Indian Pharmaceutical Industry: 1. Fragmented market with more than 1,000 players and 60000 brands 2.

Positioned as low cost life-saving generic drug industry 3. India has a very large acute segment growing at strong double digits, which is expected to continue. While the chronic market is relatively small, it is on a rapid growth path due to an ageing population and changing lifestyles 4. Currently, majority (91%) of drug sales is through the retail markets, while institutional sales are very low (9%)
The market share of generic generics is very low on account of lack of Generic regulations and guidelines for the establishment of bio equivalence Generics Doctor comfort derived from prescribing medications on the basis of brand name. Branded Rapid increase in sales force by almost all players is a sign of Generics growth that companies see in India in this segment

The market size for patented drugs as of today is very small.

Patent Only about 1-2% of the market is made up of patented drugs, which are being sold by multinational innovators

Reasons why India has emerged as an exporter in pharma products and its key strengths: 1. India has over 120 USFDA-approved and 84 UK MHRA - approved manufacturing facilities vs. 55 in Italy, 27 in China and 25 in Spain 2. The manufacturing cost of Indian pharma companies is up to 65 per cent lower than that of US firms and almost half of that of European manufacturers which also helps to create opportunities for Indian companies in emerging markets and Africa. Savings arise from lower operating and labour costs 3. Apart from manufacturing costs, there are huge savings in research cost and clinical trials that form a large part of the expense of a pharmaceutical company Macro drivers: Rising income could drive 73 million households to the middle class over the next ten years Over 650 million people expected to be covered by health insurance by 2020 Government-sponsored programmes set to provide health benefits to over 380 million BPL people by 2017 By 2017, the government also plans to provide free generic medicines to half the population at an estimated cost of USD 5.4 billion From 18.9 per cent of healthcare expenditure in 2008, pharmaceuticals sales is likely to increase to 27 per cent of total spending on healthcare by 2016 Patent expiration in the U.S are one of the major factors that will help the generic business to a large extent, and companies that have a product lifecycle spread out over the next few years will benefit a lot

ANDA Filings: Abbreviated New Drug Filings This still remains the most important factor to gauge the growth that is most likely to take place in the US business of the pharma company. Currently Sun Pharma, Ranbaxy and the likes of Aurobindo Pharma have the highest number of cumulative filings and have the maximum number approved with a healthy pipeline. The Para IV filings by Lupin are significant and high quality filings are a big positive for the company
Cumulative 453 148 101 112 198 99 130 NA NA 244 ANDA filings Approved Pending 320 133 110 38 78 23 87 25 135 63 73 26 65 65 Para-IV 35 35 77 7 14

Sun Pharma Dr. Reddy Laboratories Lupin Cipla Ranbaxy Glenmark Cadila Health Care Ipca Torrent Pharmaceuticals Aurobindo Pharma

181

63

Last year and even in the first half of this year, Sun Pharma and Lupin have gathered a significant number of approvals from the FDA which augurs well for the markets.
No. of approvals (in 2012) 31 19 19 18 16 11 10 8 8 6 171

Company name Aurobindo Pharma Dr. Reddy's Strides Arcolabs Sun Pharma Wockhardt Lupin Glenmark Torrent Pharma Cadila Healthcare Alembic Pharma Total

Drug Portfolio:
Specialization in therapeutic diseases, both chronic and acute Anti Gynae- RespirAnti DermatDiabetic Gastro cology atory Pain infectives ology 11 7 8 1 2 4 1 6 5 14 25 8 8 5 17 8 16 3 12 7 8 4 6 11 30 5 15 9 5 5 10 4 13 3 8 20 8 29 24 30 15 7 8 11 12 30 6 7

CVS* Sun Pharma Dr. Reddy Laboratories Lupin Cipla Ranbaxy Glenmark Cadila Health Care Ipca Torrent Pharmaceuticals 21 20 24 12 13 22 20 17 35

CNS* 27 1 5 3 3 1 2 3 19

Others 11 16 11 14 17 7 18 8+25 (Malarials) 14

*CNS: Central Nervous System, *CVS: Central Vascular System The best products are the ones that are focused on a particular class of maladies. These can be diseases, cancers or viruses that attack the nervous system, respiratory, heart and so on, or it can be diseases that affect a demographic like children, the elderly or middle-aged men with a waning libido. By targeting specifics, these companies avoid head-to-head competition Both Lupin and Sun pharma has a very high percentage coming from chronic diseases, 45% and 55% of the total sales respectively. Further presence in speciality segment (Gasto and Anit Diabetic) will augur well for Sun Pharma and the relatively higher growing segment of anti-infectives will prove beneficial to Lupin. Cipla is also a market leader in the respiratory segment and faces very less competition from other players in the industry.
Revenue Distribution Outside Domestic 64 36 87 13 72 28 54 47 83 18 73 27 63 38 67 33 65 35 77 23 Contribution to Sales (%) Acute Chronic 45 55 70 30 55 45 60 40 80 20 60 40 70 30 40 60

Sun Pharma Dr. Reddy Laboratories Lupin Cipla Ranbaxy Glenmark Cadila Health Care Ipca Torrent Pharmaceuticals Aurobindo Pharma

Inorganic growth will form the theme of the next phase of growth and companies having a good balance sheet are the most apt to do it:
B/S strength (INR cr.) Debt/EBITDA Debt Cash 0.0x 198 5,364 1.4x 3,676 2,210 0.5x 1,164 435 0.5x 1,002 2,260 2.6x 5,735 1,687 2.6x 2,765 619 2.6x 2,681 675 1.0x 617 58 1.0x 3.0x 718 3,435 687 208 Net Debt -5,166 1,466 730 -1,258 4,048 2,146 2,006 559 30 3,227

Sun Pharma Dr. Reddy Laboratories Lupin Cipla Ranbaxy Glenmark Cadila Health Care Ipca Torrent Pharmaceuticals Aurobindo Pharma

Sun Pharma, Lupin and Cipla are cash rich companies and it is a big positive because growth is expected to come through acquisitions.

Key Reforms in the Pharma industry both domestically and internationally that will impact the Indian companies:
Drug Price Control Order (National List of Essential Medicines): With the National List of Essential Medicines (NLEM) estimated to cover almost 20% of the Rs 72,800 crore domestic formulation business, an expected price cut of 15 20% will erode the market by 34%, it said. Companies with higher dependence on the Indian market like Indian arm of MNCs, mid size pharma companies and greater share of acute therapy segments (like 70 per cent of NLEM) will be impacted the most. In line with the earlier proposal, the policy has adopted a marketbased pricing mechanism wherein the ceiling price for each branded drug or a generic version will be determined by taking a simple average of all drugs with market share equal to or greater than 1%.

Companies like Glaxo, Ranbaxy and Cipla are expected to suffer the most while the effect on Lupin and Sun Pharma will be minimal
Domestic sales value Impacted Domestic contribution to total business (%) 93 17.5 100 95 100 46.5 37.5 13.4 35.9 27.6 32.6 60 72 35.3 26.6 % of domestic revenue under revised DPCO 39 32 NA 45 28 42 44 33 24 25 39 34 54 30 20 % of domestic sales Net Impact on FY14PBT (INR bn) 1.0 0.5 0.3 0.2 0.1 0.9 0.6 0.5 0.4 0.2 0.2 0.2 0.1 0.1 0.0

Domestic Sales MNCs Glaxo Ranbaxy Wyeth Pfizer Aventis Large Caps Cipla Cadila Dr Reddy Sun Pharma Lupin Mid caps IPCA labs Alembic Unichem Torrent Pharma Glenmark

INR bn

26 21 6 12 12 32 23 13 29 19 8 15 9 9 10

2.3 1.2 0.6 0.4 0.3 1.4 1 0.8 0.6 0.3 0.3 0.3 0.2 0.2 0

8.8 5.5 10.0 2.9 2.4 4.4 4.3 6.4 2.0 1.6 3.5 2.0 1.8 1.7 0.4

Reforms like Obama Care and regulations in the Europe are primarily looking for reduction in the healthcare costs and looking to increase the number of people under the insurance space will augur well for companies that have a good presence in the foreign markets and further high percentage of product portfolio focussed towards Chronic will augur well for those companies Companies like Sun Pharma, Lupin, Cipla and Ranbaxy are best placed to capture the future market. Further, high percentage of their portfolio comes from the generic business and the potential increase remains significant.

Financials and Valuation:

Margins EBIT Net Income 41% 8% 17% 14% 22% 15% 23% 19% 18% (1%) 19% 13% 14% 10% 20% 12% 20% 14% 14% 7% 3-yr CAGR Growth (%) Revenue EBITDA 39% 46% 20% 21% 25% 34% 13% 14% 5% (0%) 25% 9% 19% 3% 22% 23% 20% 21% 15% 12%

Sun Pharma Dr. Reddy Laboratories Lupin Cipla Ranbaxy Glenmark Cadila Health Care Ipca Torrent Pharmaceuticals Aurobindo Pharma

Gross 83% 52% 55% 55% 55% 68% 64% 54% 64% 39%

Companies such as Sun Pharma, Lupin and Cipla continue to maintain high margins. EBIT margins are much better for these companies as compared to peers
Financial Numbers (INR cr.), LTM Market Cap Revenue EBIT Net Income 1,11,953 14,775 4,922 1,147 37,049 13,759 2,052 1,976 36,685 11,690 2,154 1,704 33,321 9,984 1,889 1,863 15,567 12,560 1,894 -162 14,948 6,229 965 794 14,138 7,418 868 760 8,138 3,425 558 394 7,057 5,262 3,783 7,422 662 893 537 513

Sun Pharma Dr. Reddy Laboratories Lupin Cipla Ranbaxy Glenmark Cadila Health Care Ipca Torrent Pharmaceuticals Aurobindo Pharma

Just a fact: In 2000, the market cap of Ranbaxy used to be equal to the market cap of the other 5 big players in the industry and currently market cap of Sun Pharma is almost equal to next 3 big players in the industry. While the top line remains healthy for the top 5 players the major factor is converting that to EBIT and finally the bottom line.

R&D expense as a % of Sales:

While Lupin and Sun pharma spend the highest amount in doing R& D which is also reflected in the higher number of ANDA filings with the FDA by Sun Pharma, Cipla has recently stepped up its expenditure on R&D to capture the future market
R&D expense % of Sales 6.0 3.0 7.0 4.5 4.0

Sun Pharma Dr. Reddy Laboratories Lupin Cipla Ranbaxy

P/E trading multiple comparison:

P/E Multiple Current Fwd Multiple 26.1x 19.6x 22.2x 20.9x 14.6x 18.4x 17.1x 16.8x 13.4x 8.3x

Sun Pharma Dr. Reddy Laboratories Lupin Cipla Ranbaxy Glenmark Cadila Health Care Ipca Torrent Pharmaceuticals Aurobindo Pharma

Sun Pharma despite being highly valued and trading at a significant premium to its competitors derives the premium and I believe that Lupin and Cipla have a potential to be ranked at a premium to others. Otherwise Ranbaxy looks highly undervalued but due to the uncertainty surrounding its operations, it could be a risky investment at this time.

Sun Pharma:
Promoted by Mr. Dilip S Shanghvi, Sun Pharmaceuticals (SUNP) is one of the fastest growing companies with revenue and profit growth of 27% CAGR and 18% CAGR, respectively, over FY08-13 With 3,600 medical reps, SUNP has a market share of 4.8% and is the third largest player in the domestic market, while Taros acquisition in US generics space augments its pipeline with differentiated products in dermatology

The premium valuations are justified given its consistent track record of successful acquisitions, high profitability, and extremely strong cash flows and return ratios. Sun Pharma has had a fairly successful track record of acquisitions in the US (unlike some of its domestic peers) of turning around distressed assets and thus generating value This has enabled Sun Pharma to not only enlarge its product pipeline with lower investments and leapfrog development timelines (e.g. URL Pharma and Taro) but also establish strong beach-heads in lucrative US segments like derma and generate best-in-class return ratios Sun Pharma has successfully transitioned from the commodity generics segments to more niche segments such as dermatology and indictable over FY05-13 Sun Pharma is essentially a strong franchise and good cash flow generation ability. With EBITDA margin of 44 per cent, Sun Pharma still remains a preferred pick within the pharma space

Lupin: Promoted by Dr. D.B. Gupta, Lupin Pharmaceuticals (LPC) is ranked as 7th largest player in domestic market. LPCs revenues and profits have posted 30% and 26% CAGR in FY07-13, driven by strong and consistent performance in key markets of India and US and entry into new geographies of Japan and South Africa. India contributes 25% to FY13 revenues and have posted 16% CAGR over FY09-13. Lupin strategic intent to shift focus on chronic segments vis--vis veteran cephalosporin business have rendered it a strong position in CVS/Diabetes, CNS and respiratory segment. LPCs export sales have posted 30% CAGR during FY09-13 and now form a more formidable part of overall business. US constitutes 35% of sales and is the largest international market for Lupin. LPCs branded formulation play reduces volatility in US operations while Kyowa and Irom provides strategic foothold in crucial Japanese market

Cipla: Owned and managed by Dr. Y.K. Hamied, a second generation entrepreneur, Cipla is Indias third largest company by domestic sales. Ciplas domestic formulations contribute 45% to total FY13 revenues (excluding tech fees) and have posted 13% CAGR in FY09-13. With a market share of ~5%, Cipla is the third largest player in the Indian market, with leadership positions in ARTs, respiratory and urology. Ciplas export sales have grown at 15% CAGR during FY09-13. Africa, with 30% share, is the largest contributor to exports, followed by the Americas and Europe together (40%)

Ciplas growth profile and margin expansion render strong earnings growth.. Further, timely approval of inhalers for EU and/or long-term partnerships with innovator companies and lower capex could add large upsides to our estimates