Post on 28-Mar-2018
Deutsche Bank Markets Research
Asia
India
Health Care
Industry
Indian Pharmaceuticals
Date
2 December 2015
Initiation of Coverage
Acquisition upside outweighs regulatory fears Acquisition-led growth; regulatory risks to drive near-term sentiment
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.
Kartik Mehta
Research Analyst
(+91) 22 7180 4210
kartik-a.mehta@db.com
Key Changes
Company Target Price Rating
SUN.NS – to 880.00(INR) NR to Buy
CIPL.NS – to 722.00(INR) NR to Buy
CADI.NS – to 422.00(INR) NR to Hold
GLEN.NS – to 1,133.00(INR) NR to Buy
TORP.NS – to 1,672.00(INR) NR to Buy
REDY.NS – to 2,748.00(INR) NR to Sell
LUPN.NS – to 2,165.00(INR) NR to Buy
Source: Deutsche Bank
Top picks
Sun Pharma (SUN.NS),INR729.25 Buy
Lupin (LUPN.NS),INR1,811.55 Buy
Dr. Reddy's (REDY.NS),INR3,210.90 Sell
Source: Deutsche Bank
Companies Featured
Sun Pharma (SUN.NS),INR729.25 Buy
Lupin (LUPN.NS),INR1,811.55 Buy
Cipla (CIPL.NS),INR648.55 Buy
Glenmark (GLEN.NS),INR983.45 Buy
Torrent (TORP.NS),INR1,468.65 Buy
Cadila Healthcare (CADI.NS),INR401.05 Hold
Dr. Reddy's (REDY.NS),INR3,210.90 Sell
Source: Deutsche Bank
Product launches in US markets and synergies from recent acquisitions are set to drive sector earnings at a CAGR of 24% in FY15-18E, following a CAGR of 18% over the past three years. Indian pharmaceutical companies will continue to use their under-leveraged balance sheets to pursue inorganic growth by acquiring assets in both the Indian and US markets. While regulatory risks will remain a sector overhang, the risk-reward profile appears favourable, with current valuations discounting recent moves by the FDA (S&P BSE Healthcare underperformed BSE Sensex by c.10% in last 3M).
Initiating with Buy on Sun, Lupin, Cipla, Glenmark, Torrent; Sell on Dr. Reddy’s We initiate coverage with a Buy rating on Sun (PER of 22x, lower than historical multiple mainly on account of impending FDA issues), Lupin (PER of 23x, to factor in higher growth trajectory), Cipla (PER of 21x, discount to Sun and Lupin to factor in continuing front-end investments), Glenmark (PER of 21x, at c.5-10% discount Sun and Lupin) and Torrent Pharma (PER of 20x, at c.5-15% discount to Sun and Lupin); a Sell rating on Dr. Reddy’s (PER of 18x to factor in USFDA warning letter on three of its plants); and a Hold rating on Cadila (PER of 18x to factor in delays in approvals for Moraiya plant). All our target prices are based on PER (x) assigned to our FY18 recurring earnings forecast plus relevant one-offs on a cash basis.
Regulatory risks appear highest for Dr. Reddy’s While Dr. Reddy’s (US sales 44%) has received a warning letter for two of its bulk drugs and one oncology formulation plant, Sun and Cadila have seen a slower pace of approvals in FY16 due to observations issued for their USFDA formulation plants in India (Halol and Moraiya). US sales, which represent the highest proportion (c.30%-45%) of sales for Indian pharma companies, will likely see sluggish growth rates as the ANDA approvals for Dr. Reddy’s, Sun and Cadila could be delayed, leading to downside risk to consensus earnings for these companies. We see low risk to our earnings forecasts for Sun as we do not factor in new approvals for Halol until 4QFY17.
Low leverage and low dividend payouts expected to drive acquisitions We expect Indian companies to capitalise on their low leverage by seeking inorganic growth opportunities, mainly in regulated markets like the US, to add to and diversify their existing portfolios, while also acquiring front-end businesses in emerging markets. Sun, Lupin, Dr. Reddy’s and Cipla look set to take the lead in seeking acquisitions globally. Consequently, we expect Sun, Lupin and Cipla to deliver the highest earnings growth in the sector. With organic growth capped for Dr. Reddy’s, due to existing US FDA regulatory issues, it could be aggressive in seeking acquisitions globally. We believe acquiring assets at reasonable multiples will remain a challenge and payback periods may get stretched if integration synergies are delayed.
Demographics to drive IPM, product launches to fuel US generic sales We forecast a c.12-15% CAGR in the Indian pharma market over the next five years and anticipate key product launches such as generic Gleevec (Sun), generic Glumetza (Lupin), generic Zetia (Glenmark) and generic Asacol HD (Cadila).
2 December 2015
Health Care
Indian Pharmaceuticals
Page 2 Deutsche Bank AG/Hong Kong
Table Of Contents
Executive summary ............................................................. 3
Acquisitions have been mainly in India and US .................. 6
USFDA risks – allaying investor concerns ........................... 9
Research costs have been rising, approvals lagging ........ 11
IPM – positive outlook ....................................................... 13
Valuation and risks ............................................................ 15
Glossary ............................................................................. 27
Company Section .............................................................. 28
Sun Pharma ....................................................................... 29
Lupin .................................................................................. 40
Dr. Reddy's ........................................................................ 49
Cipla ................................................................................... 60
Cadila Healthcare .............................................................. 70
Glenmark ........................................................................... 80
Torrent ............................................................................... 89
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 3
Executive summary
Acquisition-led growth supported by balance sheet strength USFDA actions are NOT generic regulatory sector risk Regulatory risks for Dr. Reddy’s are higher than for Sun and Cadila
Acquisition-led growth to emerge as key sector theme
A confluence of factors, ranging from strong balance sheets following several
years of robust cash flow generation to confidence in successfully integrating
acquisitions, is set to drive an even faster pace of M&A activity in the sector.
As M&A continues, the recent acquisition multiples could set the benchmark
for secondary market valuations. US sales contribute c.30-50% of sales for
most large Indian companies; others with lower US exposure are adding to
their presence in this market by acquiring assets (Cipla – Invagen and Exelan).
While non-US markets like Japan, Latam and the EU are large, every company
has a different strategy in these markets, as they continue to pose challenges
in relation to entry, regulation and currency volatility.
Regulatory challenges notwithstanding, we estimate that current business
operations should drive an EPS CAGR of 24% for the sector for FY15-18E. The
big outperformance should be from Sun (26.3% EPS CAGR in FY15-18E) and
Lupin. We see downside risk to the consensus earnings of Dr. Reddy’s, which
faces headwinds in the US. Acquisitions by Indian pharma companies (with a
few exceptions) have a payback period of 5-7 years under modest growth
assumptions (Sun – Taro, Torrent – Elder, see Figure 8).
USFDA actions are NOT generic regulatory sector risk
Following recent US FDA actions on Indian pharma manufacturing units,
investors fear a generic regulatory risk for the sector. Our detailed table (see
glossary on page 28) should allay investor fears: not all 483 observation letters
turn into warning letters, and not all warning letters turn into import alerts.
Also, on most occasions, further USFDA actions have been initiated within a
year of the issuance of 483 observations and warning letters.
Regulatory risks for Dr. Reddy’s are higher than for Sun and Cadila
In November 2015, the USFDA issued warning letters for three of Dr. Reddy's
Indian manufacturing sites. The US contributes 44% of Dr. Reddy’s sales and
we believe that delays in the resolution of the issues at these plants will have
an impact on new approvals, putting pressure on consensus sales and
earnings. Currently, the status of Sun's USFDA plant at Halol in Gujarat is
Official Action Initiated; this plant has not seen any ANDA approvals for about
a year. Sun transferred generic Gleevec from its Halol plant to another facility
outside India. We see low risk to our earnings forecasts for Sun Pharma, as we
do not factor in new approvals for Halol until 3QFY17. Sun and Cadila received
483 observations at the above plants in September 2014.
2 December 2015
Health Care
Indian Pharmaceuticals
Page 4 Deutsche Bank AG/Hong Kong
Valuation based on PER, risks mainly relate to market growth
We have used PER as our principal valuation matrix for the sector. The critical
parameter is our assessment of each company’s ability to enhance growth in
key markets (US and India). We also consider the potential for growth beyond
FY’18 that will be derived from acquisitions made in the past 1-2 years, as well
as the historical valuation ranges, before arriving at the appropriate multiple for
each stock. Our assessment suggests that Sun and Lupin are well entrenched
in these key markets and have demonstrated above-industry growth rates; we
therefore estimate that they should be able to sustain current one year forward
multiples of 20x-24x. This is also premised on our EPS CAGR forecasts of 18-
26% (FY15-18E) for the two companies. For companies constrained by low
growth and ongoing regulatory issues, we have factored in a marginal
discount to historical trading averages.
Figure 2: DB recommendation summary
Company Rec. CMP
(INR)
TP
(INR) Upside
EPS CAGR (%)
FY2015-18E
Avg.PER
5 yr/3 yr.
PER
FY17E/18E
Target
FY18 PER Comment
Sun Buy 730 880 21% 26.7 24x/30x 20x/18x 22x
Lower than historical PER, mainly to factor in USFDA issues at Halol, which has OAI and Ranbaxy integration
Lupin Buy 1,787 2,165 21% 18.9 21x/23x 23x/19x 23x Highest PER justified by high growth trajectory and higher EBITDA margin
Cipla Buy 644 722 12% 32.7 21x/20x 23x/19x 21x
Lower than Sun and Lupin to factor in continuing front-end investments, relatively low EBITDA margin
Glenmark Buy 981 1,133 16% 33.2 19x/23x 19x/18x 21x
Higher than 5-year average because of strong outlook for US and India business, despite relatively low EBITDA margin
Torrent Buy 1,426 1,672 17% 23.5 21x/20x 22x/17x 20x
Higher PER to factor in traction in India and US business despite higher base effect in FY16.
Cadila Hold 401 422 5% 27.3 12x/13x 21x/17x 18x Lower PER to factor in USFDA approval risk, weaker margin outlook
Dr. Reddy’s Sell 3,108 2,748 -12% 7.1 19x/21x 23x/20x 18x Lower than historical multiple mainly on account of impending FDA warning letter
Source: Deutsche Bank estimates, Price data as on 30/11/2015
Figure 1: Key business comparison
Dr. Reddy's
Cipla
Cadila
Lupin
TorrentGlenmark
Sun
0
10
20
30
40
50
60
0 10 20 30 40 50
US
Ou
tlo
ok
India Outlook
Source: Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 5
S&P BSE Healthcare Index has largely outperformed BSE Sensex
The S&P BSE Healthcare Index (S&PBSEHC) has outperformed the BSE Sensex
thanks to strong core business growth in the sector and a weakening Indian
rupee. In seven of the past nine years (YTD for 2015), the S&P BSE Healthcare
Index has outperformed the BSE Sensex on a relative basis, mainly due to
investors’ recognition that the pharma sector is not sensitive to interest rate
rises and demand for products is inelastic.
Figure 4: Performance of S&P BSE Healthcare Index vs. BSE Sensex
35
40
45
50
55
60
65
70
50
150
250
350
450
550
650
Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15
S&P BSE HEALTHCARE INDEX S&P BSE SENSEX USD-INR movement (sec. axis)
1 2 34
56
Source: Deutsche Bank, Bloomberg Finance LP (Data as on 17/11/2015)
Sun and Lupin are top picks
Lupin and Sun are the top picks in our coverage universe, with more than
c.20% upside to our target prices. We mainly differ from consensus as we
factor in lower traction in the US business, resulting in lower EBITDA margin.
Figure 5: DB vs. consensus
Sales EPS Comment
FY16E FY17E FY18E FY16E FY17E FY18E
Sun Pharma 1.4% 2.2% (1.9%) (1.0%) 6.4% 1.4% We have assumed Halol resolution in Q4FY17
Lupin Ltd. (3.8%) (3.6%) (6.0%) (4.1%) 2.8% 5.3% We factor in lower US sales but better EBITDA margin
Dr. Reddy's (1.8%) (3.0%) (5.4%) (3.5%) (6.1%) (10.4%) We factor low US approvals, which also impact EBITDA
Cipla 1.8% (2.2%) (2.4%) (6.0%) (3.5%) (2.4%) We factor in higher front end costs in EBITDA
Cadila (4.7%) (2.8%) (0.9%) (6.0%) (1.4%) 3.8% We assume delays in US approvals in FY16
Glenmark (0.8%) (1.5%) 0.0% (3.3%) (5.9%) (8.4%) We assume low contribution from LATAM markets
Torrent (11.9%) (16.2%) (14.4%) (9.4%) (8.6%) (2.2%) We assume lower US sales in the US markets
Source: Deutsche Bank estimates, Bloomberg Finance LP (Data as on 27/11/2015)
Key sector risk: slower-than-expected growth in key markets like India and US
Key sector risks include slower-than-expected growth of the IPM, delays in
product approvals by the USFDA, delays in integrating acquired assets, slower-
than-expected growth in other large emerging markets and currency volatility.
1. Bull Phase, Pharma underperforms
2. Bear Phase, Pharma outperforms
3. Pharma outperforms despite market recovery,
driven partially by weak INR
4. Pharma sector earnings driven by INR weakness
and faster growth in US sales
5. Some gains from weak INR lost due to new
Pharma pricing policy
6. Regulatory concerns drive negative sentiment for
the sector
Figure 3: Oct-Nov’15 performance
85
90
95
100
105
110
4-O
ct-1
5
13-O
ct-1
5
22-O
ct-1
5
31-O
ct-1
5
9-N
ov-1
5
18-N
ov-1
5
S&P BSE Healthcare Index
S&P BSE Sensex
Source: Deutsche Bank, Bloomberg Finance LP (Data as on 20/11/2015)
2 December 2015
Health Care
Indian Pharmaceuticals
Page 6 Deutsche Bank AG/Hong Kong
Acquisitions have been mainly in India and US
Focus on US generic markets Low leverage enables expansion Direct correlation between execution and stock performance
US generic markets remain key focus of Indian companies
The US accounts for c.30-50% of sales for large Indian companies like Sun, Dr.
Reddy’s, Lupin, Cadila and Glenmark. Other companies with lower exposure
are adding to their presence in this market by acquiring assets (Cipla – Invagen
and Exelan) or acquiring capabilities (Torrent Pharma – Zyg Pharma). The US
remains a major focus market for Indian companies; while other markets such
as Japan, LatAm and the EU are large, every company has a different strategy
in these markets. These include acquisitions in South Africa by Lupin and
Cipla, in France by Cadila, in Japan by Lupin, and in LatAm by Lupin and
Cadila. While these markets are large they continue to pose challenges in
relation to entry, regulation and currency volatility.
Figure 6: US acquisitions by Indian companies
Acquirer Target
Sun Pharma Taro, URL, DUSA, Pharmalucence , Ranbaxy's US Assets
Cipla Invagen Exelon
Lupin Gavis
Dr. Reddy’s Small Portfolio from Glaxo and a manufacturing facility
Cadila Nesher
Torrent Pharma Zyg Pharma which has USFDA manufacturing capabilities
Source: Company, Deutsche Bank
Acquisitions driven by low existing leverage
Indian pharma players have acquired several companies and assets in
developed markets. We expect Indian companies, which have the comfort of
low leverage on the balance sheet, to add to their existing product portfolios in
regulated markets and to increase their footprint in emerging markets. Equity
dilution is also an option as the promoter holding in most of the companies is
c.45-75% (except Dr. Reddy’s). While acquisitions will lead to volatility in
earnings in the short term, we expect return ratios to improve in the medium
term. We expect the dividend payout from these companies to remain at
existing levels and see cash being used to fund inorganic growth.
Figure 7: Low leverage, high promoter holding
Company Debt to equity Promoter holding Pay outs US sales Comment
Sun Pharma 0.3x 54.7% 15-20% 50% Includes Taro (c.19% , USD 863m) , generic Gleevac to drive sales
Dr. Reddy’s 0.4x 25.5% 14-18% 44% Generic Treanda and Generic Pristiq are larger upsides
Lupin 0.1x 46.6% 13-18% 45% Gavis key growth driver
Cadila 0.8x 74.8% 21-24% 40% Large approvals, Asacol HD
Glenmark 1.3x 46.5% 8-12% 31% Generic Zetia key growth driver
Torrent 1.1x 71.3% 25-35% 18% Higher base in FY16 due to generic Abilify
Cipla 0.2x 36.8% 10-16% 8% North America sales , Invagen to drive future US sales
Source: Company, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 7
Acquisitions have been an important driver of growth in India
Over the past four years, acquisitions in the IPM have been transacted at the
equivalent of c.2-9x annual sales. Acquisitions by Indian companies have been
to increase or add therapeutic segment presence and by MNCs have been for
the purpose of gaining market share in India. The multiple at the top of the
price-to-sales range is mainly for businesses with strong brands or high
EBITDA margins.
Figure 8: Key acquisitions in India
Acquirer Target Multiple (P/Sales)
Sun Pharma Ranbaxy 2.2x
Torrent Elder 5x-6x
Abbott Piramal c.9x
Strides Acrolab Ranbaxy’s CNS unit 1x
Dr. Reddy’s Laboratories UCB India 5.3x
Source: Company, Deutsche Bank
Currently, there are eight listed (10 in 2007) and eight unlisted (four in 2007)
Indian companies in the top 20 companies in the IPM. We believe that while,
currently, several family-run companies may not be keen to sell their stakes,
the formation of alliances (in manufacturing, research and distribution) or
partial stake sales may emerge as a precursor to sales.
Figure 9: Top 20 companies in IPM
Company Type
2015 2014 2013 2010 2007 Summary
MNC 4 5 5 6 6 Abbott (Piramal HC), Glaxo, Pfizer-Wyeth, Sanofi-Aventis
Listed 8 7 7 8 10 Cipla, Sun Pharma + Ranbaxy, Cadila HC, Lupin, Dr. Reddy’s, Glenmark, Torrent Pharma, Alembic
Not Listed 8 8 8 6 4 Mankind, Alkem, Macleods, Intas, Aristo, Emcure, Micro Labs, USV
Source: AIOCD AWACS, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 8 Deutsche Bank AG/Hong Kong
Payback of assets has driven stock performance
In the case of Sun Pharma, the payback period for Taro and URL was less than
three years. Regulatory changes in Germany had a negative impact on Dr
Reddy’s after its acquisition of Betapharm.
Figure 10: Stock price movement after M&A
Company Date of Acquisition
1 day 1 month 3 month 6month 1 year 2 year 5 year Comments
Sun Pharma
Taro 22-Sep-10 -2% 11% 11% 15% 26% 77% 367% Turnaround in less than 3 years
URL 17-Dec-12 3% 0% 16% 33% 60% 129% na Payback in less than 2 years
Ranbaxy 08-Apr-14 7% 6% 23% 46% 84% na na Acquisition completed at the end of 4QFY15
Dr Reddy's
Betapharm 17-Feb-06 0% 5% 23% 14% 14% -18% 166% Large asset, change in policy in Germany had a negative impact
UCB's India Assets 10-Apr-15 2% -10% 0% 13% na na na Small acquisition, recently integrated, yet to estimate the details of payback
Lupin
Gavis 24-Jul-15 -3% 9% 19% na na na na Large US acquisition, estimate payback of 5-7 years
Kyowa 11-Oct-07 1% -1% 9% -11% 38% 104% 416% Entry strategy in Japan, smaller asset
Cipla
Cipla Medpro 22-Nov-12 -2% 8% -2% 7% 4% 60% na Good acquisition but stock impacted as core business performance lagged
Invagen 03-Sep-15 0% -2% na na na na na Appears reasonable at a payback period of 5-7 years
Torrent Pharma
Elder Assets 14-Dec-13 0% -2% 13% 44% 119% na na Good acquisition, payback period under reasonable assumptions is 4-5 years
Cadila
Nesher 17-Jun-11 -1% 6% -10% -22% -20% -15% na Small asset, company's other business was weak, leading to lower returns
Source: Deutsche Bank, Bloomberg Finance LP
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 9
USFDA risks – allaying investor concerns
USFDA actions have severely impacted stock prices USFDA actions are NOT a generic regulatory risk Dr. Reddy’s, Sun and Cadila have recently been affected by USFDA
actions
USFDA actions have severely impacted stock prices
Stock prices have reacted to USFDA actions – warning letters and import alerts
issued to companies. The fall has been continuous as US business is disrupted
for at least one year.
Figure 11: Stock price movement after US FDA warnings
Company Facility Date of Warning letter
1day 2 weeks 1 month 3 month 6month 1 year Comment
Dr Reddy's Srikakulam 06-Nov-15 -15% -21% na na na na Warning letter on 3 plants
Cadila Moraiya 21-May-11 0% 1% 1% -9% -19% -10% Approvals got delayed
Sun Karkhadi 07-May-14 0% -8% -4% 24% 36% 50%
Issue still not resolved but forms less than 1% of revenues, other events overshadowed
Wockhardt Chikalthana 18-Jul-13 -9% -54% -53% -51% -58% -41% Warning letter followed by escalations resulted in stock de-rating
Aurobindo Unit III and Unit Vi 20-May-11 1% -8% -9% -25% -52% -47% Impacted a large revenue stream for a year, approvals came after one year
Company Facility Date of import Alert
1day 2 weeks 1 month 3 month 6month 1 year Comment
Ipca 2 plants 18-Jul-14 -1% -16% -17% -20% -15% -19% USFDA issued import alert. So far the issue is not resolved, stock has de-rated
Ranbaxy Mohali 16-Sep-13 2% 3% 5% -23% -11% 1% Limited impact as USFDA had earlier imposed import alert on all its Indians plant
Source: Deutsche Bank, Bloomberg Finance LP, US FDA
2 December 2015
Health Care
Indian Pharmaceuticals
Page 10 Deutsche Bank AG/Hong Kong
USFDA actions are NOT a generic regulatory risk
Following recent US FDA actions on Indian plants, regulatory risk has emerged
as a key concern for the sector. We understand that investors fear a generic
regulatory risk. Figure 12 should allay investor fears: not all 483 observation
letters turn into warning letters and not all warning letters turn into import
alerts. Also, on most occasions, further USFDA actions have been initiated
within a year of the issuance of a 483 observation letter and warning letter; for
example, in the case of Lupin, the warning letter was issued within c.6 months
of the inspection, while in the case of Ranbaxy, the import alert status was
declared on the Mohali plant about a year after the date of inspection.
Figure 12: Recent FDA actions
Company Facility Issue Date of inspection Date of letter Time Gap (days)
Dr. Reddy's Srikakulam Warning Letter Dec 14, Jan-15 Nov-15 c.11 months
Cadila Healthcare Moraiya Warning Letter 03-Feb-11 21-Jun-11 138
Lupin Mandideep Warning Letter 12-Nov-08 07-May-09 176
Ranbaxy Dewas Warning Letter 12-Feb-08 16-Sep-08 217
Ranbaxy Paonta Sahib Warning Letter 07-Mar-08 16-Sep-08 193
Strides Agila (Bangalore) Warning Letter 27-Jun-13 09-Sep-13 74
Sun Pharma Karkhadi Warning Letter 16-Nov-13 07-May-14 172
Sun Pharma Cranbury Warning Letter 28-Apr-10 25-Aug-10 119
Wockhardt Chikalthana Warning Letter 31-Jul-13 25-Nov-13 117
Wockhardt Waluj Warning Letter 22-Mar-13 18-Jul-13 118
Aurobindo Unit III Warning Letter 24-Sep-10 20-May-11 238
Aurobindo Unit VI Warning Letter 22-Dec-10 20-May-11 149
Ipca Pithampur Import Alert 19-Dec-14 24-Mar-15 95
Ipca Ratlam Import Alert 18-Jul-14 23-Jan-15 189
Ranbaxy Toansa Import Alert 11-Jan-14 23-Jan-14 12
Ranbaxy Mohali Import Alert 26-Sep-12 16-Sep-13 355
Source: US FDA, Deutsche Bank
Dr. Reddy’s, Sun and Cadila have been recently impacted by USFDA actions on
their manufacturing plants
In November 2015, the USFDA issued warning letters to three Indian sites of
Dr. Reddy's, relating to its Active Pharmaceutical ingredient manufacturing
facilities at Srikakulam, Andhra Pradesh and Miryalaguda, Telangana, as well
as its Oncology Formulation manufacturing facility at Duvvada,
Visakhapatnam, Andhra Pradesh. The US contributes c.44% of sales, and we
believe that delays in the resolution of the issues at these plants will impact
new approvals and put pressure on consensus sales and earnings.
Sun and Cadila received 483 observations at their plants in September 2014.
Currently, the status of Sun's USFDA plant at Halol in Gujarat is Official Action
Initiated; this plant has not received any ANDA approvals for about a year. The
company has shifted generic Gleevec from its Halol plant to another facility
outside India. We assume normalisation from Halol in 4QFY17. After the
USFDA's 483 observations issued to Cadila's plant at Moraiya in Gujarat, the
company has not received any final ANDA approval for this plant.
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 11
Research costs have been rising, approvals lagging
Research costs have a considerable range of c.5-12% of sales In the US drug pipeline, generic Gleevec and generic Zetia are
significant ANDA approvals have dropped due to USFDA concerns
Research costs have a huge range of c.5-12% of sales
While research and development costs continue to rise, mainly on the back of
filing-related costs in the US and other regulated markets, companies like Dr.
Reddy’s, Lupin and Glenmark have been investing more in long gestation
filings like 505 B(2), New Chemical and Biological entities. Sun Pharma’s R&D
cost is capped, as most of such filings are done by the Sun Pharma Advanced
Research Company (SPADV IN).
Figure 13: R&D expense as a percentage of sales
FY2013 FY2014 FY2015E FY2016E
Company Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Dr. Reddy's 6.1 7.1 7.3 8.5 9.0 8.4 11.4 11.0 11.5 11.2 13.3 11.7 11.2
Lupin 4.2 9.7 7.9 8.1 8.3 9.1 8.0 7.4 9.1 8.3 10.1 10.2 12.2
Glenmark 8.4 7.4 6.9 9.0 9.8 8.5 8.9 9.2 9.7 10.3 10.9 10.3 9.4
Sun Pharma 5.3 5.7 7.1 5.5 5.0 6.8 7.3 5.5 6.0 6.8 8.9 7.7 7.3
Cadila HC 7.7 8.8 8.1 6.6 7.6 6.7 5.4 5.2 5.7 8.7 6.6 7.1 7.3
Source: Company, Deutsche Bank; for the above period Cipla and Torrent’s R&D is around c.3-5% of sales
2 December 2015
Health Care
Indian Pharmaceuticals
Page 12 Deutsche Bank AG/Hong Kong
In the US drug pipeline, generic Gleevec and generic Zetia are significant
Figure 14 lists large launches for Indian Pharmaceutical companies over the
next two years. (For more launches, refer to the individual company sections.)
Figure 14: Key products to be launched
Company Key Products
Sun Generic Gleevac, expected to be launched on February 1, 2016; first to file, branded market size is c.USD 2bn
Glenmark Generic Zetia, expected to be launched on December 12, 2017; first to file, branded market size is c.USD 2bn
Cadila Generic Asacol HD, approval not received on launch date on November 15, 2015, branded market size c.USD 500mn
Lupin Generic Glumetza, expected to be launched in February 1, 2016, sole first to file , market size c.USD 200-300mn
Dr. Reddy's Generic Gleevac, expected to be launched a few quarters after Sun launch, branded market size is c.USD 2bn
Source: Company, Deutsche Bank
ANDA approvals have dropped due to USFDA concerns
The ANDA approval rate for companies like Cadila, Sun and Dr. Reddy’s has
been low, mainly on account of the USFDA concerns at some of their plants,
whereas approvals have been higher for Lupin, Glenmark and Torrent.
Figure 15: ANDA approvals CY2015 Figure 16: ANDA approvals CY2014
57 7
1
4 3
2
1
62
1
2
1
2
2
1
0
5
10
15
20
25
1Q15 2Q15 3Q15
Lupin Sun Dr Reddy’s Glenmark Cadila Torrent
6
117 6
4
3
5
2
1
2
3
74
1
2
1
2
1
80
5
0
0
5
10
15
20
25
30
1Q14 2Q14 3Q14 4Q14
Sun Dr Reddy’s Torrent Lupin Glenmark Cadila
Source: US FDA, Deutsche Bank
Source: US FDA, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 13
IPM – positive outlook
Demographic factors will continue to drive growth Volumes have been key growth drivers in IPM Chronic segment contribution increasing in IPM
Demographic factors will continue to drive growth
The Indian pharma market continues to grow, driven by the sheer size of its
demography; early, improved diagnosis and the increasing shift from acute to
chronic diseases; and low healthcare spend (less than 5% of GDP) .The IPM is
currently c.INR 930bn and is mostly a branded generics market (c.95% of the
market), with high out-of-pocket expenses. We expect the IPM to post a c.12-
15% CAGR over the next five years.
Figure 17: Healthcare expenditure Figure 18: Underpenetrated doctor reach
India
China
Brazil
Russia
South Africa
UK
Spain
Italy
France
Germany
Japan
US
0
20
40
60
80
100
0 3 6 9 12 15 18
% o
f o
ut
of
po
cket
exp
en
se
% of GDP
India
China
BrazilSouth Africa
UK
Spain
Italy
France
Germany
US
-
10
20
30
40
50
60
0 2 4 6
Per
cap
ita (
US
D'0
00
)
Physicians (per '000 people)
Source: World Bank, Deutsche Bank
Source: World Bank, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 14 Deutsche Bank AG/Hong Kong
Volumes have been key growth drivers in IPM
We expect growth rates to revive as the impact of the new drug pricing policy
(NPPP), which was implemented in August 2013, is now entirely in the base
and companies have taken the Wholesale Price Index adjusted price hike into
their NPPP impacted portfolio.
Figure 19: Growth drivers
8.9%
(0.2%)
4.9%7.3%
3.6%
3.3%
2.4%
4.7%
3.9%
2.9%
3.2%
2.8%
-1.0%
3.0%
7.0%
11.0%
15.0%
19.0%
2012 2013 2014 2015
Vol growth Price growth New Product growth
Source: AIOCD AWACS, Deutsche Bank
Chronic segment contribution increasing in IPM
The IPM has seen an increase in exposure to chronic care over the years
(c.31% in 2015 vs. c.28% in 2011). This has been driven by faster-than-market
growth in chronic therapies, on account of an increase in diseases like diabetes
and hypertension. The sub-chronic segment (like anti-retrovirals, vitamins and
supplements), which is a combination of acute and chronic care, has remained
stable at an industry level.
Figure 20: Sales MAT by segment, October 2015 Figure 21: Sales MAT by segment, October 2011
48
50
46
43
40
31
29
26
31
30
42
36
37
48
58
50
20
20
12
21
22
20
14
24
0 20 40 60 80 100
IPM
DR. REDDYS
CIPLA
ZYDUS …
GLENMARK
LUPIN LTD
SUN PHARMA
TORRENT
ACUTE CHRONIC SUB CHRONIC
53
53
51
49
47
46
35
29
28
27
39
31
42
29
43
44
20
20
10
19
11
25
22
27
0 20 40 60 80 100
IPM
DR. REDDYS
CIPLA
ZYDUS …
GLENMARK
LUPIN LTD
SUN PHARMA
TORRENT
ACUTE CHRONIC SUB CHRONIC
Source: IOCD AWACS, Deutsche Bank , MAT refers to Moving Annual Total
Source: IOCD AWACS, Deutsche Bank , MAT refers to Moving Annual Total
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 15
Valuation and risks
Sector PER has been steadily improving Similar strengths but different outlook for India and US Valuation on PER, risks mainly relate to market growth
Sector PER has been steadily improving
The PER for the sector has been steadily improving for the last four years,
mainly on the back of launches in the US market, inorganic opportunities and
the weak rupee v/s the dollar.
Figure 22: Sector P/E
5
10
15
20
25
30
30-1
1-2
007
10-0
5-2
008
19-1
0-2
008
30-0
3-2
009
08-0
9-2
009
17-0
2-2
010
29-0
7-2
010
07-0
1-2
011
18-0
6-2
011
27-1
1-2
011
07-0
5-2
012
16-1
0-2
012
27-0
3-2
013
05-0
9-2
013
14-0
2-2
014
26-0
7-2
014
04-0
1-2
015
15-0
6-2
015
24-1
1-2
015
PE
R (
x)
Sector P/E 5 yr avg.
Source: Deutsche Bank, Bloomberg Finance LP (Data as on30/11/2015)
Similar strengths but different outlook for India and US
We believe Sun Pharma, Lupin and Dr. Reddy’s have similar strengths in the
US market. However, the ongoing manufacturing issues for Dr. Reddy's API
plant will delay ANDA approvals and thereby delay timely launches. While
products can be transferred to alternate sites, this can take around 2-4
quarters or even more for complex products.
Apart from acquisitions, developing a significant product pipeline with a good
mix of limited competition products, FTFs, NDDS products, etc, will be one of
the key growth drivers in the US. Increasing consolidation in the US market on
the distribution side, as well as M&A in the US generic pharmaceutical space,
will continue to put higher pricing pressure on the US business. On the other
hand, the Indian business will drive sales growth and profitability. Hence, we
prefer companies that have a strong India focus, with leadership in the chronic
segments. Lupin makes gains over Dr. Reddy when it comes to comparing
their India businesses. Sun Pharma has the strongest Indian business amongst
its India peers.
Figure 23: Key business comparison
Dr. Reddy's
Cipla
Cadila
Lupin
TorrentGlenmark
Sun
0
10
20
30
40
50
60
0 10 20 30 40 50
US
Ou
tloo
k
India Outlook
Source: Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 16 Deutsche Bank AG/Hong Kong
Valuation on PER, risks mainly relate to market growth
We have used PER as our principal valuation matrix for the sector. The critical
parameter in our assessment is each company’s ability to enhance growth in
key markets (US and India). We also consider the potential for growth beyond
FY’18 that will be derived from acquisitions made in the past 1-2 years, as well
as the historical valuation ranges, before arriving at the appropriate multiple for
each stock. Our assessment suggests that Sun and Lupin are well entrenched
in these key markets and have demonstrated above-industry growth rates,
leading us to believe that they should be able to sustain current one year
forward multiples of 20x-24x. This is also premised on our EPS CAGR forecasts
of 18-26% (FY15-18E) for the two companies. For companies constrained by
low growth and ongoing regulatory issues, we have factored in a marginal
discount to historical trading averages.
Figure 24: Financial outlook
Sales CAGR Earnings CAGR EBITDA Margin Comments
FY12-15 FY15-18E FY12-15 FY15-18E FY12-15 FY15-18E
Sun 50.5 10.5 15.7 26.7 c.28-45 c.28-35 Driven by generic Zetia and Ranbaxy synergies
Dr. Reddy’s 15.3 6.9 16.1 7.1 c.22-26 c.23-25 Stable due to continuous product launches in the US
Lupin 21.9 15.2 40.8 18.9 c.19-29 c.24-33 US business driven EBITDA margin , mainly Gavis
Cipla 17.3 18.8 1.1 32.7 c.19-27 c.19-24 Key product launches have driven EBITDA margin
Cadila 18.6 16.6 16.8 27.3 c.14-19 c.18-24 US business has driven EBITDA margin
Glenmark 18.1 18.0 3.9 33.2 c.18-21 c.18-25 Driven by generic Zetia
Torrent 20.9 12.0 29.0 23.5 c.15-21 c.20-36 Driven by US launches mainly generic Cymbalta and generic Abilify
Source: Company, Deutsche Bank estimates, all figures in %
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 17
Sun Pharma target PER of 22x
Sun has leadership across chronic segments in India and has also expanded
significantly in the US markets, while its business dynamics across markets
have continued to improve significantly. Sun has been trading at an average
one-year forward PER of 24x for the past five years (30x for the past three
years) on account of limited periods of upside in the US markets (generic Doxil
and doxycycline); this is at a premium of c.10-25% to Lupin and Dr Reddy’s.
However, in arriving at our target PER, we factor in the OAI at Halol by the
USFDA, supply issues from the plant and Ranbaxy integration. We assign a
PER of 22x (discount of 25% over the past three years’ one-year forward PER).
Thus, we rate Sun a Buy, with a target price of INR 880 (including INR 11 per
share for generic Gleevec) on our FY18 recurring EPS. Improvement in supplies
at Halol and the successful integration of Ranbaxy could potentially see the
stock getting re-rated and trading at PER of c.25-26x. With net cash of c.INR
61bn, Sun is in a stronger position than peers and cash-adjusted ROEs are in
the range of 25-30% over the next two years.
Figure 25: PE band – Sun Pharma
0
400
800
1,200
1,600
31-M
ar-0
9
09-S
ep-0
9
18-F
eb-1
0
30-J
ul-1
0
08-J
an-1
1
19-J
un-1
1
28-N
ov-1
1
08-M
ay-1
2
17-O
ct-1
2
28-M
ar-1
3
06-S
ep-1
3
15-F
eb-1
4
27-J
ul-1
4
05-J
an-1
5
16-J
un-1
5
25-N
ov-1
5
Price 15x 25x 35x 45x
Source: Deutsche Bank, Bloomberg Finance LP (data as of 30/11/2015)
2 December 2015
Health Care
Indian Pharmaceuticals
Page 18 Deutsche Bank AG/Hong Kong
Lupin target PER of 23x
Lupin has grown across chronic segments in India and also expanded
significantly in the US markets; its business dynamics across markets have
improved significantly. Its execution also remains on track, although
successful integration of Gavis will be key to future earnings growth. Lupin’s
FY15 had a higher base of product launches, mainly generic Cymbalta, which
was sold under shared exclusivity, and key brand Suprax, which now faces
generic competition; this is reflected in lower sales and earnings in FY16.
Our target valuation is at par with its three-year average one-year forward PER
of 23x. Thus, we rate Lupin a Buy, with a target price of INR 2,165 on our FY18
recurring EPS. We assign Lupin the highest PER in our coverage universe,
premised on 1) pieces in place for growth in India, 2) no near-term negatives
from the USFDA, and 3) continuous EBITDA margin improvement.
Figure 26: PE band – Lupin
0
500
1,000
1,500
2,000
2,500
3,000
3,500
06-A
pr-0
9
31-D
ec-0
9
26-S
ep-1
0
22-J
un-1
1
17-M
ar-1
2
11-D
ec-1
2
06-S
ep-1
3
02-J
un-1
4
26-F
eb-1
5
22-N
ov-1
5
Price 15x 25x 35x 45x
Source: Deutsche Bank, Bloomberg Finance LP (data as of 30/11/2015)
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 19
Dr. Reddy’s target PER of 18x
Dr Reddy’s has been trading at an average one-year forward PER of 19x for the
past five years (21x for the past three years on the back of continuous product
launches in the US markets), which is a discount of c.10-30% to Sun Pharma
and Lupin. The stock has fallen c.20% following the recent warning letters sent
to three of its plants. This will slow down approvals for the US market and
have a meaningful impact on overall sales and earnings growth. Furthermore,
remediation efforts at the USFDA plants will entail costs, temporary disruption
of supplies and timelines that could range from six months to over a year,
further dampening the earnings outlook.
We believe successful resolution of the warning letters issue would be a key
trigger in the medium term, but with Street estimates being revised down we
choose to adopt a conservative valuation. We assign a PER of 18x (discount of
5% to the past three years’ one-year forward PER), which is at a c.20-30%
discount to Sun and Lupin’s target PER. Thus, we rate Dr Reddy’s a Sell. We
have a INR 2,748 target price on our FY18E recurring EPS. While successful
site transfer would improve its sales growth outlook, EBITDA margin
improvement could be delayed as these transfers would entail additional costs
and in some cases also profit sharing; we believe the stock could trade at c.
18x-19x, but this is still below its historical multiple of 20x-21x.
Figure 27: PE band – Dr. Reddy’s
0500
1,0001,5002,0002,5003,0003,5004,0004,5005,000
31-M
ar-0
9
09-S
ep-0
9
18-F
eb-1
0
30-J
ul-1
0
08-J
an-1
1
19-J
un-1
1
28-N
ov-1
1
08-M
ay-1
2
17-O
ct-1
2
28-M
ar-1
3
06-S
ep-1
3
15-F
eb-1
4
27-J
ul-1
4
05-J
an-1
5
16-J
un-1
5
25-N
ov-1
5
Price 15x 20x 25x 30x
Source: Deutsche Bank Estimates, Bloomberg Finance LP (Data as on 30/11/2015)
2 December 2015
Health Care
Indian Pharmaceuticals
Page 20 Deutsche Bank AG/Hong Kong
Cipla target PER of 21x
Cipla’s investments in setting up and adding to its distribution will likely cap
EBITDA margin growth. While the company has acquired several assets in
markets across the world, execution and successful integration are vital; we
factor this into our target PER of 21x, which is at a discount of c.5-10% to
Lupin’s and Sun’s PERs. We rate Cipla a Buy, with a target price of INR 722
based on our FY18E recurring EPS.
Figure 28: PE band – Cipla
0
200
400
600
800
1,000
31-M
ar-0
9
09-S
ep-0
9
18-F
eb-1
0
30-J
ul-1
0
08-J
an-1
1
19-J
un-1
1
28-N
ov-1
1
08-M
ay-1
2
17-O
ct-1
2
28-M
ar-1
3
06-S
ep-1
3
15-F
eb-1
4
27-J
ul-1
4
05-J
an-1
5
16-J
un-1
5
25-N
ov-1
5Price 20x 25x 30x 35x
Source: Deutsche Bank estimates, Bloomberg Finance LP (data as on 30/11/2015
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 21
Cadila target PER of 18x
While Cadila’s US business has grown in the past on the back of product
launches, recent product approvals have been fewer in number, and the
company did not get approval for generic Asacol for the settled November 15,
2015 rates, due to 483 observations at its Moraiya plant. We assign a target
PER of 18x, which is lower than the three-year average one-year forward PER
of 20x to factor in delays in key product approvals in the US markets (Moraiya
plant) and a lower EBITDA margin compared to peers. The target PER is at its
historical discount of c.15- 30% to Sun and Lupin. Thus, we rate Cadila Hold,
with a target price of INR 422 on our FY18 recurring EPS.
Figure 29: PE band – Cadila
0
100
200
300
400
500
600
31-M
ar-0
9
09-S
ep-0
9
18-F
eb-1
0
30-J
ul-1
0
08-J
an-1
1
19-J
un-1
1
28-N
ov-1
1
08-M
ay-1
2
17-O
ct-1
2
28-M
ar-1
3
06-S
ep-1
3
15-F
eb-1
4
27-J
ul-1
4
05-J
an-1
5
16-J
un-1
5
25-N
ov-1
5
Price 8x 15x 22x 29x
Source: Deutsche Bank, Bloomberg Finance LP (data as of 30/11/2015)
2 December 2015
Health Care
Indian Pharmaceuticals
Page 22 Deutsche Bank AG/Hong Kong
Glenmark target PER of 21x
We expect Glenmark’s earnings growth over the next three years to be driven
by new launches in the US business and market share gains in therapeutic
segments in the India business. Our target valuation of 21x is marginally below
Lupin and Sun; it is on a par with Cipla and marginally lower than Glenmark’s
own three-year average one-year forward PER of 23x. We maintain the
discount to industry leaders Sun and Lupin but the PER is higher than other
peers’ to factor in sales and earnings growth .Thus, we rate Glenmark Buy with
a target price of INR 1,133 (including INR 10 for generic Zetia) on our FY18
recurring EPS. We have not factored any NCE licensing income into our
forecasts.
Figure 30: PE band – Glenmark
0
200
400
600
800
1,000
1,200
1,400
1,600
06-A
pr-0
9
31-D
ec-0
9
26-S
ep-1
0
22-J
un-1
1
17-M
ar-1
2
11-D
ec-1
2
06-S
ep-1
3
02-J
un-1
4
26-F
eb-1
5
22-N
ov-1
5
Price 15x 20x 25x 30x
Source: Deutsche Bank estimates, Bloomberg Finance LP (Data as on 30/11/2015)
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 23
Torrent target PER of 20x
Torrent has re-rated substantially and is now trading at par with its peers,
mainly on the back of significant growth in the US business due to the launch
of generic Cymbalta (in FY15) and generic Abilify (FY16), with help from
synergies in the India business following the Elder Pharma acquisition. The
expected year-on-year fall in earnings in FY17 is mainly due to a higher base
for generic Abilify. We assign a target PER of 20x, which is c.60% higher than
its three-year average one-year forward PER of 13x. We believe this multiple is
justified as India and US Business have a favorable business outlook and
EBITDA margin profile of the company has improved significantly. Our target
PER is at a discount of 10% and 15% to Sun and Lupin, respectively, and
factors in the scale of business of these two companies in the India and the US
markets. We rate Torrent a Buy, with a target price of INR 1,672 on our FY18E
recurring EPS.
Figure 31: PE band – Torrent
0
400
800
1,200
1,600
2,000
31-M
ar-0
9
09-S
ep-0
9
18-F
eb-1
0
30-J
ul-1
0
08-J
an-1
1
19-J
un-1
1
28-N
ov-1
1
08-M
ay-1
2
17-O
ct-1
2
28-M
ar-1
3
06-S
ep-1
3
15-F
eb-1
4
27-J
ul-1
4
05-J
an-1
5
16-J
un-1
5
25-N
ov-1
5
Price 7x 12x 17x 22x
Source: Deutsche Bank, Bloomberg Finance LP (data as of 30/11/2015)
Key sector risk: slower-than-expected growth in key markets like India and US
Key sector risks include slower-than-expected growth of the IPM, delays in
product approvals by the USFDA, delays in integrating acquired assets, slower-
than-expected growth in other large emerging markets and currency volatility.
2 December 2015
Health Care
Indian Pharmaceuticals
Page 24 Deutsche Bank AG/Hong Kong
Lupin and Sun are top picks
Lupin and Sun are the top picks in our coverage universe, with more than
c.20% upside to our target prices. Our differences with consensus mainly stem
from factoring in lower traction in the US business, resulting in lower EBITDA
margins.
Figure 32: DB recommendation summary
Coverage EPS INR/Share Upside /
Downside %
Rec. Valuation framework FY16E FY17E FY18E CMP TP
Sun Pharma 19 27 39 730 880 21% Buy 22x FY18 recurring EPS plus INR 11 for generic Gleevec
Dr. Reddy’s 148 137 153 3108 2,748 -12% Sell 18x FY18 recurring EPS
Lupin 49 77 94 1787 2,165 21% Buy 23x FY18 recurring EPS
Cipla 22 28 34 644 722 12% Buy 21x FY18 recurring EPS
Cadila 14 18 23 401 422 5% Hold 18x FY18 recurring EPS
Glenmark 34 44 54 981 1,133 16% Buy 21x FY18 recurring EPS plus INR 10 for generic Zetia
Torrent Pharma 84 68 84 1426 1,672 17% Buy 20x FY18 recurring EPS Source: Deutsche Bank Estimates, CMP as on 30/11/2015
Figure 33: DB vs. consensus
Sales EPS Comment
FY16E FY17E FY18E FY16E FY17E FY18E
Sun Pharma 1.4% 2.2% (1.9%) (1.0%) 6.4% 1.4% Mainly in line with consensus, we have assumed Halol resolution in Q4FY17
Lupin (3.8%) (3.6%) (6.0%) (4.1%) 2.8% 5.3% We assume lower US sales but better EBITDA margins driven by US and other markets
Dr. Reddy's (1.8%) (3.0%) (5.4%) (3.5%) (6.1%) (10.4%) Our US sales assumptions and EBITDA margin are significantly lower than consensus, mainly on account of the USFDA warning letter
Cipla 1.8% (2.2%) (2.4%) (6.0%) (3.5%) (2.4%) We have assumed higher front-end costs, which have capped EBITDA margin expansion
Cadila (4.7%) (2.8%) (0.9%) (6.0%) (1.4%) 3.8% We assume delays in US approvals in FY16, which are not in line with consensus assumptions
Glenmark (0.8%) (1.5%) 0.0% (3.3%) (5.9%) (8.4%) We assume lower contribution from ROW and LATAM business
Torrent (11.9%) (16.2%) (14.4%) (9.4%) (8.6%) (2.2%) We assume lower US sales than consensus on the back of competition in generic Abilify in 3QFY16 and lower growth in US markets
Source: Deutsche Bank estimates, Bloomberg Finance LP (data as on 29/11/2015)
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 25
S&P BSE Healthcare Index has outperformed BSE Sensex in seven out of past
nine years
The S&P BSE Healthcare Index (S&PBSEHC) has outperformed the Sensex due
to strong core business growth in the sector and a weakening Indian rupee.
However, regulatory risks have resulted in a sharp underperformance in the
last one year.
Figure 34: Performance of S&P BSE Healthcare Index vs. BSE Sensex
35
40
45
50
55
60
65
70
50
150
250
350
450
550
650
Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15
S&P BSE HEALTHCARE INDEX S&P BSE SENSEX USD-INR movement (sec. axis)
1 2 34
56
Source: Deutsche Bank, Bloomberg Finance LP (Data as on 17/11/2015)
S&P BSE Healthcare Index has outperformed BSE Sensex over most of the last
decade
In seven of the past nine years (YTD for 2015), the S&PBSE Healthcare Index
has outperformed the BSE Sensex on a relative basis, mainly due to investors’
recognition that Indian pharma companies are not sensitive to interest rate
rises and the demand for their products is inelastic. Over the past eight years,
Sun (six times), Lupin (thrice), Dr. Reddy’s, Glenmark, Torrent (twice) and
Cadila (once) have been among the top two performers in our coverage
universe vis-a-vis the S&P BSE Healthcare Index
Figure 36: Performance of S&P BSE Healthcare Index and DB pharma universe vs. BSE Sensex (all figures in %)
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015
Duration 12M 12M 12M 12M 12M 12M 12M 12M YTD
S& P BSE Healthcare (33.1) 20.6 (3.6) 16.2 10.3 10.1 14.6 15.8 16.1
Sun (13.1) 50.4 (25.2) 41.9 26.1 15.1 42.1 59.2 (6.8)
Cipla (61.1) 40.6 6.3 (6.5) 12.6 2.7 (11.3) 6.9 7.7
Dr. Reddy’s (57.6) 19.0 78.9 32.1 18.9 (9.2) 26.8 25.9 0.7
Lupin (40.9) 51.3 48.5 39.4 12.0 8.0 35.6 65.4 30.6
Cadila (59.3) 43.5 59.0 60.5 7.7 (5.7) (19.9) 27.8 30.2
Glenmark 47.2 4.6 (76.7) 14.8 (1.4) 28.0 (7.4) 1.8 32.3
Torrent (53.2) 16.2 92.5 29.2 15.4 3.3 20.4 120.8 31.0
Source: Deutsche Bank, Bloomberg Finance LP (Data as on 1/11/2015), all figures are in %
1. Bull Phase, Pharma underperforms
2. Bear Phase, Pharma outperforms
3. Pharma outperforms despite market
recovery, driven partially by weak INR
4. Pharma sector earnings driven by INR
weakness and faster growth in US sales
5. Some gains from weak INR lost due to
new Pharma pricing policy
6. Regulatory concerns drive negative
sentiment for the sector
Figure 35: Oct-Nov ’15 performance
85
90
95
100
105
110
4-O
ct-
15
13-O
ct-
15
22-O
ct-
15
31-O
ct-
15
9-N
ov-1
5
18-N
ov-1
5
S&P BSE Healthcare Index
S&P BSE Sensex
Source: Deutsche Bank, Bloomberg Finance LP (Data as on 20/11/2015)
2 December 2015
Health Care
Indian Pharmaceuticals
Page 26 Deutsche Bank AG/Hong Kong
Average valuation in line with global peers’, but with wider dispersion
Our global comparison table summarises the valuation metrics for the seven
Indian pharmaceutical stocks and a group of US peers. The US group trades at
an average PER of 12.6x based on CY17, which is at a discount to the Indian
group average of 18.3x based on our forecasts for FY18. We believe the reason
for the discount is a higher earnings CAGR and higher ROE for the Indian
players.
Figure 37: Peer comp sheet
Global companies
Price Mkt cap
(USD) (USD bn) USD mn CAGR (%) CY14-17E USD mn
CAGR (%) CY14-17E
DB Rating 2015 2014 2017E 2015E 2016E 2017E 2014 2017E 2016E 2017E 2016E 2017E
Teva TEVA.N Buy 62.9 54.1 20,272.4 8.7 33.3 36.7 38.3 3,055.4 19.6 11.5 8.1 10.6 10.1
Allergan AGN.N Buy 313.9 121.3 12,846.8 14.4 46.6 49.9 51.7 (1,631.0) nm 1.3 2.3 20.5 17.7
Mylan MYL.OQ Buy 51.3 25.6 7,719.6 13.3 30.0 30.3 31.0 929.7 30.9 16.2 15.8 10.6 9.9
Indian companies under coverage
Price Mkt cap
Rs (USD bn) USD mn CAGR (%) FY15-18E USD mn
CAGR (%) FY15-18E
DB Rating 2015 2015 2018E 2016E 2017E 2018E 2015 2018E 2017E 2018E 2017E 2018E
Sun SUN.NS Buy 730 26.4 4,103.5 10.5 28.4 34.5 34.7 718.4 26.7 28.5 24.9 20.4 18.1
Cipla CIPL.NS Buy 644 7.8 1,706.2 18.8 21.9 23.0 23.5 177.6 32.7 16.8 18.1 23.2 18.7
Dr Reddy's
REDY.NS Sell 3,108 8.0 2,228.6 6.9 24.9 22.5 23.0 319.1 7.1 16.4 15.9 22.6 20.4
Lupin LUPN.NS Buy 1,787 12.1 1,892.8 15.2 24.1 30.4 32.3 380.7 18.9 28.1 27.2 23.3 19.0
Cadila CADI.NS Hold 401 6.2 1,277.8 16.6 20.7 22.0 23.9 174.8 27.3 30.9 31.6 22.1 17.1
Glenmark GLEN.NS Buy 981 4.2 997.0 18.0 22.7 25.0 23.4 99.6 33.2 27.1 23.4 19.0 17.7
Torrent TORP.NS Buy 1,426 3.6 689.6 12.0 35.5 24.7 25.8 112.9 23.5 29.0 28.5 20.8 17.1
Sales EBITDA margins PAT ROE PER
Name Ticker
Sales EBITDA margins PAT ROE PER
Name Ticker
Source: Company, Deutsche Bank estimates, prices as on(27/11/2015), Note: For Indian companies reporting year is FY, for US companies it is CY.
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 27
Glossary
Terms related to USFDA inspection
FDA Form 483 observation: Upon completion of the inspection, if
objectionable conditions are observed, the FDA provides the owner of
the establishment with a document, called an FDA Form 483.
FDA provides initial classification of the inspection based on the
observations noted during the inspection, the investigator’s report,
and the FDA District Office supervisory personnel’s review. With the
exception of instances where procedures indicate that the relevant
product centre has the right of final classification, the final
classification of the inspection is made by the FDA District Office. An
inspection classification reflects the compliance status of the
establishment at the time of the inspection, based on the observations
documented. The conclusions of the inspection are reported as Official
Action Indicated (OAI), Voluntary Action Indicated (VAI), or No Action
Indicated (NAI).
An OAI inspection classification occurs when significant objectionable
conditions or practices were found and regulatory action is warranted
to address the establishment's lack of compliance with statutes or
regulations.
A VAI inspection classification occurs when objectionable conditions
or practices were found that do not meet the threshold of regulatory
significance. Inspections classified with VAI violations are typically
more technical violations of the FDCA.
An NAI inspection classification occurs when no objectionable
conditions or practices were found during the inspection or the
significance of the documented objectionable conditions found does
not justify further actions.
An EIR is provided if no enforcement action is contemplated, or after
the enforcement action is concluded, the FDA provides inspected
establishments with a final inspection report, called an Establishment
Inspection Report (EIR).
Warning Letters: The FDA’s position is that Warning Letters are issued
only for violations of regulatory significance. Significant violations are
those violations that may lead to enforcement action if not promptly
and adequately corrected. Normally, a plant that has received a
warning letter and has not resolved the regulatory issues will receive
no new approvals.
Import Alert: Import Alerts are issued whenever the FDA determines
that it already has sufficient evidence to conclude that products
appear to be adulterated, misbranded, or unapproved, and hence
refused admission.
Other terms
ANDA : Abbreviated New Drug Application
API : Active Pharma Ingredient
2 December 2015
Health Care
Indian Pharmaceuticals
Page 28 Deutsche Bank AG/Hong Kong
Company Section
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 29
Reuters Bloomberg SUN.NS SUNP IS
Forecasts And Ratios
Year End Mar 31 2014A 2015A 2016E 2017E 2018E
Sales (INRm) 160,043.9 272,865.0 286,792.8 341,704.5 368,498.5
EBITDA (INRm) 71,140.8 77,197.6 81,332.8 117,804.5 127,869.0
Reported NPAT (INRm) 31,414.7 45,393.8 45,995.8 86,158.5 97,122.2
Reported EPS FD(INR) 15.17 18.87 19.12 35.81 40.36
DB EPS FD(INR) 27.32 19.85 21.96 35.81 40.36
DB EPS growth (%) 58.4 -27.3 10.6 63.0 12.7
PER (x) 20.1 39.9 33.2 20.4 18.1
EV/EBITDA (x) 15.1 24.2 20.8 14.0 12.3
DPS (net) (INR) 1.50 3.00 3.00 5.70 6.50
Yield (net) (%) 0.3 0.4 0.4 0.8 0.9
Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items
2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which
uses the year end close
Best execution record for integrating acquisitions We initiate coverage on Sun Pharma with a Buy rating for three reasons: 1) generic Gleevec launch will likely drive earnings in the near term; 2) fall in Taro contribution should be made up for by Ranbaxy synergies; 3) we estimate Sun can deliver a FY15-18 EPS CAGR of 26.7%, factoring in approvals from Halol from Q4FY17. The stock has lagged the sector by 23% YTD, and PERs are now c.10-15% cheaper than those of peers (vs. c.20% premium historically).
Taro key driver of business in the near term, India business in the medium term We forecast Taro (Taro US) to contribute c.11% of sales in FY18 (down from c.19% in FY15) and c.25% of EBITDA (down from c.41% in FY15), mainly on account of increasing competition. For FY18, we forecast the India formulation business to contribute c.26% of sales (up from c.24% in FY15). We believe the dip in the earnings contribution from Taro will be made up for by the synergy benefits of c.USD 250-300m arising from the Ranbaxy acquisition.
Key triggers are generic Gleevec launch and USFDA approvals from Halol Positive triggers include the launch of generic Gleevec on final approval from the USFDA on 1 February 2016. We factor in ANDA approvals from Halol from 4QFY17. In the event that the Halol plant receives a warning letter and normalcy of operations is delayed beyond FY18, we estimate an EPS impact of 0.5% (FY17) and 4.3% (FY18). We have not factored in revenues for MK-3222 (Tildrakizumab), Sun’s IL-23, which is currently in Phase III clinical trials.
Our 12M target price of INR 880/sh provides c.21% upside potential; risks We rate Sun a Buy, with a target price of INR 880, or a target PER of 22x (lower than the historical multiple, mainly to factor in USFDA issues) on FY18E recurring EPS, and INR 11/share for generic Gleevec. Key downside risks: escalation of existing non-compliance with current good manufacturing practices resulting in a warning letter at Sun’s Halol plant; slower-than-expected growth rate of Indian formulations market; delay in approval of generic Gleevec; faster-than-expected decline in Taro’s sales.
Rating
Buy Asia
India
Health Care
Pharmaceuticals / Biotechnology
Company
Sun Pharma
Near-term risks factored in; medium- and long-term positives in place
Price at 30 Nov 2015 (INR) 729.65
Price target - 12mth (INR) 880.00
52-week range (INR) 1,165.41 - 706.20
Bombay Stock Exchange (BSE 30)
26,146
Kartik Mehta
Research Analyst
(+91) 22 7180 4210
kartik-a.mehta@db.com
Price/price relative
450
600
750
900
1050
1200
12/13 6/14 12/14 6/15
Sun Pharma
Bombay Stock Exchang (Rebased)
Performance (%) 1m 3m 12m
Absolute -18.0 -18.9 -12.4
Bombay Stock Exchange (BSE 30)
-1.9 1.8 -8.4
Source: Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 30 Deutsche Bank AG/Hong Kong
Model updated:30 November 2015
Running the numbers
Asia
India
Pharmaceuticals / Biotechnology
Sun Pharma Reuters: SUN.NS Bloomberg: SUNP IS
Buy Price (30 Nov 15) INR 729.65
Target Price INR 880.00
52 Week range INR 706.20 - 1,165.41
Market Cap (m) INRm 1,755,900
USDm 26,312
Company Profile
Sun Pharmaceuticals Industries, started as a partnership firm in 1983 by Dilip Shanghvi, manufacturing formulations and bulk drugs. Initially operating with a plant at Vapi, Gujarat, it now has more than 35 manufacturing locations (including India, US, Europe) Hungary). In India it is the industry leader in chronic-care. Sun has expanded internally and via acquisitions, important acquisitions being that of Caraco, Taro, Ranbaxy. Sun sells its product in more than 50 countries, US and India being its largest markets.
Price Performance
450
600
750
900
1050
1200
Dec 13Mar 14Jun 14Sep 14Dec 14Mar 15Jun 15Sep 15
Sun PharmaBombay Stock Exchange (BSE 30) (Rebased)
Margin Trends
2024283236404448
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
0
5
10
15
20
25
30
0
20
40
60
80
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
50
100
150
200
-60
-50
-40
-30
-20
-10
0
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Kartik Mehta
+91 22 7180 4210 kartik-a.mehta@db.com
Fiscal year end 31-Mar 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (INR) 17.25 27.32 19.85 21.96 35.81 40.36
Reported EPS (INR) 14.40 15.17 18.87 19.12 35.81 40.36
DPS (INR) 2.50 1.50 3.00 3.00 5.70 6.50
BVPS (INR) 66.9 80.6 91.2 108.9 142.8 181.0
Weighted average shares (m) 2,071 2,071 2,406 2,406 2,406 2,406
Average market cap (INRm) 696,011 1,136,960 1,903,779 1,755,900 1,755,900 1,755,900
Enterprise value (INRm) 649,562 1,077,300 1,871,111 1,690,614 1,648,776 1,576,149
Valuation MetricsP/E (DB) (x) 19.5 20.1 39.9 33.2 20.4 18.1
P/E (Reported) (x) 23.3 36.2 41.9 38.2 20.4 18.1
P/BV (x) 6.06 7.10 11.19 6.70 5.11 4.03
FCF Yield (%) 1.9 2.1 0.7 2.6 3.1 4.8
Dividend Yield (%) 0.7 0.3 0.4 0.4 0.8 0.9
EV/Sales (x) 5.8 6.7 6.9 5.9 4.8 4.3
EV/EBITDA (x) 13.4 15.1 24.2 20.8 14.0 12.3
EV/EBIT (x) 14.4 16.1 28.7 24.0 15.6 13.7
Income Statement (INRm)
Sales revenue 112,389 160,044 272,865 286,793 341,705 368,498
Gross profit 91,655 132,251 205,473 219,156 270,849 291,114
EBITDA 48,353 71,141 77,198 81,333 117,805 127,869
Depreciation 3,362 4,092 11,947 10,823 11,942 12,887
Amortisation 0 0 0 0 0 0
EBIT 44,991 67,049 65,250 70,510 105,862 114,982
Net interest income(expense) 1,937 -442 -5,790 -5,374 -2,875 -1,704
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries -5,901 -25,174 -2,378 -6,852 0 0
Other pre-tax income/(expense) 2,122 4,384 6,946 9,356 8,028 9,406
Profit before tax 43,149 45,817 64,029 67,640 111,016 122,683
Income tax expense 8,456 7,027 9,147 11,850 16,652 18,402
Minorities 4,863 7,375 9,488 9,794 8,205 7,158
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 29,831 31,415 45,394 45,996 86,158 97,122
DB adjustments (including dilution) 5,901 25,174 2,378 6,852 0 0
DB Net profit 35,732 56,589 47,771 52,848 86,158 97,122
Cash Flow (INRm)
Cash flow from operations 34,395 35,229 39,329 64,787 74,672 105,720
Net Capex -21,391 -11,563 -26,906 -19,077 -19,893 -20,871
Free cash flow 13,003 23,666 12,422 45,710 54,780 84,849
Equity raised/(bought back) 0 0 0 0 0 0
Dividends paid -6,058 -3,635 -8,689 -8,445 -16,046 -18,298
Net inc/(dec) in borrowings -668 22,908 51,073 -32,508 -23,029 -2,977
Other investing/financing cash flows -2,549 -692 -19,538 4,548 10,650 12,509
Net cash flow 3,728 42,247 35,269 9,305 26,355 76,084
Change in working capital -3,661 -7,653 -27,501 -1,825 -31,633 -11,448
Balance Sheet (INRm)
Cash and other liquid assets 64,781 103,762 137,143 147,048 174,061 250,869
Tangible fixed assets 25,901 25,051 53,128 65,378 77,044 88,483
Goodwill/intangible assets 24,870 33,191 57,073 53,078 49,362 45,907
Associates/investments 0 0 0 0 0 0
Other assets 81,930 113,358 204,940 185,874 238,100 259,595
Total assets 197,483 275,362 452,284 451,378 538,567 644,854
Interest bearing debt 1,982 24,890 75,963 43,455 20,426 17,449
Other liabilities 40,582 64,357 128,438 107,547 128,139 138,187
Total liabilities 42,564 89,247 204,401 151,003 148,565 155,636
Shareholders' equity 138,568 166,903 219,371 262,069 343,491 435,549
Minorities 16,351 19,212 28,512 38,306 46,511 53,669
Total shareholders' equity 154,919 186,115 247,883 300,375 390,002 489,218
Net debt -62,799 -78,872 -61,180 -103,592 -153,635 -233,420
Key Company Metrics
Sales growth (%) 40.4 42.4 70.5 5.1 19.1 7.8
DB EPS growth (%) 34.4 58.4 -27.3 10.6 63.0 12.7
EBITDA Margin (%) 43.0 44.5 28.3 28.4 34.5 34.7
EBIT Margin (%) 40.0 41.9 23.9 24.6 31.0 31.2
Payout ratio (%) 17.4 9.9 15.9 15.7 15.9 16.1
ROE (%) 23.8 20.6 23.5 19.1 28.5 24.9
Capex/sales (%) 19.0 7.2 9.9 6.7 5.8 5.7
Capex/depreciation (x) 6.4 2.8 2.3 1.8 1.7 1.6
Net debt/equity (%) -40.5 -42.4 -24.7 -34.5 -39.4 -47.7
Net interest cover (x) nm 151.7 11.3 13.1 36.8 67.5
Source: Company data, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 31
Investment thesis
Outlook
We rate Sun a Buy, premised on the following: 1) in IPM, Sun is ranked
number one, with a c.8.9% market share, with a focus on, and leadership
across, chronic care segments; 2) Sun’s key product launch is generic Gleevec
in 4QFY16, for which Sun is first to file (for FY15-18, we forecast Sun’s US
sales to register a CAGR of 8.8% and to contribute c.48% of sales in FY18); 3)
the stock has lagged the sector by 23% YTD, and PER multiples are now c.10-
15% cheaper than those of the large-caps (vs. c.20-30% premium historically).
We forecast sales and earnings to register CAGRs of 10.5% and 26.7%,
respectively, for FY15-18.
Valuation
We use PER as our principal valuation matrix for Indian Pharma. Sun has
leadership across the chronic segments in India, and has also expanded
significantly in the US market, while its business dynamics across markets
have continued to improve significantly. Sun has been trading at an average
one-year forward PER of 24x for the past five years (30x for the past three
years on account of limited period upside in the US market − generic Doxil and
doxycycline), which represents a premium of c.10-25% to Lupin and Dr
Reddy’s. However, in arriving at our target PER, we factor in the OAI at Halol
by the USFDA and supply issues from the plant and the Ranbaxy integration.
We assign a PER of 22x (discount of 25% over the past three years’ one-year
forward PER). Thus, we rate Sun a Buy, with a target price of INR 880
(including INR 11 per share for generic Gleevec) on our FY18E recurring EPS.
Improvements in supplies at Halol and the successful integration of Ranbaxy
will likely see the stock being re-rated and trading at a PER of c.25-26x. Sun,
with net cash of c. INR 61bn as of 31 March 2015, is in a stronger position
than its peers, and cash-adjusted ROEs are in the range of c-25-30% over the
next two years, on our estimates.
Risks
Key downside risks include escalation of the existing non-compliance with
current good manufacturing practices, resulting in a warning letter at Sun’s
Halol plant, slower-than-expected growth rate of the Indian formulations
market, delay in approval of generic Gleevec, and a faster-than-expected
decline in Taro’s sales.
2 December 2015
Health Care
Indian Pharmaceuticals
Page 32 Deutsche Bank AG/Hong Kong
Initiating coverage with a Buy rating
We estimate Sun’s sales and earnings to register CAGRs of 10.5% and 26.7%
respectively, over FY15-18. We expect he EBITDA margin to improve, driven
mainly by synergies of USD 300m on account of the Ranbaxy integration and
the launch of generic Gleevec. We estimate Taro’s sales to be USD 763m in
FY18, down from USD 863m in FY15, driven mainly by price competition in
existing brands.
We have factored in that the Halol plant (which was under OAI) will receive
new approvals from 4QFY17. In the event that Halol receives a warning letter
and normalcy of operations is delayed beyond FY18, the negative impact on
EBITDA on our numbers will be USD 7m for FY17 and USD 71m for FY18. We
believe that the dip in the earnings contribution from Taro will be made up for
by the synergy benefits of c.USD 250-300m arising from the Ranbaxy
acquisition.
Figure 38: Impact on earnings if approvals from Halol are delayed beyond
FY18
In USD m FY14 FY15 FY16E FY17E FY18E
Avg USD/INR 59.21 61.11 65.03 66.95 68.03
EBITDA % 44.5 28.3 26.5 30.7 35.5
EBITDA change (excluding Gleevec)
385 99 -51 307 501
Break up :
Ranbaxy impact : FY15 actual, 2% of sales in FY16E
0 -101 -86 200 300
Halol impact assumed @ 25% EBITDA margin
0 -33 -40 6 71
Taro EBITDA (currency-adjusted) 131 110 19 -14 9
Sun business (ex Halol, currency benefit included)
254 122 55 103 88
EPS impact in INR if Halol receives warning letter and new approvals are delayed beyond FY18
0.13 1.70
% of EPS ( ex Gleevec) 0.5% 4.3%
Source: Deutsche Bank estimates, Sun without Ranbaxy
Figure 39: Gleevec impact
FY14* FY15 FY16E FY17E FY18E CAGR
2015-18E (%) Comment
PAT (INR m) 56,589 47,771 52,848 86,158 97,122 26.7
PAT (ex generic Gleevec) (INR m)
56,589 47,771 46,517 65,614 95,041 25.8 Assuming 15% tax rate for Gleevec
EPS (INR) 27.3 19.9 22.0 35.8 40.4
EPS (ex generic Gleevec) (INR)
27.3 19.9 19.3 27.3 39.5 INR 11 for Gleevec
Source: Company data, Deutsche Bank estimates. *Sun without Ranbaxy
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 33
Muted FY16 guidance driven by Halol and planned sale of non-strategic assets
Sun Pharma expects FY16 revenues to remain flat or decline marginally on a
yoy basis, owing mainly to supply constraints at the Halol facility and the
discontinuation of certain non-strategic businesses of Ranbaxy.
Figure 40: Sales mix summary
Metric, INR m FY14* FY15 FY16E FY17E FY18E CAGR
2015-18E (%)Comments
India formulations 34,967 64,322 71,436 81,558 95,213 14.0 Integration of acute care-focused Ranbaxy will see gradual improvement.
US 97,844 137,196 140,776 176,027 176,635 8.8 Driven by generic Gleevec launch.
Taro 45,868 52,752 50,595 50,756 52,602 (0.1) Assuming sales of USD 778m, USD 758m, and USD773m in FY16E, FY17E and FY18E, respectively.
Others 51,976 84,444 90,181 125,270 124,033 13.7 Ex-generic Gleevec is 14.1%; we assume approval from Halol plant starting in Q4FY17.
ROW 8,777 23,320 22,006 26,120 31,343 10.4 Currency fluctuations will lead to volatility in sales growth.
EM 10,308 37,326 39,468 44,204 50,393 10.5 Mainly Ranbaxy’s business.
API & Others 8,149 10,702 13,107 13,796 14,914 11.7 Mostly used for captive purposes.
Net sales 160,044 272,865 286,793 341,705 368,498 10.5 Driven by India and US markets.
Net sales (ex generic Gleevec )
160,044 272,865 278,518 309,928 362,557 9.9
Assuming generic Gleevec sales of USD 125m, USD 506m and USD 88m in FY16E, FY17E, and FY18E, respectively.
EBITDA margin (%) 44.5 28.3 28.4 34.7 35.6 Synergies of USD 300m on account of the Ranbaxy integration in FY18.
EBITDA margin (ex generic Gleevec)
44.5 28.3 26.5 30.7 35.5 Assuming generic Gleevec EBITDA margin of 90%, 65%, and 35% in FY16E, FY17E, and FY18E, respectively.
Source: Company data, Deutsche Bank estimates, * Sun without Ranbaxy
Leads the IPM, with 8.9% market share
Sun is ranked No. 1 in the IPM, with a c.8.9% market share. We estimate Sun’s
India sales to register a CAGR of 14% over FY15-18; the lower growth rate
(lower than Sun’s historical growth rate, which has been c.17-20%) is on
account of the merger of Ranbaxy’s acute care-focused portfolio with Sun’s
chronic care-focused segments in the IPM.
Figure 42: Revenue break-up
Neuro-Psychiatry18%
Cardiology17%
Anti-Infective12%
Gastroenterology12%
Ophthalmology9%
Pain / Analgesics7%
Others6%
Vitamins/Minerals/Nutrients
4%
Gynaecology4%
Dermatology4%
Respiratory4%
Opthalmology3%
Source: Company data, Deutsche Bank Data as of Sept 2015
Figure 41: Leadership in key
therapeutic areas
Sun
Sun + Ranbaxy
Psychiatrists 1 1
Neurologists 1 1
Cardiologists 1 1
Orthopedic 1 1
Ophthalmologists 1 1
Gastroenterologists 1 1
Nephrologists 1 1
Diabetologists 2 1
Consulting Physicians 5 1
Dermatologists 6 1
Urologists 6 1
Chest Physicians 5 1
Oncologists 8 1
Source: Company data, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 34 Deutsche Bank AG/Hong Kong
Figure 43: IPM vs. Sun Pharma Figure 44: Top five therapies Figure 45: Top five brands in India
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
Mar'13 Mar'14 Mar'15 Sep'15
MA
T Y
oY
gro
wth
(%
)
IPM Sun Pharma*
No.
1. Neuro / CNS
2. Cardiac
3.Anti-
Infectives
4.Gastro
Intestinal
5. Anti Diabetic
Top 5 therapies Brand name TherapyMAT Sep'15
sales (INR bn)
VoliniPain /
Analgesics2.0
Rosuvas Cardiac 1.5
Gemer Anti Diabetic 1.5
Istamet Anti Diabetic 1.4
Susten Gynaecological 1.4
Source: AIOCD AWACS, Deutsche Bank, *includes Ranbaxy for all the years
Source: AIOCD AWACS, Deutsche Bank
Source: AIOCD AWACS, Deutsche Bank
US sales growth expected to pick up through increased number of launches
As of 30 September 2015, Sun has 445 ANDA approvals and 154 ANDAs
pending approval. We expect Sun to gain traction in US sales, owing to several
launches (refer to Figure 47). We expect Sun’s R&D costs to be c.7-8% of
sales, driven by MK 3222 (Tildrakizumab), the IL-23 monoclonal anti-body to be
used for treatment of plaque psoriasis. In September 2014, Sun acquired
worldwide rights to tildrakizumab, for use in all human indications, from Merck
(MRK.N, Hold), in exchange for an upfront payment of USD 80m, milestone
payments and tiered royalties. Merck will continue with all its clinical
development and regulatory activities, which will be funded by Sun. Upon final
approval for the product, Sun will be responsible for all subsequent activities.
The product is currently in Phase III, and top-line data are expected to be
available by early CY16.
Among the key product launches in Sun’s pipeline is generic Gleevec (branded
market is c. USD 2bn; Sun is first to file and has settled for launch on 1
February 2016). We forecast Taro (Taro US) to contribute c.11% of sales in
FY18 (down from c.19% in FY15) and c.25% of EBITDA (down from c.41% in
FY15), mainly on account of increasing competition.
Figure 46: US sales and Taro contribution
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
‐
10,000
20,000
30,000
40,000
50,000
60,000
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
Taro as % of US sales
US Sales (INR mn)
US sales Taro as % of US Sales
GenricDoxil salesstart here
With Ranbaxy Halol supplies issues
GenericZetia launch
Source: Company data, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 35
Figure 47: Sun Pharma’s key generic drug pipeline
Quarter FY16 FY17 FY18 Beyond FY18
Q1 Saphris, Ampyra, Angiomax, Uloric, Sensipar, LyricaTreximet, Alimta, Vimpat, Vagifem, Effient, Oglyza
Q2 Glumetza, Crestor
Q3 Coreg CR, Ortho Tri-Cyclen Lo
Q4 Gleevec Multaq, Focalin XR Sandostatin LAR
Can launch on approval Abilify, Precedex
Source: Company data, Deutsche Bank estimates
Taro’s existing portfolio faces competition, and the recently launched Keveyis will take time to generate revenue
Taro continues to enjoy a pricing advantage on its US portfolio, owing to a
favourable competitive situation. However, we are cautious about the
increasing competition and consequent erosion of volume on some of its major
products, such as Nystatin/Triamcinolone. Taro currently has 34 ANDAs
pending approval. While faster-than-expected sales in Taro’s existing portfolio
are a risk to Sun’s earnings, we believe this can be mitigated by higher
revenues from the launch of Keveyis (dichlorphenamide), a new drug
application for the treatment of primary hyperkalemic and hypokalemic
periodic paralysis and related variants, which is estimated to affect c.5,000
patients in the United States. Keveyis is an orphan drug that was launched in
September 2015 and has exclusivity until August 2022.
Figure 48: Movement in historical product portfolio
50%
60%
70%
80%
90%
100%
-30%
-10%
10%
30%
50%
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14NC
2Q14SI
3Q14DV
4Q14SD
1Q15FL
2Q15SD
3Q15SD
4Q15FL
1Q16-8%
2Q16
qoq% (LHS) GP margin % (RHS)
20127 products which
were 25% of portfolio increased
by c.4 times, rest up by c.10%
20136 products which
were 29% of portfolio increased by c.2times, rest up
by c.5%
20148 products which
were 12% of portfolio increased by c.14 times, rest
flat
201512 products which
were 32% of portfolio increased by c.50%, rest flat
Source: Company data, Deutsche Bank
Acquisition of Glaxo’s opiate to further integrate controlled substances
business
Sun’s acquisition of Glaxo’s (GLXO.LN) opiates business in Australia is the
company’s fourth acquisition in the area of controlled substances used mainly
for treatment of moderate to severe pain. In 2005, Sun Pharma acquired a
facility in Hungary authorised to make controlled substance APIs, starting from
the initial stage. In the same year, Sun acquired two manufacturing sites in
New Jersey from Able Labs, which is equipped with special suites for the
manufacture of controlled substances in finished dosages. Sun later acquired
Chattem (US-based registered narcotic API importer and producer). The main
entry barriers in the controlled substances business are the integration of a
regulated source of supply for raw materials and the requisite registration to
import and produce in the US.
2 December 2015
Health Care
Indian Pharmaceuticals
Page 36 Deutsche Bank AG/Hong Kong
Valuation and risks
Valuation
We use PER as our principal valuation matrix for Indian Pharma. Sun has
leadership across the chronic segments in India, and has also expanded
significantly in the US market, while its business dynamics across markets
have continued to improve significantly. Sun has been trading at an average
one-year forward PER of 24x for the past five years (30x for the past three
years on account of limited period upside in the US markets − generic Doxil
and doxycycline), which represents a premium of c.10-25% to Lupin and Dr
Reddy’s. However, in arriving at our target PER, we factor in the OAI at Halol
by the USFDA and supply issues from the plant and Ranbaxy integration. We
assign a PER of 22x (discount of 25% over the past three years’ one-year
forward PER). Thus, we rate Sun a Buy, with a target price of INR 880
(including INR 11 per share for generic Gleevec) on our FY18 recurring EPS.
Improvements in supplies at Halol and the successful integration of Ranbaxy
will likely see the stock being re-rated and trading at a PER of c.25-26x. Sun,
with net cash of c. INR 61bn as of 31 March 2015, is in a stronger position
than its peers, and cash-adjusted ROEs are in the range of c-25-30% over the
next two years, on our estimates.
Figure 49: PE band – Sun Pharma
0
400
800
1,200
1,600
31-M
ar-0
9
09-S
ep-0
9
18-F
eb-1
0
30-J
ul-1
0
08-J
an-1
1
19-J
un-1
1
28-N
ov-1
1
08-M
ay-1
2
17-O
ct-1
2
28-M
ar-1
3
06-S
ep-1
3
15-F
eb-1
4
27-J
ul-1
4
05-J
an-1
5
16-J
un-1
5
25-N
ov-1
5
Price 15x 25x 35x 45x
Source: Deutsche Bank, Bloomberg Finance LP (data as of 30/11/2015)
Risks
Key downside risks include escalation of the existing non-compliance with
current good manufacturing practices resulting in a warning letter at Sun’s
Halol plant, slower-than-expected growth rate of the Indian formulations
market, delay in approval of generic Gleevec, and a faster-than-expected
decline in Taro’s sales.
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 37
Company description
Sun Pharmaceuticals Industries, started as a partnership firm in 1983 by Dilip
Shanghvi, manufactures formulations and bulk drugs. Initially operating with a
plant at Vapi, Gujarat, it now has 50 manufacturing sites across six continents.
Sun has expanded internally and via acquisitions, with important acquisitions
being Caraco, Taro and Ranbaxy. Sun sells its products in more than 50
countries. In India, Sun has a leadership position in 13 classes of therapies,
and is ranked number one, with a c.8.9% market share in the IPM; it is the
fifth-largest specialty generic pharma company in the world.
Management summary
Figure 51: Selected board of directors and senior management
Name/designation Summary
Mr. Israel Makov
Chairman
Former President and CEO of Teva Pharmaceuticals Industries Ltd. He joined Teva in 1995 and managed more than 12 acquisitions. Israel joined Sun Pharmaceuticals in 2012.
Mr. Dilip S Shanghvi
CEO Founded Sun Pharmaceuticals in 1983 as a partnership firm.
Mr. Kalyanasundaram Subramanian
Director & CEO - Taro
Appointed CEO in August 2013; was previously Chairman of the Taro Board from April 2012. He was Sun Pharma’s Chief Executive Officer from April 2010 to April 2012 (and a director of the Sun Pharma board until March 2012). He has almost three decades of experience, largely with GlaxoSmithKline plc, where he held country, regional and global responsibilities.
Mr. Sudhir Valia
Whole-time Director
He became a member of the Taro Board in September 2010. Mr. Valia joined Sun Pharma as a director in January 1994, and has been a full-time director since his appointment in April 1994.
Mr. Uday V Baldota
CFO Appointed as the CFO in 2014.
Source: Company data, Deutsche Bank
Corporate actions and shareholding pattern
Figure 52: Corporate actions (1997-2015) Figure 53: Shareholding pattern
Year Corporate Action Summary
2015 Acquisition Insight Vision Inc
2015 Divestiture Ranbaxy's "solus" and "solus care" divisions
2015 Divestiture GSK Opiates Business
2015 Divestiture US rights to Fibricor
2015 Equity Offering Amount raised: INR 199.92B
2014 Acquisition Ranbaxy
2014 Divestiture Tildrakizumab rights
2014 Acquisition Pharmalucence Inc
2013 Joint Venture Intrexon Corp
2013 Stock Dividend Adjustment Factor ‐ 2
2012 Acquisition URL’s generic business
2012 Acquisition Dusa Pharmaceuticals Inc
2011 Joint Venture Merck & Co Inc
2010 Stock Split Adjustment Factor ‐ 5
2008 Acquisition Chattem Chemicals Inc
2008 Debt Redemption/Call Raised USD 350 million by issuing FCCB
2007 Acquisition Taro Pharmaceutical Industries Ltd.
2007 Spin‐off Sun Pharma Advanced Research Co.
2005 Acquisition Able Laboratories Inc
2005 Acquisition ICN Co. Hungary
2004 Stock Dividend Adjustment Factor ‐ 2
2002 Stock Split Adjustment Factor ‐ 2
2002 Stock Buyback Amount: 4M
2002 Debt Offering‐New Issue INR 187.2M
2002 Stock Dividend Adjustment Factor ‐ 4
2002 Acquisition MJ Pharmaceuticals Ltd.
2001 Acquisition Pradeep Drug Co
1997 Acquisition Caraco
0% 20% 40% 60% 80% 100%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Sep‐15
Promoters
FIIs
Others
FIs/Banks/Insurance companies
Bodies Corporate
Mutual Funds/UTI
Central/State Governments
Source: Company data, Deutsche Bank, Bloomberg Finance LP
Source: Company data, Deutsche Bank
Figure 50: Revenue split FY15
India formulations
24%
US 50%
ROW8%
EM14%
API & Others
4%
Source: Company data, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 38 Deutsche Bank AG/Hong Kong
Company financials
Figure 54: Income statement
Year to March, INR m FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
India formulations 23,801 29,154 29,657 36,918 67,166 74,290 85,010 98,936
US 28,982 45,841 76,808 97,844 137,196 140,776 176,027 176,635
ROW 10,191 25,997 36,473 8,777 23,320 22,006 26,120 31,343
EM 18,791 19,843 40,335 10,308 37,326 39,468 44,204 50,393
API & Others 5,283 6,147 7,622 8,149 10,702 13,107 13,796 14,914
Gross sales 58,066 81,141 114,087 161,995 275,709 289,646 345,156 372,221
Less: Excise 852 1,075 1,698 1,951 2,844 2,854 3,452 3,722
Net sales 57,214 80,067 112,389 160,044 272,865 286,793 341,705 368,498
Other op. income 0 128 0 0 0 0 0 0
Total revenue 57,214 80,195 112,389 160,044 272,865 286,793 341,705 368,498
yoy growth% 42.8% 40.2% 40.1% 42.4% 70.5% 5.1% 19.1% 7.8%
Total op. exp. 37,514 48,152 64,036 88,903 195,667 205,460 223,900 240,629
EBITDA 19,700 32,043 48,353 71,141 77,198 81,333 117,805 127,869
Margins % 34.4% 40.0% 43.0% 44.5% 28.3% 28.4% 34.5% 34.7%
yoy growth% 44.5% 62.7% 50.9% 47.1% 8.5% 5.4% 44.8% 8.5%
Depreciation 2,041 2,912 3,362 4,092 11,947 10,823 11,942 12,887
EBIT 17,659 29,132 44,991 67,049 65,250 70,510 105,862 114,982
Other income 1,356 2,738 2,122 4,384 6,946 9,356 8,028 9,406
Interest -1,341 -1,696 -1,937 442 5,790 5,374 2,875 1,704
PBT 20,355 33,565 49,050 70,991 66,407 74,492 111,016 122,683
Tax 1,284 3,132 8,456 7,027 9,147 11,850 16,652 18,402
Tax rate (%) 6.3% 9.3% 17.2% 9.9% 13.8% 15.9% 15.0% 15.0%
Minority interest 913 3,855 4,863 7,375 9,488 9,794 8,205 7,158
Adjusted PAT 18,158 26,578 35,732 56,589 47,771 52,848 86,158 97,122
Net margins 31.7% 33.1% 31.8% 35.4% 17.5% 18.4% 25.2% 26.4%
Extraordinary items 3 -11 -5,901 -25,174 -2,378 -6,852 0 0
Reported PAT 18,161 26,567 29,831 31,415 45,394 45,996 86,158 97,122 Source: Company data, Deutsche Bank estimates, Includes Ranbaxy from FY15 onwards
Figure 55: Cash flow statement
Year to March, INR m FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
PBT (adj. for extraordinary items) 20,358 33,554 43,149 45,817 64,029 67,640 111,016 122,683
Depreciation 2,041 2,912 3,362 4,092 11,947 10,823 11,942 12,887
Net chg in WC (6) (8,929) (1,821) (5,666) (19,094) 3,309 (25,107) (6,335)
Others (4,046) (4,763) (10,295) (9,014) (17,553) (16,984) (23,179) (23,516)
CFO 18,346 22,774 34,395 35,229 39,329 64,787 74,672 105,720
Capex (12,833) (8,085) (21,391) (11,563) (26,906) (19,077) (19,893) (20,871)
Net investments made - - - - - - - -
Others investing activities 26,941 (2,341) (5,078) 3,267 1,887 (599) (659) (725)
CFI 14,109 (10,426) (26,470) (8,297) (25,020) (19,676) (20,551) (21,596)
Change in share capital - - - - - - - -
Change in debt 2,006 (1,068) (668) 22,908 51,073 (32,508) (23,029) (2,977)
Div. & div. tax (4,213) (5,115) (6,058) (3,635) (8,689) (8,445) (16,046) (18,298)
Others 4,563 2,863 2,529 (3,959) (21,425) 5,147 11,309 13,234
CFF 2,357 (3,320) (4,197) 15,315 20,959 (35,806) (27,766) (8,041)
Total cash generated 34,811 9,027 3,728 42,247 35,269 9,305 26,355 76,084
Cash opening balance 6,073 40,884 49,911 53,639 95,886 131,155 140,460 166,815
Cash closing balance 40,884 49,911 53,639 95,886 131,155 140,460 166,815 242,898 Source: Company data, Deutsche Bank estimates, Includes Ranbaxy from FY15 onwards
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 39
Figure 56: Balance sheet
As at 31 March, INR m FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Paid-up capital 1,036 1,036 1,036 2,071 2,071 2,406 2,406 2,406
Reserves & surplus 86,078 111,104 137,532 164,832 217,300 259,663 341,085 433,143
Total equity 87,114 112,140 138,568 166,903 219,371 262,069 343,491 435,549
Minority interest 8,472 11,615 16,351 19,212 28,512 38,306 46,511 53,669
Total debt 3,717 2,650 1,982 24,890 75,963 43,455 20,426 17,449
Capital employed 99,302 126,404 156,901 211,005 323,847 343,831 410,428 506,668
Current liabilities 15,361 26,566 38,528 61,600 128,438 107,547 128,139 138,187
Total curr. lia. & prov. 16,709 28,118 40,582 64,357 128,438 107,547 128,139 138,187
Total liabilities 116,012 154,522 197,483 275,362 452,284 451,378 538,567 644,854
Net fixed assets 27,568 32,742 50,771 58,242 110,201 118,456 126,406 134,390
Deferred tax assets 5,001 6,835 9,176 11,867 17,516 22,650 29,176 34,289
Inventory 14,895 20,870 25,778 31,230 56,680 59,573 85,426 92,125
Debtors 11,049 20,787 27,108 22,004 53,123 51,073 60,851 65,623
Other current assets 12,893 17,313 19,869 48,257 77,620 52,579 62,646 67,558
Cash and equivalents 44,606 55,975 64,781 103,762 137,143 147,048 174,061 250,869
Total curr. assets 83,443 114,945 137,535 205,253 324,567 310,272 382,984 476,175
Total assets 116,012 154,522 197,483 275,362 452,284 451,378 538,567 644,854 Source: Company data, Deutsche Bank estimates, Includes Ranbaxy from FY15 onwards
Figure 57: Financial ratios
Year to March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Adj EPS (INR) 8.8 12.8 17.3 27.3 19.9 22 35.8 40.4
yoy growth% 34.5% 46.4% 34.4% 58.4% -27.3% 10.6% 63.0% 12.7%
EBITDA - core (%) 34.4 40 43 44.5 28.3 28.4 34.5 34.7
NPM (%) 31.7 33.2 31.8 35.4 17.5 18.4 25.2 26.4
Net debt to equity (x) net cash net cash net cash net cash net cash net cash net cash net cash
ROCE (%) 21.2 26.8 24.4 21 21.7 17.7 25.4 22.9
DPS (Rs) 1.7 2.1 2.5 1.5 3 3 5.7 6.5
Dividend payout (%) 20 16.6 17.4 9.9 15.9 15.7 15.9 16.1
Asset turnover ratio (sales/invested capital)
1.3 1.4 1.5 1.7 2 1.7 1.8 1.7
Avg. collection days 73 72 78 56 64 66 60 63
Avg. inventory days (on opex.) 125 136 133 117 108 103 118 135 Source: Company data, Deutsche Bank estimates, Includes Ranbaxy from FY15 onwards
2 December 2015
Health Care
Indian Pharmaceuticals
Page 40 Deutsche Bank AG/Hong Kong
Reuters Bloomberg LUPN.NS LPC IN
Forecasts And Ratios
Year End Mar 31 2014A 2015A 2016E 2017E 2018E
Sales (INRm) 110,702.5 125,859.9 134,901.6 170,324.7 192,573.7
EBITDA (INRm) 28,630.1 35,773.1 32,526.3 51,765.3 62,138.9
Reported NPAT (INRm) 18,363.7 24,032.4 22,178.1 34,588.1 42,522.2
Reported EPS FD(INR) 40.79 53.20 49.10 76.57 94.14
DB EPS FD(INR) 42.12 56.04 49.10 76.57 94.14
DB EPS growth (%) 39.8 33.0 -12.4 56.0 22.9
PER (x) 19.9 23.4 36.4 23.3 19.0
EV/EBITDA (x) 13.0 16.1 25.4 15.5 12.4
DPS (net) (INR) 5.98 7.46 6.97 10.95 13.93
Yield (net) (%) 0.7 0.6 0.4 0.6 0.8
Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items
2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses
the year end close
US business to drive EBITDA margin expansion We initiate coverage on Lupin with a Buy rating for three reasons: 1) US business is driven by several launches and Gavis integration; we expect Lupin’s US sales to increase at a 17.5% CAGR in FY15-18E; 2) Lupin continues to grow ahead of the IPM; we forecast a domestic sales CAGR of 15.4% for FY15-FY18E; and 3) we forecast an 18.9% EPS CAGR over FY15-18E, driven by traction in its US business. The stock has outperformed the sector by c.14% YTD and now trades at its three-year average PER of c.23x.
US business to drive sales and earnings Lupin has several product launches in the US markets; key products are generic Glumetza and generic Welchol. For FY15-FY18E, we forecast Lupin’s US sales to increase at a 17.5% CAGR and contribute c.48% of sales in FY18E. The growth will also be driven by launches by Gavis, which has a pipeline of c.130 products, of which c.65 are filed for approval with the USFDA.
Domestic business focused on lifestyle and chronic therapy segments Lupin’s domestic business is focused on the lifestyle and chronic therapy segments, which contributed more than 50% of its sales in FY15 (up from 5% in FY01). For FY15-FY18E, we forecast Lupin’s domestic sales to increase at a CAGR of 15.4%. Cardio Vascular, CNS, Anti-diabetic, and Anti-asthma increased to c.53% of domestic sales in FY15 (up from 18% in FY05).
Key trigger is timely approval and launch of products in the US market Lupin expects c.150 approvals over the next three years, including c.50 approvals for Gavis. We expect US business growth to be driven by new product launches.
Our 12M target price of INR 2,165/sh provides c.21% upside potential; risks
We rate Lupin Buy, with a target price of INR 2,165 on a target PER of 23x on
FY18 recurring EPS. Key downside risks: lower-than-expected sales growth in
the India market and delays in approvals in the US for Lupin and recently
acquired Gavis.
Rating
Buy Asia
India
Health Care
Pharmaceuticals / Biotechnology
Company
Lupin
Strong business outlook justifies premium valuations
Price at 30 Nov 2015 (INR) 1,786.95
Price target - 12mth (INR) 2,165.00
52-week range (INR) 2,108.85 - 1,372.13
Bombay Stock Exchange (BSE 30)
26,146
Kartik Mehta
Research Analyst
(+91) 22 7180 4210
kartik-a.mehta@db.com
Price/price relative
800
1200
1600
2000
2400
12/13 6/14 12/14 6/15
Lupin
Bombay Stock Exchang (Rebased)
Performance (%) 1m 3m 12m
Absolute -6.1 -2.6 24.5
Bombay Stock Exchange (BSE 30)
-1.9 1.8 -8.4
Source: Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 41
Model updated:30 November 2015
Running the numbers
Asia
India
Pharmaceuticals / Biotechnology
Lupin Reuters: LUPN.NS Bloomberg: LPC IN
Buy Price (30 Nov 15) INR 1,786.95
Target Price INR 2,165.00
52 Week range INR 1,372.13 - 2,108.85
Market Cap (m) INRm 804,456
USDm 12,054
Company Profile
Lupin was incorporated in 1983. It develops and markets a wide range of generic and branded formulations and APIs for the developed and developing markets of the world. The company has 10 manufacturing plants in India and 6 out of India including 2 in Japan and 1 in US. Lupin is present both in branded and generic space in US and India and also has large presence in the generic markets of Japan and South Africa. Lupin's important acquisitions are Kyowa and Gavis.
Price Performance
800
1200
1600
2000
2400
Dec 13Mar 14Jun 14Sep 14Dec 14Mar 15Jun 15Sep 15
LupinBombay Stock Exchange (BSE 30) (Rebased)
Margin Trends
16
20
24
28
32
36
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
05101520253035
0
10
20
30
40
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
050100150200250300350
-20
-10
0
10
20
30
40
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Kartik Mehta
+91 22 7180 4210 kartik-a.mehta@db.com
Fiscal year end 31-Mar 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (INR) 30.13 42.12 56.04 49.10 76.57 94.14
Reported EPS (INR) 29.26 40.79 53.20 49.10 76.57 94.14
DPS (INR) 3.99 5.98 7.46 6.97 10.95 13.93
BVPS (INR) 115.9 154.0 196.5 238.6 304.2 384.4
Weighted average shares (m) 449 450 452 452 452 452
Average market cap (INRm) 253,953 376,831 592,200 804,456 804,456 804,456
Enterprise value (INRm) 259,917 373,274 575,753 827,022 804,375 772,483
Valuation MetricsP/E (DB) (x) 18.8 19.9 23.4 36.4 23.3 19.0
P/E (Reported) (x) 19.3 20.5 24.6 36.4 23.3 19.0
P/BV (x) 5.34 6.02 10.18 7.49 5.87 4.65
FCF Yield (%) 2.5 2.9 3.0 nm 3.4 4.8
Dividend Yield (%) 0.7 0.7 0.6 0.4 0.6 0.8
EV/Sales (x) 2.8 3.4 4.6 6.1 4.7 4.0
EV/EBITDA (x) 12.2 13.0 16.1 25.4 15.5 12.4
EV/EBIT (x) 14.5 14.3 18.3 30.4 19.0 14.8
Income Statement (INRm)
Sales revenue 94,500 110,703 125,860 134,902 170,325 192,574
Gross profit 59,020 72,529 84,290 92,138 120,071 136,732
EBITDA 21,291 28,630 35,773 32,526 51,765 62,139
Depreciation 3,322 2,610 4,347 5,355 9,394 9,964
Amortisation 0 0 0 0 0 0
EBIT 17,969 26,020 31,426 27,171 42,371 52,175
Net interest income(expense) -410 -267 -98 -900 -1,096 -951
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries -388 -602 -1,280 0 0 0
Other pre-tax income/(expense) 2,075 3,164 4,101 6,015 6,986 8,084
Profit before tax 19,246 28,317 34,148 32,286 48,261 59,309
Income tax expense 5,842 9,622 9,704 10,024 13,513 16,606
Minorities 263 331 412 84 160 180
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 13,142 18,364 24,032 22,178 34,588 42,522
DB adjustments (including dilution) 388 602 1,280 0 0 0
DB Net profit 13,530 18,965 25,313 22,178 34,588 42,522
Cash Flow (INRm)
Cash flow from operations 10,771 17,040 35,101 26,659 35,751 47,365
Net Capex -4,497 -6,098 -17,191 -62,440 -8,000 -9,000
Free cash flow 6,274 10,942 17,909 -35,781 27,751 38,365
Equity raised/(bought back) 2 2 2 0 0 0
Dividends paid -2,094 -2,939 -4,058 -3,588 -5,638 -7,176
Net inc/(dec) in borrowings -4,337 -4,205 -824 36,676 -5,725 -5,725
Other investing/financing cash flows 480 -173 -16,192 666 436 883
Net cash flow 324 3,626 -3,162 -2,027 16,824 26,347
Change in working capital -5,173 -4,934 6,322 -828 -8,335 -5,305
Balance Sheet (INRm)
Cash and other liquid assets 4,349 7,975 4,814 2,562 19,643 45,990
Tangible fixed assets 27,241 29,080 32,031 78,830 79,374 80,214
Goodwill/intangible assets 5,868 7,518 17,411 27,697 25,758 23,955
Associates/investments 21 1,785 16,584 16,584 16,584 16,584
Other assets 50,956 54,995 59,696 61,706 74,470 83,083
Total assets 88,434 101,352 130,535 187,378 215,829 249,826
Interest bearing debt 9,739 5,533 4,710 41,386 35,661 29,936
Other liabilities 26,059 25,834 36,844 37,895 42,267 45,580
Total liabilities 35,798 31,367 41,554 79,281 77,928 75,516
Shareholders' equity 52,042 69,316 88,741 107,772 137,416 173,645
Minorities 595 669 241 325 485 665
Total shareholders' equity 52,636 69,985 88,982 108,097 137,901 174,310
Net debt 5,390 -2,442 -104 38,824 16,018 -16,054
Key Company Metrics
Sales growth (%) 35.9 17.1 13.7 7.2 26.3 13.1
DB EPS growth (%) 49.1 39.8 33.0 -12.4 56.0 22.9
EBITDA Margin (%) 22.5 25.9 28.4 24.1 30.4 32.3
EBIT Margin (%) 19.0 23.5 25.0 20.1 24.9 27.1
Payout ratio (%) 13.6 14.7 14.0 14.2 14.3 14.8
ROE (%) 28.5 30.3 30.4 22.6 28.2 27.3
Capex/sales (%) 4.8 5.5 13.7 46.3 4.7 4.7
Capex/depreciation (x) 1.4 2.3 4.0 11.7 0.9 0.9
Net debt/equity (%) 10.2 -3.5 -0.1 35.9 11.6 -9.2
Net interest cover (x) 43.8 97.6 320.3 30.2 38.7 54.9
Source: Company data, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Page 42 Deutsche Bank AG/Hong Kong
Investment thesis
Outlook
We rate Lupin a Buy premised on the following: 1) In IPM, Lupin is ranked fifth
with a c.3.5% market share, with a focus on the lifestyle and chronic
segments, which account for c.50% of its domestic business. 2) Lupin has
several launches in the next one year; its key product is generic Glumetza in
4QFY16, for which Lupin is first to file. We forecast a CAGR of 17.5% in
Lupin’s US sales for FY15-FY18E and expect the US to account for c.48% of
sales in FY18E. 3) The stock has outperformed the sector by c.14% YTD and
now trades at its three-year average PER of c.23x. We forecast sales and
earnings CAGRs of 15.2% and 18.9%, respectively, for FY15-18E.
Valuation
We use PER as our principal valuation methodology for Indian Pharma. Lupin
has grown across chronic segments in India and also expanded significantly in
the US markets; its business dynamics across markets have improved
significantly. Its execution also remains on track, although successful
integration of Gavis will be key to future earnings growth. Lupin’s FY15 had a
higher base of product launches, mainly generic Cymbalta sold under shared
exclusivity and key brand Suprax, which now faces generic competition; this is
reflected in lower sales and earnings in FY16. Our target valuation is at par
with its three-year average one-year forward PER of 23x. Thus, we rate Lupin a
Buy, with a target price of INR 2,165 on our FY18 recurring EPS. We assign
Lupin the highest PER in our coverage universe, as we see 1) the pieces in
place for growth in India, 2) no near-term negatives from the USFDA, and 3)
continuous EBITDA margin improvement.
Risks
Key downside risks: lower-than-expected sales growth in the India market and
delays in approvals in the US for Lupin and recently acquired Gavis, as well as
lower-than-expected sales growth in the emerging markets, RoW, and semi-
regulated markets.
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 43
Initiating coverage with a Buy rating
Initiating coverage with a Buy rating
We estimate Lupin’s sales and earnings to increase at CAGRs of 15.2% and
18.9%, respectively, for FY15-18E. We expect EBITDA margin to improve,
mainly driven by increased contribution from US business (mainly Gavis). We
estimate Lupin’s sales in Japan and EU to have low CAGRs of c.6-13%, mainly
due to higher competition, lower product approvals, and weak currency.
Figure 58: Sales-mix summary
Metric FY14 FY15 FY16E FY17E FY18E CAGR
2015-18E (%)Comments
India 24,795 29,679 33,916 39,343 45,637 15.4 Expecting faster-than-Industry growth, reducing focus on Anti-TB sales, launches expected in oncology and gynaecology
US 48,751 56,576 57,448 81,576 91,694 17.5 Growth driven by product launches and integration of Gavis
Europe 3,054 3,279 3,880 4,268 4,694 12.7 Hormosan integration in Germany and new product launches to drive EU sales
Japan 12,955 13,239 13,295 14,625 16,087 6.7 More product launches expected; I'rom acquisition has improved profile in Japan
Others 10,008 11,146 13,353 15,944 18,142 17.6 Includes Grin SA in Mexico, Generic Health in Australia, Pharma Dynamics in South Africa, and Multicare Pharma in Philippines
API 11,140 11,941 13,009 14,570 16,318 11.0 Low growth but higher EBITDA margin business
Net sales 110,703 125,860 134,902 170,325 192,574 15.2 Driven by US and India business
EBITDA margin 25.9 28.4 24.1 30.4 32.3 Margins improve as the contribution of the US business improves, mainly Gavis
Source: Company, Deutsche Bank estimates
India business changing from acute to chronic focus
We forecast Lupin’s domestic sales to increase at a CAGR of 15.4% for FY15-
18E. Lupin is focused on the lifestyle and chronic therapy segments, which
contributed 53% of its sales in FY15 (up from 5% in FY01 and 18% in FY05).
The growth in India is driven by increasing market share in the CV, diabetes,
CNS, asthma, and GI segments.
Figure 60: Market share in top therapeutic segments
Therapeutic Segment FY05 FY11 FY12 FY13 FY14 FY15 Top 3 brands
Anti-TB 33 10 10 9 8 8 R-cinex, AKT 4, AKT 3
Cephalosporins 23 16 17 16 15 14 Merotrol, L Cin, Cetil, Odoxil
CVs 13 21 23 23 23 22 Tonact, Ramistar, Lupenox
Anti-diabetics 3 7 12 15 15 16 Gluconorm-G, Gluconorm-PG,
Anti-asthma 2 9 10 9 10 11 Budamate, Esiflo, Telekast-L
CNS 0 4 5 5 4 4 Cognistar, Stalopam Plus, Citi Star
GI 0 6 7 8 8 8 Rablet, Rablet D, Softovac
Gynec 0 3 4 4 4 4 Lupi HCG, Lupigest, FAA
Others 26 24 12 11 13 13
TOTAL 100 100 100 100 100 100
CV+CNS+anti-diabetic + anti-asthma
18 41 50 52 52 53
Source: Deutsche Bank
Figure 59: IPM vs. Lupin
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Mar'13 Mar'14 Mar'15 Sep'15
MA
T Y
oY
gro
wth
(%
)
IPM Lupin
Source: AIOCD AWACS, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 44 Deutsche Bank AG/Hong Kong
US sales growth should pick up thanks to increased number of launches
As of September 30, 2015, Lupin has filed 220 ANDAs and has approvals for
124 ANDAs. Lupin has several launches over the next 12 months (refer to
Figure 61). We forecast Lupin’s US sales to increase at a CAGR of 17.5% for
FY15-18E and to contribute c.48% of sales in FY18E, driven by Lupin’s
approval and also by launches by Gavis, which has a pipeline of c.130
products, of which c.65 are filed for approval with the USFDA. We expect
Lupin’s R&D cost to be c.10-12% of sales. Among key product launches in
Lupin’s pipeline is generic Glumetza (branded market is c.USD 200-300mn;
Lupin is first to file, and launch date is settled on February 1, 2016).
Figure 61: Lupin’s key generic drug pipeline
Quarter FY16 FY17 FY18 Beyond FY18
Q1 Prolensa, Quartette, Banzel Effient
Viread, Latuda, Pradaxa, Livalo, Uloric, Savella, Toviaz, Paxil CR, Safyral, Vimovo DR, Atripla, Phoslyra, Namenda Xr, Apriso
Q2 Coreg CR, Zymar, Angeliq, Asacol (AG), Crestor
Q3 Natazia, Prezista, Zorvolex, Epzicom
Q4 Glumetza Welchol, Renagel / Renvela, Nuvigil, Multaq, Axiron, Tamiflu
Can launch on approval
Prevacid ODT, Detrol LA, Acular LS, Abilify
Source: Company, Deutsche Bank
Lupin’s acquisition of Gavis increases footprint in the US markets.
Lupin expects more than 20 filings a year from the Gavis platform, primarily in
the areas of controlled substances, dermatology, respiratory, and
gastrointestinal. Gavis also provides Lupin with a USFDA-compliant
manufacturing facility in the US, which would help Lupin enter the US
government’s supplies business.
Figure 64: US sales, YoY growth, and Gavis
‐40%
‐20%
0%
20%
40%
60%
80%
‐
5,000
10,000
15,000
20,000
25,000
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
US Sales (INR mn)
US Sales Gavis as % of US Sales US sales increase
generic glumetza
Source: Company, Deutsche Bank estimates
Figure 62: Break-up of Lupin + Gavis
pending filings
Solid/Oral/ Liquids62%
Derma13%
Controlled Substances
11%
Oral Contraceptives
11%
Ophthal3%
Figure 63: Break-up of Lupin + Gavis
developmental pipeline
Solid/Oral/ Liquids48%
Derma20%
Injectibles13%
Controlled Substances
8%
Ophthal5%
Nasal4%
MDI2%
Source: Company, Deutsche Bank Data as of July 2015
Source: Company, Deutsche Bank Data as of July 2015
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 45
Valuation and risks
Valuation
We use PER as our principal valuation matrix for Indian Pharma. Lupin has grown across chronic segments in India and also expanded significantly in the US markets, and its business dynamics across markets have improved significantly. Its execution also remains on track, although successful integration of Gavis will be key to future earnings growth. Lupin’s FY15 had a higher base of product launches mainly generic Cymbalta which was sold under shared exclusivity and key brand Suprax which now faces generic competition which is reflected in lower sales and earnings in FY16.Our target valuation is at par with its three-year average of one-year forward PER of 23x. Thus, we rate Lupin as a Buy, with a target price of INR 2,165 on our FY18 recurring EPS. We assign Lupin the highest PER in our coverage universe premised by 1) set pieces in place for growth in India, 2) no near-term negatives from the USFDA, and 3) continuous EBITDA margin improvement.
Figure 65: PE band – Lupin
0
500
1,000
1,500
2,000
2,500
3,000
3,500
06-A
pr-0
9
31-D
ec-0
9
26-S
ep-1
0
22-J
un-1
1
17-M
ar-1
2
11-D
ec-1
2
06-S
ep-1
3
02-J
un-1
4
26-F
eb-1
5
22-N
ov-1
5
Price 15x 25x 35x 45x
Source: Deutsche Bank, Bloomberg Finance LP (data as of 30/11/2015)
Risks
Key downside risks: lower-than-expected sales growth in the India market and
delays in approvals in the US for Lupin and recently acquired Gavis, as well as
lower-than-expected sales growth in the emerging markets, RoW, and semi-
regulated markets.
2 December 2015
Health Care
Indian Pharmaceuticals
Page 46 Deutsche Bank AG/Hong Kong
Company description
Lupin was incorporated in 1983. It develops and markets a wide range of
generic and branded formulations and APIs for the developed and developing
markets of the world. The company has ten manufacturing plants in India and
six outside of India, including two in Japan and one in the US. Lupin is present
in both the branded and generic space in the US and India and also has a large
presence in the generic markets of Japan and South Africa. Lupin’s important
acquisitions are Kyowa and Gavis.
Management summary
Figure 67: Selected board of directors and senior management
Name/Designation Summary
Dr. Desh Bandhu Gupta
Chairman Founded the company in 1968.
Dr. Kamal K Sharma
Vice-Chairman
Career spanning three decades in the Industry. Joined Lupin in 2003 as Managing Director. Appointed Vice-Chairman in September 2013.
Ms. Vinita Gupta
CEO
Appointed CEO in September 2013. Previously Group President & CEO, Lupin Pharmaceuticals Inc., USA. She Joined Lupin in 1993.
Mr. Nilesh Gupta
Managing Director Appointed Managing Director in September 2013. Previously Group President and Executive Director. Joined Lupin in 1996.
Mr. Ramesh Swaminathan
CFO & Additional Director Appointed CFO in 2007.
Source: Company, Deutsche Bank
Corporate actions and shareholding pattern
Figure 68: Corporate actions (2001-2015) Figure 69: Shareholding pattern
Year Corporate Action Summary
2015 Acquisition US-based Gavis
2015 Acquisition Temmler's specialty product portfolio
2015 Acquisition Russia-based ZAO Biocom
2015 Acquisition Balance 40% stake in South African Pharma Dynamics
2014 Acquisition Mexico-based Grin Laboratories
2014 Acquisition Netherlands-based injectable company Nanomi BV
2011 Divestiture Japan-based I'rom Pharmaceutical Co.
2010 Stock Split Adjustment Factor - 5
2009 Acquisition US rights for Antara (Fenofibrate Capsules)
2009 Acquisition Multicare Pharmaceuticals Philippines
2008 Acquisition 60% stake in South African Pharma Dynamics
2008 Acquisition Minority stake in Australia-based Generic Health
2008 Acquisition Germany-based Hormosan Pharma.
2007 Acquisition Japan-based Kyowa Pharma
2007 Acquisition Pharma business of Rubamin
2007 Joint Venture Symbiotec Pharmalab for steroids market
2007 Divestiture IP for Perindopril for multiple countries to France-based Laboratoires Servier
2006 Divestiture Entire stake in Lupin Chemicals (Thailand) Ltd
2003 Stake sale Citigroup picked up 12.55%
2001 Reverse-stock split 1 for 10
2001 Name Change From Lupin Chemicals to Lupin Ltd
0% 20% 40% 60% 80% 100%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Sep‐15
Promoter
FIIs
Others
Mutual Funds/UTI
Bank/FI/Insurance Companies
Source: Company, Deutsche Bank, Bloomberg Finance LP
Source: Company, Deutsche Bank
Figure 66: Revenue split FY15
India formulations
24%
US & EU48%
Japan10%
API9%
Others9%
Source: Company, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 47
Company financials
Figure 70: Income statement
Year to March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
India formulations 15,509 19,059 23,644 24,795 29,679 33,916 39,343 45,637
US and EU 22,017 27,278 40,051 51,805 59,855 61,328 85,843 96,388
Japan 6,212 8,607 13,040 12,955 13,239 13,295 14,625 16,087
API 8,589 8,491 9,498 11,140 11,941 13,009 14,570 16,318
Others 4,697 6,078 8,267 10,008 11,146 13,353 15,944 18,142
Net Sales 57,024 69,513 94,500 110,703 125,860 134,902 170,325 192,574
yoy Growth% 19.7% 21.9% 35.9% 17.1% 13.7% 7.2% 26.3% 13.1%
Total Op. Exp. 46,275 55,897 73,209 82,072 90,087 102,375 118,559 130,435
EBITDA 10,750 13,616 21,291 28,630 35,773 32,526 51,765 62,139
Margins % 18.9% 19.6% 22.5% 25.9% 28.4% 24.1% 30.4% 32.3%
yoy Growth% 21.2% 26.7% 56.4% 34.5% 24.9% -9.1% 59.1% 20.0%
Depreciation 1,712 2,275 3,322 2,610 4,347 5,355 9,394 9,964
EBIT 9,038 11,341 17,969 26,020 31,426 27,171 42,371 52,175
Other Income 1,317 1,376 2,075 3,164 4,101 6,015 6,986 8,084
Interest 325 355 410 267 98 900 1,096 951
PBT 10,030 12,362 19,634 28,918 35,429 32,286 48,261 59,309
Tax 1,169 3,086 5,842 9,622 9,704 10,024 13,513 16,606
Tax Rate (%) 11.7% 25.0% 29.8% 33.3% 27.4% 31.0% 28.0% 28.0%
Minority Interest 168 199 263 331 412 84 160 180
Adj PAT 8,693 9,077 13,530 18,965 25,313 22,178 34,588 42,522
Net Margins 15.2% 13.1% 14.3% 17.1% 20.1% 16.4% 20.3% 22.1%
EO Items -67 -401 -388 -602 -1,280 0 0 0
Reported PAT 8,626 8,677 13,142 18,364 24,032 22,178 34,588 42,522 Source: Company, Deutsche Bank estimates
Figure 71: Cash flow statement
Year to March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
PBT (Adj. for Extraordinary items) 9,963 11,961 19,246 28,317 34,148 32,286 48,261 59,309
Depreciation 1,712 2,275 3,322 2,610 4,347 5,355 9,394 9,964
Net Chg in WC (1,528) (5,009) (6,146) (4,411) 6,906 (1,260) (8,797) (5,799)
Others (1,193) (3,055) (5,652) (9,475) (10,300) (9,723) (13,108) (16,108)
CFO 8,955 6,172 10,771 17,040 35,101 26,659 35,751 47,365
Capex (4,544) (8,737) (4,497) (6,098) (17,191) (62,440) (8,000) (9,000)
Net Investments made 233 4 7 (1,764) (14,799) - - -
Others Investing Activities - - - - - - - -
CFI (4,311) (8,733) (4,489) (7,862) (31,991) (62,440) (8,000) (9,000)
Change in Share capital 3 1 2 2 2 - - -
Change in Debts (1,056) 3,734 (4,337) (4,205) (824) 36,676 (5,725) (5,725)
Div. & Div Tax (1,575) (1,684) (2,094) (2,939) (4,058) (3,588) (5,638) (7,176)
Others 171 334 473 1,591 (1,392) 666 436 883
CFF (2,457) 2,384 (5,957) (5,552) (6,271) 33,755 (10,926) (12,018)
Total Cash Generated 2,186 (177) 324 3,626 (3,161) (2,027) 16,824 26,347
Cash Opening Balance 2,015 4,201 4,025 4,349 7,975 4,814 2,787 19,611
Cash Closing Balance 4,201 4,025 4,349 7,975 4,814 2,787 19,611 45,958 Source: Company, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Page 48 Deutsche Bank AG/Hong Kong
Figure 72: Balance sheet
As at March 31st FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Paid up Capital 892 893 895 897 899 899 899 899
Reserves & Surplus 31,918 39,236 51,147 68,419 87,842 106,873 136,517 172,746
Total Equity 32,811 40,129 52,042 69,316 88,741 107,772 137,416 173,645
Minority Interest 515 723 595 669 241 325 485 665
Total Debt 10,903 14,809 9,739 5,533 4,710 41,386 35,661 29,936
Deferred Liabilities 1,411 1,442 1,632 1,779 1,182 1,483 1,888 2,386
Capital Employed 45,640 57,103 64,008 77,297 94,874 150,966 175,450 206,632
Total Cur. Lia. & Prov. 15,223 21,770 24,427 24,055 35,662 36,412 40,379 43,194
Total Liabilities 60,863 78,872 88,434 101,352 130,535 187,378 215,829 249,826
Net Fixed Assets 25,472 31,934 33,109 36,597 49,442 106,526 105,132 104,169
Investments 32 28 21 1,785 16,584 16,584 16,584 16,584
Inventory 12,000 17,327 19,489 21,295 25,036 24,705 29,531 32,954
Debtors 12,556 17,318 21,870 24,641 26,566 28,474 35,951 40,647
Other Current Assets 6,602 8,241 9,597 9,060 8,095 8,526 8,988 9,482
Cash and Equivalents 4,201 4,025 4,349 7,975 4,814 2,562 19,643 45,990
Total Cur. Assets 35,359 46,911 55,305 62,970 64,510 64,267 94,113 129,073
Total Assets 60,863 78,872 88,434 101,352 130,535 187,378 215,829 249,826 Source: Company, Deutsche Bank estimates
Figure 73: Financial ratios
Year to March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Adj EPS (Rs) 19.4 20.2 30.1 42.1 56 49.1 76.6 94.1
yoy Growth% 29.3 4.4 49.1 39.8 33 -12.4 56 22.9
EBITDA - Core (%) 18.9 19.6 22.5 25.9 28.4 24.1 30.4 32.3
NPM (%) 15.2 13.1 14.3 17.1 20.1 16.4 20.3 22.1
Net Debt to Equity (x) 0.2 0.2 0.1 net cash net cash 0.4 0.1 net cash
ROCE (%) 22.1 18.2 23.2 27.4 29 18.8 21.9 22.9
DPS (Rs) 3 3.2 4 6 7.5 7.0 11.0 14.0
Dividend Payout (%) 15.5 16.5 13.6 14.7 14 14.2 14.3 14.8
Asset Turnover Ratio (sales/ invested capital)
1.5 1.5 1.7 1.7 1.8 1.3 1.3 1.4
Avg Collection days 76 78 76 77 74 74 69 73
Avg Inventory days (on opex.) 86 96 92 91 94 89 83 87
Source: Company, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 49
Reuters Bloomberg REDY.NS DRRD IN
Forecasts And Ratios
Year End Mar 31 2014A 2015A 2016E 2017E 2018E
Sales (INRm) 132,170.0 148,189.0 158,508.3 167,175.6 180,797.4
EBITDA (INRm) 33,138.0 34,386.0 39,430.9 37,657.4 41,531.3
Reported NPAT (INRm) 21,511.5 22,179.0 25,327.9 23,432.7 26,039.1
Reported EPS FD(INR) 126.10 130.01 148.47 137.36 152.64
DB EPS FD(INR) 124.03 124.40 148.21 137.36 152.64
DB EPS growth (%) 28.9 0.3 19.1 -7.3 11.1
PER (x) 18.7 23.8 21.0 22.6 20.4
EV/EBITDA (x) 13.0 15.8 14.1 14.6 13.1
DPS (net) (INR) 17.95 19.98 23.00 22.00 24.00
Yield (net) (%) 0.8 0.7 0.7 0.7 0.8
Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items
2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which
uses the year end close
Weak outlook driven by regulatory issues We initiate coverage on Dr Reddy’s with a Sell due to: 1) the weak outlook for its US business, which is c.44% sales in FY15 – we expect US sales growth to be tepid, increasing at a CAGR of 3.3% over FY15-18; 2) EBITDA margin to fall by c.150bps due to lower new product launches in the US market; 3) 7.1% EPS CAGR over FY15-18, on our estimates, given a lack of clarity in timelines in restoring normalcy in its US business. Further, the stock has lagged the sector by c.15% YTD, and its PER multiples – now at par with its peers’ (vs.c.20-30% premium historically) – do not reflect the earnings uncertainty.
Muted US sales growth slowdown due to warning letter issued to three plants The USFDA issued a warning letter to three of Dr Reddy's Indian sites relating to two of its API units as well as one relating to an oncology formulation unit. We forecast Dr Reddy’s US formulation sales to increase at a CAGR of 7.1% for FY15-18. The affected plants account for c.10-12% of total sales. While existing supplies may not be halted, there could be delays in new product approvals. Should no new US approvals be received until FY18, we estimate the EPS impact at 3.3% for FY18 and, should there be an import alert for FY18, we estimate the EPS impact at 29% for FY18.
Key trigger is approvals of new products from alternative site We believe approval of key products is key to US sales growth. Remediation efforts at the USFDA plants will entail costs, and timelines range from six months to over a year. We believe successful resolution of the warning letter issues would be a key trigger for Dr Reddy’s.
Our 12M target price of INR 2,748/share implies c.12 % downsides; risks We rate Dr Reddy’s as a Sell. We base our INR 2,748 target price on our target PER of 18x (factoring in a slowdown in the US business due to the warning letters to three plants) on FY18E recurring EPS. Key upside risks: faster-than-expected resolution of the warning letters issue, higher-than-expected market growth in India and faster-than-expected market growth in the PSAI business.
Rating
Sell Asia
India
Health Care
Pharmaceuticals / Biotechnology
Company
Dr. Reddy's
Earnings uncertainty not in the price
Price at 30 Nov 2015 (INR) 3,107.80
Price target - 12mth (INR) 2,748.00
52-week range (INR) 4,347.60 - 3,022.91
Bombay Stock Exchange (BSE 30)
26,146
Kartik Mehta
Research Analyst
(+91) 22 7180 4210
kartik-a.mehta@db.com
Price/price relative
2000
2400
2800
3200
3600
4000
4400
12/13 6/14 12/14 6/15
Dr. Reddy's
Bombay Stock Exchang (Rebased)
Performance (%) 1m 3m 12m
Absolute -25.0 -24.4 -11.0
Bombay Stock Exchange (BSE 30)
-1.9 1.8 -8.4
Source: Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 50 Deutsche Bank AG/Hong Kong
Model updated:29 November 2015
Running the numbers
Asia
India
Pharmaceuticals / Biotechnology
Dr. Reddy's Reuters: REDY.NS Bloomberg: DRRD IN
Sell Price (30 Nov 15) INR 3,107.80
Target Price INR 2,748.00
52 Week range INR 3,022.91 - 4,347.60
Market Cap (m) INRm 530,155
USDm 7,944
Company Profile
Dr Reddy's, established in 1984, is a leading pharmaceutical company in India with vertically-integrated operations. Dr. Reddy's produces finished dosage forms of drugs, APIs and biotechnology products and markets them globally, with a focus on India, the US, Europe and Russia. Dr Reddy's key acquisitions are Betapharm in Germany and UCB's India business. The company has 8 manufacturing locations (USA, Mexico, UK, China and India).
Price Performance
2000
2400
2800
3200
3600
4000
4400
Dec 13Mar 14Jun 14Sep 14Dec 14Mar 15Jun 15Sep 15
Dr. Reddy'sBombay Stock Exchange (BSE 30) (Rebased)
Margin Trends
16
18
20
22
24
26
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
0
5
10
15
20
25
30
0
5
10
15
20
25
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
50
100
150
200
0
10
20
30
40
50
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Kartik Mehta
+91 22 7180 4210 kartik-a.mehta@db.com
Fiscal year end 31-Mar 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (INR) 96.21 124.03 124.40 148.21 137.36 152.64
Reported EPS (INR) 98.35 126.10 130.01 148.47 137.36 152.64
DPS (INR) 14.94 17.95 19.98 23.00 22.00 24.00
BVPS (INR) 428.5 532.3 652.5 777.9 893.3 1,021.9
Weighted average shares (m) 171 171 171 171 171 171
Average market cap (INRm) 290,864 395,997 505,706 530,155 530,155 530,155
Enterprise value (INRm) 322,016 431,482 542,404 554,342 549,508 545,404
Valuation MetricsP/E (DB) (x) 17.7 18.7 23.8 21.0 22.6 20.4
P/E (Reported) (x) 17.3 18.4 22.8 20.9 22.6 20.4
P/BV (x) 4.05 4.76 5.32 3.99 3.48 3.04
FCF Yield (%) 0.9 nm 1.0 1.8 1.6 1.5
Dividend Yield (%) 0.9 0.8 0.7 0.7 0.7 0.8
EV/Sales (x) 2.8 3.3 3.7 3.5 3.3 3.0
EV/EBITDA (x) 12.1 13.0 15.8 14.1 14.6 13.1
EV/EBIT (x) 15.3 16.6 20.6 17.7 19.1 17.1
Income Statement (INRm)
Sales revenue 116,266 132,170 148,189 158,508 167,176 180,797
Gross profit 60,579 75,801 85,403 93,595 94,544 103,044
EBITDA 26,662 33,138 34,386 39,431 37,657 41,531
Depreciation 5,549 7,106 8,100 8,090 8,865 9,550
Amortisation 0 0 0 0 0 0
EBIT 21,113 26,032 26,286 31,341 28,792 31,981
Net interest income(expense) -1,018 -1,274 -1,092 0 -220 -220
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries 365 354 958 45 0 0
Other pre-tax income/(expense) 1,113 1,320 1,816 648 1,418 1,546
Profit before tax 21,573 26,432 27,968 32,034 29,991 33,307
Income tax expense 4,900 5,094 5,984 6,831 6,598 7,327
Minorities -104 -174 -195 -125 -40 -60
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 16,777 21,512 22,179 25,328 23,433 26,039
DB adjustments (including dilution) -365 -354 -958 -45 0 0
DB Net profit 16,412 21,158 21,221 25,283 23,433 26,039
Cash Flow (INRm)
Cash flow from operations 13,192 13,568 18,586 19,848 19,347 20,138
Net Capex -10,609 -14,392 -13,499 -10,500 -10,800 -12,000
Free cash flow 2,583 -825 5,087 9,348 8,547 8,138
Equity raised/(bought back) 392 438 703 0 0 0
Dividends paid -2,981 -3,582 -4,102 -4,590 -4,391 -4,790
Net inc/(dec) in borrowings -3,710 8,115 -6,433 -3,392 -1,813 125
Other investing/financing cash flows 1,473 -832 1,688 792 678 756
Net cash flow -2,243 3,315 -3,057 2,158 3,021 4,229
Change in working capital -16,000 -11,717 -13,123 -13,314 -19,509 -22,719
Balance Sheet (INRm)
Cash and other liquid assets 5,136 8,451 5,394 7,552 10,573 14,802
Tangible fixed assets 42,745 50,209 52,587 55,594 58,096 61,084
Goodwill/intangible assets 9,090 8,912 11,933 11,336 10,770 10,231
Associates/investments 472 806 1,033 1,033 1,033 1,033
Other assets 84,926 101,845 123,814 127,186 138,724 152,878
Total assets 142,369 170,223 194,762 202,702 219,195 240,029
Interest bearing debt 36,760 44,742 43,126 32,772 30,959 31,084
Other liabilities 32,504 34,680 40,335 37,224 35,850 34,613
Total liabilities 69,264 79,422 83,460 69,996 66,809 65,698
Shareholders' equity 73,105 90,801 111,302 132,706 152,386 174,331
Minorities 0 0 0 0 0 0
Total shareholders' equity 73,105 90,801 111,302 132,706 152,386 174,331
Net debt 31,624 36,291 37,731 25,220 20,386 16,282
Key Company Metrics
Sales growth (%) 20.2 13.7 12.1 7.0 5.5 8.1
DB EPS growth (%) 20.9 28.9 0.3 19.1 -7.3 11.1
EBITDA Margin (%) 22.9 25.1 23.2 24.9 22.5 23.0
EBIT Margin (%) 18.2 19.7 17.7 19.8 17.2 17.7
Payout ratio (%) 15.2 14.2 15.4 15.5 16.0 15.7
ROE (%) 25.7 26.2 21.9 20.8 16.4 15.9
Capex/sales (%) 9.1 10.9 9.1 6.6 6.5 6.6
Capex/depreciation (x) 1.9 2.0 1.7 1.3 1.2 1.3
Net debt/equity (%) 43.3 40.0 33.9 19.0 13.4 9.3
Net interest cover (x) 20.7 20.4 24.1 nm 130.9 145.4
Source: Company data, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 51
Investment thesis
Outlook
We rate Dr Reddy’s as a Sell premised on the following: 1) in IPM, Dr Reddy’s
is ranked 16th with a 2.3% market share with a focus on gastro-intestinal
segments; its India sales growth has been in line with the market growth rate;
2) US approvals are set to slow down due to warning letters issued in
November 2015 to three of its USFDA manufacturing sites in India for FY15-
FY18; we forecast the US sales of the company will increase at a CAGR of
7.1% and contribute c.42% of sales in FY18; 3) the stock has lagged the sector
by 15% YTD, and PER multiples are now at a par with peers (vs.c.20-30%
premium historically). We forecast sales and earnings to grow at CAGRs of
8.4% and 11.9% respectively for FY15-FY18.
Valuation
Dr Reddy’s has been trading at an average one-year forward PER of 19x for the
past five years (21x for the past three years on the back of continuous product
launches in the US markets) which is a discount of c.10-30% to Sun Pharma
and Lupin. The stock has fallen c.20% following the recent warning letter sent
to three of its plants. This will likely slow down approvals for the US market
and have a meaningful impact on overall sales and earnings growth.
Furthermore, remediation efforts at the USFDA plants will entail costs,
temporary disruption of supplies and timelines that could range from six
months to over a year further limiting earnings outlook.
We believe successful resolution of the warning letters issue would be a key
trigger in the medium term but with estimates being revised down by the
Street choose to adopt a conservative valuation. We assign a PER of 18x
(discount of 5% over the past three years’ one-year forward PER) which is
c.20-30% discount to Sun and Lupin’s target PER. Thus, we rate Dr Reddy’s as
a Sell. We have an INR 2,748 target price on our FY18E recurring EPS. While
successful site transfer would improve the sales growth outlook, EBITDA
margin improvement could be delayed as these transfers would entail
additional costs and in some cases also profit sharing. The stock could trade at
c.18x-19x but still below its historical multiple of 20-21x.
Risks
Key upside risks: faster-than-expected resolution of the warning letters issue,
higher-than-expected market growth in the India and faster-than-expected
market growth in PSAI business
2 December 2015
Health Care
Indian Pharmaceuticals
Page 52 Deutsche Bank AG/Hong Kong
Initiating with a Sell
We estimate Dr. Reddy’s sales and earnings will increase at CAGRs of 6.9%
and 7.1% respectively for FY15-18. We expect the EBITDA margin to remain
stable as pressure on the US business is likely to cap any margin improvement.
US approvals will likely slow down due to warning letters issued in November
2015 to three of its USFDA manufacturing sites in India for FY15-FY18; we
forecast the company’s US sales will increase at a CAGR of 7.1%. We present
scenarios of earnings impact as follows: 1) assuming no approvals until FY18,
EPS impact would be 3.3% for FY18E; 2) assuming import alert in FY18, EPS
impact would be 29% for FY18E.
Figure 74: Scenarios for US approvals with earnings
impact
Figure 75: Scenarios for US approvals with earnings
impact
c. 5% fall in US sales 1,911
GM % 58
PAT (INR mn) 864
EPS impact (INR) 5.1
FY18 EPS (INR) 152.6
% of EPS 3.3
Case 1: No new US approvals received until FY18
c.10% of sales (INR mn) 15,851
GM % 60
PAT (INR mn) 7,480
EPS impact (INR) 43.8
FY18 EPS (INR) 152.6
% of EPS 29
Case 2: Import Alert in FY18
Source: Deutsche Bank estimates
Source: Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 53
Russia key market but currency depreciation has capped sales growth
Dr Reddy’s is among the fastest-growing OTC companies in Russia with 35%
of its sales contributed by OTC products. However, the depreciation of the
rouble against the US dollar has impacted the company’s sales and EBITDA
margin. We forecast the company’s Russia and CIS sales will increase at a
CAGR of 5.7% and contribute c.11% of sales in FY18 (down from 12% in
FY15).
Figure 76: Sales mix summary
Metric FY14 FY15 FY16E FY17E FY18E CAGR
2015-18E (%)Comments
Global generics 105,165 120,293 130,071 135,968 146,668 6.8 Driven by India business
North America 55,302 64,471 72,835 70,173 71,096 3.3 Subdued growth due to warning letter issued to the company for three of its plants in India
Europe 6,970 7,056 8,559 9,373 10,148 12.9 Market growth rate is less than 10% annually
India 15,714 17,870 21,350 24,546 28,228 16.5 Driven by UCB's acquisition in FY16.
Russia & other CIS 19,820 17,838 15,727 18,187 21,043 5.7 Expect to launch biosimilars in near term. Currency depreciation has capped growth
Others 7,359 13,058 11,601 13,689 16,153 7.3
PSAI (Pharmaceutical Services & Active Ingredients)
23,974 25,456 24,520 27,576 30,198 5.9 Lower growth in regulated markets
North America 4,355 4,605 2,803 3,164 3,561 (8.2)
Europe 8,770 10,507 10,056 10,056 10,056 (1.5)
India 3,786 3,287 2,975 3,065 3,157 (1.3)
Others 7,063 7,057 8,685 11,292 13,425 23.9
Proprietary products 3,034 2,439 3,918 3,632 3,931 17.2 The focus is on building a pipeline in the therapeutic areas of dermatology and neurology
Net sales 132,173 148,189 158,508 167,176 180,797 6.9 US generics business impacted by warning letters to API facilities will see delay in approval
EBITDA margin (%) 25.1 23.2 24.9 22.5 23.0 Pressure on US business will cap margin improvement
Source: Company, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Page 54 Deutsche Bank AG/Hong Kong
Recovery in domestic business growth driven by UCB’s portfolio
In April 2015, Dr Reddy’s acquired select brands from UCB India in therapy
segments like respiratory, dermatology and paediatrics. Annual sales of these
brands were INR 1.5bn and were integrated with Dr. Reddy’s from Q1FY16.
We forecast the company’s India sales will increase at a CAGR of 16.5%.
Figure 77: IPM vs. Dr. Reddy’s Figure 78: Top five therapies Figure 79: Top five brands in India
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Mar'13 Mar'14 Mar'15 Sep'15
MA
T Y
oY
gro
wth
(%
)
IPM DRL
No.
1.Gastro
Intestinal
2. Cardiac
3.Anti-
Neoplastics
4. Respiratory
5.Anti-
Infectives
Top 5 therapies Brand name TherapyMAT Sep'15
sales (INR bn)
OmezGastro
Intestinal1.2
Omez DGastro
Intestinal0.8
NisePain /
Analgesics0.6
EconormGastro
Intestinal0.6
Stamlo Cardiac 0.6
Source: AIOCD AWACS, Deutsche Bank
Source: AIOCD AWACS, Deutsche Bank
Source: AIOCD AWACS, Deutsche Bank
We expect US sales growth to be driven by existing products.
As of 30 September 2015, Dr Reddy’s had 230 ANDA approvals and 76 ANDA
pending approval. We expect key products like decitabine, azacitabine,
metoprolol and divaloproex ER and zoledronic acid (Reclast) to contribute
significantly to the company’s US sales. Please refer to list of launches below.
We expect Dr Reddy’s R&D costs to be c.11-13% over the next three years.
Over the past four years the US business has been a key driver of the
company’s EBITDA margin, which we expect to fall due to delays in new
product approvals at the India plants.
Figure 80: US sales
0%
10%
20%
30%
40%
50%
60%
70%
80%
-
5,000
10,000
15,000
20,000
1Q
FY
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FY
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13
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18
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18
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FY
18
US
sale
s (IN
R m
n)
US sales Company gross Margin Global Generic Gross Margin
PSAI gross Margin EBITDA Margin
generic Zyprexa
USFDA warning letter for 3 plants
generic Dacogen, generic Vidaza
generic Propecia
Source: Company, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 55
Among the key product launches in Sun’s pipeline is generic Gleevec (branded
market is c.2bn, Sun is first to file and has settled for launch on 1 February
2016; Dr Reddy’s plans to launch within some quarters of Sun’s launch). Dr
Reddy’s has several products due to be launched in the US markets (see
below).
Figure 81: Dr. Reddy’s key generic drug pipeline
Quarter FY16 FY17 FY18 Beyond FY18
Q1 Intermezzo, Vimovo Effient Aloxi, Amitiza, Clolar, Copaxone (20mg and 40mg), Finacea, Folotyn, Gleevec, Ixempra® kit, Kuvan, Uloric, Vascepa, Velcade, Dexilant
Q2 Zegerid
Q3 Treanda Jevtana
Q4 Mozobil
Can launch on approval
Diprivan, Pristiq
Source: Company, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 56 Deutsche Bank AG/Hong Kong
Valuation and risks
Valuation
Dr Reddy’s has been trading at an average one-year forward PER of 19x for the
past five years (21x for the past three years on the back of continuous product
launches in the US markets) which is a discount of c.10-30% to Sun Pharma
and Lupin. The stock has fallen c.20% following the recent warning letter sent
to three of its plants. This will slow down approvals for the US market and
have a meaningful impact on overall sales and earnings growth. Furthermore,
remediation efforts at the USFDA plants will entail costs, temporary disruption
of supplies and timelines that could range from six months to over a year,
further limiting earnings outlook.
We believe successful resolution of the warning letters issue would be a key
trigger in the medium term but, with Street estimates being lowered, choose to
adopt a conservative valuation. We assign a PER of 18x (discount of 5% over
the past three years’ one-year forward PER) which is c.20-30% discount to Sun
and Lupin’s target PER. Thus, we rate Dr Reddy’s as a Sell. We have an
INR 2,748 target price on our FY18E recurring EPS. While successful site
transfer would improve the sales growth outlook, EBITDA margin improvement
could be delayed as these transfers would entail additional costs and in some
cases also profit sharing; the stock could trade c.18x-19x but still below its
historical multiple of 20-21x.
Figure 82: PE band – Dr. Reddy’s
0500
1,0001,5002,0002,5003,0003,5004,0004,5005,000
31-M
ar-0
9
09-S
ep-0
9
18-F
eb-1
0
30-J
ul-1
0
08-J
an-1
1
19-J
un-1
1
28-N
ov-1
1
08-M
ay-1
2
17-O
ct-1
2
28-M
ar-1
3
06-S
ep-1
3
15-F
eb-1
4
27-J
ul-1
4
05-J
an-1
5
16-J
un-1
5
25-N
ov-1
5
Price 15x 20x 25x 30x
Source: Deutsche Bank estimates, Bloomberg Finance LP (data as on 30/11/2015)
Risks
Key upside risks: faster-than-expected resolution of the warning letter issue,
higher-than-expected market growth in India and faster-than-expected market
growth in PSAI business.
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 57
Company description
Dr Reddy’s, established in 1984, is a leading pharmaceutical company in India
with vertically-integrated operations. Dr. Reddy’s produces finished dosage
forms of drugs, APIs and biotechnology products and markets them globally,
with a focus on India, the US, Europe and Russia. Dr Reddy’s key acquisitions
are Betapharm in Germany and UCB’s India business. The company has eight
manufacturing locations in five countries (USA, Mexico, UK, China and India)
Management summary
Figure 84: Selected board of directors and senior management
Name/Designation Summary
Mr. G V Prasad
Co-chairman, MD & CEO
In May 2014, he was appointed as co-chairman and managing director. Previously, In April 2013 , he was appointed as the chairman and CEO. He was managing director of Cheminor Drugs Ltd, which merged with Dr. Reddy’s in 2001.
Mr. Satish Reddy
Chairman
In May 2014, the board appointed him as chairman. Previously in April 2013 he was appointed as vice chairman, MD and COO. In 1997 he became the managing director of the company.
Mr. Saumen Chakraborty
CFO
Appointed in 2012, previously he was the president and global head of quality, HR and IT & business process excellence. He was also the CFO of Dr. Reddy’s between 2006 and 2008.
Mr. Abhijit Mukerjee
COO Appointed in May 2014 , previously he was the president global generics division
Source: Company, Deutsche Bank
Corporate actions and shareholding pattern
Figure 85: Corporate actions (2001-2015) Figure 86: Shareholding pattern
Year Corporate Action Summary
2015 AcquisitionIP rights of Alchemia’s fondaparinux
drug
2015 Acquisition
Signed commercialisation deal with
Hatchtech, to market its product -
Xeglyze in India & Other countries
2015 Acquisition UCB India business
2014 Acquisition Acquired Novartis's Habitrol brand
2012 Acquisition Picked up 98.6% Stake in OctoPlus BV
2008 AcquisitionPurchased equity holding in Perlecan
Pharma Pvt Ltd
2008 Acquisition Dow Chemical's molecule business
2008 Acquisition BASF's contract manufacturing unit
2006 Equity OfferingIssued 12.5m additional ADS at USD 16
per ADS
2006 Acquisition Betapharm Arzneimittel GmbH
2005 Acquisition Roche's API business in Mexico
2005 DivestitureSold manufacturing unit in Goa to Us
based Watson Pharma
2001 Divestiture
Acquired six dental prescription brands
of Mumbai based Group
Pharmaceuticals
2001 Stock Split Adjustment Factor - 2
2001 Equity OfferingListed in NYSE with a net IPO proceeds
of USD 122.96m
2000 Acquisition Merger with American Remedies
2000 Acquisition Acquired 64.66% in Cheminor Drugs Ltd
0% 20% 40% 60% 80% 100%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Sep-15
FIIs
Others
Promoter
Mutual Funds/UTI
Bank/FI/Insurance Companies
Source: Company, Deutsche Bank, Bloomberg Finance LP
Source: Company, Deutsche Bank
Figure 83: Revenue split FY15
Global Generics
81%
PSAI (Pharmaceu
tical Services &
Active Ingredients)
17%
Others2%
Source: Company, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 58 Deutsche Bank AG/Hong Kong
Company financials
Figure 87: Income statement
Year to March (INR m) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Global generics 53,341 70,243 82,563 1,05,164 1,20,293 130,071 135,968 146,668
PSAI (pharmaceutical services & active ingredients)
19,647 23,812 30,702 23,974 25,456 24,520 27,576 30,198
Others 1,705 2,682 3,001 3,032 2,439 3,918 3,632 3,931
Net sales 74,693 96,737 1,16,266 1,32,170 1,48,189 158,508 167,176 180,797
Total revenue 74,693 96,737 1,16,266 1,32,170 1,48,189 158,508 167,176 180,797
yoy growth % 6.3% 29.5% 20.2% 13.7% 12.1% 7.0% 5.5% 8.1%
Total operating expenses 57,917 73,817 89,604 99,032 1,13,803 119,077 129,518 139,266
EBITDA 16,776 22,920 26,662 33,138 34,386 39,431 37,657 41,531
Margins % 22.5% 23.7% 22.9% 25.1% 23.2% 24.9% 22.5% 23.0%
yoy growth% 26.2% 36.6% 16.3% 24.3% 3.8% 14.7% -4.5% 10.3%
Depn. & amortisation 4,147 4,668 5,549 7,106 8,100 8,090 8,865 9,550
EBIT 12,629 18,252 21,113 26,032 26,286 31,341 28,792 31,981
Other income/interest (net) -132 -529 95 46 724 648 1,198 1,326
PBT 12,497 17,723 21,208 26,078 27,010 31,989 29,991 33,307
Tax 1,403 4,204 4,900 5,094 5,984 6,831 6,598 7,327
Tax rate (%) 11.2% 23.7% 23.1% 19.5% 22.2% 21.4% 22.0% 22.0%
Minority interest -3 -54 -104 -174 -195 -125 -40 -60
Adjusted PAT 11,097 13,573 16,412 21,158 21,221.0 25,283 23,433 26,039
Net margins (%) 14.9% 14.0% 14.1% 16.0% 14.3% 16.0% 14.0% 14.4%
Extraordinary Items -57 689 365 354 958 45 0 0
Reported PAT 11,040 14,262 16,777 21,512 22,179 25,328 23,433 26,039
Source: Company, Deutsche Bank estimates
Figure 88: Cash flow statement
Year to March (INR m) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
PBT (adj. for extraordinary items) 12,440 18,412 21,573 26,432 27,968 32,034 29,991 33,307
Depreciation 4,147 4,668 5,549 7,106 8,100 8,090 8,865 9,550
Net change in working capital 5,341 (18,036) (9,881) (15,637) (10,533) (13,533) (13,004) (15,489)
Others (2,101) (5,094) (4,049) (4,333) (6,949) (6,742) (6,505) (7,229)
CFO 19,827 (50) 13,192 13,568 18,586 19,848 19,347 20,138
Capex (12,603) (6,555) (10,609) (14,392) (13,499) (10,500) (10,800) (12,000)
Net investments made (3) (55) (104) (334) (227) - - -
Others investing activities - - - - - - - -
CFI (12,606) (6,610) (10,713) (14,726) (13,726) (10,500) (10,800) (12,000)
Change in share capital 293 324 392 438 703 - - -
Change in debts (114) 11,064 (3,710) 8,115 (6,433) (3,392) (1,813) 125
Dividends and dividend tax (2,213) (2,709) (2,981) (3,582) (4,102) (4,590) (4,391) (4,790)
Others (6,042) (369) 1,577 (498) 1,915 792 678 756
CFF (8,076) 8,310 (4,722) 4,474 (7,916) (7,191) (5,526) (3,909)
Total cash generated (855) 1,650 (2,243) 3,315 (3,057) 2,158 3,021 4,229
Cash opening balance 6,584 5,729 7,379 5,136 8,451 5,394 7,552 10,573
Cash closing balance 5,729 7,379 5,136 8,451 5,394 7,552 10,573 14,802 Source: Company, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 59
Figure 89: Balance sheet
As at 31 March (INR m) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Paid-up capital 22,253 22,577 22,969 23,407 24,110 24,110 24,110 24,110
Reserves & surplus 23,737 34,867 50,136 67,394 87,191 108,596 128,275 150,221
Total equity 45,990 57,444 73,105 90,801 111,302 132,706 152,386 174,331
Total debt 23,572 32,210 36,760 44,742 43,126 34,640 30,959 31,084
Other non-current liabilities 2,729 2,238 2,993 4,619 5,158 3,413 5,408 5,541
Capital employed 72,291 91,892 112,858 140,162 159,586 170,759 188,753 210,956
Total current liabilities & provisions 22,714 27,585 29,511 30,061 35,177 31,943 30,442 29,072
Total liabilities 95,005 119,477 142,369 170,223 194,762 202,702 219,195 240,029
Net fixed assets 44,888 46,775 51,835 59,121 66,299 68,798 70,827 73,375
Deferred tax asset 2,653 2,966 4,861 7,847 9,411 9,322 9,228 9,130
Investments 313 368 472 806 1,033 1,033 1,033 1,033
Inventory 16,059 19,352 21,600 23,992 25,529 25,599 28,643 30,663
Debtors 17,615 25,339 31,972 33,037 40,755 39,465 41,623 45,015
Other current assets 7,748 17,298 26,493 36,969 46,341 50,932 57,268 66,011
Cash and equivalents 5,729 7,379 5,136 8,451 5,394 7,552 10,573 14,802
Total current asset 47,151 69,368 85,201 102,449 118,019 123,548 138,107 156,490
Total assets 95,005 119,477 142,369 170,223 194,762 202,702 219,195 240,029 Source: Company, Deutsche Bank estimates
Figure 90: Financial ratios
Year to March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Adj EPS (INR ) 65.1 79.6 96.4 124.0 124.4 148.2 137.4 152.6
yoy growth (%) 1,014.2 22.3 20.9 28.9 0.3 19.1 (7.3) 11.1
EBITDA – core (%) 22.5 23.7 22.9 25.1 23.2 24.9 22.5 23.0
NPM (%) 14.9 14.0 14.1 16.0 14.3 16.0 14.0 14.4
Net debt to equity (x) 0.4 0.4 0.4 0.4 0.3 0.2 0.1 0.1
ROCE (%) 21.3 22.9 21.0 21.6 18.4 18.0 14.9 14.7
DPS (INR) 11.2 13.7 14.9 17.9 20.0 23.0 22.0 24.0
Dividend payout (%) 17.2 16.3 15.2 14.2 15.4 15.5 16.0 15.7
Asset turnover ratio (sales/invested capital)
1.3 1.3 1.3 1.2 1.1 1.1 1.1 1.0
Average collection days 72 81 90 90 91 92 89 87
Average inventory days (on opex.) 93 88 83 84 79 78 76 78
Source: Company, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Page 60 Deutsche Bank AG/Hong Kong
Reuters Bloomberg CIPL.NS CIPLA IS
Forecasts And Ratios
Year End Mar 31 2014A 2015A 2016E 2017E 2018E
Sales (INRm) 101,003.9 113,454.4 141,924.0 164,557.0 190,188.5
EBITDA (INRm) 21,330.5 21,617.0 31,025.3 37,846.5 44,702.3
Reported NPAT (INRm) 13,884.1 11,807.7 17,537.1 22,237.0 27,590.8
Reported EPS FD(INR) 17.29 14.71 21.84 27.70 34.36
DB EPS FD(INR) 17.29 14.71 21.84 27.70 34.36
DB EPS growth (%) -7.8 -15.0 48.5 26.8 24.1
PER (x) 23.0 35.4 29.5 23.2 18.7
EV/EBITDA (x) 15.3 19.6 17.9 14.4 11.9
DPS (net) (INR) 2.01 2.00 3.00 4.00 5.00
Yield (net) (%) 0.5 0.4 0.5 0.6 0.8
Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items
2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which
uses the year end close
Export gains not priced in We initiate coverage on Cipla with Buy for three reasons: 1) we forecast export formulation business driven by launches from Invagen to increase at a CAGR of 24.4% over FY15-18; 2) in IPM, Cipla maintains its lead in the respiratory segments, where we forecast domestic sales to increase at a CAGR of 13.2% over FY15-FY18; 3) we forecast a 32.7% EPS CAGR over FY15-18 driven by its exports business. Also, the stock has lagged the sector by c.8% YTD and PER multiples are c.5-15% cheaper than peers (vs. c.5-10% premium historically).
Shift in the business to front end from partnership With front-end acquisitions in South Africa, the US and other ROW markets, Cipla is focusing on distribution; this marks a shift from the earlier partnership model, where it had manufacturing relationships in regulated markets. We believe the shift will entail significant investments in terms of manpower, the acquisition of assets and filing costs; this will continue to cap EBITDA margin improvement over the next two years (see detailed table in Figure 97).
US business driven by Invagen and Exelon acquisitions Cipla’s acquisition of Invagen should increase focus in the US in terms of scales, revenue, manufacturing opportunities and building a wide product portfolio. We forecast Cipla’s export formulation sales to increase at a CAGR of 24.4% and contribute c.55% of sales in FY18 (up from 48% in FY15).
Key trigger is launch of inhaler in the UK Cipla has approval for combination inhalers (aerosol Salmeterol / Fluticasone) in c.10 countries in Europe. It is expecting approval of generic Advair in the UK, which should be a key trigger and drive sales and earnings.
Our 12M target price of INR722/share implies c.12% upside potential; risks We rate Cipla as Buy. We have a target price of INR722, based on our target PER of 21x on FY18E recurring EPS. Key downside risks: lower-than-expected sales growth in India and South Africa, delays in integration of Invagen and Exelan as well as hold-ups in USFDA product approvals.
Rating
Buy Asia
India
Health Care
Pharmaceuticals / Biotechnology
Company
Cipla
Export gains not priced in
Price at 30 Nov 2015 (INR) 643.65
Price target - 12mth (INR) 722.00
52-week range (INR) 739.60 - 572.74
Bombay Stock Exchange (BSE 30)
26,146
Kartik Mehta
Research Analyst
(+91) 22 7180 4210
kartik-a.mehta@db.com
Price/price relative
300
400
500
600
700
800
12/13 6/14 12/14 6/15
Cipla
Bombay Stock Exchang (Rebased)
Performance (%) 1m 3m 12m
Absolute -6.1 -2.2 1.1
Bombay Stock Exchange (BSE 30)
-1.9 1.8 -8.4
Source: Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 61
Model updated:30 November 2015
Running the numbers
Asia
India
Pharmaceuticals / Biotechnology
Cipla Reuters: CIPL.NS Bloomberg: CIPLA IS
Buy Price (30 Nov 15) INR 643.65
Target Price INR 722.00
52 Week range INR 572.74 - 739.60
Market Cap (m) INRm 516,918
USDm 7,746
Company Profile
The Chemical, Industrial, & Pharmaceutical Laboratories, now known as Cipla, was incorporated in 1935. The company has a diversified portfolio, spread across therapeutic segments and is present in with all its overseas partners in more than 150 countries. Cipla has over 35 plants for API and formulations. Cipla's key acquisitions are Cipla Medpro, Invagen and Exelan. Cipla was recognized as the first pharmaceutical company to provide triple combination anti-retroviral in Africa at less than a dollar a day. India and Africa are its largest markets.
Price Performance
300
400
500
600
700
800
Dec 13Mar 14Jun 14Sep 14Dec 14Mar 15Jun 15Sep 15
CiplaBombay Stock Exchange (BSE 30) (Rebased)
Margin Trends
12
16
20
24
28
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
0
5
10
15
20
0
5
10
15
20
25
30
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
10
20
30
40
50
60
05
101520253035
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Kartik Mehta
+91 22 7180 4210 kartik-a.mehta@db.com
Fiscal year end 31-Mar 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (INR) 18.75 17.29 14.71 21.84 27.70 34.36
Reported EPS (INR) 19.24 17.29 14.71 21.84 27.70 34.36
DPS (INR) 2.01 2.01 2.00 3.00 4.00 5.00
BVPS (INR) 112.3 125.2 134.5 152.9 175.9 204.4
Weighted average shares (m) 803 803 803 803 803 803
Average market cap (INRm) 286,439 319,958 417,440 516,918 516,918 516,918
Enterprise value (INRm) 290,522 327,014 424,222 555,791 544,499 531,079
Valuation MetricsP/E (DB) (x) 19.0 23.0 35.4 29.5 23.2 18.7
P/E (Reported) (x) 18.5 23.0 35.4 29.5 23.2 18.7
P/BV (x) 3.34 3.04 5.28 4.21 3.66 3.15
FCF Yield (%) nm 0.3 1.3 nm 3.1 3.7
Dividend Yield (%) 0.6 0.5 0.4 0.5 0.6 0.8
EV/Sales (x) 3.5 3.2 3.7 3.9 3.3 2.8
EV/EBITDA (x) 13.2 15.3 19.6 17.9 14.4 11.9
EV/EBIT (x) 15.6 18.6 25.6 21.7 17.2 14.2
Income Statement (INRm)
Sales revenue 82,793 101,004 113,454 141,924 164,557 190,189
Gross profit 55,504 67,242 76,052 93,495 105,923 123,148
EBITDA 21,979 21,331 21,617 31,025 37,847 44,702
Depreciation 3,305 3,726 5,047 5,428 6,243 7,201
Amortisation 0 0 0 0 0 0
EBIT 18,674 17,604 16,570 25,597 31,604 37,501
Net interest income(expense) -339 -1,457 -1,683 -2,157 -2,324 -1,794
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries 398 0 0 0 0 0
Other pre-tax income/(expense) 2,221 2,654 1,656 1,407 1,811 2,652
Profit before tax 20,954 18,800 16,543 24,846 31,091 38,359
Income tax expense 5,443 4,634 4,000 6,733 8,084 9,973
Minorities 62 283 735 576 770 795
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 15,449 13,884 11,808 17,537 22,237 27,591
DB adjustments (including dilution) -398 0 0 0 0 0
DB Net profit 15,051 13,884 11,808 17,537 22,237 27,591
Cash Flow (INRm)
Cash flow from operations -8,515 34,108 15,074 10,227 23,449 27,378
Net Capex -7,402 -33,232 -9,769 -38,924 -7,629 -8,466
Free cash flow -15,917 876 5,305 -28,697 15,820 18,912
Equity raised/(bought back) 0 0 0 0 0 0
Dividends paid -1,880 -1,880 -1,933 -2,818 -3,757 -4,697
Net inc/(dec) in borrowings 9,535 2,614 4,734 27,147 -8,287 -13,219
Other investing/financing cash flows -618 -1,289 -4,216 0 0 0
Net cash flow -8,880 322 3,891 -4,367 3,775 996
Change in working capital -27,293 16,353 -4,327 -11,710 -4,678 -7,423
Balance Sheet (INRm)
Cash and other liquid assets 5,587 5,723 12,040 7,673 11,448 12,444
Tangible fixed assets 39,878 44,378 47,215 75,348 78,992 82,356
Goodwill/intangible assets 0 25,005 26,891 32,253 29,996 27,896
Associates/investments 0 0 0 0 0 0
Other assets 71,062 58,898 70,558 93,144 105,817 122,041
Total assets 116,527 134,004 156,704 208,419 226,252 244,737
Interest bearing debt 9,669 12,283 17,018 44,165 35,878 22,659
Other liabilities 16,671 20,721 29,867 39,139 46,010 54,024
Total liabilities 26,340 33,004 46,885 83,304 81,887 76,683
Shareholders' equity 90,187 100,504 108,015 122,734 141,214 164,108
Minorities 0 496 1,805 2,381 3,151 3,946
Total shareholders' equity 90,187 100,999 109,820 125,115 144,365 168,054
Net debt 4,082 6,560 4,977 36,492 24,430 10,215
Key Company Metrics
Sales growth (%) 17.7 22.0 12.3 25.1 15.9 15.6
DB EPS growth (%) 31.9 -7.8 -15.0 48.5 26.8 24.1
EBITDA Margin (%) 26.5 21.1 19.1 21.9 23.0 23.5
EBIT Margin (%) 22.6 17.4 14.6 18.0 19.2 19.7
Payout ratio (%) 10.4 11.6 13.6 13.7 14.4 14.6
ROE (%) 18.6 14.6 11.3 15.2 16.8 18.1
Capex/sales (%) 8.9 32.9 8.6 27.4 4.6 4.5
Capex/depreciation (x) 2.2 8.9 1.9 7.2 1.2 1.2
Net debt/equity (%) 4.5 6.5 4.5 29.2 16.9 6.1
Net interest cover (x) 55.1 12.1 9.8 11.9 13.6 20.9
Source: Company data, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Page 62 Deutsche Bank AG/Hong Kong
Investment thesis
Outlook
We rate Cipla as a Buy premised on the following: 1) It is ranked third by
market share in two large emerging markets, India and South Africa. In IPM,
Cipla has a 4.9% market share with a leading position in respiratory and a
strong presence in anti-infectives. Post the acquisition of Cipla Medpro, Cipla
has a c.5% market share in South Africa. 2) Cipla’s acquisition of Invagen and
Exelan will drive its US footprint. For FY15-FY18, we forecast Cipla’s export
formulation sales will increase at a CAGR of 24.4% and contribute c.55% of
sales in FY18. 3) The stock has lagged the sector by 8.4% YTD, and its PER
multiples are now c.5-15% cheaper than those of the large-caps (vs. a c.5-10%
premium historically). For FY15-FY18, we forecast sales and earnings to grow
at CAGRs of 18.8% and 32.7%, respectively.
Valuation
We use PER as our principal valuation matrix for Indian Pharma, we use PER
as a valuation matrix for Indian Pharma. Cipla has grown in India on the back
of its strong respiratory and anti-infectives portfolio and has expanded
significantly across export markets through its partnership model. The recent
strategy of transforming from a partnership model to a front-end model will
entail significant investments in terms of manpower, the acquisition of assets
and filing costs and this will continue to cap EBITDA margin improvement over
the next two years. The stable business model in India and an export
formulation business together accounted for c.90% of sales in FY15 and we
forecast will increase over FY15-18 at CAGRs of 13.2% and 24.4%,
respectively. Cipla’s investments in setting up and adding to its distribution will
entail investments and would cap EBITDA margin growth. While the company
has acquired several assets in markets across the world, execution and
successful integration is the key, which we factor in our target PER of 21x, a
discount of c.5-10% to Lupin and Sun’s PER. Thus, we rate Cipla as a Buy,
with a target price of INR722 based on our FY18E recurring EPS.
Risks
Key downside risks: lower-than-expected sales growth in India and South
Africa; delays in the integration of Invagen and Exelan; hold-ups in USFDA
product approvals; and delays in product approvals from its Indian plant at
Indore.
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 63
Initiating with a Buy
We expect sales and earnings to grow at 18.8% and 32.7% CAGR (FY2015-18),
respectively. We expect the EBITDA margin to increase to 23.5% in FY18
driven by export sales, mainly the US business of Invagen. Cipla is ranked third
by market share in two large emerging markets, India and South Africa. In
IPM, Cipla has a 4.9% market share with a leadership position in respiratory
and a strong presence in anti-infectives. Post the acquisition of Cipla Medpro,
Cipla has a c.5% market share in South Africa. 2) Cipla’s acquisition of Invagen
and Exelan will drive its US footprint. For FY15-FY18, we forecast Cipla’s
export formulation sales will increase at a CAGR of 24.4% and contribute
c.55% of sales in FY18.
Figure 91: Sales mix summary
Metric (INRm) FY14 FY15 FY16E FY17E FY18E CAGR
2015-18E (%)
Comments
Domestic sales (net of excise duty)
40,180 48,250 52,868 60,798 69,917 13.2 Mainly acute focus, growing ahead of the acute care market
Export sales 57,352 60,582 85,495 1,00,127 1,16,457 24.3 Driven by US acquisition of Invagen and product launches
APIs 7,520 6,320 8,917 10,513 11,895 23.5 Supplier of API across markets
Formulations 49,832 54,262 76,578 89,614 1,04,562 24.4 Driven by US acquisition of Invagen and Exelan and product launches
Other operating income 3,472 4,622 3,562 3,633 3,814 -6.2
Net sales 1,01,004 1,13,454 1,41,924 1,64,557 1,90,189 18.8 Driven by export sales, mainly Invagen acquisition
EBITDA margin (%) 21.1 19.1 21.9 23.0 23.5 Driven by export sales, mainly US business of Invagen
Source: Company data, Deutsche Bank estimates
Strong presence in the respiratory segment in India
In IPM, Cipla maintains market leadership positions in various therapeutic
segments, namely respiratory, anti-viral, gynaecology and urology. For FY15-
18, we forecast Cipla’s domestic sales CAGR at 13.2% driven by its existing
portfolio. With a sales force of around 8,000 in India the company continues to
have a strong reach in the domestic market.
Figure 92: IPM v/s Cipla Figure 93: Top five therapies Figure 94: Top five brands in India
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Mar'13 Mar'14 Mar'15 Sep'15
MA
T Y
oY
gro
wth
(%
)
IPM Cipla
No.
1. Respiratory
2.Anti-
Infectives
3. Cardiac
4.Gastro
Intestinal
5. Urology
Top 5 therapies Brand name TherapyMAT Sep'15
sales (INR bn)
Foracort Respiratory 1.8
Budecort Respiratory 1.4
Asthalin Respiratory 1.4
Seroflo Respiratory 1.4
Duolin Respiratory 1.2
Source: AIOCD AWACS, Deutsche Bank
Source: AIOCD AWACS, Deutsche Bank
Source: AIOCD AWACS, Deutsche Bank
Product development and approval in the respiratory space in the EU
Cipla already has approval for combination inhalers (aerosol Salmeterol /
Fluticasone) in c.10 countries in Europe including Germany and Sweden. It is
also looking to have approval in the UK.
2 December 2015
Health Care
Indian Pharmaceuticals
Page 64 Deutsche Bank AG/Hong Kong
Figure 95: Respiratory products launched by Cipla in the EU
Product Market Comments
Duohal (Salmeterol / Fluticasone )
Croatia Small market size
Ipratropium MDI UK Market size of c.USD.20m
Mometasone Netherlands Market size of c.USD20m
Seroflo (Salmeterol/ Fluticasone MDI)
Germany
The product will be available in the strengths of 120 doses of 25/125 mcg salmeterol / fluticasone and 120 doses of 25/250 mcg salmeterol / fluticasone
Salmeterol / Fluticasone Cipla
Sweden
Budesonide UK, Portugal, Denmark and Germany Single ingredient inhaler
Salbutamol UK, Portugal, Denmark, Ireland and Germany
Single ingredient inhaler
Salmetrol UK, Germany and some other EU markets
Single ingredient inhaler
Fluticasone UK and some other EU markets Single ingredient inhaler
Salmeterol / Fluticasone
Russia and South Africa Combination inhaler
Source: Company data, Deutsche Bank
Invagen acquisition will increase US footprint.
Cipla’s acquisition of Invagen and Exelan will increase its focus in the US in
terms of scale, revenue, manufacturing opportunities and building a wide
range of product portfolio. Apart from two manufacturing facilities in the US,
Cipla obtains c.30 products marketed by Invagen with a further c.30 under
development, which are likely to be approved over the next four years.
Figure 96: Export formulation sales and contributions of Invagen and Exelan
0%
5%
10%
15%
20%
25%
30%
‐
5,000
10,000
15,000
20,000
25,000
30,000
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
Export form
ulation Sales (INR mn)
Export formulation sales Invagen as a % of Export
Invagen & Exelan acquisition
Source: Company data, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 65
Cipla’s forays across the world to establish front-end presence
With the front-end acquisitions in South Africa (Cipla Medpro), the US
(Invagen) and a few other ROW markets, Cipla is focusing on distribution,
which marks a shift from the earlier partnership model, where it had
manufacturing relationships with large pharmaceutical companies for
regulated markets. Cipla has ventured into Croatia, Yemen and Iran to expand
its distribution network in these markets.
Figure 97: Cipla's front-end expansion across global markets
Date Acquired company Consideration Comments
21-Nov-13 Quality Chemical (Additional 14.5% stake)
USD15m
Cipla’s stake in the company post the deal – 51.05%. QCIL’s principal activity is manufacturing and selling of pharmaceutical drugs with emphasis on ARV’s and anti-malarial drugs. QCIL has a WHO-approved manufacturing facility in Uganda
05-Dec-13 100% stake in Celeris d.o.o., Croatia
NA Celeris is largely involved in obtaining the marketing authorization design, organization and implementation of sales and marketing activities
12-May-14 Chase Pharmaceuticals (14.6% stake)
USD1.5m. Cipla will invest an additional USD4.5m in Chase upon achievement of certain milestones
Alzheimer's disease drug development
17-Jun-14 60% stake in a Sri Lanka-based company
USD14m Signed agreement with existing distributor in Sri Lanka
30-Jun-14 51% stake In Yemen-based distributor
US21m. The deal includes additional considerations to be paid over the next three years on achievement of agreed milestones
Company already has a leading position with over 200 products
17-Jul-14 Additional 75% stake in Mabpharm (now 100%)
NA Mabpharm is engaged in the development of monoclonal antibodies for the treatment of cancer and auto-immune diseases
08-Sep-14 Commercial tie-up with UK's S&D Pharma in the Czech Republic and Slovakia
NA S&D Pharma will physically distribute all products, including respiratory products, and this portfolio will increase over the next few years
04-Oct-14 75% stake in Iranian distributor INR2.25bn
Cipla signed a definitive agreement with its existing Iranian distributor for setting up a manufacturing facility in Iran. The total contribution from the company over the next three years will include machinery, equipment and technical knowhow, and is expected to cost c.INR225 crore for a 75% stake
09-Feb-15 JV with existing partners – Cooper Pharma and The Pharmaceutical Institute (PHI)
Cipla (EU) will hold a 60% stake in the JV, while Cooper Pharma and PHI shall together hold a 40% stake. Cipla (EU) expected investment in cash in the JV is estimated at up to USD15m
This JV will enable Cipla to establish a front-end presence in Morocco’s, pharmaceutical market, becoming the launch vehicle for Cipla’s portfolio while leveraging the commercial strengths of partners. The initial focus of the JV shall be respiratory and neurology products and it shall also invest in setting up a manufacturing facility in Morocco
13-Feb-15 JV with existing partner in Algeria – Biopharm SPA
Cipla (EU) Limited’s initial investment in cash in the JV company is expected to be USD6m
The JV company will manufacture and market respiratory products, facilitating Cipla’s front-end presence in Algeria. According to the term sheet, the company’s wholly owned subsidiary, Cipla (EU) Limited, will hold a 40% stake in the JV company while the remainder being held by a Biopharm-led Algerian consortium. The JV company is expected to make an investment of up to USD15m to construct a manufacturing facility
9-Apr-15 100% stake in Duomed Produtos Farmaceuticos Ltda (Brazil)
INR26m Duomed was incorporated on June 10, 2013. It has in place approval of ANVISA (Brazilian health authority) and other regulatory authorities to import and distribute pharmaceutical products in Brazil
Source: Company data, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 66 Deutsche Bank AG/Hong Kong
Valuation and risks
Valuation
We use PER as our principal valuation matrix for Indian Pharma, we use PER
as a valuation matrix for Indian Pharma. Cipla has grown in India on the back
of its strong respiratory and anti-infectives portfolio and has expanded
significantly across export markets through its partnership model. The recent
strategy of transforming from a partnership model to a front-end model will
entail significant investments in terms of manpower, the acquisition of assets
and filing costs and this will continue to cap EBITDA margin improvement over
the next two years. The stable business model in India and an export
formulation business together accounted for c.90% of sales in FY15 and we
forecast will increase over FY15-18 at CAGRs of 13.2% and 24.4%,
respectively. Cipla’s investments in setting up and adding to its distribution will
entail investments and will cap EBITDA margin growth. While the company
has acquired several assets in markets across the world, execution and
successful integration is the key, which we factor in our target PER of 21x, a
discount of c.5-10% to Lupin and Sun’s PER. Thus, we rate Cipla as a Buy,
with a target price of INR722 based on our FY18E recurring EPS.
Figure 98: PE Band – Cipla
0
200
400
600
800
1,000
31-M
ar-0
9
09-S
ep-0
9
18-F
eb-1
0
30-J
ul-1
0
08-J
an-1
1
19-J
un-1
1
28-N
ov-1
1
08-M
ay-1
2
17-O
ct-1
2
28-M
ar-1
3
06-S
ep-1
3
15-F
eb-1
4
27-J
ul-1
4
05-J
an-1
5
16-J
un-1
5
25-N
ov-1
5
Price 20x 25x 30x 35x
Source: Deutsche Bank estimates, Bloomberg Finance LP (data as on 30/11/2015
Risks
Key downside risks: lower-than-expected sales growth in India and South
Africa; delays in the integration of Invagen and Exelan; hold-ups in USFDA
product approvals; and delays in product approvals from its Indian plant at
Indore.
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 67
Company description
The Chemical, Industrial, & Pharmaceutical Laboratories, now known as Cipla,
was incorporated in 1935. The company has a diversified portfolio, spread
across therapeutic segments and is present with all its overseas partners in
more than 150 countries. Cipla has over 35 plants for API and formulations.
Cipla’s key acquisitions are Cipla Medpro, Invagen and Exelan. Cipla was
recognized as the first pharmaceutical company to provide triple combination
anti-retrovirals in Africa at less than a dollar a day. India and Africa are its
largest markets.
Management summary
Figure 100: Selected board of directors and senior management
Name/designation Summary
Dr. Y.K. Hamied
Chairman In February 2013, he announced his plans for retirement from Cipla after remaining managing director for 52 years
Mr. Subhanu Saxena
CEO
Appointed in November 2012. Prior to joining Cipla, he worked for 25 years with various companies like Novartis Pharma AG, Citicorp, The Boston Consulting Group and Pepsico
Mr. Umang Vohra
CFO Appointed as the CFO in September 2015. Prior to joining Cipla, he headed the North America business for Dr. Reddy’s
Source: Company data, Deutsche Bank
Corporate actions and shareholding pattern
Figure 101: Corporate actions (2001-2015) Figure 102: Shareholding pattern
0% 20% 40% 60% 80% 100%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Sep‐15
Promoter
Others
FIIs
Mutual Funds/UTI
Bank/FI/Insurance Companies
Bodies Corporate
Source: Company data, Deutsche Bank, Bloomberg Finance LP
Source: Company data, Deutsche Bank
Figure 99: Revenue split FY15
Exports -Formulations
47%
Domestic sales43%
Exports -APIs6%
Others4%
Source: Company data, Deutsche Bank
Year Corporate Action Summary 2015 Divestiture Biomab Holding Ltd.
2015 DivestitureInvestment led by Fidelity into Cipla's consumer healthcarebusiness
2015 Acquisition Duomed Produtos Farmaceuticos Ltd
2015 Acquisition Jay Precision Pharmaceuticals Pvt Ltd
2015 Joint VentureBiopharma SPA in Algeria to manufacture and market respiratoryproducts
2015 Joint VentureSociete Marocaine De Cooperation Pharmaceutique (CooperPharma) and the Pharmaceutical Institute (PHI) in Morocco
2014 Divestiture Jiangsu Cdymax Pharmaceuticals Co Ltd
2014 Acquisition Cipla Biotec Pvt Ltd 2014 Acquisition Majority stake in UAE based Pharma manufacturer for USD
21m
2013 Acquisition Celeris d.o.o
2013 Acquisition Quality Chemicals Ltd.
2012 Acquisition Cipla Medpro South Africa Ltd 2010 Acquisition Meditab Specialities Pvt Ltd 2010 Divestiture IPR for i-pill brand 2006 Stock Split Adjustment Factor - 1.5
2004 Stock Split Adjustment Factor - 5
2 December 2015
Health Care
Indian Pharmaceuticals
Page 68 Deutsche Bank AG/Hong Kong
Company financials
Figure 103: Income statement
Year to March (INRm) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Domestic sales 28,292 32,996 36,712 41,351 49,340 52,868 60,798 69,917
Export sales 33,548 36,920 45,243 57,352 60,582 85,495 100,127 116,457
…API's 6,792 7,243 6,550 7,520 6,320 8,917 10,513 11,895
…Formulations 26,756 29,677 38,693 49,832 54,262 76,578 89,614 104,562
Other operating income 1,907 1,488 1,925 3,472 4,622 3,562 3,633 3,814
Gross sales 63,747 71,404 83,880 102,175 114,545 141,924 164,557 190,189
less: excise duty 495 1,081 1,087 1,171 1,090 0 0 0
Total revenue 63,252 70,323 82,793 101,004 113,454 141,924 164,557 190,189
YoY growth% 12.8% 11.2% 17.7% 22.0% 12.3% 25.1% 15.9% 15.6%
Total operating expenses 49,927 53,619 60,815 79,673 91,837 110,899 126,710 145,486
EBITDA 13,325 16,705 21,979 21,331 21,617 31,025 37,847 44,702
Margins % 21.1% 23.8% 26.5% 21.1% 19.1% 21.9% 23.0% 23.5%
YoY growth% -3.1% 25.4% 31.6% -2.9% 1.3% 43.5% 22.0% 18.1%
Depreciation 2,542 3,122 3,305 3,726 5,047 5,428 6,243 7,201
EBIT 10,784 13,582 18,674 17,604 16,570 25,597 31,604 37,501
Other income 1,014 1,279 2,221 2,654 1,656 1,407 1,811 2,652
Interest 173 383 339 1,457 1,683 2,157 2,324 1,794
PBT 11,625 14,478 20,556 18,800 16,543 24,846 31,091 38,359
Tax 1,952 3,065 5,443 4,634 4,000 6,733 8,084 9,973
Tax rate 16.8% 21.2% 26.5% 24.6% 24.2% 27.1% 26.0% 26.0%
Minority interest - - -62 -283 -735 -576 -770 -795
Adjusted PAT 9,673 11,413 15,051 13,884 11,808 17,537 22,237 27,591
Net margins 15.3% 16.2% 18.2% 13.7% 10.4% 12.4% 13.5% 14.5%
EO items -225 29 398 0 -0 0 0 0
Reported PAT 9,448 11,442 15,449 13,884 11,808 17,537 22,237 27,591 Source: Company data, Deutsche Bank estimates
Figure 104: Cash flow statement
Year to March (INRm) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
PBT (adj. for extraordinary items) 11,400 14,508 20,954 18,800 16,543 24,846 31,091 38,359
Depreciation 2,542 3,122 3,305 3,726 5,047 5,428 6,243 7,201
Net change in working capital (2,631) 4,146 (27,803) 15,931 (2,272) (13,599) (6,114) (8,554)
Others (1,613) (2,864) (4,970) (4,350) (4,244) (6,448) (7,770) (9,629)
CFO 9,699 18,912 (8,515) 34,108 15,074 10,227 23,449 27,378
Capex (9,383) (5,197) (7,402) (33,232) (9,769) (38,924) (7,629) (8,466)
Net investments made 0 0 0 0 0 0 0 0
Others investing activities 0 0 0 0 0 0 0 0
CFI (9,383) (5,197) (7,402) (33,232) (9,769) (38,924) (7,629) (8,466)
Change in share capital 0 0 0 0 0 0 0 0
Change in debts 5,359 (5,275) 9,535 2,614 4,734 27,147 (8,287) (13,219)
Dividends & dividend tax (2,615) (1,866) (1,880) (1,880) (1,933) (2,818) (3,757) (4,697)
Others 723 152 256 (1,474) (1,789) 0 0 0
CFF 3,467 (6,989) 7,911 (740) 1,012 24,329 (12,045) (17,916)
Total cash generated 3,783 6,725 (8,006) 136 6,317 (4,367) 3,775 996
Cash opening balance 3,085 6,867 13,593 5,587 5,723 12,040 7,673 11,448
Cash closing balance 6,867 13,593 5,587 5,723 12,040 7,673 11,448 12,444 Source: Company data, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 69
Figure 105: Balance sheet
As at March 31st (INRm) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Paid-up capital 1,606 1,606 1,606 1,606 1,606 1,606 1,606 1,606
Reserves & surplus 64,966 74,694 88,581 98,898 106,409 121,128 139,608 162,502
Total equity 66,572 76,300 90,187 100,504 108,015 122,734 141,214 164,108
Minority interest 0 0 0 496 1,805 2,381 3,151 3,946
Total debt 5,410 135 9,669 12,283 17,018 44,165 35,878 22,659
Deferred liabilities 2,131 2,332 2,805 3,090 2,846 3,131 3,444 3,788
Capital employed 74,113 78,767 102,662 116,372 129,684 172,411 183,686 194,501
Current liabilities 11,714 14,594 13,865 17,631 27,021 36,008 42,566 50,236
Total current liabilities and provisions
11,714 14,594 13,865 17,631 27,021 36,008 42,566 50,236
Total liabilities 85,826 93,361 116,527 134,004 156,704 208,419 226,252 244,737
Net fixed assets 33,706 35,780 39,878 69,383 74,105 107,601 108,987 110,252
Inventory 19,062 18,501 23,871 28,953 37,806 47,297 50,289 58,242
Debtors 14,908 15,536 16,688 16,389 20,043 29,189 35,271 39,317
Other current assets 11,284 9,952 30,503 13,556 12,710 16,659 20,257 24,481
Cash and equivalents 6,867 13,593 5,587 5,723 12,040 7,673 11,448 12,444
Total current assets 52,121 57,581 76,649 64,621 82,599 100,818 117,265 134,485
Total assets 85,826 93,361 116,527 134,004 156,704 208,419 226,252 244,737
Source: Company data, Deutsche Bank estimates
Figure 106: Financial ratios
Year to March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Adj EPS (INR) 7.6 8.3 7.9 12.5 13.4 12.0 14.2 18.7
yoy growth% 48.3% 9.9% (5.0) 58.1 7.6 (10.4) 18.0 31.9
EBITDA – core (%) 25.6 22.7 20.0 23.2 24.5 21.1 23.8 26.5
NPM (%) 19.8 18.7 15.0 19.2 19.2 15.3 16.2 18.2
Net debt to equity (x) 0.2 net cash 0.1 0.2 net cash 0.03 net cash 0.1
ROCE (%) 28.2 22.4 17.8 16.0 19.0 14.2 15.3 17.3
DPS (Rs) 1.9 2.0 2.0 1.9 2.0 2.8 2.0 2.0
Dividend payout (%) 25.6 24.0 22.9 20.2 14.8 23.8 14.0 10.4
Asset turnover ratio (sales/ invested capital)
1.4 1.3 1.1 1.1 1.0 1.0 1.1 1.0
Average collection days 87 98 105 114 111 88 79 71
Average inventory days (on opex.) 136 128 113 114 126 125 128 127
Source: Company data, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Page 70 Deutsche Bank AG/Hong Kong
Reuters Bloomberg CADI.NS CDH IS
Forecasts And Ratios
Year End Mar 31 2014A 2015A 2016E 2017E 2018E
Sales (INRm) 70,602.2 84,970.6 96,362.4 114,144.3 134,529.7
EBITDA (INRm) 10,363.2 16,014.6 19,923.5 25,118.0 32,119.1
Reported NPAT (INRm) 8,038.2 11,505.6 14,356.3 18,598.1 24,006.5
Reported EPS FD(INR) 7.85 11.24 14.02 18.16 23.44
DB EPS FD(INR) 7.91 11.35 14.02 18.16 23.44
DB EPS growth (%) 18.4 43.5 23.5 29.5 29.1
PER (x) 19.4 22.9 28.6 22.1 17.1
EV/EBITDA (x) 16.9 17.7 21.2 16.6 12.8
DPS (net) (INR) 1.80 2.40 3.00 4.00 5.20
Yield (net) (%) 1.2 0.9 0.7 1.0 1.3
Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items
2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which
Timely US approvals key to earnings growth We initiate coverage on Cadila with a Hold for three reasons: 1) delay in timely approvals of Cadila’s key ANDAs will depress earnings growth; we forecast US sales to post a CAGR of 22.3% for FY15-18; 2) Cadila’s domestic business growth has been muted; we forecast Cadila’s India sales to post a CAGR of 11.9% for FY15-FY18; 3) it can deliver a 27.3% EPS CAGR over FY15-18, on our estimates, driven by timely US approvals; the stock has outperformed the sector by c.14% YTD and now trades at c.10% above its three-year average PER.
US business subdued due to slow rate of approvals We believe Cadila’s US business has seen fewer launches, mainly on account of the 483 observations at its key US plant at Moraiya. The company has more than 160 ANDAs pending USFDA approval; timely approval of these products is key. We forecast Cadila’s US sales to post a CAGR of 22.3% and contribute c.46% of sales in FY18 (up from c.40% in FY15).
Domestic business growth to remain subdued We forecast Cadila’s domestic sales to post a CAGR of 11.9% for FY15-FY18, and contribute c.26% of sales in FY18 (down from c.30% in FY15), mainly due to discontinuation of two brands, Buscopan and Dulcolax.
Key triggers are generic Asacol HD and generic Lialda approvals Cadila did not receive approval of generic Asacol HD (15 November 2015) on its launch date; we believe this could be due to 483 observations received from its Moraiya plant. Delays in the future launch of products like generic Lialda in FY17 and Prevacid ODT will impact sales and earnings in FY17.
Our 12M target price of INR 422/sh provides c.5% upside, risks We rate Cadila as a Hold, with a target price of INR 422 on a target PER of 18x on FY18 recurring EPS. Key downside risks include a slower-than-expected growth rate of the IPM, delay in product launches in the US generics markets. Key upside risks include the higher-than-expected growth rate of IPM.
Rating
Hold Asia
India
Health Care
Pharmaceuticals / Biotechnology
Company
Cadila Healthcare
Missed opportunities will likely change currently positive outlook
Price at 30 Nov 2015 (INR) 400.90
Price target - 12mth (INR) 422.00
52-week range (INR) 443.10 - 290.23
Bombay Stock Exchange (BSE 30)
26,146
Kartik Mehta
Research Analyst
(+91) 22 7180 4210
kartik-a.mehta@db.com
Price/price relative
100
200
300
400
500
12/13 6/14 12/14 6/15
Cadila Healthcare
Bombay Stock Exchang (Rebased)
Performance (%) 1m 3m 12m
Absolute -3.8 6.7 29.4
Bombay Stock Exchange (BSE 30)
-1.9 1.8 -8.4
Source: Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 71
Model updated:30 November 2015
Running the numbers
Asia
India
Pharmaceuticals / Biotechnology
Cadila Healthcare Reuters: CADI.NS Bloomberg: CDH IS
Hold Price (30 Nov 15) INR 400.90
Target Price INR 422.00
52 Week range INR 290.23 - 443.10
Market Cap (m) INRm 410,522
USDm 6,152
Company Profile
Cadila was founded in 1952 and restructured as Zydus Cadila in 1995. It has currently 10 manufacturing locations (India, Europe and North and South America ). Cadila's key acquisitions are Alpharma, Biochem and Nesher. The company also has presence in Animal health and consumer business and has presence into other markets such as Brazil, South Africa and Japan. US and India are its largest markets. In IPM, Cadila is ranked 4th with c.4.1% market share in the IPM with focus on CV,GI and Women healthcare segments .
Price Performance
100
200
300
400
500
Dec 13Mar 14Jun 14Sep 14Dec 14Mar 15Jun 15Sep 15
Cadila HealthcareBombay Stock Exchange (BSE 30) (Rebased)
Margin Trends
8
12
16
20
24
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
05101520253035
0
5
10
15
20
25
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
10
20
30
40
50
60
-20
0
20
40
60
80
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Kartik Mehta
+91 22 7180 4210 kartik-a.mehta@db.com
Fiscal year end 31-Mar 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (INR) 6.68 7.91 11.35 14.02 18.16 23.44
Reported EPS (INR) 6.38 7.85 11.24 14.02 18.16 23.44
DPS (INR) 1.50 1.80 2.40 3.00 4.00 5.20
BVPS (INR) 28.8 33.6 41.5 52.0 65.5 82.9
Weighted average shares (m) 1,024 1,024 1,024 1,024 1,024 1,024
Average market cap (INRm) 162,339 157,114 266,498 410,522 410,522 410,522
Enterprise value (INRm) 183,380 174,849 283,283 422,451 418,140 409,649
Valuation MetricsP/E (DB) (x) 23.7 19.4 22.9 28.6 22.1 17.1
P/E (Reported) (x) 24.8 19.5 23.2 28.6 22.1 17.1
P/BV (x) 5.04 6.02 8.34 7.71 6.12 4.84
FCF Yield (%) nm 4.3 1.8 2.2 2.4 3.7
Dividend Yield (%) 0.9 1.2 0.9 0.7 1.0 1.3
EV/Sales (x) 3.0 2.5 3.3 4.4 3.7 3.0
EV/EBITDA (x) 19.9 16.9 17.7 21.2 16.6 12.8
EV/EBIT (x) 24.9 20.9 21.6 25.2 19.4 14.7
Income Statement (INRm)
Sales revenue 61,552 70,602 84,971 96,362 114,144 134,530
Gross profit 38,350 43,466 53,005 62,478 73,194 86,266
EBITDA 9,226 10,363 16,015 19,923 25,118 32,119
Depreciation 1,847 2,012 2,873 3,182 3,618 4,201
Amortisation 0 0 0 0 0 0
EBIT 7,379 8,351 13,142 16,742 21,500 27,918
Net interest income(expense) -1,380 -1,010 -664 -688 -674 -532
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries -307 -65 -119 0 0 0
Other pre-tax income/(expense) 2,395 2,147 2,096 3,972 3,730 4,110
Profit before tax 8,087 9,424 14,455 20,026 24,555 31,496
Income tax expense 1,188 1,060 2,594 5,205 5,402 6,929
Minorities 364 326 355 464 555 560
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 6,535 8,038 11,506 14,356 18,598 24,007
DB adjustments (including dilution) 307 65 119 0 0 0
DB Net profit 6,842 8,103 11,625 14,356 18,598 24,007
Cash Flow (INRm)
Cash flow from operations 4,442 11,278 8,906 14,414 16,157 22,781
Net Capex -6,141 -4,553 -4,221 -5,500 -6,500 -7,500
Free cash flow -1,699 6,725 4,685 8,914 9,657 15,281
Equity raised/(bought back) 0 0 0 0 0 0
Dividends paid -1,734 -2,116 -2,907 -3,594 -4,792 -6,230
Net inc/(dec) in borrowings 6,737 -4,185 693 -817 -6,504 -3,263
Other investing/financing cash flows -2,132 -774 -1,144 1,212 0 0
Net cash flow 1,172 -350 1,327 5,715 -1,639 5,788
Change in working capital -4,125 946 -5,453 -3,254 -6,330 -5,753
Balance Sheet (INRm)
Cash and other liquid assets 6,025 5,675 7,002 12,717 11,079 16,867
Tangible fixed assets 27,558 30,491 32,154 35,126 38,617 42,482
Goodwill/intangible assets 10,054 9,662 9,347 8,693 8,084 7,518
Associates/investments 958 679 1,241 29 29 29
Other assets 29,127 33,358 40,727 44,627 53,169 61,396
Total assets 73,722 79,865 90,471 101,192 110,977 128,292
Interest bearing debt 26,831 22,646 23,339 22,522 16,018 12,755
Other liabilities 16,253 21,386 22,927 23,239 25,167 27,407
Total liabilities 43,084 44,032 46,266 45,761 41,185 40,162
Shareholders' equity 29,445 34,390 42,516 53,278 67,084 84,861
Minorities 1,193 1,443 1,689 2,153 2,708 3,268
Total shareholders' equity 30,638 35,833 44,205 55,431 69,792 88,129
Net debt 20,806 16,971 16,337 9,805 4,939 -4,112
Key Company Metrics
Sales growth (%) 20.9 14.7 20.4 13.4 18.5 17.9
DB EPS growth (%) -6.1 18.4 43.5 23.5 29.5 29.1
EBITDA Margin (%) 15.0 14.7 18.8 20.7 22.0 23.9
EBIT Margin (%) 12.0 11.8 15.5 17.4 18.8 20.8
Payout ratio (%) 23.5 22.9 21.4 21.4 22.0 22.2
ROE (%) 23.7 25.2 29.9 30.0 30.9 31.6
Capex/sales (%) 10.0 6.4 5.0 5.7 5.7 5.6
Capex/depreciation (x) 3.3 2.3 1.5 1.7 1.8 1.8
Net debt/equity (%) 67.9 47.4 37.0 17.7 7.1 -4.7
Net interest cover (x) 5.3 8.3 19.8 24.3 31.9 52.4
Source: Company data, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Page 72 Deutsche Bank AG/Hong Kong
Investment thesis
Outlook
We rate Cadila a Hold, premised on the following: 1) In the Indian
Pharmaceuticals market, Cadila is ranked 4th with c.4.1% market share, with
a focus on the Cardio Vascular, Gastro Intestinal and Women’s healthcare
segments. Its domestic business has grown between c.6-9% over the last two
years, mainly on account of the higher impact of the drug pricing policy and
discontinuation of two GI brands, Buscopan and Dulcolax, which have annual
sales of INR 900m. We forecast Cadila’s domestic sales to post a CAGR of
11.9% for FY15-18 and contribute c.26% of sales in FY18 (down from c.30% in
FY15). 2) We believe Cadila’s US business has seen fewer launches, mainly on
account of the 483 observations at its key US plant at Moraiya. The company
has more than 160 ANDAs pending USFDA approval, and timely approval of
these products is key. We forecast Cadila’s US sales to post a CAGR of 22.3%
and contribute c.46% of sales in FY18 (up from c.40% in FY15). And 3) Cadila
has outperformed the sector by c.14% YTD and is now c.10% above its three-
year average PER, trading above a c.5-10% premium to peers versus an
average discount of c.5% over the last three years.
Valuation
We use PER as our principal valuation matrix for Indian Pharma. Cadila’s
growth across its focus segments in India has been in line with market growth.
While Cadila’s US business has grown in the past on the back of product
launches, recent product approvals have been fewer, and the company did not
get approval of generic Asacol for the settled 15 November 2015 rates, due to
483 observations at its Moraiya plant. We assign our target PER of 18x which
is lower than the three-year average one-year forward PER of 20x, to factor
delays in key product approvals in the US markets which are filed from the
Moraiya plant and a lower EBITDA margin as compared to peers. The target
PER is at its historical discount of c.15- 30% to Sun and Lupin. Thus, we rate
Cadila as Hold, with a target price of INR 422 on our FY18 recurring EPS.
Risks
The key downside risks include a slower-than-expected growth rate for the
Indian formulations market, incremental products brought under price control
in India, delay in product launches in the US generics markets and higher-than-
expected pricing pressure in its key emerging markets like Brazil.
The key upside risks include a higher-than-expected growth rate in the Indian
formulations market, higher-than-expected product launches in the US
generics market, lower-than-expected pricing pressure in key emerging
markets.
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 73
Initiating with a Hold
We estimate Cadila’s sales and earnings to post CAGRs of 16.6% and 27.3%
respectively for FY15-18. We expect EBITDA margin to improve, mainly driven
by the US, India and LatAm markets. While the sales growth will be driven by
timely launches in the US market, delays in product approvals will adversely
impact EBITDA margin improvement by c.300 basis points from FY16 over
FY18. We estimate Cadila’s sales in the EU and emerging markets (including
Latin America) to have low CAGRs of c.10-14%, mainly due to higher
competition, lower product approvals and weak currency. This will cap the
EBITDA and earnings growth. Cadila also has a presence in the consumer
wellness business which constitutes c.5% of FY15 sales with its key brand
Sugar Free which has c.92% market share.
Figure 107: Sales-mix summary
Metric FY14 FY15 FY16E FY17E FY18E CAGR
2015-18E (%)Comments
Home Markets 47,244 61,382 71,300 85,323 100,492 17.9 Driven by US markets
US formulations 21,647 33,933 41,448 51,740 62,088 22.3 Driven by approvals of key products like generic Asacol HD and generic Lialda
Domestic Formulations ( net of Excise)
23,168 25,101 27,707 31,081 35,215 11.9 In line with industry growth for the segments in which the company operates
Latin America Formulations
2,429 2,348 2,145 2,502 3,190 10.8 Currency impact will cap growth in these markets
Other Markets and Businesses
23,358 23,589 25,062 28,821 34,037 13.0
Europe Formulations 3,900 3,376 2,946 3,657 4,935 13.5 Mainly France through its subsidiary Alpharma
Emerging Markets Formulations
3,757 4,065 4,668 5,060 5,566 11.0 Markets include Spain, South Africa, Sri Lanka, Myanmar
Zydus Wellness 4,296 4,430 4,928 5,913 7,096 17.0
Sugar Free has 92% market share, other key brands are Ever Yuth (skin care) , Nutralite (butter and substitutes) and Actilife (nutritional milk additive for adults)
Animal Health , API & Others
6,907 7,007 6,922 7,688 8,881 8.2 Launched eight new products in Animal health in FY15, overall 116 DMFs filed until March 2015
JVs and Alliances 4,498 4,711 5,598 6,503 7,560 17.1 JVs with Hospira, Takeda
Net sales 70,602 84,971 96,362 114,144 134,530 16.6 Mainly France through its subsidiary Alpharma
EBITDA margin (%) 14.7 18.8 20.7 22.0 23.9 Driven by US, India and LatAm marketsSource: Company, Deutsche Bank Estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Page 74 Deutsche Bank AG/Hong Kong
Domestic business growth to remain in line with market growth
We forecast Cadila’s domestic formulation business, which constituted c.30%
of total sales in FY15, to post a CAGR of 11.9% for FY15-18, which is in line
with market growth. In FY15, growth was subdued, mainly due to
discontinuation of two GI brands, Buscopan and Dulcolax, which had annual
sales of c.INR 800m in FY14. These brands were transferred back to
Boehringer Ingelheim (Unlisted) after Cadila had manufactured and distributed
them for 10 years in the Indian market.
Figure 108: Therapy-wise breakdown of branded formulations
Therapeutic segment FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Cardiovascular 21 21 21 20 17 18 17 17.6
Gastro-intestinal 16 16 16 17 17 16 15 13.6
Female healthcare 11 11 11 10 8 7 7 7.7
Respiratory 10 11 11 11 11 11 11 12.2
Anti-infectives 10 11 11 10 16 15 15 14.8
Pain management 6 7 7 7 7 7 7 7
CNS 2 3 3 3 2 3 3 1.6
Derma 3 2.3 2.3 3.1 4.3 6.2 7.9 7.2
Biological 4 3.2 3.2 2.9 2.9 3.1 3.5 4.1
Others 17 14.5 14.5 16 14.8 13.7 13.6 14.2
Total 100 100 100 100 100 100 100 100
Source: Company, Deutsche Bank, all figures in %
Figure 109: IPM vs. Cadila Figure 110: Top 5 brands in India
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
Mar'13 Mar'14 Mar'15 Sep'15
MA
T Y
oY
gro
wth
(%
)
IPM Cadila
Brand name TherapyMAT Sep'15
sales (INR bn)
Skinlite Derma 1.9
Mifegest Kit Gynaecological 1.3
Atorva Cardiac 1.2
Deriphyllin Respiratory 0.9
PantodacGastro
Intestinal0.9
Source: AIOCD AWACS, Deutsche Bank
Source: AIOCD AWACS, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 75
US business has more than 160 ANDAs pending approval
Cadila has more than 150 ANDA approvals and c.20 ANDAs pending approval.
Cadila expects to file c.30-40 ANDAs annually. We expect Cadila’s R&D cost to
be c.7-8% of sales. Amongst key products in Cadila’s pipeline is generic Asacol
HD (branded market is c.USD 500m, Cadila has a first to file and had settled
for 15 November 2015, Cadila can launch the product on 1 July 2016, if it does
not receive approval for the product from USFDA).
Figure 111: US sales and YoY growth
0%
10%
20%
30%
40%
50%
60%
0
5000
10000
15000
20000
25000
1QFY
14
2QFY
14
3QFY
14
4QFY
14
1QFY
15
2QFY
15
3QFY
15
4QFY
15
1QFY
16
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
4QFY
17
1QFY
18
2QFY
18
3QFY
18
4QFY
18
YoY
gro
wth
US
sal
es (I
NR
mn)
US sales YoY growth
Source: Company, Deutsche Bank estimates
Figure 112: Cadila’s key generic drug pipeline
Quarter FY16 FY17 FY18 Beyond FY18
Q1 Zegerid Effient Toviaz, Exelon Patch, Astepro, Daliresp, Livalo, Namenda XR, Suprenza, Trokendi XR, Uloric, Solodyn, Silenor, Strattera
Q2 Lialda Vimpat
Q3 Asacol HD Pennsaid
Q4 Prevacid Solutab
Can launch on approval Abilify, Niaspan, Pristiq
Source: Company, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 76 Deutsche Bank AG/Hong Kong
Valuation and risks
Valuation
We use PER as our principal valuation matrix for Indian Pharma. Cadila’s
growth across its focus segments in India has been in line with market growth.
While Cadila’s US business has grown in the past on the back of product
launches, recent product approvals have been fewer, and the company did not
get approval of generic Asacol for the settled 15 November 2015 rates, due to
483 observations at its Moraiya plant. We assign our target PER of 18x which
is lower than the three-year average one-year forward PER of 20x to factor
delays in key product approvals in the US markets which are filed from
Moraiya plant and lower EBITDA margin as compared to peers. The target
PER is at its historical discount of c.15- 30% to Sun and Lupin. Thus, we rate
Cadila as Hold, with a target price of INR 422 on our FY18 recurring EPS.
Figure 113: PE Band - Cadila
0
100
200
300
400
500
600
31-M
ar-0
9
09-S
ep-0
9
18-F
eb-1
0
30-J
ul-1
0
08-J
an-1
1
19-J
un-1
1
28-N
ov-1
1
08-M
ay-1
2
17-O
ct-1
2
28-M
ar-1
3
06-S
ep-1
3
15-F
eb-1
4
27-J
ul-1
4
05-J
an-1
5
16-J
un-1
5
25-N
ov-1
5
Price 8x 15x 22x 29x
Source: Deutsche Bank estimates, Bloomberg Finance LP (Data as on 16/11/2015)
Risks
The key downside risks include the slower-than-expected growth rate for the
Indian formulations market, incremental products brought under price control
in India, delay in product launches in the US generics markets and higher-than-
expected pricing pressure in its key emerging markets, like Brazil.
The key upside risks include a higher-than-expected growth rate in the Indian
formulations market, higher-than-expected product launches in the US
generics market, lower-than-expected pricing pressure in key emerging
markets.
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 77
Company description
Cadila was founded in 1952 and restructured as Zydus Cadila in 1995. It
currently has 10 manufacturing locations (India, Europe and North and South
America). Cadila’s key acquisitions were Alpharma, Biochem and Nesher. The
company also has a presence in animal health and consumer businesses and
has also made forays into other markets such as Brazil, South Africa and
Japan; the US and India are its largest markets. Recently, Cadila launched
Exemptia in India (biosimilar for Adalimumab for inflammatory arthritis). It is
among the fastest-growing companies in the domestic market. In the IPM,
Cadila is ranked 4th with a c.4.1% market share, with a focus on the Cardio
Vascular, Gastro Intestinal (GI) and women’s healthcare segments (Source
AIOCD AWACS). In FY15, India sales contributed c.30% of sales.
Management summary
Figure 115: Selected board of directors and senior management
Name/Designation Summary
Mr. Pankaj R Patel
Chairman & MD Joined the company in 1976, helmed the restructured company in 1995
Dr. Sharvil P Patel
CEO Associated with the company for more than 10 years
Mr. Nitin D Parekh
CFO Appointed CFO in 2009
Source: Company, Deutsche Bank
Corporate actions and shareholding pattern
Figure 116: Corporate actions (2001-2015) Figure 117: Shareholding pattern
Year Corporate Action Summary
2015 Stock Split Adjustment Factor - 5
2015 Acquisition Buys out JV partner Bharat Serum's stake in Zydus BSV
2011 Acquisition Biochem Pharmaceutical Industries Ltd
2011 Acquisition US generics business of KV Pharmaceutical Co.
2011 Acquisition German animal drug company Bremer Pharma GmbH
2011 Joint Venture Bayer Zydus Pharma - 50:50 JV
2010 Stock Dividend Adjustment Factor - 2
2008 Spin-off Demerger into Cadila Healthcare and Zydus Wellness
2008 Acquisition Buys out 30% remaining stake in Zydus Pharma USA
2008 Acquisition Etna Biotech, subsidiary of Crucell
2008 MergerMerger of Cadila's Consumer products division with
Carnation Nutra-Analogue
2008 Acquisition South Africa Simayla Pharma
2008 Acquisition Combix Laboratories
2007 Acquisition Sarabhai Zydus Animal Health
2007 Acquisition Quimica e Farmaceutica Nikkho do Brasil Ltda
2007 Acquisition Japan's Nippon Universal
2007 Acquisition Live Healthcare
2006 Acquisition15% stake in Carnation Nutra-Analogue Foods - renamed as
Zydus Wellness
2006 Divestiture 29 branded products sold to France's Aerocid for EUR 7m
2003 Acquisition Patents for 2 cholesterol drugs from Fermenta Biotech
2003 Acquisition Alpharma SAS France
2003 Divestiture Mumbai real estate property
2002 Acquisition Banyan Chemicals
2001 Acquisition German Remedies
0% 20% 40% 60% 80% 100%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Sep‐15
Promoter
Others
FIIs
Mutual Funds/UTI
Bank/FI/Insurance Companies
Bodies Corporate
Source: Company, Deutsche Bank, Bloomberg Finance LP
Source: Company, Deutsche Bank
Figure 114: Revenue split FY15
US formulations39%
Domestic Formulations
31%
Other formulations11%
JVs 6%
Zydus Wellness5%
APIs and Others4%
Animal Health & Others
3% APIs1%
Source: Company, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 78 Deutsche Bank AG/Hong Kong
Company financials
Figure 118: Income statement
Year to March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Domestic 22,324 24,546 29,879 31,886 34,822 38,297 43,305 49,366
…Formulations 17,145 18,955 23,243 24,651 26,772 29,474 33,079 37,491
…Zydus Wellness 3,355 3,446 4,100 4,296 4,430 4,928 5,913 7,096
…Animal Health & Others 1,472 1,708 2,014 2,299 2,676 2,908 3,257 3,648
…APIs 353 437 522 640 944 987 1,056 1,130
Exports 22,887 27,260 32,969 40,199 51,755 59,832 72,836 87,441
…US formulations 9,655 12,431 15,068 21,648 33,933 41,448 51,740 62,088
…Other formulations 7,409 7,867 9,865 10,628 9,791 9,759 11,219 13,691
…JVs 2,707 4,230 5,011 4,498 4,711 5,598 6,503 7,560
…APIs and Others 3,116 2,733 3,025 3,424 3,320 3,027 3,375 4,102
Total Gross Sales 45,211 51,807 62,848 72,085 86,577 98,129 116,142 136,807
Excise 564 907 1,296 1,483 1,606 1,766 1,997 2,277
Total Net Revenue 44,647 50,900 61,552 70,602 84,971 96,362 114,144 134,530
yoy Growth% 24.9% 14.0% 20.9% 14.7% 20.4% 13.4% 18.5% 17.9%
Total Op. Exp. 35,650 41,794 52,326 60,239 68,956 76,439 89,026 102,411
EBITDA 8,997 9,106 9,226 10,363 16,015 19,923 25,118 32,119
Margins % 20.2% 17.9% 15.0% 14.7% 18.8% 20.7% 22.0% 23.9%
yoy Growth% 29.1% 1.2% 1.3% 12.3% 54.5% 24.4% 26.1% 27.9%
Depreciation 1,269 1,579 1,847 2,012 2,873 3,182 3,618 4,201
EBIT 7,727 7,527 7,379 8,351 13,142 16,742 21,500 27,918
Other Income 1,786 2,264 2,395 2,147 2,096 3,972 3,730 4,110
Interest 780 1,088 1,380 1,010 664 688 674 532
PBT 8,733 8,703 8,394 9,489 14,574 20,026 24,555 31,496
Tax 1,064 1,130 1,188 1,060 2,594 5,205 5,402 6,929
Tax Rate (%) 12.2% 13.0% 14.2% 11.2% 17.8% 26.0% 22.0% 22.0%
Minority Interest 251 286 364 326 355 464 555 560
Adj PAT 7,418 7,287 6,842 8,103 11,625 14,356 18,598 24,007
Net Margins (%) 16.6 14.3 11.1 11.5 13.7 14.9 16.3 17.8
EO Items -309 -761 -307 -65 -119 0 0 0
Reported PAT 7,110 6,526 6,535 8,038 11,506 14,356 18,598 24,007 Source: Company, Deutsche Bank estimates
Figure 119: Cash flow statement
Year to March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
PBT (Adj. for Extraordinary items) 8,425 7,942 8,087 9,424 14,455 20,026 24,555 31,496
Depreciation 1,269 1,579 1,847 2,012 2,873 3,182 3,618 4,201
Net Chg in WC (1,362) (1,811) (4,125) 946 (5,453) (3,254) (6,330) (5,753)
Others (1,078) (1,072) (1,368) (1,104) (2,969) (5,539) (5,686) (7,163)
CFO 7,254 6,638 4,442 11,278 8,906 14,414 16,157 22,781
Capex (4,579) (12,261) (6,141) (4,553) (4,221) (5,500) (6,500) (7,500)
Net Investments made - (5) (934) 279 (562) 1,212 - -
Others Investing Activities - - - - - - - -
CFI (4,579) (12,266) (7,075) (4,274) (4,783) (4,288) (6,500) (7,500)
Change in Share capital 342 (0) 0 - - - - -
Change in Debts (678) 9,867 6,737 (4,185) 693 (817) (6,504) (3,263)
Div. & Div Tax (1,529) (2,066) (1,734) (2,116) (2,907) (3,594) (4,792) (6,230)
Others (364) (459) (1,199) (1,053) (582) - - -
CFF (2,229) 7,342 3,805 (7,354) (2,796) (4,411) (11,296) (9,493)
Total Cash Generated 445 1,714 1,172 (350) 1,327 5,715 (1,639) 5,788
Cash Opening Balance 2,694 3,139 4,853 6,025 5,675 7,002 12,717 11,079
Cash Closing Balance 3,139 4,853 6,025 5,675 7,002 12,717 11,079 16,867
Source: Company, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 79
Figure 120: Balance sheet
As at March 31st FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Paid up Capital 1,024 1,024 1,024 1,024 1,024 1,024 1,024 1,024
Reserves & Surplus 20,691 24,743 28,421 33,366 41,492 52,254 66,060 83,837
Total Equity 21,715 25,767 29,445 34,390 42,516 53,278 67,084 84,861
Minority Interest 669 904 1,193 1,443 1,689 2,153 2,708 3,268
Total Debt 10,227 20,094 26,831 22,646 23,339 22,522 16,018 12,755
Deferred Liabilities 1,127 1,185 1,005 961 586 252 0 0
Capital Employed 33,738 47,950 58,474 59,440 68,130 78,205 85,810 100,884
Current Liabilities 12,368 15,842 15,248 20,425 22,341 22,987 25,167 27,407
Total Cur. Lia. & Prov. 12,368 15,842 15,248 20,425 22,341 22,987 25,167 27,407
Total Liabilities 46,106 63,792 73,722 79,865 90,471 101,192 110,977 128,292
Net Fixed Assets 22,636 33,318 37,612 40,153 41,501 43,819 46,733 50,266
Investments 20 25 958 679 1,241 29 29 29
Inventory 8,119 10,905 12,136 13,675 15,357 16,603 20,004 23,324
Debtors 7,652 8,863 9,551 11,337 15,884 18,806 23,454 27,643
Other Current Assets 4,540 5,828 7,440 8,346 9,486 9,218 9,679 10,163
Cash and Equivalents 3,139 4,853 6,025 5,675 7,002 12,717 11,079 16,867
Total Cur. Assets 23,450 30,450 35,152 39,033 47,729 57,344 64,215 77,997
Total Assets 46,106 63,792 73,722 79,865 90,471 101,192 110,977 128,292 Source: Company, Deutsche Bank estimates
Figure 121: Financial ratios
Year to March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Adj EPS (INR) 7.2 7.1 6.7 7.9 11.4 14.0 18.2 23.4
yoy Growth% 45.4 (1.7) (6.1) 18.4 43.5 23.5 29.5 29.1
EBITDA - Core (%) 20.2 17.9 15.0 14.7 18.8 20.7 22.0 23.9
NPM (%) 16.6 14.3 11.1 11.5 13.7 14.9 16.3 17.8
Net Debt to Equity (x) 0.3 0.6 0.7 0.5 0.4 0.2 0.1 -0.0
ROCE (%) 26.2 19.0 15.0 15.6 19.5 21.0 23.9 26.7
DPS (Rs) 1.3 1.5 1.5 1.8 2.4 3.0 4.0 5.2
Dividend Payout (%) 18.0 23.5 23.5 22.9 21.4 21.4 22.0 22.2
Asset Turnover Ratio (sales/ invested capital)
1.6 1.4 1.3 1.4 1.5 1.5 1.6 1.7
Avg Collection days 50 59 55 54 58 66 68 69
Avg Inventory days (on opex.) 80 83 80 78 77 76 75 77
Source: Company, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Page 80 Deutsche Bank AG/Hong Kong
Reuters Bloomberg GLEN.NS GNP IN
Forecasts And Ratios
Year End Mar 31 2014A 2015A 2016E 2017E 2018E
Sales (INRm) 60,052.0 66,297.5 76,901.8 96,187.8 108,944.3
EBITDA (INRm) 12,632.9 12,096.2 17,464.6 24,051.9 25,494.7
Reported NPAT (INRm) 5,422.8 4,753.2 9,539.5 14,625.0 15,640.4
Reported EPS FD(INR) 19.18 16.81 33.74 51.72 55.32
DB EPS FD(INR) 25.28 23.43 33.74 51.72 55.32
DB EPS growth (%) 15.3 -7.3 44.0 53.3 6.9
PER (x) 21.2 29.5 29.1 19.0 17.7
EV/EBITDA (x) 14.0 18.6 17.0 12.2 11.4
DPS (net) (INR) 1.92 1.92 3.99 5.99 7.48
Yield (net) (%) 0.4 0.3 0.4 0.6 0.8
Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items
2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which
uses the year end close
Strong India and US business outlook to drive earnings We initiate coverage on Glenmark with a Buy for three reasons: 1) Glenmark continues to grow ahead of IPM; we forecast domestic sales to increase at a CAGR of 25.2% for FY15-FY18; 2) the US business is driven by several launches; we forecast Glenmark’s US sales to increase at a CAGR of 18.4% for FY15-FY18; and 3) we expect a 33.2% EPS CAGR over FY15-18, driven by generic Zetia launch in December 2017, and the stock has outperformed the sector by c.16% YTD and is now c.10-20% below its three-year average PER.
Domestic business has gained market share across chronic segments Over the past five years, Glenmark has continuously gained market share in segments like Cardio Vascular, respiratory, anti-infective and gynaecology. For FY15-FY18, we forecast Glenmark’s domestic sales to increase at a CAGR of 25.2% and contribute c.31% of sales in FY18.
US business driven by product launches, generic Zetia launch in 3QFY17 Glenmark has several launches over the next twelve months; the key product launch is of generic Zetia in 3QFY17 where Glenmark is the first to file. We forecast Glenmark’s US sales to increase at a CAGR of 18.4% for FY15-FY18 and to contribute c.31% of sales in FY18.
Key trigger is revival of growth in Latam and ROW markets Currency depreciation has negatively affected Glenmark’s business outlook in Russia and Latam, which together contributed c.24% of sales in FY15. Higher product launches in these markets is a key trigger as we believe that revival of growth rates in Latam and ROW markets will improve the EBITDA margin.
Our 12M target price of INR 1,133/share provides c.16% upside potential; risks We rate Glenmark as Buy with a target price of INR 1,133 on a target PER of 21x on FY18E recurring EPS and INR 10 for generic Zetia. Key downside risks are lower-than-expected sales growth in the RoW and semi-regulated markets and higher-than-expected pricing pressures in India and the US market.
Rating
Buy Asia
India
Health Care
Pharmaceuticals / Biotechnology
Company
Glenmark
Strong India and US business outlook to drive earnings
Price at 30 Nov 2015 (INR) 981.00
Price target - 12mth (INR) 1,133.00
52-week range (INR) 1,224.39 - 705.01
Bombay Stock Exchange (BSE 30)
26,146
Kartik Mehta
Research Analyst
(+91) 22 7180 4210
kartik-a.mehta@db.com
Price/price relative
450
600
750
900
1050
1200
1350
12/13 6/14 12/14 6/15
Glenmark
Bombay Stock Exchang (Rebased)
Performance (%) 1m 3m 12m
Absolute -0.8 -12.4 22.9
Bombay Stock Exchange (BSE 30)
-1.9 1.8 -8.4
Source: Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 81
Investment thesis
Outlook
We rate Glenmark a Buy premised on the following: 1) In IPM, Glenmark is
ranked 15th with a c.2.8% market share with a focus on the dermatology
segment which accounts for c.30% of its domestic business. 2) Glenmark has
several launches over the next twelve months; its key product launch is
generic Zetia in 3QFY17 where Glenmark will be the first to file. We forecast
Glenmark’s US sales to increase at a CAGR of 18.4% for FY15-FY18 and
contribute c.31% of sales in FY18. 3) The stock has outperformed the sector by
c.16.2% YTD and is now c.10-20% below its three-year average PER. We
forecast sales and earnings to increase at CAGRs of 18% and 33.2% for FY15-
FY18, respectively.
Valuation
We use PER as our principal valuation matrix for Indian Pharma. Glenmark has
grown across its focus segments in India by increasing its market share. While
US business growth was flat in FY15, due to a low rate of approvals, growth is
most likely to be back on track with the recent surge in approvals. Glenmark’s
US business driven by new launches and India business driven by market
share gains in focused therapeutic segments is expected to drive earning
growth over the next three years. Our target valuation of 21x is marginally
below those for Lupin and Sun and at par with Cipla and marginally lower than
its own three-year average one-year forward PER of 23x. We discount the PER
and maintain the discount to industry leaders Sun and Lupin. However, the
PER is higher than other peers’ to factor sales and earnings growth .Thus, we
rate Glenmark Buy with a target price of INR 1,133 (including INR 10 for
generic Zetia) on our FY18E recurring EPS. We have not factored any NCE
licensing income into our forecasts
Risks
The key downside risks are lower-than-expected market share in the products
launched in the US, lower-than-expected sales growth in the RoW and semi-
regulated markets, and lower-than-expected growth in India driven by pricing
and new product launches.
2 December 2015
Health Care
Indian Pharmaceuticals
Page 82 Deutsche Bank AG/Hong Kong
Initiating with a Buy
For FY15-18, we estimate Glenmark’s sales and earnings will increase at
CAGRs of 18% and 33.2% ,respectively. We expect the EBITDA margin to
improve mainly driven by its higher-than-market growth in India, higher
number of product approvals, and first-to-file opportunities. We have not
factored any licensing income from out-licensing any NCE candidates in the
pipeline into our forecasts. We estimate Glenmark’s sales in emerging markets
(including Latin America) and ROW markets to have low CAGRs of c.8-15%
over FY15-18 mainly due to higher competition, lower product approvals, and
weak currency.
Figure 122: Sales-mix summary
Metric FY14 FY15 FY16E FY17E FY18E CAGR
2015-18E (%) Comments
India 15,180 17,490 22,264 27,984 34,333 25.2 Growing significantly ahead of the market, driven by Chronic segments
US 20,270 20,398 24,651 32,944 33,819 18.4 Driven by new launches, generic Zetia in 3QFY17
ROW 9,839 7,973 8,445 10,247 11,974 14.5 Currency fluctuations have capped sales growth, mainly Russia
Europe 5,061 6,445 7,139 8,715 10,225 16.6 Growth driven by new launches
Latin America 4,009 7,640 7,696 8,728 9,756 8.5 Currency fluctuations in Brazil and Venezuela have impacted sales growth
API 5,328 6,053 6,707 7,569 8,838 13.4 Sales to regulated and semi-regulated markets
Out-licensing revenue 366 299 - - -
Net sales 60,052 66,298 76,902 96,188 108,944 18.0 Driven by US business
Net sales ( Ex. Zetia) 3,638 904 8.2
EBITDA margin 21.0 18.2 22.7 25.0 23.4
EBITDA margin (Ex. Zetia) 21.0 18.2 22.7 22.8 23.0 Driven by India and US business Source: Company, Deutsche Bank estimates
Glenmark is one of the fastest-growing companies in the IPM
The Dermatology segment continues to be a key revenue driver for the
company, accounting for about 30% of its domestic formulation business.
Also, growth has come from segments like cardiac, respiratory, anti-infective,
and gynecology where the company has gained market share in all of these
segments
Figure 124: Market share in top therapeutic segments
MAT (%) Mar-11 Sep-11 Mar-12 Sep-12 Sep-13 Sep-14 Sep-15 Top four brands
Dermatology 8.23 8.3 8.69 8.84 8.36 8.07 8.26 Candid-B, Candid, Elovera, Momate
Cardiac 2.34 2.47 2.86 3.2 3.43 3.81 3.77 Telma, Telma H, Tema AM, Eptus
Respiratory 2.65 2.69 2.84 3.06 3.45 3.59 3.89 Ascoril Plus, Alex, Ascoril LS, Ascoril D
Anti-infective 1.31 1.27 1.44 1.43 1.57 1.79 1.80 Lizolid, Altacef, Milixim, Glevo
Gynecology 1.26 1.3 1.43 1.31 1.47 1.47 n.a Dubagest, Mumfer XT, Trigova HP, Astima
Source: Deutsche Bank, company data
Figure 123:IPM vs. Glenmark
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
Mar'13 Mar'14 Mar'15 Sep'15
MA
T Yo
Y gr
owth
(%
)
IPM Glenmark
Source AIOCD AWACS, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 83
US sales growth expected to pick up given increased number of launches
As of 30 September 2015, Glenmark has 102 ANDA approvals and 64 ANDA
pending approvals. We expect Glenmark to gain traction in US sales due to
several launches (see below). We expect Glenmark’s R&D cost to be c.9-11%
of sales. Among key product launches in Glenmark’s pipeline is generic Zetia
(branded market is c.USD 2bn for which Glenmark is first to file and has settled
for launch on 12 December 2017.
Figure 125: US sales and YoY growth
‐30%
‐20%
‐10%
0%
10%
20%
30%
40%
50%
60%
0
20
40
60
80
100
120
140
160
180
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
YoY growth
US sales (USD
mn)
US sales % YoY growth
generic Zetia launch
Source: Company data, Deutsche Bank estimates
Figure 126: Glenmark’s key generic drug pipeline
Quarter FY16 FY17 FY18 Beyond FY18
Q1 Effient Finacea, Benzel, Bystolic, Alimta, Epiduo Gel, Faslodex, Jevtana, Onglyza, Savella, Velcade
Q2 Crestor Vimpat Q3 Ortho Tri-Cyclen Lo Zetia, Treanda
Q4 Zyvox Multaq
Can launch on approval Welchol
Source: Company data, Deutsche Bank
Glenmark’s NCE pipeline is large
Glenmark has one of the best NCE pipelines in India, in our view. The company
has completed seven out-licensing deals since 2004, with a cumulative income
exceeding c.USD200m received in terms of upfront and milestone payments.
Currently, the company has about five candidates which are ready to be out-
licensed. However, we do not assign any value to the company’s NCE pipeline,
due to the inherently risky nature of the business.
2 December 2015
Health Care
Indian Pharmaceuticals
Page 84 Deutsche Bank AG/Hong Kong
Figure 127: Glenmark: NCE pipeline
Compound Primary indication Target Comment
Croflelemer HIV related Diarrhea / Adult Acute infectious Diarrhea
CFTR Inhibitor Salix obtained US FDA approval on 31 December 2011. Glenmark has filed in some of the key markets within the 140 countries. Market potential – 10m patients globally
GRC 17536 Neuropathic pain TRPA 1 Inhibitor
Glenmark has submitted IND for Phase 2b dose range finding study with the USFDA along with regulatory submission in India. Regulatory submissions in EU for the Phase 2b study are underway. Market potential -more than 40m patients worldwide with market size of USD 2bn
GRC 27864 Chronic inflammatory condition
Mpges-1 Inhibitor
Option agreement with Foreest labs Glenmark is planning a Pre-IND meeting with US FDA in Q4FY2015-16. Glenmark has completed preclinical studies and Phase I enabling GLP studies for its selected lead molecule, GRC 27864 and has approval for Phase I first-in-human trial from MHRA, UK. Multiple ascending dose study is currently on-going.
Vatelizumab Multiple Sclerosis VLA-2 Antagonist (mAb)
Sanofi has made the decision not to pursue further. Phase 1 studies completed in the US. The Phase II studies which are conducted by Sanofi are currently on-going for multiple sclerosis. Market potential -> 1.5m patients worldwide (750,000 in the US alone) with market size of USD 3bn
GBR 900 Chronic pain TrkA Antagonist (mAb)
Phase I enabling toxicity studies have been completed; phase 1 clinical trial has been initiated in the UK. Market potential -> 100m patients worldwide with market size of >USD 3bn
GBR 830 Autoimmune disorder OX40 Antagonist (mAb)
Phase I enabling toxicity studies have been completed; Phase I study is currently on-going in Netherlands, Europe.Glenmark intends to open an IND in Q2FY16
GBR 1302 Oncology indications Bispecific antibody The first clinical candidate based on Glenmark’s proprietary BEAT platform. Glenmark is currently putting together a submission package for initiating clinical trials and expects to obtain approval by Q3FY16
Source: Company Deutsche Bank
Figure 128: Glenmark: Molecules out-licensed
Year Molecule Company Comment
2014 GBR 500 Sanofi Aventis USD 5m as a milestone payment from. Sanofi does not want to pursue this molecule
2014 MPGES -1 Forest Labs USD 4m as a milestone payment from Forest Lab
2012 MPGES -1 Forest Labs For this, Forest made a USD 6m upfront payment and provide an additional USD 3m to support the next phase of work.
2011 GBR 500 Sanofi Aventis First novel biologics out-licensing deal; upfront payment of USD 50m; total deal size – USD 613m
2010 GRC 15300 Sanofi Aventis Received an upfront fee of USD 20m for development and commercialization rights of the first-in-class TRPV3 antagonist; received USD5m in October 2011 as milestone payment; deal with a potential of USD 325m
2007 GRC 6211 Eli Lilly Eli Lilly acquired the rights to a portfolio of TRPV1 antagonist molecules, Received an upfront payment of USD 45m (development of the lead molecule GRC6211 has been stalled)
2006 Melogliptin Merck KGaA
Deal worth USD250 m in October 2006. Received a total payment of USD3 1m; due to reduced R&D focus on diabetes, Merck returned the molecule to Glenmark in April 2008; completed Phase IIb trials and is ready to enter Phase III
2005 Oglemilast Teijin Pharma USD 53m deal for Oglemilast Japan rights; Teijin Pharma made an upfront payment of USD 6m
2004 Oglemilast Forest Labs Deal worth USD 190m on Oglemilast US rights; received USD 35m as upfront and milestone payments
Source: Company, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 85
Valuation and risks
Valuation
We use PER as our principal valuation matrix for Indian Pharma. Glenmark has
grown across its focus segments in India by increasing its market share. While
US business growth was flat in FY15 due to the low rate of approvals, growth
is most likely to be back on track with the recent surge in approvals.
Glenmark’s US business driven by new launches and India business driven by
market share gains in focused therapeutic segments is expected to drive
earnings growth over the next three years. Our target valuation of 21x is
marginally below those of Lupin and Sun and at par with Cipla and marginally
lower than its own three-year average one-year forward PER of 23x. We
discount the PER and maintain the discount to industry leaders Sun and Lupin.
However, the PER is higher than other peers’ to factor sales and earnings
growth .Thus, we rate Glenmark Buy with a target price of INR 1,133 (including
INR 10 for generic Zetia) on our FY18E recurring EPS. We have not factored
any NCE licensing income into our forecasts
Figure 129: PE band – Glenmark
0
200
400
600
800
1,000
1,200
1,400
1,600
06-A
pr-0
9
31-D
ec-0
9
26-S
ep-1
0
22-J
un-1
1
17-M
ar-1
2
11-D
ec-1
2
06-S
ep-1
3
02-J
un-1
4
26-F
eb-1
5
22-N
ov-1
5
Price 15x 20x 25x 30x
Source: Deutsche Bank estimates, Bloomberg Finance LP (Data as on 30/11/2015)
Risks
The key downside risks are lower-than-expected market share in the products
launched in the US, lower-than-expected sales growth in the RoW and semi-
regulated markets, and lower-than-expected growth in India driven by pricing
and new product launches.
2 December 2015
Health Care
Indian Pharmaceuticals
Page 86 Deutsche Bank AG/Hong Kong
Company description
Glenmark Pharmaceuticals was incorporated in 1977. After commissioning its
first facility at Nashik, Maharashtra, it now has six manufacturing locations
(India, EU, Brazil). Today, apart from having branded generic formulation
interests in several countries across the world, it also focuses on the discovery
of new molecules (both NCEs and biologics) with several molecules in various
stages of clinical and pre-clinical development. The US and India are its largest
markets for generic and branded generic, respectively.
Management summary
Figure 131: Selected board of directors and senior management
Name/designation Summary
Mr. Glenn Saldanha
Chairman & MD Joined the company in 1998 as a director and took over as managing director and CEO in 2001
Ms. Cheryl M Pinto
Director – corporate affairs Joined the company in 1999
Mr. Rajesh V. Desai
Executive director Heads Finance, IT and Legal. Appointed ED in 2002
Source: Company data, Deutsche Bank
Corporate actions and shareholding pattern
Figure 132: Corporate actions (2001-2015) Figure 133: Shareholding pattern
Year Corporate Action Summary
2015 Equity OfferingIssued 10.8 million shares at INR 875/share to
Temasek Holdings on preferential basis
2009 Equity OfferingQIP of 18,712,935 equity shares with net proceeds of INR 4,038.19 million
2008 AcquisitionPurchased seven pharmaceutical brands from Iceland's Actavis Group hf in Poland
2007 Stock Split Adjustment Factor - 2; New Par Value: INR 1
2007 AcquisitionPurchased rights to 2 new biological entities
from Chromos Molecular Systems
2005 Acquisition South Africa based Bouwer Bartlett Pty Ltd
2005 AcquisitionServycal S.A., an Argentine marketing
company
2005 AcquisitionLeading hormonal brand, Uno-Ciclo for USD 4.6m
2005 Stock Dividend Adjustment Factor - 2
2004 AcquisitionAcquired two generic products of STADA
Arzneimittel AG
2003 Divestiture Glenmark Laboratories Pvt Ltd
2002 AcquisitionGSK's bulk drug manufacturing facility at
Ankleshwar for INR 14 crore
0% 20% 40% 60% 80% 100%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Sep-15
Promoter
FIIs
Others
Mutual Funds/UTI
Bank/FI/Insurance Companies
Bodies Corporate
Source: Company data, Deutsche Bank, Bloomberg Finance LP
Source: Company data, Deutsche Bank
Figure 130: Revenue split FY15
India26%
US31%
ROW12%
Europe10%
Latin America
12%
API9%
Source: Company, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 87
Company financials
Figure 134: Income statement (INR m)
Year to March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Specialty 16,858 23,801 27,263 31,741 36,386 41,630 50,923 60,494
Generic 12,633 16,405 22,860 28,311 29,911 35,272 45,265 48,451
Net sales 29,491 40,206 50,123 60,052 66,298 76,902 96,188 108,944
YoY growth% 22.2% 36.3% 24.7% 19.8% 10.4% 16.0% 25.1% 13.3%
Total op. exp. 23,568 31,764 39,971 47,419 54,201 59,437 72,136 83,450
EBITDA 5,923 8,443 10,153 12,633 12,096 17,465 24,052 25,495
Margins % 20.1% 21.0% 20.3% 21.0% 18.2% 22.7% 25.0% 23.4%
YoY growth% -4.4% 42.5% 20.3% 24.4% -4.2% 44.4% 37.7% 6.0%
Depreciation 947 979 1,270 2,168 2,600 2,741 3,120 3,315
EBIT 4,976 7,464 8,883 10,465 9,496 14,724 20,931 22,179
Other income 1,441 182 107 115 219 103 96 109
Interest 1,605 1,466 1,600 1,886 1,902 1,727 1,502 1,402
PBT 4,812 6,180 7,390 8,694 7,814 13,099 19,525 20,886
Tax 237 238 1,107 1,513 1,190 3,547 4,881 5,221
Tax rate (%) 4.9% 3.8% 15.0% 17.4% 15.2% 27.1% 25.0% 25.0%
Minority interest 46 40 83 33 -1 12 19 24
Adjusted PAT 4,529 5,903 6,200 7,148 6,624 9,539 14,625 15,640
Net margins 15.4% 14.7% 12.4% 11.9% 10.0% 12.4% 15.2% 14.4%
Extraordinary items 4 -1,299 0 -1,725 -1,871 0 0 0
Reported PAT 4,532 4,603 6,200 5,423 4,753 9,539 14,625 15,640
Source: Company data, Deutsche Bank estimates
Figure 135: Cash flow statement (INR m)
Year to March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
PBT (adj. for extraordinary items) 4,816 4,881 7,390 6,969 5,943 13,099 19,525 20,886
Depreciation 947 979 1,270 2,168 2,600 2,741 3,120 3,315
Net chg in WC 1,671 (126) (1,442) (847) (1,009) (3,915) (5,628) (3,937)
Others (2,029) (1,830) (2,236) (2,852) (2,981) (3,739) (5,169) (5,581)
CFO 5,404 3,904 4,982 5,437 4,553 8,186 11,849 14,683
Capex (3,750) (3,712) (4,700) (4,841) (4,925) (6,500) (7,000) (7,500)
Net investments made (100) (17) (25) (7) (34) - - -
Others investing activities - - - - - - - -
CFI (3,850) (3,729) (4,725) (4,848) (4,959) (6,500) (7,000) (7,500)
Change in share capital 0 0 0 0 0 11 - -
Change in debts 2,423 2,108 5,275 4,691 4,856 (7,000) (2,000) (2,000)
Div. & div tax (126) (629) (634) (635) (635) (1,320) (1,980) (2,475)
Others (2,935) (388) (2,042) (2,730) (4,082) 9,439 - -
CFF (638) 1,092 2,599 1,327 139 1,130 (3,980) (4,475)
Total cash generated 916 1,267 2,857 1,916 (268) 2,816 869 2,708
Cash opening balance 1,070 1,986 3,253 6,110 8,026 7,759 10,574 11,443
Cash closing balance 1,986 3,253 6,110 8,026 7,759 10,574 11,443 14,151
Source: Company data, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Page 88 Deutsche Bank AG/Hong Kong
Figure 136: Balance sheet (INR m)
As at 31 March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Paid-up capital 270 271 271 271 271 282 282 282
Reserves & surplus 20,102 23,746 27,359 29,562 29,732 47,390 60,035 73,200
Total equity 20,372 24,016 27,630 29,833 30,003 47,673 60,317 73,482
Minority interest 267 250 244 133 -2 10 29 53
Total debt 21,116 23,225 28,500 33,191 38,047 31,047 29,047 27,047
Capital employed 41,756 47,491 56,373 63,157 68,048 78,730 89,393 100,582
Total cur. lia. & prov. 7,746 9,843 13,568 21,109 26,029 27,023 32,446 35,944
Total liabilities 49,501 57,334 69,942 84,265 94,077 105,753 121,840 136,526
Net fixed assets 22,123 24,856 28,286 30,959 33,284 37,043 40,923 45,107
Deferred tax asset 1,081 2,674 3,803 5,142 6,933 7,125 7,412 7,772
Investments 281 298 323 331 365 365 365 365
Inventory 8,070 7,877 8,435 9,329 12,690 13,342 16,839 19,187
Debtors 11,308 12,436 16,400 21,563 25,118 29,135 36,442 41,275
Other current assets 4,651 5,940 6,584 8,915 7,929 8,168 8,415 8,670
Cash and equivalents 1,986 3,253 6,110 8,026 7,759 10,574 11,443 14,151
Total cur. assets 26,016 29,506 37,530 47,834 53,495 61,220 73,140 83,282
Total assets 49,501 57,334 69,942 84,265 94,077 105,753 121,840 136,526
Source: Company data, Deutsche Bank estimates
Figure 137: Financial ratios
Year to March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Adj EPS (INR) 16.0 20.9 21.9 25.3 23.4 33.7 51.7 55.3
yoy growth% 39.6 30.3 5.0 15.3 (7.3) 44.0 53.3 6.9
EBITDA – core (%) 19.4 24.3 26.4 32.9 32.6 43.4 62.8 67.0
NPM (%) 20.1 21.0 20.3 21.0 18.2 22.7 25.0 23.4
Net debt to equity (x) 15.4 14.7 12.4 11.9 10.0 12.4 15.2 14.4
ROCE (%) 0.9 0.8 0.8 0.8 1.0 0.4 0.3 0.2
DPS (INR) 13.3 12.5 14.1 11.1 9.0 14.5 18.5 17.4
Dividend payout (%) 2.4 11.8 8.7 10.0 11.4 11.8 11.6 13.5
Asset turnover ratio (sales/ invested capital)
0.7 1.0 1.1 1.3 1.3 1.4 1.5 1.5
Avg collection days 137 108 105 115 129 129 124 130
Avg inventory days (on opex.) 117 92 74 68 74 80 76 79
Source: Company data, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 89
Reuters Bloomberg TORP.NS TRP IS
Forecasts And Ratios
Year End Mar 31 2014A 2015A 2016E 2017E 2018E
Sales (INRm) 40,363.0 45,853.0 60,187.0 56,870.9 64,390.1
EBITDA (INRm) 8,030.6 9,520.1 21,336.7 14,025.8 16,587.8
Reported NPAT (INRm) 6,638.8 7,509.0 14,258.3 11,576.6 14,145.8
Reported EPS FD(INR) 39.23 44.37 84.25 68.40 83.58
DB EPS FD(INR) 39.23 44.37 84.25 68.40 83.58
DB EPS growth (%) 41.2 13.1 89.9 -18.8 22.2
PER (x) 11.1 19.5 16.9 20.8 17.1
EV/EBITDA (x) 9.4 17.4 12.1 17.7 14.6
DPS (net) (INR) 10.00 11.25 21.00 17.00 21.00
Yield (net) (%) 2.3 1.3 1.5 1.2 1.5
Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items
2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which
uses the year end close
India business to drive earnings; valuations do not factor in all positives We initiate coverage on Torrent Pharma with a Buy for three reasons: 1) Elder brands will drive India business, which we estimate will register a 15.4% sales CAGR over FY15-18; 2) US business growth, to be driven by product launches, and to register a 15.5% sales CAGR over FY15-18E; 3) delivery of a 23.5% EPS CAGR over FY15-18, on our estimates, factoring in complete synergies from the Elder brands from FY17. The stock has outperformed the sector by c.15% YTD, and the PER has rerated by c.50% − now at par with its large peers (vs. c.25-30% discount historically).
India business driven by synergies with Elder brands Post the integration of the Elder brands, Shelcal and Chymoral sales have grown by c.22-25%. We forecast Torrent’s domestic sales to register CAGR of 15.4% over FY15-18, contributing c.39% of sales in FY18 (from c.35% in FY15).
US business strategy has been successful Despite being a late entrant into the US business, Torrent has ramped up significantly, driven mainly by the timely launches of generic Cymbalta in FY15 and generic Abilify in FY16. We forecast Torrent’s US sales to achieve a CAGR of 15.5% over FY15-18 and contribute c.20% of sales in FY18 (up from c.18% in FY15, down from 31% in FY16E).
Key trigger − improvement in field force productivity Torrent has rationalised its India field force after acquiring certain of Elder’s India assets in FY15. We expect synergies with the acquired Elder portfolio and an improvement in field force productivity to drive the EBITDA margin.
Our 12M target price of INR 1,672/sh implies c.17% upside potential; risks We rate Torrent a Buy, with a target price of INR 1,672, on a target PER of 20x on FY18E recurring EPS. The key downside risks include a slower-than-expected growth rate in the Indian formulations market, incremental products brought under price control in India, lower product launches in the US generic markets, and higher-than- expected pricing pressure in its key generic markets − Brazil, Russia and Germany.
Rating
Buy Asia
India
Health Care
Pharmaceuticals / Biotechnology
Company
Torrent
Acquisition synergies to kick in
Price at 30 Nov 2015 (INR) 1,425.55
Price target - 12mth (INR) 1,672.00
52-week range (INR) 1,650.00 - 1,024.72
Bombay Stock Exchange (BSE 30)
26,146
Kartik Mehta
Research Analyst
(+91) 22 7180 4210
kartik-a.mehta@db.com
Price/price relative
400
800
1200
1600
2000
12/13 6/14 12/14 6/15
Torrent
Bombay Stock Exchang (Rebased)
Performance (%) 1m 3m 12m
Absolute -4.7 -10.2 33.2
Bombay Stock Exchange (BSE 30)
-1.9 1.8 -8.4
Source: Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Page 90 Deutsche Bank AG/Hong Kong
Model updated:30 November 2015
Running the numbers
Asia
India
Pharmaceuticals / Biotechnology
Torrent Reuters: TORP.NS Bloomberg: TRP IS
Buy Price (30 Nov 15) INR 1,425.55
Target Price INR 1,672.00
52 Week range INR 1,024.72 - 1,650.00
Market Cap (m) INRm 241,235
USDm 3,615
Company Profile
Torrent was incorporated in 1959 as Trinity Laboratories and in 1971 was renamed to Torrent Pharmaceuticals Ltd. Torrent engages in the manufacture and sale of branded and generic pharmaceutical products.. Torrent exports to more than 50 countries and has 4 manufacturing plants in India. Torrent's key acquisitions are Heumann, Elder's key India brands and Zyg Pharma. In IPM, Torrent Pharma is ranked 14th with 2.4% with focus on chronic segments. Torrent is the largest Indian company in Brazil
Price Performance
400
800
1200
1600
2000
Dec 13Mar 14Jun 14Sep 14Dec 14Mar 15Jun 15Sep 15
TorrentBombay Stock Exchange (BSE 30) (Rebased)
Margin Trends
12162024283236
13 14 15 16E 17E 18E
EBITDA Margin EBIT Margin
Growth & Profitability
0
10
20
30
40
50
-10
0
10
20
30
40
13 14 15 16E 17E 18E
Sales growth (LHS) ROE (RHS)
Solvency
0
10
20
30
40
50
0
20
40
60
80
13 14 15 16E 17E 18E
Net debt/equity (LHS) Net interest cover (RHS)
Kartik Mehta
+91 22 7180 4210 kartik-a.mehta@db.com
Fiscal year end 31-Mar 2013 2014 2015 2016E 2017E 2018E
Financial Summary
DB EPS (INR) 27.79 39.23 44.37 84.25 68.40 83.58
Reported EPS (INR) 25.57 39.23 44.37 84.25 68.40 83.58
DPS (INR) 11.50 10.00 11.25 21.00 17.00 21.00
BVPS (INR) 84.0 112.4 147.2 210.4 261.8 324.4
Weighted average shares (m) 169 169 169 169 169 169
Average market cap (INRm) 53,697 73,511 146,654 241,235 241,235 241,235
Enterprise value (INRm) 53,756 75,282 165,412 257,627 248,335 243,007
Valuation MetricsP/E (DB) (x) 11.4 11.1 19.5 16.9 20.8 17.1
P/E (Reported) (x) 12.4 11.1 19.5 16.9 20.8 17.1
P/BV (x) 3.95 4.59 7.83 6.78 5.44 4.39
FCF Yield (%) nm 0.2 nm 2.5 5.0 3.7
Dividend Yield (%) 3.6 2.3 1.3 1.5 1.2 1.5
EV/Sales (x) 1.8 1.9 3.6 4.3 4.4 3.8
EV/EBITDA (x) 10.1 9.4 17.4 12.1 17.7 14.6
EV/EBIT (x) 11.9 10.5 21.7 13.6 22.0 18.0
Income Statement (INRm)
Sales revenue 30,535 40,363 45,853 60,187 56,871 64,390
Gross profit 21,227 27,888 31,639 44,751 39,810 46,040
EBITDA 5,346 8,031 9,520 21,337 14,026 16,588
Depreciation 827 870 1,907 2,416 2,761 3,120
Amortisation 0 0 0 0 0 0
EBIT 4,519 7,161 7,613 18,921 11,265 13,468
Net interest income(expense) -338 -586 -1,752 -1,922 -961 -304
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries -375 0 0 0 0 0
Other pre-tax income/(expense) 2,010 1,866 3,537 4,303 4,730 5,207
Profit before tax 5,816 8,440 9,398 21,301 15,035 18,371
Income tax expense 1,467 1,801 1,888 7,043 3,458 4,225
Minorities 22 0 0 0 0 0
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 4,328 6,639 7,509 14,258 11,577 14,146
DB adjustments (including dilution) 375 0 0 0 0 0
DB Net profit 4,703 6,639 7,509 14,258 11,577 14,146
Cash Flow (INRm)
Cash flow from operations 2,570 4,036 7,564 10,420 17,169 14,882
Net Capex -2,721 -3,914 -22,923 -4,500 -5,000 -6,000
Free cash flow -152 122 -15,359 5,920 12,169 8,882
Equity raised/(bought back) 0 0 0 0 0 0
Dividends paid -2,276 -1,980 -2,284 -4,158 -3,366 -4,158
Net inc/(dec) in borrowings 1,142 4,388 16,086 0 -11,500 -10,000
Other investing/financing cash flows 551 146 656 604 489 604
Net cash flow -734 2,676 -901 2,366 -2,208 -4,672
Change in working capital -2,151 -2,267 -2,066 -6,223 2,864 -2,351
Balance Sheet (INRm)
Cash and other liquid assets 6,874 9,551 8,650 11,016 8,808 4,136
Tangible fixed assets 10,825 13,808 15,999 19,421 22,905 26,942
Goodwill/intangible assets 226 286 19,111 17,773 16,529 15,372
Associates/investments 0 0 1 0 0 0
Other assets 19,095 25,971 32,960 37,282 35,264 39,046
Total assets 37,020 49,616 76,720 85,492 83,506 85,496
Interest bearing debt 6,930 11,318 27,404 27,404 15,904 5,904
Other liabilities 15,868 19,270 24,406 22,474 23,289 24,687
Total liabilities 22,797 30,588 51,810 49,877 39,192 30,591
Shareholders' equity 14,219 19,024 24,906 35,610 44,309 54,901
Minorities 4 4 4 4 4 4
Total shareholders' equity 14,223 19,028 24,910 35,614 44,314 54,905
Net debt 56 1,767 18,754 16,388 7,096 1,768
Key Company Metrics
Sales growth (%) 17.7 32.2 13.6 31.3 -5.5 13.2
DB EPS growth (%) 34.6 41.2 13.1 89.9 -18.8 22.2
EBITDA Margin (%) 17.5 19.9 20.8 35.5 24.7 25.8
EBIT Margin (%) 14.8 17.7 16.6 31.4 19.8 20.9
Payout ratio (%) 45.0 25.5 25.4 24.9 24.9 25.1
ROE (%) 33.1 39.9 34.2 47.1 29.0 28.5
Capex/sales (%) 8.9 9.7 50.0 7.5 8.8 9.3
Capex/depreciation (x) 3.3 4.5 12.0 1.9 1.8 1.9
Net debt/equity (%) 0.4 9.3 75.3 46.0 16.0 3.2
Net interest cover (x) 13.4 12.2 4.3 9.8 11.7 44.4
Source: Company data, Deutsche Bank estimates
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 91
Investment thesis
Outlook
We rate Torrent Pharma a Buy, premised on the following: 1) in the Indian
pharmaceuticals market, Torrent Pharma is ranked 14th, with a 2.4% focus on
chronic segments, and it continues to grow ahead of the industry; 2) US sales
registering a CAGR of 15.5% over FY15-18 and contributing c.20% of sales in
FY18, on our estimates, up from c.18% in FY15 and down from 31% in FY16E
(lower growth due mainly to high base of exclusivities on generic Cymbalta
and generic Abilify in FY15 and FY16, respectively); 3) Torrent’s
outperformance of the sector by c.15% YTD and a c.50% PER re-rating (now at
par with large peers, vs. c.25-30% discount historically).
Valuation
We use PER as our principal valuation matrix for Indian Pharma. Torrent’s
growth across its focus segments in India has been ahead of the market’s
growth, and we expect synergies with the Elder brands to sustain the growth
momentum in the domestic markets. While the US business has more than
doubled in the past two years, the higher base and lack of similar-sized
opportunities will result in moderate growth. For the India and US businesses,
which together contribute c.53% of sales, which we forecast CAGRs of 15.4%
and 15.5%, respectively, over FY15-18.
Torrent has re-rated substantially, and is now trading at par with its peers,
mainly on the back of significant growth in the US business, owing to the
launch of generic Cymbalta (in FY15) and generic Abilify (in FY16), and also
owing to synergies in the India business post the acquisition with Elder
Pharma. The year-on-year fall in earnings in FY17E is due mainly to a higher
base of generic Abilify. We assign a target PER of 20x, which is c.60% higher
than its three-year average one-year forward PER of 13x. We believe this
multiple is justified as India and US Business have a favorable business outlook
and EBITDA margin profile of the company has improved significantly. Our
target PER is at a discount of 10% and 15% to Sun and Lupin, respectively, and
factors in the scale of business of these two companies in the India and US
markets. Thus we rate Torrent a Buy, with a target price of INR 1,672 on our
FY18E recurring EPS.
ce 0
Risks
The key downside risks include a slower-than-expected growth rate in the
Indian formulations market, incremental products brought under price control
in India, lower product launches in the US generic markets, and higher-than-
expected pricing pressure in its key generic markets − Brazil, Russia and
Germany.
2 December 2015
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Page 92 Deutsche Bank AG/Hong Kong
Initiating with a Buy rating
We estimate Torrent’s sales and earnings to register CAGRs of 12% and
23.5%, respectively, over FY15-18, driven by the integration of the Elder brands
and the company’s growing presence in export markets, especially the US. The
fall in the EBITDA margin that we estimate for FY17 is due to limited upside
from generic Abilify in FY16. In FY17 and FY18, we expect the EBITDA margin
to improve over FY15, driven mainly by the India business. The Brazil business
continues to be driven by volume and new product approvals; however,
currency weakness limits Torrent’s growth potential in this market. Torrent has
a c.200-strong field force in Brazil.
Figure 138: Sales mix summary
Metric (INR m) FY14 FY15 FY16E FY17E FY18E
CAGR
2015-18E (%)Comments
Domestic sales (net of excise)
11,759 16,203 18,655 21,473 24,901 15.4 Integration of Elder brands will drive synergies in pain and nutraceuticals. CNS, cardio, diabetes, GI and dermatology continue to grow ahead of the market.
International sales 25,814 27,110 37,991 31,656 35,682 9.6 Driven by launches in the US market.
US 7,760 8,314 18,881 10,686 12,823 15.5 Despite being a late entrant, it has ramped up the US business through large launches like generic Cymbalta and generic Abilify. New launches will continue to drive growth.
Brazil 5,330 6,056 5,430 6,082 6,811 4.0 40 products approved, 20 products await approval. Negative impact of currency; expect local currency growth of c.16-18% over the next three years. Largest Indian company in this market.
Others 12,724 12,741 13,680 14,889 16,048 8.0 Includes Germany, Russia, Dossier income, other Latam and Asian markets.
Contract manufacturing
2,790 2,540 3,542 3,742 3,807 14.4 Mostly from manufacture of human insulin, supply for Novo Nordisk (NOVOB:DC; Hold) for the Indian markets.
Net sales 40,363 45,853 60,187 56,871 64,390 12 Driven mainly by US. India sales driven by Elder portfolio.
EBITDA margin (%) 19.9 20.8 35.5 24.7 25.8 Driven by India and US. Dip in FY17E and FY18E due to generic Abilify in FY16E. R&D cost c.4-5% of sales.
Source: Company data, Deutsche Bank estimates
India business focuses on key chronic segments/synergies from Elder brands
Torrent is one of the leading players in key chronic therapies – Cardio Vascular
(CV) and neuro-psychiatry (CNS). In FY14, CV, CNS and oral anti-diabetes
accounted for c.60% of India sales.
Figure 140: Therapeutic area-wise breakdown of branded formulations
% FY04 FY06 FY08 FY11 FY12 FY13 FY14 FY15 Top three brands
CV 33 33 35 33 35 36 36 26 Nikoran, Dilzem, Nebicard
GI 22 21 19 19 18 18 18 13 Domstral, Nexpro RD, Nexpro
CNS 18 19 21 21 19 18 18 13 Alprax, Lamitor, Pregeb M
Anti-infective 15 16 10 13 11 9 8 6 Topcef, Droxyl, Moxif
Pain 6 4 4 4 4 4 4 NA Lefra, Diclogesic, Torcoxia BCD
Oral anti-diabetes 3 4 6 5 8 8 8 6 Azulix-MF, Voglitor, Dibeta
Others 3 3 5 5 5 7 8 36 Largely includes Elder brands
Source: Company data, Deutsche Bank
Figure 139: IPM vs. Torrent
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
Mar'13 Mar'14 Mar'15 Sep'15
MA
T Y
oY
gro
wth
(%
)
IPM Torrent Pharma
Source: AIOCD AWACS, Deutsche Bank
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 93
Elder portfolio synergies to improve field force productivity
Torrent has rationalised its India field force following the acquisition of certain
brands from Elder Pharma in FY15. The current per man per month
productivity is c.INR 0.6m, and we estimate it to be c.INR 1m over the next
three years. We expect synergies with the acquired Elder portfolio and an
improvement in field force productivity to drive the EBITDA margin. Post the
acquisition of the Elder brands, Shelcal (annual sales INR 2.14bn, segment-
Vitamins), Chyromal (annual sales INR 820m, segment-Pain) and Carnisure
(annual sales INR 220m, segment-CV) sales have increased at a steady rate.
Figure 141: Monthly secondary sales of Shelcal and Chymoral Forte
Source: AIOCD AWACS, Deutsche Bank)
US business expected to see launches of c.8-10 products a year
Torrent has c.50 ANDA approvals and c.20 ANDA pending approvals. It
expects to file c.10-20ANDs per year and launch c.8-10 products annually. We
expect Torrent’s R&D costs to be c.4-5% of sales over the next three years.
Among the key products in Torrent’s pipeline is generic Seroquel XR (branded
market is c. USD 1.3bn; Torrent has settled for a November 2016 launch, along
with five to six other players).
Figure 142: Torrent’s key generic drug pipeline
Quarter FY16 FY17 FY18 Beyond FY18
Q1 Benicar Daliresp, Viagra, Bystolic, Latuda
Q2 Crestor
Q3 Enablex Seroquel XR
Q4
Can launch on approval Luvox CR, Diovan HCT
Source: Company data, Deutsche Bank
Post the integration of the
Elder brands in July 2014,
sales of Shelcal and Chymoral
have grown by c.22-25%
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Valuation and risks
Valuation
We use PER as our principal valuation matrix for Indian Pharma. Torrent’s
growth across its focus segments in India has been ahead of the market’s
growth, and we expect synergies with the Elder brands to sustain the growth
momentum in the domestic markets. While the US business has more than
doubled in the past two years, the higher base and lack of similar-sized
opportunities will result in moderate growth. For the India and US businesses,
which together contribute c.53% of sales, we forecast CAGRs of 15.4% and
15.5%, respectively, over FY15-18.
Torrent has re-rated substantially, and is now trading at par with its peers,
mainly on the back of significant growth in the US business, owing to the
launch of generic Cymbalta (in FY15) and generic Abilify in (FY16), and also
owing to synergies in the India business post the acquisition with Elder
Pharma. The year-on-year fall in earnings in FY17E is due mainly to a higher
base of generic Abilify. We assign a target PER of 20x, which is c.60% higher
than its three-year average one-year forward PER of 13x. Our target PER is at a
discount of 10% and 15% to Sun and Lupin, respectively, and factors in the
scale of business of these two companies in the India and US markets. Thus
we rate Torrent a Buy, with a target price of INR 1,672 on our FY18E recurring
EPS.
Figure 143: PE band – Torrent
0
400
800
1,200
1,600
2,000
31-M
ar-0
9
09-S
ep-0
9
18-F
eb-1
0
30-J
ul-1
0
08-J
an-1
1
19-J
un-1
1
28-N
ov-1
1
08-M
ay-1
2
17-O
ct-1
2
28-M
ar-1
3
06-S
ep-1
3
15-F
eb-1
4
27-J
ul-1
4
05-J
an-1
5
16-J
un-1
5
25-N
ov-1
5
Price 7x 12x 17x 22x
Source: Deutsche Bank, Bloomberg (data as of 30/11/2015)
Risks
Key downside risks include a slower-than-expected growth rate in the Indian
formulations market, incremental products brought under price control in
India, lower product launches in the US generic markets, and higher-than-
expected pricing pressure in its key generic markets − Brazil, Russia and
Germany.
2 December 2015
Health Care
Indian Pharmaceuticals
Deutsche Bank AG/Hong Kong Page 95
Company description
Torrent was incorporated in 1959 as Trinity Laboratories and, in 1971, it was
renamed to Torrent Pharmaceuticals Ltd. Torrent engages in the manufacture
and sale of branded and generic pharmaceutical products in India and
internationally. Further, it offers contract manufacturing services and the
supply of insulin formulations under the third-party brand name. Torrent
exports to more than 50 countries around the world, and has four
manufacturing plants in India. Its key acquisitions have been Heumann, Elder’s
key India brands and Zyg Pharma. In the Indian pharmaceutical market,
Torrent Pharma is ranked 14th, with a 2.4% focus on chronic segments. In
FY15, Brazil sales contributed c.13% of Torrent’s sales, making the company
the largest Indian company in Brazil.
Management summary
Figure 145: Selected board of directors and senior management
Name/Designation Summary
Mr. Sudhir Mehta
Chairman Emeritus
Instrumental in the diversification of the Torrent Group into the power sector. Took over as the Chairman of the Torrent Group in 1998.
Mr. Samir Mehta
CEO Associated with the company since 1986.
Mr. Ashok Modi
ED & CFO Appointed CFO in FY14.
Source: Company data, Deutsche Bank
Corporate actions and shareholding pattern
Figure 146: Corporate actions (2001-15) Figure 147: Shareholding pattern
Year Corporate Action Summary
2015 Acquisition 100% stake in Zyg Pharma Pvt Ltd
2013 Acquisition
Branded domestic formulations business of
Elder Pharmaceutical in India and Nepal for
INR 2,004 crore
2013 Stock Dividend Adjustment Factor - 2
2006 Stock SplitAdjustment Factor - 2; new Face Value: INR
5
2005 Acquisition Heumann Pharma GmbH & Co of Germany
2002 Divestiture
Rights to its patented AGE (Advanced
Glycosylation Endproducts) breaker
compound
0% 20% 40% 60% 80% 100%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Sep‐15Promoter
FIIs
Others
Mutual Funds/UTI
Bodies Corporate
Bank/FI/Insurance Companies
Source: Company data, Deutsche Bank, Bloomberg Finance LP
Source: Company data, Deutsche Bank
Figure 144: Revenue split, FY15
Domestic sales35%
International sales59%
Contract manufacturing
6%
Source: Company data, Deutsche Bank
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Company financials
Figure 148: Income statement
Year-ending 31 March (INR m) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Domestic sales 8,210 9,233 10,447 11,833 16,282 18,751 21,557 24,997
International sales 11,016 14,332 17,849 25,814 27,110 37,991 31,656 35,682
Contract manufacturing 2,380 2,427 2,310 2,790 2,540 3,542 3,742 3,807
Total gross revenue 21,606 25,992 30,606 40,437 45,932 60,283 56,955 64,486
Excise 387 48 71 74 79 96 84 96
Net sales 21,220 25,944 30,535 40,363 45,853 60,187 56,871 64,390
yoy growth% 15.8% 22.3% 17.7% 32.2% 13.6% 31.3% -5.5% 13.2%
Total op. exp. 18,173 21,953 25,189 32,332 36,333 38,850 42,845 47,802
EBITDA 3,047 3,991 5,346 8,031 9,520 21,337 14,026 16,588
Margins % 14.4% 15.4% 17.5% 19.9% 20.8% 35.5% 24.7% 25.8%
yoy growth% -9.8% 31.0% 33.9% 50.2% 18.5% 124.1% -34.3% 18.3%
Depreciation 626 817 827 870 1,907 2,416 2,761 3,120
EBIT 2,421 3,174 4,519 7,161 7,613 18,921 11,265 13,468
Other income 1,176 1,460 2,010 1,866 3,537 4,303 4,730 5,207
Interest 387 395 338 586 1,752 1,922 961 304
PBT 3,211 4,240 6,191 8,440 9,398 21,301 15,035 18,371
Tax 725 723 1,467 1,801 1,888 7,043 3,458 4,225
Tax rate (%) 22.6% 17.1% 23.7% 21.3% 20.1% 33.1% 23.0% 23.0%
Minority interest -0 23 22 0 0 0 0 0
Adj. PAT 2,486 3,494 4,703 6,639 7,509 14,258 11,577 14,146
Net margin 11.7% 13.5% 15.4% 16.4% 16.4% 23.7% 20.4% 22.0%
Extraordinary items 216 -654 -375 0 0 0 0 0
Reported PAT 2,702 2,840 4,328 6,639 7,509 14,258 11,577 14,146
Source: Company data, Deutsche Bank estimates
Figure 149: Cash flow statement
Year-ending 31 March (INR m) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
PBT (adj. for extraordinary items) 3,427 3,586 5,816 8,440 9,398 21,301 15,035 18,371
Depreciation 626 817 827 870 1,907 2,416 2,761 3,120
Net chg in WC 190 903 (2,350) (3,034) (3,081) (6,254) 2,832 (2,383)
Others (744) (689) (1,724) (2,240) (660) (7,043) (3,458) (4,225)
CFO 3,498 4,618 2,570 4,036 7,564 10,420 17,169 14,882
Capex (2,270) (1,820) (2,721) (3,914) (22,923) (4,500) (5,000) (6,000)
Net investments made (10) (175) 375 - (0) 0 - -
Others investing activities - - - - - - - -
CFI (2,280) (1,995) (2,346) (3,914) (22,923) (4,500) (5,000) (6,000)
Change in share capital - - 0 - - - - -
Change in debt 497 67 1,142 4,388 16,086 - (11,500) (10,000)
Div & div tax (787) (836) (2,276) (1,980) (2,284) (4,158) (3,366) (4,158)
Others 15 (294) 176 146 656 604 489 604
CFF (275) (1,063) (957) 2,554 14,458 (3,554) (14,377) (13,554)
Total cash generated 943 1,560 (734) 2,676 (901) 2,366 (2,208) (4,672)
Cash opening balance 5,105 6,048 7,608 6,874 9,551 8,650 11,016 8,808
Cash closing balance 6,048 7,608 6,874 9,551 8,650 11,016 8,808 4,136
Source: Company data, Deutsche Bank estimates
2 December 2015
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Deutsche Bank AG/Hong Kong Page 97
Figure 150: Balance sheet
As at 31 March (INRm) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Paid-up capital 423 423 423 846 846 846 846 846
Reserves & surplus 9,801 11,515 13,796 18,178 24,059 34,764 43,463 54,055
Total equity 10,224 11,938 14,219 19,024 24,906 35,610 44,309 54,901
Minority interest 16 35 4 4 4 4 4 4
Total debt 5,721 5,787 6,930 11,318 27,404 27,404 15,904 5,904
Deferred liabilities 480 514 258 -182 0 0 0 0
Capital employed 16,440 18,275 21,410 30,164 52,313 63,018 60,217 60,809
Total current liabilities & provisions 8,916 12,204 15,868 19,270 24,406 22,474 23,289 24,687
Total liabilities 25,357 30,479 37,278 49,434 76,720 85,492 83,506 85,496
Net fixed assets 8,154 9,157 11,051 14,095 33,904 36,000 38,249 41,139
Intangibles - - - - 159 148 137 128
Investments 200 375 0 0 1 0 0 0
Inventory 5,048 5,316 9,239 10,061 10,672 9,808 9,816 10,558
Debtors 3,404 5,228 6,878 10,994 15,945 20,930 18,697 21,522
Other current assets 2,502 2,796 3,236 4,734 7,390 7,590 7,798 8,013
Cash and equivalents 6,048 7,608 6,874 9,551 8,650 11,016 8,808 4,136
Total current assets 17,003 20,947 26,227 35,340 42,656 49,344 45,119 44,229
Total assets 25,357 30,479 37,278 49,434 76,720 85,492 83,506 85,496
Source: Company data, Deutsche Bank estimates
Figure 151: Financial ratios
Year-ending 31 March FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Adj EPS (Rs) 14.7 20.6 27.8 39.2 44.4 84.2 68.4 83.6
yoy growth% 13.5 40.5 34.6 41.2 13.1 89.9 -18.8 22.2
EBITDA - core (%) 14.4 15.4 17.5 19.9 20.8 35.5 24.7 25.8
NPM (%) 11.7 13.5 15.4 16.4 16.4 23.7 20.4 22.0
Net debt to equity (x) net cash net cash 0.00 0.09 0.75 0.46 0.16 0.03
ROCE (%) 20.0 18.5 23.5 27.2 20.9 26.9 19.8 23.7
DPS (Rs) 4.0 4.2 11.5 10.0 11.2 21.0 17.0 21.0
Dividend payout (%) 25.1 25.3 45.0 25.5 25.4 24.9 24.9 25.1
Asset turnover ratio (sales/invested capital)
2.2 2.5 2.5 2.3 1.4 1.2 1.1 1.2
Avg collection days 55 61 72 81 107 112 127 114
Avg inventory days (on opex.) 83 86 105 109 104 96 84 78
Source: Company data, Deutsche Bank estimates
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Appendix 1
Important Disclosures
Additional information available upon request *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Kartik Mehta Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:
1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period
52 %
38 %
11 %18 %11 % 15 %
050
100150200250300350400450500
Buy Hold Sell
Asia-Pacific Universe
Companies Covered Cos. w/ Banking Relationship
Regulatory Disclosures
1.Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2.Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are
consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the
SOLAR link at http://gm.db.com.
2 December 2015
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Deutsche Bank AG/Hong Kong Page 99
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Copyright © 2015 Deutsche Bank AG
GRCM2015PROD034948
David Folkerts-Landau
Chief Economist and Global Head of Research
Raj Hindocha
Global Chief Operating Officer Research
Marcel Cassard Global Head
FICC Research & Global Macro Economics
Steve Pollard Global Head
Equity Research
Michael Spencer Regional Head
Asia Pacific Research
Ralf Hoffmann Regional Head
Deutsche Bank Research, Germany
Andreas Neubauer Regional Head
Equity Research, Germany
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