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Wind of change-US opportunity dips;India & EMs shine
Pharmaceuticals | Thematic | India Research
October 3, 2011Souvik Chatterjee([email protected])+912222877009
Mitesh Shah([email protected])
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Contents
Executive Summary 3
USgenericattractivenessdippingout 10
48%dropinpatentexpirypost2012-14;isitthebeginningoftheend?
Streetoverestimatingpatentexpiryopportunity 11
USgenericmarkettobecomevolumeplay;marginpressuretoremain 1
Historyrepeats:expectcontributionfromUStoreduce~40%postFY13 13
Scarcityofmajorblockbusterdrugexpirypost2015 14
Emerging markets to drive long term growth 16
Emergingmarketstoleadgenericgrowth 16
India-strongdemandgrowth 18
Japan-landofopportunities 20
China-theMedicineMan 22
Russia-onsolidground 25
LatinAmerica-growingstrong 27
Valuations 29
Key risks 33
Company Section 34
SunPharmaceuticalsLtd.(SUNP) 35
Dr.Reddy'sLaboratoriesLtd.(DRRD) 47
LupinLtd.(LPC) 62
Cadila(CDH) 76
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Wind of change - US opportunity dips; India and EMs shineInstitutional Equities
Executive Summary
We expect a significant change in business strategy of large cap Indian generic pharmaceutical companies as
we forecast US attractiveness is likely to get reduced post the patent cliff dips off. The Indian generic drug
makers should now shift focus to the domestic and Pharma-emerging markets which provides exciting
growth opportunities. We believe the next phase of valuation of the Indian pharmaceutical companies will be
driven by the Pharma-emerging markets opportunities, robust product pipeline and strong domestic growth.
We initiate coverage on DRRD IN (Out-performer), LPC IN (Out-performer) and CDH IN (Out-performer); we
upgrade our rating on SUNP IN from Market-performer to Out-performer.
Except ~48% drop in patent expiry post 2014 in the US: The golden era of patent expiry opportunity
(USD71bn) is likely to come to end post 2015, however we expect 2013 to be the beginning of the end on theback of a ~74% drop in patent expiry opportunity. We see a sharp drop of ~85% in the patent expiry
opportunity for the generic players in the US over 2016-20 (USD10.7bn) from USD71bn over 2011-15.
Generic growth to slow down post 2015: Generic market in the US over the past 10 years suggests that as
the level of penetration increased there has been sharp drop in the growth rate for generic pharma market.
The high growth during 2000-05 was mainly attributed to the lower penetration of generics coupled with
expiry of blockbuster drugs during 2002-06. We expect CAGR 7% for generic pharma market in the US as
against 12% in the previous decade.
US becoming a pure volume play: Generic penetration in the US is at its peak (80-85%) and we estimate stiff
erosion of generic drug prices owing to sharp increase in competition thus resulting in lower margins. We
anticipate slower generic prescription sales growth in the US, at CAGR of 9% over 2010-20 vs. 12% over 2000-
09, putting pressure on the margins of the generic drug manufacturers.
Exhibit-1: Global pharmaceutical market CAGR of 7% over 2010-14E
Source: IMS, Industry
781 808875
920990
1,0601,140
0%
1%
2%
3%
4%
5%
6%7%
8%
9%
10%
0
200
400
600
800
1,000
1,200
200820092010E2011E2012E2013E2014E
(%)USDbn
TotalWorldMarket GrowthRate
3
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Institutional Equities
Pharma-emerging markets to account for ~40% of global healthcare revenue by 2015
Weestimatethepharma-emergingmarketstogrowata15-17%(CAGR)over2010-15andtor250bn. TheAsia-Pacific(APAC)healthcaremarketisprojectedtogrowby~13-15%ov
USD560bncontributing~30-40%oftheglobalhealthcarerevenue.WepreferIndia,China
Brazilasthemajorpharma-emergingmarketsintermsofgrowthopportunities.
INDIA:Theriseinincomelevelcoupledwithriseinchronicailmentsinthetier-II/IIIciti
50%riseinhealthcarespendingby2015.WeforecasttheIndianpharmamarkettomain
annualgrowthtrendof~16%till2015.WeexpectmedicalinfrastructureinIndiatoreg
withoverUSD150-200bnbeinginvestedover2015increatingandupgradingmedicalfacili
JAPAN: Japanhasthelargestpopulationofoldagedpeople(above60yearsage)representing~
populationandby2050theseniorcitizenpopulationwillaccountfor~50%ofthetotal
currentlyspend~7.5%ofitsentireGDPonhealthcarewhichisexpectedtoreach15%bydrivenbybrandeddrugs.GenericdrugsinJapanaccountsforlessthan~10%invaluetermscre
marketforthegenericdrugmanufacturers.WeexpecttheJapanesegenericindustrytoreachUSD
by2015ataCAGR9-12%andtodrivethenextphaseofgrowthfortheIndiangenericmanufactu
CHINA:ChinawithaGDP(nominal)ofUSD~6.5tnandpopulationof1.4bnispoisedt
pharmaceuticalmarketintheworldaftertheUSovertakingJapanandFranceby2015.Generi
thebackboneoftheChinesepharmaceuticalindustry.Genericdrugsaccountto~63%(USD
totalpharmaceuticalmarketandisexpectedtoregisterCAGR15%till2014.
RUSSIA:RussianpharmaceuticalmarketisestimatedataboutUSD8.6bnason2010andisex
reachUSD22bnby2015atCAGR21%.ThecountryhasapercapitapharmaceuticalspendofabouwhichisevenlowerthanthatofRomania(USD200)suggestingtremendousgrowth
pharmaceuticalindustryinRussia.
LATIN AMERICA:TheLatinAmericanpharmaceuticalmarketisamongthefastestgrowingmark
world.Althoughindividualmarketsaregrowingatdifferentrates,theentireLatinAme
toexpandatCAGRof10-12%over2010-15.Oneofthemajordriversofgrowthforthepharmace
isnationalgovernmentssteppedupeffortstoincreaseaccesstohealthcarefortheirrespectiveci
Exhibit-2: Pharma-emerging market to dominate growth
Source: Glenmark, SMC Inst. Research
0%
5%
10%
15%
20%
25%
30%
ChinaRussiaIndiaBrazil JapanUS EUCanada
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Drivers India Japan China Russia LatAM US
GDP Growth (%) (2012) 8.0% 3.0% 9.0% 4.5% 4.0% 2.0%
Healthcare spending as % of GDP 8.0% 8.5% 8.0% 5.5% 7.5% 17.0%
Total Pharma market by 2015 (USD bn) 20 102 80 22 55 480
Generic penetration (Sales) NA 6% NA 40% 80% 20%
Regulatory environment
Semi-regulated
marketwithprice
controlmechanism
Highlyregulated.
GovernmentofChinahas
implementedNEDL
(NationalEssentialDrug
List)andNERDL(National
EssentialReimbursement
DrugList)toregulateand
restructurethelocal
pharmaceuticalindustry
andtocuttherisingdrug
cost.
Highlyregulated. Semiregulated
Highlyregulated.USFDA
thenodalauthorityfor
genericapproval.Hatch-
Waxmanlawprovidesthe
rightof180days
exclusivitytothefirst
genericfiler.
Opportunities
Hugedomestic
demand.Increase
inchronicdisease
andrisinghealh
awarenessto
providesuperior
growth
22%oftotalpopulate
above60yearsputing
pressureon
Government's
healthcarespend.Low
genericpenetration
andGovernmentgenericfavoring
policiestohelp
growth.
Hugedomesticdemand.
Governmentpoliciesto
regulatethepharma
marketandprotectIP
rightswillattractforeign
companiesandprovide
growthopportunity.
Largemarket.Increasein
chronicdiseasesprovides
hugeopportunity.
Largemarket.Increase
inchronicdiseases
providehuge
opportunity.
Nearterm:Patentexpiry
opportunityworth
USD80bnby2015in
Farterm:Largestpharma
market;highyreceptiveto
genericdrugs
Challenges
Pricesensetive
market.
Government
interventioninthe
drugspricing.
Lessgenericawarness.
Moreinclinedtowards
brandeddrugs
Largenumberoflocal
playersalongwithun-
regulatedmarketstructure
providestremendous
competitiontonew
foreignentrants.
Regulationslackclarity
andtransparencyandare
subjecttofrequent
changes
Regulatorydelaysin
approvalsalongwith
Governments
protectismpolicies.
Highcompetitionalong
withcut-throatpricewar.
Morethan90%price
erosionafterpatent
expiry.
Indian presence All LPC,RBXY,DRL,CDHNA DRRD,SUNP,GNP GNP,DRRD,SUNP Almostall
SMC Comment
Riseincomelevel
coupledwithrisein
chronicdiseases
likelytolead50%
riseinhealthcare
spendingbyFY15E.
Weforecastthe
Indianpharma
markettomaintain
itscurrentannualgrowthtrendof
~16%till2015.
ExpectJapantodrive
thenextphaseof
growthforgeneric
manufacturershaving
CAGR9-12%overFY11-
15
Governmentfundingof
USD125bntargeting
substantialimprovementto
thenationshealthcare
infrastructurewilldoublethe
pharmaceuitalmarketsize
by2015.WeforecastCAGR
18-20%overthenext3years
totouchUSD80bnby2015.
Russiaisanimportant
marketwithhugegrowth
potential.Russian
pharmaceuticalmarketis
expectedtoreachUSD22bn
(fromcurrentUSD8.6bn)by
2015atCAGR21%.
LatinAmericanpharma
marketisexpectedto
expandatCAGRof10-
12%over2010-15.One
ofthemajordriversof
growthforthe
pharmaceuticalmarkets
isnationalgovernments
steppedupeffortsto
increaseaccesstohealthcareforits
citizens.
Weviewthisdippingoutof
patentexpiryopportunities
intheUSgenericspaceasa
possiblethreattothe
genericgrowthofIndian
pharmacompanies.
termsofParaIVlaunches.
Exhibit-3: Snapshot of world pharmaceuticals market
Source: Company, SMC Inst. Research
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Institutional Equities
Dr Reddy's Laboratory Ltd. (DRRD IN) Out-performer TP: INR1,864
Dr.Reddy'sLab(DRRD)isoneofourtoppicksintheIndiangenericpharmaceuticalspace
Indiandomesticgrowth,strongUSbusinessandexcitingproductpipelineincludinganu
opportunitiesintheUS.
WeareimpressedwithDRRD'srobustpipelineofproductsincludingtheFTFopportunityca
WeexpectDRRDtomonetize~USD3bnofrevenueoverFY14throughitsFTFpipelineintheU
gArictra,gGeodon,andgZyprexa.
WeinitiatecoverageonthestockrecommendingOut-performerforecasting36%earningsCAGRoverFY1
13Eonthebackofincreasinggrowthinthedomesticmarket(CAGR15%overFY11-13);expan
pharma-emergingmarketsandnewlaunchesintheUStohelpdriveearnings.
WevalueDRRDat20xFY13EearningsofINR91.8andaddingNPVofINR30pershareforthe
opportunitiestoarriveatourtargetpriceofINR1,865implyingapotentialupsideof2
Sun Pharmaceuticals (SUNP IN) Out-performer TP: INR557
SunPharma(SUNP)isoneofthemostaggressivelarge-capplayersinthepharmaceuticalsp
SUNP,withitsstrongproductpipelinewillbeabletomonetizeonthepatentcliffopportun
domesticbusinessprovidessupporttovolatileinternationaloperations.Weseenewpr
tappingnewmarkets(tierIIandtierIIIcities)thekeytoSUNP sgrowthstrategyinthedo
believeSUNPtohaveamarketableopportunityof~USD10bnoverFY12-13Eandwillbeon
beneficiariesofthePatentcliffopportunity.
WerecommendOut-performer recommendationforecastingearningsCAGRof23%overFY11-13
expectSUNPtomaintainitsleadershipacrosskeysegmentsinthedomesticmarket.Wef
domesticgrowthtocontinue,helpingthebasebusiness(exTaro)togrowby22.5%(CAGR)o
WevalueSUNPat22xFY13EearningsofINR24.8andaddingNPVoflimitedcompetitio
INR12toarriveatourtargetpriceofINR558implyingapotentialupsideof19%fromthe
Particulars FY10 FY11 FY12E FY13E
Revenues(INRmn) 40,075 57,214 88,611 97,398
Revenuegrowth(%) (5.8) 42.8 54.9 9.9
EBITDA(INRmn) 13,632 19,700 27,582 30,962
EPS(INR) 13.0 17.5 27.0 30.5
RoE(%) 18.2 23.0 30.1 26.0
PE(x) 36.0 26.7 17.1 15.1
Financial Summary
Source: SMC Inst. Research
Particulars FY10 FY11 FY12E FY13E
Revenues(INRmn) 70,277 74,693 86,124 97,291
Growth(%) 1.2 6.3 15.3 13.0
EBITDA(INRmn) 2,008 12,629 16,902 22,439
EPS(INR) (6.7) 49.5 69.6 91.8
RoE(%) (2.6) 18.3 20.4 21.2
PE(x) NA 32.3 21.6 16.2
Financial Summary
Source: SMC Inst. Research
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Institutional Equities
Lupin (LPC IN) Out-performer TP: INR 580
Lupin(LPC)oneofthemostaggressiveIndianmid-capplayersintheIndianpharmaceutitransformeditselffrombeingabulkdrugplaytoanintegratedformulationsplayerwitha
portfolioinUSandJapanbackedbyCAGR19%indomesticbusiness.Weexpectthedomesticf
drivefuturegrowthwithaCAGR19%overFY11-14stronglybackedbyKwoya(Japansubsidiary
toregisteraCAGR15%
LPC'sbrandedformulationbusinessintheUS(accountsfor~45%ofitstotalUSrevenues)
contributemoretothegrowthwiththelaunchofnewproducts(AllerNaze)andsomelimi
opportunities.
WerecommendOut-performeronthestockforecastingearningsCAGRof23%overFY11-13E.Wev
at20xFY13EearningsofINR29.2toarriveatourtargetpriceofINR580implyingapotent
fromtheCMP.
Cadila Healthcare (CDH IN) Out-performer TP: INR 912
CadilaHealthcare(CDH)isourpreferredcounteramongtheemergingmid-capintheIndi
spacemainlybecauseofitsstrongmixofdevelopedandpharma-emergingmarket.Weforecast
CAGRat27%overFY11-14andexpectthedomesticbusinessofCDHwilladdtractiontotheo
growthandforecastCAGR17%overFY11-14forthedomesticbusinessledbyitsflagshipformu
withCAGR15%overthestatedperiod.
WeexpectJapantobeoneofthefastestgrowingpharma-emergingmarketsintheworld
Government'sincreasedefforttoreducetherisinghealthcarecost.WebelieveCDH'sJapan
longtermgrowthwithCAGR40%overFY11-14E.
WeinitiatecoverageonthestockrecommendingOut-performerandforecastingearningsCAGRof16%ov
FY11-13E. WevalueCDHat20xFY13EearningsofINR45.6toarriveatourtargetpriceofIN
Particulars FY10 FY11 FY12E FY13E
Revenues(INRmn) 36,868 46,302 55,573 66,280
Growth(%) 25.9 25.6 20.0 19.3
EBITDA(INRmn) 8,086 10,262 11,079 13,331
EPS(INR) 24.6 34.7 37.3 45.6
ROE(%) 35.3 37.4 31.1 30.2
PE(x) 30.8 21.9 20.3 16.6
Financial Summary
Particulars FY10 FY11 FY12E FY13E
Revenues(INRmn) 48,708 58,320 69,586 82,840
Growth(%) 26.0 19.7 19.3 19.0
EBITDA(INRmn) 9,839 11,911 15,439 18,142
EPS(INR) 15.3 19.3 24.7 29.2
RoE(%) 34.1 29.5 29.4 27.2
PE(x) 31.3 24.8 19.4 16.4
Financial Summary
Source: SMC Inst. Research
Source: SMC Inst. Research
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Institutional Equities
Parameter
Rating
LPC
Out-performer
CDH
Out-performer
Target price
(Upside %)
INR585 (22%) INR912 (20%)
Recent
developments
1)LaunchofgUltramER(Marketsizeof
USD130mn, OrthoPain),2)Marketingagreement
withSanofiforCNS
productsinPhilippines.
1) USFDA warning letter tothe Mexican unit for
manufacturing violation.2) Zydus Cadila acquires
German company, Bremer
Pharma GmbH. 3) Zydusplans to buy US drug cos
for USD60 mn
Financial
forecasts
EarningsCAGRof23%
overFY11-13
EarningsCAGRof32%over
FY11-13
Share PriceOutperform VsHC Sector (1yr)
36% 1% 21% 31%
Positive
catalysts
1)Robustdomesticsales
growth.2)LaunchofnewOCproductstoprovide
growthtraction.3)Japantoprovidehugeearnings
opportunity.
BayerandZydusCadila
joinhandstosetupanewpharmaceuticalsJoint
VentureinIndia
DRRD
Out-performer
INR1,864 (26%)
1)Pfizer(PFE)andDRRDsettlepatentsuitover
Lipitor.2)ReceivedapprovaltolaunchgLipitor
(Atorvastatin)intheUS.3)
DRRD sAllegrastartsretailinginUS.
EarningsCAGRof36%
overFY11-13
1)LaunchofFondaparinux
intheUSwith180dayexclusivity. 2)Agreement
withFujiFilmstosetfootholdintheJapanesemarket.
SUNP
Out-performer
INR558 (21%)
1)ReceivedtentativeUSFDAapprovalfor
gPlavix, 2)ReceivedUSFDAapprovalfor
gUroxatralER with180
daymarketingexclusivity
EarningsCAGRof32%
overFY11-13
1)Robustdomesticsales
growth.2)StrongproductpipelineintheUSto
capitalizeonthegenericopportunity.36)Taroto
providegrowthtractionintheUS.
Negative
catalysts
1)Slowgrowthandsharepricingpressureinthe
Germanmarket. 2)Recenttepidperformanceinthe
domesticmarket. 3)
USFDAwarninglettertoDRRD'sMexicanplant
Michiganplantuncertaintyprevails.
1)LowerthanexpectsgrowthintheOCbusinessin
theUS.2)LowerthanexpectAllerNazerrealisation.
USFDAwarninglettertotheMexicanunitfor
manufacturingviolation
Source:Industry,Company,SMC Inst. Research
Exhibit-5: Company Snapshot
Exhibit-4: FY11 Geogrophical breakup of Indian companies
Source:Company,SMC Inst. Research
21%
53%
40%
32%35%
23%
38%41%
0%
10%
20%
30%
40%
50%
60%
Dr reddy Cadila Sun Lupin
Domestic US
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Exhibit-6: Global peer comparison
Mkt Cap EV EBITDA (USD mn) EV/EBITDA EPS PE
(USD bn) (USD bn)(USD bn) EBITDA EPS
Company FY 11 FY 12 FY 13 CAGR FY 11 FY 12 FY 13 FY 11 FY 12 FY 13 CAGR FY 11 FY 12 FY 13
Indian front-line generics
Sun* 10.710.0437.8581.6643.721%18x18x 16x 0.4 0.6 0.628%20x19x17x
DrReddy's* 5.2 6.6280.7375.6498.633%21x16x 12x 1.1 1.5 2.036%32x21x16x
Cipla 5.0 5.9300.3340.8403.816%18x15x 13x 0.3 0.3 0.415%23x20x17x
Ranbaxy 4.4 5.9341.2466.4387.37%14x 10x 12x 0.6 0.7 0.68%19x15x16x
LPC* 4.4 4.4264.7343.1403.223%8x 14x 12x 0.4 0.5 0.623%22x19x16x
Median 21% 18x 15x 12x Median 23% 22x 19x 16x
Mean 20% 16x 15x 13x Mean 22% 23x 19x 16x
Mid-cap Indian generics
Cadila* 3.6 3.8228.0245.5294.314%9x 16x 13x 0.9 0.2 0.5(28%) 23x22x18x
Glenmark* 1.8 2.2131.6193.8238.835%16x 12x 10x 0.4 0.4 0.521%26x16x13x
Aurobindo 0.8 1.8209.9205.5244.68%7x 6x 5x 0.4 0.4 0.58%7x 7x 6x
Strides 0.4 1.0 99.4 119.3156.125%8x 7x NA 0.7 1.0 1.232%9x 6x 5x
Median 19% 9x 9x 10x Median 14% 16x 12x 9x
Mean 20 10x 10x 10x Mean 8% 16x 13x 10x
Indian CRAMS
Divi's 2.0 1.9 97.9 137.8172.733%20x 14x 11x 0.6 0.8 1.030%26x19x15x
Biocon* 1.4 1.5139.9128.2159.67%11x 13x 10x 0.4 0.4 0.513%19x18x15x
Jubilant 0.7 1.2146.7152.8183.312%10x 9x 8x 0.4 0.4 0.510%12x12x9x
Dishman 0.1 0.4 34.6 46.154.826%9x 6x 5x 0.2 0.2 0.314%7x 7x 5x
Median 19% 10x 11x 9x Median 13% 16x 15x 12x
Mean 19% 12x 10x 9x Mean 16% 16x 14x 11x
US generics
Mylan 8.315.71,686.71,922.42,038.310%8x 7x 7x 2.0 2.3 2.512%10x 8x 8x
Hospira 6.710.51,083.01,161.41,169.24%7x 7x 7x 3.9 4.2 4.710%10x10x9x
Watson 8.810.31,100.61,357.21,470.016%9x 7x 7x 4.4 5.6 6.218%15x12x11x
Impax 1.2 1.1103.5135.0175.030%8x 6x 5x 0.9 1.2 1.529%20x15x12x
Par 1.0 0.9202.6207.6215.83%3x 3x 3x 3.3 3.3 3.64%8x 8x 8x
Median 10% 8x 7x 7x Median 12% 10x 10x 9x
Mean 13% 7x 6x 6x Mean 15% 13x 11x 9x
GLobal generics
Teva 35.750.05,919.66,974.27,569.013%N/A N/A N/A 5.0 5.8 6.211%8x 7x 6x
Aspen 5.1 6.4500.6624.3694.318%11x 9x 8x 0.7 0.8 1.016%17x14x12x
Richter 2.9 3.7366.2389.8439.09%8x 7x 7x NA NA NANA13x13x12x
Hikma 1.7 2.7171.9223.9247.420%12x 9x 8x 0.5 0.7 0.829%18x13x11x
Stada 1.8 3.6458.2519.2561.411%7x 6x 5x 3.3 3.8 4.314%9x 8x 7x
Median 13% 9x 8x 7x Median 15% 13x 13x 11x
Mean 14% 9x 8x 7x Mean 17% 13x 11x 10x
Japanese generics
Sawai 1.6 1.5201.7247.0280.618%8x 7x 6x 5.6 7.2 8.523%17x14x12x
Nichi-iko 1.1 1.1165.3192.9213.514%7x 6x 5x 1.5 1.9 2.426%18x14x11x
Towa 0.8 0.8134.9164.0187.218%5x 5x 4x 4.1 4.3 4.43%10x10x10x
Nippon 0.2 0.2 NA NA NA NANANA NA 0.2 0.3 0.4NA22x12x10x
Median 18% 7x 6x 5x Median 23% 18x 13x 11x
Mean 16% 7x 6x 5x Mean 17% 17x 13x 11x
Japanese Formulation
Takeda 38.127.26,265.46,651.25,410.1-7%4x 4x 5x 4.6 4.8 3.6(12%) 10x10x13x
Astellas 17.315.12,161.72,571.42,651.511%7x 6x 6x 2.2 2.5 2.813%16x15x13x
Daiichi 14.213.22,167.42,064.42,413.66%6x 7x 6x 1.3 1.1 1.44%15x18x15x
Median 6% 6x 6x 6x Median 4% 15x 15x 13x
Mean 3% 6x 6x 6x Mean 2% 14x 14x 14xSpecialty pharma
Allergan 24.024.91,826.52,060.92,291.012%13x11x 10x 3.6 4.2 4.916%21x18x
Forest 8.9 8.51,565.11,382.7470.0-45%4x 5x 14x 4.4 3.7 1.3(46%) 7x 9x26x
Cephalon 6.3 6.41,161.5778.3682.2-23%6x 8x 9x 8.1 5.1 4.2(28%) 10x16x19x
United 2.5 2.8320.0391.9489.324%7x 5x 4x 5.0 5.6 6.817%9x 8x 6x
King NA 2.1351.2386.0NA NA9x 8x NA 0.7 0.9 NANANANANA
Median (6%) 7x 8x 10x Median (6%) 9x 12x 18x
Mean (8%) 8x 8x 10x Mean (11%) 12x 13x 17x
Big Pharma
Pfizer 142.3178.731,309.731,257.231,409.30%5x 5x 5x 2.3 2.3 2.43%8x 8x 8x
Johnson 174.3173.520,439.322,324.623,671.88%8x 7x 7x 5.0 5.3 5.77%13x12x
Novartis 149.0170.318,250.218,603.718,536.61%9x 9x 9x 5.7 5.8 6.02%10x9x 9
Merck 98.6115.618,764.718,874.717,682.0-3%6x 6x 6x 3.7 3.9 3.92%9x 8x 8x
GlaxoSmithKline 103.764.417,114.017,328.0NA NA0x 0x NA 3.2 3.5 NANA13x12xN
Sanofi 86.862.420,193.018,301.0NA NA0x 0x NA 4.7 4.2 4.5NA7x 8x 7x
Abbott 78.691.311,260.212,053.212,878.37%8x 7x 7x 4.6 5.0 5.37%11x10x10
Novo 57.756.44,385.84,848.55,419.011%13x 11x 10x 5.3 6.0 6.914%19x17x1
AstraZeneca 58.267.614,836.013,030.112,635.4-8%4x 4x 5x 7.3 6.2 6.2(8%) 6x 7x 7xBristol-Myers 50.246.97,232.35,592.75,067.0-16%7x 9x 9x 2.3 2.0 2.0(6%) 13x14x1
Eli 41.743.87,458.76,548.77,014.8-3%6x 6x 6x 4.3 3.7 4.0(3%) 8x10x9x
Median 0% 6x 6x 7x Median 2% 10x 10x 9x
Mean (0%) 6x 6x 7x Mean 2% 10x 10x 10x
*SMC Inst. Research estimate Source: Bloomberg
9
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US generic attractiveness dipping out
@Lower patent expiry opportunity to shrink US opportunity by ~48% post FY12
@US generic market turning a volume play with lower margin, penetration levels are above 80%
and negative generic inflation
@Higher para-IV approval and better than expected US generic market growth act as a potential
risk to our estimates
We ring the alarm bell foreseeing the challenges emerging on the Indian pharmaceutical industry post
2015 on the back of sharp drop in patent expiries in the US. The Indian pharmaceutical industry is been
bullish for long on the USD70bn US patent expiry (generic opportunity of ~USD14-20bn) overlookingthe stiff downfall thereafter. We expect the patent expiry opportunity to fall ~48% over 2012-14 and
85% post 2015 (2016-20) creating serious challenge for the Indian generic pharmaceutical industry.
48% drop in patent expiry post 2012-14; is it the beginning of the end?
Thegoldeneraofpatentexpiryopportunity(USD70bn)islikelytocometoendpost2015,
2013tobethebeginningoftheendofthisopportunityonthebackofa~74%dropinpa
opportunityover2012.AspertheMedcoHealthSolutions,Inc.(2009)data,majority
brandeddrugpatentsareset toexpirebetween2011-15Ethusshrinkingthemarketableopport
genericdrugsintheUSfromUSD7-14bnover2011-15toUSD1-2bnover2016-20(assumingprices).Weseeasharpdropof~85%inthepatentexpiryopportunityforthegenericplayersi
2016-20E(USD10.7bn)fromUSD71bnover2011-15E.
Exhibit-7: Sharp drop in the US patent expiry opportunity
Source: Medco, SMC Inst. Research
4.0
6.24.3
9.7
4.0
6.07.0
8.5
13.0
26.5
6.9
13.8
9.7
2.6 3.2 2.51.6
0.8
0
5
10
15
20
25
30
2003 04 05 06 07 2008 09 10 11 12 13 14 2015 16 17 18 19 2020
USDbn
~85% fall in overall patent
expiry opportunity
~55% fall in patent
expiry opportunity
10
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Street over estimating patent expiry opportunity; generic opportunity to increase by
mere USD1.6bn over 2010-15
According to our analysis, we believe the street has been over estimating patent expiry opportunity in the US
over 2010-15. Branded drugs worth USD70bn is likely to face patent expiry over 2010-15 only to add USD1.6-
4bn to the US generic (base) market after ~95-98% price erosion post expiry. We see this opportunity to be
very miniscule (10-20% addition over 2011-15) in order of addition to the USD31bn US generic market.
Exhibit-8: Patent expiry of USD70bn to add only 10-20% generic market in the US
Source: Medco, SMC Inst. Research
We expect slower CAGR of 7% for generic market in the US over FY10-20
Our trend analysis of the generic market in the US over the past 10 years suggests that as the level of
penetration increased there has been sharp drop in the growth rate for generic pharma market. The high
growth during 2000-05 was mainly attributed to the lower penetration of generics coupled with expiry of
blockbuster drugs during 2002-2006. We expect 7% CAGR (2011-20) for generic pharma market in the US as
against 12% in the previous decade.
Exhibit-9: Generic growth to slow over 2010-20
Source: IMS Health Dec 2009, SMC Inst. Research
Total pharma mkt size Generic mkt size
Generic mkt growth (%) (RHS) Pharma mkt growth (%) (RHS)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0
50
100
150
200
250
300
350
400
450500
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
USDb
n
0
20
40
60
80
100
120
USDBn
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
11
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US generic market to become volume play; margin pressure to remain
Generic penetration in the US is at its peak (80-85%) and we estimate stiff erosion of generic drug prices owing
to sharp increase in competition thus resulting in lower margins. We expect the US generic market to become a
volume play from the high margin play for the generic pharma players, (exception being the Para IV
opportunity). We anticipate slower generic prescription sales growth in the US, at CAGR of 7% over 2010-20
vs. 12% over 2000-09, putting pressure on the margins of the generic drug manufacturers.
Exhibit-10: Generic pharma market penetration in the US
Source: SDI, SMC Inst. Research
1%
9%
20%23%
33%
45%
55%
72%78%
85%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Generic drug inflation at the lowest; margins pressure to remain
The generic drug inflation in the US is at the lowest (-1.1% in 2009) since 2004 indicating gradual decline in
the generic drug prices. It is expected that generic drug prices to further decline on the back of large number of
drugs hitting the market post the patent expiry 2013 onwards.
We expect generic pharma market in the US to be more competitive with more players entering the market
resulting in sharp fall in drug prices and thin margins.
Exhibit-11: Generic drug inflation at the lowest
Source: Medco, Caremark, SMC Inst. Research
6.76.3
6.97.4
8.3
9.2
0.5 0.4 0.2 0.1
(0.4) (1.1)
5.24.7 4.9 4.9
5.3 5.5
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
2004 2005 2006 2007 2008 2009
Branded Generic Total
(%)
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History repeats: expect contribution from US to reduce ~40% post FY13
We dig in to the history to find a similar situation of high patent expiry in the US. We analyze the performanceof various companies (mainly US based generic companies) over 2004-08 when USD35bn of patent expiry
opportunity went off in the US.
Our analysis showed profitability of these generic companies depicted sharp rise during the high patent expiry
period but contracted severely post that. Revenue growth of Teva, Mylan and Watson (the three companies we
used in our analysis) plunged significantly in 2006-08 on the back shrinking patent opportunity post 2006.
Mylan recorded a revenue de-growth of 11% in 2007 on account of sharp drop in patent expiry and high base
effect of 2006 (refer to Exhibit7). Mylan's high revenue growth of 49% in 2007 was mainly attributed to
Matrix lab acquisition (2007 sales of USD1.6bn), adjusting to the acquisition the growth is only 11%. Similar
trend of decline in revenue and margins has been observed for Teva and Watson over 2007-08.
We expect a similar situation happening for the generic pharma companies (more specifically the Indianpharma companies). We anticipate US revenues to decline by ~40% over 2015-20 mainly because of limited
growth coupled with high base of 2012-15.
Exhibit-12: Revenue and margin contraction of US generic companies post 2006
Source: Company, SMC Inst. Research
4%
83%
0%
11%
20% 19% 16% 15%
-10%
10%
30%
50%
70%
90%
0
1,000
2,000
3,000
4,000
5,000
2005 2006 2007 2008
Teva
US Revenue Rev Growth (%) (LHS)
EBITDA Margin (%) (LHS)
USDm
n
0%-2%
-11%
49%
0% 0% 0%0%
-30%
-10%
10%
30%
50%
70%
90%
0
500
1,000
1,500
2,000
2005 2006 2007 2008
Mylan
US Revenue Rev Growth (%) (LHS)
EBITDA Margin (%) (LHS)
USDmn
-1%
22%
-1%-2%
15%
7%
10%
0%
-10%
10%
30%
50%
70%
90%
0
500
1,000
1,500
2,000
2005 2006 2007 2008
WatsonUS Revenue Rev Growth (%) (LHS)
EBITDA Margin (%) (LHS)
USDmn
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Exhibit-13: Scarcity of blockbuster drug expiry post 2015
Patent Expiry Name of drug US Sales in 2009 (USD mn)
2010 Nov Aricept 1,465
2011 Jun Levaquin 1,633
2011 Oct Zyprexa 1,968
2011 Nov Lipitor 6,054
2012 Mar Lexapr 2,557
2012 Mar Seroquel 2,557
2012 Mar Gabitril 3,483
2012 Jul Tricor 1,350
2012 Jul Singulair 3,466
2012 Aug Actos 2,783
2012 Aug Diovan 1,4702012 Aug Diova 1,376
2012 Oct Viagra 1,001
2012 Nov Lidoderm 1,065
2013 Nov AcipHex 1,160
2013 Dec Cymbalta 2,621
2014 May Celebrex 1,581
2014 Aug ProAir 1,074
2015 Oct Abilify 3,583 Source:Medco,SMC Inst. Research
Patent Expiry Name of drug US Sales in 2009 (USD mn)
2016 Jul Crestor 2,626
2017 Oct Zetia 1,111
2017 Oct Vytorin 1,233
2018 Jul Spiriva 1,436
2018 Oct Nasonex 1,098
2019 Jul Lyrica 1,566
Scarcity of major blockbuster drug expiry post 2015
We see drying up of blockbuster drugs (sales >USD1bn) post 2015. Apart from AstraZeneca's anti cholesteroldrug Crestor (rosuvastatin calcium), patent expiry in Q3FY16, there is no drug with sales more than USD2bn
expiring between 2016-20 vis--vis 10 such blockbuster drug over 2011-15, sharply reducing the
opportunity of generic pharma companies in the US market.
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Indian generic drug makers, according to us will emerge as likely winners because of their diverse
geographical presence and strategic alliances. LPC (currently 41% revenue from the US) will compensate the
patent expiry opportunity loss post 2015 in the US through its strong domestic presence (currently 35% of
revenue) and concentrating in Japan and other key markets through its aggressive organic and inorganic
expansion plans. DRRD (currently 35% of revenue from US) is likely to gain for the GSK marketing agreement
in the emerging markets and through its plans to enter in to other key markets including Japan.
SUNP according to us is likely to be runners-up predominantly on account of their US dependency. SUNP is
expected to have ~40% US dependency (including Taro) in FY12E and we expect the US contribution to come
down to 36% by FY14E on the back of strong domestic and emerging market sales.
Our assessment
We believe the loss of patent expiry opportunity in the US will hit the generic pharma industry hard post 2015.
Though there will be a flood of generic products in US market by then, we expect a cut-throat price war
environment to prevail significantly reducing the profit margin. With lower new drug approval trend in the US
we expect pharma companies will have to revisit their growth strategy in the wake of lowering opportunities.
Exhibit-14: Decline in new product approval to reduce generic opportunity in the long run
Source: USFDA, SMC Inst. Research
0
10
20
30
40
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
USFDA New drug approval
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Emerging markets to drive long term growth@Emerging markets to generate ~40% of global healthcare revenue by 2015
@Expect domestic market (India) CAGR of ~15/18% over FY10-15 to fuel growth for Indian
pharma companies
@Japan, APAC, CIS and LatAm to fuel future growth for Indian pharma companies
We believe more focus on domestic and emerging markets will help drive growth for the Indian
pharmaceutical companies over medium to long term. Japan being the second biggest pharma market
(~USD80bn) after the USA, has
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Exhibit-16: Bifurcation of pharma emerging countries
Tiers Countries 2009 GDP based on Incremental PharmaPPP valuation (tn USD) Market Growth from
2009-13 (bn USD)
Tier1 China 9 40
Tier2 Brazil 2-4 5-15
Russia
India
Tier3 Venezuela Thailand
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India- strong demand growth
The rise in income level coupled with rise in chronic diseases in the tier-II/III cities is likely to lead 50% rise in
healthcare spending by FY15E. We forecast the Indian pharma market to maintain its current annual growth
trend of ~16% till 2015. We expect medical infrastructure in India to register huge changes with over USD150-
200bn being invested over 2015 in creating and upgrading medical facilities.
Exhibit-17: Indian pharma market likely to triple by 2015
Source: McKinsey, SMC Inst. research
6.3
11.8
20.9
27.3
35.2
0
10
20
30
40
50
CAGR 10% (Bear
case)
CAGR 16% (Base
case)
CAGR 20% (Bull
case)
2005 2009 2015E
USD
bn
Rapid growth in chronic disease to fuel growth of domestic pharma market
As a result of rapid urbanization, the Indian tier-II/III cities have witnessed a sharp rise in chronic/lifestyle ailments like
obesity, diabetes, cardio vascular ailments and oncology. The healthcare spend on these lifestyle-related diseases is
expected at 50% CAGR by 2015. This would eventually result in huge healthcare opportunity in the tier-II/III cities across
India.
Exhibit-18: Rapid rise in several chronic diseases to prevail
Source:WHO,Industry,SMCInst.rese
1.9 2.63.6
5.12.0 3.0
4.56.8
8.9
14.2
22.8
36.5
0
5
10
15
20
25
30
3540
2008 2009 2012E 2015E
INRbn
Cardic Diabetic Oncology
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Healthcare spends to increase growth
With rise in chronic diseases, the per capita healthcare expenditure as a percentage of per capita income in
tier-II/III cities is likely to increase from 7% in 2008 to 14% by 2020. However, per capita healthcare spending
as a percentage of per capita income in India is much lower at 7% vs. 10% of the world average). Rise in chronic
diseases and healthcare spending in tier-II/III cities coupled with the metro/tier I cities, Indian healthcare
market is expected at 50% CAGR by 2015E. Penetration of health insurance would also boost healthcare
spending. Currently, health insurance accounts for less than 8% of the overall health expense which is likely to
increase to 15% by 2015.
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Down penetration of health insurance to offer additional opportunities
Healthinsurancehasbecomeoneofthefastestgrowingsegmentsinthenon-lifeinsuranc
higherinsurancepenetrationwouldresultinhigherpropensitytowardshealthcarespent.I
years,healthinsurancepremiumhasgrownten-foldfromINR7bnin2001-02toINR66
introductionofcashlesshealthcarefacilitybyhealthinsuranceprovidershashelpedincre
towardshospitalization.
Source:IRDA,E&Y,SMCInst.resea
20%22%25%26%26%
30%32%
44%
20%
30%
40%
50%
60%
70%
0
1,000
2,000
3,000
4,000
5,000
6,000
20042005200620072008200920102015
Healthinsurancepremium(INRmn) Growth(%)(LHS) %ofTierII/IIIcities(LH
Exhibit-21: Increase in health insurence to help domestic pharma growth
Source:IRDA,E&Y,Industry,SMCInst.Source:IRDA,E&Y,Industry,SMCInst.
Exhibit-19: Per capita income in India is much lower
at 7% vs. 10% of the world
10%
12%
14%
16%
17%
0%
5%
10%
15%
20%
0%
5%
10%
15%
20%
25%
2008 2010E 2012E 2015E 2020EAllIndiaEM(exIndia) USA WorldAverage
7
1618
25
13
India2008India2020EChina2020EOECD2020EEM(exInd
andChina)
2020E
Exhibit-20: Percentage of average household
spending on healthcare
Source:IRDA,E&Y,Industry,SMCInst.research
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Japan- Kikai no tochi (Land of opportunities)
Japan is the second largest pharma market in the world after the US with market size of ~USD80bn. Mostly
driven by formulation drugs, generics in Japan accounts for less than ~10% in value terms. We expect Japan to
drive the next phase of growth for the Indian generic manufacturers (previously it was US led). We expect the
Japanese generic industry to reach USD10-15bn by 2015 at a CAGR 9-12%.
Generic, the only option for ageing Japan
Japan has the largest population of old aged people (above 60 years age) representing ~22% of total
population. As per the Japanese government estimates, by 2050 the senior citizen population will account for
~50% of the total population. Japan currently spend ~7.5% of its entire GDP on healthcare and is expected to
reach 15% by 2020 thus putting tremendous pressure on the public healthcare cost. To get relieved of this
burden, Japan's government is promoting the use of generic drugs and has set a target of 30% market share ofgenerics in prescription by 2012 from current ~18-20%.
Exhibit-22: Healthcare cost as percent of GDP (2009)
Source: OECD, Mckinsey, SMC Inst. Research
16.0
11.210.5
8.7 8.5 8.5
7.5 6.55.9
7.0
0
4
8
12
16
20
USA
France
Germany
UK
Australia
Norway
Japan
Korea
Mexico
India
%o
fGDP
4.7%
6.6%
10.1% 10.6%
13.8%
0%
4%
8%
12%
16%
0
300
600
900
1,200
1990 2005 2020E 2025E 2035E
Medical expense (USD bn) Medical expenditure as % of GDP (LHS)
Exhibit-23:Japan's healthcare cost to rise three fold
Source: OECD, Mckinsey, SMC Inst. Research
Low generic penetration to provide greater opportunity
Japan has one of the world's lowest consumption rates for generic drugs. Japanese generic drugs contribute
only 18-20% of prescription sales and ~6% in value terms. Although, Japanese pharmaceutical market
contributed ~10% of global sales at ~USD900bn, generics had sales of USD5-7bn or accounted for 6-8% of the
Japanese pharmaceutical market. We see high demand growth for generics drugs in Japan backed by
government's initiative to increase generic acceptability in order to reduce public healthcare cost.
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Exhibit-24:Japan has one of the lowest generic
penetrations among the developed countries
Source: OECD, Japan Ministry of health, SMC Inst. Research
Exhibit-25:Japan's healthcare cost to rise three fold
28%23% 20%
16% 14%
6%
15%
71%75%
89%
52%
41%
20%
60%
-10%
10%
30%
50%
70%
90%
UK Germany USA France Spain Japan Global
Value (sales) Volume (prescription)
0%
5%
10%
15%
20%
25%
Value Volume
In 2003, Japan announced incentive for sellinggeneric products to doctors and pharmacists
Japan's healthcare expenses to reach JPY 95tn by 2035 having deficit of 47%
According to McKinsey report, Japan's healthcare budget is expected to increase from 6.7% in 2005 to 13.5%
of the GDP by 2035. We expect Japan's healthcare spend to rise at CAGR 3.6% to JPY 63tn by 2020 and JPY
95tn by 2035 while the conventional sources of funds (copayments, insurance premiums, and government
subsidies) are expected to generate revenues of JPY 43tn by 2020 and JPY 50tn by 2035. Hence, in our view,
the snowballing gap between the healthcare expenses and the NHI (National Healthcare Insurance) revenues
reinforce the need to stress on the generic drugs in order to reduce the deficit.
Exhibit-26:Japan's health care deficit to
reach 47% by FY35break-up
Source: McKensey, SMC Inst. Research
Fig27: Japan's health insurance industry
27%
32%
47%
0%
10%
20%
30%
40%
50%
0
20
40
60
80
100
120
140
160
2005 2020 2035
JPYtn
Expenditure Revenue Deficit (%)
National healthinsurance, 40%
Society health
insurance (Union
managed), 24%
Government
(managed health
insurance), 28%
Other mutual benefit
insurance, 8%
Source: OECD, Japan Ministry of health, SMC Inst. Research
Source: McKensey, SMC Inst. Research
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China- Yo rn (The Medicine Man)
China with a GDP (nominal) of USD ~6.5tn and population of 1.4bn is poised to be the second largest
pharmaceutical market the world after the US overtaking Japan and France by 2015. An incremental
government funding of USD 125bn targeting substantial improvement to the nation's healthcare
infrastructure will according to us double the size of China's pharmaceutical market by 2015. We forecast
China pharmaceutical market CAGR 18-20% to touch USD 80bn by 2015. We believe China to be the next
industry leader in the medium to long term as US attractiveness reduces post the sharp fall of the patent cliff
post 2015.
Exhibit-28: Scarcity of blockbuster drug expiry post 2015
2003 2008 2013 2020
United States United States United States United States
Japan Japan Japan China
Germany France China Japan
France Germany Germany Brazil
Italy China France Germany
United Kingdom Italy Italy France
Spain Spain Spain Russia
Canada United Kingdom Brazil Italy
Brazil Canada Canada India
China Brazil United Kingdom South Korea
Mexico Russia Russia United Kingdom
Australia Mexico India Canada
India India Venezuela Spain
Netherlands Australia South Korea Venezuela
South Korea Turkey Mexico Mexico
Belgium South Korea Australia Australia
Poland Greece Greece Greece
Portugal Netherlands Turkey Turkey
Greece Belgium Poland Poland
Switzerland Poland Belgium Belgium
Source:Mckinsey,SMCInst.Researc
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We believe Indian generic players have a better opportunity in China than their MNC counterparts because of
low cost model and proven expertise in the US and other pharma-emerging markets.
Current situation
Chinese healthcare system is marked by: 1) growing demand of superior drugs and 2) wide disparities
between the urban and rural healthcare system.
To regulate and restructure the local pharmaceutical industry and to cut the rising drug cost, Government of
China (GoC) has implemented NEDL (National Essential Drug List) and NERDL (National Essential
Reimbursement Drug List). Currently the medicines listed under NEDL and also those drugs having monopoly
in the market are subject to price control by the Government.
Source: BMI, SMC Inst. Research
Exhibit-30: China Pharmaceutical industry break-up
Generics,
22%
Patented
Drugs,14%OTC, 64%
USD34bn
0
20
40
60
80
100
120
2005200620072008200920102011201220132014
Branded Generic OTCSource:Industry,SMCInst.Resear
Exhibit-29: Generic drugs account to ~63% of the total Chinese pharmaceutical market
Generic advantage
Generic drugs are the back bone of the Chinese pharmaceutical industry. Generic drugs account to ~63% (USD29bn) of the total pharmaceutical market and rising at a CAGR of 13% over 2014.
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Exhibit-31: Overview of drug distribution in China
Now is the time to act for Indian pharma players
We believe investment in to the Chinese pharmaceutical sector is the need of the hour for the global generic
drug makers (including Indian majors). Chinese pharmaceutical industry witnessed a sea change in the recent
past post the government regulations. Most of the global majors have already made a footing in to the Chinese
market mainly with their off-patent drugs. We believe now is the time for the Indian generic players to tap in to
this opportunity in to one of the fastest growing pharma market in the world. According to us Indian
companies should penetrate the Chinese market through JV with the local players instead of going solo as it
former strategy will increase marketing strength and will help reduce cost drastically.
Pharmaceutical
companiesWholesalers
Hospitals 80% Pharmacies 20%
Patient
Exhibit-32: Global majors in China
1Q 2011 Sales Growth (%) Market
(USD mn) share (%)
Pfizer 835 31 8.32
AstraZaneca 749 32 7.47
Bayer 663 20 6.61
Sanofi 620 31 5.59
Roche 531 31 5.29
Merck 443 15 4.42
Novartis 440 25 4.39
GSK 378 30 3.77
Novo Nordisk 359 30 3.58
J&J 288 30 2.87
Exhibit-33: Sample M&A transections in China in 2010
Buyer SellerDeal size(USD mn)
GSK Nanjin MeiruiPharmaceuticalcompany
70
Sanofi Minsheng Pharma NA
Nycomed Guangdong TianpuPharma
214
Sanofi BMP 520
Shanghai
Pharma
China HealthSystem Ltd.
339
Shanghai
Pharma
Xinya pharma 217
Source:BMI,Deloitte,SMCInst.R
Source: KPMG, BMI, SMC Inst. ResearchSource:KPMG,BMI,SMCInst.Research
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Russia- na tverdoi pochve (on solid ground)
Russia, according to us is an important market for global pharmaceutical players with huge growth potential.
Russian pharmaceutical market is estimated at about USD9bn as 2010 and is expected to reach USD22bn by
2015 at CAGR15%. The country has a per capita pharmaceutical spend of about USD130 which is even lower
than that of Romania (USD200) suggesting tremendous growth potential of pharmaceutical industry in
Russia.
Current environmentImportantdevelopmentindrugregulationcameintoeffectin2009withtheacceptanceoDrugList(EDL),consistingofdrugsrecommendedbyWHOandanassessmentsystembasedond
andexclusioncriteria.From2010,drugregistrationandpricedeclarationarerequiredf
includedontheEDL.
Currentlybrandedproductsoccupytwo-thirdsofthepharmaceuticalmarket.Toimprove
production, thegovernmenthasdefinedalistofstrategically-importantmedications
manufacturedinRussia,includingexpensivedrugsfortreatmentofoncologyandcardiovasc
Thegovernmenthassetagoalfordomesticallymanufacturedpharmaceuticalstoreacha50%of
by2020(currentlyaround20%).Thiswillbestimulatedthroughgovernmentpurchasing
Exhibit-34: Russian pharma market to grow 15% over 2010-12
Source: IQS, SMC Inst. Research
16%18%
31%29%
14%16%
21%
0%
5%
10%
15%
20%
25%
30%
35%
0
10
20
30
40
200620072008200920102011E2012E
PharmaMarketSize(USDbn) Growth(%)
Exhibit-35: Ratio of Original & Generic in real term is 1:2; while opposite in value term (2:1)
Source: Pharma Expert, SMC Inst. Research
8773 65
1327 35
0
20
40
60
80
100
120
HospitalmarketBeneficiarydrugcoverageOut-of-pockmarket
(%)
Inrealterm
Generics Originaldrugs
43
2236
57
7864
Hospitalmarket Beneficiarydrug
coverage
Out-of-pockmarket
Invalueterm
Generics Originaldrugs
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State-owned segment
ThissegmentincludessalesofmedicinesthroughpharmaciesundertheFRPprogram,aswell
variouspreventionandtreatmentfacilitiesandclinicalchains.Thesegmentaccountsformarketvalue.
State-owned
sector, 70%
Commercial
sector, 30%
Source: Industry, SMC Inst. Research
Market segmentationRussian pharmaceutical market has come out of the domination of the state owned companies and
pharmacies. Currently private sector accounts for nearly 70% of the market value.
Commercial segmentThis segment includes retail drug sales and 'Para-Pharmaceuticals' (health and beauty products and other
non-medicinal products) but excludes medical drug sales under the Federal Reimbursement program (FRP).
The segment forms about 70 % of the market by value.
TOP5 ATC groups of generics (in value terms) TOP5 ATC groups of generics (in Real terms)
Cardiovascular system 20.73 Cardiovascular system 20.86
General anti-infectives systemic 15.88 General anti-infectives systemic 19.00
Alimentary tract and metabolism 15.31 Alimentary tract and metabolism 12.14
Musculo-skeletal system 11.25 Musculo-skeletal system 12.03
Respiratory system 10.71 Respiratory system 11.99
Total (%) 73.88 Total (%) 76.02
Source: Pharma Expert, SMC Inst. Research
Exhibit-36: Russian pharma market segment
Exhibit-37: Top 5 therapeutic segment contribution (in percentage)
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Latin America - creciendo fuerte (growing strong)
The Latin American pharmaceutical market is among the fastest growing across the world. The top eight
pharmaceutical markets in Latin American were worth more than USD30 bn in 2009. Although individual
markets are growing at different rates, the entire Latin American market is expected to expand at CAGR of 10-
12% over 2010-15. One of the major drivers of growth for the pharmaceutical markets is national
governments stepped up efforts to increase access to healthcare for its citizens. The Latin American markets,
which are already growing at double-digit rates, will receive a huge boost from the increasing use of generic
pharmaceuticals.
Exhibit-38: Latin America pharma market growth
Source: BMI, SMC Inst. Research
12.9%
9.5%
4.6% 4.3%7.2%
9.2%
27.6%
13.7%
9.7%
7.4%8.8%
7.4%8.8%
26.7%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Argentina Brazil Chile Columbia Mexico Peru Venezuela
CAGR 2003-07 CAGR 2007-12
Brazil
Brazil being one of the largest emerging into a world power and is already the largest market in Latin America,
representing 38% of the market compared with 21% for Mexico, 16% for Venezuela, and 9% for Argentina.
Brazil's healthcare spending represents almost 8% of GDP and of its population of nearly 200 million people
(20% have private insurance) make use of both private and public-health services with demand for
pharmaceutical products is growing 10% per year.
Brazilian, 88%
Swiss, 5.1%
Indian, 3.6%
German, 1.8%US, 1.1%
Canadian, 0.3%
Exhibit-39: Indian generic players command ~4% market share in Brazil
Source:Industry,SMCInst.Resear
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Brazil, according to Osec, a Swiss Bank, houses are 270 private and 20 state-owned pharmaceutical
laboratories in business. This growing local business has been driven by the government's industrial policy,
enhanced regulations, and the introduction of generics. The government supports investments throughspecial credits and encourages innovation through subsidies and strong IP protection. A number of global
pharmaceutical companies are using Brazil as a production platform, and there are small, but growing R&D
opportunities in the country.
Mexico
Mexico is the second-largest pharmaceutical market in Latin America after Brazil. Mexico after signing the
North American Free Trade (NAFTA) has opened the door to trade with large pharmaceutical markets.
Enforcement of patent protection laws has also increased foreign investment. It also enables foreign
manufacturers to register their patents with the Mexican regulatory authorities and manufacture their
products in Mexico.
Branded products are purchased primarily by population with higher income, while generics are bought by
population with lower income. Expiry of patents of blockbuster products is also expected to spark an increase
in the growth of generics. Mexico is one of the most attractive destinations for foreign manufacturers,
however, the research and development sector has not matured and so the majority of foreign investment in
Mexico is targeted at its manufacturing industry.
Argentina
Argentina's pharmaceutical market is dominated by local players accounting for ~60% of the market value.
Despite the increasing inflation and manufacturing costs, the pharmaceutical industry has managed to keep
the price of its drugs low. The Government in order to increase affordability and to maintain growth gave
discount of approximately 30% was given on 600 drugs. Demand continues to rise significantly in Argentina'spharmaceutical market propelled by the efforts of the government and its commitment to increasing access to
healthcare.
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ValuationsWe expect a re-look in the valuation multiple on the back of changing industry fundamentalsDomestic and emerging market growth would help Indian pharma companies command
premium over its global peers
We Initiate Out-performer on DRRD, LPC, CDH and recommend Out-performer on SUNP.
SoTP methodology
Indian generic pharma companies have always traded at a premium to its global peers on the back of strong
growth and high revenue visibility both in the domestic market and also in the regulated market.
We value the Indian generic players on SOTP basis to assess the various parts of the business. We value the
base business on earnings multiple to capture the relative growth and the product pipeline on NPV based onthe opportunity. We assign premium multiple to the Indian players vis--vis the global players.
-10%
0%
10%
20%
30%
40%
50%
60%
BSETHCIndex DRRDINEquityCDHINEquityLPCINEquity SUNPINEquity
Sep-10Oct-10
Nov-10
Dec-10
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
Mar-11
Feb-11
Jan-11
Exhibit-40: BSE HC vs SUNP, DRRD, LPC and CDH (price performance)
Source:Bloomberg,SMCInst.Researc
Source:Bloomberg,SMCInst.Resear
Exhibit-42: DRRD 1-year fwd P/E
15x
20x
25x
30x
-1500
-1000
-500
0
500
1000
1500
2000
2500
3000
Dec-05
INR
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
PE band chart of all the above companies
10x
15x
20x
25x
Exhibit-41: SUNP 1-year fwd P/E
0
100
200
300
400
500
600
INR
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Source:Bloomberg,SMCInst.Research
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Exhibit-43: LPC 1-year fwd P/E
Source:Bloomberg,SMCInst.Resear
Exhibit-44: CDH 1-year fwd P/E
10x
15x
20x
25x
0
200
400
600
800
1000
1200INR
Apr-06
Oct-06
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Apr-07
Oct-07
12x
15x
20x
25x
0
100
200
300
400
500
600
700INR
Apr-06
O
ct-06
Apr-08
O
ct-08
Apr-09
O
ct-09
Apr-10
O
ct-10
A
pr-11
Apr-07
O
ct-07
Source:Bloomberg,SMCInst.Research
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DRRD Out-performer TP: INR 1864
Target price calculation FY12 FY13
BasebizEPS 69.6 91.8
TargetBasebizP/E(x) 20
TargetPrice(basebusiness) 1,835
Limited competition opportunities (NPV) 29
Total Target Price (INR) 1,864
LPC Out-performer TP: INR 585
Target price calculation FY12 FY13
BasebizEPS 24.7 29.2
TargetBasebizP/E(x) 20Total Target Price (INR) 585
CDH Out-performer TP: INR 912
Target price calculation FY12 FY13
Base biz EPS 37.2 45.6
TargetBasebizP/E(x) 20
Total Target Price (INR) 912
SUNP Out-performer TP: INR 558
Target price calculation FY12 FY13
BasebizEPS 20.5 24.8
TargetBasebizP/E(x) 22
TargetPrice(basebusiness) 546
Limitedcompetitionopportunities(NPV) 12
Total Target Price (INR) 558Source: SMC Inst Research
Source: SMC Inst Research
Source: SMC Inst Research
Source: SMC Inst Research
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Exhibit-45: Peer Comparison table
Mcap Mcap Revenue EBITDA EPS PECompany USD bn INR bn INR bn Margin (%) FY11 FY12E FY13E FY11 FY12E FY13E
Sun* 10.63504.0957.21 34.47 17.525.7 28.720.4 18.6 16.
Drreddy* 5.29250.5474.11 20.84 49.569.6 91.832.3 21.3 16
Cipla 4.84229.5261.30 22.18 12.314.3 17.020.0 16.8 14.7
Ranbaxy 4.31204.2089.61 20.92 35.633.0 29.714.7 16.3 11
Lupin* 4.54215.2157.07 21.14 19.324.7 29.221.8 17.9 16.
Cadila* 3.59170.1744.65 19.89 34.737.3 45.622.8 22.1 18.
Divi's 2.0697.7713.07 38.12 32.437.5 46.919.7 15.7 13.5
Glenmark* 1.8788.4129.49 20.08 16.819.7 24.526.4 16.3 13
Biocon* 1.4166.6523.01 24.60 18.419.4 23.419.5 18.5 15.
Piramal 1.2760.3625.10 4.76 573.719.3 21.318.7 17.0 12.
Aurobindo 0.8037.9843.81 22.05 19.618.6 22.97.0 5.7 5.0
Ipca 0.7535.4618.83 20.20 21.022.7 27.912.4 10.1 9.1
Jubilant 0.7334.5134.33 16.43 14.417.6 22.812.3 9.5 7.2
Strides 0.3717.4916.96 19.26 26.144.1 56.26.8 5.3 NA
Orchid 0.3014.2016.84 20.49 22.220.8 28.49.7 7.1 6.2
Dishman 0.115.12 9.91 16.7 9.9 9.1 11.87.0 5.4 4.3
*SMC Inst Research Estimates Source: Bloomberg
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Key risk to our call
Business risk
Failure of research and development efforts may restrict introduction of new products
Futureresultsofoperationsdependontheabilitytosuccessfullycommercializeproductsinglob
othersegments.FailureinR&Dprocesscouldadverselyaffecttheabilitytocontinuedevelopi
successfulproductsandoverallprofitability.
Increase in competition, and higher than expected fall in prices of generic products
Anyincreaseincompetitioninthelaunchedproductcategorywillresultincutthroatpricewar
marketsharethusadverselyeffectingthemarginandprofitabilityofthecompany.Ourrecommen
adverselyeffectedduetomorethanexpectdropinpricesofdrug(bothbrandedandgeneric)thusnega
impactingourrevenueandearningsestimates.
Regulatory risk
Delay in regulatory approvals and timely launch of products is a key risk to our call
Thesubmissionofanapplicationtoaregulatoryauthoritydoesnotguaranteethatalicensetoma
willbegrantedparticularlyinrespecttotheFTFfilled(having180daysexclusivity)withthe
WaxmanActof1984.Eachauthoritymayimposeitsownrequirementsand/ordelayorrefusetogran
evenwhenaproducthasalreadybeenapprovedinanothercountry.Thetimetakentoobtainapproval
countrybutgenerallytakesfromsixmonthstoseveralyearsfromthedateofapplication.Thisregi
increasesthecosttousofdevelopingnewproductsandincreasestheriskthatwewillnotbeabletosuc
suchnewproducts.
Theregulatoryrequirementsandthepoliciesandopinionsofregulatorsmayattimesbeunclear,
arbitraryduetoabsenceofadequateprecedentsorforotherreasons.Asaresult,thereisincreasedri
compliancewithsuchregulations,whichcouldleadtogovernment-enforcedshutdownsandoth
asthewithholdingordelayofregulatoryapprovalsfornewproducts.
Market risk
Demand slowdown in key markets adversely impact our recommendation
WehaveestimatedPharma-emergingmarketstooutperformthedevelopmarketintermofgrowthont
fadingpatentopportunityintheUSpost2015andstrongregulatoryandpricingenvironmentinot
markets.SlowdownindemandinthekeymarketsparticularlyintheUSandIndiaandthepharma-em
holdsadownsiderisktoourestimateandtoourrecommendation.
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Company Section
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SUN PHARMACEUTICALS INDUSTRIES LTD.
Institutional Equities
Out-performer Shining bright upon the cloudy sky
Shareholding pattern (%)
Promoter group 63.7
FII 18.4
DII 7.2
Others 10.7
Stock price performance
Return (%)1 Mth 6 Mths 1Yr
Absolute (5) 5 15
Relative (5) 18 32
Analyst
Souvik Chatterjee
+91 22 [email protected]
Mitesh Shah
Stock details
Bloomberg code SUNP IN
Shares O/S (mn) 1,030
M Cap (INR mn) 479,988
M Cap (USD mn) 9,711
52 week H/L (INR) 540 / 390
Avg. 6M daily vol 1,038,859
Current Price:
1year Target:
Expected Return:
INR 462
INR 558
+21%
October 03, 2011
India | Pharmaceutical
Company Review
35
Stock chart
Sun Pharma (SUNP) according to us is one of the most aggressive large-cap players in theIndian pharmaceutical space. We believe SUNP, with its strong product pipeline will be ableto monetize on the patent cliff opportunity in the US.
We recommend on SUNP as OUT-PERFORMER, forecasting an earning CAGR of 25%.
Domestic business to drive growth at CAGR 17% over FY11-14SUNP's chronic domestic portfolio in our view would be a key growth driver. The company has beenable to maintain its leadership position in the key therapeutic segments of neurology, cardiology,
ophthalmology, orthopedics and psychiatrists with strong brand recall among doctors. We expect thedomestic segment CAGR of 17% FY11-14 on the back of aggressive product launches in key segmentsand increasing penetration through existing products.
Strong growth across key markets, headwinds in the US to remainSUNP has formidable presence in key global markets like the US and Europe. We expect a CAGR of 52%in the semi-regulated markets for SUNP. We however, expect tepid performance from Sun Pharma (exTaro) and Caraco in the US for FY12 on account of limited near-term Para IV opportunities (Effexor XRlaunch in Q4 FY11 expected to be competitive and no clarity on the generic Gemzar and Taxoterelaunch). Moreover, the USFDA's warning to SUNP Michigan plant will add to the slow US growth.
Taro integration, a long term growth driver for SunWe see Taro as a long-term growth driver for SUNP mainly in the US. Taro compliments SUNPs
portfolio through its presence in key dermatology products (~57% of revenue) and steroids. We expectsignificant growth from Taro in the next 6-8 quarters on account of improvements in execution. Weestimate Taro to provide an incremental revenue growth of CAGR of 12.6% over FY10-13E for SUNP.
Recommend Out-performer; TP INR570At CMP of INR462 SUNP trades at 15.1x FY13E earnings. We recommend Out-performerrecommendation forecasting earnings CAGR of 32% over FY11-13. We expect SUNP to maintainits leadership across key segments in the domestic market. We forecast strong domestic growthto continue, helping the base business (ex Taro) grow by 22.5% (CAGR) over FY10-13E.We value SUNP at 22x FY13 earnings of INR24.8 and adding NPV of limited competitionopportunities of INR 12 to arrive at our target price of INR558 implying a potential upside of21% from the CMP.
Key risk to our recommendation1) Lower than expected growth in the domestic business 2) Delay in regulatory approvals in term ofnew launches and resolution of legal issues, and 3) Lower than expected growth in the key Pharma-emerging markets.
Summary financials
Particulars (INR mn) FY10 FY11 FY12E FY13E CAGR (%) (FY 10-13E)
NetSales(INRmn) 40,075 57,214 88,611 97,398 34.4
EBITDA(INRmn) 13,632 19,700 27,582 30,962 31.4
EPS(INR) 13.0 17.5 27.0 30.5 32.8
EV/EBITDA(x) 25.7 17.8 17.0 14.4 NM
ROE(%) 18.2 23.0 30.1 26.0 NM
PE(x) 36.0 26.7 17.1 15.1 NM
BVpershare 75.6 77.0 102.0 133.1 NM
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Sep-10 Dec-10 Mar-11 Jun-11 Sep-11
SUNP IN Equity NIFTY Index
SUNPIN=462Nifty=5,015
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Financial statements
Profit and loss statements
Particulars FY10 FY11 FY12E FY13E
Incomefromoperations 40,075 57,214 88,611 97,398
Totaloperatingexpenses (26,442) (37,514) (61,029) (66,436)
EBITDA 13,632 19,700 27,582 30,962
Depreciation&Amortization (1,533) (2,041) (2,858) (2,919)
EBIT 12,099 17,659 24,724 28,043
Otherincome 2,048 2,699 4,974 5,599
Profitbeforetax&extraordinary 14,147 20,358 29,698 33,641
Extraordinaryincome 199 - - -
Profitbeforetax 14,347 20,358 29,698 33,641
Provisionfortax (679) (1,284) (1,782) (2,018)
Netprofit 13,469 19,074 27,916 31,623
MinorityInterest 41 (913) - -
Reported PAT 13,510 18,161 27,916 31,623
Adjusted Profit 13,311 18,161 27,916 31,623
Source: Company, SMC Inst. Research
Balance sheets
Particulars FY10 FY11 FY12E FY13E
Shareholder'sequity 78,289 79,755 105,643 137,843
Minorityinterests 1,932 8,472 8,472 8,472
Long-termdebt 459 2,049 2,049 2,049
Provisions 3,484 5,030 3,366 3,382
Short-termdebt 1,252 2,207 2,207 2,207
Currentliabilities 4,095 9,203 8,982 9,783
Totalliabilities&equity 89,512 106,715 130,718 163,736Netintangibleassets 5,747 10,600 10,092 9,584
Netfixedassets 15,090 25,060 27,209 28,298
Investments 30,664 22,310 22,310 22,310
Inventories 10,739 14,794 19,641 26,871
Sundrydebtors 11,748 11,716 13,114 14,415
Loans&advances 8,488 11,281 12,973 14,919
Othercurrentassets 74 445 490 514
Cash&cashequivalents 6,073 6,858 21,772 44,313
Currentassets 37,121 45,094 67,989 101,031Deferredtaxasset,net 890 3,653 3,118 2,513
Totalassets 89,512 106,715 130,718 163,736
Cash Flow
Particulars FY10 FY11 FY12E FY13E
PAT 13,510 18,161 27,916 31,623
Depreciaiton 1,533 2,041 2,858 2,919
Changeinworkingcapital (4,675) 5,482 (9,867) (9
Othernon-cashadjustments (3,392) (3,986) (851) 1
Operating cashflow 7,614 23,894 21,837 28,464
Capitalexpenditure (2,752) (4,170) (4,500) (3,
Changeininvestments (11,584) (1,460) - -
Otherinvestingcashflow 1,447 (15,855) - -
Investing cashflow (12,889) (21,485) (4,500) (3,500)
Free cashflow to firm 4,862 19,724 17,337 24,964
Changeinborrowings 306 (3,787) - -
Dividendpaid (3,321) (3,314) (2,423) (2,4
Otherfinancingcashflow (442) (647) - -
Financing cashflow (3,457) (7,747) (2,423) (2,423)
Net cash generated during year (8,733) (5,338) 14,914 22,541
Cash at beginning of year 14,634 12,196 6,858 21,772
Cash at end of year 5,901 6,858 21,772 44,313
Source: Company, SMC Inst. Research
Key ratio
Particulars FY10 FY11 FY12E FY13E
EPS(INR) 13.017.527.030.5
BVpershare(INR) 75.677.0102.0133.1
ROE(%) 18.223.030.126.0
Growth (%)
Revenues (5.8) 42.854.9 9.9
EBITDA (14.4) 46.451.810.3
Netprofit (26.9) 44.540.012.3
EPS (30.5) 46.040.013.4
Margins (%)
EBITDA 34.034.431.131.8
EBIT 30.230.927.928.8
Netprofit 35.335.633.534.5
Valuation ratios
Year ending 31 March FY10 FY11 FY12E FY13E
P/E(x) 36.026.717.115.1
Price/BV(x) 6.2 6.1 4.6 3.5
Marketcap/sales(x) 12.1 8.5 5.5 5.0
EV/sales (x) 8.7 6.1 5.3 4.6
EV/EBITDA(x) 25.717.817.014.
Mcap/Sales(x) 12.1 8.5 5.5 5.0
EarningsYiels(%) 2.8 3.7 5.7 6.5
Source: Company, SMC Inst. Research Source: Company, SMC Inst. Research
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Domestic business holds the key to success
The domestic business comprises high-margin (above 30%), high-growth chronic therapeutic areas, such as
neuro-psychiatry, cardiovascular, diabetes and gastroenterology. SUNP commands dominance with strong
brand recall amongst doctors in these therapeutic areas. During FY0511, SUNP's domestic formulation
business registered 22% CAGR (consistently growing above the industry average) and contributed 45% to the
total turnover in FY10. Strong domestic business provides support to volatile international operations.
We see new product launch and tapping new markets (tier II & tier III cities & towns) the key to SUNP's growth
strategy in the domestic market. SUNPs aggressive strategy with 4,000 strong field force and lower attrition
provides a leading edge in the acute therapeutic segment.
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Exhibit-46: Domestic business to grow at 17-18% over the next 3 years
Source: Company, SMC Inst. Research
-10
-5
0
5
10
15
20
25
30
35
40
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
FY10 FY11 FY12E FY13E FY14E
INRMN
(%)
Domestic leader in chronic therapy; top 10 brands contribute ~20% of revenue
SUNP is the market leader in key chronic therapy in India commanding a 4.4% market share. SUNP derives ~70%
of its revenue from lifestyle therapeutic segments including CNS, CVS, GI and anti-diabetes. It is the market leader
in two of the fastest growing therapy segments, CNS and CVS. The top 10 brands of SUNP contribute to nearly 20%
of its domestic revenue. Seven of its brands feature among the top 300 brands of the industry. Most of the top
brands have one of the highest recall values among physicians in the respective sector.
Exhibit-47: WACC Calculation
Brand Name Therapy area
Pantocid Proton pump inhibitor
Glucored Group Oral anti diabetic
Susten Women's healthcare
Aztor CVS, cholesterol reducing agent
Pantocid-D Proton pump inhibitor
Gemer Oral anti diabetic
Strocit CNS, stroke
Repace Group CVS, Hypertension
Encorate chrono CNS, epilepsy
Clopilet CVS, anti clotting agent
Source: Company, SMC Inst. Research
Neuro-Psychiatry, 28%
Cardiology, 19%
Gastroenterology,
11%
Diabetology, 14%
Gynecology &Urology, 7%
Antiasthamatic &Antiallergic, 4%
Musculo-Skeletal &Pain, 5%
Opthamology, 5%
Others, 8%
Exhibit-48: India Branded Generics
Source: Company, SMC Inst. Research
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Emerging market to add growth traction
SUNP's ex-US markets consist more than c1500 product registrations and c900 strong product pipeline
across 40 countries in the world. Currently, non-US base business contributes ~62% to overall sales. We
believe that while growth in the US will continue to ride on the back of new launches and increasing
penetration through existing products, Pharma-emerging markets share as a proportion of total sales will
improve on the back of diminishing US opportunity post 2015. Ex-US markets consist of 40 markets with more
than 1500 product registrations and above 900 are in the pipeline. We expect the high growth in the emerging
market coupled with the aggressive growth strategy and efficient management team of SUNP will add growth
traction to the overall financials of the company.
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Strong Para IV pipeline to help accelerate growth
We expect SUNP's strong product pipeline with more than 369 cumulative filings (including Caraco and Taro)
would provide accelerated growth in the next 2-3 years on the back of the large amount of patent expiries in
the US. We believe SUNP to have a marketable opportunity of ~USD10bn over FY12-13E and will be one of the
key beneficiaries of the Patent cliff opportunity.
Exhibit-49: SUNP's robust product pipeline provides USD10bn opportunities by 2013
API / Generic name Innovator Brand Name Therapy Brand Patent Sales (USD
Docetaxel Sanofi-Aventis Taxotere Oncology Sep-10 3,033
Entacapone/Levodopa/Carbidopa Orion Stalevo CNS, Parkinson's Oct-10 233
Entacapone Orion Comtan CNS Oct-10 94
Gemcitabine Hcl Eli Lilly Gemzar Oncology Nov-10 1,363Alfuzosin Hcl Aventis Uroxatral Urology Jan-11 487
Azelastine Hcl, Opthalmic Drops Meda pharma Optivar Antihistamine May-11 41
Azelastine Hcl, Nasal metered spray Meda Pharma Astelin Antihistamine May-11 177
Acetaminophen; Tramadol Hydrochloride J&J Ultracet Pain management Aug-11 -
Tiagabine Hydrochloride Cephalon Gabitril CNS, Anticonvulsant Sep-11 56
Risedronate Sodium Aventis Actonel Women's Healthcare Nov-11 -
Eszopiclone Sepracor Lunesta CNS Jan-12 761
Escitalopram Oxalate Forest Lexapro CNS Mar-12 2,300
Amifostine Astra Zeneca Ethyol Oncology Jul-12 43
Rivastigmine Tartrate Novartis Exelon CNS Aug-12 945
Levocetirizine DiHcl Aventis Xyzal Respiratory Sep-12 253Source:Company,SMCInst.Research
expiry mn)
Taro, a long term growth driver; effective integration holds the key
Taro compliments SUNP's product portfolio through its presence in key dermatology products (~60% of
revenue) and steroids. Taro has over 153 ANDAs and 30 active DMFs filed with the USFDA and manufacturing
sites in Israel and Canada. Taro in our view, would also give SUNP access to Europe with more than 100 filings
in the EU. With Caraco still shackled with regulatory issues, Taro's manufacturing facilities would provide
necessary support to SUNPs US manufacturing strategy. We expect revenue CAGR of 18% over FY11-14E
from Taro on account of improvements in execution.
Exhibit-50: Financial performance of Taro
Source: Company, SMC Inst. Research
- 10%
0%
10%
20%
30%
40%
50%
0
100
200
300
400
500
600
700
CY05 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E
USDMn
NET SALES EBITDA Margin
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Increase in product portfolio to add strength to US revenues
SUNP has the largest ANDA filings (369) by any Indian player in the US post the Taro acquisition. Taro
integration strengthens the US formulation business particularly in the field of dermatology and steroids. In
our view SUNP through its proven management skills will be able to increase Taro's efficiency.
We forecast a CAGR of 26% in SUNP's US business over FY10-13E on account of upsides from exclusivity
products and constant new launches and helping SUNP to become the numero uno among the Indian generic
players in the US. We expect significant growth from Taro in the next 6-8 quarters on account of improvements
in execution. We estimate Taro to provide CAGR of 12.6% incremental revenue growth over FY10-13E for
SUNP.
Exhibit-51: Cumulative ANDA approvals
Products filled Product approvalsFY06 59 20
FY07 96 29
FY08 142 53
FY09 177 69
FY10 207 84
FY11 (Incl Taro) 377 225
Source: Company, SMC Inst. Research
Exhibit-52: Comparing SUNP with other peers
Source: Company, SMC Inst. Research
224 215173 158
127 106
153
0
50
100
150
200
250
300
350
400
Sun Ranbaxy Aurobindo
Pharm
Dr Reddy Lupin Cadila
Taro
Taxotere case partially favourable; limited upside remaining
US district court has invalidated patents of Sanofi's Taxotere (docetaxel), favouring SUNP and other three
generic manufactures (Hospira, Apotex and Sandoz), limiting the exclusive marketing opportunity for SUNP.
Now with the USFDA approval we expect Hospira (having FTF status) to launch generic Taxotere (docitaxcel)
post expiry of branded drug by H1FY12. SUNP's launch (~6 months after Hospira's launch) of generic Taxotere
may be further delayed by 12-15months in the event of a possible Preliminary Injunction (PI) granted to
Sanofi by a higher US court.
In case of a launch, we expect SUNP to garner incremental EPS of 9.5% in FY12E and 6.1% in FY13E (assuming
60% price erosion and 10% market share in FY12E and 80% price erosion and 20% market share in FY13E).
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Particulars FY12E FY13E
Taxotere market size in US (USD Mn.) 2,800 2800
Price erosion 60% 80%
Sun's market share 10% 20%
Sun's market opportunity (USD Mn) 112 112
Profitability 40% 30%
Earnings (USD Mn) 44.8 33.6
Earning in INRMn (USD/INR 45) 2016 1512
No. of shares 1036 1036
Earning impact (INR) 1.9 1.5
Source: SMC Inst Research
Caraco merger to help resolve USFDA issues
We expect the proposed merger of SUNP and Caraco would help in resolution of the USFDA issues in terms of
quality at the Caraco's Detroit plant. SUNP in previous instance has helped to reinstate Caraco sales following
the product seizure from Caraco's Detroit facility in 2008, through site transfer and product acquisition.
Caraco, had earlier stated that