indian pharmaceutical sector (2)

8/13/2019 Indian Pharmaceutical Sector (2)

1/50

ICRA LIMITED

Summary

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

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

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

long-term growth

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

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

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

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

expanding product portfolio and exclusivities

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

companies have a fairly well spread out product pipeline till 2014. While some companies have a healthy pipeline of FTF opportunities,others are likely to benefit from the launch of niche, limited competition products

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

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

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

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

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

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

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

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

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

on innovator companies which supports outsourcing to low-cost nations

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

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

their strong credit profile

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

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

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

pharmaceutical companies remain strong providing adequate room for fund raising

INDIAN PHARMACEUTICAL SECTOR

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

Industry Update March 2012

ICRA RATING FEATURE

Corporate Ratings

Anjan Ghosh+91 22 3047 0006

[email protected]

Subrata Ray

+91 22 3047 0027

[email protected]

Shamsher Dewan

+91 124 4545 328

[email protected]

Kinjal Shah

+91 22 3047 0054

k inja l [email protected]

Khushboo Shahani

+91 22 3048 1070

[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


2/50

ICRA LIMITED

17.4%

20.8%13.9% 16.6%

9.7%9.1%

13.1%

0%

5%

10%

15%

20%

25%

-

500

1,000

1,500

2,000

2,5003,000

3,500

4,000

4,500

Q1

FY10

Q2

FY10

Q3

FY10

Q4

FY10

Q1

FY11

Q2

FY11

Q3

FY11

Q4

FY11

Q1

FY12

Q2

FY12

Q3

FY12

D ome st ic Fo rmu lat io ns Sal es (Rs. Cr ore ) Ch ange (%) Yo Y

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

Exhibit 1: Trend in Domestic Formulations Revenues* & Growth

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

Exhibit 2: Key Management takeaways from earning calls

Company Comments on Domestic Formulations

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

impact growth in the domestic market; however some recovery in

growth is visible;

consumer healthcare business continues to do well

Lupin Domestic formulations business grew by 192% during Q3 FY12

driven by growth across therapeutic segments

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

grow steadily with a growth of 14% in Q3 FY12

Dr. Reddys There are initial signs of recovery; secondary sales trends have been

encouraging

Source: Company Earnings Call; ICRA

Structural demand drivers to support growth despite short-term headwinds

After a period of sustained growth, the domestic formulations market began to decelerate since

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

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

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

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

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

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

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

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

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

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

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

the long-run despite short-term headwinds.

The Domestic formulations market, valued at ~Rs. 48,200 crore has grown steadily at CAGR of 14-15% over the past five years. The strong growth has been driven by a confluence of factors

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

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

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

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

introductions as against prices increases.

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

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

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

slew of product launches.

Lifestyle related disorders to propel faster growth in chronic segments

The acute therapy segments dominate the market with a share of 73% of the total market.

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

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

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

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

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

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


3/50

ICRA LIMITED

4.0%8.3%

11.9%

24.3%

17.5%13.0%

9.8%

18.0% 15.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

2006 2007 2008 2009 2010

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

26.4%

29.4% 29.1%

25.1% 25.9%

40.9%39.8%

38.8% 39.6%

32.0%

20.0%

24.0%

28.0%

32.0%

36.0%

40.0%

44.0%

2006 2007 2008 2009 2010

PBDIT Margins (%) RoCE (%)

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

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

Source: Capitaline; ICRA Estimates

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

Source: Capitaline; ICRA Estimates

Increasing investments by MNCs reflect at their renewed interest in the Indian market

The MNC pharma companies which have so far lagged the domestic market growth are now

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

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

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

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

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

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

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

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

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

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

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

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

manufacturing capabilities of the local generic companies on one hand and the extensivemarketing & distribution footprint of MNCs in other markets on the other. With increasing focus

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

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

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

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

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

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

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

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

developing combination and controlled release products and even looking at in-licensing/co-marketing opportunities with foreign players. We believe, companies with relatively diversified

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

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

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


4/50

ICRA LIMITED

225

135

133

103

48 6

5 69

152

6

3

10

38

23

65 26

7

54 3

8

77

14

0%

20%

40%

60%

80%

100%

Sun

Pharma*

Ran bax y Au rob ind o D r. Re dd y's L up in Cadi la Gl en mar k

Approved Pending (Non Para IV) Para IV

31.3% 19.1% 17.5%

14.6%

4.8% 29.4%

90.3%

0%

20%

40%

60%

80%

100%

-

1,000

2,000

3,000

4,000

5,000

6,000

Q1

FY10

Q2

FY10

Q3

FY10

Q4

FY10

Q1

FY11

Q2

FY11

Q3

FY11

Q4

FY11

Q1

FY12

Q2

FY12

Q2

FY13

US Formulations Sale s (Rs. Crore) Change (%) YoY

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

Exhibit 5: Trend in US Formulation for Indian Companies*

Source: Company Reports; ICRA Estimates; * peer set includes seven companies

Exhibit 6: Market Position in the US gradually improving

Company Comments

Lupin 5th

largest generic company in the US in terms of prescriptions

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

Dr. Reddys 25 products rank among top 3 in terms of markets

Developed a meaningful OTC business with revenues of $60 million

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

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

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

With a market size of US$ 320 billion, the United States remains the largest pharmaceutical

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

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

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

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

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

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

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

the generics market.

Indian generics to benefit from the ongoing wave of patent expiries

Riding on back of the generic opportunity, Indian companies have capitalized on the growth

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

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

The quality of the filings by top Indian companies has also significantly improved over the yearswith complex molecules, non-standard categories (i.e. inhalers, injectables, oral contraceptive,

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

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

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

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

has emerged as the 5th

largest generic company in terms of prescriptions, Dr. 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 theimpact 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.

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

Exhibit 7: Details of ANDA filings by leading Indian Companies


5/50


6/50

ICRA LIMITED

US Generics: Continued

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

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

0%

10%

20%

30%

40%

50%

60%

70%

U.K Germany Netherlands France Spain Italy

Source: IMS Health, ICRA Research

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.


7/50

ICRA LIMITED

Europe: Continued

Exhibit 12: Snapshot of measures announced by European Governments

Country Government Initiatives to reduce healthcare cost

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

expensive drugs; generic substitution by pharmacists is among the

highest in the UKGermany 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

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

Company Contribution Comments

Wockhardt 37% Has among the highest exposure to Europe

Dr. Reddys 21% Acquisition of Betapharm (Germany) and

subsequent transformation of the industry to

tender driven impacted companys performance in

EuropeRanbaxy 15% Leading generic company in Romania

Cipla 14% Targeting the inhalers segment in Europe

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

Intas Pharma Targeting multiple markets in Europe to insulate

from single market linked adversities

Source: Industry Estimates, ICRA

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

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

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

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

with significant potential in growth in a number of countries.

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

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

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

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

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

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

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

substitution levels and patent expirations.

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


8/50

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 Challenges Positioning of Indian Players

Russia Market Growth ~13-14% over medium

term

Growth Drivers

- Per capita spending on healthcare is higher

than other emerging markets but remains

low

- Transition to the OTC segment offers

strong growth prospects

- The Government is playing an increasing active role in regulating

market access as well as controlling prices of essential drugs

through reference pricing mechanism- The market is gradually transforming from a high out-of-pocket

driven market to a western European model of centralized

reimbursements

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

manufacturing by offering incentives to promote R&D

Key Indian Players - Ranbaxy, Dr. Reddys, Lupin and

Glenmark

For instance, Dr. Reddys is ranked 15th

in Russia and is thethird most important market after US and India with 17%

contribution to turnover

Brazil Market Growth

Largest pharmaceutical market in Latin

America, growing at a CAGR of ~15%

Growth Drivers

- Low per capita spending on healthcare

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

pocket spending is significant

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

to penetrate given the strong dominance of local players which

control over 60-70% of the market

Key Indian PlayersRanbaxy, Torrent Pharma

Torrent is one of the leading Indian player in the Brazilian

market with a share of 6.8% in the representative market

Ranbaxy is also ranked 9th

(M.S. 2.8%) in generics

Participation in Govt. tenders also is significant among Indian

players

South

Africa

Market Growth

- Relatively small market but growing at fast

pace; in FY11 market grew by 8%

Growth Drivers

- Implementation of NHI to encourage the

penetration of generics

- Prices increases are generally restricted and controlled by the

Government

- Industry works on a Single Exit Price mechanism for essential

drugs which essentially means that companies are mandated to

sell their products at same price to all customers

Key Indian PlayersCipla, Ranbaxy, Lupin

Cipla through its partner Medpro has major presence in

South Africa among Indian players.

Lupin acquired Pharma Dynamics (ranked 19th

& 6th

in

generics); currently is working on moving manufacturing to

India & augmenting product portfolio

Source: Industry Data, ICRA Research


9/50

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 l ikely 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 regulatorypathway 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, Bio con 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-bodiesand insulin.


10/50

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 manufac turing facility in U.S., allowing it to enter the U.S.

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

biotic segment in the Indian market. During the year, Lupin also continued with its strategy to augment its presence in the Japanese market; having acquired IromPharmaceuticals in November 2011.

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

Company Acquisition Market Month Consideration Rationale

Zydus Cadila Biochem India

(Branded)

December

2011

Not disclosed Strengthens Cadilas presence in domestic formulations market especially in the anti-biotic segment

Lupin Limited Irom Pharmaceuticals Japan November

2011

Not disclosed Strengthens Lupins presence in the Japanese generics market with diversification into the specialty

injectables segment

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

Zydus Cadila Nesher Pharma United States

(Generics)

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

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

Dr. Reddys GSKs Penicillin

manufacturing facility

United States

(Generics)

March

2011

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

such asAugmentinandAmoxiland diversify its generics portfolio in the US

Source: Company Releases, ICRA

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

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

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

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

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


11/50

ICRA LIMITED

Conclusion

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JV/Alliances Market Rationale

Sun PharmaMerck Emerging Markets 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

Dr. Reddys GSK Emerging Markets Based on similar structure; DRLwould manufacture products; while GSKwould distribute in Latin America, Africa, Middle East and Asia

Cadila HealthcareBayer India Primarily a co-marketing arrangement with focus on certain therapy segment

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

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

oncology, CVS, neurological and respiratory diseases

LupinEli Lilly India Primarily a co-marketing arrangement with focus on insulin segment

Aimed at leveraging on Lupinsmarketing & distribution footprint in India and Eli Lillysproduct portfolio in the insulin segment

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

Working on early stage of the development cycle

Source: Company Releases, ICRA


12/50

ICRA LIMITED

Company Section


13/50

ICRA LIMITED

44% 51%54% 56%

51% 44%40% 43%

4% 5% 6% 2%

0%

20%

40%

60%

80%

100%

FY09 FY10 FY11 9m FY12

Formulations APIs Dossier Income

AUROBINDO PHARMA LIMITED

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

Source: Company Data, ICRA Estimates

ICRA Ratings

Shareholding Pattern (%)

Promoters 54.7%

FIIs 13.7%

DIIs 16.3%

Others 15.3%

Price Performance (%)

3M 12M

APL 26.9% -37.8%

CNX Pharma 6.7% 10.9%

CNX Nifty 13.1% -1.8%

Stock Movement

Bloomberg Code ARBP

Market CapitalisationRs. 3,451 Crore

Valuations

FY12e FY13e

Price/Earnings 11.9X 7.9X

Price/Sales 0.8X 0.7X

Source: Bloomberg

Not Rated by ICRA

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

Revenue GrowthAPL 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.

ProfitabilityThe 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

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

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

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

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

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

management however remains confident of a recovery led by launch ofcertain high value products (under Pfizer deal), ramp-up in injectables

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

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

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

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 1,192.2 1,284.5 1,075.3

Growth (%) - YoY 7.7% 19.5%

OPBDIT 319.5 191.2 114.6

Less: Depreciation 43.4 55.2 46.2

Less: Interest Charges 11.5 27.4 20.7

Other Income 5.9 4.9 6.0

Exceptional Gain/Loss 4.1 (144.5) (185.4)

PBT 267.0 (31.0) (131.7)

Less: Tax 78.3 (2.4) (51.6)

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

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

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


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

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

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

OPBDIT 171.5 171.7 254.2 319.5 211.7 163.9 114.6

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

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

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

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

0

200

400

600

800

-

50.0

100.0

150.0

200.0

250.0

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Ju

l-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan

-12

Feb-12

Mar-12

V ol um es A ur ob in do 's S to ck P ri ce


14/50

ICRA LIMITED

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

APLs Sales Mix

Formulations (54%)

Dossier Income 6%

APIs (40%)

US (27%)

EU & RoW (12%)

ARVs (15%)

SSPs (13%)

Cephs (19%)

ARVs & etc (9%)

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

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

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

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

formulations accounted for 54% of companys turnover (up from 39% in FY08), while the share oflow-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 operationsbesides 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 byaggressive 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.


15/50

ICRA LIMITED

CADILA HEALTHCARE LIMITED

Exhibit: Break-up of Cadila Healthcares FY11 Revenues

ICRA Ratings


Promoters 74.8%

FIIs 5.2%

DIIs 12.3%

Others 7.7%


3M 12M

CHL 1.1% -8.3%


CNX Nifty 13.1% -1.8%

Stock Movement

Bloomberg Code CDH

Market Cap. Rs. 14,513 Crore

Valuations

FY12e FY13e

Price/Earnings 20.8x 16.8x

Price/Sales 2.8x 2.4x

Source: Bloomberg

Not Rated by ICRA

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

Revenue GrowthCadilas Q3 FY12 net sales at Rs. 1,352.5 crore grew by

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

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

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

Cadilas reported a growth of 45.1% in the US, however after adjusting for

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

rates were much lower largely due to lack of product introductions. Cadilas

didnt receive US FDA approvals during the quarter being impacted by the

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

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

markets (up 2.8%). The companys wellness business also had a challenging

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

competition in the skin care segment. The management indicated that

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

recent period and renewed marketing efforts should help in reviving thedemand going forward.

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

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

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

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

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

European markets. While warning letter related issues continue to impede

growth in the US, challenging environment in Europe is likely to derailgrowth 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.

Q3 FY11 Q3 FY12 Q2 FY12


Growth (%) 18.5% 11.9%

OPBDIT 256.2 261.6 237.1Less: Depreciation 33.4 46.5 37.5

Less: Net Interest 19.4 59.4 76.9


Exceptional Gain/Loss - - -

PBT 206.4 173.9 133.7

Less: Tax 36.8 17.4 23.5

PAT (Concern Share) 162.0 149.2 102.7

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

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



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

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

OPBDIT 189.4 297.4 244.9 256.2 227.8 302.4 237.1

PAT 118.8 199.2 170.8 162.0 179.0 229.8 102.7

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

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

Source: Com an Data ICRA Estimates Amounts in Rs. Crore

India

Formulations

38%

Export

Formulations

43%

APIs

9%

India

Consumer

Business

7%

Other

3%

Cadila's Sales Break-up (FY11)

0

10

20

30

40

50

100

300

500

700

900

1100

Feb-11

Ma

r-11

Ap

r-11

May-11

Jun-11

Ju

l-11

Aug-11

Sep-11

Oc

t-11

No

v-11

De

c-11

Jan-12

Feb-12

Ma

r-12

Vol ume CHL's St oc k P ri ce


16/50

ICRA LIMITED

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

wT

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 Sugarfreeand Nutraliteare also being planned

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

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

Business Overview

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

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

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

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

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

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

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

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

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 astransdermals, 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 capabil ities in certain therapy areas or markets:

Tie-Ups Area Comments

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

Turnover Rs. 111.2 crore (FY11)

Zydus Hospira Oncology Oncology 50:50 JV with Hospira Inc.; TurnoverRs. 430.4 crore (FY11)

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

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

Abbotts strong marketing & distribution footprint in those markets and Cadilas manufacturing capabilitiesSource: Company Data, ICRA


17/50

ICRA LIMITED

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2006-07 2007-08 2008-09 2009-10 2010-11

Domestic Revenues Exports Revenues

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

CIPLA LIMITED

Exhibit: Trend in Ciplas Domestic & Export Revenues (FY07-11)

ICRA Ratings


Promoters 36.8%

FIIs 13.1%

DIIs 20.4%

Others 29.7%


3M 12M

CIPLA -6.5% 2.5%


CNX Nifty 13.1% -1.8%

Stock Movement

Bloomberg Code CIPLA


Valuations

FY12e FY13e



Source: Bloomberg

Not Rated by ICRA

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

Revenue GrowthCiplas 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

ProfitabilityOn 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).

Q3 FY11 Q3 FY12 Q2 FY12


Growth (%) 12.9% -1.1%

OPBDIT 318.2 391.5 437.6





PBT 275.7 342.6 393.9

Less: Tax 43.0 72.7 85.0


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

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



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

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

OPBDIT 258.0 337.9 366.6 318.2 302.1 369.5 437.6

PAT 275.5 257.4 263.0 232.7 214.0 253.3 309.0

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

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


Source: Company Data

0

100

200

300

400

500

200

250

300

350

400

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Vol ume Ci pla's St oc k Pri ce


18/50


19/50

ICRA LIMITED

DISHMAN PHARMACEUTICALS & CHEMICALS LIMITED

ICRA Ratings


Promoters 61.4%

FIIs 3.3%

DIIs 7.4%

Others 28.0%


3M 12M

DISHMAN -34.0% -47.5%


CNX Nifty 13.1% -1.8%

Stock Movement

Bloomberg Code DISH

Market Cap. Rs. 407 Crore

Valuations

FY12e FY13e



Source: Bloomberg

Not Rated by ICRA

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

Revenue GrowthDishmans operating income grew by 11.9% on a YoY

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

movement. While the Marketable Molecule business reported a YoY

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

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

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

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

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

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

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

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

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

management is hopeful of achieving 20% growth in FY13.

ProfitabilityNon-recurring research income and higher contribution fromsale 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 towhich China has no longer remained a core business area for the company,

Dishman is in the process of selling its China factory.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 237.9 266.2 269.7

Growth (%) - YoY 11.9% 15.7%

OPBDIT 31.5 61.5 28.8



Other Income - - -


PBT 1.0 26.0 (7.0)

Less: Tax (0.7) 9.3 (0.7)

PAT (Concern Share) 1.7 16.7 (6.3)

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

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



Operating Income 251.2 212.3 233.1 237.9 347.8 242.8 269.7

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

OPBDIT 51.9 54.9 57.2 31.5 57.5 49.3 28.8

PAT 19.9 27.1 29.5 1.7 23.0 15.1 -6.3

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

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


0

20

40

60

80

100

120

0

20

40

60

80

100

120

Feb-1

1

Mar-1

1

Apr-1

1

May-1

1

Jun-1

1

Jul-1

1

Aug-1

1

Sep-1

1

Oct-1

1

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-1

2

Vo l um es D is hm an 's S to ck P ri ce


20/50

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 ofEuro 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 FY13a contract worth Euro 100 million over three years

Supply of an oncology drug to Astellas from January 2013a 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.


21/50

ICRA LIMITED

DIVIS LABORATORIES LIMITED

ICRA Ratings


Promoters 52.2%

FIIs 10.2%

DIIs 17.3%

Others 20.4%


3M 12M

DIVIs 1.5% 19.5%


CNX Nifty 13.1% -1.8%

Stock Movement

Bloomberg Code DIVI


Valuations

FY12e FY13e



Source: Bloomberg

Not Rated by ICRA

Revenue momentum continues; to be further boosted by the commissioning of the new facility

Revenue GrowthDivis 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 QoQde-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.

ProfitabilityDiviss 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.

Q3 FY11 Q3 FY12 Q2 FY12

Operating Income 315.0 417.4 366.1

Growth (%) - YoY 32.5% 42.5%

OPBDIT 123.5 151.1 138.2





PBT 116.5 160.4 133.2

Less: Tax 14.9 37.9 27.1


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

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



Operating Income 312.1 269.4 256.9 315.0 482.5 364.8 366.1

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

OPBDIT 151.8 102.5 88.3 123.5 194.4 134.0 138.2

PAT 130.0 86.3 73.0 101.6 174.8 102.6 106.1

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

PAT/OI (%) 41.7% 32.0% 28.4% 32.2% 36.2% 28.1% 29.0%Source: Company Data, ICRA Estimates; Amounts in Rs. Crore

0

50

100

150

200

500

600

700

800

900

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Vo lu me s D IVI 's St oc k P ri ce


22/50

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 commissionedat 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, Divi s

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

filed 18 patents in India and 12 patents in the USA for generic products. During FY11, 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. Divi s 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, Divi s 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. D ivis 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, Divisfollows 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.


23/50

ICRA LIMITED

North

America

31%

Europe

21%

India

19%

Russia & CIS

15%

ROW

14%

Dr. REDDYS LABORATORIES LIMITED

Exhibit: Trend in Dr. Reddys Revenues (FY11)

ICRA Ratings


Promoters 25.6%

FIIs 27.2%

DIIs 13.8%

Others 33.5%


3M 12M

Dr. REDDYs 5.9% 6.2%


CNX Nifty 13.1% -1.8%

Stock Movement

Bloomberg Code DRRD


Valuations

FY12e FY13e



Source: Bloomberg

Long Term [ICRA]AA+

Short Term [ICRA]A1+

Outlook Stable

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

Revenue GrowthDRLs Q3 FY12 revenues at Rs. 2,769.2 crore grew by a

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

benefited from the exclusivity on Olanzapine and steady growth in the

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

has been able to garner around 50% market share in Olanzapine with 40-45% price erosion. Among other key markets, DRL reported a growth of

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

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

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

constant currency terms was flat at 2% YoY. In 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 January-

end following rupee appreciation.

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

approvals to 79 including 40 on Para IV and 10 FTFs

Q3 FY11 Q3 FY12 Q2 FY12


Growth (%) 45.9% 22.1%

OPBDIT 404.6 920.8 520.1


Less: Net Interest 5.0 (17.4) 5.0



PBT 288.4 772.1 369.5

Less: Tax 15.2 261.7 63.0


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

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



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

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

OPBIT* 187.6 243.9 300.8 273.6 333.3 260.2 352.9

PAT 166.7 209.6 286.8 273.1 334.5 262.7 307.8

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

PAT/OI (%) 10.1% 12.5% 15.3% 14.4% 16.6% 13.3% 13.6%Source: Company Data, ICRA Estimates; Amounts in Rs. Crore; Data based on IFRS Reporting; * after depreciation

Source: Company Data

0

20

40

60

80

indian pharmaceutical sector (2)

Documents