leading market share. The competitive landscape in the oncology segment has been intensifying as MNC pharmaceutical companies have become increased their focus in the Indian market and a number of domestic players backed by strengths in R&D and manufacturing have also widened their product offerings in the oncology segment. As a result, the segment has become extremely price competitive, leading to severe price erosion. While we see competition rising in the domestic oncology space with more Indian players and innovators aggressively targeting the market, we expect the company to maintain its strong presence. Implementing a differentiated approach for regulated markets NPL has adopted a differentiated approach to scale up its business in regulated markets. Unlike other generic players, which typically focus on filing a basket of ANDAs across therapy segments and establish a marketing presence in regulated markets, the company is focusing on developing niche, difficult to manufacture molecules and has tied up with leading generic players. It is pursuing a de-risked business model wherein it develops and files the ANDAs and enters into tie-up with bigger and more established generic players, which manage the regulatory/litigation risk and would eventually market the products in the US. The company has so far filed 21 ANDAs including five on Para IVs basis, of which four are FTFs. It has partnered with leading companies for all the ANDAs where it has challenged the innovators. All these tie-ups are currently in the investment phase and could provide significant growth potential in the long-run. However, the potential upside on these challenges remains exposed to uncertainties related to litigation outcomes, approval timelines and market dynamics (i.e. price erosion, market share etc.) Focus has shifted away from US Pharmacy business - NPL had identified US pharmacy business as a strategy to build its understanding of the US generics markets. However, given the operational issues, NPL sold two of its stores and operates only a single store which is owned through a subsidiary in the U.S. In 2010-11, the company generated revenues of Rs. 111 crore from pharmacy business and incurred a loss of Rs. 1.8 crore as compared to revenues and loss of Rs. 149 crore and Rs.0.02 crore in FY10, respectively. The company has shifted focus away from the US pharmacy business and does not expect any further investments. Apart from ANDA programs, NPLs R&D activities are also focused on developing New Chemical Entities (NCE). At present, the company has two molecules under development. Both the molecules are being targeted at multiple oncological indications and are initial stages of development. Given the fact that, drug discovery process entails significant investments in later stages and is also characterised by low success rate, the company plans to out-license the molecules once they generate proof-of-concept data after completion of Phase II trials.
ICRA LIMITED
ORCHID CHEMICALS & PHARMACEUTICALS LIMITED Orchid Chemicals posts consolidated loss of Rs 11.1 crore in Q3; one time forex loss impacts performance
Q3 FY11 Operating Income Growth (%) - YoY OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) OPBDIT/OI (%) 131.3 32.2 27.1 3.0 3.7 78.6 19.0 59.6 27.4% 478.6 Q3 FY12 496.9 3.8% 129.0 38.3 49.6 0.0 -49.1 -7.9 3.2 -11.1 26.0% -2.2% Q2 FY12 419.5 9.9% 105.9 36.0 40.1 0.0 -86.4 -56.6 0.0 23.4 25.2% 5.6%
ICRA Ratings
Not Rated by ICRA
Revenue Growth In Q3FY12, on a consolidated basis, Orchids revenues stood at Rs. 496.9 crore, up by 3.8% on YoY basis and 18.4% on QoQ basis. In this quarter, Orchids revenues continued to witness a healthy growth mainly driven by the long term supply contracts with MNC clients which contribute nearly ~40% of the companys top line. As such, the API business which contributes over ~70% of the revenues of the company; grew by 7.1% YoY to Rs.353.3 crore. As for the formulations business, Orchid maintained its growth momentum aided by key launches in the oral formulations segment; with the revenues for the formulations business higher by 26.3% at Rs.114.0 crore. Profitability During the quarter, Orchids EBIDTA on a consolidated basis was Rs.129.0 crore as against Rs.131.3 crore for the corresponding quarter in previous year. While the EBIDTA margin was 26.0% as against 27.4% in Q3FY11. In Q3FY12, the company made a one-time foreign exchange loss of Rs. 49.0 crore after raising external commercial borrowings of $100 million to repay foreign currency convertible bonds maturing in February. Higher interest charges due to the hardening of interest rates coupled with the exchange loss on outstanding foreign currency loans have impacted the bottom line of the company. At a consolidated level, the company made a net loss of Rs.11.1 crore as against a net profit of Rs. 56.6 crore in Q3FY11. Developments-. Recently in Feb12, Orchid received USFDA approval for its ANDA for Levofloxacin tablets (bacterial infections). Also Orchid has successfully completed in Europe a Phase I trial of its orally administered PDE4 (phosphodiesterase 4 inhibitor) molecule OCID 2987 positioned for the treatment of inflammatory disorders.


3M 11.6 % 6.7% 13.1% 12M -37.6% 10.9% -1.8%
PAT/OI (%) 12.4% Source: Company Data, ICRA Estimates
Orchid CNX Pharma CNX Nifty
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Q4 FY10 Operating Income Growth (%) - YoY OPBDIT PAT OPBDIT/OI (%) PAT/OI (%) 327.2 -16.6% 223.2 -103.6 68.2% -31.7%
Q1 FY11 330.9 7.2% 83.8 21.6 25.3% 6.5%
Q2 FY11 381.8 21.4% 73.5 24.0 19.2% 6.3%
Q3 FY11 478.6 32.8% 131.3 56.6 27.4% 12.4%
Q4 FY11 540.0 65.0% 133.2 63.7 24.7% 11.8%
Q1 FY12 383.6 15.9% 87.0 15.5 22.7% 4.1%
Q2 FY12 419.5 9.9% 105.9 -56.6 25.2% 5.6%
Bloomberg Code OCP Market Cap. Rs. 1,260 Crore Valuations

Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
ICRA LIMITED
ORCHID CHEMICALS & PHARMACEUTICALS LIMITED: Business Overview (Page 2 of 2)

Orchid Chemicals & Pharmaceuticals Limited established in 1992 is a vertically integrated pharmaceutical company with presence in bulk drugs manufacturing, formulations, CRAMS and NDDS. The company is mainly engaged in the manufacturing of APIs and formulations across therapies like as anti-infective, anti-inflammation, cardio vascular, Nutraceuticals and oral and sterile products for the developed markets of US, Japan and Europe. With exports spanning over 75 countries, nearly 90% of Orchids revenues coming from the overseas markets; as such the contribution from the domestic branded drugs division is relatively small. The company is the largest manufacturer-exporter of cephalosporin molecule in India and is ranked among the top 5 producers of cephalosporin in the world. It is also among the very few players in the world supplying certain group of antibiotics like Penicillin and cephalosporin to the regulated markets like Europe and USA. APIs: Orchid has three API manufacturing sites, two in India (Chennai and Aurangabad) and one in China (joint venture); with the API business contributing ~ 75% of the revenues in FY11. Cephalosporin contributes nearly one third of the companys Rs.1, 659 crore total revenue in FY11; thus Orchid is the largest manufacturer-exporter of cephalosporin molecule in India and is ranked among the top 5 producers of cephalosporin in the world. After the divestment of the injectable business; the companys operations are more focused on API business (for niche molecules like cephalosporin, carbapenem and several other non-antibiotics) and oral formulation business of cephalosporin and non-antibiotics. Hospira contributes around 22% of total sales in FY11, with the majority accruing through limited competition for products such as penems. Orchid negotiated a 10 year exclusive agreement with Hospira for exclusive supply of Carbapenem API (Meropenem) and other APIs to the company under a cost plus arrangement. Orchid has also entered into a 5 year contract with a large Japanese Pharma company to supply Cephalosporin API. The company has various supply agreements with players in the regulated as well as non-regulated markets which are expected boost the companys overall growth. Formulations: In FY10 Orchid exited its sterile injectable formulation business by transferring it to one of its marketing partners, Hospira Inc. for ~Rs. 1900 crore (US$ 400 million). In order to reduce its debt, Orchid sold its US-FDA approved low cost manufacturing unit which was used to make difficult to replicate niche betalactum injectables. Currently, Orchid largely depends on its non-antibiotic segment for its formulations presence; with share of formulations business in its total sales being ~ 25% in FY11. Orchid plans to increase the share of its formulations business by either buying businesses or in-licensing brands in therapies outside antibiotics. It recently acquired Karalex Pharma, a US-based generic marketing and sales services company; which has been growing at 20% annually. Currently, the company has its presence across therapies like cardio, antidiabetic, neuropsychiatry and critical care and for many of these products, Orchid possesses marketing alliances in the US and Europe with prominent players such as Actavis, North Star and Alvogen. Going forward, In FY12, Orchid plans to incur Rs 200 crore capex for developing niche therapeutic formulations and for which it also plans to set up a new manufacturing facility at Vishakhapatnam. Orchid has a strong product pipeline with 43 ANDA filings for the US markets, which include eight PARA IV FTF filings. The break-up of total ANDAs filed is 13 in the cephalosporin space and 30 in the Non- penicillin, Non-Cephalosporin (NPNC) space. In the EU region, the cumulative count of Marketing Authorizations (MAs) filed stood at 25. The break-up of the total MA filings is 13 in the cephalosporin space and 12 in the NPNC space. NDDS & NCE: Orchid conducts new drug discovery research at its own centre in Chennai. The Chennai centre is focused on anti-infective, anti-inflammatory and anti-cancer drugs. All these molecules are in the pre-clinical stage and some of these are expected to enter Phase I soon. Orchid undertakes NCE development through its US JV with Bexel Pharmaceuticals. The JV is focused on the development of anti- diabetes and anti-obesity molecules. The anti diabetes molecule BLX-1002 has completed phase II clinical trials while the remaining drugs are still in preclinical stage.
ICRA LIMITED
RANBAXY LABORATORIES LIMITED

Lipitor exclusivity drives growth and profitability improvement; $500 million provisioning + forex results in losses
Q4 CY10 Operating Income Growth (%) OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) 2,128.8 230.2 103.0 14.5 77.0 (211.5) (4.8) 88.0 (97.5) Q4 CY11 3,792.3 78.1% 860.0 168.1 30.4 163.2 (3,485.9) (2,903.4) 74.7 (2,982.8) 22.7% -78.5% Q3 CY11 2,095.5 8.7% 174.1 78.8 15.3 102.0 (362.4) (431.3) 25.6 (464.6) 8.3% -21.8%
ICRA Ratings
Short Term Rating [ICRA]A1+
Revenue Growth Ranbaxys Q4 CY11 revenues at Rs. 3,792.3 crore grew by 78% on YoY basis led primarily by sales of Lipitor in the US. Apart from US, which benefitted from the launch of Lipitor and Caduet, companys India formulations business and Africa were the only other two markets which witnessed growth during the quarter. While the growth in the domestic market at 8.9% (in CY11) was lower than the industry average owing largely to higher exposure on the anti-infective segment, the management expects the market to recover going forward. All other markets either witnessed a decline or flattish sales (in $ terms) during the quarter. Overall, the growth is likely to be driven by the US market (led by Lipitor) in the near term as growth prospects remain relatively subdued in other key markets. Profitability Ranbaxys Q4 CY11 operating margins at 22.7% were significantly better on YoY and QoQ basis largely driven by higher proportion of sales from exclusivity on Lipitor. Given the exclusivity is likely to continue in Q1 CY12 and part of the next quarter, the companys margins in the near term are likely to remain higher than base business margins. For the longer run, management remains confident on improving its margins profile and bringing it line with its peers in the next 3-4 years time frame though we believe that stringent norms of the consent decree, forfeiture of exclusivities on three FTFs and higher regulatory cost could impede the margin improvement. Developments During the quarter, Ranbaxy entered into a consent decree with the US FDA (also approved by the District Court) which requires the company to strengthen procedures for ensuring data integrity in its applications. The consent decree also requires the company forfeit three of its FTFs and also pay a hefty fine. As a result, the company provided $500 million towards the same, which coupled with heavy forex losses resulted in a loss of Rs. 2,982.8 crore at net level.


3M 4.8% 6.7% 13.1% 12M -9.1% 10.9% -1.8%
OPBDIT/OI (%) 10.8% PAT/OI (%) -4.4% Source: Company Data, ICRA Estimates
Exhibit: Break-up of Ranbaxys CY 11 Revenues
RANBAXY CNX Pharma CNX Nifty
Others 11%
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Q1 CY10
Q2 CY10
Q3 CY10
Q4 CY10* 2108.6 -6.5% 231.7 (100.0) 11.0% -4.4%
Q1 CY11 2,180.9 -21.0% 403.2 304.4 18.5% 14.0%
Q2 CY11 2,093.1 -2.3% 181.7 243.2 8.7% 11.7%
Q3 CY11 2,095.5 8.7% 174.1 (464.6) 8.3% -21.8%
Operating Income 2,761.5 2,150.5 1,934.7 Growth (%) - YoY 75.4% 14.4% 2.6% OPBDIT 983.9 416.8 138.6 PAT 960.6 325.7 307.9 OPBDIT/OI (%) 35.6% 19.5% 7.2% PAT/OI (%) 34.9% 15.5% 16.2% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore; * Derived from full year financials
Bloomberg Code RBXY Market Cap. Rs. 17,957 Crore Valuations

Price/Earnings Price/Sales Source: Bloomberg CY12e 13.0x 1.6x CY13e 14.9x 1.6x
ICRA LIMITED
RANBAXY LABORATORIES LIMITED: Business Overview (Page 2 of 2)

Ranbaxy is a leading Indian pharmaceutical company, with a strong international business complementing its leading presence in India. It is one of the leading Indian companies in the US (with presence supported by a combination of plain vanilla generics and a strong patent challenge pipeline) besides having leading presence in emerging markets such as Africa and Latin America. The companys sales mix can be broadly divided into developed markets and emerging markets with latter accounting for 50% of the turnover in CY11. Ranbaxy is also one of most integrated companies with backward integration into APIs. Among developed markets, United States with revenues of $720 million (or 34% of turnover in CY11) is largest market for the company followed by Europe (at 14%). Among emerging markets, Ranbaxy is among the leading players in the Indian market with market share in access of ~4.5% and meaningful presence in markets such as Russia, South Africa, Nigeria (in Africa), Brazil & Mexico (in Latin America) and Romania (in Europe). Among Indian pharmaceutical companies, Ranbaxy is also one of the most diversified companies from geographic standpoint. US Generics business predominantly influenced by FTF opportunities: After a major upheaval in its U.S. business due to import ban by US FDA and imposition of AIP, the companys operations started turning around from Q4 CY09 on back successful monetization of its FTF products, improvement in base business and site transfer for most of its U.S. operations. Ranbaxys revenues started growing with the 180 day exclusive launch of generic Valtrex (Valacyclovir) in November 2009, which continued to favorably support growth till Q1CY10. In addition to Valacyclovir, the company successfully monetized its other FTFs including the one on Lipitor (in November 2011). Apart from exclusivity opportunities, the companys base business have also turned around with market share being maintained on most of the recent launched. Among Indian peers, Ranbaxy continues to have a healthy pipeline of products, with the cumulative ANDA filings at 205, of which 135 have been approved and 70 pending approval. The recent consent decree and its restrictions have however resulted in a hefty fine of $500 million, forfeiture of three FTFs and increased adherence on data integrity standards which are likely impact growth rates and delay the process of transferring manufacturing to India to some extent. Focused marketing initiatives started showing results but competition intensifies: Among emerging markets, India remains one of the largest and important markets for Ranbaxy with a turnover of Rs. 1,915.3 crore in CY 2011. With a market share of ~4.5%, Ranbaxy is positioned as the fourth-largest company in the domestic formulation segment after Abbott India (which after the acquisition of Piramal Healthcares formulation business became the largest player), Cipla and Glaxo SmithKline. In India, Ranbaxys business primarily comprises of two business segment (a) branded generics and (b) OTC products. In CY 2011, revenues from branded generics stood at $345 million, while OTC business accounted for $67 million. Despite its prominent position in domestic market, Ranbaxys formulations business underperformed the industry growth as well as some its peers. Slower growth in this period is mainly attributed to higher proportion of revenue coming from therapeutic segments such anti-infective, gastrointestinal, which have been growing at lower than chronic/lifestyle related segments. However recognizing the strong growth prospects of the domestic market, the company initiated and implemented a project Viaraat to strengthen its leadership position in domestic market by increasing field force, expanding presence in tier-2 cities and reshaping its product strategies. The project has started showing results as evidenced with improvement in growth rates. In terms of market positioning, Ranbaxy continues to be among the top 3-4 players with leadership position in the anti-biotic segment (market share 9.1%) and strong presence in several other segments such as CVS (rank 5th), Analgesics (rank 3rd) and Vitamins (rank 5th). Ranbaxy is well established & diversified presence across other markets: After United States and India, Europe is the third largest market in terms of revenues for Ranbaxy with 14.0% contribution in CY11. The company generated revenues of $297 million from European markets in CY11, achieving a 11% growth over the previous year. In terms of diversity, although the company has well established presence across 20+ countries in Europe but it generates majority of its business from U.K., Germany, Romania and France. Ranbaxy is also well diversified across other emerging markets with strong presence in South Africa, Nigeria, Brazil & Mexico and Romania. Synergies with Daiichi could generate long-term growth: Post acquisition by Daiichi Sankyo and management change, both Ranbaxy and Daiichi Sankyo are working on a long-term hybrid business model to explore synergies between the two companies across areas of their expertise right from R&D, manufacturing capabilities and marketing & distribution network. To begin with, Daiichi Sankyo has started out licensing select branded products from its portfolio to Ranbaxy for launch in markets where Ranbaxy has strong distribution presence.
ICRA LIMITED
SUN PHARMACEUTICAL INDUSTRIES LIMITED Taros strong operating performance and favourable forex augment profitability
Q3 FY11 Operating Income Growth (%) OPBDIT Less: Depreciation Less: Net Interest Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) 1,561.7 440.5 80.5 (32.2) 25.8 418.1 54.5 350.2 Q3 FY12 2,145.1 37.4% 963.8 77.4 (59.1) (86.3) 859.1 63.4 668.3 44.9% 31.2% Q2 FY12 1,894.6 13.2% 784.0 66.8 (41.7) 76.5 835.5 128.1 597.7 41.4% 31.5%
ICRA Ratings
Not Rated by ICRA
28.2% OPBDIT/OI (%) 22.4% PAT/OI (%) Source: Company Data, ICRA Estimates
Revenue Growth Sun Pharmas Q3 FY12 revenues at Rs. 2,145.1 crore grew by a strong 37.4% driven by Taros strong operating performance and steady growth across key markets including India and RoW. The companys US business which accounts for over 48% of the consolidated turnover was the leading growth driver, reporting an increase of 47.0% (in $ terms). The growth was primarily driven by Taro which benefited from increased selling prices on select products even as overall volumes remained flat. Taro reported revenues of $148 million, reflecting a growth of 44.0% on YoY basis. Apart from US, the growth in the India market at 17% (excluding the discontinuation of third party manufacturing) continued to remain steady aided by companys pole position in many of the fast-growing chronic therapies. With the highest number of ANDA applications pending approval, potential Para IVs and niche opportunities, Sun Pharma is well placed to witness steady growth in the medium. Additionally, its strong position in the domestic market and focus on emerging markets are also likely to add to the growth momentum. Profitability The companys OPBDIT margins at 44.9% in Q3 FY12 improved sharply on both sequentially and on YoY basis largely driven by higher margins in Taro (50.3% in Q3 FY12) and inventory translation gains. With $62 million in net profits, Taro was the principal contributor to the 91% growth in Sun Pharmas net profit of Rs. 668.3 crore. With sharp improvement in profitability largely coming in from price increases in select products in the US and favourable currency movement, the impact of this may not be sustainable going forward and earnings may return to base level going forward barring the impact of one-off gains on exclusivities.


3M 14.1% 6.7% 13.1% 12M 37.0% 10.9% -1.8%
Exhibit: Trend in Sun Pharmas (FY11)

International Generics 11%
SUN PHARMA CNX Pharma CNX Nifty
APIs 9%
Stock Movement
700.0 600.0 500.0 400.0 300.0 200.0 100.0
India Branded Generics 41%
400 300 200 100 0
US Generics 39%
Volume
Sun's Stock Price
Source: Company Data Q4 FY10 Q1 FY11 Operating Income 1,080.1 1,365.1 Growth (%) YoY -4.8% 77.7% OPBDIT 418.5 616.0 PAT 394.5 564.3 OPBIT/OI (%) 38.7% 45.1% PAT/OI (%) 36.5% 41.3% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore; Q2 FY11 1,370.1 15.6% 467.0 503.7 34.1% 36.8% Q3 FY11 1,561.7 56.8% 440.5 350.2 28.2% 22.4% Q4 FY11 1,463.3 35.5% 443.6 442.8 30.3% 30.3% Q1 FY11 1,635.7 19.8% 547.4 501.0 33.5% 30.6% Q2 FY12 1,894.6 38.3% 784.0 597.7 41.4% 31.5%
Bloomberg Code SUNP Market Cap. Rs. 60,126 Crore Valuations

ICRA LIMITED
SUN PHARMACEUTICAL INDUSTRIES LIMITED: Business Overview (Page 2 of 2)

Sun Pharmas domestic formulations business grew by 14.0% in Q3 FY12 driven by steady growth in key therapeutic segment; adjusted for the discontinuation of the contract manufacturing business, growth rate stands at ~17% in Q3; during the quarter, the company launched six new products and ended the CY with 4.5% market share (as per AIOCD) Strong performance during the quarter was supported by Taros continued strong numbers; with net sales of $148 million and net profit of $62 million, Taro contributed substantially to companys overall performance; as per the management, the performance was driven principally by increased selling prices on select products in the US market even as the overall volumes were flat; during the quarter, the company filed only one ANDA and received approvals for three products; cumulative ANDA list stands at 389 products (including Taros) with 241 approved and 148 awaiting approvals The companys formulations business in ROW markets grew by 44% (and 33% in constant currency terms) during the quarter; management remains upbeat on growth prospects in emerging markets R&D expenditure in 9m FY12 at Rs. 310 crore (5.5% of sales) was marginally below companys guidance; capex for FY12 was expected to be around Rs. 400 crore The company booked a net forex loss of Rs. 86 crore (clubbed under other income) The company reiterated its plans of strengthening its presence in the US generics and other attractive emerging markets through in-organic opportunities; with $1 billion in revenues, it is comfortably positioned to fund acquisitions however they are no set financial parameters being pursued in this regard
Business Overview
Sun Pharma (Sun) is a leading Indian pharmaceutical company engaged in developing, manufacturing and marketing formulations and APIs. Its business is broadly categorized in four segments India Branded Generics, US Formulations, International Generics and APIs. The company has strong branded generics business in India, which accounts for 41% of the consolidated turnover. In the domestic market, Sun has market leadership in as much as seven therapy segment largely in the fast-growing chronic segments. As on December 2011, the company held a market share of 4.5% (as per AIOCD data) in the Indian formulations market. Over the past five years, the companys revenues growth at a CAGR of 19.1% ahead of the underlying market growth. Higher than industry average growth has been aided by companys strong focus on fast-growing chronic therapeutic segments, its focused field force catering to specialist doctors and other initiatives such as in licensing of branded products. To pursue growth opportunities in the anti-diabetic segment, the company has recently entered into a JV with Merck to co-market Mercks diabetes drugs sitagliptin and sitagliptin plus metformin. Apart from India, U.S. is the second most important market for Sun, contributing 39% to revenues. Driven by acquisitions, ramp-up in ANDAs pipeline and Para IV opportunities, U.S. has been key growth driver for the company with 44% CAGR growth in revenues. In Sept. 2010, Sun acquired Taro Pharmaceuticals, an Israeli based generic pharmaceutical company with the objective to strengthen presence in the US generics space. The acquisition of both Caraco and Taro has allowed the company to diversified its presence across therapy areas and emerge as a strong player in the U.S. market. As on December 2011, the company had 389 ANDA filings with 148 pending approval. Apart from India and US, Sun is looking to enhance its presence in other markets especially Europe, Latin America, Russia and CIS. At present, these markets, collectively account for 11% of companys turnover and have grown at a CAGR of 34.1% over the past five years (FY06-11). Going forward, the company aims to strengthen its presence in these markets through focus on chronic segments and differentiated (i.e. non-orals, controlled released substances etc.) products. In line with recent trends, Sun has also entered into a JV with Merck to market branded generics in emerging markets. Sun is expected to develop and manufacturing, while Merck would leverage on its regulatory and marketing expertise. Despite volatility in earnings, Sun maintains one of the strongest margins profile and robust balance sheet among Indian peers. With sizeable cash reserves, company is well positioned to pursue in-organic investments and support its R&D pipeline to target the emerging complex generics opportunities in developed markets. Delay in resolution at Caraco and a potential damages pertaining to the ongoing litigation over Protonix are key sensitivities to companys earnings profile over the medium, which is characterized by strong US generics pipeline and strengthening position in the US as well other emerging markets by virtue of its acquisition of Taro Pharma and JV with Merck.
ICRA LIMITED
TORRENT PHARMACEUTICALS LIMITED Revenue growth driven by international operations; revival of domestic business remains key
ICRA Ratings
Long Term Short Term Outlook [ICRA]AA [ICRA]A1+ Positive
Revenue Growth TPLs operating income grew by 20.6% on a YoY basis in Q3 FY12 to Rs. 696.6 crore driven primarily by robust growth of 33% from international operations, partially aided by favourable currency movement. The sales growth was, however, moderated by the subdued performance (8% YoY growth) of the domestic formulations business primarily due to relatively low performance in the acute therapy segment on account of increasing competitive pressures. Nonetheless, the management has guided to a sharp recovery in domestic revenues in the coming quarters led by improved product focus through 15% expansion in field force to 3,000 medical representatives. US and Brazil markets are the key contributors to the growth in international business. While US operations witnessed a revenue growth of 67% YoY (50% in constant currency terms) led by the launch of Donepezil ODT, the 27% YoY (19% in constant currency terms) growth in Brazilian operations was facilitated by increased contribution from new product launches. TPL plans to launch three-four new products in Brazil in the coming two quarters, which should further enhance its growth. Profitability TPLs EBITDA margin at 17.4% in Q3 FY12 witnessed a decline of 247 bps on YoY basis led by forex loss of Rs. 18 crore compared to a forex gain of Rs. 7 crore in Q3 FY11. The lower DEPB benefits further impacted the OPBDITA margin to the extent of 1%. However, the same was moderated to a certain extent by reduced interest expenses on account of replacement of high-cost rupee loans as well as higher returns on surplus funds. Developments TPL has filed three ANDAs in US taking the cumulative count to 65, of which 34 have been approved till date. The company has also announced a capex plan of Rs. 200-250 crore for FY13 for API and formulation capacity expansion at Dahej SEZ.


3M 7.9% 6.7% 13.1% 12M 18.2% 10.9% -1.8%
Torrent CNX Pharma CNX Nifty
Stock Movement
700 650 600 550 500 450 400 30 25 20 15 10 5 0
Nov-11
Dec-11
Jun-11
Feb-11
Apr-11
Sep-11
Oct-11
Jul-11
Mar-11
Feb-12
Volumes
May-11
Torrent's Stock Price
Q4 FY10 Q1 FY11 Operating Income 475.3 541.0 Growth (%) - YoY 17.4% 12.5% OPBDIT 96.9 112.1 PAT 59.1 74.2 OPBDIT/OI (%) 20.4% 20.7% PAT/OI (%) 12.4% 13.7% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
Q2 FY11 581.5 21.2% 117.5 76.2 20.2% 13.1%
Q3 FY11 577.5 20.3% 115.0 76.9 19.9% 13.3%
Q4 FY11 536.4 10.8% 64.6 42.8 12.3% 8.1%
Q1 FY12 647.5 19.7% 153.1 102.5 23.6% 15.8%
Q2 FY12 683.3 17.5% 140.7 100.0 20.6% 14.6%
Bloomberg Code TRP Market Cap. Rs. 5,110 Crore Valuations

ICRA LIMITED
Mar-12
Aug-11
Jan-12
TORRENT PHARMACEUTICALS LIMITED: Business Overview (Page 2 of 2)

With presence across Indian formulations (comprising branded formulations sold in the Indian market), international formulations (comprising sales outside India of branded and unbranded generic formulations) and contract manufacturing, Torrent Pharmaceuticals Limited (TPL) is one of the leading pharmaceutical companies having presence in Indian and global markets. The companys current international operations are focused on five thrust areas Brazil & Latin America, Europe, Russia & CIS countries, North America and Rest of World (ROW) comprising less regulated markets of Africa and Asia. TPL is currently working on several in-house NCE projects within the areas of diabetes and its related complications, metabolic and CVS disorders, ischemic diseases and neuropathic pain. The company has cumulatively filed 445 patents for NCEs in all major markets worldwide, of which 207 patents have been granted so far. Domestic Formulations: Ranked 18 by turnover in the domestic formulations market, TPL is a strong player in the domestic market with strong presence in the fast growing lifestyle related therapeutic segments of CVS and CNS, having 6 brands in the top 300 brands and 36 brands in leadership positions in their respective molecule segments. The company is ranked No. 2 in the CVS segment and No. 3 in Neuro-psychiatry therapies with a market share of 6.2% and 7.6%, respectively, in FY11. Cardiology continues to remain the main therapeutic segment for the company, followed by neuro-psychiatry and gastroenterology segments. However, revenue growth for the company, which was mainly driven by the anti-infective and gastro segments in the past, has been impacted in 9m FY12 owing to increased competitive pressures. Going forward, the companys increased marketing efforts, entry into tier II to VI cities and foray into new therapeutic areas of Gynaecology are expected to drive growth. The company also has plans to enter the infertility market in the future. Brazilian Branded Formulations: Brazil is the largest contributor to TPLs revenues from international markets. TPL has a basket of 27 products comprising 11 products in the CVS segment, 11 products in the CNS segment and 5 products in the Oral Anti Diabetic segment. TPL is one of the leading Indian branded generic players in the Brazilian market enjoying a market share of 6.8% in the covered market. The company has 31 products under approval and 6 products are expected to be approved during the current fiscal. Going forward, the company plans launching new products in the CNS and CVS segments to augment growth. With the company already having invested to develop the required infrastructure including product development, increase in sales is expected to result in higher operating profitability for the Brazilian operations. The company is looking to launch 3-4 new products in the next two quarters and a total of 35-40 new products by FY15. U.S. Formulations: TPL forayed into the US market in FY04 through incorporation of a wholly-owned subsidiary and is one of the late entrants in the US generics market. However, it is currently the largest supplier of Citalopram (anti-depressant) and the second largest supplier of Zolpidem (anti-convulsant) in the US market. The company has 34 ANDA approvals and its pipeline consists of 31 pending approvals. With the company having started realizing the benefits of its investments in the US market, the US business is expected to contribute to the growth of TPLs international business in a significant way, with breakeven expected by FY13. Germany Formulations: Sales have been driven by continuing traction in the non-tender sales as also recent wins in the tender business. TPLs German subsidiary (Heumann operations) was successful in obtaining tender awards announced by various health insurance funds during FY11, which constituted 56% of total sales. 15 new products are proposed to be launched during the current fiscal, thereby successfully servicing the increased demand from the tender business. Contract Manufacturing: A major portion of TPLs contract manufacturing operations is derived from manufacture of human insulin for Novo Nordisk, Denmark, for their India market needs. The company has entered into product out-licensing and supply contracts with three global pharma players, one of them being AstraZenca, which is expected to start contributing materially from H2 FY13 onwards.
th
ICRA LIMITED
UNICHEM LABORATORIES LIMITED Margin pressure to continue in the domestic formulations business; net profit declines
Q3 FY11 Operating Income Growth (%)-YoY OPBDIT Less: Depreciation Less: Interest Charges Other Income Exceptional Gain/Loss PBT Less: Tax PAT (Concern Share) OPBDIT/OI (%) 39.4 6.9 0.2 1.3 0.0 33.6 8.0 25.6 20.0% 197.1 Q3 FY12 222.6 12.9% 36.8 6.7 0.4 2.1 0.0 31.8 7.3 24.5 16.5% 11.0% Q2 FY12 198.8 -1.6% 30.5 6.9 0.2 26.0 0.0 26.0 6.9 19.1 15.3% 9.6%
ICRA Ratings
Short Term [ICRA]A1+
Revenue Growth In Q3 FY12, Unichems revenues grew by 12.7% YoY to Rs.222.6 crore mainly driven by the export formulations business which witnessed a robust growth of 83.8% aided by the commencement of CRAMS contract with a U.S. MNC for 3 products and strong demand for APIs. However, the domestic formulations business; which is the main business segment; continued to be under pressure as revenues declined by 6.1% on YoY basis led by restructuring in the distribution channel and growth erosion in top brands. Among the top 10 brands of the company, 6 brands reported a negative YoY growth. The ongoing shift in the inventory rationalization efforts at the distributor level would continue to drag the sales for next 2-3 quarters before the business stabilizes. On a consolidated basis, the major subsidiary of Unichem, Niche Generics U.K continued to report losses at PAT level and the breakeven is still some time away. Profitability Unichems EBITDA margins continued to be under pressure as it fell by 344 bps YoY basis to 16.5% due to decline in sales from high margin domestic formulations business, increase in overhead costs and commissioning of new manufacturing facilities at Sikkim and Baddi. However, on QoQ basis, EBIDTA margins expanded by 120 bps on the back of depreciation of rupee vis-a vis other currencies. The net profit for Q3 FY12 stood at Rs.24.5 crore lower by 4% compared to corresponding quarter previous year. Developments The Company has signed a contract with a US customer to supply formulations from the Ghaziabad plant. This may generate revenue of Rs.100 crore in FY13. Company has also filed 2 ANDA in US in Q3 FY12, taking the cumulative filings to 23 ANDA with 11 approvals. The company is planning a capex spend of Rs. 40 crore in Q4FY12 and Rs. 100 crore in FY13.


3M 30.0% 6.7% 13.1% 12M -23.0% 10.9% -1.8%
PAT/OI (%) 13.0% Source: Company Data, ICRA Estimates
Unichem CNX Pharma CNX Nifty
Stock Movement
250.0 200.0 150.0 100.0 50.0
Nov-11 Dec-11 Jun-11 Apr-11 Feb-11 Sep-11 Oct-11 Jul-11 Mar-11 Feb-12 May-11 Mar-12 Aug-11 Jan-12
100 80 60 40 20
0
Volumes
Unichem's Stock Price
Q4 FY10
Q1 FY11
Q2 FY11 202.0 15.7% 49.6 34.7 24.5% 17.2%
Q3 FY11 197.1 14.1% 39.4 25.6 20.0% 13.0%
Q4 FY11 178.1 2.4% 23.6 14.8 13.3% 8.3%
Q1 FY12 188.7 0.7% 26.9 15.6 14.3% 8.3%
Q2 FY12 198.8 -1.6% 30.5 19.1 15.3% 9.6%
Operating Income 173.8 187.5 Growth (%) - YoY 18.8% 10.7% OPBDIT 41.5 48.2 PAT 33.9 33.3 OPBDIT/OI (%) 23.9% 25.7% PAT/OI (%) 19.5% 17.8% Source: Company Data, ICRA Estimates; Amounts in Rs. Crore
Bloomberg Code UL Market Cap. Rs. 1,221 Crore Valuations

ICRA LIMITED
UNICHEM LABORATORIES LIMITED: Business Overview (Page 2 of 2)

Unichem Laboratories Limited (Unichem) is an integrated pharmaceutical company with presence across research, manufacturing and marketing of formulations and APIs. The companys business mix can be broadly divided into two segments formulations (accounts for 90.5% of Unichems revenues in FY 2011) and APIs (9.5%). Unichem is positioned as a domestic formulations company with focus towards high margin lifestyle related therapeutic segments. The company is also present in the bulk drug business largely meant for exports, though the scale of operations in bulk drugs presently remains relatively small. Unichem has presence in over 20 countries across the five continents with four wholly owned subsidiaries in UK, USA, Brazil & South Africa. Apart from this, the Company has a network of distribution and marketing alliances in the CIS, Nepal, South-East Asian region, Europe and Latin America. Domestic Formulations: Unichems product portfolio is dominated by its flagship brand groups namely Ampoxin (anti-infective), Losar (CVS), Telsar (CVS) and Trika (CNS). Presently five Unichem brands feature among the top 300 Indian pharmaceutical brands and out of which three brands are in the top 100 namely Ampoxin (Rank 60th), LosarH (Rank 72nd) and Losar (Rank 81st). A majority of Unichems domestic formulation revenues are derived from chronic therapies namely CVS and CNS which together accounted for ~59% of overall revenues. These segments also offer higher pricing flexibility given the limited competition as compared to more mature segments such as antibiotics and anti-TB. Cardiology continues to be the thrust segment for the Company and has contributed ~46% of the domestic formulations sales. However, going forward Unichem could be impacted by the price controls with major molecules in the CVS segment falling under NPPP 2011. At present, nearly 20% of Unichems domestic portfolio (in value terms) falls under the purview of DPCO. As such, the new avenues for growth identified by Unichem are in the segments of hospital products, women health, ophthalmology and nutritionals. In the last 2 years, Unichem undertook a series of restructuring measures which included sales force realignment and strengthening of its second tier power brands like TELSAR and OLSAR to reduce its dependence on its flagship brands. It is also in the midst of shifting in its distribution channel to lower its dependence on distributors and is attempting to route sales primarily through C&F agents, in line with the practices followed by its peers. Currently, the company has field force strength of ~1800 personnel and faces issues of higher attrition rate (~30%) than industry standards and subdued sales force productivity. All these factors combined have impacted Unichems domestic formulations sales in the recent months. Export Formulations: Unichems international presence is primarily targeted towards regulated markets namely US and Europe. The company had entered the European markets through the acquisition of Niche Generics Limited (NGL) in 2002. However, in recent times, a number of European governments have proposed or implemented austerity measures aimed at reducing healthcare spending, including cost-controls for various drugs, as they seek to repair their fiscal deficits. These measures have severely restricted the pricing power of pharmaceutical companies in Europe. Unichem has been a relatively late entrant into the US generic market and has till date filed 17 ANDAs of which 10 have been approved. The company has so far launched five of the approved products in the US. Unlike some of the larger domestic peers; the company has been fairly conservative in terms of ANDA filings and mainly focuses on targeting Para III filings (wherein the patent has already expired) thereby limiting any chances of litigation from the innovator company. The company currently has formulation plants in Goa, Baddi, Ghaziabad and Sikkim of which the Goa and the Ghaziabad plants are USFDA approved. APIs: Unichems API manufacturing facilities are located at Roha and Pithampur with most of the supplies being used for captive consumption; as such the third party API sales contributed only 9% of total sales in FY11. The company is now looking to further increase its API presence in the regulated markets through supply of niche APIs to global generic players and expanding its presence in contract manufacturing for APIs and intermediates. Currently, the company predominantly supplies APIs for lifestyle, anti asthmatic and anti ulcerative segments.
ICRA LIMITED
ICRA Limited
An Associate of Moody's Investors Service CORPORATE OFFICE nd Building No. 8, 2 Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002 Tel: +91 124 4545300; Fax: +91 124 4545350 Email: info@icraindia.com, Website: www.icra.in REGISTERED OFFICE th 1105, Kailash Building, 11 Floor; 26 Kasturba Gandhi Marg; New Delhi 110001 Tel: +91 11 23357940-50; Fax: +91 11 23357014 Branches: Mumbai: Tel.: + (91 22) 24331046/53/62/74/86/87, Fax: + (91 22) 2433 1390 Chennai: Tel + (91 44) 2434 0043/9659/8080, 2433 0724/ 3293/3294, Fax + (91 44) 2434 3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065 Ahmedabad: Tel + (91 79) 2658 4924/5049/2008, Fax + (91 79) 2658 4924 Hyderabad: Tel +(91 40) 2373 5061/7251, Fax + (91 40) 2373 5152 Pune: Tel + (91 20) 2552 0194/95/96, Fax + (91 20) 553 9231
Copyright, 2011 ICRA Limited. All Rights Reserved. Contents may be used freely with due acknowledgement to ICRA. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided 'as is' without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents.
ICRA LIMITED

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INDIAN PHARMACEUTICAL SECTOR

Structural demand drivers to support growth despite short-term headwinds

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

Exhibit 2: Key Management takeaways from earning calls

Lifestyle related disorders to propel faster growth in chronic segments

24.3% 17.5% 13.0% 4.0%

2006 2007 2008

0.0% 2009 2010

MNC Pharma Revenues

Domestic Market Growth (%)

Source: Capitaline; ICRA Estimates

Exhibit 4: Trend in profitability indicators of listed MNCs in India

Source: Capitaline; ICRA Estimates

Generics to propel growth in the US market over the medium term

14.6% 31.3% 19.1% 17.5% 4.8% 29.4%

3,000 2,000 1,000

Indian generics to benefit from the ongoing wave of patent expiries

Exhibit 6: Market Position in the US gradually improving

Exhibit 7: Details of ANDA filings by leading Indian Companies

5 2012e 2013e 2014e 2015e 2016e

Source: Industry Estimates

Exhibit 9: Major Product Launches Expected in 2012

Exhibit 10: Major Product Launches Expected in 2013

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

0% U.K Germany Netherlands France Spain Italy

Source: IMS Health, ICRA Research

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

Ranbaxy Cipla Cadila Intas Pharma

Source: Industry Estimates, ICRA

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

Biosimilars offers strong long-term potential

GSKs Penicillin manufacturing facility Source: Company Releases, ICRA

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

Emerging Markets India Emerging Markets India N.A

Shareholding Pattern (%)

Price Performance (%)

Exhibit: Trend in APLs Revenue Mix (FY09-9m FY12)

0% FY09 Formulations FY10

9m FY12 Dossier Income

Q2 FY11 1,112.6 26.1% 254.2 198.3 22.8% 17.8%

Q3 FY11 1,192.2 30.3% 319.5 188.6 26.8% 15.8%

Q4 FY11 1,154.4 24.8% 211.7 125.0 18.3% 10.8%

Q1 FY12 1,076.9 16.8% 163.9 (122.8) 15.2% -11.4%

Q2 FY12 1,075.3 -3.4% 114.6 (80.2) 10.7% -7.5%

Bloomberg Code ARBP Market Capitalisation Rs. 3,451 Crore Valuations

APL CNX Pharma CNX Nifty

800 600 400 200 0

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

Exhibit: Break-up of Cadila Healthcares FY11 Revenues

India Formulations 38%

18.1% 244.9 170.8 21.9% 15.3%

17.7% 256.2 162.0 22.0% 13.9%

43.3% 227.8 179.0 18.8% 14.8%

9.9% 302.4 229.8 24.3% 18.4%

10.7% 237.1 102.7 19.2% 8.3%

FY12e Price/Earnings 20.8x Price/Sales 2.8x Source: Bloomberg

FY13e 16.8x 2.4x

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

Shareholding Pattern (%)

Price Performance (%)